Wednesday, February 04, 2009

At least the temperature got above zero for a few hours today

Lots of news today - here's the quick rundown.

1) The Senate added a $15,000 tax credit for home buyers to their version of the stimulus. I expect that this will be widely praised by the primary beneficiaries of this amendments (realtors/builders) but this remains flawed logic. This is like a store having a sale by giving you a $10 off coupon but everything in the store is priced $20 above normal market prices. This will keep an artificial floor under home prices and further delay any real recovery in housing.

2) While we have been struggling with our economic crisis, I'm not sure that we have been aware of the serious global upheavals that are underway. China is seeing waves of unemployment, Indians are flowing back to India from lucrative Middle Eastern jobs, and Russia is burning through its reserves in an effort to defend its falling currency.

"With the ruble under pressure, First Deputy Prime Minister Igor Shuvalov pledged to defend the currency. But he warned the next month will be "very difficult" as the central bank seeks to keep the ruble from breaching the floor it set for the currency last month. Russia has spent $200 billion -- more than a third of its reserves -- to slow the ruble's slide since August, and many analysts question whether the central bank will be able to prevent further declines.

Citing the rapid loss of reserves and surging capital outflows, Fitch Ratings on Wednesday cut Russia's credit rating by one notch to BBB -- two rankings above junk. In December, Standard & Poor's cut its rating, the first such reduction for Russia in a decade."

3) As I said before, the coming credit card crunch is likely to be the next big shoe to fall on the head of the banks. Today we heard that 4% of all credit cards are at least 60 days behind on their payments which is an all-time high.

4) Cisco will probably dominate the news tomorrow because their guidance was so cut so dramatically. Perhaps a more stunning story is that of Novellus (a semiconductor company) that has seen it's sales from $340 mil in the first quarter of 2008 to an estimated $95-$110 million in the first quarter of 2009. WOW! It's hard to do long-term planning when your business is shrinking 60% in a year.

Finally, just a quick note on the plan to limit executive compensation at bailed out banks. As I understand the proposal it only applies to executives of the banks and frankly, they are not the ones typically receiving the big bonuses. The huge bonuses are usually reserved for the profit generators. I think once someone in Washington figures that out, they may try to change the terms to limit bonuses of any employee to prevent a bond trader from making $25 million next year.

If this happens, I think we'll see a spike in demand for outsourced investment professionals. Bankers, traders, analysts, etc - will form small teams to work on a contract basis for the banks. The banks will then be paying an outside "fee" not a huge bonus.

Build a roadblock at noon and someone will find a loophole by dinner.



Anonymous said...

Continued good stuff :) The banks aren't going to fix this beause inside every bank stand thousands of front line loan managers who will still be subject to termination if the loans they are "forced or enticed" by the govt. to give out, ultimatley fail. The fed may have to save the banks for the ultimate future of our economy, but they will not "fix" the economy. One of our primary problems is that "and of course people will bitch about this" but the high cost of labor (union and otherwise) in this country has forced production of consumables and deprecable hard goods offshore. All brought to you by our quest for cheaper prices for consumer goods. In fact one of the reason we haven't had inflation in recent years is because the whole dynamics of inflation have changed from not what it cost us to produce and ultimatley bring products to market, but at what price does someone else in some other country (preferably one that is not dollar stabilized) provive that product to us.

The only thing other that homeland security that has been floating our economy for the past 8 years is home building,and their associated sales and consumer driven over appraising.

Which was all fine except they don't break down and or depreciate. If we were building washing machines and TV's that last 5 years instead of houses that last 100, we would have been fine.

We simply need to tack 36.9% + Fica on the top of the Mfg. price of every single product we bring into this country, minus the tax the govenment from wherein it was produced, has already assessed.

Which of course means that if the other govt. subsidizes it by 10%, the tax would be 46.9%. It will still be net/net much less than what we would pay for the product if it was produced here, but at the same time help to pay for the very system and national infrastructure that supports the very purchase of said products, from countries that would othewise be back in the stone age. Of course this could be said in a little more politically correct manner :)

Of govt has really screwed the pooch on the free trade concept, considering that tarrifs on imports are in many cases the only way that other countries collect tax, becuase they don't have a bloated and complex IRS. Telling China that they should not charge duty on corn from the US is the equivilent of the Chinese saying that the IRS should refund to each US taxpayer 25% of the value of every product we buy, that comes from China.

Idiots ! We've been scammed and now everybody's running around like chicken little with absolutley no plan.

We need to freeze all govt wages, union and otherwise for 5 years. We need to freeze all union wages and benifits from all companies that are requesting any TARP for 5 years, and we need to forget the joke perpetrated that Protectionism created the Great Depression. Especially in the face of the obvious fact that WTO is going to make the Great Depression look like a week at club med.

Once we are back in the consumable production business, it will again become apparent to labor that they will ultimately pay the price for inflated wages and benifits, by paying more for the products and services consumed therein.

RWiley said...

"1) The Senate added a $15,000 tax credit for home buyers to their version of the stimulus. I expect that this will be widely praised by the primary beneficiaries of this amendments (realtors/builders) but this remains flawed logic."

I am not sure I agree with you on this one. Some homes have sat unsold for months and years. As the buyer credit comes along, I doubt that people watching those homes would fall for such a scheme and want to share that credit with the seller. Home buyers watch the market for months. People who are buying consumables are more compulsive and fall for the coupon game. Its not the same thing as financial brokers and bankers who are hiding fees like squirrels hiding nuts.

Jefferson's Leaning Left

The Artful Blogger said...

Anonymous - Some valid points - particularly regarding manufacturing. It is interesting that the only aspects of our economy seeing vast inflation are those service fields that employ Americans - Healthcare and Education.

The biggest single error that I see from Washington to Wall Street is the misquided quest to find a solution to this problem in the history books. This problem is unlike any other crisis. It will require bold thinking but it is easier to say "this is what we did last time."

The Artful Blogger said...

Rwiley - You're probably right that the coupon analogy was an oversimplification. My point is that the tax credit interferes with a market that is trying to find balance.

When prices fall far enough back to a normalized level people will come back to the market and buy (see California's recent uptick in sales as prices have returned to 2002 levels). If prices in the North Country went back to 2002 levels even I'd consider buying again :)

Thanks for the comments!