Economic Crisis Anniversary Sees U.S. on the Edge of a Knife
This week marked the one-year anniversary of Lehman Brothers’ bankruptcy filing, which many argue accelerated the global financial meltdown thus resulting in government reform and bailout deals. President Obama recognized the date with a speech Monday at Freedom Hall in lower Manhattan.
The global financial services firm spent over 158 years in business before its bankruptcy filing, but its post-bankruptcy period may be viewed as being more influential because of the fiscal devastation to worldwide savings and investment accounts. When Lehman fell, the financial world initiated a run on the $3.6 trillion money market industry. Panic and chaos ensued shortly after.
As Bloomberg News reported:
Of all the quakes of 2008 – the fall of Bear Stearns Cos. in March, the takeover of mortgage buyers Fannie Mae and Freddie Mac and the salvaging of American International Group Inc. (AIG) in September – the failure to account for the effects of Lehman’s demise was the most critical because its aftershocks came closest to wrecking the world economy.
“They put the entire financial system at risk, and they didn’t have to,” said Harvey R. Miller, a partner at Weil Gotshal & Manges LLP in New York who represented Lehman in the bankruptcy, referring to government officials to Bloomberg News. “They were warned. I told them, ‘Armageddon is coming. You don’t know what the consequences will be.’ Their response was, ‘We have it covered.’”
Finger-pointing will continue for years as many blame too little government oversight and firms considered “too big to fail” as the primary causes for the subprime crisis and market meltdown following the Lehman bankruptcy. Nothing has changed, though. Bulge-bracket firms, such as Bank of America Corp. and Citigroup, have been given billions of dollars in tax incentives and loan guarantees that have enabled them to grow even bigger. And, some Wall Street strategists feel Washington’s inability to change its ways may be inviting a cataclysmic episode that will certainly lead to another Great Depression.
Richard Bernstein, CEO of Richard Bernstein Capital Management LLC in New York and former chief investment strategist at Merrill Lynch, had this to say to Bloomberg News: “Designating certain institutions as too big to fail, and not having a thorough regulatory process to match, practically invites another catastrophe.”
Regulatory Reform
President Obama used the Lehman bankruptcy anniversary date as a way to renew conversations about heavy regulatory reform. The speech was given at the famed Federal Hall, on the corner of Wall and Broad Streets, at 12:10 p.m. ET on Monday.
The president hopes to pass stricter regulatory reform before year-end, a challenging task considering the current debate taking place on Capitol Hill regarding healthcare reform. Regardless, the president feels new rules are crucial to deflecting another financial catastrophe.
Among the new rules being discussed in the Oval Office are additional powers to be granted to the Federal Reserve. Obama would like the Fed to be in a position to monitor big financial firms that pose a “systematic risk” to the economy. The president would also like to set up a process for the federal government to seize and liquidate troubled financial firms and create a new consumer watchdog agency for products like mortgages, car loans and credit cards. Monday’s speech highlighted these initiatives.
All Doom and Gloom?
But is all the news doom and gloom? Sure, we are going into debt. Sure, a lot of us lost half our net worth as our 401(k)s became 200.5(k)s and our houses were foreclosed on. But heck, 10% unemployment means that 90% of us get up and go to work and make things happen.
The basic fact of business is that booms turn to busts, and busts to booms, just as assuredly as autumn turns to winter, and winter into spring.
There are reasons to be happy about this economic situation.
Jobless claims fell this week. According to the Labor Department by way of Bloomberg:
The number of Americans filing first-time claims for jobless benefits fell unexpectedly last week, a sign the labor market is deteriorating at a slower pace as the economy pulls out of the recession.
Applications dropped by 12,000 to 545,000 in the week ended Sept. 12, from a revised 557,000 the week before, Labor Department data showed Thursday in Washington. The total number of people collecting unemployment insurance rose the prior week, to 6.23 million.
The Obama people have been poor-mouthing the economy for more than a year now. This “I feel your pain” empathy garbage does no one any good. Anecdotal evidence suggests that the job market is picking up – especially in tech, government and healthcare.
Housing Construction Up
Apartment construction is going up. According to Yahoo Finance:
Housing construction rose in August to the highest level in nine months as a big surge in apartment building offset a decline in single-family activity.
The August performance was another sign that the nation's housing industry has begun to recover from its worst downturn in decades.
The Commerce Department said Thursday that construction of new homes and apartments rose 1.5 percent to an annual rate of 598,000 units last month. That is slightly lower than the 600,000-unit pace that economists had forecast.
The increase pushed building activity to the highest level since last November and left home construction 24.8 percent above the record low hit back in April.
Housing won’t find a bottom until it is commonly believed that “it is better to rent than to own.” The good news is there is money to be made from renters.
And, we have enough clean energy to last 100 years.
New Discovery Boost Reserves by 58%!
A new horizontal drilling method has increased the known reserves of natural gas in the country by 58%. This ensures enough clean energy to fuel our power plants and transportation needs for the next 100 years.
According to The Wall Street Journal:
Natural-gas futures moved lower Thursday as traders adjusted their positions ahead of a U.S. government report on natural gas storage.
Natural gas for October delivery on the New York Mercantile Exchange was trading down 9.8 cents, or 2.61%, at $3.662 a million British thermal units. The contract fell as low as $3.625/MMBtu in earlier trading.
Analysts and traders expect the data to show that natural gas storage levels grew by 76 billion cubic feet last week, according to the average of estimates in a Dow Jones Newswires Survey.
Most of us have jobs, a place to stay and more than enough energy to keep us warm. So where, exactly, is the downside?
Inflation, Stupid…
It’s got to be inflation, right? And yet we haven’t seen the boost in inflation based on the massive expansion of money that was wildly predicted except in the form of the plunging dollar, which is much the same thing.
Gold is below $1,000. Oil is below $70 and the dollar has rebounded.
For the time being, inflation is low, and the Fed is expected to keep rates unchanged for the near future.
“Underlying inflation remains dormant,” Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Mass., told Bloomberg News on Wednesday. “This gives the Fed plenty of room to keep rates low for an extended period.”
The United States Labor Department released its monthly cost of living report Wednesday. The print, otherwise known as the Consumer Price Index, came in slightly above expectations, showing consumer prices rising 0.4% in August from July. Wall Street economists were forecasting a 0.3% rise.
The highlight, though, was the so-called “core” rate, which excludes food and energy costs. This print was a very benign 0.1%. The lower “core” rate should help alleviate inflationary concerns for the Fed, which have been very outspoken about the threat of higher prices preventing an economic recovery.
Knowing that a dramatic increase in consumer prices will force the hand of the Fed to begin raising rates, policy makers have remained committed to keeping the key interest rate between zero and 0.25 “for an extended period” to promote economic recovery. When the group met on Aug. 12, they said they expected “inflation will remain subdued for some time.” The central bankers meet again next week, Sept. 22-23.
Retail Sales Jump
But there is the fact that according to the Commerce Department, sales last month exceeded expectations and rose 2.7%.
While much of this increase came from the “Cash for Clunkers” program, The Wall Street Journal tells us it’s a mixed bag of bailout and hope:
“While much of that big gain came from cars and gasoline, other sales rose 0.6%; that was the second increase in six months within the ex-car, ex-gas category.”
And the fact that consumers were not buying diddly-squat over the summer means:
Tuesday's report of a 2.7%, broad-based August retail sales increase marked a good sign for the economy as it tries growing out of recession. Tuesday's data showed clothing store sales increased 2.4% last month, the largest gain since February. Also, the federal government rolled out "cash for clunkers," which let motorists swap their gas guzzlers for more fuel-efficient cars. The retail report Tuesday showed auto and parts sales in August increased by 10.6%, the largest gain since 25.6% in October 2001.
It would seem that retail sales would run contrary to inflation and insider buying, but then again, consumers have a long history of overspending at market tops.
Broadsided?
Does this mean that the Fed could be caught napping? Could the economy be broadsided by creeping inflation, particularly as gasoline prices climbed 9.1% last month?
According to Bloomberg:
Wholesale prices in the U.S. rose more than twice as much as forecast in August, led by gasoline costs that have since partially receded.
The 1.7 percent increase in prices paid to factories, farmers and other producers was the fourth gain in five months and followed a 0.9 percent drop in July, the Labor Department said today in Washington. Excluding food and fuel, so-called core prices gained 0.2 percent, more than forecast.
One thing we do know is that the smart money is taking profits.
Massive Insider Selling
With costs rising and consumers unwilling to open their wallets, companies have had a hard time making money. One indicator of where the market is heading is insider buying and selling. These are the principals of a company, such as the CEO, CFO or anyone who owns more than 10%.
The idea is that these people know more about their company than anyone else. If they are selling in massive quantities it could point to a market meltdown. And according to CNNMoney, they are melting down faster than Serena Williams at the U.S. Open.
There have been “$31 worth of insider stock sales in August for every $1 of insider buys…” And “insiders are selling at their most aggressive clip since the summer of 2007.”
That’s a massive signal. We could see another round of dollar decline, which would be painful to some portfolios. You can make gains by playing the falling dollar through ETFs.
But traditional portfolio protection is a must. That means precious metals, like gold, silver and platinum.
Just because gold is below $1,000 doesn’t mean that it hasn’t climbed 16.5% since the beginning of the year as the U.S. dollar has fallen some 6% against major currencies.
This isn’t the crazy, hyperinflation of Zimbabwe, but it could be the thin edge of the wedge.
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