Hello everyone!
Originally called Decoration Day, Memorial Day is a day of remembrance for those who have died in our nation's service.
On May 5, 1868, Memorial Day was officially proclaimed by General John Logan who was national commander of the Grand Army of the Republic. Memorial Day was first observed on May 30, 1868. On this day, there were flowers placed on graves in remembrance of Union and Confederate soldiers at Arlington National Cemetery.
Throughout history, Memorial Day has become a nationally observed holiday dedicated to commemorate the many strong men and women who serve our nation.
Lets all make this a day of remembrance for those who fight for our freedom.
I hope everyone had a great holiday weekend.
Best Regards,
Rene Ferland
Tuesday, June 1, 2010
Wednesday, April 1, 2009
Mortgage rates drop to record low
WASHINGTON — Rates on 30-year mortgages fell this week to the lowest level on record after the Federal Reserve launched a new effort to assist the staggering U.S. housing market.
Mortgage finance giant Freddie Mac said Thursday that average rates on 30-year fixed-rate mortgages dropped to 4.85 percent this week, from 4.98 percent last week. It was the lowest in the history of Freddie Mac's survey, which dates back to 1971 and was down a full percentage point from a year ago.
The previous record low of 4.96 percent was set in the week of Jan. 15. Rates fell after the Fed last week said it will pump $1.2 trillion into the economy in an effort to lower rates on mortgages and loosen credit.
Rates on 30-year mortgages traditionally track yields on long-term government debt.
Though the yield on the benchmark 10-year Treasury note initially plunged by about 0.5 percentage points after the Fed's move, lenders did not pass the entire drop on to borrowers. Bond yields rose after worries about what some saw as lackluster demand at a government debt auction Wednesday.
"There was a honeymoon effect initially" after the central bank's announcement, said Greg McBride, senior financial analyst with Bankrate.com. "The reality of large government deficits and the need for substantial government borrowing is setting in with investors."
Mortgage applications surged last week, mostly from borrowers looking to refinance and save money on their monthly payment. The Mortgage Bankers Association said Wednesday its weekly application index climbed more than 30 percent for the week ended March 20.
Nearly 80 percent of applications came from borrowers seeking to refinance home loans at lower rates, rather than purchase homes.
In Freddie Mac's survey, the average rate on a 15-year fixed-rate mortgage dropped to 4.58 percent this week, down from 4.61 percent last week.
Rates on five-year, adjustable-rate mortgages fell to 4.96 percent, compared with 4.98 percent last week. Rates on one-year, adjustable-rate mortgages rose fell to 4.85 percent, from 4.91 percent.
The rates do not include add-on fees known as points. The nationwide fee averaged 0.7 point last week for all mortgages in Freddie Mac's survey except for one-year adjustable mortgages, which had an average fee of 0.6 point.
Mortgage finance giant Freddie Mac said Thursday that average rates on 30-year fixed-rate mortgages dropped to 4.85 percent this week, from 4.98 percent last week. It was the lowest in the history of Freddie Mac's survey, which dates back to 1971 and was down a full percentage point from a year ago.
The previous record low of 4.96 percent was set in the week of Jan. 15. Rates fell after the Fed last week said it will pump $1.2 trillion into the economy in an effort to lower rates on mortgages and loosen credit.
Rates on 30-year mortgages traditionally track yields on long-term government debt.
Though the yield on the benchmark 10-year Treasury note initially plunged by about 0.5 percentage points after the Fed's move, lenders did not pass the entire drop on to borrowers. Bond yields rose after worries about what some saw as lackluster demand at a government debt auction Wednesday.
"There was a honeymoon effect initially" after the central bank's announcement, said Greg McBride, senior financial analyst with Bankrate.com. "The reality of large government deficits and the need for substantial government borrowing is setting in with investors."
Mortgage applications surged last week, mostly from borrowers looking to refinance and save money on their monthly payment. The Mortgage Bankers Association said Wednesday its weekly application index climbed more than 30 percent for the week ended March 20.
Nearly 80 percent of applications came from borrowers seeking to refinance home loans at lower rates, rather than purchase homes.
In Freddie Mac's survey, the average rate on a 15-year fixed-rate mortgage dropped to 4.58 percent this week, down from 4.61 percent last week.
Rates on five-year, adjustable-rate mortgages fell to 4.96 percent, compared with 4.98 percent last week. Rates on one-year, adjustable-rate mortgages rose fell to 4.85 percent, from 4.91 percent.
The rates do not include add-on fees known as points. The nationwide fee averaged 0.7 point last week for all mortgages in Freddie Mac's survey except for one-year adjustable mortgages, which had an average fee of 0.6 point.
Wednesday, January 28, 2009
Home sales soar as foreclosures drive down prices
(01-21) 10:16 PST SAN FRANCISCO -- Fully half of all existing homes sold in the Bay Area in December were foreclosures unloaded by banks at fire-sale prices. Those sales sent median prices tumbling to new lows and attracted droves of buyers, according to a real estate report released Wednesday.
"If you are OK with a little bit of work or a Class-B neighborhood rather than Class-A, you can get a smoking deal," said Stephen Bloom, a Realtor with Lawton Associates in Berkeley. "The banks understand if they want to move these things, they have to be quite aggressive on pricing. They're not fooling around anymore. They want to get them off their books."
Both investors and first-time home buyers are avidly pursuing foreclosure bargains.
Chai Chanthapak, 37, of San Ramon is one such investor.
"It is incredible what value you are getting now," Chanthapak said Wednesday as he walked through a foreclosed Oakland triplex he is in escrow to purchase for $106,000. It sold in May 2007 for $557,600.
While the Bay Area median price didn't plunge as precipitously as that, it is just over half of what it was a year ago.
The median for existing single-family homes in the nine-county region sold in December was $330,000, down 46.8 percent from a year ago, according to research firm MDA DataQuick of San Diego. For all homes, including condos and new homes, the median was also $330,000, down 46.8 percent. That was the lowest median since March 2000 and about half of the $665,000 peak reached in June and July 2007.
A total of 5,171 existing homes changed hands in December, about two-thirds more than in the previous year, DataQuick said. The fact that half of them were foreclosures stood in stark contrast to figures last December, when just 14 percent of sold homes were bank-owned.
"There is a lot of foreclosure activity flushing through the system," said Andrew LePage, a DataQuick analyst. "A significant share of what's selling is distressed in one way or another, whether it is actually a foreclosure or being sold under the threat of foreclosure. It has a big impact on the median sales price."
Double-digit declines
Every Bay Area county experienced double-digit declines in the median price. The annual drops for existing homes ranged from 11.8 percent in San Francisco to 48.4 percent in Contra Costa County.
The median marks the point at which half the homes sold for more, half for less. It reflects the composition of homes sold rather than an across-the-board change in all home values.
"It would be wrong to say that Bay Area home values are half of what they were a year and a half ago," John Walsh, MDA DataQuick president, said in a statement. "Maybe half of the decline in median is a market mix issue and the rest a drop in value."
Indeed, the mix of sold properties skewed toward lower-cost homes. Mortgages of more than $417,000 used to account for 60 percent of Bay Area purchase financing, DataQuick said. In December, just one-fifth of homes sold in the area had loans greater than $417,000.
Experts said that banks increasingly are unloading foreclosed homes at bargain prices.
"The return is so good, you cannot pass it by," said Chanthapak, the investor buying the Oakland triplex.
The Victorian building, which needs significant work, has a three-bedroom, a two-bedroom and a one-bedroom unit. Situated in an industrial-residential area near the San Leandro border, it is a stone's throw from Arcadia Park, a new Pulte Homes development where single-family homes start in the upper $300,000 range.
He plans to spend about $30,000 on rehabilitation - some of the kitchens and bathrooms have no fixtures, for instance - and anticipates renting the three units for a positive cash flow of about $2,000 a month.
Chanthapak, who has a day job as a draftsman at an engineering firm, became a real estate investor by chance. He was browsing Craigslist in October and saw that an online auction of a house in Richmond was taking place at that moment.
"I took lunch, drove to Richmond to see the property, and then came back to work and bid on it," he said. He didn't win the auction, but he was hooked on the concept that there are great deals to be had.
Since then, Chanthapak bought another Richmond property with two homes on one lot for $90,000. He spent $30,000 on rehab, and now expects that property will have positive cash flow of $1,400 a month. He said renting out one of the homes will cover his mortgage, taxes and insurance, so rent from the other will be all profit.
Investor competition fierce
Ken Kho, a Realtor with Burlingame's New Light Realty, which specializes in bank-owned properties, sold the Oakland triplex to Chanthapak and said he is working with several investors who are finding many properties with potential for positive cash flow among the foreclosures for sale. But competition is fierce, he said.
"This week I made four offers (for clients), and two went pending even before we submitted our offers," he said. "Some of the deals are incredible. You can buy a three-bedroom house in Oakland for $60,000 cash and rent it for $1,200. That leaves you with $1,000 a month after property tax and insurance, so you would recoup all your money in five years."
In fact, Realtors say many investors, particularly those who own more than four properties, are paying all cash. Those who own more than four properties find banks very reluctant to lend to them.
Chanthapak and his wife, who works as a finance manager, hope to buy a couple more investment properties.
"It won't happen for many years, but I plan to keep on going (with real estate investments) and one of these days not have to work anymore," he said.
Sales volume increased the most dramatically in foreclosure-ridden counties. In Contra Costa County, 1,384 existing homes were sold, almost two-thirds of them foreclosures. It was a 152.6 percent increase from 548 sales last December. In Solano County, 623 existing homes - 67.7 percent of them foreclosures - were sold, representing a 185.8 percent increase from 218 sales last year.
Conversely, areas with few foreclosures, such as San Francisco, also had far fewer sales. The 180 existing homes sold in the city was down about 20 percent from last year; only 12.4 percent of those homes were foreclosures. Marin and San Mateo counties also saw sales volume decline and had relatively low foreclosure activity.
E-mail Carolyn Said at csaid@sfchronicle.com.
"If you are OK with a little bit of work or a Class-B neighborhood rather than Class-A, you can get a smoking deal," said Stephen Bloom, a Realtor with Lawton Associates in Berkeley. "The banks understand if they want to move these things, they have to be quite aggressive on pricing. They're not fooling around anymore. They want to get them off their books."
Both investors and first-time home buyers are avidly pursuing foreclosure bargains.
Chai Chanthapak, 37, of San Ramon is one such investor.
"It is incredible what value you are getting now," Chanthapak said Wednesday as he walked through a foreclosed Oakland triplex he is in escrow to purchase for $106,000. It sold in May 2007 for $557,600.
While the Bay Area median price didn't plunge as precipitously as that, it is just over half of what it was a year ago.
The median for existing single-family homes in the nine-county region sold in December was $330,000, down 46.8 percent from a year ago, according to research firm MDA DataQuick of San Diego. For all homes, including condos and new homes, the median was also $330,000, down 46.8 percent. That was the lowest median since March 2000 and about half of the $665,000 peak reached in June and July 2007.
A total of 5,171 existing homes changed hands in December, about two-thirds more than in the previous year, DataQuick said. The fact that half of them were foreclosures stood in stark contrast to figures last December, when just 14 percent of sold homes were bank-owned.
"There is a lot of foreclosure activity flushing through the system," said Andrew LePage, a DataQuick analyst. "A significant share of what's selling is distressed in one way or another, whether it is actually a foreclosure or being sold under the threat of foreclosure. It has a big impact on the median sales price."
Double-digit declines
Every Bay Area county experienced double-digit declines in the median price. The annual drops for existing homes ranged from 11.8 percent in San Francisco to 48.4 percent in Contra Costa County.
The median marks the point at which half the homes sold for more, half for less. It reflects the composition of homes sold rather than an across-the-board change in all home values.
"It would be wrong to say that Bay Area home values are half of what they were a year and a half ago," John Walsh, MDA DataQuick president, said in a statement. "Maybe half of the decline in median is a market mix issue and the rest a drop in value."
Indeed, the mix of sold properties skewed toward lower-cost homes. Mortgages of more than $417,000 used to account for 60 percent of Bay Area purchase financing, DataQuick said. In December, just one-fifth of homes sold in the area had loans greater than $417,000.
Experts said that banks increasingly are unloading foreclosed homes at bargain prices.
"The return is so good, you cannot pass it by," said Chanthapak, the investor buying the Oakland triplex.
The Victorian building, which needs significant work, has a three-bedroom, a two-bedroom and a one-bedroom unit. Situated in an industrial-residential area near the San Leandro border, it is a stone's throw from Arcadia Park, a new Pulte Homes development where single-family homes start in the upper $300,000 range.
He plans to spend about $30,000 on rehabilitation - some of the kitchens and bathrooms have no fixtures, for instance - and anticipates renting the three units for a positive cash flow of about $2,000 a month.
Chanthapak, who has a day job as a draftsman at an engineering firm, became a real estate investor by chance. He was browsing Craigslist in October and saw that an online auction of a house in Richmond was taking place at that moment.
"I took lunch, drove to Richmond to see the property, and then came back to work and bid on it," he said. He didn't win the auction, but he was hooked on the concept that there are great deals to be had.
Since then, Chanthapak bought another Richmond property with two homes on one lot for $90,000. He spent $30,000 on rehab, and now expects that property will have positive cash flow of $1,400 a month. He said renting out one of the homes will cover his mortgage, taxes and insurance, so rent from the other will be all profit.
Investor competition fierce
Ken Kho, a Realtor with Burlingame's New Light Realty, which specializes in bank-owned properties, sold the Oakland triplex to Chanthapak and said he is working with several investors who are finding many properties with potential for positive cash flow among the foreclosures for sale. But competition is fierce, he said.
"This week I made four offers (for clients), and two went pending even before we submitted our offers," he said. "Some of the deals are incredible. You can buy a three-bedroom house in Oakland for $60,000 cash and rent it for $1,200. That leaves you with $1,000 a month after property tax and insurance, so you would recoup all your money in five years."
In fact, Realtors say many investors, particularly those who own more than four properties, are paying all cash. Those who own more than four properties find banks very reluctant to lend to them.
Chanthapak and his wife, who works as a finance manager, hope to buy a couple more investment properties.
"It won't happen for many years, but I plan to keep on going (with real estate investments) and one of these days not have to work anymore," he said.
Sales volume increased the most dramatically in foreclosure-ridden counties. In Contra Costa County, 1,384 existing homes were sold, almost two-thirds of them foreclosures. It was a 152.6 percent increase from 548 sales last December. In Solano County, 623 existing homes - 67.7 percent of them foreclosures - were sold, representing a 185.8 percent increase from 218 sales last year.
Conversely, areas with few foreclosures, such as San Francisco, also had far fewer sales. The 180 existing homes sold in the city was down about 20 percent from last year; only 12.4 percent of those homes were foreclosures. Marin and San Mateo counties also saw sales volume decline and had relatively low foreclosure activity.
E-mail Carolyn Said at csaid@sfchronicle.com.
Monday, January 12, 2009
Deflation, Deleveraging, and the Stimulus Effect
Thoughts from the Frontline Weekly NewsletterForecast 2009:
Deflation and Recession
by John Mauldin
January 10, 2009
In this issue: Forecast 2009: Deflation, Deleveraging, and the Stimulus Effect
Muddle Through on Hold
Lies, Damned Lies, and Government Unemployment Numbers
Central Bankers of the World, Unite!
Predictions 2009
La Jolla, Bermuda, and Europe
Where are we headed in 2009? We will explore that in detail over the next few issues of Thoughts from the Frontline, but today we will start with some of the larger forces which will have a major impact on the economies of the world, and I will end with my usual attempt to forecast the various markets. We will look at deflation, deleveraging, the fallout from the stimulus plans (note plural), housing, consumer spending, unemployment, and a lot more. There is a lot to cover. But first two quick announcements.
Along with my partners Altegris Investments I will be co-hosting our 6th annual Strategic Investment Conference in La Jolla, California, April 2-4. I have invited some of the top economic minds in the country to come and address us, giving us their views on what seem to be a continuing crisis. It will be a mix of economic theory and practical investment advice. Already committed to speak are Martin Barnes, Woody Brock, Dennis Gartman, Louis Gave, George Friedman (of Stratfor), and Paul McCulley. I anticipate adding another stellar name or two. This is as strong a lineup as we have ever had, and on par with any conference I know of anywhere.
Due to securities regulations, attendance is limited to qualified high-net-worth investors and/or institutional investors. Early registrants will get a discount. Last year we had to close registration, and I anticipate we will run out of room again, so I would not procrastinate. Simply click on the link below, give us your name and email, and you will be sent a form next week to register.
https://hedge-fund-conference.com/2009/interest.aspx?m=t
I should note that most attendees say this conference is the best investment conference they have ever been to. One of the benefits is being with several hundred very nice people in a relaxed setting. We do it up right.
Second, I and some of my fellow newsletter writers (Bill Bonner and Dennis Gartman, among others, are slated to be there) are going to be hosting a special tribute dinner to honor Richard Russell for his outstanding contribution of over 50 years to not only the craft of investment writing but also to the lives and investment portfolios of his readers. He is one of my personal heroes as well as a good friend. At 84, his writing today is better than ever, and now he writes every day, not just once a month! Richard is an institution in the investment writing world, and after talking with his wife Faye he has said he will let us plan the dinner.
Richard has some of the most loyal readers anywhere. I have personally talked to people who have been reading Dow Theory Letters almost since the beginning (1956), and their enthusiasm for all things Richard has not waned. We have a long list of people who want to attend.
Based on the response so far, we believe we can get a large roomful of Richard's friends, writing colleagues, and fans who have benefitted from his wisdom over the years, to honor him for a life well-lived and a true servant's spirit, as well as being a guide not just in the markets but in life. The dinner will be Saturday evening, April 4, 2009 in San Diego. In order to know how many people we should plan for, please send an email to russelltribute@2000wave.com indicating how many tickets you would like. If you have already responded, you will get an email with a link next week for you to register. If you have not and want to come, I suggest you do so quickly, as again we anticipate a packed room. The tickets will be $195, with any money left over going to Richard's favorite charity.
(Note: If you register for my conference, you must register separately for the Russell Tribute Dinner, which will be held at a different venue, after the close of my conference on Saturday. Thanks!)
And for new readers and those who get this letter forwarded to them, you can get a free subscription of your own just by going to www.frontlinethoughts.com. And now to our regular letter.
Muddle Through on Hold
First, a quick look back at how I did in my 2008 forecast issue. In general, it was not a bad year in terms of getting the direction right on many of the markets, including gold, oil, the dollar (especially against the pound sterling), and stocks. Some predictions were on target, like a second-half rebound in the dollar.
But I missed the economy. I noted then that I believed we were already in recession (which we have now found out that we were), and I wrote that a recovery would begin by the end of the year, but that it would be a very weak one for a long time -- my basic Muddle Through scenario. Obviously, the recession is a lot worse than I thought it would be at the time. Looking to the end of this letter, I now think we will be in recession through at least 2009 before we begin a recovery, which will again be a rather anemic Muddle Through period of maybe two years, for a variety of reasons, some of which I cover today and others over the next few weeks.
And I should note that it was not long into the year before I began to get decidedly more gloomy, as many of you noted. And I expect that this year will bring a few surprises that will cause me to change my opinions yet again. When the facts change, I will try and change with them.
Forecast 2009: Deflation, Deleveraging, and the Stimulus Effect
For a very long time, I have been adamant that deflation is in our future. In the next few pages I outline how inflation might come back, but I doubt it will be this year. For now, deflation is the economic factor that the Fed and central banks will be battling. And believe me, it will be a very large and controversial battle.
We had a brief period last summer where inflation (as measured by the Consumer Price Index or CPI) was over 5%, and the trend was clearly up. The increase was almost entirely due to food and energy costs. Core inflation (less food and energy) was around 2%. Many commentators noted that real people actually bought gas and food and we should look at overall CPI and not just core. Now, with the drop in food and energy costs, their impact has vanished.
For the three months ending last November, the compound annual rate for the CPI was a negative(!) -10.2%, reflecting the almost 70% drop in energy. Annualized core CPI for the last three months ending November was a very low 0.4%. November CPI was a flat 0.0%. It has been falling steadily for the last five months.
December is likely to be negative. There is a trend here, and if you are a central banker it is not one you like. And that trend is being manifested in every part of the developed and much of the developing world. It is a global problem.
Given how high inflation was last summer, how could I credibly maintain that deflation was in our future? For reasons that I wrote about extensively then. Briefly, we were in a recession. Recessions are almost by definition deflationary. We had two massive bubbles bursting: the very visible housing bubble which was massively destroying wealth, and the less visible but even more powerful bursting of the credit bubble, which was accompanied by profound deleveraging and the destruction of what Paul McCulley termed the Shadow Banking System.
It would be a strange, strange world indeed if inflation could get any real traction in such an environment, and it didn't.
But now we have a structural problem in that deflation has the potential to get some very real traction going forward. Why? Because not just in the US, but all over the world, we built too much of almost everything. Too many houses, too many manufacturing plants, too many retail stores -- and just too much stuff.
In the US, capacity utilization is falling rapidly. Typically, if we produce "stuff" (cars, food, lumber, etc.) in the range of 80% of potential capacity, that is considered to be a good economy. Capacity utilization has been dropping for some time and is down below 75% for all industries, but in many industries is close to 70%. And the clear trend when looking at ISM manufacturing statistics is that it has a lot further to fall.
That means industries have no pricing power, as they can make a lot more "stuff" than they can sell. And when demand due to the recession drops as well, prices fall as producers try to stay in business.
As a very visible example, global output capacity for automobiles is 92 million cars, but sales will probably be around 60 million. Output in the US will be around 12 million, but right now sales are only about ten million. The average American household has 2.2 cars. Evidently, consumers are reducing the number of cars they own, buying used cars, and making their current vehicles last an average of 6 months longer -- all in just the last year.
Many auto plants, both in the US and abroad, are simply going to have to be closed. "Super-efficient Toyota expects its first operating loss in 70 years in the fiscal year ending March 31. Weak sales in China will probably force many of her 80 automakers to merge. Russian sales dropped 15% in November and 25% in Brazil from a year earlier." (Gary Shilling)
Just as there are too many auto dealers and too much auto manufacturing capacity, there are too many stores for a country whose consumers are in retreat. Consumer spending could easily drop 7% as the saving rate heads back up to 5% (or even more). It is estimated that over 70,000 retail stores will go out of business in the next six months. That would be in line with the 140,000 that closed doors last year. The economy and its businesses have to adjust to a new level of spending that will be the first serious consumer recession in 26 years.
Looking at Federal Reserve data, both total household debt and mortgage debt outstanding dropped in the third quarter, for the largest drop in 40 years. As I wrote almost two years ago, the disappearance of Mortgage Equity Withdrawals is having a negative impact of about 3% on US GDP. Evidence shows that this is also happening in Great Britain and other parts of Europe where there was a housing bubble.
Lies, Damned Lies, and Government Unemployment Numbers
There are some who see a ray of hope in the recent jobless claims reports, which have dropped back to "only" 467,000 in initial unemployment claims, down from 491,000 for the last week, after being over 500,000 for several weeks. Those numbers are seasonally adjusted. That hope disappears if you look at the actual numbers. For the current reporting week ending January 3, 2009, the advance number of initial claims came in at 726,420. Last week's advance number was 717,000. We have been above 600,000 new initial claims every week since the third week of November. Continuing claims jumped massively, by 744,000 to 5,316,124.
No conspiracy here. This is what happens when you try to smooth a volatile trend by using seasonal adjustments. If you use past performance as the tool by which you smooth the trend, when the trend changes, the seasonally adjusted numbers will be either too large or too small. Thus, the data understated the growth of jobs in 2003 because recent past performance had been bad, and it is now understating the number of unemployment claims and actual unemployment.
In December, the number of unemployed persons increased by a seasonally adjusted 632,000 to 11.1 million and the unemployment rate rose to 7.2%. Since the start of the recession in December 2007, the number of unemployed persons has grown by 3.6 million, and the unemployment rate has risen by 2.3% and is now at 7.2%.
I happened to be watching CNBC at the time of the release of the data, and several commentators remarked how much better the number was than they thought it would be. I wish they were right, but again, the actual numbers showed a loss of 954,000 jobs, over 50% more than the headline number reported in the press release. And that assumes that new businesses created 72,000 jobs from the birth/death model that I so frequently write about. It is possible that almost 1 million jobs were lost in December. I doubt the market would have liked that number.
I should note that the Bureau of Labor Statistics does not hide that number. You can find it if you dig for it. But most analysts seem to prefer just to take the press release and go with it. And most of the time that is fine. But in times like this, when trends are changing, you miss the bigger picture and get misleading data.
Unemployment could rise to 9-10% or more this year and on into 2010. That means we could easily see another 3 million lost jobs over the next year. That is going to put a lot of negative pressure on consumer spending. It also means that wages are not likely to rise, and we have already hard evidence of wages falling in many industries as companies try to find ways to remain solvent.
And that 9% will be the headline number. If you add people who have part-time jobs but would like a full-time job, and what are called marginally attached workers, the current rate is already 13.5%.
Average hours worked dropped to the lowest level since they began collecting data in 1964, as did hourly income. Given the increasing difficulty for consumers to borrow money and with income dropping, plus increased savings on the part of consumers, it is difficult to see how pricing power is going to come back any time soon.
This problem is multiplied throughout the developed world. The developing world, which sells products and goods to the US and European consumers, is starting to feel the pinch. Chinese and other Asian exports are dropping (more on that in future letters, but the data is ugly).
Overcapacity, rising unemployment, imploding leverage, lack of borrowing and/or lending, a serious retreat by consumers, and increased savings are all the conditions needed to bring about deflation. Left unchecked, we could soon see something like what Japan has experienced, and even potentially worse, as they started with a savings rate of 13%.
But deflation is not going to be left unchecked. It will be fought by central banks everywhere with low rates and the printing press, as well as government spending. And so, let's turn our attention to that process.
Central Bankers of the World, Unite!
There are many people who believe that the Fed and the Treasury increasing the money supply will bring about uncomfortably high inflation. And it is indeed their intention to "reflate" the economy. They are well aware of the problems that would develop if the US (and Europe!) caught "Japanese disease" or a prolonged bout of deflation. Bernanke has made it clear that "it" (as he called deflation in his 2002 speech) would not be allowe to happen on his watch.
And we have already seen a rather large growth in the monetary base. But as I wrote a few weeks ago, the velocity factor of money is slowing rapidly, creating the ability -- or dare I say it? -- the actual need to expand the money supply (you can read that at http://www.2000wave.com/article.asp?id=mwo120508) .
But is it having an effect?
Good friend Gary Shilling raises some doubts (emphasis mine):
"Central banks around the world continue to cut their target rates, although in today's frozen credit market, that won't ever get the horse up on his feet, let alone to the water and drinking. The distrust of banks for even loans to other banks is shown by the still wide spread between LIBOR and the Treasury bills they covet.
"The M2 money supply is 60 times bank reserves, so normally when the Fed gives the bank another dollar in reserves, M2 rises by $60. But between August and November of last year, the $577 billion rise in reserves resulted in a mere $264 billion growth in M2, less than one half!"
See the chart below (the red, smooth line is M2, the dotted line is the adjusted reserves).
The Fed is aggressively expanding its balance sheet. They have made clear that they intend to purchase mortgage securities, consumer loans, and credit card securities. Corporate loans are on the table, as well as other forms of debt. (Finland is getting ready to purchase corporate debt. The list of countries that do so will rise very quickly.) This will be direct infusion of money into the system. As Bernanke said in 2002, he knows where the keys are to the room that has the printing press. And they are going to use it.
Obama and his advisors have signaled they intend to run a deficit of at least a trillion dollars. Right now, as I add it up, it is more like $1.3 trillion (the stimulus number keeps moving), and given that tax receipts are going to drop and unemployment benefits will rise (care to bet that unemployment benefits won't be extended to 52 weeks instead of the current 26?), it could be closer to $1.7-2 trillion. That would be almost 15% of GDP!
Let's get this straight. The only difference between the Treasury and the Fed under an Obama administration and the Bush administration is that Obama will be even more willing to spend (although Bush certainly showed little restraint). Incoming Treasury Secretary Tim Geithner has worked at Treasury and is now president of the New York Fed. There will be little difference between his policies (and those of Larry Summers, Obama's economic advisor) and those of Bernanke and Paulson. And like Paulson, he is going to have to make up the play book as he goes.
The Fed and the new administration are "all in," as they say in Texas hold 'em poker, in the fight to defeat deflation and get the economy growing. And eventually England and Europe will get it and join the fight (both the European Central Bank [especially!] and the Bank of England are behind the curve).
But there is a problem.
Lowering rates isn't enough to get consumers to spend when they have seen their wealth erode from losses in the value of their houses and investment portfolios and retirement accounts. The stimulus last summer was largely saved or used to pay down debt. What was an annualized stimulus of 3% of GDP in the second quarter, which is quite large, only kept GDP growth positive for one quarter.
Obama talks about creating 3 million jobs. If he can do it, that would only partially offset the job losses that will happen in his first year in office. But it will take a long time for much of the stimulus he is talking about to make its way into the economy. You can't turn on infrastructure projects in one quarter. It takes a lot of time to plan. New green power plants? Wonderful. I'm all for it. But they take years to authorize and build. Tax cuts? Again, much of it will be saved or used for debt.
The reality is that the US and much of the world are going to see their economies shrink for at least another year. And when that new, lower level is reached, the economy will slowly start to grow again. Remember those 71,000 retail stores closing? That means that those left standing will get more business and will be able to expand and grow and hire people. That is how recessions work. Excess capacity is worked through. Businesses cut back until they can get positive cash flow.
In 1978, in the midst of high inflation, bear markets, and malaise about all our jobs going overseas, the correct answer to the question "Where will all the needed new jobs come from?" was "I don't know, but they will." That is the correct answer today. That is what free markets and capitalism do. They find a way to make new paths and new businesses where none existed before. And it will happen again. Just with a little lag this time.
In the meantime, there is a lot of pain. An Obama administration is going to do what it can to help relieve that pain, even at the cost of trillion-dollar deficits for several years.
This you can take to the bank: If the Fed buys $500 billion in assets of various kinds and if the US government spends an extra trillion dollars and deflation is still a concern, they are going to double down and do it again. And yet again if they think it is necessary. They are not going to stop until the nominal economy is growing and inflation is above at least 1%.
How much will that number finally be? No one really knows. This has never been attempted. Maybe the initial stimulus package and Fed debt purchases will be enough. My bet is that it won't be, but that is just a guess. We are in uncharted waters. But the captains of the boats are all Keynesians. They are going to fight a recession and deflation with old-fashioned stimulus. And that means we had better adjust our portfolios and businesses for that reality.
Just to give you a picture of what economists think about the effect of the stimulus, let's turn to the Levy Economics Institute of Bard College, which is one of my favorite sources for original economic insight (http://www.levy.org/). They are a rather conservative lot. The graph below shows what two different levels of government stimulus will mean to the economy. They graph unemployment at no stimulus (top black line) and at two levels of "shock" or stimulus. Shock 1 is about $380 billion and shock 2 is about $760 billion. The dotted lines are what is known as "output gap," or the measure of the difference between the actual output (actual GDP) of an economy and what it could produce at its most efficient (potential GDP).
"The implication of these projections is that, even with the application of almost unbelievably large fiscal stimuli, output will not increase enough to prevent unemployment from continuing to rise through the next two years.
"It seems to us unlikely that U.S. budget deficits on the order of 8--10 percent through the next two years could be tolerated for purely political reasons, given the strong and widespread belief that the budget should normally be balanced. But looking at the matter more rationally, we are bound to accept that nothing like the configuration of balances and other variables displayed in Figures 3 and 4 could possibly be sustained over any long period of time. The budget deficits imply that the public debt relative to GDP would rise permanently to about 80 percent, while GDP would remain below trend, with unemployment above 6 percent.
"Fiscal policy alone cannot, therefore, resolve the current crisis. A large enough stimulus will help counter the drop in private expenditure, reducing unemployment, but it will bring back a large and growing external imbalance, which will keep world growth on an unsustainable path.
"… At the moment, the recovery plans under consideration by the United States and many other countries seem to be concentrated on the possibility of using expansionary fiscal and monetary policies.
"But, however well coordinated, this approach will not be sufficient.
"What must come to pass, perhaps obviously, is a worldwide recovery of output, combined with sustainable balances in international trade."
Let me wrap up with a quick note about housing. The economy is going to have a rough time getting back to trend growth with the housing market in the tank. New home sales fell 2.9% in November, while the median price declined 11.5%. Unsold inventories stood at a rate of 11.5-month supply. Housing starts fell nearly 19% in November, while the number of building permits was down 15.6%. Sales of existing homes in November fell more than 8%. The S&P/Case-Shiller 20-city housing index showed an 18% drop in prices in October from a year earlier, while the 10-city index declined 19.1%. Prices in the 20-city index have fallen more than 23% since their July 2006 peak, while the 10-city index is down 25% since its top in June 2006.
It will be 2011 before we work through the excess supply of homes, especially as we are seeing more and more come onto the market because of foreclosures. Prices are likely to drop another 10%. There will be more wealth destruction and more pressure on consumers. 10% of all mortgages are either delinquent or in foreclosure.
Predictions 2009
Let's close with some predictions. Ten out of ten analysts in the recent Barron's forecast saw stock prices rising 10-20% this year. For reasons I outlined last week, I think we could see a tradable rally in the next few months, but at the very least test the lows this summer, if not set new lows. Earnings are going to be far worse than any analyst's projections I have seen. And earnings drive stock prices.
Further, this recession is going to be the longest in anyone's memory. It is going to seem like it is never going to end (it will, I promise), and more and more investors are just going to give up on stocks. The buy and hold for the long run mantra is wearing thin. In inflation-adjusted terms, the stock market is about where it was in 1973! If you reinvested dividends, that gets you to 1991 (again, inflation-adjusted). It takes a lot of buying to make a bull market. It only takes an absence of buying to make a bear market.
Could we get a rally after the summer or fall lows? Sure. And it could be a good one. A lot depends on how fast the stimulus kicks in and whether it really has an effect. Will the Fed really buy large-cap corporate debt? I hope we can see something like a 1974 bottom in stocks develop.
I think the correlation between the US stock market, other developed markets, and emerging markets is close to one. I prefer to stand aside until the US economy has a clear direction and we can see whether the stimulus actually works. And then we can look at the world economy. I won't embarrass them by naming names, but those who argued for "decoupling" between the US and the rest of the world are not looking good. Someday, but not this decade.
I would be a buyer of quality bonds, both corporate and municipal. The key is to have a bond analyst who knows what they are doing and not just looking at ratings. There are some real values in the bond market today.
I would not be a buyer of US government debt. Treasuries, if not in a mini-bubble, have little upside potential and just don't yield enough. Why would I hold a ten-year treasury for 2.39%? I like TIPS at these prices. TIPS are pricing in deflation for ten years and, as I outlined above, I don't think the Fed will allow deflation to take hold.
With all the massive printing of money, you would think I expect the dollar to crash. I don't. The question is, what will it fall against? The euro? Really? The pound is better valued, but England and Europe are going to have to cut rates and apply massive stimulus as well. Every developed country will have problems. I can see holding Canadian, Australian, and other commodity-country currencies, but the leverage needed to make it a reasonable investment potential is too risky for individuals.
I can't see the Japanese letting the yen get too much stronger. China seems to want to halt the rise of the yuan, and the rest of Asia will devalue their currencies to maintain whatever they think of as a competitive advantage. Longer term, I like Asian currencies.
After a year of bouncing around, gold may be poised to rise against all major currencies. We could easily see new highs in the next year.
I think oil is going lower (and maybe much lower -- can you say $1-a-gallon gas?) in the near term. As I have written about before, oil is now in the steepest contango on record. That means oil is cheap today and more expensive in a few months. That is not normal. Oil is bidding for storage. You can make 20-25% on your money in a few months if you can buy oil and find somewhere to store it. At least 25 supertankers have been leased to store oil, and sources say another ten are being bid for. It remains to be seen if OPEC can really cut enough to make a difference in the near term.
As for the other metals, I think it is quite likely copper and its industrial allies will fall in price at least for the near term, until production can be cut and demand in Asia begin to rise again. I would not be a buyer of long-only commodity funds for the near term. Someday the bull market in commodities will return, but not until Asian demand picks up.
The risks to my forecasts are quite clear. The stimulus could happen quicker and be more effective than I think, and the economy and the markets could surprise to the upside. On the other hand, and more scarily, the Fed could be pushing on a string in a liquidity trap and the economy and markets could get hit harder, along with most assets.
Briefly, if you would like to look at a range of money managers I think have the potential to navigate the current market successfully, let me suggest you contact some of my partners around the world. If you are an accredited investor (net worth $1.5 million) and would like to look at a group of hedge funds and especially commodity funds in the US, go to www.accreditedinvestor.ws and fill out the form, and my partners at Altegris Investments will get in touch with you. If you are in Europe, use the same link and I will get you in touch with Absolute Return Partners in London. In South Africa, my partner is Plexus Asset Management. We will soon be announcing new partners in Canada and in Latin America.
If your net worth is less than $1.5 million, my US partners at CMG have a platform of managers and traders that take direct-managed accounts with minimums of $100,000. These are liquid and fully transparent accounts with managers with long-term track records.
You really should check it out.
The link is http://www.cmgfunds.net/public/mauldin_questionnaire.asp.
And if you are an advisor or broker and would like to see the managers on the Altegris or CMG platforms and how you can access them for your clients, sign up and note on the form you are in the business. It might actually be fun to make a client call with a recommendation for a fund or manager that was up in 2008.
La Jolla, Bermuda, and Europe
Tiffani and I head out to La Jolla Monday to meet with Jon Sundt and his partners at Altegris Investments. There have been a lot of positive developments of late, including new managers, and of course we will be talking about the upcoming conference. And I will get to have a quick happy hour with Richard Russell and his son. The Tribute dinner is going to be so much fun.
On Wednesday, I am hosting a dinner at my new home for a small group of family office heads, hedge fund managers, and local businessmen. We are calling it an "Idea Dinner" and will throw out thoughts on how to invest in the coming year. I will report anything interesting.
I will be in Bermuda January 28-31 for a speech and some time away from the office to write on the book Tiffani and I are doing on millionaires. It is a fun project. And I have to have it finished by the end of February so I can get to London and Europe and New York in March.
I am always optimistic at the beginning of the year. Even though I see a serious recession, I am working, like every businessman in the world, on making my business grow in spite of problems in the economy. Free markets with motivated entrepreneurs will be what really creates a growing economy.
It is time to hit the send button. There is a fire in the family room, and it is time to relax. Enjoy your week. I know I will.
Your more optimistic than this letter implies analyst,
John Mauldin
John@FrontLineThoughts.com
Copyright 2009 John Mauldin. All Rights Reserved
Deflation and Recession
by John Mauldin
January 10, 2009
In this issue: Forecast 2009: Deflation, Deleveraging, and the Stimulus Effect
Muddle Through on Hold
Lies, Damned Lies, and Government Unemployment Numbers
Central Bankers of the World, Unite!
Predictions 2009
La Jolla, Bermuda, and Europe
Where are we headed in 2009? We will explore that in detail over the next few issues of Thoughts from the Frontline, but today we will start with some of the larger forces which will have a major impact on the economies of the world, and I will end with my usual attempt to forecast the various markets. We will look at deflation, deleveraging, the fallout from the stimulus plans (note plural), housing, consumer spending, unemployment, and a lot more. There is a lot to cover. But first two quick announcements.
Along with my partners Altegris Investments I will be co-hosting our 6th annual Strategic Investment Conference in La Jolla, California, April 2-4. I have invited some of the top economic minds in the country to come and address us, giving us their views on what seem to be a continuing crisis. It will be a mix of economic theory and practical investment advice. Already committed to speak are Martin Barnes, Woody Brock, Dennis Gartman, Louis Gave, George Friedman (of Stratfor), and Paul McCulley. I anticipate adding another stellar name or two. This is as strong a lineup as we have ever had, and on par with any conference I know of anywhere.
Due to securities regulations, attendance is limited to qualified high-net-worth investors and/or institutional investors. Early registrants will get a discount. Last year we had to close registration, and I anticipate we will run out of room again, so I would not procrastinate. Simply click on the link below, give us your name and email, and you will be sent a form next week to register.
https://hedge-fund-conference.com/2009/interest.aspx?m=t
I should note that most attendees say this conference is the best investment conference they have ever been to. One of the benefits is being with several hundred very nice people in a relaxed setting. We do it up right.
Second, I and some of my fellow newsletter writers (Bill Bonner and Dennis Gartman, among others, are slated to be there) are going to be hosting a special tribute dinner to honor Richard Russell for his outstanding contribution of over 50 years to not only the craft of investment writing but also to the lives and investment portfolios of his readers. He is one of my personal heroes as well as a good friend. At 84, his writing today is better than ever, and now he writes every day, not just once a month! Richard is an institution in the investment writing world, and after talking with his wife Faye he has said he will let us plan the dinner.
Richard has some of the most loyal readers anywhere. I have personally talked to people who have been reading Dow Theory Letters almost since the beginning (1956), and their enthusiasm for all things Richard has not waned. We have a long list of people who want to attend.
Based on the response so far, we believe we can get a large roomful of Richard's friends, writing colleagues, and fans who have benefitted from his wisdom over the years, to honor him for a life well-lived and a true servant's spirit, as well as being a guide not just in the markets but in life. The dinner will be Saturday evening, April 4, 2009 in San Diego. In order to know how many people we should plan for, please send an email to russelltribute@2000wave.com indicating how many tickets you would like. If you have already responded, you will get an email with a link next week for you to register. If you have not and want to come, I suggest you do so quickly, as again we anticipate a packed room. The tickets will be $195, with any money left over going to Richard's favorite charity.
(Note: If you register for my conference, you must register separately for the Russell Tribute Dinner, which will be held at a different venue, after the close of my conference on Saturday. Thanks!)
And for new readers and those who get this letter forwarded to them, you can get a free subscription of your own just by going to www.frontlinethoughts.com. And now to our regular letter.
Muddle Through on Hold
First, a quick look back at how I did in my 2008 forecast issue. In general, it was not a bad year in terms of getting the direction right on many of the markets, including gold, oil, the dollar (especially against the pound sterling), and stocks. Some predictions were on target, like a second-half rebound in the dollar.
But I missed the economy. I noted then that I believed we were already in recession (which we have now found out that we were), and I wrote that a recovery would begin by the end of the year, but that it would be a very weak one for a long time -- my basic Muddle Through scenario. Obviously, the recession is a lot worse than I thought it would be at the time. Looking to the end of this letter, I now think we will be in recession through at least 2009 before we begin a recovery, which will again be a rather anemic Muddle Through period of maybe two years, for a variety of reasons, some of which I cover today and others over the next few weeks.
And I should note that it was not long into the year before I began to get decidedly more gloomy, as many of you noted. And I expect that this year will bring a few surprises that will cause me to change my opinions yet again. When the facts change, I will try and change with them.
Forecast 2009: Deflation, Deleveraging, and the Stimulus Effect
For a very long time, I have been adamant that deflation is in our future. In the next few pages I outline how inflation might come back, but I doubt it will be this year. For now, deflation is the economic factor that the Fed and central banks will be battling. And believe me, it will be a very large and controversial battle.
We had a brief period last summer where inflation (as measured by the Consumer Price Index or CPI) was over 5%, and the trend was clearly up. The increase was almost entirely due to food and energy costs. Core inflation (less food and energy) was around 2%. Many commentators noted that real people actually bought gas and food and we should look at overall CPI and not just core. Now, with the drop in food and energy costs, their impact has vanished.
For the three months ending last November, the compound annual rate for the CPI was a negative(!) -10.2%, reflecting the almost 70% drop in energy. Annualized core CPI for the last three months ending November was a very low 0.4%. November CPI was a flat 0.0%. It has been falling steadily for the last five months.
December is likely to be negative. There is a trend here, and if you are a central banker it is not one you like. And that trend is being manifested in every part of the developed and much of the developing world. It is a global problem.
Given how high inflation was last summer, how could I credibly maintain that deflation was in our future? For reasons that I wrote about extensively then. Briefly, we were in a recession. Recessions are almost by definition deflationary. We had two massive bubbles bursting: the very visible housing bubble which was massively destroying wealth, and the less visible but even more powerful bursting of the credit bubble, which was accompanied by profound deleveraging and the destruction of what Paul McCulley termed the Shadow Banking System.
It would be a strange, strange world indeed if inflation could get any real traction in such an environment, and it didn't.
But now we have a structural problem in that deflation has the potential to get some very real traction going forward. Why? Because not just in the US, but all over the world, we built too much of almost everything. Too many houses, too many manufacturing plants, too many retail stores -- and just too much stuff.
In the US, capacity utilization is falling rapidly. Typically, if we produce "stuff" (cars, food, lumber, etc.) in the range of 80% of potential capacity, that is considered to be a good economy. Capacity utilization has been dropping for some time and is down below 75% for all industries, but in many industries is close to 70%. And the clear trend when looking at ISM manufacturing statistics is that it has a lot further to fall.
That means industries have no pricing power, as they can make a lot more "stuff" than they can sell. And when demand due to the recession drops as well, prices fall as producers try to stay in business.
As a very visible example, global output capacity for automobiles is 92 million cars, but sales will probably be around 60 million. Output in the US will be around 12 million, but right now sales are only about ten million. The average American household has 2.2 cars. Evidently, consumers are reducing the number of cars they own, buying used cars, and making their current vehicles last an average of 6 months longer -- all in just the last year.
Many auto plants, both in the US and abroad, are simply going to have to be closed. "Super-efficient Toyota expects its first operating loss in 70 years in the fiscal year ending March 31. Weak sales in China will probably force many of her 80 automakers to merge. Russian sales dropped 15% in November and 25% in Brazil from a year earlier." (Gary Shilling)
Just as there are too many auto dealers and too much auto manufacturing capacity, there are too many stores for a country whose consumers are in retreat. Consumer spending could easily drop 7% as the saving rate heads back up to 5% (or even more). It is estimated that over 70,000 retail stores will go out of business in the next six months. That would be in line with the 140,000 that closed doors last year. The economy and its businesses have to adjust to a new level of spending that will be the first serious consumer recession in 26 years.
Looking at Federal Reserve data, both total household debt and mortgage debt outstanding dropped in the third quarter, for the largest drop in 40 years. As I wrote almost two years ago, the disappearance of Mortgage Equity Withdrawals is having a negative impact of about 3% on US GDP. Evidence shows that this is also happening in Great Britain and other parts of Europe where there was a housing bubble.
Lies, Damned Lies, and Government Unemployment Numbers
There are some who see a ray of hope in the recent jobless claims reports, which have dropped back to "only" 467,000 in initial unemployment claims, down from 491,000 for the last week, after being over 500,000 for several weeks. Those numbers are seasonally adjusted. That hope disappears if you look at the actual numbers. For the current reporting week ending January 3, 2009, the advance number of initial claims came in at 726,420. Last week's advance number was 717,000. We have been above 600,000 new initial claims every week since the third week of November. Continuing claims jumped massively, by 744,000 to 5,316,124.
No conspiracy here. This is what happens when you try to smooth a volatile trend by using seasonal adjustments. If you use past performance as the tool by which you smooth the trend, when the trend changes, the seasonally adjusted numbers will be either too large or too small. Thus, the data understated the growth of jobs in 2003 because recent past performance had been bad, and it is now understating the number of unemployment claims and actual unemployment.
In December, the number of unemployed persons increased by a seasonally adjusted 632,000 to 11.1 million and the unemployment rate rose to 7.2%. Since the start of the recession in December 2007, the number of unemployed persons has grown by 3.6 million, and the unemployment rate has risen by 2.3% and is now at 7.2%.
I happened to be watching CNBC at the time of the release of the data, and several commentators remarked how much better the number was than they thought it would be. I wish they were right, but again, the actual numbers showed a loss of 954,000 jobs, over 50% more than the headline number reported in the press release. And that assumes that new businesses created 72,000 jobs from the birth/death model that I so frequently write about. It is possible that almost 1 million jobs were lost in December. I doubt the market would have liked that number.
I should note that the Bureau of Labor Statistics does not hide that number. You can find it if you dig for it. But most analysts seem to prefer just to take the press release and go with it. And most of the time that is fine. But in times like this, when trends are changing, you miss the bigger picture and get misleading data.
Unemployment could rise to 9-10% or more this year and on into 2010. That means we could easily see another 3 million lost jobs over the next year. That is going to put a lot of negative pressure on consumer spending. It also means that wages are not likely to rise, and we have already hard evidence of wages falling in many industries as companies try to find ways to remain solvent.
And that 9% will be the headline number. If you add people who have part-time jobs but would like a full-time job, and what are called marginally attached workers, the current rate is already 13.5%.
Average hours worked dropped to the lowest level since they began collecting data in 1964, as did hourly income. Given the increasing difficulty for consumers to borrow money and with income dropping, plus increased savings on the part of consumers, it is difficult to see how pricing power is going to come back any time soon.
This problem is multiplied throughout the developed world. The developing world, which sells products and goods to the US and European consumers, is starting to feel the pinch. Chinese and other Asian exports are dropping (more on that in future letters, but the data is ugly).
Overcapacity, rising unemployment, imploding leverage, lack of borrowing and/or lending, a serious retreat by consumers, and increased savings are all the conditions needed to bring about deflation. Left unchecked, we could soon see something like what Japan has experienced, and even potentially worse, as they started with a savings rate of 13%.
But deflation is not going to be left unchecked. It will be fought by central banks everywhere with low rates and the printing press, as well as government spending. And so, let's turn our attention to that process.
Central Bankers of the World, Unite!
There are many people who believe that the Fed and the Treasury increasing the money supply will bring about uncomfortably high inflation. And it is indeed their intention to "reflate" the economy. They are well aware of the problems that would develop if the US (and Europe!) caught "Japanese disease" or a prolonged bout of deflation. Bernanke has made it clear that "it" (as he called deflation in his 2002 speech) would not be allowe to happen on his watch.
And we have already seen a rather large growth in the monetary base. But as I wrote a few weeks ago, the velocity factor of money is slowing rapidly, creating the ability -- or dare I say it? -- the actual need to expand the money supply (you can read that at http://www.2000wave.com/article.asp?id=mwo120508) .
But is it having an effect?
Good friend Gary Shilling raises some doubts (emphasis mine):
"Central banks around the world continue to cut their target rates, although in today's frozen credit market, that won't ever get the horse up on his feet, let alone to the water and drinking. The distrust of banks for even loans to other banks is shown by the still wide spread between LIBOR and the Treasury bills they covet.
"The M2 money supply is 60 times bank reserves, so normally when the Fed gives the bank another dollar in reserves, M2 rises by $60. But between August and November of last year, the $577 billion rise in reserves resulted in a mere $264 billion growth in M2, less than one half!"
See the chart below (the red, smooth line is M2, the dotted line is the adjusted reserves).
The Fed is aggressively expanding its balance sheet. They have made clear that they intend to purchase mortgage securities, consumer loans, and credit card securities. Corporate loans are on the table, as well as other forms of debt. (Finland is getting ready to purchase corporate debt. The list of countries that do so will rise very quickly.) This will be direct infusion of money into the system. As Bernanke said in 2002, he knows where the keys are to the room that has the printing press. And they are going to use it.
Obama and his advisors have signaled they intend to run a deficit of at least a trillion dollars. Right now, as I add it up, it is more like $1.3 trillion (the stimulus number keeps moving), and given that tax receipts are going to drop and unemployment benefits will rise (care to bet that unemployment benefits won't be extended to 52 weeks instead of the current 26?), it could be closer to $1.7-2 trillion. That would be almost 15% of GDP!
Let's get this straight. The only difference between the Treasury and the Fed under an Obama administration and the Bush administration is that Obama will be even more willing to spend (although Bush certainly showed little restraint). Incoming Treasury Secretary Tim Geithner has worked at Treasury and is now president of the New York Fed. There will be little difference between his policies (and those of Larry Summers, Obama's economic advisor) and those of Bernanke and Paulson. And like Paulson, he is going to have to make up the play book as he goes.
The Fed and the new administration are "all in," as they say in Texas hold 'em poker, in the fight to defeat deflation and get the economy growing. And eventually England and Europe will get it and join the fight (both the European Central Bank [especially!] and the Bank of England are behind the curve).
But there is a problem.
Lowering rates isn't enough to get consumers to spend when they have seen their wealth erode from losses in the value of their houses and investment portfolios and retirement accounts. The stimulus last summer was largely saved or used to pay down debt. What was an annualized stimulus of 3% of GDP in the second quarter, which is quite large, only kept GDP growth positive for one quarter.
Obama talks about creating 3 million jobs. If he can do it, that would only partially offset the job losses that will happen in his first year in office. But it will take a long time for much of the stimulus he is talking about to make its way into the economy. You can't turn on infrastructure projects in one quarter. It takes a lot of time to plan. New green power plants? Wonderful. I'm all for it. But they take years to authorize and build. Tax cuts? Again, much of it will be saved or used for debt.
The reality is that the US and much of the world are going to see their economies shrink for at least another year. And when that new, lower level is reached, the economy will slowly start to grow again. Remember those 71,000 retail stores closing? That means that those left standing will get more business and will be able to expand and grow and hire people. That is how recessions work. Excess capacity is worked through. Businesses cut back until they can get positive cash flow.
In 1978, in the midst of high inflation, bear markets, and malaise about all our jobs going overseas, the correct answer to the question "Where will all the needed new jobs come from?" was "I don't know, but they will." That is the correct answer today. That is what free markets and capitalism do. They find a way to make new paths and new businesses where none existed before. And it will happen again. Just with a little lag this time.
In the meantime, there is a lot of pain. An Obama administration is going to do what it can to help relieve that pain, even at the cost of trillion-dollar deficits for several years.
This you can take to the bank: If the Fed buys $500 billion in assets of various kinds and if the US government spends an extra trillion dollars and deflation is still a concern, they are going to double down and do it again. And yet again if they think it is necessary. They are not going to stop until the nominal economy is growing and inflation is above at least 1%.
How much will that number finally be? No one really knows. This has never been attempted. Maybe the initial stimulus package and Fed debt purchases will be enough. My bet is that it won't be, but that is just a guess. We are in uncharted waters. But the captains of the boats are all Keynesians. They are going to fight a recession and deflation with old-fashioned stimulus. And that means we had better adjust our portfolios and businesses for that reality.
Just to give you a picture of what economists think about the effect of the stimulus, let's turn to the Levy Economics Institute of Bard College, which is one of my favorite sources for original economic insight (http://www.levy.org/). They are a rather conservative lot. The graph below shows what two different levels of government stimulus will mean to the economy. They graph unemployment at no stimulus (top black line) and at two levels of "shock" or stimulus. Shock 1 is about $380 billion and shock 2 is about $760 billion. The dotted lines are what is known as "output gap," or the measure of the difference between the actual output (actual GDP) of an economy and what it could produce at its most efficient (potential GDP).
"The implication of these projections is that, even with the application of almost unbelievably large fiscal stimuli, output will not increase enough to prevent unemployment from continuing to rise through the next two years.
"It seems to us unlikely that U.S. budget deficits on the order of 8--10 percent through the next two years could be tolerated for purely political reasons, given the strong and widespread belief that the budget should normally be balanced. But looking at the matter more rationally, we are bound to accept that nothing like the configuration of balances and other variables displayed in Figures 3 and 4 could possibly be sustained over any long period of time. The budget deficits imply that the public debt relative to GDP would rise permanently to about 80 percent, while GDP would remain below trend, with unemployment above 6 percent.
"Fiscal policy alone cannot, therefore, resolve the current crisis. A large enough stimulus will help counter the drop in private expenditure, reducing unemployment, but it will bring back a large and growing external imbalance, which will keep world growth on an unsustainable path.
"… At the moment, the recovery plans under consideration by the United States and many other countries seem to be concentrated on the possibility of using expansionary fiscal and monetary policies.
"But, however well coordinated, this approach will not be sufficient.
"What must come to pass, perhaps obviously, is a worldwide recovery of output, combined with sustainable balances in international trade."
Let me wrap up with a quick note about housing. The economy is going to have a rough time getting back to trend growth with the housing market in the tank. New home sales fell 2.9% in November, while the median price declined 11.5%. Unsold inventories stood at a rate of 11.5-month supply. Housing starts fell nearly 19% in November, while the number of building permits was down 15.6%. Sales of existing homes in November fell more than 8%. The S&P/Case-Shiller 20-city housing index showed an 18% drop in prices in October from a year earlier, while the 10-city index declined 19.1%. Prices in the 20-city index have fallen more than 23% since their July 2006 peak, while the 10-city index is down 25% since its top in June 2006.
It will be 2011 before we work through the excess supply of homes, especially as we are seeing more and more come onto the market because of foreclosures. Prices are likely to drop another 10%. There will be more wealth destruction and more pressure on consumers. 10% of all mortgages are either delinquent or in foreclosure.
Predictions 2009
Let's close with some predictions. Ten out of ten analysts in the recent Barron's forecast saw stock prices rising 10-20% this year. For reasons I outlined last week, I think we could see a tradable rally in the next few months, but at the very least test the lows this summer, if not set new lows. Earnings are going to be far worse than any analyst's projections I have seen. And earnings drive stock prices.
Further, this recession is going to be the longest in anyone's memory. It is going to seem like it is never going to end (it will, I promise), and more and more investors are just going to give up on stocks. The buy and hold for the long run mantra is wearing thin. In inflation-adjusted terms, the stock market is about where it was in 1973! If you reinvested dividends, that gets you to 1991 (again, inflation-adjusted). It takes a lot of buying to make a bull market. It only takes an absence of buying to make a bear market.
Could we get a rally after the summer or fall lows? Sure. And it could be a good one. A lot depends on how fast the stimulus kicks in and whether it really has an effect. Will the Fed really buy large-cap corporate debt? I hope we can see something like a 1974 bottom in stocks develop.
I think the correlation between the US stock market, other developed markets, and emerging markets is close to one. I prefer to stand aside until the US economy has a clear direction and we can see whether the stimulus actually works. And then we can look at the world economy. I won't embarrass them by naming names, but those who argued for "decoupling" between the US and the rest of the world are not looking good. Someday, but not this decade.
I would be a buyer of quality bonds, both corporate and municipal. The key is to have a bond analyst who knows what they are doing and not just looking at ratings. There are some real values in the bond market today.
I would not be a buyer of US government debt. Treasuries, if not in a mini-bubble, have little upside potential and just don't yield enough. Why would I hold a ten-year treasury for 2.39%? I like TIPS at these prices. TIPS are pricing in deflation for ten years and, as I outlined above, I don't think the Fed will allow deflation to take hold.
With all the massive printing of money, you would think I expect the dollar to crash. I don't. The question is, what will it fall against? The euro? Really? The pound is better valued, but England and Europe are going to have to cut rates and apply massive stimulus as well. Every developed country will have problems. I can see holding Canadian, Australian, and other commodity-country currencies, but the leverage needed to make it a reasonable investment potential is too risky for individuals.
I can't see the Japanese letting the yen get too much stronger. China seems to want to halt the rise of the yuan, and the rest of Asia will devalue their currencies to maintain whatever they think of as a competitive advantage. Longer term, I like Asian currencies.
After a year of bouncing around, gold may be poised to rise against all major currencies. We could easily see new highs in the next year.
I think oil is going lower (and maybe much lower -- can you say $1-a-gallon gas?) in the near term. As I have written about before, oil is now in the steepest contango on record. That means oil is cheap today and more expensive in a few months. That is not normal. Oil is bidding for storage. You can make 20-25% on your money in a few months if you can buy oil and find somewhere to store it. At least 25 supertankers have been leased to store oil, and sources say another ten are being bid for. It remains to be seen if OPEC can really cut enough to make a difference in the near term.
As for the other metals, I think it is quite likely copper and its industrial allies will fall in price at least for the near term, until production can be cut and demand in Asia begin to rise again. I would not be a buyer of long-only commodity funds for the near term. Someday the bull market in commodities will return, but not until Asian demand picks up.
The risks to my forecasts are quite clear. The stimulus could happen quicker and be more effective than I think, and the economy and the markets could surprise to the upside. On the other hand, and more scarily, the Fed could be pushing on a string in a liquidity trap and the economy and markets could get hit harder, along with most assets.
Briefly, if you would like to look at a range of money managers I think have the potential to navigate the current market successfully, let me suggest you contact some of my partners around the world. If you are an accredited investor (net worth $1.5 million) and would like to look at a group of hedge funds and especially commodity funds in the US, go to www.accreditedinvestor.ws and fill out the form, and my partners at Altegris Investments will get in touch with you. If you are in Europe, use the same link and I will get you in touch with Absolute Return Partners in London. In South Africa, my partner is Plexus Asset Management. We will soon be announcing new partners in Canada and in Latin America.
If your net worth is less than $1.5 million, my US partners at CMG have a platform of managers and traders that take direct-managed accounts with minimums of $100,000. These are liquid and fully transparent accounts with managers with long-term track records.
You really should check it out.
The link is http://www.cmgfunds.net/public/mauldin_questionnaire.asp.
And if you are an advisor or broker and would like to see the managers on the Altegris or CMG platforms and how you can access them for your clients, sign up and note on the form you are in the business. It might actually be fun to make a client call with a recommendation for a fund or manager that was up in 2008.
La Jolla, Bermuda, and Europe
Tiffani and I head out to La Jolla Monday to meet with Jon Sundt and his partners at Altegris Investments. There have been a lot of positive developments of late, including new managers, and of course we will be talking about the upcoming conference. And I will get to have a quick happy hour with Richard Russell and his son. The Tribute dinner is going to be so much fun.
On Wednesday, I am hosting a dinner at my new home for a small group of family office heads, hedge fund managers, and local businessmen. We are calling it an "Idea Dinner" and will throw out thoughts on how to invest in the coming year. I will report anything interesting.
I will be in Bermuda January 28-31 for a speech and some time away from the office to write on the book Tiffani and I are doing on millionaires. It is a fun project. And I have to have it finished by the end of February so I can get to London and Europe and New York in March.
I am always optimistic at the beginning of the year. Even though I see a serious recession, I am working, like every businessman in the world, on making my business grow in spite of problems in the economy. Free markets with motivated entrepreneurs will be what really creates a growing economy.
It is time to hit the send button. There is a fire in the family room, and it is time to relax. Enjoy your week. I know I will.
Your more optimistic than this letter implies analyst,
John Mauldin
John@FrontLineThoughts.com
Copyright 2009 John Mauldin. All Rights Reserved
Thursday, November 13, 2008
Friday, November 7, 2008
McGuire Real Estate Announces Merger
SAN FRANCISCO, CA, Nov 06, 2008
(MARKET WIRE via COMTEX) -- McGuire Real Estate and Urban Bay Properties have announced the merger of the two companies.
Urban Bay Properties specializes in urban-style housing such as lofts and condominiums. Established in 2003 with offices South of Market and in Oakland's Jack London Square, the firm has focused on new developments and home sales in San Francisco's South of Market and South Beach districts, as well as neighborhoods in Oakland, Emeryville, and Berkeley.
"This merger provides new opportunities for McGuire. With the addition of Urban Bay we are able to provide Bay Area-wide coverage with seven offices. We believe the East Bay and San Francisco's SOMA district will be burgeoning marketplaces for McGuire. By partnering with an established marketplace leader such as Urban Bay, McGuire will be able to offer its clients an unmatched level of knowledge and experience in these developing spaces," said Charles Moore, CEO of McGuire Real Estate.
McGuire Real Estate, founded in 1919, has been a market leader in luxury home sales for nearly 90 years. This opportunity is part of a larger plan for McGuire to expand its regional presence. In the fall of 2006, McGuire opened its Noe Valley office as the first step in this expansion. This merger is the next step and enhances McGuire's presence in San Francisco's South of Market district, as well as the East Bay.
Thomas C. Brown, CEO of Urban Bay, will assume the role of Chief Operating Officer at McGuire Real Estate, creating a unified management team for the company.
"This merger provides significant opportunities for Urban Bay Properties to be able to extend its positioning in the luxury market. The combined resources of both companies allows for greater emphasis and expansion of our web presence and technology offerings for both agents and clients," said Mr. Brown.
About McGuire Real Estate
McGuire Real Estate ( www.mcguire.com) has been an integral part of the real estate scene in the San Francisco Bay Area, stretching back nearly 90 years. A mid-sized, regional boutique, McGuire specializes in luxury real estate but applies the highest standards of service to properties in every price range, and to every client. Its "customer first" philosophy and local focus have proved to be a winning formula for this Bay Area real estate leader. McGuire's affiliation with Luxury Portfolio successfully connects McGuire's clients and agents to a worldwide marketplace. McGuire employs nearly 200 agents and operates three offices in San Francisco, one in Mill Valley serving Marin County, and one in Burlingame serving the Peninsula.
About Urban Bay Properties
Urban Bay Properties ( www.ubayp.com) is the premiere real estate brokerage for the San Francisco Bay Area's urban-style properties. Founded as Lofts Unlimited ( www.loftsunlimited.com) in 1992, the company was the first to open an office in both San Francisco's South of Market and Oakland's Jack London Square districts. Urban Bay Properties, which formed in 2003, continues to specialize in the sales and marketing of new developments and urban-style resales throughout the Bay Area, including condominiums, lofts and unique single family detached homes. In addition to its sales services, the company also offers luxury furnished and unfurnished rental services.
(MARKET WIRE via COMTEX) -- McGuire Real Estate and Urban Bay Properties have announced the merger of the two companies.
Urban Bay Properties specializes in urban-style housing such as lofts and condominiums. Established in 2003 with offices South of Market and in Oakland's Jack London Square, the firm has focused on new developments and home sales in San Francisco's South of Market and South Beach districts, as well as neighborhoods in Oakland, Emeryville, and Berkeley.
"This merger provides new opportunities for McGuire. With the addition of Urban Bay we are able to provide Bay Area-wide coverage with seven offices. We believe the East Bay and San Francisco's SOMA district will be burgeoning marketplaces for McGuire. By partnering with an established marketplace leader such as Urban Bay, McGuire will be able to offer its clients an unmatched level of knowledge and experience in these developing spaces," said Charles Moore, CEO of McGuire Real Estate.
McGuire Real Estate, founded in 1919, has been a market leader in luxury home sales for nearly 90 years. This opportunity is part of a larger plan for McGuire to expand its regional presence. In the fall of 2006, McGuire opened its Noe Valley office as the first step in this expansion. This merger is the next step and enhances McGuire's presence in San Francisco's South of Market district, as well as the East Bay.
Thomas C. Brown, CEO of Urban Bay, will assume the role of Chief Operating Officer at McGuire Real Estate, creating a unified management team for the company.
"This merger provides significant opportunities for Urban Bay Properties to be able to extend its positioning in the luxury market. The combined resources of both companies allows for greater emphasis and expansion of our web presence and technology offerings for both agents and clients," said Mr. Brown.
About McGuire Real Estate
McGuire Real Estate ( www.mcguire.com) has been an integral part of the real estate scene in the San Francisco Bay Area, stretching back nearly 90 years. A mid-sized, regional boutique, McGuire specializes in luxury real estate but applies the highest standards of service to properties in every price range, and to every client. Its "customer first" philosophy and local focus have proved to be a winning formula for this Bay Area real estate leader. McGuire's affiliation with Luxury Portfolio successfully connects McGuire's clients and agents to a worldwide marketplace. McGuire employs nearly 200 agents and operates three offices in San Francisco, one in Mill Valley serving Marin County, and one in Burlingame serving the Peninsula.
About Urban Bay Properties
Urban Bay Properties ( www.ubayp.com) is the premiere real estate brokerage for the San Francisco Bay Area's urban-style properties. Founded as Lofts Unlimited ( www.loftsunlimited.com) in 1992, the company was the first to open an office in both San Francisco's South of Market and Oakland's Jack London Square districts. Urban Bay Properties, which formed in 2003, continues to specialize in the sales and marketing of new developments and urban-style resales throughout the Bay Area, including condominiums, lofts and unique single family detached homes. In addition to its sales services, the company also offers luxury furnished and unfurnished rental services.
Friday, October 3, 2008
House approves historic bailout bill; Bush quickly signs it
By DAVE MONTGOMERY
McClatchy Newspapers
WASHINGTON -- A $700 billion bailout package designed to ease the nation's worsening economic crisis cleared Congress and was signed into law Friday after the House of Representatives approved a revised version of the bill that it had rejected days earlier.
Some 32 Democrats and 26 Republicans switched positions to vote for the Senate-passed bill, pushing it through the House by 263-171. President Bush quickly signed the measure, praising Congress for rallying behind the rescue package.
"By coming together on this legislation, we have acted boldly to help prevent the crisis on Wall Street from becoming a crisis in communities across our country," Bush said during a five-minute statement in the White House Rose Garden. Later, he walked next door to the Treasury Department, where he thanked Secretary Henry Paulson and the building's employees for their hard work during the financial crisis.
Stock prices slid on Wall Street despite the bill's passage as new data from around the world made it clear that the economic outlook is darkening rapidly. U.S. employers shed 159,000 jobs in September, the highest monthly number in five years, for example. The Dow Jones Industrial Average dropped another 157.47 points to close at 10,325.38.
Friday's vote reversed the House's rejection of the bill Monday on a 228-205 vote, and came two days after the Senate passed a revised version of the original plan by 74-25, including $110 billion in unrelated tax breaks and other incentives aimed at converting House members into backing the bill.
Over the past two days, Bush, top administration officials and corporate executives joined forces with thousands of struggling wage earners to besiege House members with calls on behalf of the bill. Presidential candidates Sens. John McCain, R-Ariz., and Barack Obama, D-Ill., both of whom voted for the measure in the Senate, also made calls to members in their respective parties urging support for the measure.
Congressional leaders in both parties said the legislation would help unfreeze distressed credit markets, and they called for further changes to correct abuses in the financial system that helped cause the crisis.
"We've just performed emergency surgery, but unless the patient starts eating right and exercising, the problem's coming right back," said House Majority Leader Steny Hoyer, D-Md.
"The passage of this flawed but necessary bill is not cause for celebration," said House Minority Leader John Boehner, R-Ohio.
House members who changed their votes to yes said they were torn by the choice of accepting an imperfect solution or facing a deepening financial crisis if they failed to act.
Rep. Jim McGovern, D-Mass., summed up the feelings of many of his colleagues when he described the legislation as "far from perfect" but acknowledged: "The way I see it, we don't have much choice."
Coming on the final day of the 110th Congress and just weeks before the Nov. 4 elections, the multifaceted rescue package is intended to ease distress across the economic spectrum.
Public opinion initially ran strongly against the measure - widely perceived as a bailout for Wall Street - but sentiment shifted after the first House vote, when the stock market plunged and hammered millions of stock-backed 401(k) retirement plans.
Even as Congress approved the measure, there were strong signs that the public remains pessimistic about the nation's economic future. Nearly two-thirds of the public doubts the government's ability to restore consumer and investor confidence, according to a new Ipsos-McClatchy poll, and 76 percent think that the economy will continue to get worse.
Obama reached out to Democrats through conference calls and individually, persuading more than a half-dozen members to change their votes. Similarly, McCain worked the Republican side of the aisle, at one point calling Minority Whip Roy Blunt of Missouri three times in a single day for guidance on whom to call.
Rep. Michael Conaway, R-Texas, said he had several conversations with Bush, a former resident of Conaway's hometown of Midland. Conaway, who originally voted against the bill, said he began changing his mind after town hall meetings in his district.
The bill essentially would create a $700 billion federal program to buy bad assets from banks and other financial firms at a steep discount. The hope is that the government would recoup much or all of that money by selling the assets later, once stability returns to the financial world.
The measure includes strong terms to ensure legislative oversight of the Treasury-run bailout, and it gives the government an ownership stake in the firms that it aids. That will give taxpayers a share of any profits once the companies return to profitability.
It also limits the pay of executives in firms that benefit from the bailout.
The Senate version made one significant change to the earlier financial-rescue package: It more than doubled the insurance that the Federal Deposit Insurance Corp. provides on customer deposits to $250,000 from $100,000. The higher amount will apply for one year.
The FDIC also was granted temporary powers to borrow without limit from the Treasury to keep the banking system solvent. Economists think that the FDIC measures will boost confidence in small community banks.
The extra tax breaks the Senate added range from a one-year fix to prevent the alternative-minimum tax from hitting more taxpayers to extending the research credit for business to allowing rural utilities to issue tax-exempt bonds for use of renewable energy.
Also included were terms extending tax breaks for motor-sports racing tracks, makers of wooden arrows for children and the rum excise tax for Puerto Rico and the Virgin Islands.
The breaks will cost the Treasury an estimated $110 billion over 10 years, according to Congress' Joint Committee on Taxation.
MORE FROM MCCLATCHY
Lax oversight? Maybe $64 million for D.C. pols explains it: http://www.mcclatchydc.com/election2008/story/53398.html
To ask a question about this story or any economic question, go to McClatchy's economy Q&A: http://tinyurl.com/46eam4
McClatchy Newspapers
WASHINGTON -- A $700 billion bailout package designed to ease the nation's worsening economic crisis cleared Congress and was signed into law Friday after the House of Representatives approved a revised version of the bill that it had rejected days earlier.
Some 32 Democrats and 26 Republicans switched positions to vote for the Senate-passed bill, pushing it through the House by 263-171. President Bush quickly signed the measure, praising Congress for rallying behind the rescue package.
"By coming together on this legislation, we have acted boldly to help prevent the crisis on Wall Street from becoming a crisis in communities across our country," Bush said during a five-minute statement in the White House Rose Garden. Later, he walked next door to the Treasury Department, where he thanked Secretary Henry Paulson and the building's employees for their hard work during the financial crisis.
Stock prices slid on Wall Street despite the bill's passage as new data from around the world made it clear that the economic outlook is darkening rapidly. U.S. employers shed 159,000 jobs in September, the highest monthly number in five years, for example. The Dow Jones Industrial Average dropped another 157.47 points to close at 10,325.38.
Friday's vote reversed the House's rejection of the bill Monday on a 228-205 vote, and came two days after the Senate passed a revised version of the original plan by 74-25, including $110 billion in unrelated tax breaks and other incentives aimed at converting House members into backing the bill.
Over the past two days, Bush, top administration officials and corporate executives joined forces with thousands of struggling wage earners to besiege House members with calls on behalf of the bill. Presidential candidates Sens. John McCain, R-Ariz., and Barack Obama, D-Ill., both of whom voted for the measure in the Senate, also made calls to members in their respective parties urging support for the measure.
Congressional leaders in both parties said the legislation would help unfreeze distressed credit markets, and they called for further changes to correct abuses in the financial system that helped cause the crisis.
"We've just performed emergency surgery, but unless the patient starts eating right and exercising, the problem's coming right back," said House Majority Leader Steny Hoyer, D-Md.
"The passage of this flawed but necessary bill is not cause for celebration," said House Minority Leader John Boehner, R-Ohio.
House members who changed their votes to yes said they were torn by the choice of accepting an imperfect solution or facing a deepening financial crisis if they failed to act.
Rep. Jim McGovern, D-Mass., summed up the feelings of many of his colleagues when he described the legislation as "far from perfect" but acknowledged: "The way I see it, we don't have much choice."
Coming on the final day of the 110th Congress and just weeks before the Nov. 4 elections, the multifaceted rescue package is intended to ease distress across the economic spectrum.
Public opinion initially ran strongly against the measure - widely perceived as a bailout for Wall Street - but sentiment shifted after the first House vote, when the stock market plunged and hammered millions of stock-backed 401(k) retirement plans.
Even as Congress approved the measure, there were strong signs that the public remains pessimistic about the nation's economic future. Nearly two-thirds of the public doubts the government's ability to restore consumer and investor confidence, according to a new Ipsos-McClatchy poll, and 76 percent think that the economy will continue to get worse.
Obama reached out to Democrats through conference calls and individually, persuading more than a half-dozen members to change their votes. Similarly, McCain worked the Republican side of the aisle, at one point calling Minority Whip Roy Blunt of Missouri three times in a single day for guidance on whom to call.
Rep. Michael Conaway, R-Texas, said he had several conversations with Bush, a former resident of Conaway's hometown of Midland. Conaway, who originally voted against the bill, said he began changing his mind after town hall meetings in his district.
The bill essentially would create a $700 billion federal program to buy bad assets from banks and other financial firms at a steep discount. The hope is that the government would recoup much or all of that money by selling the assets later, once stability returns to the financial world.
The measure includes strong terms to ensure legislative oversight of the Treasury-run bailout, and it gives the government an ownership stake in the firms that it aids. That will give taxpayers a share of any profits once the companies return to profitability.
It also limits the pay of executives in firms that benefit from the bailout.
The Senate version made one significant change to the earlier financial-rescue package: It more than doubled the insurance that the Federal Deposit Insurance Corp. provides on customer deposits to $250,000 from $100,000. The higher amount will apply for one year.
The FDIC also was granted temporary powers to borrow without limit from the Treasury to keep the banking system solvent. Economists think that the FDIC measures will boost confidence in small community banks.
The extra tax breaks the Senate added range from a one-year fix to prevent the alternative-minimum tax from hitting more taxpayers to extending the research credit for business to allowing rural utilities to issue tax-exempt bonds for use of renewable energy.
Also included were terms extending tax breaks for motor-sports racing tracks, makers of wooden arrows for children and the rum excise tax for Puerto Rico and the Virgin Islands.
The breaks will cost the Treasury an estimated $110 billion over 10 years, according to Congress' Joint Committee on Taxation.
MORE FROM MCCLATCHY
Lax oversight? Maybe $64 million for D.C. pols explains it: http://www.mcclatchydc.com/election2008/story/53398.html
To ask a question about this story or any economic question, go to McClatchy's economy Q&A: http://tinyurl.com/46eam4
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