Lonesome Tree in Sandhills

Friday, December 26, 2008

The Blinking Red Light

American leaders ignored the blinking red light at OUR economic peril.

In the past decade, the Chinese loaned trillions of excess savings to the US at very low interest rates.  China invested earnings mostly from manufacturing exports by buying U.S. T-Bills, bonds and government-backed mortgage debt.  The more they bought, the lower the interest rates. Lowered interest rates helped fuel a historic consumption binge and housing bubble in the United States.

US leaders became complacent about borrowing from a communist country & American consumers were lulled into complacency about spending beyond their means.  Economists say Americans should have recognized borrowing from abroad for consumption and deficit spending at home was not a formula for economic success.  Its not rocket science!  WHAT WERE WE THINKING??

China accumulated trillions of US debt instruments (2/3rds of US national debt) & the US taxpayers in turn pay billions of dollars in interest, with which China competes for oil supplies against the US.  If China had allowed its currency to float according to market demand in the past decade, its export growth probably would have moderated & it would not have acquired the same vast hoard of dollars to invest abroad.

"This was a blinking red light," said Kenneth Rogoff, a professor of economics at Harvard and a former chief economist at the International Monetary Fund. "We should have reacted to it."

But the Fed & Alan Greenspan didn't react.  Interest rates stayed low, contributing to the US housing bubble even as China stoked our easy-money economy to export more goods. These so-called economic experts looked right at that blinking red light like a deer in headlights & stoked speculation in real estate.  Perhaps Alan fell asleep at the wheel, but were the Fed's other members asleep, or mesmerized by the blinking red light?

Thursday, December 18, 2008

Opposite Economic Views

~ Informed investors make stronger markets. ~

The old adages, "Everything is timing" & "90% of what happens is due to attitude" is very pertinent to smart investing. Economic pendulums swing back from going too far in either direction - its just a matter of attitudes gathering speed. Much depends on consumers.

Bear market money-makers see global economies continuing to contract well into late 2010. They expect consumers outstripped their ability to pay huge levels of debt after a decade of decadent spending like there's no tomorrow. They expect most will spend only on necessities to pay off credit card debt & car loans, but those w/low-paying or no jobs will default. They believe this process will stretch out over several years - slowing annual growth to 1.0% (down from 3.5%), and that stock prices have not yet fully priced in this timing.

Speakers' motives at the Reuters Investment Summit play a huge role. They all try to influence their particular markets up or down depending on their strategy to make money. Never mind there are few alternatives for that big load of money flowing out of hedge funds.

Bears like Atteberry, who runs a $2 billion bond fund at First Pacific Advisors in LA focused on income funds, hopes to gain more institutional & high-value clients disenchanted with hedge funds & seeking safe harbors. Taylor, an old guy who trades currencies with a $14 billion hedge fund, hopes global traders will dump currencies so he can buy cheaper.

Bullish speakers like O'Shaunessy are also trying to influence managers of institutional & high-value clients to release their big load of money to buy equities now, which would drive those market up. Even if growth in spending slows to a crawl, they believe it will pick back up so best to get into equities of companies with solid fundamentals while their stock is undervalued. How severely undervalued is the question here.

Monday, December 8, 2008

Gift Card Caution

Gift Card Caution:  Buyer Beware

Consider giving cash or gift cards issued by your bank this Holiday Season - rather than merchant-branded gift cards - to avoid redemption problems should a merchant close its business.

The FDIC approved insuring "stored value cards" IF the cards are purchased from banks.  The FDIC will recognize card holders as insured "depositors" if the issuing bank fails. FDIC insurance does not cover merchant-brand cards.

With several large bankruptcies came large shocks to consumers holding gift cards in those companies.  SharperImage had close to $20 million in outstanding gift cards when it filed. The Bankruptcy Court ruled gift cards are booked as debt owed card holders as unsecured creditors and discharged the debt. Circuit City filed and asked the Bankruptcy Court to allow the company to redeem the cards at stores that will remain open during its reorganization.  States Attorney Generals are moving to protect consumers by getting state legislatures to pass laws extending time limits for redemption; e.g., Illinois law allows up to 5 years.