Dow Industrials, Week of October 27-31
S&P500, Week of October 27-31
11% Hey, that’s normally a pretty good year. Pretty solid week, with broad gains across all of the indices, mostly due to the big day we saw on Tuesday. But Thursday and Friday both saw upside action, too.
All told, a pretty wild, positive week.
What does this mean going forward? Is the bottom in?
What say ye?
Chris Whalen runs Institutional Risk Analytics.
He comes from an interesting family, with a father who was a senior advisor in both the Nixon and Reagan administrations.
Chris interviewed his father and Roger Kubarych, on the Federal Reserve, various government policies, the current state of politics, and the present economic environment. It makes for fascinating reading…
We turn to two veteran observers of the Fed and the US political process to get some perspective on the financial crisis and the policy makers who have arguably caused much of the present economic difficulty.
Roger M. Kubarych is Chief US Economist of UniCredit Global Research, part of UniCredit Markets and Investment Banking. He joined HVB Americas Inc., now part of UniCredit Group, in July 2001 with responsibility for advising management and clients on economic, financial market, and policy developments with significant implications for banking and investment decisions. He is also the Henry Kaufman Adjunct Senior Fellow for International Economics and Finance at the Council on Foreign Relations. He has published two books: Stress Testing the System: Simulating the Global Consequences of the Next Financial Crisis (2001) and Foreign Exchange Markets in the United States (1980).
Richard J. Whalen is an author and consultant who lives in New York. During his tenure at Fortune, Whalen wrote The Founding Father: The Story of Joseph P. Kennedy. His critically acclaimed book was on the New York Times’ bestseller list for more than a year. He served as a special assistant in Richard M. Nixon’s successful 1968 presidential campaign and as senior consultant to Secretary of State William Rogers in 1969-71, and then left government to launch his own political and economic intelligence and consulting firm. In 1972, Whalen wrote a prophetic study of the Nixon presidency, Catch the Falling Flag, A Republican’s Challenge to His Party, published a month before the Watergate break-in. A senior policy adviser to Ronald Reagan from 1975 through the 1980 presidential campaign, Whalen was an informal adviser thereafter. IRA co-founder
Christopher Whalen, who conducted this interview, is his eldest child.
The IRA: So Roger, we love to read your stuff, but don’t see it often enough.
Kubarych: I get to write a lot but most of what I write is internal and goes to clients and management. Henry Kaufman taught me that a little exclusivity is a good thing. Henry, by the way, still runs Henry Kaufman & Co., still has consulting clients, still finds time to help his sons with their businesses, still writes and still disagrees with power, including the powers on some of the boards on which he serves.
Whalen: He is much missed from center stage, where he operated for many years. He and Paul Volcker and people of that vintage have a toughness of mind that is missing from the plastic people we find in politics in more recent years.
The IRA: Yesterday you were talking about this issue of toughness and about President Herbert Hoover, who you spoke of in glowing terms. What did you mean by that? His memoirs is perfectly constructed and organized, like a report to the Congress, the product of a very orderly and disciplined mind.
Whalen: He had the foresight to see the need to create the Reconstruction Finance Corporation in 1928. In my view, the Bush Administration and the Congress should be recreating the RFC now so that the next president has the tools to deal with the implosion in real estate markets, recapitalizing the banks and reviving economic activity generally. The fact that these structures were in place when FDR took office was a big advantage.
Kubarych: And the RFC actually got going in 1933 in a serious way.
Whalen: Hoover saw what was coming but he did not understand the modern state and modern finance well enough to realize that time was running out and would overcome him. Secretary Hank Paulson and the Bush White House still do not understand that time is running out and that we need to immediately revive the RFC model to deal with the looming economic collapse. This effort must start immediately after Election Day. Hoover was part of that lengthy transition where the President was elected in November but sworn in the following March, now we can hardly even afford to wait till January.
Interesting piece on how mortgage workers were comped during the heyday by John Quigley, titled Compensation and Incentives in the Mortgage Business. It goes a long way to explaining why so many people did such silly things during the boom: They were well paid to do so! A quick excerpt: The incentive structure that arose…Read More
Michael Panzner writes: > Yesterday, the Commerce Department reported that the U.S. economy shrank at a 0.3% pace in the third quarter. Although there is some question about whether government reported data reflects reality, one thing seems clear from looking at a cross-section of GDP data from other countries: economic contraction is widespread. > GDP…Read More
Jake of Economopic writes: > While the media is celebrating the fact that: Personal income increased $24.5 billion, or 0.2 percent, and disposable personal income (DPI) increased $25.7 billion, or 0.2 percent, in September, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) decreased $33.6 billion, or 0.3 percent. Real per capita disposable…Read More
I am getting up to speed slowly with WordPress. (All of your suggestions have been very helpful). Our host firm is Mosso, a Rackspace company, and they showed us this insane stat: Their data for www.ritholtz.com yesterday shows total page views for the day of 270,969. That’s simply off the charts . . .
“Why am I being punished for having bought a house I could afford? I am beginning to think I would have rocks in my head if I keep paying my mortgage.”
-Todd Lawrence, Norwich, CT homeowner with a traditional 30-year mortgage
Herein lies the simple problem in trying to “save” so many mortgages: A huge swath of them should not be saved. Some of that is due to price, some of it is due to not wanting to reward irresponsible behavior, but the bulk of it is simply because the people living in these homes cannot reasonably afford to pay for them, even after a 20-30% workout.
There are now more than 10 million “home-owers” underwater, with their mortgages greater than the present value of their homes. Since they have little skin in the game — thanks to banks that did away with down payment requirements — there is little incentive for them to tough it out.
Not surprisingly, it is FDIC Chairman Sheila Bair who is leading the push towards a mortgage workout plan. She wants policy makers to take action to help people stay in their homes — thereby taking pressure off of the FDIC, which insures the banks.
Why? More foreclosures = more bank failures = bigger FDIC obligations.
The problem with this current rescue plan is that it is designed to “prevent the continued downward spiral of the housing market.” But that is EXACTLY what the housing market needs — overpriced homes that are not selling need to come down in price. We had a normal price increase from 1996-2001, and then a near vertical set of price gains from 2002-06. Any framework for systematically modifying loans that fails to comprehend that is doomed to failure.
Here is the grim reality about home prices: They remain elevated by just about every historical metric. Look at the median income to median home price, or look at the cost of renting versus the cost of ownership. Look at the inventory for sale, relative to 5 year trailing price increases.
The bottom line is that in much of the country, prices are still too high. That’s reflected in all the inventory that is not selling.
And home sales typically tend to be a chain of prices and sales: The seller of the starter home tot he newlyweds then can move to the larger home with room for their growing family, and that seller moves to an even bigger manse, and so on and so on. But if the newlyweds cannot afford that first purchase, the entire chain gets slogged down.
The notable exceptions? Where foreclosures have driven prices down 40, 50 even 60%, home sales surge. Much of our leadership fails to understand that simple truism about home prices.