Thoughts on the Stimulus

Initially drafted on Sunday, February 15 (the weekend after passing of the stimulus)….

Not more than 12 months ago, many were debating whether we were in a recession. I wondered how trivial it was. No one doubted that we were certainly heading for one, if not already in it. Today, you are beginning to hear rumblings that we’re in a depression – where the fundamentals of capital markets cease to work. There’s little doubt in my mind that history will view this period as a depression. Whether we’ll reach 25% unemployment or it will be characterized as a “lost decade,” we are in the fourth inning of cataclysmic economic pain.
The federal stimulus plan is an utter failure. Spending totals $223k for every job purported to create. Eleven percent of the $787 B spending bill is expected to be realized this year, although I’ve heard claims as high as 22%. At 9% of GDP it’s bold. What it’s not is stimulus. Add in the cost of financing and those entitlements, which are stated to be temporary but lack any mechanism to end them (as an aside, McCain was proponent of great idea to tie these entitlements to two quarters of positive GDP growth, after which point they would cease), and the burden for future generations is $2.3 T. Infrastructure spending is a small portion of the total. Only 18 – 27% of bill is tax cuts, and most of those are for people who will spend as they otherwise might or save.
Most importantly, it fails to use tax policy to sculpt behaviors. As is often the case, the best fixes are simple and have been around for a while. An immediate expensing (i.e. tax reduction) of business’ capital spending would fuel targeted improvements in innovation and create lasting jobs. Too bad our politicians don’t have the balls to pass it. Instead, they continue to pander to financial firms, making their profit (i.e. interest payments) tax deductible and creating a bias for debt. Another bias to debt is primary residence mortgage deductibility. Rates are higher and interest isn’t tax deductible in Canada so Canadians pay off their mortgages a.s.a.p. I happen to selfishly favor mortgage deductibility but it’s an interesting social question.
My admiration of China’s administration is largely because of their use of tax policy to cool the housing market a few years back and address causes of the problem (it helps to have a one-party system). The U.S. needs a governing body of wise, non-political academics responsible for spotting issues such as the U.S. total indebtedness rising to 3.5 times GDP. Who didn’t know that would end badly??
At least Obama was able to remove most of the protectionist language which would have incentivized other countries to retaliate and limit U.S. exports. There is near universal agreement that protectionist measures and putatively high marginal tax rates exacerbated the Great Depression.
Limits on executive pay for governmental infusions of capital? I don’t buy the brain drain argument: (a) the brains got us into this mess, and (b) where are they going to go? The senior-level executives with relationships might start or join smaller I-Banks but I doubt they’re the solution to the problem anyway. Innovation will start from the people in the trenches who figure out how to get our shadow banking market (i.e. syndications) back. There should be no higher priority for this administration. One idea kicked around that I like is to give B-Piece buyers with good track records the option to lever 10:1 with the fed’s money. Until spreads narrow in the secondary market, primary conduit lending will not resume.
The Congressional Budget Office projects the stimulus with detract from the economy’s 10-year growth rate.
One thing that continues to be reinforced in debacle after governmental debacle: Pelosi is as deleterious to the democratic process as Dick Cheney.

Finally time to delever, America

I finally found the debt graph you might have heard me reference. This is a great explanation of what we’re experiencing. Data came out in the past few days that consumers saved 5% of income in December. This was a five- or seven-year high (can't remember exactly. Expect the rate to approach 10% by YE as people repair their personal balance sheets. Not good for CPG firms.  Now, in light of this, does it make sense to bloat the federal budget in the manner in which Obama and Pelosi have proposed?  Download the full article at the Economist or here once that link fails.

Park City Condo & Hotel Pricing

It snowed three out of four days. Kurt’s place is Arrowleaf right on Silver Buck / Silver Strike Express lift is awesome. Centennial is the best run (great trees).
On-mountain condo pricing: about $1100 / sq. ft. for 2-year old Arrowleaf product; St Regis is trying to get $2k for their new condos but not going well (bad location at Base of Mountain); Montage is looking to get $2k too; lots are around $1M.
Deer Valley is not a very challenging slope but it snows frequently and Park City has great nightlife. I’ll come back. Great for families and novice skiers.

Impeach Pelosi. I lost faith in the House Speaker shortly after she took office. Now she has gone to far. Quote of the day: Losses to shares on the broader Dow Jones Wilshire 5000 index amounted, on paper, to $1.2 trillion. The bailout she failed to sell totaled $700 B. She has always been in over head, unable to conceptualize anything, develop an opinion other than the party line or lead. My greatest concern (one of the few) about Obama is his allegiance and indebtedness to her.

From WSJ:
The Dow Jones Industrial Average sustained its biggest point drop in history and its biggest closing decline since the day the markets re-opened after the Sept. 11, 2001, terrorist attacks. The Dow, which had opened sharply lower on fears of more possible bank failures, finished the day down 7%, with a 777.68 point drop to 10365.45. Losses to shares on the broader Dow Jones Wilshire 5000 index amounted, on paper, to $1.2 trillion — eclipsing the size of the proposed bailout package. The Nasdaq Stock Market finished down 9.1%….

Congressional Republicans cited a speech by Ms. Pelosi on the House floor that blamed the economic crisis on years of Republican economic policies, including deregulation. “For too long this government, eight years, has followed a right-wing ideology of anything goes, no supervision, no discipline, no regulation,” Rep. Pelosi said. “It has created not jobs, not capital; it has created chaos.”

Congressional leaders believe they have drafted an acceptable bill to save the U.S. from the Great Depression II. Some of my initial pessimism about the bill has wanted now that I’ve read more about it. Like everyone, I wonder whether we’re throwing good money after bad. Here’s a copy of the draft, which will be voted on this week. Makes you wonder why we can’t publish all legislation for public commentary before it goes for a congressional vote. This would be most meaningful for Chicago. Oh imagine our budget surpluses if someone would fetter Daley’s vendor relationships and spending sprees. I’ve been saying for years that technology can bring back the days of a direct democracy…then again, now that I see how near-sighted the American people can be, I don’t know if that’s preferable.
I was ecstatic when Bush selected Paulson to head the Treasury less than two years ago. He left the most successful I-Bank (check the history books if you’re reading this years from now and don’t remember what an I-Bank was) to serve. Now he’s running the biggest one ever. Unfortunately, he’s made it clear he has no intention of staying beyond the Bush presidency. I fault him for that and have less confidence in his plan since I don’t know who will carry out the structure he designed. I hoped some congressman bothered to read the entire 110-page bill to confirm that they’re not giving away all management of the country to the executive branch. You saw what happened the last time the current administration was at the center of crises: that was the first $700 B check we taxpayers wrote. At least this latest debacle shouldn’t cost 4,000 lives (unless we start counting the increasing crime rates caused by the weakened economy).
In addition to bringing liquidity, this “break the glass” plan, as the Treasury and Fed Reserve officials have dubbed it, is supposed to develop a market for – and therefore value of – the CDO’s. Much has been written, and so I have wondered, about the affects of the SarBox mark-to-market rules which have created this cycle of continual asset write-downs. Why didn’t the government pass regulations to either temporarily suspend this rule or develop some global assumptions (i.e. 70% subprime default rate) which companies could use to value these securities since no market exists (hence price doesn’t equal value). By the way, I’ve read (though can’t represent the accuracy of the sources) that RMBS are pricing in subprime default rates between 70% and 100%.
This brings me to another complaint about U.S.’s society: why doesn’t the media ever talk numbers!?* It drives me nuts that they believe (probably accurately) that Americans don’t understand or appreciate the numbers but I want to know: what the prices of these securities are telling us about the expectations on foreclosures and loan recoveries; how big is the market for each CDO, etc. Then each can decide for themselves if the Plan is worth the potential cost. While were at it, someone should study the effects of corporate tax rates and the George Bush tax cuts on the economy, corporate profits and tax revenues. U.S businesses have enjoyed incredible profit growth over the past four years. Much of it was financial related. I wonder how that will look after this debacle is over.

*FD: this complaint was initially developed by Rich Karlgaard, the great Forbes publisher, in his column a few months ago.

McCain vs. Obama?

McCain 2000 was my favorite main-party candidate of all time — he understands that money is the root of all evil (having been financed by the wrong RE developers in the run up to the S&L crisis of the early 1990’s, per Bob Woodward). This time around he hasn’t impressed me as much – too much pandering to the conservative base. Obama was my Senate choice (in the primary, obviously; there wasn’t a choice in Illinois’s general election) and I have long loved the idea of a president who understands and has experienced the toils of the common man (I don’t consider Bill Clinton human).

My feeling when they locked up their nominations (i.e. before financial Armageddon) both parties picked their best candidate . After watching the first debate, I would say that it was tough for me to find a clear winner. However, I’m fairly confident that the VP debate will solidify Obama’s success (call it a reaffirmation of my prediction after the Iowa caucus). McCain’s pick shows poor judgement and is a huge risk given his age.