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Economic/Market Highlights 1/5…”Bad and Getting Worse”

By Larry Doyle on January 7, 2009 at 12:45 AM in Current Affairs

(bumped up from early Tuesday morning by Susan)

On the first real day of business after the holidays I will tip my hat to PEBO and his economic team. Obama opened his press briefing this morning with his take that the economy is “bad and getting worse.” In deft fashion, he then caught almost everybody off guard by leading his proposed economic stimulus plan with focus on a significant level of tax cuts and tax credits. In my opinion this was a very, very strong first move. Well done, Barack!!

The general outline of these cuts and credits include:

1. tax cuts for those paying taxes or with an earned-income credit. Likely for families earning up to 200k, although that is not yet defined.

2. businesses can retroactively reduce tax bills going back 5 years by writing off losses from 2008 and 2009.

3. offer tax credits to entice firms to plow money back into new investments.

4. provide a one year tax credit for companies that make new hires or forego layoffs.

5. increase write-offs for a wide array of expenditures for small business.

The spending side of this stimulus plan will run upwards of $500 billion dollars. Will there be wasteful spending in there? It would be foolhardy to think that with that amount of government directed spending that there won’t be.

Again, for purposes of keeping these numbers in perspective, our federal government spends $300 billion annually to totally fund the Depts. of Agriculture, Education, Energy, Homeland Security, HUD, and Transportation. Against that backdrop both this stimulus plan and all the other rescue packages and bailouts need to be measured. I get increasingly peeved over the need to direct money to Freddie, Fannie, AIG, et al. However, given that I have been consistent in imploring BO and team to focus on providing tax incentives, I tip my cap to him for leading with them.

In other news of the day. The biggest moves in the market today were on the opposite ends of the credit spectrum. Government bonds have very quickly backed up almost 50 basis points over the course of the last few days. We have cautioned people that we think this sector is very expensive. The risk our economy runs again is that as other nations need to incur their own deficit spending programs to stimulate their respective economies, we will find it increasingly difficult to finance our debt. Mortgage rates inched up as well. Against those moves, the most speculative credits continued to perform dramatically well as clearly investors are putting cash to work in that space.

Banks underperformed with expectations of ongoing credit charge-offs while oil and energy in general continue to move higher supported by ongoing turmoil in the Middle East.

We have not spoken in a while about, “How Bernie “Madoff” with $50 Billion.” In Congressional testimony today, representatives from SIPC and the SEC as much admitted that they are not properly staffed to handle the degree of complexity involved with investment strategies in the financial community. That is regrettably a pathetic response in light of the development of a wide array of derivatives and complex securities over the last decade.

In the midst of that hearing, word broke that Bernie tried to move $1 million worth of jewelry and heirlooms to friends and family overseas. If that is not a violation of bail I do not know what is. The fact that he is not immediately put in jail confirms in my mind what our guest John Moynihan shared with us on December 21st, that is, Bernie is holding some trump cards and waiting to play them.

We are continuing to build our list of “people to watch.” As we see and hear these people we will pass along their thoughts. On our list currently are: Nouril Roubini, Meredith Whitney, Laszlo Birinyi, Sheila Bair, Jeff Gundlach, Bob Rodriguez, and now Mark Carney, Governor of the Bank of Canada (a favorite of last night’s guest, Kevin Doyle).

In regard to Mr. Rodriguez, in today’s WSJ it was quoted that “Morningstar has dubbed Mr. Rodriguez prophetic and is considering naming him and his team at First Pacific Advisors their Fixed Income Manager of 2008.”

Read how “Manager Foresaw the Crisis…but Didn’t Avoid Big Losses“….

On a separate topic, ever since being prompted two weeks ago to address the topic of defaulting on a mortgage I have seen an increased media emphasis on the topic we have dubbed, “Everything’s Negotiable.” For those who are feeling increasingly pressured on their finances, be proactive with your lenders.

Read how, “In a Hole? Speak Up.”

On a final note, for those who did not catch our interview last evening with KD, Kevin Doyle, it was fabulous. Kevin recently founded 12th Street Capital having most recently worked at Countrywide for the last eight years. Kevin shared his inside look at the following:

1. historical perspective of sub-prime originations…
2. thoughts on the state of our regulatory authorities…
3. view of the efficacy of the rating agencies…
4. opinion on the principal reduction plans promoted by Sheila Bair..
5. admiration for Mark Carney, Ben Bernanke’s counterpart at the Bank of Canada…

The interview is archived at NQ Radio and ran from 8:15-8:45pm. Well worth a listen!!

LD

  • wodiej

    This is a start. We have to ease the burden on business because that is where the jobs come from. Whether it has a big effect will remain to be seen. Who will be watching to make sure the businesses who take the tax credit didn’t lay anyone off and/or hired new? But balancing it w personal income tax cuts may prompt spending which would increase production in manufacturing and then increase jobs. The banks got a bunch of bail out money and it didn’t increase lending so we’ll see.

    But NO ONE should get a tax cut who is not paying taxes-NO, NO, NO.

    • LD

      Wodiej….always a steady voice of reason. I agree with you on all these points. Yes, this is a start. We need proper oversight in a lot of areas. All this said, I would rather that people, small business owners, and entrepreneurs have more of their money than the government.

      I take these moves as an indication that he will try to govern from the center at least as far as economic policies are concerned.

      Time will tell…but as opposed to a straight $800 billion spending program, I will take this.

  • kenoshamarge

    All these tax cuts sound more like Reaganomics to me than anything else. What good are tax cuts to businesses if there aren’t customers to buy their products?

    I don’t agree with the tax cut thing at all. Sounds more like something coming from a Republican President than a Democratic one. Tax cuts are the Republicans answer to everything. Guess it has now become the Democrat’s answer too.

    • sandshark222

      Tax cuts have been proven time and time again to help the economy. It’s not really just a theory anymore.

      If this is what Obama really wants to do, then I support him in this. However, the past year or so has shown me that Obama is NOT above talking out of both sides of his mouth. What I also fear is that his tax cuts are some sort of appeasment so when the really massive government increases come, they won’t seem “so bad, because, after all, he DID lower some taxes, right?”

      Sorry I just don’t trust the guy.

      • wodiej

        excellent point.

      • BernieO

        In these kinds of times with deflation looming, tax cuts are not necessarily the best option. Why buy now if you think prices will be lower in the future? What we need is a reliable way to boost spending. Bush’s rebate was ineffective, because, just as predicted, too many people used it to pay down debt. There is no reason to think that these tax cuts (for individuals at least) will not be used the same way, deepening our debt without stimulating the economy.

        Direct government spending on “ready-to-go” projects are what is most needed now, along with some way to ensure lending resumes. In addition, funding of longer term projects is important to keep the ball rolling. It is best if those projects are of the kind that will boost our economy in the future, too, buy improving our infrastructure. FDR’s TVA project is an example of spending that not only helped ease us out of the depression but also produced benefits for years after, up to the present. Spending on mass transit would be a great move. Many projects are in process or ready and can be immediately speeded up, others can come on line a little later. Not only will this provide jobs, it will help ease our dependence on foreign oil, be better for the environment and help solve traffic and sprawl problems. Some people seem to think that developing green cars is the entire answer, but, while that is also crucial, it does not solve the problem of congestion.

        • LD

          Bernie….to your point, there will be close to $500 billion in spending.

          Annually the federal government spends $300 billion in total on the Depts of Agriculture, Education, Transportation, HUD, Homeland Security, and Energy.

          These tax cuts, which are primarily focused on businesses, IMO are the equivalent of diversifying one’s portfolio and minimizing risk to maximize return.

          While neither side of the aisle is fully happy, I view this approach as governing from the center and ultimately the markets like that.

          All this said, we have LOTS of issues so I am not turniing bullish by any means.

          Thanks for your insights.

      • LD

        Sand….Believe me, I am not fully trusting either. With all my business dealings I take the approach, “TRUST….BUT VERIFY”.

        That said, at the margin and that is all that taxes are ultimately all about, we would much prefer to have tax cuts for business, especially small business, than not.

        • BernieO

          Krugman is not impressed. He calls this a weak stimulus which will likely be made weaker before it passes, crafted to appeal to Republicans who will eventually use it to say government intervention does not work.
          He is also not impressed by the tax cuts for businesses because he does not think they have a good multiplier effect. (That surprised me.)
          This is a pretty technical article, but his summary is clear:

          http://krugman.blogs.nytimes.com/2009/01/06/stimulus-arithmetic-wonkish-but-important/#more-1229

      • gaindenpendent

        Tax cuts only work in limited circumstances. If they always worked we wouldn’t be in the bad shape we are in right now economically. IMO, the problem is that Obama’s Reaganomics are basically supply side economics which don’t work. Giving someeon 20.00 a week when their insurance premium went up $100.00 a week won’t do diddly to help the economy. Solving the healthcare problem in this country would do more than what he’s proposing.

    • LD

      Keno….I view these cuts as a statement that BO wants to manage the economic policy from the center. I think the markets will like that approach more and with a chance for increased confidence over the long haul, the economy should benefit.

      Believe me, there are still plenty of unanswered questions.

  • http://sonicninjakitty.wordpress.com Sonic Ninja Kitty

    LD, I agree tax cuts are great, but like sandshark222 said, this is probably just an appeasement he’s setting in place. Where are the cuts in government spending? (crickets chirping) That is the missing essential element. Until he announces these I don’t trust him either.

  • C.S.

    One question, under Mr. Soertoro’s, aka, Obama, generous plan, do all those manufacturing businesses who moved “off shore” during Bush’s last 8 years get to keep their billions in untaxed profits untouched? Because most of the businesses left in the USA are service industry which doesn’t exactly expand the money supply. During George W. Bush’s “good economy”, the Census Bureau reported that the most common wage for workers was $27,000, which will buy very few extra services beyond utilities. Since most of us have received few raises and those not even large enough to meet inflation, one of the largest expansions has been in the area of food redistribution, from organizations like Second Harvest.

    Mr. Soertoro should be aware of this since he supposedly worked among Chicago’s poor for a couple of years. Perhaps he should get out of the mansion once in awhile and take a look around at how the real world lives. I thought Ronald Reagan’s use of trickle down economics had been disproved more than a couple of decades ago…but then I did read something about how the Obama admired Reagan’s trickle theory. Guess he skipped the S&L part of Reagan’s “legacy”. (Although we were still doing bailout in the Clinton administration.)

    I don’t see anything in that tax plan that will improve the lot of working class people for many, many years if at all and if this “worst Christmas season ever” isn’t enough to convince business that we workers all “owe our souls to the company store” and that giving the “company store” more money won’t change a thing for us. I knew Soertoro/Obama would have trouble thinking outside the box because he couldn’t think inside the box either! Savior of the world? HA!

  • SN in MN

    Typical Suupply-Side crap that got us into this mess in the first place. If their is demand, someone will supply it; if there isn’t, giving away free money won’t help.

    • LD

      SN…IMO, the economy is never and will never be a simple black and white, good and bad, up and down situation. I always believe there are shades of gray.

      I take these cuts as a message that BO wants to maange the economy from the center and typically markets like that.

      Time will tell…

  • SN in MN

    Typical Supply-Side crap that got us into this mess in the first place. If there is demand, someone will supply it; if there isn’t, giving away free money won’t help.

    • jwrjr

      There is a very simple principle of Economics that bush didn’t understand and apparently BHO doesn’t understand, either. You don’t make new jobs by throwing money/tax breaks at businesses. The only thing that creates new jobs is new customers. If there is a demand for their product the businesses will find a way to expand to meet it. More money without more customers will only result in fatter bank accounts for the executives and maybe the shareholders.

      • http://tojo toni

        I agree jwrjr. Why is it that the mention of tax cuts gets so many people excited when they are usually there to benefit the person in power more so than the average worker? Paleeeese…after the bail out bills passed and the “stimulus” yet to come, etc., are the tax cuts really going to help those who needed the bail out the most? I don’t think so. Yes, all these small, family owned companies who are now defunct will be so happy to be able to write off their losses….against what if they have no more income? It’s pandering…might as well throw in a couple of rebate checks and two extra months of low gas prices while they are at it. And I am an eternal optimist!

      • MPC

        See woodiej’s comment below. By benefiting business, firms are able to employ more workers and avoid layoffs. Those people are getting paid, so they have money to go spend to support their families, thereby supporting the businesses, and the cycle begins flowing again. In addition to salaries, businesses will also put the funds from these tax breaks towards capital expenditures and dealings with other businesses. All of this is intertwined, and directing tax breaks to business is not something that just goes up in smoke with no spreading beneficial effects. It’s not the ONLY thing that needs to be done, just part of a potential solution. I certainly won’t complain about individual taxpayer breaks (hopefully not in rebate form), but I would love to see a cut in capital gains taxes to increase incentive to invest.

        • SN in MN

          Supply-side scam. They don’t employ people and buy equipment to stack unsold goods on the shelves. So they’re sitting around on piles of money, and won’t invest it because they have to pay tax on the profits? Really? Seems like a pretty poor strategy to me.

          • jwrjr

            Exactly. Businesses do not expand manufacturing capacity unless they have or imminently foresee somebody to buy the products. Without that they say “thanks for the money” and deposit it in their bank accounts (usually offshore ones).

  • wodiej

    This proposal includes tax cuts for consumers. Tax cuts for consumers mean more money to spend. More money to spend means a demand for supply. A demand for supply means increased production. Of course we have no way of knowing what a business will do with the tax cuts. Likely some execs will get bonuses out of it. But I am pretty sure if there is a demand for a product, a business will ramp up production to provide it.

    The whole point is we have to do something. I agree, there needs to be major government spending cuts-MAJOR.

    • jwrjr

      Tax cuts don’t help either unemployed people or people with incomes too low to pay taxes in the first place.

    • gaindenpendent

      You’re ignoring the debt level many consumers have. Most of the money, and it’s really nothing to the average cosumer. The tax break that Obama is offering won’t even cover the increase in health insurance I’m going to have to pay. His tax cut will not help the economy one little bit. He’s proposing the same thing Bush has spent 8 years doing and it didn’t work.

  • jjran

    Bush came into office and passed I trillion tax-cut…. For the last 8 years, I don’t see us getting nowhere… The gov budget is in the hole, the economy is in deep recession, banks are failing, people losing homes, credit frozen, the American dollar is worthless ( Canadian $ is better)…..All these happened with the Dem holding congress and 2 years in the Senate. Now that we have the Chicago Crooks and Liars taking over, just look at the state of ILL, the worst place to live: Taxes up in the skies, murder rate up the skies, unemployment up in the skies… Counts your blessings ladies, this is the beginning of the end of America as we know it……. We are drifting into joining Mexico as part of the Third World… .. When BHO make all the illegals get IDs, America will official become a third work country with a military, navy and air force. What a disgrace..

  • WildChild

    It’s time to raise taxes. The growth in big box retail is over. The growth in post ma bell telecoms is over. The growth in real estate is over. The growth in the stock market is over. Growth is all pretty much over and it is all over because the scams have all been scammed out to include the biggest scam of all: supply side economics. Supply side never panned out. We never grew our way out of debt but instead, piled the debt even higher We never invested in new technologies so there is no follow in industries to grow off those new technologies.

    All we did was scam.

    We scammed our industrial base and the jobs that went with it out to slave wage counties. We lied to ourselves by saying this made us more productive as high paying jobs became low paying jobs. We threw our tax cut money at whatever easy money scam was the talk of the town on Wall Street. So what do we have to show for it? We’re poorer. We are deeper in debt. Our economy is a wreck and our infrastructure is falling apart. This is the legacy of supply side economics.

    We’d have to be insane to cut taxes again.

  • jjran

    BHO said his first order of business was ending the war in Iraq. What happen to that?

    • Bennie Cardozo

      Bush ended it for him. As of Jan 1, full sovereignty of the Iraqi government has been fully restored and all foreign forces now operate under the command of the Iraqi government.

  • William L. Donlon

    “Bad and getting worse”

    How much worse??

    Prediction:

    DOW goes to 5,200 and unemployment to 30%+ by Xmas 2009

    A “short” period of Deflation will be followed by HYPER Inflation.

    Cash Is KING, if you are not there, get there.

    I hope I’m wrong.

  • EWard

    LD – What Obama proposed is a redistribution of wealth….

    1. tax cuts for those paying taxes or with an earned-income credit. Likely for families earning up to 200k, although that is not yet defined.

    LD – Over 50% of Americans do not pay any taxes. These are the individuals that will be receiving the tax rebate. Even if every one of us gets a $500 check, how will that stimulate the economy?

    2. businesses can retroactively reduce tax bills going back 5 years by writing off losses from 2008 and 2009.

    LD- This is a welfare plan for businesses with our hard earned tax dollars. Companies can write off losses and later would be entitled to received cash from the government – aka-taxpayers-

    3. offer tax credits to entice firms to plow money back into new investments.

    LD – this is the crux of Obama’s “tax cut” – In other words the government is managing these businesses – a better plan – cut corporate taxes – eliminate capital gains for several years – apply a cap later – reduce government spending

    4. provide a one year tax credit for companies that make new hires or forego layoffs.

    5. increase write-offs for a wide array of expenditures for small business.

    LD – Why should failed businesses receive money from the government-taxpayers? Mortgaging our future and adding trillions of dollars in deficits will not help this country. BO has fooled the American people with the word “tax cut” when it is a welfare plan for individuals that do not pay taxes and for businesses that have failed.

  • DAB

    I’m concerned that individual tax cuts that will show up as minor amounts in paycheck deductions will offer a minimal stimulus effect, that they will shortly lead to a much larger deficit which will then result in high inflation.

    I don’t believe you can just keep printing and/or borrowing money from other countries and not elicit a major negative effect later on.

    I believe that mortgage assistance and job creation incentives should be the major priorities here.