Economic Conundrum

From memo to Oaktree Clients

"The impossibility of reaching into the economic toolbox for that one perfect tool is easily illustrated with a list of some of the challenges present today. For a learning exercise,skip today’s Sudoku or crossword puzzle and take a crack at resolving these dilemmas:

• Consumer confidence and spending are weak. We want to stimulate, but we don’t want to replace weakness with hyperinflation.


• We’re willing to drop fiscal discipline in favor of stimulus through deficit spending,but we don’t want to scare away offshore investors from the Treasury securities we’ll issue to fund our deficits.


• We’re willing to distribute stimulus checks, but we seem unable to make frightened individuals spend the money rather than save it.


• In fact, we know consumers got into trouble by spending more than they earned, and now they should build some savings. But whereas in the recent past consumer spending grew faster than incomes, a rising savings rate means spending would grow
  slower than incomes, just at a time when incomes are falling and spending is needed.


• Likewise, with tax revenues down, states and cities have to balance their budgets. One way to do so is to raise income tax and sales tax rates, but this will further depress local economies and increase the burden on their beleaguered citizens.


• We want to recapitalize the banks, but we don’t want to reward past mistakes.


• We’re thinking about buying the banks’ “toxic” assets. But if we pay above-market prices, that’s a subsidy to the reckless (see above), and if we pay market or belowmarket prices, that will further erode bank capital through write-downs.


• We know suspending mark-to-market accounting would end write-downs, but doing so might also reduce confidence in balance sheets and postpone the day of reckoning needed for our financial institutions to reach bottom and recover.


• We want the banks to lend, but we can’t – and shouldn’t – make them extend loans to non-creditworthy borrowers.


• We want to reduce the incidence of home foreclosure, but we don’t want to reward people who speculated by buying multiple homes or lied on mortgage applications. And we’d rather not treat people who bought more house than they could afford better than those who acted prudently.


• We want to make mortgage relief available to those who are unable to service their mortgages, but we don’t want to give people incentives to stop making payments.


• We’re considering letting bankruptcy judges reset mortgage contracts, but we don’t want to tell lenders that loan contracts are no longer sacrosanct, which certainly would deter them from making new loans.


• We don’t want the depressant impact of auto companies going bankrupt and suppliers and dealers following suit. But we also don’t want to pump money into the industry unless we’re confident it can produce good cars at competitive prices.


• We want to see the auto industry “rationalized,” but that means seeing people lose their jobs or have their paychecks reduced, which would spread pain, put stress on benefit funds, and cut into GDP.


• We want taxpayer-supported automakers to use American steel, but (assuming it’s more expensive than imported steel) that will either (a) raise car prices, making cars more expensive for hard-pressed buyers and making the Big 3 less competitive, or (b) require the companies to eat the difference, making it harder for them to achieve profitability.


• We want to curb speculation in derivatives, but we don’t want to make it harder for businesses, farmers, insurers and investors to legitimately hedge risk.


• In fact, we want to prevent excesses on the part of business, but most people don’t think it’s a good idea to nationalize companies or have the government tell them how to operate.

It’s abundantly clear from this list – and it’s only a partial list – that solving the current problem will require compromises and a combination of disparate elements. Some will work, while others will fail and have to be replaced. And some will work with regard to one facet of the problem but aggravate another. Lastly, no one should think that even a wise combination will produce quick results."

On the Typical Investor (Including Moi)

“The typical investor in public markets has no idea what he is doing.

Putting his money into a stock or a mutual fund brings him a temporary happiness. He sees himself as Kirk Kerkorian making a bid for General Motors or Warren Buffet shrewdly moving on an insurance company.

‘I bought Google,’ he tells his wife. His chest expands. He feels a crown of authority on his head and imagines his most private part growing.

For he has mastered the most sacred and all-powerful rite of our time; with a single gesture he has joined the Knights Templar, the Freemasons, and the local country club.

He is in. He is with it. He gets it. He is one with all the other swells who make up this wondrous modern economy. He has gone to Wall Street like Sir Galahad to Camelot.

He does not realize the misery awaiting him.

Only later, much later, does he discover that he is not a hero, but just a chump--- an insignificant speck of dust on Wall Street’s white shoes.”

-- Empire of Debt P. 309

Want to be a Billionaire?

"The average worker's salary in Zimbabwe is 15 billion Zimbabwe dollars per month. The poor fellows are billionaires, every one of them. But it takes 19 billion Zimbabwe dollars just to buy a pack of 10 cookies - if you find it. A pound of margarine is 25 billion."

From Daily Reckoning 7/3/2008

Fishy Economic Numbers

From the Daily Reckoning - 05/16/2008:

"Last month, the price of gasoline went down 2%, says the Labor Department.

Wait a minute. Do you remember gasoline prices going down in April? We don't. As we recall, oil prices were soaring…and so was the price of gasoline.

We're beginning to sniff something funny in the air…a rat.

...

Generally, we don't trust numbers. Who can trust a 5 after all - with a bottom like a communist sickle and its top nicked from a swastika? Who can trust an eight - wandering back and forth and never getting anywhere? And what about the zero? What does it mean? You put it in front of a number and it means nothing. You put it behind…and all of a sudden you've got 10 times as many. So, let's look a little more at those numbers - that is, at the crooked 4s, the slick 6s, and the empty 0s - put out by the feds.

Getting back to the price of gasoline, we check the records from NY gasoline futures trading and find the price actually rose 12% in April. How come the feds put it down as minus 2%? Turns out, they made a 'seasonal adjustment.' But turning plus 12 into minus two sounds like more than an adjustment; it sounds like either magic or major surgery…like turning a prince into a frog or a fat man into a slim woman.

Elsewhere, we find the feds working their magic on all the primary numbers. The IMF, for examples, says food prices rose 43% last year. Yet, after the feds waved their wands, U.S. food costs were up only 5.1%. And import costs rose 15% year to year - according to the numbers when they first got off the boat. But by the time the Labor Department statisticians had finished 'adjusting' them, they were down to only 0.2%.

Only investors, of course, are gullible enough to believe the government numbers. Consumers believe the numbers they see at the checkout counters and the pumps. What they see is sharply rising prices."

Dave Barry's Take on Government Rebate Checks…

Q. What is an Economic Stimulus Payment?
A. It is money that the federal government will send to taxpayers.

Q. Where will the government get this money?
A. From taxpayers.

Q. So the government is giving me back my own money?
A. Only a smidgen.

Q. What is the purpose of this payment?
A. The plan is that you will use the money to purchase a high-definition TV set, thus stimulating the economy.

Q. But isn't that stimulating the economy of China?
A. Shut up.

Do Deficits Matter?

"I read a report by David Walker, the former Comptroller of the United States, where he was explaining the depth of the fiscal budget alone. He estimated that balancing the Federal Budget by 2040 would require actions as large as: 1. Cutting Total Federal Spending by 60%, or 2. Raising taxes to 2X today's level.

He also states, "Closing the current long-term fiscal gap based on reasonable assumptions would require real average annual economic growth in the double digit range every year for the next 75 years.

Keep in mind that: During the 1990's, the economy grew at an average 3.2% per year. So… "As a result, we cannot simply grow our way out of this problem."

Well… Now that's something to help wake you up, eh? But deficits don't matter; so don't worry about what the former Comptroller of the U.S. says… HA! You won't catch me taking that bait! David Walker is a very smart man, and has been the Lone Ranger in the Government when it comes to pointing out the problems with these deficits."

Chuck Butler in The Daily Pfennig of April 16, 2008