Dax Desai.com » Economy

Credit Crisis Visualized

Dax Desai — Mon, 23 Feb 2009 05:07:57 +0000

This is probably the best visual depiction of the credit crisis. Thanks to my brother Nirav for pointing me to this video.

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Blue Collar Economic Indicators

Dax Desai — Tue, 04 Nov 2008 03:04:49 +0000

I just came across these websites. I’d consider some of them to be blue-collar economic indicators:

A few observations of mine:

More people in the office brown-bagging lunch
More small tv’s on display in the stores
I know Christmas is far, but the stores seem very quiet
Job listings seem very sparse

Personally I think:

Mass layoffs are right around the corner.
We’re going to be pushing 8% unemployment, probably around 7.5% by mid ‘09.
Auto industry is just the start. We’ll see a cycle of industrial companies on the brink of bankruptcy.

My opinion is that we must to a degree let the market sort itself out. If it is a Saudi company foolishly investing in GM so be it. If it is a merger of 2 failing giants so be it. If it is a bankruptcy of an industry so be it. On a global scale we must adhere to comparative advantage. America’s best companies that are the world’s best are so because of a fundamental Darwinian premise – Survival of the Fittest.

And of course I can’t blog without putting in a few stock picks. Despite the drop in oil recently, I’m going long in oil. In typical fair I am going leveraged going long via DBO.

Be sure to vote tomorrow!

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New and Improved Bailout Package Revealed

Dax Desai — Mon, 29 Sep 2008 04:22:36 +0000

No I’m not sarcastic. It really does get better.

I outlined in my post – The Rush to Bailout Wall St… Money, It Can’t wait what I’d like to see in the Bailout changed.

Well someone must be bright in Washington because the terms have gotten much better.

“This isn’t about a bailout of Wall Street, it’s a buy-in so we can turn our economy around”

-House Speaker Nancy Pelosi

Bailout Details

Money Provided in Phases:

The draft would authorize $250 billion immediately.
Another $100 billion would be approved by the President when needed.
Another $350 billion would be available subject to congressional approval.

Treasury will Buy & Sell:

The Treasury would be able to buy mortgages and mortgage-backed securities.
Treasury would also offer to sell insurance similar to FDIC that guarantees troubled assets in exchange for a premium.

Government Gets a Stake:

The goverment would get a stake in companies receiving bailout funds so taxpayers can participate in any upside in the companies post-bailout.
Additionally participants will be subject to varying compensation limits dependant on the level of government participation.

More Taxes for Participants:

Institutions that sell more than $300 million in assets would be subject to additional taxes including tax deduction limits for compensation over $500,000.
Additional excise tax on “Golden Parachute” clauses. Would not be retroactive, but would apply to new contracts for participating companies.

Oversight:

A new Inspector General Position to keep an eye on the Treasury.
Treasury will be required to submit regular reports to the Congress detailing loan purchases.

Transparency:

All transactions would be required to be posted on the internet within 48hours.

My Thoughts

I’m very impressed at how much has changed. I swear someone in Congress is reading my blog. I had concerns about the oversite and transparency. I also thought it would be a good idea to put in some government ownership to participate int he upside. Most of my concerns have been addressed. Of course you have the government implementing it which means it won’t be efficient. Of course you can’t win them all.

It is interesting what happens when Congress puts the brakes on things and asks “Does this make sense and is there a better way?” The devil is in the details, but this looks like a great step forward. It may not be perfect, but the alternative is largely unknown. What happens if we don’t act? Will there be a cascade of catastrophic proportions? Noone wants to find out.

All this will have consequences of course. I can’t take off my economics hat off just yet. Images of high inflation, foreign debtors, and a flight to Euros comes to mind.

What are your thoughts?

What do you think of this?

Are we doing the right thing?

Should there even be a bailout?

What do you see wrong with it?

Please leave your comments. I would love to hear your opinions.

Tomorrow’s Trades

I’ll probably be trading the XLF tomorrow. Follow Me on Twitter to follow my trades.

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The Rush to a Wall St. Bailout. Money… It can’t wait.

Dax Desai — Fri, 26 Sep 2008 02:05:38 +0000

I’ve been thinking of this “Bailout” over the past week. The Bailout can’t wait according to the Feds. I wish I could go to my bank and say “This loan can’t wait. I need it in 2 days.” It just doesn’t work that way for me. The bank has to do their dilligence and come up with a plan of action for my loan request. Do they give me the whole amount, do they give it to me in parts, how much interest, what collateral, and is the loan terms even legal that I’m asking for?

Well Money… It can’t wait. It reminds me of this great Pink Floyd song. Pay special attention to the words in the background.

The Feds need to think long and hard how they’re going to do this. Whether it is needed or not is an entirely different debate.

Possible Fed Bailout Choices & Scenarios:

Do nothing and things get Bad. Potentially we have a cascade effect and we go into some depression-like state.

Do nothing and things work themselves out eventually with some pain.

Bailout – Ends up Expensive and alot of loans end up bad.

Bailout – Ends up inexpensive - Costs little in the long run as the government resells the securities at a higher price and may even turn a profit.

The question as a leader is do you take the risk of 1? or take the chance that it might be expensive? Most will take option 1.

So the question comes down to how do you administer it and what will the terms be?

Personally I think:

Government should get equity. If the companies want the Feds to foot the bill the Feds need some collateral and by collateral I don’t mean collaterized mortgage back securities.
No Carte Blanche for the Treasury. Remove the line these 32 words that give unlimite power to the treasury: “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.” Yes. They are trying to pull a fast one. Remove that language. We’re not idiots and don’t use fear.
No Food for the Pigs. Establish the oversite and be dilligent. This thing is not going to be managed by the Treasury without some major Wall St. consulting. Some have estimated the consulting fees to approach a billion dollars annually to administer.
Don’t be a Garbase Disposal. This should be focused on the securities that caused the problem. Don’t have the Fed buying unrelated portfolio’s. The Treasury is not a goat and should not be expected to digest everything the companies deem unpalatable.
Time heals all wounds. After all the wound heals or you die, but one way or another it goes away. Don’t throw out artificial dates putting America in a panic to railroad this through written by Wall St. Stop throwing out language like “Must have a deal by the weekend.” Be reasonable and diligent and come up with a solid plan. American can wait for the RIGHT plan.

The rush in the proposed $700 billion bailout is a repete of the practices that led to our rush to war in Iraq and the adoption of the Patriot Act. No the economy is not going to seize up tomorrow. My mortgage lender has not called in my loan and my credit card still works. Last I checked my ATM still gave me money when asked of it. Stop being dramatic.

The fact is the media is focusing on the surface of the bailout, namely the amount. Noone is focusing on its lack of detail or absence of accountability. It is a blank check in its current form subject to be implemented however the Treasury chooses. The administration has scared the markets and some congressional leaders but they have not laid out a CLEAR & COHERANT plan. It is not compelling and it seems to me that the administration is going to blame the current economic slowdown on this one event. It is a convenient scapegoat even if caused by the administration over the past 8 years.

The $700 Billion Question

My last thought is this… How can this much money can be raised so quickly if the credit markets are seized up. Ask yourself.

That’s the $700 billion question.

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SEC bans short-selling of 799 financial stocks & Other Measures

Dax Desai — Fri, 19 Sep 2008 17:13:56 +0000

What a bummer. The SEC has determined that one of the ways to stave off the financial panic is to prevent shorting of some financial stocks. ”The emergency order temporarily banning short selling of financial stocks will restore equilibrium to markets. This action, which would not be necessary in a well-functioning market, is temporary in nature and part of the comprehensive set of steps being taken by the Federal Reserve, the Treasury and the Congress,” said SEC Chairman Christopher Cox in a statement. You can read the official announcement at the SEC website.

In addition U.S. authorities are putting together a plan to move “toxic” assets off the balance sheets of major U.S. firms to provide longer-term relief. This is reminiscent of the old Resolution Trust Corporation (RTC) from the 80’s when the Texas Savings & Loans collapsed. The RTC was a U.S. government owned asset-management company tasked with liquidating the assets (primarily real estate) of savings and loan associations(S&L’s)_ that went insolvent in the 1980’s. When you have a lot of crap, it is better to have an organized yard sale.

The Treasury will also establish a temporary guarantee program to insure the holdings of U.S. money market funds that pay a fee to participate. Some $78.7 billion was withdrawn from large money funds Wednesday, following a $13 billion outflow Monday and $33.7 billion Tuesday, according to Crane Data LLC. The Treasury is hoping to stem those withdrawals before it becomes a capital problem for the banks.

My take in all this is that we’re going to be in a mess for a couple of years from this, will be paying with our tax dollars. On the other side of the coin I’m an opportunistic investor. Another RTC will create a bonanza of pennies on the dollar real estate opportunities. Sure some of them will need rehab, but for those that don’t mind there will be some sweet deals. I’m fortifying DNA Investments cash position and credit lines to be ready.

I’ll probably post an “Anatomy of the Deal” type post at some point. More to come…

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How the U.S. Tax System Works

Dax Desai — Fri, 28 Mar 2008 13:03:11 +0000

I recently came across this on the interweb. Good stuff.

Bar Stool Economics

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

* The first four men (the poorest) would pay nothing.
* The fifth would pay $1.
* The sixth would pay $3.
* The seventh would pay $7.
* The eighth would pay $12.
* The ninth would pay $18.
* The tenth man (the richest) would pay $59.

So, that’s what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve.
“Since you are all such good customers”, he said, “I’m going to reduce the cost of your daily beer by $20”. Drinks for the ten now cost just $80.
The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men – the paying customers? How could they divide the $20 windfall so that everyone would get his “fair share?”
They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:

* The fifth man, like the first four, now paid nothing (100% savings).
* The sixth now paid $2 instead of $3 (33%savings).
* The seventh now pay $5 instead of $7 (28%savings).
* The eighth now paid $9 instead of $12 (25% savings).
* The ninth now paid $14 instead of $18 (22% savings).
* The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.
“I only got a dollar out of the $20,” declared the sixth man. He pointed to the tenth man, “but he got $10!”
“Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that he got ten times more than I!”
“That’s true!!” shouted the seventh man. “Why should he get $10 back when I got only two? The wealthy get all the breaks!”
“Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!”
The nine men surrounded the tenth and beat him up.
The next night the tenth man didn’t show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

David R. Kamerschen, Ph.D.
Professor of Economics, University of Georgia

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Inconvenient Information

Dax Desai — Thu, 14 Feb 2008 20:12:14 +0000

Today I found that a site I visit on some occasion – economicindicators.gov is being shut down by the government due to “budgetary constraints.” I wondered how that is possible considering the $3.1 trillion proposed budget for ‘09.

This site was even rated by Forbes on their Best of the Web list in the Market Data category. It certainly can’t be that expensive to keep this site up and the value to cost has to be through the roof. The only conclusion I could come to is that this data is inconvenient. The administration is trying to paint a rosier picture of the economy and cold hard data doesn’t support that image.

Upset with this, I did a search to find out if I can get more context around this event. I stumbled upon The Carpetbagger Report. They mentioned this shutdown as well as several other actions to make inconvenient data unavailable.

* In 2005, after a government report showed an increase in terrorism around the world, the administration announced it would stop publishing its annual report on international terrorism.

* After the Bureau of Labor Statistics uncovered discouraging data about factory closings in the U.S., the administration announced it would stop publishing information about factory closings.

* When Bush’s Department of Education found that charter schools were underperforming, the administration said it would sharply cut back on the information it collects about charter schools.

- The Carpetbagger Report

Regardless of political affiliation, this is disturbing. Government should move towards more transparency not less. Reducing public information is the characteristic of a closed society not a free one.

I encourage you to write to your congressman/woman to let them know this is not right. Last I checked that information is still available.

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Your Wallet’s Worst Nightmare

Dax Desai — Wed, 30 Jan 2008 17:42:21 +0000

Of course I’m talking about inflation, the silent mugger that robs you of your buying power.

Here’s an excerpt from a newsletter I receive from the President of Everbank World Markets:

The Fed has turned its back on inflation folks… And here’s some items that you won’t see in the CPI data…
1. Grade-A Large Eggs – Dec. 06 $1.54 a dozen… Dec. 07 $2.10, and current $2.73 a dozen… That’s up 36% in a year!
2. White Bread – Dec. 06 $1.13 a loaf… Dec. 07 $1.28 a loaf, and current $1.62 a loaf… That’s up 12.6% in a year!
3. Whole Milk – Dec. 06 $3 a gallon… Dec. 07 $3.87 a gallon, and current $3.93 a gallon … That’s up 29% in a year!
4. Fresh Whole Chicken- Dec. 06 $1.06 per pound… Dec. 07 $1.17 per pound, and current $1.19 per pound… That’s up 10.3% in a year!

These are the things I talk about all the time, in that an individual can feel the inflation eating away at this wallet… This is just some simple food items… I’m not even talking about things like: Tuition… Insurance… Medical… Movie tickets… And so on…

The Bureau of Labor Statistics tells us that inflation is running at 4.1% a year. I guess things average out, but to an individual where the household’s largest expense is housing, auto/fuel, and groceries I can’t imagine that 4.1% would hold. It is just a hunch, but the last time I bought groceries with my wife (and paid attention) I thought she was crazy because the bread was $1.99 and the milk was $3.99. I told her “I swear milk is only 2 something and bread is under a dollar.” She pointed out that you can’t even buy generic bread/milk at that price. Certain I was right, I did the right thing and shut up and Google’d food inflation stats when I got home. Sure enough it was confirmed. I was living under an inflationary rock this whole time. Prices were stable for so long that I stopped paying attention to stuff like milk prices.

One thing to note is that much of the inflation in food is caused by transportation costs (fuel). High oil prices have a direct impact on food inflation. In fact it is felt more so in Asian countries where the rate of oil consumption is going up faster than the U.S. This is yet another reason why we must strive to encourage mass transportation, less urban sprawl, and alternatives to our oil-based vehicles.

The other factor that certainly can’t be dismissed is our monetary policy. The Fed cut rates down to 3.5% last week. I suspect that today we’ll be looking at 3.00% after today’s FOMC meeting. This will further stoke inflation and reduce the dollar’s value. Since most good we purchase are foreign it reduces our buying power. I guess a nice indicator to watch is to see if Wal-Mart keeps “rolling back” prices as our dollar devalues. I believe they are the largest importer of Chinese goods now of all the chains.

Well I mentioned food, but what about housing? Housing will be pumped up or at least not allowed to deflate with these current low rates. In addition there is some work going on to increase the FHA loan guarantee limits to upwards of 729K from a current 362K (for high cost areas). There is a general concensus that some areas of the U.S. such as San Francisco are as much as 30% overvalued. By passing this type of regulation the Fed doesn’t allow prices to come back in line. This gives the false impression that prices can’t fall. This is exactly the type of interest rate policy that caused the housing bubble in the first place. When I buy a stock at say $100 and then earnings don’t materialize, it may fall to $80. That’s the market. I don’t have the government stepping in to try to boost it back up. That just wouldn’t make any sense from an economics perspective. I sort of went on a tangent, but my point is housing inflation will continue as long as we keep printing money.

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The Economy, the Dollar, and you.

Dax Desai — Sun, 27 Jan 2008 21:57:24 +0000

I’m evaluating the Fed Cuts, the state of the economy and it plays like a broken record. So I dug up some older posts and checked to see if I still believe them. Here are 2 posts that I looked at.

(11/28/07): In 5 Reasons Why the Market will Drop by q1 2008

I mentioned that the Fed would cut interest rates down to 3% perhaps even 2.5% further weakening the dollar.

What happened: The Fed has cut interest rates down to 3.5% and if they cut again to 3% on Wednesday we’ll be at my target.

Verdict: Almost there. Fed cuts will continue to weaken the dollar and “stimulate” the economy to flat growth.

(11/26/07): In 8 Reason Why the Dollar will Continue to Fall

I gave my reasons why I believe the dollar will continue to fall.

What Happened: The chart speaks for itself. The dollar has fallen 33% from $69.42 to $46.72 in a short 2 months.

Verdict: Dollar is still weak and monetary actions won’t help. The U.S. will see flat growth over the next 6 months at best.

And this week . . .

I will be basing my trades on the below assumptions:

Dollar will continue to fall.
Commodities will continue to see high prices.
Growth will continue to be outside the U.S. in 2008.

This week I will be seeking out plays against the dollar and look at commodity plays. A few like Barracks and Rio Tinto come to mind. Also I will be assessing which international markets appear to be positioned for growth in 2008 and the ETF’s/Funds to invest in them.

If you have any trade ideas along these lines, please feel free to comment.

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Why low interest rates are bad for you

Dax Desai — Wed, 28 Nov 2007 03:57:56 +0000

AKA – Ron Paul rips Bernanke a New One

One thing about Ron Paul is that he believes what he believes and doesn’t beat around the bush. You have to respect that. He is point blank on the weakening of the dollar and the inflationary effects of the Fed rate cuts. His candid speaking and relentlessness earns my respect.

[youtube]http://www.youtube.com/watch?v=yAwvlDJgJbM[/youtube]

Also Note NBC’s “Green is Universal” logo.

P.S. I had some problems with my video player and I think I have it fixed now. You may see some broken videos. I’m in the process of fixing them, but if you find some please leave a comment.

Thanks
Dax

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