Category: USA

“Occupy Wall Street” needs a clearer message

Posted by WFG – October 25, 2011

The protest named ‘OccupyWallstreet ‘ has been on for over a month so far, and has somewhat spread all over the world. Surprisingly for a social demonstration targeting the world’s largest equity exchange, people do not hear much about it on the news, neither did the stock market react. The public reaction is one of confusion because the protestors aren’t really sure of the facts when questioned. Further more, they are not demanding any specific changes.

 

What is Occupy Wall Street about?

There are several reasons so far for these waves of protest. First, it started with a blog post by a Vancouver, BC based website, expressed an idea of occupying Wall street by setting up tents, kitchens and live in a park for some time. Owners of the blog post did not claim responsibility or leadership for this protest, and many joined basically because they liked the idea that they heard through social networking websites. The original protest were fostered by the frustration of tax payer money being used to bail out the banks and Wall Street.

 

Why is there limited effect from the protests?

So far there has been waves of demonstrations on the streets, press reports, but no real effect has been made. We believe the reason for this is that there is no clear aim of the protests. Furthermore, protestors are not sending any unified message about what they want to change. Many protestors do not fully understand the government stimulus and bailout programs, and thus cannot articulate their message. The slogan that seems to stick is “I am the 99%”.

 

Should there be a protest, what message need it deliver?

The US government and the Federal Reserve has taken action by increasing the deficit and printing money. The reason the leaders always give to justify their actions was to help the unemployed. But reviews of the last few years tend to indicate that banks and large corporations (through various bailouts, quantitative easing and stimulus programs) have been the largest benefactors of the programs. For example, The TARP program that helped companies such as AIG, General Motors and many small banks all of them poorly managed. There have been reports that the government has made a profit on their actions but this profit is so far fictional as it is held in equity on the books of the government. As of today, US Treasury still has 77% stake in AIG, 32% stake in General Motors, 74% stake in Ally Financial Inc, and equity in many other smaller financial institutions. That means every US tax payer has to bear the credit risks in these companies. The Federal Reserve created Maiden Lane II, LLC to help AIG. By purchasing unwarranted toxic assets from AIG , they secured the couterparty risk of the big financial institutions, like Goldman Sachs, which now could be paid 100 cents of AIG obligations to them instead of taking a large loss. The Fed has not been transparent as to the cash flows of the debt, and so far have not been paid back. AIG recently offered to buy back the debt.

The unemployment rate in the US has increased to nearly 9% in Feb 2009, and remained in the 8.7%-10.6% range ever since, and inflation has increased to over 3% including gasoline at almost 4 dollars a gallon. The stock market has rallied, high end home prices are setting records, and conspicuous spending by the affluent is very apparent, and executive earnings have been increasing at double digits.

Therefore, the message that needs to be delivered should really be that the government need to spend money on job creation.

  • This means the fed should not print any more money, interest are artificially low enough, and only the traders will profit. Also there is a danger of more inflation and more bubbles if the economy is not allowed to stand on its own legs.
  • The Federal government should balance its books and control its spending. They should be promoting infrastructure programs and energy refurbishing programs which can be sold to the private sector.

 

The US Debt Guideline 2011

Posted by WFG – August 4, 2011

The US debt debacle continues to circulate through every media outlet across the world. But with various opinions on the topic, what actually happened for it to get this far in 2011? Here’s a US debt guideline to run you through the different stages.

In January 2011 the Senate’s ‘Gang of Six’, which included three Republicans and three Democrats, began discussing options linked with implementing the Simpson-Bowles proposal. The aim of this proposal was to create a fiscal reform plan, including tax increases, spending cuts and the aim to bring down the deficit.

Later in the month, President Obama delivered his State of the Union Address. This is presented to the United States Congress annually and reports on the state of the nation. It gave President Obama an opportunity to outline his legislative agenda. He pinpointed a five year freeze on domestic spending, which was projected to save around $400 over the coming decade. In addition, President Obama also provided a challenge in innovation to the American public and create their generations ‘sputnik moment’. Read the rest of this article

Feeble Job Numbers in the US

Posted by Winflow – July 13, 2011

Unfortunately, for the second straight month in a row, US employers have added a limited number of jobs to the market. Economists were shocked when hiring didn’t increase after oil prices eased and supply disruptions caused by Japanese natural disasters receded. Some are interpreting this as a sign that economic recovery is stalling. Details about feeble job numbers include:

  • In June, the US only added 18 000 jobs. To keep up with normal population growth, the economy would need to add about 150 000 jobs a month, according to the New York Times.
  • There are now 14.1 million people unemployed in the US.
  • Temporary-help jobs, which often signal market direction, fell by 12 000. Read the rest of this article

Betting Against the Double Dip?

Posted by WFG – July 8, 2011

Legendary investor Warren Buffet has revealed his thoughts on the potential double dip recession and US economic expansion. His bet is that the double dip is unlikely and the upward rise of the US economy is looking good.

Despite the predictions unemployment rates in the US rose to 9.2% in June. These unemployment rates are at the highest point this year and companies hiring was at its weakest point since May 2010. Warren Buffet has stated that due to these figures it’s clear that a stronger economy is some way off, but there is growth from around the world that can help the market and the US economy rise.

Though we can’t argue with the opinions of such a well-established figure, we can question whether the US has the time? With unemployment rates look pessimistic it seems the economy isn’t quite ready to make the jump. And in the time it takes to do actually make a significant leap, we could have seen another demise. Though it may not be a double dip recession, it may fall enough to make it too tough for a return. With the second recession hitting further down the line.

Will Facebook Follow MySpace?

Posted by WFG – June 29, 2011

News Corp, the parent company of MySpace, is closing the sale of the social network company for a sum in the region of $35 million. The California site was purchased by NewsCorp in 2005 for $580 million and has seen a massive decline over the past three 3 years, since it peaked at $900 million. It will be purchased by Specific Media, in the next few days,who are based in Orange County.

The social network site, around before Facebook, will be expected to make severe cuts to employee ranks. The site had already cut staff in January, after re-branding the site. But this failed attempt to bring the company back to life didn’t halt the decline in traffic. The site was once seeing 76 million users and has since fallen to around 35 million.

But will other social network sites, such as Facebook, follow in their footsteps? Facebook might be larger, but recent news has suggested that it might also be losing users. It may seem farfetched to think that a website as large as Facebook could lose its power. But where twitter offers news and connections with up to date comments, Facebook seems to be falling behind. Even MySpace was once had a media platform for musical acts, such as Lily Allen and the Arctic Monkeys.

Facebook won’t see a decline anytime soon. But with the changing market, if you compare it to sites such as Twitter, there’s no reason why it may also follow MySpace into oblivion.

Some interesting charts and figures on US economy

Posted by winflowfinancial – June 21, 2011

I have just come across the following figures and charts which are quite interesting. These by no means represent our own opinions, but they provide some different ways of looking at the economy.

First on the employment rate, Boston Properties CEO Mort Zuckerman said that

“The Great American Job Machine is breaking down, and roadside assistance is not on the horizon.”

His reasoning is that the positive job numbers reported in recent months are not plausible because there are more part-time jobs added than full time jobs which means the total working capacity did not increase as much. Hiring, in general, has not increased.

And Zuckerman is not alone. New York Times’ Paul Krugman posted a employment-population ratio chart on his blog yesterday, that showed

What you see isn’t a recovering economy that may be stumbling; you see an economy that has stopped its free fall, but hasn’t really been recovering at all.

The May existing home sales data released today were also disappointing. Some blamed on the more restrictive lending policies that forced on the banks.

“Although low mortgage interest rates are welcome, they are less meaningful compared to the tightness of loan underwriting standards,” noted Lawrence Yun, NAR chief economist.

And that brings our attention to this chart on the debt level of US household, made by Richard Koo. According to this graph, US home owners will have to suffer at least 8 more years before a healthy mortgage market is restored.

 

Treasury auctions, Bill Gross and the boiling frogs

Posted by winflowfinancial – June 15, 2011

The Fed is not only reluctant to take away the stimulus it thrown out to the market during QEII, it once again purchased government treasury bonds to further expand the monetary supply. As stated on FRBNY, the Fed bought $4.7B of t-bills today.

As the stock market shows uncertainties recently, treasury auctions showed better results, both 30-year and 10-year treasury bonds were well sold during the auctions last week.

PIMCO’s Bill Gross, who was famous for being bearish in government bonds recently, made some intersting comments. He metaphorically said the fate of today’s investors in bond are like frogs in slowly boiling water, who do not realize the danger until being cooked.

Much like gradually turning up the temperature on poor froggy’s kettle of water, monetary policy in developed countries has been lowering the temperature and absolute level of yields for the past 2½ years post Lehman Brothers. Teeter-totter yields down, teeter-totter prices up, and froggy’s total return euphoria at present seems to know no bounds. But once the potential for even lower interest rates is minimized by the zero floor, our future frog-legged entrée is left with a rather uncomfortable feeling. He’s resting inertly in this caldron as prices near the boiling point with the Fed, the Chinese and the banks all buying up whatever Treasury bonds are offered. Everything appears well. But
bond investors with a survival instinct (being one and the same as our cooking frog) should reflect on that old teeter-totter metaphor and realize that prices near the boiling point automatically imply yields near subzero.

That said, are US government bonds a good investment today?

Dodd Frank: legislation, implementation and current situation

Posted by winflowfinancial – June 15, 2011

The full title of Dodd Frank is “Dodd-Frank Wall Street Reform and Consumer Protection Act”. It was passed and signed by President Obama on July 21, 2010. The purpose of this act is to advocate strict regulations in the financial market, thus to create a solid foundation for the modern economy. The specific goals of the act is to end further bailouts to “too big to fail” companies and prevent future financial crisis from happening.

The key points are:

  • Consumer Protections with Authority and Independence
  • Ends Too Big to Fail Bailouts
  • Advance Warning System
  • Transparency & Accountability for Exotic Instruments
  • Executive Compensation and Corporate Governance
  • Protects Investors
  • Enforces Regulations on the Books

The implementation has so far been controversal. The Fed were reluctant to release the name of banks who received help during the financial crisis. More problems on Dodd-Frank were reported in a Financial Times article in March. As it said:

it fails to capture the degree of global interconnectedness of recent decades  which has not been substantially altered by the crisis of 2008. The act may  create the largest regulatory-induced market distortion since America’s  ill-fated imposition of wage and price controls in 1971.

Last week it was reported that the new act has not been implemented in many aspects:

Ten months since President Barack Obama signed Dodd-Frank into law, regulators have missed all 26 deadlines supposed to be met by April.  According to ProPublica’s Jesse Eisinger and Jake Bernstein, “Dodd-Frank requires 387 different rules from 20 different regulatory agencies. The Byzantine, tedious rulemaking process has occasionally pitted regulator against regulator and proved a bonanza for lobbyists.”

And as a result, as reported yesterday, rules that were about to commence in July have to be postponed to a later date.

 

 

Fed Officials comment on the current economy: Bernanke, Yellen, Fisher

Posted by winflowfinancial – June 14, 2011

At the International Monetary Conference held in Atlanta last week, the Fed Chairman Ben Bernanke made again somewhat dovish comments on the economy, inflation and monetary policy.

In his speech, he stated the current economic growth is slower than expected, and consumer prices has been increasing. Talking about inflation, Bernanke still emphasize that the current high prices are unlikely to persist, and most of the inflation numbers are caused by rising gasoline prices, which will eventually fade. Speaking of commodity prices, he now turned to the demand side and said that the high prices will result in a shift in spending pattern, and that’s what we are hoping that lowers the inflation.

Over longer periods, however, high levels of commodity prices curtail demand as households and firms adjust their spending and production patterns. Indeed, as I noted earlier, we have already seen significant reductions in commodity use in the advanced economies.

 

Fed Vice Chairman Janet Yellen said on June 9th that

I unfortunately can envision no quick or easy solutions for the problems still afflicting the housing market. Even once it begins to take hold, recovery in the housing market likely will be a long, drawn-out process. For its part, the Federal Reserve will continue to use its policy tools to support the economic recovery and carry out its dual mandate to foster maximum employment in the context of price stability.

which further indicated the continuation of accomodating monetary policies.

The individual reserve bank leaders are less dovish. Dallas FRB’s Richard Fisher expressed his opposition on further round of quantitative easing.

 

 

Declining Home Equity in the US

Posted by Winflow – June 9, 2011

The amount of equity American’s own in their homes is at the lowest it has been since the Second World War. Relevant statistics include:

  • In 2001, American’s owned about 61 percent of the equity in their homes. Today Americans own 23 percent less equity in their homes.
  • House prices have reached their lowest level since 2002.
  • 25 percent of homeowners in the US owe more on their mortgage than their house is worth.
  • Another 25 percent are nearing the point where they have negative equity.
  • Household debt has declined two percent annually, showing American homeowners are more interested in paying off debt than growing the economy.
  • Spending by consumers makes up 70 percent of the economy.
  • Average household debt is down from US$125 000 in 2008 to US$119, 000 today.
  • Mortgage debt represents 72 percent of overall debt in a family.
  • Housing foreclosures continue to drive down prices.
  • Americans paying off their mortgages may not see any rise in home equity.

The housing market is expected to stay in decline until the country is fully lifted out of the recession. For all of the details, read this Globe and Mail article.

For more articles on the state of the economy, follow the links:

If your small business is struggling because of the recession, contact the Winflow Financial Group. Our consultants will work with you to make a personalized plan of action for your business.