Futures: Charles Schwab, Barak Obama and me

I understand completely the importance of optimism about the future when it comes to social, political or economic change. One has to believe in positive future outcomes if one is to invest time, money, effort and hope in projects that will not come to fruition for months or years. I get it and, more importantly, I buy into the proposition that tomorrow grants us an opportunity to better ourselves and the world. So why do I find it irksome when companies hype the future, or when commentators pounce on some obscure economic indicator and turn it into the harbinger of prosperity? The new Charles Schwab ad says "Dwelling on the past won't help my future. Do something about it." Very paternal, Chuck. 

I think most people's problems from the economic downturn are not grounded in the past; rather, it's the present and very immanent future that most of us are contending with: drained retirement accounts, loss of jobs, cut hours, lack of available credit... While there is no doubting that years from now we'll look back at the 2008-2??? depression and laugh or grimace, but now is the time to think clearly about what we should be doing with dwindling, threatened or otherwise reduced resources. Pretending, as suggested by the Charles Schwab ad, that we're out of the woods and that our reluctance to go whole hog back into the stock market, or supermarket for that matter, is based on an irrational reaction to past events is foolish to say the least. 

Prudence is called for. While it might be tempting to bet on the stock market or take out more credit to get out of our current financial doldrums, we should be looking instead for sustainable solutions. Americans should not re-adopt their role as the world's economic engine. As we are finding out, the growth in the world's economy from 1995-2007 was largely based on consumers and companies overextending themselves on credit, on insane financial commodities and an irrational belief that real estate can leap in value year after year...forever. What a difference a year makes, no? How about more sustainable investments: a car that uses less fuel, appliances that use less energy, solar tiles for your home, community investments that bring quality of life returns, or an investment in education? These things won't make you rich, but some will allow you to save money and others will contribute to a genuine sense of well-being, which is what all the over-leveraging lo these many years was supposed to do, right? Here's to hope!   

An interesting take on first quarter numbers

This is an excerpt from Warren Brussee's blog. He's a smart guy, one of the few who saw that the world's financial system was in hot water long before other economists and bloggers like me, but he does have a book to sell, so take his prognostications with that in mind.

THE MASSES ARE MOBILIZING

 

In my book, I predicted that by 2012 people would begin to actively and sometimes violently protest against what they perceived as inequalities.  We are already seeing inklings of these protest movements.

 

In 1933, in “The Nation,” James Steele wrote about how 10,000 people protested against the eviction of Cleveland resident John Sparanga.  Once again, groups in Cleveland have rallied outside the Cuyahoga County courthouse, calling for a foreclosure freeze.  In Boston, the Neighborhood Assistance Corporation of America protested in front of Countrywide Financial offices.  The Mabuhay Alliance, joined by the Mexican-American Political Alliance, staged a protest in front of Countrywide’s San Diego office.  In Los Angeles and Oakland, groups like ACORN have organized low-income homeowners.  Contra Costa Interfaith Supporting Community Organization (CCISCO) protested in front of several Antioch bank branches, forcing the banks to renegotiate their members’ loans.

 

Such protests have not just been limited to foreclosures.  Groups have marched on the homes of those receiving the bonuses from AIG.  In typical mass protest confusion, the protests centered on homes where the AIG employees had already agreed to give up their bonuses!

 

And that is the problem!  Mass protests include many people who will not be rational.  It is only a matter of time until someone in these protest groups steps over the line, or they are confronted by a police team that loses their cool and becomes physical in their response.  A Vietnam-era Kent State confrontation scenario seems inevitable.  Once that happens, we could see total chaos as police and communities refuse to take on protest groups and pressure builds to stop foreclosing on people. Our financial institutions will not know what to do with such a situation.  And corporate leaders who are receiving huge bonuses or salaries will find themselves under ever-increasing pressures from stock holders and others who feel that these corporate leaders are prospering while others are hurting.

 

The Obama team will really start earning their incomes if such protests become commonplace and violent.

 

HOUSING   The January 2009 Standard & Poor’s/Case-Shiller 20-city housing index dropped a record 19% versus a year ago.  This index has dropped 29% from its peak in 2006; but housing prices must drop another 15% to 20% to get down to their historical inflation-adjusted level.

 

The New York Times and others have reported that banks are sometimes going through the foreclosure process but stopping at the last minute, insisting that the property owners still own the homes and must pay taxes and do required repairs. Banks are doing this on homes that have been vandalized and are largely not saleable.  Although the exact number of homes involved are not known, they are included in the 700,000 estimate I included in my mid-March update.

 

THE ECONOMIC NUMBERS   Recently, some economic numbers have given substance to those who believe that the downturn has bottomed out and “happy days” will be starting soon.  But it behooves an investor to do some examination of these numbers.

 

For example, in February, new home sales rose 4.7% versus January sales.  However, putting this in historical context, February’s new home sales were the second-worst on record and well below last year’s numbers.  It’s just that January numbers were so bad that February numbers look better in comparison.

 

Consumer spending in February was up for the second month in a row.  However, looking at the numbers for the past year, for the first six months of that year, the monthly change in consumer spending averaged +0.42% per month.  For the most recent six months the average change was -0.35%.

 

Perhaps a better view of the whole economy is reflected in the job benefits numbers. The Labor Department reported that initial jobless benefit claims rose last week, and those continuing to receive benefits set a record for the ninth straight week.  This means that laid off workers are having a harder time finding jobs.  The proportion of the workforce that is unemployed is the highest since 1983 and almost double what it was a year ago.  And these data do not include the almost 1.5 million receiving extended unemployment compensation.. 

 

THE STOCKMARKET   With the recent jump in the market, the S&P 500 price/dividend ratio is now at 37.  This is well above its historical median of 26 and my entry price goal of 17.2.  However, even with the recent rise in the markets, the S&P 500 is down 11% for the year.