Posted on 11/13/2002 4:11:36 PM PST by rohry
Market WrapUp for the Week Week in Graphs Storm Watch Geopolitical News Energy Precious Metals Raw Materials Wednesday, November 13, 2002 Separating Noise From Chatter On Capitol Hill Mr. Greenspan was pointing out everything that was wrong with the economy: The lengthy adjustment of capital spending, the fallout from the revelations of corporate malfeasance, the further decline in equity values, and heightened geopolitical risks. This has impacted consumer and business spending. The chairman also pointed to the fact that credit spreads have widened between investment grade and non-investment grade debt. In addition to US problems, Mr. Greenspan pointed out the current mess in Japan. Despite the numerous difficulties and the multiple bubbles in the economy (housing, mortgage refis, consumption, & financial assets), the US was on the right track. In the chairmans own words, the economy has hit a soft patch. For these reasons it was necessary to lower interest rates half a point. On a more positive note he went on to laud the bubble in housing and cash out mortgage financing as a big plus for the economy, saying, These data and some preliminary econometric results suggest that a dollar of equity extracted from housing has a more powerful effect on consumer spending than a dollar change in the value of common stocks. In other words, what happens to the bond market is more important than what happens to stocks. Therefore, the Fed will do all that is possible to maintain the mortgage-refi-housing-consumption bubbles. While stocks were rallying earlier in todays trading session the bond market was tumbling. It became necessary to focus attention on the bond market. Lower interest rates and an expanding trade and current account deficit make US-denominated Treasury debt less attractive to foreign buying. In fact, recent weakness in the bond market has been attributed to foreign selling. As I pointed out yesterday, what happens to the bond market and the currency market is much more important than what happens to equities. Mr. Greenspan reaffirmed these thoughts in his testimony today. Looking at the market since October, this rally has lacked leadership and momentum. No group outside of gold seems to be emerging as a leader in this rally. The volume hasnt been there; the number of new highs versus lows is still tilted towards losses. We have no leadership in a market that gyrates on a daily, if not hourly basis. This is a market that is looking for direction and cant seem to find it. The rallies appear to be nothing more than trading rallies made up of group rotation as fund managers play musical chairs with fewer chairs to sit on. The Impoverished Millionaire The portfolio had been close to $1.7 million at its peak. Generating $3,500 a month from capital appreciation, dividends, and interest had never been a problem. In fact, since retiring in 1996 he had seen his income and net worth go up each year. That all changed in 2000. At first he believed what his brokerage firm and cable TV told him about the downturn in stocks being nothing more than a correction. He lost money in 2000. By the fall of 2001 his portfolio was hemorrhaging. He liquidated his portfolio during the rally that followed the tragic events of 9-11. The terrorist attacks of last September had unnerved him. The money came out of stocks, preferred stocks, corporate bonds, and equity mutual funds. It went into CDs averaging between 3.5 to 4 percent. On a million dollars that would produce his needed $40,000 in income to supplement his social security. He had laddered his CDs at various financial institutions. He felt comfortable with that decision, especially as the major averages plunged double digits going into July. That is when his CDs started to mature. He was in for a big shock. Rates had fallen almost in half from where they were last winter. Today he would have to go out ten years or more to get a rate of return that was less than what he received last year. He told me with all of the financial problems at some of the financial institutions he thought of Treasuries, but was leery of going out 10 to 30 years to receive the same rate of return. He felt more comfortable going short-term, especially with all of todays uncertainty. That is when I gave him another shock. I told him that the best he could get on a 1-year t-bill was a little over 1.25%.
The returns on 2-year notes were less than 1.75% and 5-year notes were less than 3%. It was hard for him to believe that on $1,000,000 of capital he would receive less than $20,000 a year in income. This is the dilemma facing the savings class. Thanks to taxes and inflation, their rate of return on savings was now negative. The rate of return on a 1-year t-bill, currently at 1.32%, was less than the official inflation rate in the US of 1.5%. Back out federal tax rates of 28% and state taxes of 9.2% and another third is lost to taxes, bringing his after-tax return to below 1%. Maybe this is what Mr. Greenspan had in mind when he extols the favorable rates on borrowing and extracting equity out of housing. There seems to be a general focus in Washington on rewarding debt and consumption, and penalizing savings and investment. Who would have thought that a millionaire would have a hard time making ends meet? This individual is not extravagant by any means. He has a nice middle-class house that is paid for, and his hobbies arent expensive: golf and bridge. Yet with falling markets and interest rates he has fallen on hard times. Fortunately for this individual we had options. However, I cant help but think that many other retirees and savers in this country dependent on their investments are suffering similar anxieties. Lower interest rates and inflation benefit the debtor class at the expense of the savings class, which is bad for the country economically. Todays Markets Prime Ministers and intelligence officials seem to confirm Ijazs story. Interpol secretary-general Ronald Noble said, All intelligence experts agree that Al-Qaeda is preparing a major terrorist operation simultaneously. Britains Prime Minister Tony Blair warned his country yesterday about pending attacks. The French Prime Minister addressed the French people on Sunday warning of coming attacks. The German GNB (intelligence agency) has confirmed attacks will occur in the US shortly. The British Air Force, the RAF, is now patrolling the air over London and snipers have been placed on the roof of Heathrow Airport. The state department has issued a worldwide alert of an attack against Americans. The Bush Administration seems to be in a hurry to attack Iraq. Word in the intelligence community is that Saddam may be slipping weapons of mass destruction to terrorists to be used against the US. It is doubtful the US economy and the markets could withstand another 9-11 or an event equally or more devastating, given the fragile nature of business and consumers. It may be one reason why the markets are requiring propping up and have had difficulty staying above their 20-50 day moving averages. But interest rates arent the only tool at the Feds disposal. The Fed Chairman seemed to intimate he had other means when he said, We do have the capability, if required to do so, to go well beyond activities related to short-term rates. Last night an article appeared on CNN/MONEY titled For the Feds next Trick. The article listed a plethora of ideas from pushing rates to zero by monetizing the governments debt, buying corporate bonds, lowering bank reserves, lowering margin requirements for investors, to virtually giving money away. Some economists are arguing that the Fed could induce spending by consumers and business by targeting a higher rate of inflation, which would make holding on to cash less beneficial. This is the kind of madness that is now taken as sound economic policy, and most in the investment community would go along with it. In fact, many are calling for even more money. You got to have gold. Madness and lunacy and political risks are everywhere. The major averages, with the exception of the S&P 500, made it back into the black after going on a wild swing from gains to losses to squeaking by with a minor gain for the day. Investigations into Citigroups stock ratings and market practices at Merck and Schering-Plough renewed concerns over corporate malfeasance. Defense and energy shares sold off after Iraq said it would comply with UN resolutions. Traders believe that the threat of war and a disruption of oil supplies are less of a danger now. Despite minor gains for the averages, most stocks lost ground. Losing issues beat out advancing issues on the NYSE by a 10 to 9 margin. They were evenly matched on the Nasdaq. Volume fell to below the six-month daily average. The VIX rose .89 to 36.28 while thee VXN fell .79 to 54.46. Overseas Markets Japan's Nikkei 225 Stock Average fell to a 19-year low after the government reduced its economic assessment for the first time this year. Mizuho Holdings Inc. and Seven-Eleven Japan Co. led the drop. The Nikkei 225 Stock Average slid 0.3% to 8438.52, its lowest since April 1983. Copyright © Jim Puplava |
This bears repeating. Every time someone says I am a "gloomster" or a "Democrat talking down the economy" when I post the WrapUp, I shake my head. High stock prices and low bond returns are not good for everybody. Especially when the stocks are overvalued...
Amen.
Baby boomers are at or near retirement. Interest returns are about one-half of what the were less then two years ago. Other investments are worse. But hey, why should people who've worked and saved their whole adult lives expect to golf, vacation, and relax? There are hamburgers that need flipping, after all.
this statement really made me angry.....Jim's so right, this kind of economic policy is bad....the grasshoppers are triumphing over us ants because they vote their pocketbook....of course there's no cash in that pocketbook, just a bunch of credit cards....I'm gonna get off this thread and go eat...I cooked a big pot of wild goose & sausage gumbo and I got a rasberry pie in the oven.....then after that I'm gonna watch a ball game on TV....I refuse to let thinking about Greenspan ruin my evening....
As always thanks Rohry, and good luck to all [especially us ants]
Stonewalls
I just can't understand how drawing down equity to finance consumer spending is a good thing. It seems insane to me.
That would be a good idea if it ended a month before the election so workers could see the rape of their wages.
I really get bummed when I hear homeowners tapping their equity. Nothing builds more wealth for most citizens than their homes.
True but it's the only line he has left. There will be plenty to suck this down, hook, line & sinker. Boy does that sound appropriate (sinker).
I just got my Farmers Insurance quarterly magazine. There is an article in it which says only 15.4% of Americans have an IRA and only 22.2% own a 401k type plan. It didn't mention anything about pensions..
Those statistics alone don't sound that bad. It adds up to 37.6% of Americans. Add in, as you say, pensions, which many workers have from employers, public and private sector. Then, consider age as a factor. Many workers in their 20s and 30s haven't started saving for retirement yet. Then, there are people who have bank savings or investments not in retirement plans.
What do they all have in common? The value of savings is going down, along with interest rates. That, and people are throwing away home equity to buy stuff to fill their over-mortgaged houses.
Yikes!
The gold price dropped like a stone at around 11am EST. That would coincide with the news of the Iraqi.."acceptance"..of the UN Resolution.
Richard W.
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