XChange - The NBR Blog

Feeling the Pain of Recession?

2008-05-08T23:13:12Z

Everywhere I look I see people struggling, working two or three jobs, trying to buy a home or maybe even losing their home, barely able to afford filling up at the pump, cutting back on groceries, and even staying home more often to save money.

I can relate to this group of people, especially when I’m sitting quietly at my second job (which happens to be a university library). It’s in those quiet moments when it hits me how bad the economy really is.

Usually I tune out, but lately I’ve picked up on peoples’ conversations around me. I listen to their frustrations about how hard it is to make it these days. These people range in age from millenials to baby boomers and from entry level to well established professionals.

]]> I hear them talking about how they are cutting corners by walking instead of driving to the nearby store or how they are not buying certain grocery items. And now instead of going to the theater, they’re renting movies. I thought I was alone in my struggles, but now I see the economic slowdown affecting pretty much everyone.

For instance, the university is being handed some major budget cuts this year. In response, the school is disbanding programs, merging departments, freezing vacant positions and considering lay offs. There’s talk about changing the basic five day work week into a 10 hour, four day work week to save on electricity, and the school may also trim the number of students accepted for admission to further lower costs.

I remember when I started college almost seven years ago, there was a paper shortage. We had to print out our syllabus from home because the university couldn’t afford the paper. I thought how odd; but now I see something even more alarming happening, and it may get a whole lot worse. I know for a fact we are in a recession, even though we may not have hit the technical definition for one.

I am growing more concerned each day as I see more and more people affected by this economic downturn. Obviously I don’t have the answers to how to end it or what it’s going to take to turn things around. But I’d sure like to know how long it’s going to take for the conversations I’ve been overhearing to change for the better.

High Hopes for Those Stimulus Checks

2008-05-08T23:09:57Z

Every time I do a story about the economy lately, analysts talk about the government stimulus checks that consumers have received or soon will be getting. That was again true today…although today there was greater focus on what that money would mean to retailers in the coming months. Will stores like Wal-mart or Target be the biggest beneficiaries of that extra cash from Mr. Bush…or will Americans pack that money away for a really rainy day?

No one knows for sure what the fickle U.S. consumer will do. But, I felt they would be more likely to spend it rather than save it. Sure, there are the rising costs for basic necessities like milk and cereal. But, I thought it would be more likely that our shop-till-you-drop American culture would result in spending on discretionary items…mainly flat screen TVs and ipods.

But, recently, I have changed my mind.

]]> That’s because I have been informally polling people about their plans for their checks…and I keep hearing these words: I PLAN TO SAVE IT.

Now, that may be what everyone says when talking to a journalist. But, once the money is actually in your hot hands, what will you really do with it?

Gas Prices in Perspective

2008-05-07T20:50:36Z

Gas prices make people crazy.

On the one hand, you get the "serves us right crowd." You know the argument: We deserve to pay $4 a gallon, because we drive big cars and haven't been serious about energy conservation for, oh, the last 20 years. Cutting the gas tax or slapping a windfall profits tax on oil companies would be silly since everything in this market is driven by supply and demand.

On the other hand, you find the "birthright crowd." These folks basically argue that gas was a dollar a gallon when they were kids and it should be $1 a gallon now. We deserve cheap gas, because it is so important. If only we drilled enough, cut taxes enough or pressured OPEC enough things would return to "normal."

]]> In this case, I find the truth lies somewhere in the middle of the road. The good news first. Gas prices may not trigger soaring inflation this summer, as Goldman Sachs points out:

Gasoline prices typically increase by 8½% in April and a further 4½% in May. As April gasoline prices only increased about 6½% the energy price component of the CPI will likely show a seasonally adjusted decline.

Also, the stimulus checks now on the way are much larger than the increase in gas prices. Goldman Sachs also estimates that the nation's gas bill is going up about $7 billion a month. The stimulus is adding $35 billion a month over the next quarter. That's a big difference.

Now what should be done? Gas price increases are causing real pain to real people. Finding a way to offset that pain is sensible, although sensible people may argue over the best way to do that. It's also sensible to explore every option out there -- exploration, conservation, new technologies and market incentives.

I think most Americans understand gas is not going back to $2 a gallon. They also understand that most people can't stop driving. You have to get to work and in most parts of the country public transportation is just not an option.

This sounds like a problem where bipartisan cooperation could yield important policy changes. Unfortunately, there is no sign that will happen before the next president takes office.

Politics and Fannie Mae

2008-05-06T23:22:58Z

To understand Fannie Mae and its “sister company” Freddie Mac takes a lesson in politics. There is a fierce political battle going on about how to regulate government sponsored entities like Fannie and Freddie. In general, Democrats support the companies taking on a larger role in the mortgage market. They support the companies' affordable housing missions and want them to help low income borrowers. Republican generally want a smaller role for the firms and worry about the risk to taxpayers that could come with letting the firms grow their portfolios. Obviously, it’s in Fannie Mae’s best financial interest for the housing market to stabilize. But the current volatility can work to the company's political advantage, as there seems to be more need than ever for it to “work.”

Sell in May and Walk Away

2008-05-06T23:18:11Z

Gardeners and baseball fans may love May. But investors often dread its arrival.

That’s because May through October is typically the weakest six months of the year for stocks.

According to the Stock Traders Almanac, since 1950, the Dow Jones Industrial Average has gained an average of 0.5% in the May 1 - October 31 period. That’s a lot less than the average of 7.9% the index has gained in the November 1 - April 30th period. The Almanac takes it a step further, with a six month investment switching strategy:

]]> Let’s say you invested a hypothetical $10,000 in the Dow during the 'best' period and switched to treasury bonds during the 'worst' period in every year since 1950.

According to the Almanac, you would have earned a compounded $578,413 through 2006. However, if you took the same $10,000 and invested it the other way around, you’d have just $341 compounded.

I like factoids of this nature, but, personally, I can’t see investing this way. I am the type of person who invests a little into mutual funds each month, regardless of the calendar or market conditions.

What about you, do you pay attention to seasonal factors? If you have a lump sum -- like a bonus or tax refund -- do you try to figure out the perfect time to invest it? How much credence do you give to seasonal factors?

A Tale of 5 Cities - Manhattan's Unique Subprime Problem

2008-05-05T23:18:37Z

Unlike most cities in the country, the Manhattan real estate market was not initially touched by the subprime mortgage mess. In fact, as I report in our "A Tale of 5 Cities" series, up until recently there was little evidence of problems with subprime mortgages or foreclosures in Manhattan…and the real estate market here charged ahead much like it had in recent years.

The simple reason is that Manhattan is not a subprime mortgage market. In other words, people who can only obtain subprime loans don’t and can’t buy in NYC (at least not in Manhattan). That’s because the majority or homes sold in Manhattan are co-op apartments. And, co-op boards, which must approve all buyers, did a far better job vetting the finances of prospective co-op shareholders than banks typically did. On average, people buying Manhattan apartments put down 35 percent of the purchase price….and finance the remaining 65 percent. Simply put, if you need a subprime loan, you most likely won’t be buying a home in Manhattan.

]]> But, as it turns out the Manhattan market is being touched by the sub-prime problem...but in a much different way than the rest of the U.S. You see, those who work on Wall Street are big buyers of NYC real estate. Now that the crisis in the credit markets (brought on my bad subprime debt) has been eating into the profits of big Wall Street firms and causing some to even crater (e.g. BS), Wall Streeters are getting cautious about their spending. And, even though there's not yet been big evidence of a curtailment in real estate purchases in Manhattan, people are getting worried. If profits continue to evaporate for Wall Street firms and hefty layoffs follow, it's improbable that the Manhattan real estate market will go unscathed.

So, that's the Manhattan little subprime problem…our own unique version.

Showtime in Omaha

2008-05-05T15:43:36Z

The big event of the year for shareholders of Berkshire Hathaway is Warren Buffett’s annual meeting in Omaha, Nebraska. They look forward to learning from the richest man in the world. This year 31,000 shareholders -- some from as far away as India and Australia -- made the pilgrimage.

The other big event: The Movie. The meeting opens every year with this humorous hour-long satire featuring Buffett and his sidekick, Charlie Munger, Berkshire’s 84-year-old Vice Chairman. It’s produced by Buffett’s daughter, Susie. You won’t ever see clips from it on TV or You Tube. Buffett doesn’t allow anyone to film it. But it’s a perennial favorite with shareholders. And this year’s movie was a huge hit.

]]> It opened with a cartoon segment spoofing the presidential race. It shows Munger as a candidate of the “Financial Independence Party.” On the campaign trail, Munger advocates that the solution to the country’s problems is for Americans to use products made by Berkshire Hathaway. He says global warming would be reduced if everyone eats a Dairy Queen Blizzard once a day. The solution to the nation’s health problems: a daily diet of See’s Candies. To help him run the country, Munger proposes that Warren Buffett become Chairman of the Federal Reserve, Treasury Secretary and Commerce Secretary; Bill Gates as Secretary of Technology and Geico Gecko as Secretary of the Environment.

The highlight of the movie was a comical episode starring Warren Buffett and Susan Lucci, star of the soap opera “All My Children.” Lucci plots to get Buffett to rescue her from solitary confinement in prison. Buffett agrees to help. But rather than using his billions to bail her out, he urges her to play his favorite game of bridge to stay occupied in prison.

After the movie, the giant TV screens lit up with a news flash: a big management shakeup at Berkshire. Buffett had decided to swap jobs with Lucci. He would become the leading man on “All My Children” and she would take over as Chairman and CEO of Berkshire. At that moment -- to the surprise of the thousands of Berkshire shareholders -- Lucci stepped onto the stage of Omaha’s Qwest arena in a white, sexy dress. She told the crowd that as Berkshire’s new chairman she would make big changes. First, an end to Buffett’s “no dividend” policy, which she said was “so cheap.” Second, earnings guidance every week. And finally, more compensation for the company’s directors, saying they deserve more than $900 a year. With that announcement, Berkshire’s directors, seated in the front row, stood up and cheered. Buffett then walked on stage and said he had come to his senses. He told Lucci, “My show is Berkshire Hathaway and my role is to run it. All My Children can’t do without you and I can’t do without Berkshire.” He thanked her and told her to go to Borsheim’s, Berkshire’s famous jewelry store, and buy anything she wanted -- and charge it to Charlie.

It won’t win an Oscar, but it entertained and enthralled Buffett’s faithful fans. Just one more reason that Berkshire believers say the trip to Omaha is so worth it.

April Employment Report

2008-05-02T23:35:50Z

Today’s employment report was a case of less bad news being good news.

Wall Street knew there would be job losses in April. But it believed they would be in the 80 thousand payrolls range.

So, when it turns out only 20 thousand positions were lost, the cuts don’t seem so bad!

Not surprisingly, the construction and manufacturing sectors were particularly hard hit.

]]> But other troubled sectors began to rebound.

Banks, mortgage companies and other financial firms added jobs for the first time since the credit market turmoil began.

There was also a big increase in temporary-help jobs. On the one hand, they’re only temporary. So, if the economy deteriorates, they’ll be the first to be let go. But an increase in hiring temps is sometimes be a sign that a company needs workers—but isn’t quite ready to commit to staff positions.

So I guess the best news coming out of today’s report is that things don’t seem to be falling off a cliff. Companies don’t appear to be panicking and cutting jobs willy-nilly to reduce costs.

What’s your experience? Do you have layoffs at your company or are you hiring? If you are hiring, are the full-time or part-time? How is worker morale?

The Credit Crunch and the Career Decision

2008-05-02T21:00:46Z

There are many ways to measure the extent of the credit crunch.

You can compare interest rates -- current and historical -- on safe Treasury bonds and risky high yield bonds. You can poll senior loan officers at big banks, as the Fed does on a regular basis. If loan officers are tightening up and cutting back, you can bet credit is harder to get. Checking the difference in price between jumbo and regular loans is another important indicator.

My favorite new indicator of credit conditions is the "career decision" metric.

I'm told that, when pitched a new product, buyers are asking Wall Street bond salesmen a new question: "Am I making a career decision here?"

In other words, is this investment something I can defend to my boss if it goes bust. Wrightson ICAP's Lou Crandall says that, after Bear Stearns, events in the market that were thought to be highly improbable are now considered merely unlikely.

In such an environment, buyers are bewaring. They don't want to hold anything remotely risky lest they lose money AND their jobs. Loans with collateral are in. Unsecured loans to anyone, including big banks, are out.

That helps explain why the Libor rate is under pressure. For more on Libor see this link. The Fed announced today it is pumping lots of cash into Europe and the US in a bid to bring down Libor, a key interbank lending rate.

That might help a bit, but not much in a market where any unsecured loan may be a career decision.

As Crandall says, the desire to stay employed "explains an awful lot in almost any part of the economy.”

A Tale of 5 Cities - Detroit's Housing Doldrums

2008-05-02T20:22:44Z

Perhaps no real estate market in the U.S. will have as much trouble recovering from the current housing crisis as Southeast Michigan. Unlike a lot of areas, Detroit's housing market didn't become overheated by subprime mortgages. Rather, it is a region that has been on the decline for decades.

Detroit has yet to really recover from the race riots of the 1960s. Demographics reflect that. Detroit's population peaked in 1950 with about 1.8 million residents. By 1980 there were about 1.2 million people. Today there are only about 870,000.

Economics are another problem. Southeast Michigan has lost about 300,000 manufacturing jobs over the past few years. The auto industry accounts for about half of those losses. Those jobs won't be coming back, so the region is struggling along with other rust-belt communities to find new ones.

]]> Experts say areas like Las Vegas, Miami, and Southern California should bounce back fairly quickly from the current housing shock because people want to live and retire there. That isn't the case for Southeast Michigan.

Robert Van Order is a real estate and finance professor at the University of Michigan. He says strong demographics, job growth, and rising home values make a dynamic housing market. Van Order predicts that is something the Detroit area won't see for awhile.

As we drove around Detroit for my “A Tale of 5 Cities” story, it wasn't difficult to find neighborhoods with three or four homes on a single street boarded up because of foreclosure. Many of these homes seemed beyond repair, but others offered promise.

Southeast Michigan's future, and that of its housing market, hinges on young people moving to the area and investing in it. If the region fails to find a way to do that, its housing market may never fully recover.

A Tale of 5 Cities - DC's Recession Resistant Myth

2008-05-02T19:46:28Z

When real estate was booming, the mantra of people in the business of selling homes was that the DC market was “recession resistant.” The theory went that since the federal government is here, house prices would stabilize or continue to rise. While it is true that the DC economy is buoyed by the government’s presence, the region is not immune from the unwinding of real estate speculation and tightening of lending standards.

Prices are still falling in the most distant suburbs. This lower end of the housing market is where the subprime lending standards took their heaviest toll. There is still land to develop in these suburbs, which has also added to the supply of homes. When I asked John McClain of GMU’s Center for Regional Analysis if the problems were from overbuilding, he described it as “overbought.” There was a time when builders couldn’t keep up with buyer demand. Prices escalated as a result. But that’s over. Buyers backed out as lending standards tightened and prices stopped rising.

]]> Some of the decline in housing is due to the near disappearance of the speculative buyer. Some has to do with homes no longer being affordable. And some of the troubles in the distant suburbs may also have to do with rising energy prices. When gas prices were lower, 40-50 mile commutes were not as expensive. $3.65 (and rising) a gallon gas makes that no longer true. Now a smaller home, closer to the city or public transportation, that buyers will live in (as opposed to flip), is the choice of buyers now.

Of course, this is just the housing story in the D.C. region – one of the many regions we focus on in our “A Tale of 5 Cities” series.

The Adventure of Flying These Days

2008-05-01T23:19:51Z

My ten year old daughter complains about being the only one in her class to have never been on an airplane. My husband and I both travel for work; and when the kids were younger, the last thing we wanted to do with our precious time off was spend it slogging through airports. We’re lucky to have both of our families within driving distance. Now that they are getting older, we’d like to take a trip; but with the cost of everything going up, the far-away vacation is one of the first things to go.

I remember when I was a kid how exciting my first flight was. The pilot came out from the cockpit to give us “wings.” My daughter won’t have that experience. Yet, even with all the hassles of flying these days, I’d still like give her a “first flight” experience soon. In my travels, flying is almost always an adventure... although not usually a pleasant one.

The Dollar Rally?

2008-05-01T19:45:02Z

The dollar had a good day today, rising roughly 1%. Some are beginning to wonder if the greenback has hit bottom and is ready to rebound.

Consider this: the dollar is off about 26% from its peak in February 2002. So, as this chart from Win Thin, Senior Currency Strategist at Brown Brothers Harriman & Co, shows the dollar has had a long fall.

]]> And after a long fall, there is usually a long climb back. The implications of such a swing are important. Oil prices, which are set in dollars, would likely come down some. Relief at the pump means less pressure on Congress to pass policy changes -- gas tax relief, windfall profits tax on oil companies, etc.

A shift in the dollar also reduces pressure on import inflation, easing the Fed's job.

On the downside, exports might fall as US products become more expensive.

On the whole, a moderate rise in the dollar would be a welcome development. But it will take more than a one-day rally to be sure the greenback's worst days are behind us.

Paulson on the Economy

2008-04-30T22:48:58Z

A couple quick thoughts on my interview today with Henry Paulson.

First, he seemed more relaxed than I have seen him in months. That makes some sense. The economy did not dip negative in the first three months of the year. And credit markets are a bit calmer.

Second, Paulson sounded, to my ears anyway, a bit more optimistic about the dollar. Yes, he sounded the usual lines about a strong dollar. Markets have hear this so often that they no longer believe it. After all, the dollar has fallen 12% since Paulson became secretary.

But Europe is showing signs of slowing. The Fed here is signaling rate cuts are at an end, the ECB is expected to cut rates in the coming year.

Perhaps finally the dollar is reaching a bottom. If that's the case, and credit markets are calmer and the stimulus checks are in the mail, then Paulson -- and all of us -- can breath easier.

Let's hope.

Diesel Prices and Washington

2008-04-28T22:06:24Z

Truckers circled the Capitol this morning, slowing for cameramen, blaring their horns at the right moment in protest of the hefty price for diesel fuel. Certainly, relative to prices last year-- up more than 40% -- the cost of $4.20 a gallon is a heavy burden in a slow economy.

And yet. . .

I can't help recall other protests over high prices. Seniors regularly parade by arguing prescription drug prices are too high. Back in the day, housing advocates were worried middle income couples were being priced out of the market. In the late 90s, California consumers flooded lawmakers with complaints about the steep cost of a kilowatt.

More often the complain is about low prices. Low prices for steel led to higher steel tariffs at the beginning of the Bush administration. Years ago, farmers drove their tractors to town to dramatize the sorry state of the farm economy.

]]> I am sympathetic to small business folks and farmers who are trying to make ends meet in a tough economy.

But I have also become skeptical of appeals to Washington to solve problems created by global market forces. Often price spikes in commodities become convenient excuses for industries to press Congress into passing long-held agenda items that were stalled because of the cost or, more often, real concerns about the wisdom of granting a special break to a special interest.

Recessions are, however, times when bailouts are floated and often passed. The difficult challenge is finding the wisdom to know who to help and how. Diesel prices are high, but so is the price of wheat and cotton and gold. If we help the truckers, will the bakers, tailors and jewelers be next?