Snorrius
Librivorator
You better stay out of stock markets for a time. They will fall even lower. As for GM and Ford - there is very high probability they will go bankrupt rather soon.
Ask an Economist (Post #1005 and counting)
- Thread starter JerichoHill
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JerichoHill
Bedrock of Knowledge
They'll be happy that you're paying, but the moment you're 1 second late you're gonna be getting a notice.
And sure, there's buying opps. Lemme know when yousee em. I kinda feel its nasty weather out there and I'm happy staying dry
They'll be eager to foreclose? On a property that they couldn't recover their own full mortgage price on? I'd think they'd be more eager to foreclose on a property that doesn't have more owed on it than it's current value.
I understand that a bank would be unhappy about the value of some loan's collateral dropping below the current loan amount outstanding, I just don't see what they could logically do about it - it certainly isn't (in 99% of the cases) the fault of the homeowner.
I'm just thinking about pushing a bucket out to collect some rainwater. With the market the way it is certainly I could lose my investment entirely but I could also get in at the ground floor of a recovery - what kind of returns would someone get having gone into the market at the bottom of the '87 crash?
innonimatu
the resident Cassandra
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No. Even if they do climb a little now, end of year results are going to be bad all around, and worse next year.
And anyway judging from what Berlusconi said (out of turn, as usual) politicians have already figured out the obvious solution. Freeze the whole financial system for a few days and dump a lot of newly-created cash there. It will utterly destroy confidence on markets for at least a generation, and do no good to restart the economy. The money is lacking not on banks but on people's saving accounts. Either debt must be canceled (how to do that without destroying lender's trust?), or wages must go up right when the world is entering a recession. Driving wages up will resolve the recession problem (Keynes was right) but how can debt-addicted companies be kept running during the many months it will take? Nationalize all the big employers too, or force the newly-nationalized banks to lend to them? It must be the first, because the second option will leave the same management culture in place, the one which for "efficiency's sake" (oh, and competition, too, another term dear to economists!) squeezed wages.
JH--why would you compare this to Japan? They raised rates in late 1989 early 1990 and didn't lower real rates below zero till 1996 whereas we did it in less than six months. Also, in 1989 they raised taxes from zero on VAT and capital gains to 5% and 20%, respectively. Seems like that was quite a combination of events on top of bad loans that led to that 10 year malaise.
Second question, other recessions have been caused by some combination of monetary tightness, higher taxes, and/or protectionism.
However, the current weakness isn't due to any of those factors. Instead, it seems to be coming from the massive amount of bad lending (itself ignited by loose money) mixed with untimely new mark-to market accounting rules and the uptick rule. In turn, this has impacted earnings which meant lower equity prices which meant the rating agencies changed their ratings and then we get this vicious cycle that slows the velocity of money.
Shouldn't we be addressing some of these ancillary issues by modifying some of the rules (IE 3 year market to market averaging or allowing a certain per cent to be allocated to a "held to maturity" accounting measure). It seems this recession will be driven by the snails pace of money velocity. First time ever.
Ford would not meet any of these criterion and is extremely correlated to the macro economy which is not pretty right now. Look for a catalyst for growth from companies like this before buying them.
Companies like Coke, Pepsico, Emerson Electric, Chevron, Flowers Foods, ADP, P&G, Genuine Auto Parts etc meet all the above criterion. Always use the principle of K.I.S.S. when investing for your strategic core holdings. Later you can get fancy by sateliteing off the core and become more tactical.
The question you should ask is in three years what should you have done in 2008.
I'd fund a Roth IRA for sure and keep adding as long as you can.
There's a lot of flexibility as you can always take out your contribution amount. You can also take out the earnings and contributions for $10k towards a 1st time home purchase if you have the account opened for 5 years. If you don't have it open for five years then the $10k for a home taxes only what you've earned but the contribution amount can still come out free. Meaning if you contributed $10k it comes out free but if you contributed $5k and made $6k then you'd be taxed on the $4k you earned. Clear as mud, yes?
If it's for qualified education expenses only the earnings are taxed but not the contribution. This type of shelter allows for virtually any investment vehicle to be held inside so for single earners making AGI less than $101k ($159k married) this is a layup.
For those of you with IRA accounts you will find no better time to convert to a Roth (if you qualify but if you don't wait till 2010) than right now because chances are your account is worth less than it's been in a long time and the same 5 year rule applies on withdrawals of the conversion amount (free from tax) and previously stated rules apply on earnings (house, education). Nice safety net to have...
Second question, other recessions have been caused by some combination of monetary tightness, higher taxes, and/or protectionism.
However, the current weakness isn't due to any of those factors. Instead, it seems to be coming from the massive amount of bad lending (itself ignited by loose money) mixed with untimely new mark-to market accounting rules and the uptick rule. In turn, this has impacted earnings which meant lower equity prices which meant the rating agencies changed their ratings and then we get this vicious cycle that slows the velocity of money.
Shouldn't we be addressing some of these ancillary issues by modifying some of the rules (IE 3 year market to market averaging or allowing a certain per cent to be allocated to a "held to maturity" accounting measure). It seems this recession will be driven by the snails pace of money velocity. First time ever.
ID--don't compound the error that others have made. Leverage has been the death of many investors and do borrow from a loan shark (credit card) is even more deathly. If you have the cash to put away and let it cook for awhile that's different. What I do think is if you're doing this you should try starting with quality. What I mean by that businesses that are not only cheap but have organic growth, low debt/equity, better than market dividends, rated A+, A or A- for quality of earnings stability and dividend growth, top half ROE and free cash flow greater than dividend payout by a factor of at least one.
Ford would not meet any of these criterion and is extremely correlated to the macro economy which is not pretty right now. Look for a catalyst for growth from companies like this before buying them.
Companies like Coke, Pepsico, Emerson Electric, Chevron, Flowers Foods, ADP, P&G, Genuine Auto Parts etc meet all the above criterion. Always use the principle of K.I.S.S. when investing for your strategic core holdings. Later you can get fancy by sateliteing off the core and become more tactical.
Better than it was a day, week, month, year or even 10 years ago, yes.
The question you should ask is in three years what should you have done in 2008.
I'd fund a Roth IRA for sure and keep adding as long as you can.
There's a lot of flexibility as you can always take out your contribution amount. You can also take out the earnings and contributions for $10k towards a 1st time home purchase if you have the account opened for 5 years. If you don't have it open for five years then the $10k for a home taxes only what you've earned but the contribution amount can still come out free. Meaning if you contributed $10k it comes out free but if you contributed $5k and made $6k then you'd be taxed on the $4k you earned. Clear as mud, yes?
If it's for qualified education expenses only the earnings are taxed but not the contribution. This type of shelter allows for virtually any investment vehicle to be held inside so for single earners making AGI less than $101k ($159k married) this is a layup.
For those of you with IRA accounts you will find no better time to convert to a Roth (if you qualify but if you don't wait till 2010) than right now because chances are your account is worth less than it's been in a long time and the same 5 year rule applies on withdrawals of the conversion amount (free from tax) and previously stated rules apply on earnings (house, education). Nice safety net to have...
Perfection
The Great Head.
IS WE DOOMED? 
It's just one component that makes the economic engine run but it's also a economically sensitive industry so it requires the strong macro environment as we experienced in the past. Question is how soon does that environment recover and considering the industry requires large capital commitments debt is an important part of their growth potential.
However, Chevron is another company that meets my criterion and they're paying you 4% right now just to hold the shares and that's without any future appreciation and increase in income (which is consistent with their history).
Broaden out to multiple growth industries that don't require a lot of debt and have demographics, great products and solid manangement in your favor. You can make more mistakes this way and still come out ahead.
C~G
Untouchable
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It seems my friend was more or less right, but it just happened faster than he ever thought.
Of course governments are reacting so we don't know how bad this will be in the end after all.
Whomp, I think that you've said (Or implied) several times that Obama's tax plan isn't as clear cut "95% of America gets tax cuts" as it seems, (Something about AMT, Social Security, maybe some other things?) and that people making a lot less than $250,000 a year are going to end up paying more, or at least, as much as they're paying now under an Obama administration. Did I just totally get that wrong, or is that somewhat right? If it is, could you explain a bit more in detail about what exactly he's planning on changing, and who it will affect negatively (Financially, from their point of view)?
El--here's the deal. Without reform of AMT he doesn't help those who fall into the AMT category by lowering their bracket since AMT is fixed (and eliminates most all deductions and exemptions). Our tax system is a "best ball" type tax (whichever is higher marginal tax amount or AMT is what you pay).
AMT is most insidious for middle income taxpayer (less than 28%) who have property tax, pay high state/city/local tax, have kids, other deductions like large % of income for medical expenses, charity, casualty losses, any depreciation and/or one who may have exercized non qualified stock options (not worth so much for many anymore).
If you do reform AMT then all we do is continue to increase deficits significantly without offsetting increases in revenue or substantial decreases in expenses. Patching AMT has been the standard lately and that doesn't help since it's simply lost revenue. No one really wants to fully address the issue on either side.
So even with higher taxes on the highest wage earners (working wealthy over $250k) to 39.6% you don't nearly fill the AMT gap that occurs with fixes. Charles Rangel has proposed raising the top marginal rate to 44% but that's simply too much and hasn't been received with much enthusiasm.
Obama has backed off of his Social Security donut hole apparently because his advisors have made it clear you'd destroy the only part of the economy creating jobs, the small business owner. If that went through people making $500k in New Jersey, for instance, who owned their own business would come in around ~62% tax. Good luck getting those people to hire anyone with that slice taken out.
One simple thing he could do is beat the daylights out of Charles Shummer to close the hedge fund loophole (see "carried interest") which allows them to pay at capital gains rates (15% max rate) rather than taxes at marginal rates (35%). This will be a big test for Obama to see if he can close this. McCain could never close this because democrats would simply side with Shummer however when your president is democrat you have a much better chance of closing these types of loopholes. Question is whether he's willing to spend political capital on it.
Personally, one thing he should consider is graduated capital gains rates for those that incur them on a large level and for special purposes. IE restricted stock and sales that are enormous . This is why Buffet (capital gains) plays less tax than his secretary (ordinary income)
AMT is most insidious for middle income taxpayer (less than 28%) who have property tax, pay high state/city/local tax, have kids, other deductions like large % of income for medical expenses, charity, casualty losses, any depreciation and/or one who may have exercized non qualified stock options (not worth so much for many anymore).
If you do reform AMT then all we do is continue to increase deficits significantly without offsetting increases in revenue or substantial decreases in expenses. Patching AMT has been the standard lately and that doesn't help since it's simply lost revenue. No one really wants to fully address the issue on either side.
So even with higher taxes on the highest wage earners (working wealthy over $250k) to 39.6% you don't nearly fill the AMT gap that occurs with fixes. Charles Rangel has proposed raising the top marginal rate to 44% but that's simply too much and hasn't been received with much enthusiasm.
Obama has backed off of his Social Security donut hole apparently because his advisors have made it clear you'd destroy the only part of the economy creating jobs, the small business owner. If that went through people making $500k in New Jersey, for instance, who owned their own business would come in around ~62% tax. Good luck getting those people to hire anyone with that slice taken out.
One simple thing he could do is beat the daylights out of Charles Shummer to close the hedge fund loophole (see "carried interest") which allows them to pay at capital gains rates (15% max rate) rather than taxes at marginal rates (35%). This will be a big test for Obama to see if he can close this. McCain could never close this because democrats would simply side with Shummer however when your president is democrat you have a much better chance of closing these types of loopholes. Question is whether he's willing to spend political capital on it.
Personally, one thing he should consider is graduated capital gains rates for those that incur them on a large level and for special purposes. IE restricted stock and sales that are enormous . This is why Buffet (capital gains) plays less tax than his secretary (ordinary income)
I have a question to do with how LIBOR inversion comes about. I can understand the borrowing costs rising due to solvency issues with banks, but why would the short term rate rise above the long term rate? Wouldn't it be riskier to lend money long term (say 6 months) because if the bank gets into trouble a month from now your money would be stuck?
Integral
Can't you hear it?
So Krugman won the Nobel in Economics, "For his analysis of trade patterns and location of economic activity."
I thought this thread would be the most appropriate place to put the news.
I thought this thread would be the most appropriate place to put the news.
Homie
Anti-Lefty
Yeah, this was mentioned in class today. Some students were muttering "what a popularity contest" under their breath. I don't know much about him though, other than that I read an article by him, "The crazy economist" or some similar title, I forget.
No one's lending for most anything and 6 months is most definitely not long term. LIBOR is the rate banks lend to each other and currently they don't trust each other overnight because they're can't be confident they'll be paid back.
Until velocity of funds comes back we'll continue to see chaotic fixed income markets. The "investment grade corporate" index in the US (LQD) is a good example of this because ordinarily these bonds would decline in value if either inflation was high or going higher (due to the fixed payment they make) or there was a risk of default. The prices are down over 17% year to date (even after today's rally of over 6%). That tells you investors aren't willing to assume risk of default.
Don't be surprised that Inbev can't come up with the financing to acquire Aneheuser Busch if financing doesn't improve.
Erik Mesoy
Core Tester / Intern
I have a series of questions derived from reading lots of moldbuggery. Here comes the first wave:
What is the difference between "bankrupt" and "insolvent"?
Did any banks become either or both during the recent financial crisis?
Were any banks either or both prior to the financial crisis, but it only came to a head then?
Can a bank practically function while bankrupt or insolvent?
Is a bank legally allowed to function while bankrupt or insolvent?
What is the difference between "bankrupt" and "insolvent"?
Did any banks become either or both during the recent financial crisis?
Were any banks either or both prior to the financial crisis, but it only came to a head then?
Can a bank practically function while bankrupt or insolvent?
Is a bank legally allowed to function while bankrupt or insolvent?
Homie
Anti-Lefty
An insolvent bank is a bank that cannot pay its depositers back. I.e. the bank has lost all its depositers money through making bad investments and bad loans with that money. A bankrupt bank is like any business who declares itself bankrupt: It has declared that it has failed as a business, it ceases to operate and its assets are sold off.
Erik Mesoy
Core Tester / Intern
If that's correct, is there a term for a bank which will predictably become insolvent? For example, if it has 100 Generic Currency Units in storage, will be receiving 100 GCUs each week for the next six weeks, and has a (non-negotiable) due payment of 500 GCUs in two weeks?
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