Saturday, November 24, 2007

The Stealth Recession

Today's post is an economic idea I have had. Its nothing terribly fancy in fact its rather simple. I got this idea from the criticism of Alan Greenspan and the Federal Reserve keeping interest rates so low for several years from 2001-2005 that when inflation was taken into account real interest rates were actually negative.

So here it goes. The federal reserve, supposedly in a move to be more transparent, released and internal study forecasting that the economy would slow to as slow as a 1.6% GDP. However, this federal reserve is well known for always focusing on so called "core" inflation which excludes energy and housing costs among other thing. But obviously energy and housing prices affect the consumer's standard of living heavily. So essentially if the difference between "core" inflation and say an inflation figure including energy and housing is more than 1.6% than a fair measure of the GDP during the forecasted time would actually be zero or less ( i.e. a recession).

So I hereby coin the term the "stealth recession." To me its a recession wherein a true GDP is negative while the nominal ones, and the so called real ones which utilize "core" inflation show a positive gain. If the fed's real GDP ( nominal GDP - core inflation) forecast is 1.6% but say the so called non-core inflation is closer to 6% than a true of fair measure of real GDP would be closer to -4.5%.

I theorize that we have had stealth recessions before. That is why the economic figures are always touted as being okay or good and then anecdotally through the media we hear stories of how consumers still seem to be suffering or not feeling as though things are improving on their end.

Tuesday, November 20, 2007

Why would you leave your money in Money Markets?

Well it was funny today I saw an article on Motley Fool speculating about the perceived risk in money market funds. But I already saw this risk weeks ago. In fact someone I know has moved money in response to my expressed concern.

Okay so what am I talking about? I am talking about Money Market funds, which are funds that typically pay better than FDIC insured savings accounts. Money Market funds are allowed to invest in and have invested in all sorts of so called toxic debt instruments (CDO's, Asset backed securities, etc. ). They are also not insured by either the FDIC or the SPIC. According to the article money market funds only pay a 1% premium over similar funds which limit their holdings to Treasuries. A 1% risk premium seems pretty stingy for something that might only give you back 95% of your money.

I also remember vividly having a conversation with someone managing money for high net worth individuals at a party about a year and a half ago who cued me in that the Broker/Dealer/Investment Bank had recently amended their disclosure statements within the prospecti of their money funds. Clearly the risk that these funds might lose money was understood by the big investment banks. So some smart people foresaw these risks. I mean how else did Goldman make a profit in Quarter 3?

The article is tame and trying too hard to be objective. But I have to ask you in this market what kind of idiot would leave money in a money market fund? I mean in the future when the capital markets regain some stability sure, but for now with all this volatility and the uncertain nature of how far the write downs will go why risk it? For the record I am very bearish on the financial stocks for the time being. I will not even think about changing my mind until 4th quarter results come out in January. I expect that FASB rule 157, effective November 15, 2007, will require these financials to mark even more worthless securitized products to market forcing more write offs and mark downs.

Monday, November 19, 2007

My take on Bernake's Statements to Cato Institute!

Much is being said of Mr. Bernake's presentation to the Cato Institute this last week. In various portions of the statement he appears to be suggesting that the Federal Reserve Open Market committee is shifting its focus from rescuing various capital markets to fighting inflation and keeping the main street economy going. While its nice to see a discussion that so called core inflation is not representative of what consumers face in so called non-core inflation, I simply don't believe anyone at the Fed to make good on their threats.

This sort of talk by Bernake is most likely a bluff. Why would Mr. Bernake signal a shift in fed focus? Why bluff? Well perhaps its to help shore up confidence in the plummeting dollar and try to put a lid on oil and other commodity futures prices. However on December 11, the next fed open market committee market we shall see whether Mr. Bernake and the Wall Street friendly Fed stick to its new focus of fighting non-core inflation. I view core inflation as a sort of a joke, an academic notion which has little basis in reality.

If the credit crunch of which I have warned for a while, continues to worsen (new accounting standards make more write offs all but certain) Bernake and the rest of the Fed will not have the balls to defy the Wallstreet MSNBC pundit machine and hold rates steady. Of course, as soon as another fed funds rate cut is announced it will send gold and silver prices soaring again.

Personally I am watching the correction in gold and silver prices to try and increase my positions in ETF's between now and December 11.