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The State of the Economy How bad - or good - is the economy? You may ask!How's the nation's economy doing these days? BEA, the statistical arm of the US Commerce Department, has reported that the market value of all goods and services produced, adjusted for inflation, rose 2.7 percent during the first quarter of 2010 (10/Q1).Good news. But no bed of roses! Return to TopRead → Luckily, the Federal Government, as expected, helped the economy by having a unsustainable but positive federal spending contribution for the entire 2009 year. But hold on! 2009 wasn't a "bear" year - as far as the stock market goes! During 2009, the stock market, as measured, e.g., by 500 companies which makeup the "S&P500" index, actually rebounded by more than 20 percent. Of course it had fallen sharply in 2008 by a painful 38 percent - and with it, also crashed people's savings and pensions. This scarring experience is an important issue which has affected - and is affecting - our public's opinion. How erroneous are forecasts?Are forecasts credible to you? By definition and by experience forecasts are mainly "erroneous." Hindsight maybe be 20/20 but economic foresight is hardly ever that giving. As an example, look at how forecasters - using the "US Model" - performed in the recent times, as our report reflects in the table on the next page. The first row in the table shows the actual performance of the economy. In the second row, we report the forecasts made on April, 2008 - when the real bad news about the economy - the "financial meltdown" - was just being felt in the Wall Street (but not yet in the Main Street). Although the walls where already crumbling down and most of us started feeling it and we warned investors of it when the exuberant market levels where reached in 2007. So, comparing the first two rows in the US growth record, how do you judge the reliability of forecasts? Measuring the "forecast errors" gives us a clue. One way to measure the errors is simply to subtract the two numbers for each quarter (forecasts - actual performance). If we measure the "errors" algebraically in this simple way, some errors are close to 10 percent (e.g., for 09/Q1)! The US model is one of the oldest and most "reliable" forecasting models in the United States, which, in some way, is "housed" in the Yale University. It consists of 123 equations, 27 stochastic equations and 96 identities. There are 123 endogenous variables, slightly over 100 exogenous variables, and many lagged endogenous variables. Yes, it's complicated and we don't bore you with more specifications. Indeed, models, economists - and politicians - err when they forecast or try to sell us the economy. This time the errors were shocking! We may find 2010 to be a very different year than what most forecasters expect. Return to Top Read → Some blame would probably be shared by the management of financial/banking sector, especially:
And lets not forget those "publicly traded" Rating Agencies: Rating agencies These agencies were (are) supposed to "rate" or measure the "financial health" of companies and their bonds (i.e., their debt obligations) before they reach a crisis point (or improve). But now these private companies, like Standard & Poor's and Moody's, are accused of lack of transparency and missing the signs ahead of the financial meltdown. But the list doesn't end here. We should also mention the GSEs: "Government Sponsored Enterprises" or their offspring. Strictly speaking, while these GSEs were not regulators, they were "facilitators" in the housing market which promoted the "subprime" disarray. Thus, they can also be partly blamed for the financial meltdown, since it originated from the housing and finance markets. These include:
These associations/corporations purchased, bundled "securitized" mortgages and guaranteed mortgages. It is estimated that Fannie Mae and Freddie Mac, own or guarantee between 60-70 percent of home mortgages in the entire nation. But don't stop please include: The consumer; Yes "we the people!" Return to TopRead → "The miserable seventies"WealthAdvocates.Org's, research reflects the "regulatory-stability" trend which had started with FDR was to be reversed, beginning in the 1980s by the stage set in the "volatile 1970s": The Vietnam war, Watergate, Arab-Israeli wars and Arab oil boycott, 10-fold increase in oil prices during the decade, long lines at the gas stations, reduction of speed limit, high and unprecedented inflation rates reaching to record levels in 1979, upward creeping residential mortgage rates, the Iranian hostage crisis, Japan's unprecedented rise in international banking and rankings (to the detriment of US banks), slow US productivity growth, the widespread scare that we are "being pushed around" and are "falling behind." Indeed, the list can go on!
We had to do something about this depressing list. Everybody thought our hands were tied up by too much regulation. "Deregulation" was supposed to be the answer. The financial/banking deregulation trend started with the celebrated "Depository Institutions Deregulation and Monetary Control Act" of 1980. It wasn't President Reagan who signed this into law. It was President Carter. He signed it in March 31, 1980. Of course, it was too late for him and Democrats. Then-candidate Ronald Reagan had a more refreshing idea: Switch from an over-regulated economy by implementing sweeping deregulations and promote our rights in all aspects of life. Deregulation, thus, swept the nation. The waves that were pushed by President Reagan continued to President Bill Clinton. In November 12, 1999, he signed into law another historically significant legislation - known as GLB Act (see below). President George W. Bush and Mr. Greenspan, the Fed's previous Chairman, together with FDIC, SEC and CFTC chairmen, "did not interfere with market forces" which actually meant more deregulation or lax regulatory practices. As far as President Bush is concerned, in April, 2006, Boston Globe wrote, "Many legal scholars say they believe that Bush's" Theory about his own powers goes too far and that he is seizing for himself some of the law making roles of Congress and the Constitution-interpreting role of the courts." Return to TopRead → President Obama's "politically-correct" mannersOver 30 years of deregulation created "inertia" and, in turn, re-regulation may be viewed as bad. Beyond the new law, you may have to step on toes - including some on Wall Street and, in fact, some on Main Street! Moreover, the blame game may spread once scrutiny deepens. The politicians are bunkering down for the mid-term elections. What President Barack Obama claims as the catalyst for the financial crisis, is:
What does Mr. Obama want to do? Announcing to take action, his recommendations are categorized around five major issues. In what follows, a summary detail is presented for you. 1)Promoting robust supervision and regulation of financial firms
2) Establishing comprehensive supervision and regulation of financial markets He proposes to:
Read → However, Mr. Obama has not been alone in this crusade. During the last two years, two committees in the House and Senate were very active in designing re-regulation:
Initially and by the recommendation of the House Committee, the House approved the core bill regarding financial (re) regulation on December, 2009. The Senate was slower to respond. But on April the Senate Banking Committee, voting along the party lines, approved a legislation to transform the regulation of financial markets as well. Then, the Senate approved the bill as recommended by its banking committee on May, 2010. The House version of the law was about 1279 pages long, while that of Senate was over 1500. There was a need for reconciliation, which the lawmakers agreed to, with President Obama applying his own influence. The House reconciliation bill, passed on June 28 with 2323 pages, reflected almost all of Mr. Obama's goals. This version eventually was approved by the Senate on July 15, 2010, and signed into law by the President, who can now claim a huge victory. The new law is called the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
How could re-regulation affect you?The overriding goal of the new law and its associated regulation is to create more stability, but at the expense of growth! That is, stability could slowdown the rate of economic growth. Good or bad? Perhaps most ordinary people would want stability in their economic and financial affairs, rather than volatility. Or do they? Well, the younger generations and those yet not so financially vested may differ on that view from senior citizens or families with larger porfolios. Return to TopRead → |
This is an "average" rate for the so-called Real Gross Domestic Product, which is the major index of nation's economic performance. It's measured quarterly and its percentage changes are dubbed "economic growth." During the last quarter of 2009 the economy grew by 5.6 percent. That rate was pretty impressive since during the 3rd quarter of 2009 (09/Q3), the economy had grown by only 2.2 percent. Below, in the following diagram, we show the performance of the US economy from its last "peak" – reached in 07/Q3 – until the currently available 10/Q1.
2009: A "bad, bear" year?For the entire year 2009, the economy shrank by 2.4 percent, although, in our analysis, during the second half of the year, the economy rebounded. Four culprits could be named for 2009's performance: (a) People's personal (consumer) spending
"Financial Meltdown” and Financial Reform" HOW IS MR. OBAMA TAKING ON THE FINANCIAL-REGULATION GOLIATH ON WALL STREET? The Financial Overhaul Act of 2010 is the first step to re-regulate America's banking and finance, taming a deregulatory “wind-waive” which started as of March of 1980, when Jimmy Carter was president.
The "blame-game" pastime: From the Presidents to ... You!Clearly, the "financial meltdown" of 2007-08 was the marked the "Great Recession” of 2008/09 – the worst our world has experienced since the Great Depression of 1929-33. Of course, some indicators reveal that we are not out of the financial-meltdown mess yet. Who is to blame for the meltdown? WealthAdvocates.Org's information, analysis and experience reveals that the financial and banking deregulation wind-wave of the old-fashioned and historically-significant pieces of legislations and traditional regulatory practices could be culprits of the financial meltdown. Banking and investment deregulation has persisted in our nation at least since the last year of Jimmy Carter's presidency, before then-candidate Ronald Reagan ran on that very platform and established the "Reagan Revolution." Who were the "key players" in this wind wave? Here's a list of prospects: In other words, with our participation, we bit the bullet, we were partially responsible for this wind wave and some of us are also culprits in the financial meltdown. Also please do remember that – by relying on risky "innovative financial instruments"– majority of the people "over-extended" their livelihoods beyond their means! Here and then later in other countries abroad. From FDR's regulation to Messrs. Carter's, Reagan's and Clinton's deregulationsIn the "new-deal" era (1933-36), President Roosevelt acted and Congress enacted several important pieces of legislation for money, banking and financial stability – and consumer protection. They included the Banking Act, the Securities Acts, Truth in Lending Acts, and so on. In the meantime, "margin requirements" were set, limiting how much investors could borrow to purchase shares, using "leverage". Bankers were forced to act responsibly with people's deposits – their major source of loans. FDIC was established to insure deposits and avoid "runs" on the banks. Also, "Regulation Q" was born as the Fed capped deposit rates so that banks would not take excessive risk by jacking up their loan rates which could mean swimming in risky-loan waters.
Hence, the trend continued, with little signs that the deregulatory initiatives had gone too far. It took the tsunami of "financial meltdown" for everyone to realize the colossal extent of the effects. On October 3, 2008, President Bush had to sign into law the firstever "Financial System Bailout" legislation – worth $700 billion. Indeed, the deregulation wave which had started on March, 1980, practically had to be curtailed on October, 2008. The battle between GS and GLB:GLB Act was formally known as the Financial Services Modernization Act of 1999 and named after its sponsors, Gramm, Leach and Bliley. It was signed into law by President Clinton and was the last nail in the coffin of Glass-Steagall Act (or the Banking Act) which was signed into law by President Franklin Roosevelt, in June 16, 1933. The Glass- Steagall (GS) Act, had not allowed any financial institution to act as a supermarket but the GLB did. Indeed, according to a report by the Federal Reserve Bank of San Francisco, published in late March, 2000: “After more than two decades of debate, full affiliation of commercial banking with other financial services became a reality in March 2000. The GLB Act, signed into law last November, authorized the certification of financial holding companies, the structure that looks to be the main vehicle for linking commercial banks with securities firms, insurance firms, and merchant banking.” Financial institutions jumped the gun and the Federal Reserve released a list of the first 117 institutions approved as financial holding companies.
GLB was declared winner over GS! GS had served the financial sector for nearly 70 years, bringing more stability and less volatility. But now it was seen as contributing to slower growth.
3) Protecting consumers and investors from financial abuse The President would like to see:
4) Improving tools for managing financial crises Mr. Obama believes in:
And the winner is...Just as some economists are, leaning toward stability, President Obama has also been aiming to create a more "stable and fair financial system" which would prevent crises in the future.
Could more “transparency” help? Of course, more transparency is always desirable and necessary in the financial system. But here transparency alone should not be expected to significantly change the financial industry. These days, with complex financial instruments and practices, it is difficult for nonexperts to fairly play in the same sandbox. They cannot compete with financial engineers or Hedge fund managers. Thus, there seems to be a dichotomy developing. How much transparency is good? How much of it is useful – given that it will be costly? The best “models” we can think of are: 1) A "Non-Profit Orientation, Non-Moral- Hazard Oversight" of the US banking and financial industry. Tame "conflicts of interest. 2) Restrict Pension/Retirement Funds from playing in the same sandbox as speculators. They end up taking the loosing end of a bad trade and investment. At WealthAdvocates.Org, we will watch the financial regulation in action for you as this "child is reborn."
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Financial TriageTM
What is going on behind the scenes of your financial life?
Are you working for your investments or are they working for you? Kamyar "Kam" Shadan, Belvedere-Tiburon since 1976 with 20 years of industry experience Protecting You and Your Wealth
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Bay Area Real Estate
Are Buyers and Investors coming back?If you have owned a Marin County real estate for over a decade, you should be generally content. But if you have been waiting to buy a house or a condo in Marin, you've been sharpening your sights trying to figure how to finance the potential opportunities. Some recovery in prices is hopeful as buyers and investors are making their moves again.Of course, it is all relative. Most Marin real estate indexes seem to be improving. Recent reports and statistics we screened show some good news. In the following table, we compare the May and April 2010 data with the respective months a year ago, concentrating on single family homes as a representative of the market. In April, 2010, single family units sold in Marin nearly rose by over 50 percent as compared to a year ago (54.2%). This is perhaps effected by the scarce number of transactions but still an improvement. In May 2010, the figure was equally improving at 35.9%. Both average and median single-family house prices in the market have been rising - median prices above 11% per year. In fact, for the first time, housing prices in Marin rebounded beyond their December, 2008, lows. Moreover, if you listed your house for sale earlier this year, on the average, you had to wait 74 days to close the deal. This is much better news, if you consider that the listed properties remained in the market for over 110 days between Read → The 12 towns that make much differenceOut of the 12 towns countywide, Sausalito won the price competition over the other 12 (incorporated) towns in Marin in April, 2010 - at a average price of $4.3 million. But those had to stay much longer in the market than the average: for 178 days vs. average of 80 days for the whole County. Over all original prices had to be reduced much further to excite the buyers. But in May, 2010, Ross won the price competition - by a $3.3 million average price.
As far as towns and decline in prices are concerned, data shows that median price of homes sold in April dropped largest in Corte Madera and Kentfield, by 33 percent, compared to April, 2009. At the same time, a condo at Tiburon sold at 1,750,000 - the highest in Marin in April. In May, Corte Madera recorded highest condo average sale at $705,000. In the other extreme, Novato had the lowest median price of house and condos sold in the County. The Marin Outlook: The summer sun or gathering clouds?How does the Marin outlook look to us at WealthAdvocates.Org? We are cautiously optimistic of the stabilization but the jury is still out!Summers sales will be a big determining factor. Historically speaking, more real estate listings and more sales dominate summers. So we expect a rush of inventory at the beginning of summer after the schools are out, and families are more mobile. The strength or weakness of the market will be better demonstrated toward the end of the summer when people make a final decision on their moves. Of course, the national and regional economic picture is clouded by lots of uncertainties and dichotomies. The corporate sector in America is doing well and profits rose nicely during the last quarter which data is available. But unemployment in California, and in the nation, is troubling. Read → |
December, 2009 and March, 2010, before they were taken off the market or sold. Indeed, 110 days was the peak in the last 5 years. When was the "trough" for this index during this period? It was in the summer of 2006, when you had to wait 50 days, on the average, to sell your property in Marin. That was pretty quick in an overheated market. Also, house are being sold closer to their list prices - another sign that the local market is getting more real. Now sales average around 4.1 percent below their original listing price. Since May 2009, on the condominium side sales have picked up at a rate of 34%. But the average price of condos sold has dropped (-6.8%) while the median price has risen close to the conventional homes (at +10.5%).
The middle tier houses are selling better and faster than the low range or high priced properties. In fact, the largest percentage of prices sold in April was houses that were worth between $500,000 and $750,000. This range made up 30 percent of the Marin real estate market in April, 2010.Look at our graph in the next page more carefully and it shows that 68 percent of homes sold in Marin were below 1 million dollars. The largest two segments were homes in the range of 500k to 1 million - constituting 54 percent of sales. On the other extreme, over 5 million dollar homes only represent 1 percent of the sweet Marin market. The average and median prices of condos sold in Marin stood at $422,825 and $376,000, respectively in April. But their list price were much closer to their sales price at 97.5 percent. See ChartMoreover, personal income isn't doing great either. At the top of that, foreclosures are at record levels. When we look at the data and the unsatisfactory government and bank programs (such as HAMP and loan modification programs), we aren't encouraged. The data we gathered shows that this year 6-10 million homeowners may face foreclosure. Also the banks in the U.S. may be troubled by the financial panics in Europe and by our own level of debt at home. Banks will continue to practice their very conservative lending. Mortgage rates falls will be marginal if at all. These factors may affect the housing outlook in the U.S., in the Bay Area and in Marin County a bit negatively. Generally, we don't expect to see the percentage growth in sales and prices during the next 12 months as steep as the stats show over the past year. But we are cautiously awaiting data on Marin's housing market for the entire summer of 2010. Economic Outlook How are forecasters looking at the near future "health" of the US economy over the entire 2010? Of course, there are many forecasts and forecasters of the U.S. economy. These include the Federal Reserve as the "Banker's Bank" and the International Monetary Fund, a "Global Banker's Bank," (although there is a World Bank, also in Washington, which is really a development bank concentrating on the developing countries). Various academics and financial institutions (such as banks and securities companies) also forecast the US economy. A survey by WealthAdvocates.Org may interest you. In the following table, we have compiled a number of forecasts for the entire 2010.
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As you see, 2010 forecasts are pretty close to each other. In our survey, the forecasts range from a low of +2.1 (by CBO) to a high of +3.5 (the upper range of the Federal Reserve). Why are forecasts of 2010 so close to each other, but yet so far from the 5.6 percent growth in 09/Q4, you may ask? Let's see pros and cons. For one, most forecasters think the US economy cannot continue at a rate which is much beyond the economy's capacity - as reflected by the past behavior. Our computations show that the "long-term" growth capacity of the US economy is only 3.3 percent.
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Moreover, in the competitive game of forecasting, no forecaster can "afford" to forecast much differently than other forecasters. In fact, there seems to be a kind of "Delphi method," as forecasters look at other forecasts and adjust their forecasts. WealthAdvocates.Org's outlook analysis First, we are "cautiously optimistic" about production and economic growth, for the following four reasons:
A jobless, polarized economy? Follow us in WealthAdvocates.Org's future issues To sum up: the combined "unemployment + small business + housing" picture is troubling, while the "productivity + production + corporate sector" seems to be doing better. Unfortunately, unemployment rate will not decline quickly and the housing market will not recover as fast as US economic growth rate is accelerating and corporate profits are rising. This should raise a serious question for all of us. Are we seeing the emergence of diminishing labor-oriented economy around us - a "jobless economy?" Are we facing a "polarized business vs. people economy?" We will continue to watch and monitor these trends in our future issues.
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