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Where Does The Barometer Needle Point?

By John Dietz - Email Editor

Date : February 17, 2009

Dear Valued Reader,

Where does the needle point on the recovery barometer? Clearing skies, turbulent storms, does anyone really know? (Anyone includes those who are writing, acting as shepherds and leading the new bill H.R.1 American Recovery and Reinvestment Act of 2009.)

The suffering of the American family has been depicted in a study called the Survey of Consumer Finances published by The Federal Reserve Board’s Survey of Consumer Finances in 2007. The report states that since the survey was conducted in 2007, median net worth fell by 17.8% to $99,300, that net worth is estimated between $90,000 and $95,000, significantly less than in 2004, and this was before the Wall Street problems in November and December. As a comparison, in 1998 levels were estimated around $91,300.

In simple business terms on troubleshooting, Phase I is usually analysis and assessment; the U.S. and the world have come through this phase. Phase II is to outline the solution(s), but the Phase II problem now seems to be based on “what the fix will actually accomplish.” This is why we advocate to our clients that you stay educated and aware. Things are going to change even more. In some ways, it is like the weather: One storm creates another, and conquering these stormy problems requires us to pick apart the economics of each sector to find reasonable solutions.

If the barometer is pointing to storms, it may be in the banking sector, including the security firms on Wall Street.

We kick ourselves in the pants when we ignore our intuition. Have you ever seen the clouds coming during the sixteenth hole of a golf game and figured you could beat the rain?

Many saw the Wall Street bonuses as “sick” before it even bubbled to the surface. In 2006 and 2007, Lloyd Blankfein, the CEO of Goldman Sachs, was the highest paid executive on Wall Street, making over $125 million in total compensation. Goldman Sachs now has over $168 billion in total outstanding debt and has laid off over 10 percent of its workforce. Subsequently, in 2008, the taxpayers of this country provided Goldman Sachs with a $10 billion bailout.

The banking sector is suspect due to its lack of progress and perhaps, though most of us are against socialization, this sector may be where the hammer should swing with more force. There seems to be an administrative restraint and unwillingness to take on the large banks and the “too big to fail” dilemma. The U.S. banking weakness has spread rapidly to the Euro zone financial markets. At the start of the banking mess, the U.S. banks were leveraged 26 to 1 alongside the shocking European banks at 61 to 1. No, that is not a typo; the pressure is now showing up in places such as Greece, Italy, Spain, Ireland and Portugal as they face another round of their own bailouts.

A recent Newsweek article by Fareed Zakaria mentions that the Canadian banks were only leveraged at 18 to 1. So far, not one Canadian bank has failed. Our northern conservative brothers refused to follow suit when the European central banks loosened regulations in the financial services sector. Maybe we do not need to reinvent the banking system, but copy one that is working and very close to home.

These stormy cycles have appeared before. Some investments of the past that were once considered quite stable, like long term bonds, can become quite risky in inflationary times, as in the 1970s. It is important to look at the entire globe when analyzing your personal economics. Remember that the corporate world is attempting to rebalance their balance sheets while consumers save. The banks and the Wall Street companies will begin employing creative strategies with insurance; many of these similar philosophies are options to you and if you pay attention may trickle down to provide opportunities for you.

More often we need to “act” on our intuitions, especially about our finances. Like the person who is now saying “I should have changed that investment”, “protected my pension”, “obtained that life insurance policy”, or “rolled my assets into a trust”. Maybe if you have an “intuition” you should avoid the “coulda’, woulda’, shoulda’” scenario and seek education and advice.

A supporting point is that you are not alone in your opinions; even great economists are kicking themselves in the pants.

Here is Simon Johnson about the bonuses that CEOs on Wall Street and the CEOs of the banks are taking. (This is from the interview with Bill Moyers, Journal with Simon Johnson, Former Chief Economist of the International Monetary Fund (IMF), MIT Sloan School of Management professor and senior fellow at the Peterson Institute for International Economics.)

This is nothing new, it reinforces that every average American can see the clouds if they look up into the sky.

“Think of it like this, our taxpayer money is ensuring their bonuses. We're making sure those companies and those banks survive. And eventually, of course, the economy will turn around. Things will get better. The banks will be worth a lot of money. And they will cash out. And we will be paying higher taxes, our children and we, will be paying higher taxes so those people could have those bonuses. That's not fair. It's not acceptable. It's not even good economics.”

Until next time,

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