From the New York Times today:

Even with the sharp drop in stocks over the last week, the Dow Jones is up about 80 percent from its low in March 2009. And with the overall economy nowhere near its recession lows, buying nice, expensive things is back in vogue for people who can afford it.

Make that 75 percent as consumer confidence wanes. And once again, Red Rover, Red Rover, send the economic recovery back over
Even Marked Up, Luxury Goods Fly Off Shelves [New York Times]
Stocks Tumble as Two-Year Treasury Yield Drops to Record Low [Bloomberg]
Consumer Confidence in U.S. Declines [Bloomberg]
Red Rover, Red Rover, Send The Economic Recovery Back Over [SocketSite]

34 thoughts on “Make That 75 Percent”
  1. This is a “don’t even look at my portfolio” day. Its a “look ast Socket Site for groovy real estate porn” day.
    And what do you poops give me?
    Stock market story.

  2. Well, bonds are having a mighty rally!
    Not a good sign for the economy, of course, but at least some cushion for those with a balanced portfolio . . .
    (as to this NYT story, even Nordstrom is down 5% right now . . .)

  3. I hope the republican party is satisfied with their debt “crisis” resolution. They’ve successfully stalled the economy for the next couple of years so Obama looks bad in his next election. All at our expense. Way to go guys… I’m honored to be signing your checks.

  4. For conspiracy theorists, it is nice timing that the chaos and plunge in oil and other commodity prices is taking place now since COLA adjustments for social security are calculated based on third-quarter CPI. Nice timing to save SS billions of dollars next year with a lower (or zero) COLA adjustment.

  5. Gotta have a dip in the stock market to justify spinning up QEIII.
    @kg: this correction has been in the cards for some time, and people have been expecting it since QE2 ended. it has nothing to do with Republicans vs Democrats.
    *(for instance, I started posting here around January that we’d likely see a major correction in the end spring/early summer timeframe once QE2 rolled off).
    the underlying global economy is seriously weak, weaker than it has been at any other time except perhaps the Great Depression. (some think it’s even worse than GD times).
    The stock market has been artificially boosted by Federal Reserve manipulation (ZIRP plus QE) over the last year or so. Thus, removal of that support was bound to cause issues.
    This is why I have been continually perplexed by people who think we “recovered” when the government was overtly pumping Trillions of dollars into the stock market, and covertly pumping even more into the stock market.
    the overall problems have been papered over temporarily but remain. We have Zombie Banks that continue to operate on sky high leverage and low capitalization, we have very high unemployment with no foreseeable jobs program, we have terribly high debt levels that cannot be serviced, and we have a major trading partner (Eurozone) that has major unresolved obstacles. (including possible breakup of the euro).
    NONE of this has been addressed. Instead we simply had the Fed use ZIRP to give cash to the banks which they then used to buy government debt in a circular ponzi scheme… we changed accounting rules to help them lie about their condition, we used QE to purchase Treasuries, we used Fannie/Freddie to covertly transfer crap from the banks to the government, and so on.
    the debt has been transferred from Private (banks) to Public (Govt), but the debt remains.
    it will only get worse. now that much of the crap has been suckered onto the taxpayer/government, now these same hypocritical bankes have the nerve to squawk about “unrestrained spending” and they have bought all our politicians. Thus, the politicians have taken on the mantle of “austerity”.
    whether or not one believes in austerity is immaterial. what is clear is this: even with QE2 real economic activity was very weak. Removal of QE2 and initiation of austerity will cause a further drag yet on future GDP… probably plunging us into recession. (one can argue if this recession is part of the 2007-9 downturn, a so called double dip, or if it is a de novo recession… it’s all semantics).
    Most market players never believed in the recovery meme. they simply went along with it because the Fed was playing, and one NEVER fights the Fed. Thus they went all in. But now with the Fed out of the game a drop must happen. Greasing the wheels is the fact that almost every economic indicator was far worse than expected, except some company earnings which don’t count for much because the earnings are coming as a result of cost-cutting and not as a result of sales/revenue.
    Eventually, the Fed will come out with QE3. however it won’t be able to call it QE3 because if it does you’ll see Gold go to $3000/oz and worse Oil to $200/bb. Thus, they’ll call it something else and make it more covert. but QE3 it will be.
    but the Fed needs cover. Can’t do QE3 when the stock market is near it’s previous high and gold is at $1680 and oil >$100. thus, IMO the stock market will need to fall about 15-20% from its recent high and oil needs to get down to the 80s or so… and I think gold needs to get down to the 1400’s but that is less important. if this happens our leaders (and “the market”) will BEG for QE3.
    the big boys understand that too.
    Once QE3 happens you will see a bounce in equities and a bigger bounce in Gold/metals/oil. My guess is that the bump will be shorter lived compared to QE2. this is a total guess.
    I have no idea the exact date that QE3 will happen, nor how low the market really needs to get before QE3 happens, but the above are some pretty good thoughts off the top of my head.
    the Fed playbook has been clear since 2009. One need only read Ben’s famous “helicopter” speech to understand.
    The complications are also clear… one just needs to look at the history of the Great Depression and Japan in 1980s for a general understanding, realizing of course that history never repeats exactly.
    unfortunately for us all, this still has a very very long way to go.
    one last note: this current downturn will not last forever. we are unlikely to fall right to S&P500 of 600 or something. More likely a 10-20% retracement, then a bump up with QE3, then a retracement, then a bump up with QE4, and so on over many many years.
    look at the Nikkei from 1985-present or the Dow from 1929-1950 for an example.
    the current gamechanger of course is a currency crisis…something I’ve worried about for a few years now watching our “leaders”. I never thought they’d do what they did… but here we are. (both Euro and Dollar currency crisis). If our leaders are lucky, they can continue a very slow coordinated “race to the bottom” so that all currencies fall together, and none too fast or too slow. but it is a hard juggling act to do.

  6. “Our business is fairly closely tied to how the market performs,” said Karen W. Katz, the president and chief executive of Neiman Marcus Group.
    With the Dow down $330+ today, I guess Neiman Marcus will be experiencing a drop in sales volume.

  7. The luxury category has posted 10 consecutive months of sales increases compared with the year earlier,…
    Wal-Mart is selling smaller packages because some shoppers do not have enough cash on hand to afford multipacks of toilet paper.
    The gap between the rich and poor is indeed growing.

  8. …not looking at my portfolio …not looking at my portfolio …not looking at my portfolio …not looking at my portfolio …not looking at my portfolio …not looking at my portfolio…
    Just looked. Gaaahh!
    I don’t have the fortitude of stucco-sux

  9. I looked at my portfolio as well… Hold me…
    Anyway, as this all pertains to SF real estate… I’m seeing a lovely bank-owned place coming soon over here in prime Pacific Heights. Should be interesting…

  10. I looked at my portfolio. YEEEHAW!
    -short equities yesterday (check)
    -short silver Monday, Tuesday, Wed (check)
    Today is a great day.
    Oh and I still rent. As long as rent control is around, I’ll systemically underpay my rent forever.

  11. I’ve been in a conservative holding pattern for the last year with short positions basically compensating for longs — and just making rents off of covered call sells. It’s been working out quite nicely. Better than a savings account, CD, or SF real estate investment anyway.

  12. Great analysis ex-sfer — I have been contemplating when to buy oil and gold stocks in this market. I agree that the market still has to drop more before the government steps in with more easing. Just hoping to time my purchase between those steps.

  13. Y’all are way more aggressive and smarter than I am in the markets. However, I have been overweighted in bonds and cash for quite some time, so this market sucks, but it’s just a minor dip, about 0.75%. No idea what to do from here . . .

  14. Yawn. Will one of the experts please tell us what alternate decisions in Washington would have resulted in the equity markets going up 5% today?

  15. In January I took out about 1/3 of equity holdings out of the market and bought a 1/3 interest in a vacation fixer-upper. Then on Thursday July 21st I moved 75% of my remaining investment (a S&P500 index fund) into a stable value fund that is paying just under 2%. The closing price on the S&P that day was 1345. So I don’t actually fear looking at my portfolio today. Sure what I still have in equities just got hammered, but at least I can spend this weekend up in the mountains working on my new place knowing I mostly ducked a 10% loss in just a two week time span.

  16. Easy. A New Deal version 2.
    1 – Tax gold speculation profits at 75%. Gold investing is not producing anything anyway. Tax higher incomes to where they were before the Bush tax cuts.
    2 – Take the proceeds to fund massive infrastructure projects. HSR, expand Broadband access and quadruple existing speeds, make public education a priority. In short fix 30 years of neglect on the country we inherited from our parents.
    3 – Develop alternative energy/transportation through a gas tax similar to Europe. We’re almost where electric cars are worth it for everyone. We need the final push. We need clean power to make it worthwhile, if only for the pleasure to sticking it up to the Saudis!
    Not 5% in one day, but a long sustainable growth.

  17. Why tax gold speculation? Seems better to tax stock speculation as it seems much more rampant and harmful. Eliminate automated trading and investment bank trading desks and you’d go a lot further towards fixing the problems in the stock market.

  18. Yawn. Will one of the experts please tell us what alternate decisions in Washington would have resulted in the equity markets going up 5% today?
    There is no such option. I’ve used this analogy before, but it is still functional.
    Smoking a ton increases your chance for Lung Cancer. Once you have lung cancer, there are no easy answers. The easy answer was to not smoke. Thus, you have a choice: chemo/radiation, or no treatment. Both suck.
    Likewise, we blew a major credit bubble in part to mask stagnating incomes to the majority of Americans. it infested all areas (homes, cars, student loans, personal loans, corporate debt, private equity, mergers/aquisitions, etc). now that we are in a deleveraging mode there are no easy answers. the answer was to not blow the bubble in the first place. All current “answers” lead to serious pain.
    All we can do now is try to get through the pain as best as possible, and decide where to allocate the pain.
    Our leaders have decided that pain should not affect the creditors. Therefore, all attempts are being made to artificially prop up asset valuations. (Federal guarantees of a lot of debt, TARP and all the other “liquidity” measures done by the Fed, stuffing Fannie/Freddie with tons of toxic debt, Maiden Lane, changing accounting rules for big banks like abolishing mark to market, ZIRP, QE, etc).
    Doing so worsens the situation because the debt remains. Worse, the creditor class can then double down on their gambles, knowing that if they fail then they will be propped up by the Federal government. With little to no risk and with significant upside it encourages gambling. Thus, this is what our financial houses have done.
    unfortunately, the situation will continue until the debt is cleared. this takes many years to decades because it is hard to force clearance.
    in terms of what we “should” have done… I’ve said so many times. It would NOT have lead to a 5% increase in stocks today though. In fact, it likely would have lead to an immediate depression. Politicians are afraid to do these ideas because they don’t want to be blamed for the downturn. But as I said above, there ARE no good answers. If there were we wouldn’t be talking about this.
    the answers are and were
    1) take over the insolvent banks and clean them up. this includes getting rid of all the failed executives and cleaning up corporate balance sheets.
    2) writing down debt that is unrecoverable. Making modifications and workouts to debt that is salvageable.
    3) breaking up the TBTF banks. they are the flash points of systemic failure and are too big to exist.
    4) reinstate Glass Steagal separating banking and deposits from investment banking. The banks cannot be allowed to use deposits in order to backstop risky investment decisions.
    5) wind down most CDS products and other synthetic derivatives. Although they have some purpose in theory, their use should be restricted to suppliers and end-users. no speculators. there is no reason to have a company with oustanding CDS contracts that are hundreds of times the value of the underlying company (as we saw with GM). CDS are and should be thought of as insurance, not a speculative investment.
    6) prosecute and jail executives whose banks did fraudulent behavior. Robosigning is not a technicality, it was FRAUD and PERJURY.
    7) force as honest accounting as possible. Prosecute all accounting gimmicks with prison. Force the exeuctives to face prison for false representations. If they think they are worth $20M/year, then they better understand their books. If they can’t then they aren’t worth $20M/year
    8) Focus on employment. The only way to get out of this is to grow our way out of it… and that takes jobs. it can be a new deal type of jobs program but doesn’t have to be. Trickle down economics has never worked, so it will have to be something different.
    9) we may need to focus on tax laws. that’s a thorny one and many will disagree about it. however, I doubt many would be surprised to learn that if 0.1% of the people hold a massive amount of wealth and the majority of people have little to no wealth then aggregate consumption will fall. Since aggregate consumption is a large aspect of GDP…
    anyway: these are some of the BARE MINIMUM IDEAS that need to be done. none of them have even been started. in fact, we are going the opposite way.
    (for instance, we made the TBTF banks BIGGER, we RELAXED their accounting rules, we hide debt instead of writing it down/modifying, etc).
    my ideas are not controversial (most of them). For instance, this is what was done with the S&L scandal. Executives were tried, S&Ls taken over, bad debt written down, and we got through this. It’s also the Nordic example from last decade. Hordes of research shows that zombifying a financial system doesn’t work.

  19. Agreed on many of your points. Inflating bubbles did mask the painful wage deflation that was taking place in the Naughts.
    Germany understood that and went in a totally opposite direction, making their wages more competitive by innovation, automation, trimming the unnecessary. What is remarkable is that they did this while keeping all of their very benefits intact.
    Something that compounded the problem is all the tax cuts given by Bush, benefiting mostly the rich, and given with the fake growth as a backdrop. Now the fake growth is gone and all we have to show for are these stupid tax cuts (and the fiscal catastrophe it created).
    Of course giving all this money away created a class of super-rich who can now buy voters through misguided and dangerous propaganda. The monstrous Tea Party Mad Haters have media power and most GOP politicians in their pockets. Murdoch knew what he was doing with Fox News, then the WSJ. Populist sludge masquerading as legitimate business information.

  20. I agree with es SF-er’s analysis. We could also inflate the currency, which would really piss off the banks (and the Chinese). This would make our personal and public debt worth less and would encourage spending, which our economy sorely needs.

  21. This is a fun echo chamber about how great a New Deal 2 would be, but the political reality is that Obama blew his chance. With his poll numbers and the general mood of the country, the Democrats will be running scared up until the 2012 elections. A little more slowdown, and assume we get a costly extension of unemployment benefits and payroll tax reduction this fall, and Obama may have to revisit the debt ceiling debate even before the election – which would be disastrous politically. 2.4 trillion just doesn’t go as far as it used to!

  22. No worries, El Bombero.
    Democrats will come to the voting booth in record numbers in 2012 and regain all powers, and possibly more than necessary to avoid filibusters.
    Teabillies are an awful bunch. Pretty much the scarecrow of the political arena. The gagging reflex is simply too overwhelming. People have seen the beast up close and what it could do.

  23. ex SF-er has this right. Most of these are not controversial unless you’re a bankster. ex SF-er is right that we made the problems worse — Too Much Bigger to Fail is a failed policy, and so is moral hazard.

  24. Agree to most of ex-SFers ideas. Doubt if they ever get implemented.
    I also see there are lot of tea party haters. I consider myself fiscally conservative blue dog. I actually liked that tea partiers changed the tone in Washington.
    Look, the current problems are caused by both Dems and Reps. They all share the blame. If you pick only one, you are just being blind.
    For us to move forward, we need to balance budget, that could be done by closing tax loopholes ( eliminate all deductions) and have a fair tax rate, reducing entitlements, reduce government spending on healthcare (this doesn’t need to just reduce Medicare, but think outside the box and make people healthier to avoid costs), reduce public sector pensions, and get more revenue from corporations(no loopholes).

  25. Agree to most of ex-SFers ideas. Doubt if they ever get implemented.
    you are correct. It is very sad.
    $1 = 1 vote these days.
    Big corps have the $$$, thus Big Corps buy both parties.
    but the political reality is that Obama blew his chance.
    depends on what you mean. Obama took full advantage of his chance. The problem is that people have consistenly misunderstood our President. He is left leaning on some social issues. Otherwise he truly is a center-right politician. He has taken the Clinton playbook and mastered it.
    Say one thing (we need change) and then perpetuate the same old tired neoliberal ideology. He stuck with Geithner, Summers, Bernanke and he threw Sheila Bair and Elizabeth Warren under the bus. He extended all of Bush2’s policies including wars and big bank bailouts. He refused to fight for a public option, instead going with Big Pharma and Big Insurance ideas.
    He is the Trojan Horse president, doing things that no Republican could ever dream of. Don’t forget, it was OBAMA who put Medicare and Social Security up for cuts… not the Republican leadership. Because it is Obama, the left is neutered. They are terrified of Michelle Bachman and Sarah Palin and thus don’t dare cross Obama even when he stabs them in the back.
    I hate to get political, but as I’ve said for about 2 years now, economics is all about politics these days, and one must appropriately understand the politics of the situation.
    the current politics is that we have a far right Republican party with even further right Tea Partiers and a fairly right President (who masquerades as left). It serves all parties to pretend that there is conflict when there is none. All parties agree to austerity. All important parties agree the austerity should be focused on the upper middle, middle, and lower class (cuts to SS, Medicare, possible cuts to mortgage interest… but no tax raises on table to uber wealthy and no revision of subsidies to big Corps).
    there is some disagreement between parties of exactly how to force austerity down the public’s throat… and thus the Kabuki theater as they manufacture a “debt crisis”. Most people are economically illiterate and thus believed that the US Gov could somehow “run out of money” even though that is impossible. (as witnessed when they recently created $16T out of thin air for bank bailouts/subsidies).
    Therefore: I think it wise to use this lens when investing… how will cuts to social entitlements change your investing strategy? what will that mean to real estate? SF specifically, will the high income earners (like tech workers) be spared or do you think they’ll be lumped in with the middle and lower classes? Will tax laws continue to spare RE (such as mortgage interest deduction)? Will Fannie/Freddie survive once all the dreck is off the Big bank’s books? Will govt continue to guarantee mortgages in other formats?
    all very difficult questions to answer.

  26. What this country needs right now is jobs. The way to provide for them is to develop a program, we’ll call it the “American Reinvestment and Recovery Act”. We’ll dedicate billions of dollars to “shovel ready projects” we can implement “right now” to “put Americans back to work”.
    Except that we only want to give that money to Union jobs because then they’ll vote for us. So of course that means only half the jobs we could otherwise provide, and only half the benefits to the American people. So, OK, the American people will therefore only get 1/4 of the benefit that would otherwise be possible.
    And oh, lets make sure that the money goes to projects that are popular with our constituents, not those that will benefit the most people, so
    the 1/4 of the possible benefit realized will be more like 1/8 of the possible benefit.
    The other 7/8 will be squandered to buy votes to allow us to get reelected while we continue to ignore the interests of more and more Americans.
    I just don’t understand why people don’t want to raise taxes for all of the above. Seems like a worthy cause to “put Americans back to work”. At least for a few weeks, after which they can just file for unemployment like everybody else, because none of the structural problems of the economy will ever get solved when we can just spend taxes or blow bubbles.

  27. What the world needs now is jobs, sweet jobs
    It’s the only thing that there’s just too little of
    What the world needs now is jobs, sweet jobs,
    No not just for some but for everyone.
    Lord, we don’t need another bailout,
    There are bailouts and taxcuts enough for them
    There are cheap loans and reserves enough to loan,
    Enough to last till the end of time.
    What the world needs now is jobs, sweet jobs
    It’s the only thing that there’s just too little of
    What the world needs now is jobs, sweet jobs,
    No, not just for some but for everyone.
    No, not just for some, oh, but just for everyone.

  28. lol: “Democrats will come to the voting booth in record numbers in 2012 and regain all powers, and possibly more than necessary to avoid filibusters.”
    The part about getting the votes needed to avoid filibusters isn’t going to happen. The problem is that the seats up for election are the same ones that were up in 2006 and the Democrats already talk almost every possible seat they could from this set. There are only 10 Republican seats up for election. They would need to win 30 out of 33 seats after already having 23 of 33 of them.
    Here are the seats up for election:
    State – Current Party – Possibility of Change
    Arizona – Republican – Could switch
    California – Democrat – unlikely
    Conn – Ind (D) (Liberman) – likely D (but no change)
    Delaware – D – unlikely to switch
    Florida – D – could switch but small chance
    Hawaii – D – unlikely
    Indiana – R – unlikely unless Lugar gets primaried
    Maine – R – unlikely unless Snowe gets prim’d
    Maryland – Dem – unlikely
    Mass – R – possible
    Michigan – D – unlikely but possible
    Minnisota – D – unlikely but possible
    Miss – R – very unlikely
    Misouri – D – possible
    Montana – D – possible
    Nebreska – D – unlikely
    Nevada – R – possible
    NJ – D – unlikely
    New Mex – D – unlikely
    NY – D – unlikely
    ND – D – very likely to go to Rep’s
    Ohio – D – possible
    Penn – D – unlikely
    RI – D – unlikely
    Tenn – R – unlikely
    Texas – R – unlikely
    Utah – R – very unlikely
    Vermont – I (Sanders) – unlikely
    Wash – D – unlikely
    WV – D – unlikely
    Wisc – D – unlikely
    Wyoming – R – unlikely
    There just are not enough opportunities for the Democrats to pick up 7 seats, let alone doing that while offsetting the sure loss of ND.
    There best opportunities are: AZ, MA, NV.
    After that the pickings get slim and it would require perhaps some tea party help in knocking out established Republican incumbants like Lugar in Indiana and Snowe in Maine. But that is still just 5 seats, which with the loss of ND would leave the Dem’s with 57. So they would need 3 more from the following states: MS, TN, TX, UT, WY.

  29. ex SF-er wrote:

    …the answers are and were:…
    2) writing down debt that is unrecoverable. Making modifications and workouts to debt that is salvageable.

    I agree with a lot of what ex SF-er wrote, except for this and even on this point I don’t have a coherent better idea.
    Here’s the problem. From a behavioral economics perspective, it seems to me that if you bail people out by reducing their debt, then what you’ll get in the future is more of the debt-loading-up behavior that you set out to reduce when you did the bail out, this making the ultimate cost higher than if you let the natural economic incentives and punishments take their course.
    Put another way, if the people who participated in the bubble don’t have to face the negative consequences of their bubble-era behaviors, then they’ll continue that type of behavior in the future.
    To take a real estate example, let’s say the banks widely write down the principal on mortgages that people are underwater on. After all, that debt is “unrecoverable”!
    When the marketplace “recovers”, faster than it normally would because we reduced lots of people’s mortgage principal, then any rational economic actor is going to immediately load up on more debt by taking out large debt-to-equity mortgages, no doc, no money down loans, interest only loans, “teaser” ARMs, etc., just like they did in the credit bubble up until 2007. Why? Because everyone will know by then that if their mortgage goes underwater, the principal will be reduced when that debt is deemed “unrecoverable”.
    This is just another moral hazard creation, except on the demand side.
    And make no mistake, banks have begun writing down principal on the mortgages for underwater borrowers. From the same day as ex SF-er’s comment, Bank of America agrees to write down California mortgage principal:

    Bank of America …has signed on to the principal reduction component of the Keep Your Home California program, which uses federal funds reserved for the 2008 rescue of the financial system to help homeowners behind on their mortgages.
    BofA is the largest of the nation’s major banks to join the program, which was launched this year with $2 billion in federal funds. The California Housing Finance Agency, which runs the program, said BofA has been writing down principal on some mortgages as part of a pilot program since February and is now moving into full participation.

    There’s no way to tell how many of the people benefiting from these principal reductions are people who could afford to keep paying their mortgage, but choose not to because they are underwater, or deliberately chose to skip payments because they desired a principal reduction.
    Like I said, this is just creating moral hazard, but this time not on the side of the financial institutions. It also tends to delay the much needed reductions in housing price levels, because now many people in houses they can’t afford won’t have to put their homes on the market for a reduced price. Widespread principal reduction can’t be the answer.

  30. “Widespread principal reduction can’t be the answer.”
    Good public policy should deal with a failed loan in a way that punishes both the borrower and lender. Leniency on either side just creates moral hazard.
    One assumes that principle reduction is done because the banks think that foreclosing and reselling will lead to an even greater loss so I have no problem with this. My only tweak would be to require that the property be listed on the MLS for 60 days and turned over to anyone who will bid more than the reduced principle amount.

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