The Government Makes It Rain --- Stimulus To the Rescue

Coronavirus Update – Shutdown Has Finally Started

Thanks to the great leadership exhibited from New York, California, and Chicago the nation is slowly shutting down city by city --- and state by state. While unbelievable, this is very necessary to starve the virus. There will be debates on how long and I remind people to look to China’s recovery and the timeline they used. For example, Wuhan the epicenter of this crisis will remove the lockdown on April 8th. SO the reality is the longer the better for the hotspots. Why I demanded leadership --- one voice, one plan. Providing risk consultation to large corporations puts you in a position to see some amazing dynamics. People will not do thing unless they know the order has come from the top…it appears countries are no different. The shutdown should be federal because if we all go into shelter at the same time, you hope we can plan to exit strategically around the same time. Let me give you an example, if you have a missing child, technology (like the Amber Alert) has allowed for us to receive notification all at the same time rather than piecemeal.  This speeds up the likelihood of finding the child much better than sending it to one police department at a time. If the coronavirus shutdown does not come from the top, when one state recovers my question is: “Does that state allow you to travel or accept visitors from states that did not shutdown at all or that shutdown much later than your state did. Essentially this recovery could drag on longer than needed if we cannot move in a cohesive manner as a country. There could be a lack of trust in the air which is why I believe countries like Italy, China, S. Korea and others when into lockdowns all at once. Make It Rain – Last Resort to Inflate the Economy I am hoping for better coordination so we can begin to recover quicker and get the economy going.  The importance of the pillars we work on so hard here is to help you during these exact moments. If you have savings, you have some cushion during these bad times. See these articles, ripped from the news headlines: “Many Americans Biggest Worry is April 1st Rent and Mortgage Payments”  -- Washington Post “Real Estate Billionaire Barrack says Commercial Mortgages on a brink of Collapse” – Bloomberg “Jobless Claims Soar Past 3 Million to Record High” -- CNBC  “Mortgage Rates Surge to Highest Level Since January” – Marketwatch “2 Trillion Dollar Stimulus Package” --- See below These are just a few of the necessary reasons why the Federal Reserve is making it rain. It’s basically a blank check to shore up the economy until we can get a handle on the COVID-19.  Like in 2008, the market has responded with a rally since a “handshake deal” was announced just a few days ago. This rally will likely continue into the actual signing of the bill. Use this an opportune time to trade in the relief rally that is not uncommon. But when the dust settles, I am still not risking my individual retirement account funds at the moment because we know there is more to come. Mortgages need to be paid, the rent is due, businesses are asking for a bailout and jobs are being shuttered. Hopefully all this is temporary but it is a big risk. I don’t see an all clear sign, just yet. Urb Lesson of the Day:  Account Diversification · Savings Accounts – Gets you through the rough patches in life · Investment Accounts – Allows you to take risks when others are NOT – like today · Individual Retirement Accounts – This is truly for your future, why NOT wait for a sign that the recovery is strong

Thanksgiving - Plenty to Be Thankful For

First, I would like to apologize for the pause in posting of my thoughts, articles, and trades. The last month has been very fast paced with lots going on. I was in Vegas for training and learned the latest developments in the banking industry. Then I was off to London to actually do some work.  I did get some time to enjoy the weekend in Vegas and celebrate my birthday...let's hope I'm getting wiser with age.  Here is a rundown of what's going on and specifically what to be thankful for:

Economic Outlook, YAHOO, All Talk, & Netflix...

Urbanomics Outlook on the Economy
Here is my outlook on the economy. The economy is like a leaky faucet, slowly dripping. If you review the last few months, the data supporting jobs and economic growth have been bad kind of like when your faucet is clogged up. But every now and then you get a surprise and a few gushes come out and occasionally the economic numbers have had a few surprises. But if you put it all together the economy continues to be a very slow drip for a population of Americans that are thirsty for jobs and an economic rebound to our investments, 401K portfolios, real estate, and lifestyles.

Do You Yahoo?
I know I do. I use Yahoo all the time. Yahoo is my home page, my email service and also my source for fantasy football. But even with all these reasons they are having trouble keeping up with the big boys of technology (Google, Amazon, Ebay). They are even used as a verb, no one ever asks whether you ‘Yahooed’ something! Well it may be time to circle the wagon on this old reliable tech company. We have a little help in stirring the pot. Dan Loeb, founder of the hedge fund Third Point sent a scathing letter to Yahoo’s Board and then kindly reminded them that he now owns a roughly 5% stake in the company. Here at Urbanomics we are fans of investors that stir the pot and when it happens at unloved companies like Yahoo we get excited.

The Market's Continuous Drop...

I've been listening to some smart investors talk about how to invest in an environment like this.  These theories vary and this helps me shape my frame of reference.  It allows me to hear how bankers, investors, and politicians think and then I can ground some of that in reality because I can probably tell what's going on with the everyday person better than they might experience.

Right now we are in rapidly changing times in the US, some parts of the world and of course in the stock market.  The stock market has been violently gyrating and for the last few weeks it has been decidedly lower.  The smart money will tell you not to panic and while I subscribe to this theory it can be very difficult.  The economy is weak and some are reporting the increasing risk of a double dip recession.  For me, I go with my gut feeling and I have stayed consistent that too many Americans are hurting for anyone to be blindly buying stocks.  I agree that certain actions along the way have helped to stimulate the economy but not enough has been done to help alleviate the areas that the average citizen is being hampered by.  I believe the economy will continue to be fragile until: 1) Jobs return in a consistent fashion 2) Debt levels for the average American must get rightsized, and 3) Housing burdens for the average person become less of a constant drag on people and their local economies.  I'm not happy with the fact that are politicians can't stay focused on some of these core issues that are plaguing us today and make this their top priority.  So I will remind you to not get fooled by their gimmicks of last minute deal-making and understand that this slow painful decline will continue until they address the real problems at hand.

I do wish I had sounded a louder alarm because I've noticed that many big investors had recently been hedging their bets and protecting themselves if things got bad.  And as you can see they got bad in a hurry.  I think my approach will not change from the points I've been highlighting from the beginning of the year, and that is this is the YEAR OF DEFENSE. See the following articles to learn what we've been doing to stay defensive in these uncertain markets:

Meet Me @ The Gas Pump...It's Going Down

Literally, it may be time to meet at the gas station because the prices are finally going down.  When I thought about gas prices I obviously had the rap song "It's Going Down", by Yung Joc in my head.  It's been going down to the tune of 21 STRAIGHT DAYS with an average price around the country now at $3.60.  Yes I said to the tune...I can get that song outta my head.

Why is this happening??

Economy
 Well, start by taking a look at my last post written almost a month ago that outlined how high gas prices and not enough job creation hurts an economy.  If prices stay high for too long it begins to change the way people do things.  Remember Yung Joc said, "Meet me in the Mall, Meet me in the Club...it's going down"...well when gas prices stay high people start cutting back on buying gas and going to those spots.  As more and more people cut back, carpool, take public transportation or just travel less, the demand for gas will continue to fall and so will the prices. 

Over-Speculation
The other reason is there have been some high profile prosecutions recently of traders who were manipulating oil markets which has an impact on gas.  These traders can at times make the supply or demand greater or less than what the real market demand is for oil and when the fools are removed from the equation it helps to bring gas prices down.

Oil Reserves
Lastly, the US government just released barrels of oil from a strategic reserve that is maintained for emergency situations.  This was a coordinated effort of 28 countries around the world to release oil from emergency stashes in an effort to begin reducing the price and impact high gas is having on the global economy. The group of 28, also known as International Energy Agency (IEA), has taken these steps only three other times in history.

How to Invest - Stay defensive at this point - Dividends, Healthcare, and Energy

What's Up With The Economy, The Deficit...

That is a really good question, "What's Up With the Economy?"!  The best analogy is the economy is sorta like a really nice business train that is slowly chugging along and starting to lose passengers at each stop.  I think this is an accurate picture because the data is definitely mixed, showing corporate businesses are doing quite well and chugging along, like the train.  The passengers being lost at each stop are comparable to middle-class Americans that are being negatively impacted by: 1) high gas & food prices, 2) declining housing prices, 3) still high unemployment numbers.  And the biggest problem is JOBS, JOBS, JOBS, or the lack thereof.  Jobs are so critical because they give Americans confidence that the economy is getting better when they see their neighbors getting up and going to work, coming home with bags of groceries, and investing in their homes.  So who is focusing on getting more Americans jobs? That's the question that needs to be asked of everyone from the president and his administration, to your senators, then your local congressmen, and also of the companies that are doing well.  Every moment should be spent on turning the dismal job scenario around and we've seen our politicians come up with some solutions but not nearly enough.  The formula is not that difficult as it usually comes down to stimulating Americans and stimulating the companies who are tasked with hiring more Americans.  Its a shame the debate in Washington is whittled down to spending versus tax cuts, but that has been the case.  Last time I checked both scenarios cost taxpayers money but are needed to bring this economy back to life.

My Take On Things

My goal today for posting is similar to Nike’s slogan of “Just Do It”. I am just going to write and pretty much relay what’s on my mind. As you can tell from the gap in my postings, this has been a busy last few months. I have been impacted by many of the things that all Americans are facing with the downturn in the economy. Job loss has hit close to home and impacted my family members, I am working more hours and seem to be stressed out more, and time seems to keep ticking in the back of my head like one of those old grandfather clocks. Literally (because I reside in the Midwest) and figuratively, its grey outside and it appears that a year ago I was looking into the abyss of what I truly believe is the closest thing that we will experience in our lifetimes to an economic depression. And my goal is not to be depressing, but to keep it real. So I am going to flashback and flashforward in this posting on where I believe our economy WAS and where I truly believe things stand TODAY as it relates to my life. This hopefully will hit home to you and help you understand how all of the things that we hear, read, and see…such as the big Wall Street bonuses, TARP, cash for clunkers and the homebuyer’s tax credit are ALL RELATED but from a regular guy’s perspective like mine (and yours).

Where the Economy Was ~
Depending on how far we go back (let’s say 2.5 years ago), there was jubilation amongst everyone. I seemed to be eating out everyday, throwing bring your own booze ‘BYOB’ events at different restaurants and traveling to either Vegas or South Beach at least twice a year. And I never thought to ask why but before it used to be a small trip between me and my friends that managed their finances well (fiscally conservative) and then it blossomed to the guys that didn’t always manage their finances but who could now make the trip. And I never thought much about the phenomenon but our trip of almost 10 people for a sun filled trip to Miami could have been an indicator of things to come. Where did everyone get the money (steady jobs, bonuses, easy credit) to be able to go all of a sudden…especially when a round of Patron in S. Beach cost each person over 80 bucks??? I didn’t think about that at the time but the other event I did find strange was home buying activities in Chicago. I recall a few years back that everyone was asking me when I was going to buy. So I stuck my toe in the water and found out that buying a home in Chicago was easily going to cost me almost 3x as much as it did in Indiana. And on my average joe salary the numbers didn’t match up??? So what did I do…I BLOGGED about this phenomenon over and over and some people got it, while many others didn’t (see http://urbanomics.blogspot.com/2006/02/huff-puff-blow-houses-down.html . My only mistake with housing was assuming that most of the inventory was being bought by speculative investors with deep pockets, but read on because the investors were average people like you and I caught up in the frenzy…of flipping houses and retiring early. But what I didn’t see was the tsunami effect that was to come of too much easy debt to buy houses and obtain loans, credit cards, etc. I didn’t watch TV outside of sports and the occasional Law and Order episode. If I would have clicked a little bit further I would have known that there were new shows cropping about how to “FLIP That House”, “Buying Tons of Property with Lines of Credit”, and I appreciate Suze Orman’s segment of “Can I Afford It”. I wasn’t in tune to the fact that the nation was building a culture of people that were just buying things with no regards as to whether they could afford it. My rule of thumb is if you have to call into a show to ask whether you can afford something then you probably should not be buying it! And to be fair these tv shows should show both sides by doing a “Where are They Know” segment: helping us understand how long those flippers had to hold that property before they ran out of money or were foreclosed on and their dreams where swept away. That would have been Real TV and not just the happy story of flip every home and make a minimum of $35-50K of each flip in no time.

I don’t know what kicked things off but the house of cards crumbled. Was it finally that the market ran out of easy buyers and found the one’s like me that asked “How Can I Afford This” or “Why Are You Giving Me So Much Debt”? There must have been a peak when the banks realized that the uninformed buyers were running out OR that we had stretched them too thin. Who could keep up with inflated mortgages, debt to furnish this gigantic house, and debt to finance their new life of upgrades (i.e., cars, clothes, dinners, vacations). I am guessing the first realization came as banks began HALTING credit lines à No more borrowing against your home (Home Equity Lines of Credit) and no more extensions for your credit card which has reached it limits. So guess what this halting of initial credit does, it crimps our lifestyles and people stop making extravagant purchases. My first clue was the Recreational Vehicle (RV) market and their predictions of a slowdown. Think this is the ultimate purchase for people with excess money a lavish vehicle to travel around in and still feel at home. Then most people stopped spending on themselves and stopped buying clothing, jewelry, cars, and holiday trips to warm places. This pullback caused all these industries – Retail, RV, auto, transportation to start to cut jobs to match the lack of demand. And hell breaks loose when anyone (but especially overextended people) starts to loose a job. Why, because there is a mountain above your head of things to pay. Let’s start naming them: mortgage/rent, car bills, utilities, credit card, school loans, insurance, and medical bills. And when jobs are cut across entire social classes you begin to realize that even rich people have huge mortgages, autos, boats, vacation properties to keep up with.

For me and my family, the downturn in the economy hit hard and hit fast. It rattled our conservative little family because our family’s employment history represents the entire workforce via construction, legal, business, technology, healthcare, and education. And the first shoe to drop was the construction section and we had a member of our family unemployed. I began writing even further that this wasn’t your normal recession and not to drink the Kool-Aid from all the people on Wall Street like Larry Kudlow who told you to keep waiting for the goldilocks rally that never came as the Dow Jones Industrials dropped from 10K to below 7K. This recession was hitting college educated people in growth fields like construction. And I didn’t believe the hype when they were telling you that this is where capitalism kicks in and the great trickle down effect of rich people spending money would bring us back see http://urbanomics.blogspot.com/2008/03/hey-i-cant-swimand-neither-can-wall.html . This time I wrote it seems different, because this was not like other bubbles and it wasn’t just people on the lower end of the social spectrum being hit with job losses or their dollar not stretching as far. But what they didn’t realize what that the folks of every class where being impacted because everyone was trying to keep up with the next level up.

If you recall, I wrote about conservation and a prudent evaluation of your entire financial landscape. Reassess everything and get rid of excess debt (see http://urbanomics.blogspot.com/2008/07/mystery-market.html & http://urbanomics.blogspot.com/2008/05/hot-topics-oil-housing-economy.html ). For me, I had caught the bug slightly and often bought stocks on margin…what a mistake that was. When you use someone else’s money and the value of your investment goes down, not only do you have to pay them back in full but with interest. So in some ways I felt want the homeowner or credit card borrower was going through. I don’t want to sell while the value was dropping and ohhh great…money has to come out of my bank account to get rid of this extra debt. This prompted me to start taking my lunch to work, and going out less, and shopping less…and buying groceries. There were no vacations this year except for weddings and family get togethers. And that’s when I thought about what would turn this economy around…I didn’t know then but I summed up my hunch saying that it would take a mix of things to stimulate people from “pulling back” (see http://urbanomics.blogspot.com/2008/10/bailout-what-this-means-to-you-plus.html) And I remember saying let’s help the people that have pulled back on spending and can pull no further and need help with daily responsibilities. And while I was right then, I missed the fact that all the temporary band-aids (tax cuts, clunker) only work for so long… and the ultimate area of assistance has always been with JOBS. If there are no jobs, this pull back continues…because while again others may use the phrase “90% of Americans are still working and therefore consuming” they may be a little bit out of touch with the real world. The real world knows that its more that 10% unemployment and it also knows that many of the “90%” are like me and don’t and won’t consume much until things start looking better for the people around us.

And for my flashforward ~ To be continued

Stimulating the Economy...

The hardest question I received so far this year is, "Do I agree with the stimulus bill?" It is a very difficult question because we are facing a very tough economy that has a number of different scenarios currently in play. Consider the following scenarios:

1. Young, middle, and old aged people are unemployed
2. A single mother working retail has her hours cut because demand is slowing
3. Governors fear slashing jobs if the state doesn't balance its budget
4. An employed young man is not going to the bar, eating out, or vacationing
5. A young couple with children did everything right but is underwater on their new housing purchase after buying at the height of the real estate market
6. The parents of a well off family of four still lives their daily but are shopping less and saving more than ever do to declining investments and the declining value of their home.

I went to answer this question and tried to address as many of these different scenarios as possible. The realization I quickly came to is there are a FEW small measures that will help everyone and those should be the focus of the government. Here is what I've got to assist in each of these scenarios:

1. Jobs, Immediate Assistance(to pay bills)
2. Jobs (More work hours or new job options), Immediate Assistance(to pay bills)
3. Immediate Assistance (to balance budget, and maintain Jobs)
4. Confidence (in the economy) and Incentive (to spend his hard earned money)
5. Confidence (in the economy) and Extra Help (with underwater mortgage and kid)
6. Confidence (in the economy and Incentive (to spend their hard earned money)

After analyzing these scenarios a true stimulus bill would address the areas that can help the most people. Here is what my stimulus bill would include:

~ Developing Jobs is needed to provide work and options to those in need and improve the confidence in the overall market (Scenarios: 1,2,4,5,6)

• Create new jobs through state and federal projects that put people to work
• Maintain jobs through by increasing the demand for American goods domestically and internationally

~ Immediate assistance needs to be given to Americans to help buy food, pay for rent/utilities, and help with kids which begins to circulate money back into the economy and builds confidence (Scenarios: 1,2,3,4,5,6)

• Food stamps assist will immediate help and will be spent immediately at grocery stores everywhere (circulating money and keeping jobs intact)
• Cash to only those that need immediate help with Utilities (No jobs and low income)
• Utility and Day Care assistance as an incentive for middle income families to spend money and not hoard any cash given by the government

~ Incentives need to be given to Americans to who have discretionary income which will circulate cash, develop jobs, and improve confidence (Scenarios 4,6,1,2,5)

• Housing and Auto Credits will provide incentives to Americans with discretionary income to help revive two major industries
• Temporary reduction in sales tax (but will this hurt state budgets)
• Tax Cuts will put more money in our pockets but I don't think this measure should be heavily relied upon because it would not cause me to spend the money...rather to save it.

These are the pillars to what I would recommend in a stimulus package. Ironically, I believe that the government has gotten the bill correct but the allocation of the bill is what I believe is out of what. Roughly 80% of the package should have gone towards DEVELOPING JOBS and providing IMMEDIATE ASSISTANCE. The remaining 20% should have focused on providing incentives to those who have been impacted the least but can provide additional help in stimulating the economy.