“More prosperous shoppers seem to be defying continuing high unemployment levels and economic uncertainty to renew their spending on luxuries such as jewelry, fashion and cosmetics,” we read in the Financial Times this morning.   This would seem to be consistent with the long chain of positive earnings releases thus far in 2010.  Just last week LVMH, owner of the Louis Vuitton brand among others. reported that demand for its high-end products accelerated towards the end of 2009.

So what gives?  Isn’t this supposed to be a “rich man’s recession?”  There are a couple of important points to be made here.

Yes, this is a rich man’s recession. It is an asset-based recession marked by deleveraging.  A crisis that sees virtually all non-Treasury assets fall in value is going to take a bigger bite out of the net worth of the “asset rich” than of the average Joe who works for a paycheck.  When the financial world imploded in 2008, consumption of luxury goods ground to a virtual halt.  Retailers were stuck with a mountain of inventory that they couldn’t sell without deep discounting — a cardinal sin for a purveyor of luxury goods!

But once the shock of the crisis wore off, wealthier shoppers returned to their old haunts.  How do we explain all of this? Read the rest of this entry »

Stratfor reported some statistics for China that should be disturbing.

China’s National Bureau of Statistics released on Feb. 2 details about economic growth for 2009, including the components of the year’s 8.7 percent growth rate. Growth is broken down into investment, consumption and net exports. Of these categories, investment contributed 8 percentage points, or 92 percent, of overall growth.

Meanwhile, consumption contributed a comparatively measly 4.6%, while net actually exports subtracted 3.9%. So,virtually all of China’s growth is based on stimulus / investment.  Without this capital spending splurge, China’s growth rate would have been a paltry 0.7%.

Given this, it would hardly seem that China would be the engine to pull the world economy out of the doldrums.   This is a development we intend to keep an eye on in the months ahead.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

At HS Dent, we are generally quite bullish about the long-term prospects for India.  With a large population, a growing middle class, a developing consumer economy, and a tech-savvy workforce, India has a lot going for it.

Unfortunately, the country also has a history of getting in its own way.  For example, in today’s Financial Times, we read this little tidbit that will make you want to pull your hair out:

Indian authorities have sealed off about 300 mobile phone towers in a New Delhi suburb, after ruling that a decades-long ban on commercial activities in residential areas was being violated.

Telecom industry insiders said mobile phone services in Noida, a busy residential and industrial area near New Delhi, had been hampered by the move to put out of action nearly a third of the area’s 1,000 mobile phone towers, most of which have been in place for years.

The impact on consumers is huge — mobile penetration in the country far exceeds landline availability, even in urban areas.

Well, that’s just brilliant.  In an era in which fast communication is everything, send your citizens back to the Stone Age by cutting off their access to mobile phone towers — all in the name of enforcing what amounts to an insignificant municipal regulation. Read the rest of this entry »

What is it w/ the NYT? Lowenstein wrote that home owners should just “Walk Away!” in an article back in January, and today there is another article on more homeowners walking away.  The discussions in these two articles are lopsided, painting what could be construed as a positive picture of why walking away from one’s home mortgage is justified, but they do not adequately talk through the long term effects on either the homeowner or the housing industry. 

I have written about this subject repeatedly here because I believe it is an important component of our housing crisis.  If there is a move to somehow give mortgage defaulters amnesty or otherwise provide cover for reneging on a debt, then where does it end?  What creditor would then be confident in giving any one a loan at anything above 50-60% Loan-to-Value?  What would this mean for valuations of real estate if suddenly the ability to finance was curtailed? 

On the personal side, there is much better treatment of this subject from Bloomberg here, where the discussion is more in depth about how banks and other lenders pursue the assets of those who strategically default…even in the case of short sales.  One of the determining factors is whether or not your home is in a non-deficiency state, which is a state like CA or AZ where it is illegal for lenders to come after other assets if you default on your home mortgage.  This is unusual.  In most states, mortgage lenders can come after you, even years after the fact. 

The difference in treatment between lenders and borrowers is appalling.  If you are a homeowner who put down 20%, paid your mortgage on time every month, but now your home value is below your mortgage, well tough luck.  If you are a large lender who did a poor job of protecting your balance sheet and now you are stuck with a lot of assets that are far below what you paid for them (a lot like homeowners) then you get a massive bailout at taxpayer’s expense and live to collect not only your pay but bonuses in the future.  It is this basic difference in how poor decisions are treated that is causing so many to question the responsibility to repay their personal debt.

Harry Dent and many, many other analysts over the years have written volumes about the nature of cycles in commodity prices.  To summarize those volumes in one paragraph, commodity bubbles are always self defeating.  Once a valuable commodity becomes prohibitively expensive, market mechanisms correct the imbalance in a couple of different, complimentary ways:

1. High prices lead to reduced usage (setting the air conditioning at 80 degrees instead of 75, for example)
2. High prices lead to efficiency drives (think insulation in homes and increased fuel efficiency in cars)
3. High prices lead to substitution effects (switching from gasoline to diesel in your choice of car or from steak to chicken at your dinner table, for example)
4. High prices lead to new sources of supply being searched for and found (consider Brazil’s enormous recent oil discoveries in the Atlantic)

These adjustments do not always happen overnight, of course.  Depending on the rate of technological change and other factors, some supply/demand imbalances can persist for years or decades, and sometimes the points above can conflict with each other.   One example is rubber. Read the rest of this entry »

$1.6 trillion, then $1.3 trillion, a mere $8.5 trillion over the next decade…and that assumes (always a dangerous proposition) very rosy GDP growth numbers in the later years.   This is the best that the brightest economic minds in our administration can do.  Think about that.  The most thoughtful, determined, experienced members of our leading economic team cannot come up with a budget proposal that is balanced, near balanced, thinks about being balanced, or has any chance of coming close to balanced for the foreseeable future.  I’m not singling out the current administration because of political affiliation, I’m singling them out because they are currently in the seat of power.  They have the reins.  The previous administration was a fiscal train wreck as well.

We raise taxes (which I believe are necessary) and lower spending, but we don’t even scratch the surface of what is necessary.  Starting in 1933 we promised all citizens a safety net, which has eventually grown into a foundation of benefits that have taken on the stature of rights.  Costs have never been contained, the programs have never been actuarially sound.  There has not been a methodology for lowering payments or benefits as circumstances of the country changed.  We are not being honest - politically or intellectually.

David Walker, the old Comptroller of the Currency who is now part of the Pete Peterson Foundation, was on CNBC this morning talking yet again about “restructuring” entitlement payments.  He’s trying to get to the point of cutting payments without having to say the word “cut” because he knows, as we all do, that people stop listening.

We, as constituents, have turned a blind eye to this issue for decades.  There has never been a sustainable path outlined for our entitlement spending, and yet by its very name (entitlement) we treat it as untouchable.  It’s not.  It will be unpleasant.  It will be heart-wrenching.  The burdens will fall in an unfair manner.  However these programs are not untouchable. 

Because we as constituents were not focused on our debt and the incredible weight of entitlement spending, any and every politician that attempted to rein it in was crucified by special interest groups.  There is a reason Social Security is considered the third rail (the electrified rail in the NYC subway system) of politics.  If you touch it, you die.  So we end up with entire generations of politicians who pledge to do nothing in this area.  They have performed admirably.

Now we are turning a page in America.  There is anger, resentment, and fear.  Ordinary citizens are talking about the deficit, the budget, and monetary policy.  Imagine, everyday people discussing the role of the Fed and the printing of dollars and monetizing the debt!  This rising sense of fiscal responsibility will not cause our current elected class to change course.  They’ve seen it before and nothing came of it.  Those that took the bait and called for drastic changes were once again punished.  What must happen to convince those in public office that Americans are serious is an overturn of who is in office.  In short, throw them out.  The good ones, the bad ones, the mediocre ones.  There must be a stand taken, somewhere, to say that we see this debt as a crippling habit that will not only slow down our lives, but ruin the lives of those that come after us.  

The path is simple.  Changing the regulations require Congressional action.  To get action, the members of Congress must be motivated.  To be motivated, they must understand that their voters are focused on these issues (debt, spending, etc.).  To get them focused, they must have their political fortunes based on these issues, which means we must elect those who run on platforms that are clearly based in debt reduction and responsible tax and spend programs.  This will mean sweeping out those currently in office, those who were elected based on different platforms and issues.  With a very large group of freshman we might have a chance at change.  I’m hoping for that.  Wait a minute…I’m starting to sound like a campaign.

Last week, we had a blog post about the changing demographics of the Middle East based on data from the Christian Science Monitor.  Today, we’re going to comment on another snippet from that issue (January 24, 2010) titled “Adults, and still in the nest.”

No, we’re not talking about American college kids who move back in with mom after graduation.  We’re talking about  Italians who are pushing 40 and still living with mama.  We’ve covered this topic before, but it’s interesting to see it covered again by one of the top foreign affairs newspapers in the world.  The Monitor writes,

The phenomenon of the bamboccioni, or grown-up kids that live with Mom and Dad until their late 30s, has prompted many jokes both here and abroad. Reluctance to give up Mama’s lasagna is just part of the picture. Read the rest of this entry »

The U.S.-Mexico frontier has always had a certain romantic image as a place where bank robbers, bootleggers, and other assorted ne’er-do-wells could escape the law by slipping across the border into Mexico.  But California Governor Schwarzenegger now views our neighbor to the south as a destination for criminal after they are caught, tried and sentenced:

Schwarzenegger suggested California could ease its crowded prison system by sending thousands of undocumented inmates to specially built jails in Mexico.  Speaking to reporters at the Sacramento Press Club, Schwarzenegger said California could ease its strained finances by a billion dollars if 20,000 illegal immigrants currently held in the state were housed across the border.
“I think that we can do so much better in the prison system alone if we can go and take, inmates for instance, the 20,000 inmates that are illegal immigrants that are here and get them to Mexico,” Schwarzenegger said. (Click here for full article)

This isn’t the first time California has  tried “outsourcing” its prison population.  The state has sent inmates to Michigan, for example.  This is, however, the first time the state would be outsourcing and offshoring its corrections obligations.

We have doubts about the feasibility of the plan, but we find the plan itself interesting and indicative of how truly desperate the Golden State’s fiscal position is.   There simply is not enough money to go around at the moment, and the Governor is making an attempt to think “outside the box.”

In the months and years to come, as California struggles to put its house in order, we would expect to see an increase in…shall we say…”unorthodox” solutions.

It reminds me a little of Jonathan Swift’s “Modest Proposal“  in which, as a solution to the Irish famine of the 1720s, Swift recommended that the Irish eat their own children.  Swift was writing a satire, of course.  His goal was to shock policymakers into taking action.  Perhaps the Governator has similar motivations.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

The Dow is off another 160 pts so far today (11:30am EST), putting us just under 10,100.  This is a far cry from the 10,700 of just over a week ago.  The reasons for the fall - Geithner testimony, banking fee, screed againt fat cats, SOTU, etc, all seem to come up short.  How about, “curren prices are ridiculously beyond what companies are worth?”  That seems like a good one.   Or, “unemployment data, housing data, lending data, spending data, and every other reasonable and halfway believable measure of economics points to a long, protracted difficult economy.”   That also would seem appropriate. 

At least today’s fall comes as we deal w/ jobless claims and manufacturing.  We’ll be going through this at length in our newsletter this weekend.

 ”Across the Middle East, where Christianity was born and its followers once made up a sizable portion of the population, Christians are now tiny minorities,” writes Kristen Chick.  “Driven by different factors — the search for better opportunities abroad, their status as targets of Iraq’s sectarian conflict, a low birth rate, and discrimination — the trend largely holds true across a region where Christians have maintained a presence for two millenniums.” — From “The Wane of Christians in the Mideast,” Christian Science Monitor print edition, January 24, 2010.

The demographic changes happening in the Middle East have interesting implications for the economic development of the region, not to mention the geopolitics as well.  We’ll cover some of these trends today.   Read the rest of this entry »