Monday, October 26, 2009

Lender Capmark Financial Group Files for Bankruptcy

“Oct. 25 (Bloomberg) -- Capmark Financial Group Inc., the lender owned by firms including Goldman Sachs Group Inc. and KKR & Co., filed for bankruptcy protection after posting a second- quarter loss of about $1.6 billion.

Capmark is one of the largest U.S. commercial real estate finance companies, with more than $10 billion in originations, according to Moody’s Investors Service. The company, formerly known as GMAC Commercial Holding Corp., services more than $360 billion of debt.

The Horsham, Pennsylvania-based company has struggled as the default rate on commercial mortgages held by U.S. banks more than doubled to the highest since 1994. Capmark said on Sept. 2 that it may reorganize under Chapter 11 of the bankruptcy code.”


Just when people are thinking the worst is over…is this a signal for more commercial real estate related bankruptcies? More problems ahead?

Sunday, October 18, 2009

2009 Federal Deficit Surges to $1.42 Trillion

Associated Press (AP):

“WASHINGTON – What is $1.42 trillion? It's more than the total national debt for the first 200 years of the Republic, more than the entire economy of India, almost as much as Canada's, and more than $4,700 for every man, woman and child in the United States.”

-MARTIN CRUTSINGER, AP Economics Writer, 10/17/09

Let’s take a look at what $1.42 trillion really is.

According to the Bureau of Economic Analysis (BEA) of the Department of Commerce , the GDP of the United States, or what the media roughly calls “The Economy” in the second quarter of 2009 was $12.901 trillion. With a little division, we can easily find that the federal deficit as a percentage of GDP is approximately 11%.

Put in those terms, the deficit doesn’t look thaat bad. I’m not a bull currently, but it is funny when the media exaggerates.

Moving on, further down in the article it does write out the troublesome quintessential bear argument which I found a bit more interesting:

“If those investors [such as China] started dumping their holdings, or even buying fewer U.S. Treasurys, the dollar's value could drop. The government would have to start paying higher interest rates to try to attract investors and bolster the dollar.

A lower dollar would cause prices of imported goods to rise. Inflation would surge. And higher interest rates would force consumers and companies to pay more to borrow to buy a house or a car or expand their business.”

Yikes. People are finally looking into a repeat of Paul Volcker, chairman of the Federal Reserve in the late ‘70s, who in order to combat inflation had to increase the federal funds rate to more than 20%. What a lot of people aren’t getting right now is that the Federal Reserve is going to definitely increase interest rates to combat inflation and reign in the monetary supply which it has let loose rampantly.

The big question is just how fast the Fed will increase interest rates and just how high. My guess is that it’s going to be high, to counteract this period of near 0% interest rate. This, counter-intuitively, won’t necessarily cause the economy to stagnate considerably if people expect the increase in interest rates. What’s more important is that the Fed increase rates in a manner that plays well with the expectations of people and also at a speed that doesn’t create a shock to the economy.

If the Federal Reserve either increases interest rates too fast or too high, expect another big recession. If the Federal Reserve increases rates too slowly or too low, expect another big bubble. Or, if the Federal Reserve does its job and Ben Bernanke is successful, expect a steady economy where you get what you expect.

Tuesday, October 13, 2009

Bloomberg: Central Banks’ Reserve Shift Ignores Dollar Data

central bank “Oct. 12 (Bloomberg) -- Central banks have been shifting their record reserves into the euro at the expense of the U.S. dollar..”

I’m a little worried. There’s a long term trend that the dollar is declining.

Many people have dismissed this with simple arguments like “The US Dollar is too important to go away” or “US Dollar is still the currency that everyone uses”.

One of the top ten rules in my invisible book of investing is that the past does not predict the future. It really wasn’t too long ago that the British Pound was the leading currency of the world. I’m not going to make a solid prediction on what will become the next leading currency, but my bet is on the Euro or the Chinese RMB.

The simple concept with currency exchange is that money inflows into a country increases the value of that country’s currency. Outflows decrease the value of a country’s currency. The biggest driver for money flows are differences in interest rates. So for example, if the US’s interest rate is at 0% and another country’s interest rate is at 3%, more so than not people will put their money into the other country. This is a bit of an overgeneralization, but the point here is that money is flowing out of the United States which has its federal funds rate set at near 0%. The result? A lower value for its currency.

I’m pretty worried. Even though Bernanke has recently said that the Fed will rein in its monetary stimulus and be on a lookout for inflation, I don’t think the market is believing it at all. The market is a little worried about inflation in the US dollar (which will decrease the real value of the dollar) and money outflows and the decline of the dollar from the US shows it.

Where are investors putting their money?

Anybody read about how gold hit record highs above $1000? That oil has hit levels above $70?

They’re putting their money into commodities. Is it a real rally?

I’ll explore this in a future blog post.