The Ignorant Investor

The Fed is keeping rates near zero and continues to say that rates will stay that low for “an extended period.” Stocks rallied slightly during the afternoon. The way it was explained to me is that when the fed keeps rates low, there's no money to be made in bonds and bank accounts. The only place to go for returns is equities, real estate, or alternative investments like gold, commodities, or the like. It also discourages saving money, because money in a bank account with low interest is constantly shrinking in value as inflation eats away at real return.

After seeing consumer confidence and consumer spending improve with rising stock prices, I've decided that the Fed and the government will continue to try to support the market and push up asset prices to encourage the consumer to relax and stop worrying about saving money.

In a story about opposition to the new financial reform bill among what I call Business Class America, the NY Times writes:

Generating almost as much opposition in the private sector is the proposed regulation of derivatives, which are used by many manufacturers and producers, in areas including natural gas, food products and agriculture, to hedge their investments against losses. Business lobbyists are seeking to exempt more “end users,” manufacturers and others who invest in derivatives on assets they own, as part of the final Senate package so they will not have to post large amounts of collateral on their investments.

"Insuring against losses" using derivatives sounds like a good idea, and commodity markets have used them to apportion the risk of sudden rises or drops in price among farmers and buyers for generations. But hedging requires a counterparty capable of paying off when the losses come. One of the major issues in the late financial crisis was that when it was time for AIG to pay off it's bad bets, it didn't have the money. The government had to step in. Hedging strategies only work well when they're symmetrical and all the players have the property to back up their bets. Hearing corporations worry about posting collateral is like hearing a poker player complain about being forced to put cash up front because "hey, you know I'm good for it."

Some publicly traded companies are concerned about a section of the Senate bill that would allow “proxy access” to corporate boards and, critics say, would make it easier for unions, hostile investors and others to gain seats on a company’s board.

Employees with a seat on the board? My God, the horror.

Major papers are running stories this week about how there are signs all around of economic recovery. I remain pessimistic, but perhaps that's because I'm pessimistic about everything.

Ford reported a sizable profit for the first quarter of this year. Sales are up from the same period last year, so not all the profit is due to aggressive cost cutting. Demand looks higher. However:

Booth said the company is seeing some economic recovery, especially in the U.S., but the recovery isn't exceeding Ford's earlier prediction of 11.5 million to 12.5 million in total U.S. sales for the year. That would be up from 10.4 million in 2009 but far below sales of more than 16 million five years ago.

This is a move off the bottom. So it is a recovery. But it's not a snapback.

Bank of America reports a small rise in first-quarter earnings. The bank continues to rack up losses in consumer loans in the real economy that regular people live and work in, but it made a lot of money trading assets in the financial economy.

The financial economy is truly a kick ass place in which to work. Meanwhile, profits are getting better, but look at the state of gross revenues instead of profits to get a sense of what business conditions are like after GE came out with 1st quarter numbers:

New orders for equipment and services at GE's industrial units--which the conglomerate has been focusing on to drive future growth--fell 8% to $17.1 billion. This is below the $18 billion in new orders reported in last year's second quarter, which Chief Executive Jeff Immelt previously referred to as a possible low point for new orders amid the broad economic downturn.

In other words, demand for GE's widely used industrial products was actually down even from the craptastic first quarter of 2009, when people were talking about society exploding in a bank-induced economic Chernobyl. An eight percent decline in demand as a recession is ending doesn't fit with the "we're accelerating out of the corner" story that's been making the rounds.

Yes, corporate profits are rising. That's good for shareholders and investors, and by extension, the trading houses that feed off of them (via the sucking of blood, naturally). But it's not good for government, since fewer orders means fewer sales, lower production, and less tax revenue. What it does to employees is even worse. CEOs start cutting even more employees to maintain profit levels and "beat expectations" so they can get a bump in the value of their stock options.

The number of newly laid off workers signing up for unemployment went up for a second week in a row. Mortgage foreclosures are still at a record high. But J.P. Morgan and Intel are reporting profits. Could this be what the future looks like - high unemployment combined with higher corporate profits?

...can be read in this chart. That the financial service industry- the industry that lubricates the gears for the producers, inventors, and service providers in the rest of the economy- makes more than a third of the profits in America is a truly bizarre situation. The chance of passing financial reform opposed by the country's most profitable industry can be observed only by using a microscope.

Seen on the Drudge Report this morning at the top left of the page:

GINGRICH: Obama 'most radical president ever'...
LIMBAUGH: Obama 'inflicting untold damage on this great country'...
PALIN: Obama's Nuke Stance Like Kid Who Says 'Punch Me in Face'...
LIZ CHENEY: Obama Putting America on 'Path to Decline'...
HANNITY: Obama 'Is a Socialist'...
SAVAGE: 'Obama The Destroyer'...

Obama is not a socialist any more than Bill Clinton was a socialist. He's pretty much a "third way" corporatist of the type that arose after the unions went into decline and TV advertising made campaigning too expensive for anyone who couldn't raise a zillion dollars. Obama makes deals with industry insiders to create legislation that will benefit the poor. If the corporations weren't getting something out of the deal, too, they wouldn't agree to these deals.

California pension funds are underfunded to the tune of about $500 billion. The yield from modern bonds is so low, and the desire among executives to keep cash with the company instead of putting aside for pensions so high, that it's no wonder than pension fund managers feel the pressure to juice up their returns with risky alternative investments.