Financial Crisis: Ten Years Ago, the World Changed

Ten Years Ago, The World Changed

A rolling crisis born of decades of mistakes finally erupted across the US financial landscape approximately ten years ago, with each month of that year highlighting a new and more ominous dilemma for US markets.

The Financial Crisis of 2008 goes by many names – The Great Recession (which doesn’t capture the magnitude of all that happened during this time), the Banking Crisis (which unfairly blames banks alone for the collapse) – any number of “titles” will most likely not provide an adequate description of what took place.

Exactly ten years ago during this month, July of 2008, the financial industry saw massive upheaval and government action which would have been unimaginable just a few years before.  But a lot had already transpired … decades of bad government policy and unwelcome government intervention into the marketplace had already distorted US real estate markets.  And now, 2008 saw the crisis unfolding almost nightly on the cable business channel.

  1. October 2007 –  Official beginning of the recession; Florida real estate market collapsing.
  2. February 2008 – Bush signs into law a tax rebate bill, and increases FHA loan limits and lowers down payment requirements as loan borrowing/lending is rapidly declining.
  3. March 2008 – Bear Stearns, with substantial exposure to mortgage backed securities, was bailed out by the Fed and eventually forced into a sale to JP Morgan Chase.
  4. April/May 2008 – Through the “Term Auction Facility,” the Federal Reserve lent a then record $150 billion to investment banks; the Fed Funds Rate was dropped for the third time that year – to 2%.
  5. June 2008 – Fed bank loans break the record again, lending $225 billion to distressed banks with massive loan losses from defaulting real estate.

And then, the calendar turned to July …

By now it was fairly evident that the traditional method of allowing banks and financial companies to file bankruptcy and/or reorganization had been disregarded, and throwing tax payer money at the failing institutions was the preferred method of stemming the tide of the crisis.  No one, however, was prepared for the events that occurred in July.

**The two BIG July 2008 events which headlined the ongoing financial crisis of that year:

  1.  “Secretary Paulson asks Congress for a $25 billion bailout of Fannie Mae and Freddie Mac”: Looking back, the numbers seem so small compared to the gargantuan debt and bailout numbers we have seen since.  However, at the time, it was a body-blow to the stock market.  Street guys knew (A) if the Feds were moving in it was probably already too late; and, (B) it was not going to be enough.  Instead of stabilizing markets, it rattled them further, and set the stage for what would become inevitable – the complete nationalization of the Fannie and Freddie marketplace.
  2. “IndyMac Bank failure … depositors angry”: In a prelude of what would come in the fall, IndyMac Bank was a mid-sized regional bank and the first traditional bank failure of the year (Bear Stearns being an investment bank and financial services company).  At the time, FDIC insurance only covered $100,000.00 of a person’s bank deposits (the crisis would lead to reforms later that would include an increase in FDIC coverage up to $250,000.00).  Angry depositors pushed the local police force to the brink, as they demanded access to the bank and access to their accounts.  The televised events spurred widespread fear of further calamity with other banks throughout the country.

IndyMac Bank failure … depositors angryIndyMac Bank failure … depositors angry

 

Many more dominoes were still to fall in that fateful year of 2008.  August and September would not be kind to markets, nor to many of the nation’s oldest and most famous banking institutions.  At the onset of the Federal takeover of Fannie and Freddie, and the beginning of traditional depositor bank failures in the Midwest, the public remained largely unaware of the declining stock market………most advisors were simply saying it was “time to buy” as stock prices fell.  “Buy low, sell high” – a long standing mantra on Wall Street – proved disastrously wrong over those remaining months in 2008.

Ten years ago was proof in our lifetimes that what goes up must come down, and many times we are too late in taking action to protect our hard-earned money.  Make sure you are not too late when the next downturn becomes a market collapse.  Call now for safe and simple principal protection products for your investment portfolio. (877) 912-1919

Government Makes Good Financial Decisions?

Government Makes Good Financial Decisions?

The country is moving through an uneasy and unexpected post-Cold War period.  Many have commented on the hyper-polarized world we live in, and the fast pace of events which surround us.

It is also an era of empowered individuals … while government continues to intervene and control, we also see the tools of capitalism spreading information, wealth and prosperity like never before.

Nonetheless government can, and still, does big projects on a big scale … for better and for worse.  Considering the size and scope of government action in relation to our money involves taking a look at our top 5, best and worst, government actions involving your tax dollars.

I. Top 5 Government Financial Decisions That Were Great For Our Money:

  1. Jackson’s closing of the first federal bank”: President Andrew Jackson may not have been a man of the people, but he was surely a man for the people.  Enduring a nasty mud-slinging campaign that would make modern campaign consultants blush, Jackson was elected as a “populist” (sound familiar) and went on to dismantle the second national bank and allow the charter to expire without renewal.  This was described in the historical record as the “Bank War”, as Jacksonian populists did not want the country to be beholden to the “bankers and the speculators.”  This is considered a great decision because it reduced, at the time, volatility in the value of the US currency, as the national government was rife to print money on a regular basis.
  2. Kennedy tax cuts”: President Reagan wasn’t the first to endorse the “Laffer Curve,” or rather – “supply-side economics.”  Democratic President John F. Kennedy cut the tax rate 20% and was quoted as saying:  “The paradoxical truth is that the tax rates are too high today and tax revenues are too low and the soundest way to raise revenues in the long run is to cut rates now.”  Tax revenue and GDP soared after Kennedy’s tax cuts.
  3. “Stealth Bomber Project”: A defense project … spending money … really?  Yes, stealth tech made its way through the commercial economy and its 1980s technology remains state of the art some 30 years later.  Stealth allowed less expenditure on more costly systems and the overall investment made us save money, advance technology, and protect America at a lower cost.  That was a great investment.
  4. “The Apollo Program”: Yes, again, spending money, not saving … but the return on investment has been extraordinary. Velcro … microwaves …. microwavable food … LED lights … ear thermometers … anti-icing technology for planes … radial tires … firefighter equipment … enriched baby food … cordless vacuums … solar energy cells and technology … the list goes on and on.  The public prestige of a “can-do” America was easily matched by the practical commercial gains from the project.  Tax money invested wisely, with a significant rate of return.
  5. “The Reagan Tax Cuts”: No political philosophy, no policy prescription, nothing in the field of economics matched Ronald Reagan’s historic tax cuts in 1981 and his Tax Reform Act – passed with Democratic support – in 1986.  By reducing marginal tax rates from 70% to 28%, Americans kept more of their money, jobs exploded, GDP exploded, economic growth exploded, businesses expanded, American businesses were infused with entrepreneurial spirit and vitality, and … tax revenues increased as more economic transactions and wealth creation led to more money to tax!  Minus the crash in ’87, and the recession of ’92 caused by George H.W. Bush’s tax increase, and you had essentially 18 years of uninterrupted wealth and economic growth.

 

II. Top 5 Government Financial Decisions That Were Terrible For Our Money:

  1. “Going off the Gold standard”:  Inflation, rising interest rates, economic stagnation, “stagflation” … going off gold and letting the American dollar float relative to every other currency was the Nixon Administration’s last gasp at funding the Vietnam War AND domestic spending at the same time without fiscal restraints.  The recessionary 1970’s were proof of how bad the decision was … our modern $20 trillion debt is confirmation.
  2. “2009 Stimulus Package”: Almost $1 trillion borrowed US dollars, passed without a single bi-partisan Republican vote in the House, was to help the economy recover from the “Great Recession” which started in 2007 but was best known from the 2008 banking collapse.  However, it quickly became known for what non-Keynesian economists predicted:  a boondoggle of a failure.  “Shovel Ready Projects” were not so shovel ready … Solyndra payouts to Democratic Party donors … sub-2% growth … this should have been the final nail in the coffin for Keynesian economic theory.
  3. “Smoot-Hawley Tariff Act”:  While the Great Depression seemingly started from varying economic events leading up to the Stock Market Crash of 1929, the consensus view among economists was that “The Tariff Act of 1930,” commonly known as the Smoot–Hawley Tariff or Hawley–Smoot Tariff, greatly expanded and exacerbated the effects of the depression, and most likely extended the economic pain and misery for the years that followed.  The act raised U.S. tariffs on over 20,000 imported goods and reduced the US Gross Domestic Product by more than half.
  4. “George Bush’s TARP Bailout”: Some of you are reading and saying to yourself – “worse than Smoot-Hawley?”   TARP (Troubled Asset Relief Program) bailed out bankers who advanced products to clients that were not credit-worthy, knowing they had the implicit guarantee of a government bailout through the Fannie and Freddie underwriting of mortgage notes.  The government encouraged, and in many cases required, the bank’s loan to risky borrowers.  The bailout took taxpayer money – borrowed from China – to salvage failing banks and not one bank President or leader lost their jobs or were held accountable.  We never changed our banking practices, and we simply borrowed our way out of a crisis.   Moral Hazard on steroids …. debt well into the future … no one held accountable … we have yet to learn, or pay the price, for the banking collapse of 2008, and TARP covered up everyone’s bad decisions.
  5. “Creating the federal income tax”: Federal income taxes existed in the 19th century primarily to fund the Civil War.  But they expired after the conflict.  Another income tax was passed in 1894, but in 1895 the Supreme Court ruled the tax unconstitutional (Pollock v. Farmers’ Loan & Trust Company, 157 U.S. 429 (1895), affirmed on rehearing, 158 U.S. 601 (1895)).  So, in 1913, the public and the Congress finally passed the 16th amendment, allowing for a Federal US Income Tax.  How did society and government function before they had an income tax?  Needless to say, federal income taxes have led to a lessening of personal wealth, and a limiting of personal freedom.  Combined with our current debt load, the evidence has shown it has simply empowered leaders incapable of balancing a check book.

Our current Congress and President passed needed tax reform.  And as we know, cutting taxes has always brought in more revenue to the government.  At the same time, tax reform without government reform – cutting Congressional staff, cutting Congressional pay, reducing executive branch costs, streamlining government – it is only one half of the fiscal equation.  We are enjoying a record stock market and high-flying consumer sentiment.  But our structural fiscal problems, and debt load, is not being addressed.

The good and bad of government decision making will have profound affects on the market, and on your portfolio.  One way to avoid that volatility is utilizing principal protection products … safe, simple, and reasonable rates of return.  Call now! 877-912-1919

Please Don’t Say Recession?

Please Don’t Say Recession?

Years of concern over deficits and paying the debt seem to be moving to the forefront. But not just government debt.  While markets continue their historic run, and warning signs have proven not to be a threat to market gains as we have seen in the recent past, there are several recent warning signals whose track record of preceding an economic downturn (i.e. recession) are almost 100%.  As the economy recedes, stocks will go with it.

Last week we discussed the upward movement of oil and how it sends a mixed signal to where the economy may be going next … but it is usually an inflationary signal which ultimately hurts consumer spending.

This week, three critical variables could play a huge factor in where the economy will go for 2018, and whether or not the dreaded “R” word makes its return.

 

I. What are three critical variables that could hurt the economy, and which could drive stocks lower for the remainder of 2018?

  1. “Budget deficit and unemployment going in opposite directions for the first time since World War II”: Not since World War II have we seen the unemployment rate going down … and the budget deficit going up!   Goldman Sachs lists this inversion as the most dangerous trend for the economy this year, and almost assures us of breaking 3.5% on the Fed funds rate.  Needless to say, servicing the debt becomes problematic as the Fed funds rate goes up.
  2. “Yield curve inversion on the near horizon”: The spread between the 2-year Treasury note and the 10-year Bond is at its lowest since 2008 … only 40+ basis points.   If the spread turns negative, this is called a “yield curve inversion.”  Bottom line, the last 7 times the yield curve has inverted, we entered a recession the next quarter.
  3. “Checking account balances and savings are highest since 1991”: Typically, when people believe things are going well, they spend more and save less.  When they fear things are going badly, or that they will in the near future, they save for the proverbial “rainy day.”  As of May 1st, the average checking account balance in the United States is $3,700.00!!!.  That number was last seen in 1991.  The median average for US checking accounts is typically around $2,300.00, and it shrunk to its lowest on record in 2007, at $900.00 on average.  Yes, Americans have cash on hand.  The problem is, if history is a guide, that shows fear, not confidence, in the future.

 

II. What are three factors that support continued economic expansion and stock market growth in 2018?

  1. “Trade fears are diminishing”: While there are major sticking points to NAFTA renegotiation, and Chinese/American competition can alter the entire global marketplace, there is a sense among most analysts that any trade complications is baked into current stock prices.  US industries, so far, seem to be taking trade conflict in stride.
  2. “Low unemployment means businesses are confident”: For the first time since December 2000, there are as many job openings as those counted as unemployed.  That is an unprecedented accomplishment for President Trump and his policies.  Businesses are confident, and that means businesses are hiring.
  3. “Market remains on a winning streak”: Sometimes momentum can propel stocks, and economic expansion, all on its own.  We may be in such a period, since there are headwinds in front of us as described above yet we keep seeing record numbers across the economic spectrum.

There are more headwinds, and also more positives, than just one blog can cover.  But it is enough to see that certain variables have a near full-proof record of predicting economic downturns and knowing the right time to “time” the market is a difficult risk to measure.  Having your money safe in the first place is one way to mitigate against such risk.

Call now! 877-912-1919