Part II: Ten Years Ago, The World Changed

Part II – Ten Years Ago, the World Changed

This is part II in our three-part series remembering the 10th Anniversary of the 2008 Financial Crisis (view part I of the series here).  This week, we look at the month of August of that year and the big events which represented the closing days of the real estate boom.

It was real estate, and the government’s intervention into that market, that drove the collapse of the banks in that year.  It was not too little government, but too MUCH!  President Jimmy Carter signed, and President Clinton extended, a law known as the Community Reinvestment Act (CRA).  This law required banks to loan sub-prime into communities which had bad credit, eliminating the bank’s risk calculus and making the government liable for the debt when Fannie and Freddie bought the paper, or in general, as banks have FDIC insurance to cover accounts.   Failure to loan into bad credit neighborhoods, and the government could revoke your bank charter.  With implicit government guarantees on the debt, the banks happily extended loans to people who would not be able to repay them.

This, by itself, was just one of many issues that had deformed the real estate and bank lending markets.    The one regulation which may have helped – Glass-Steagall – had been repealed by Clinton with Republican support in 1999.  This allowed bank traders to use regular bank depositor funds to trade in the stock market.  Resourceful capitalists that they are – Wall Street began bundling bad credit loans, known as subprime, with good loans in what was known by few as “mortgage backed securities” (MBS Bonds).

When the bad credit loans’ adjustable rate mortgage adjusted upward in the early to mid-2000’s, these people stopped paying.  The bad debt was mixed with the good debt in the bonds as stated above, and Wall Street began to sell them….rapidly.  Those holding the notes – banks and the government – began to see massive losses.  Those who insured the bonds began to receive massive claims they could not cover……you remember what happens next, we cover it in the final Part III next month.

So how did markets and money look in August 2008 – not pretty:

The 4 BIG events in August 2008 which headlined the ongoing financial crisis of that year:

4. “Global Banking Giant HSBC announces 28% drop in profits”: As earnings reports were released that first week of August, HSBC was hemorrhaging money and suggested in a note to clients that the economy was projecting to be the “…worst we have seen in decades.”

3. “Another global bank announces a suspension of withdrawals”: August 10th BNP Paribas announces in a press release that they were suspending all account withdrawals “…because it cannot value the assets in them, owing to a complete evaporation of liquidity…” in the market.  While the biggest shoe to drop to date – the first withdrawal suspension of the crisis – the markets were rather melancholy in response.  They would trade in a 200 point range the remainder of the month.

2. “Geo-political crises are rampant across the globe”: Russia has invaded Georgia … President Musharraf resigns in Pakistan, setting off protests in the streets … the Baltic States – Latvia, Estonia and Lithuania – enter a steep recession which begins migrating through eastern Europe … Al Qaeda launches simultaneous attacks in Afghanistan and Iraq … the financial crisis was one of many that were striking at the confidence of Western society.

1. “Nationwide Insurance reports real estate prices slid 10% just in the month of August”: In one of the steepest declines of the on-going crisis, Nationwide reported a 10% drop on August 28th.  It appeared to be what would force the water over the dam, and it was one of the many factors that would – on 8/28 we were less than two weeks from the Lehman Bros. collapse.

America’s Democratic party would nominate Barack Obama as their nominee this month 10 years ago, and the American team was on their way to winning another overall medal count at the Summer Olympics in China.  The economy was struggling, but we were completely unaware of what was coming soon.

Or were we?

As has been well documented, many traders had been forecasting doom for over a year – Michael Bury, Gregg Lippman, Steve Eisman and Ben Hockett were preaching for well in advance that the system was corrupted and the banks were over-extended.  They were ably portrayed in the hit 2015 movie titled “The Big Short,” based upon the book of the same title.  They were not the only ones – our firm’s “safety first” clients experienced ZERO losses, and started the climb back up with their portfolio 50% ahead of those who remained in risk associated assets.

New clients in the months that followed were often represented by the money manager in the home being dragged into the office by the ear, and when asked if they were ready to get into a principal protection product, they would offer some resistance – the remnants of the “I know better” mentality of the easy money era, only to receive an immediate “Shhh!” from the other spouse.  This was the classic spousal refrain you could see in each couple sitting at the table in the days and months that followed the collapse:  “…You screwed things up listening to Wall Street, now I am making sure we don’t lose the rest of it.”

 August 2008 had some precarious moments, but was really the calm before the storm.  Part III will follow in September with our examination of what would become the biggest financial crisis in recorded history.

Booming Economy vs. Looming Debt

Booming Economy vs. Looming Debt

Last week we described a soaring GDP number and that there looked to be multiple factors supporting continued growth.  It was a series of great datapoints that have been a constant since the election of President Trump!

This week, however, the US Treasury reported soaring debt sales topping the previous high from March.  Many standard conservative deficit hawks bemoaned the soaring debt, which some reports are now showing well above the 100% of GDP – that usually means a debt crisis is coming.

Sales of US Treasuries are needed to fund the US government’s fiscal deficits, as our government’s budget has been woefully unbalanced for decades.  There was a four-year period from 1998 through 2001 in which the budget was balanced, encompassing the last three years of the Clinton Administration and the first year of the Bush Administration.  Those 4 years saw budget surpluses and a brief moment of hope that we would begin to pay down US debt.   Before 1998, there was one year under Nixon (1970) the budget was balanced, and then again in 1960.  Prior to the Vietnam War, the US regularly ran a mix of budget surpluses and deficits during peace time (Peace being the operative term – enormous debts were run up during both World Wars).  The permanent deficit, however, has become a fixture of the 21st century.

There are arguments pro and con regarding the importance of debt and deficits – Japan’s debt is 200% of their GDP… China has trillions in debt … France, Canada, Spain, and Britain all have higher debt-per-GDP numbers than the United States.  But America is the central player in the global economy.  Our debt load matters.

Or does it? 

 There remains a deep and liquid market for the sale of US Treasuries, and a very high demand for US debt.  As Eric Souza, senior portfolio manager at SVB Asset Management in San Francisco, recently stated: “From an absolute yield perspective, where else are you going to go?”   You apparently cannot satisfy the global appetite for US Treasuries.

If the market-makers are not worried about US government debt, what DOES worry them?  Not much – of all the global economies, the US remains the primary destination for investment.  But some of the issues that remain a background concern include the following:

If US Debt Is Not A Concern For The Market, What Are The Top 5 Issues Right Now That Worry The Investment Community?

 5.“Federal Reserve rate hikes”:  Rate hikes make the dollar stronger dollar, they hold down inflation – lots to like about the Federal reserve raising interest rates.  But it will squeeze money out of the market, as investment dollars chase yield with safer downsides.

4.“Decline in US Worker productivity”:  US worker productivity is up, but the gains are lower than projected.   It is currently the highest on record at 109.5 units per hour/per worker year over year, but the last decade has been the lowest on record – since we began keeping such data in 1947  .  Analysts fear there is not much more we can squeeze out of worker production, and with an aging population, that can be a dangerous combination.

3.“Inflation – the data point that always cries wolf”:  We have preached the dangers of inflation ever since the Obama Administration launched his stimulus package, Obamacare, and years of trillion-dollar deficits.  Yet the inflation never came … until now.  Inflation has been steadily rising throughout 2018 – from 2.0% to now 2.9%.  There is a tipping point on consumer prices, not a question of “if,” only “when.”

2.“Gas Prices keep going up”:   A corollary to inflation, and like inflation, rising gas prices can mean profits and rising stock prices for energy companies.  That benefits retirement and 401K portfolios.  But there is a tipping point for the consumer, when gas prices begin to eat away at their disposable income.  Once that happens, GDP will be negatively impacted.

1.“Trade War with China”:  The Trade War boogeyman doesn’t go away.  Yet, America is uniquely positioned to win trade conflicts.  Disputes always favor the nation running the trade deficit, since they are not reliant on exports for GDP growth.  Further, short term complaints from specific industries hit by tariff’s will increase the political pressure on the President, but long term we are well positioned.  America is the only country who has access to all self-reliant resources such as arable farm land, energy, timber, rare earths and drinking water.  Combined with a global network of allies such as the EU (recently joined with Trump to avoid tariff conflicts for now – in a direct rebuff to China), it is unlikely the United States would find substantial long-term negative impacts and would easily win a battle over trade.

In conclusion – GDP is soaring … economic indicators are through the roof … and the typical US debt offering did not cause a calamitous drop in US markets.  Despite all the potential headwinds, including long term debt service, things remain on an upward trajectory for the US economy.

Call now to get your money in a place where you can achieve growth and still maintain downside protection from stock market fluctuations. (877) 912-1919


Top 5 Reasons 4.1% GDP Growth is Just the Beginning!

Top 5 Reasons 4.1% GDP Growth Could Be Just the Beginning!

The top-line Gross Domestic Product (GDP) number came in for the second quarter last week, and it beat most analysts expectations with a resounding 4.1% of growth reported.

US GDP growth under President Trump so far has been below average – for Reagan standards – but extraordinary as compared to the economic numbers since the post-2008 crisis.   Furthermore, the growth has been more reflective of actual business activity – job hiring, business expansion, sales and wage growth – as opposed to government debt and banks buying and selling one another’s own stocks with borrowed federal dollars.

As we have commented in these blogs many times:  GDP growth based upon business expansion is “real” GDP growth; growth based upon zero interest rate policies and banks borrowing funds to buy other bank stocks – that is “artificial” growth.

Artificial growth still drives paper assets and markets, so your 401(k) will certainly benefit.  But you will not – and did not – see wage growth, employment growth, or real capital investments and marketplace expansion.  Therefore, growth fueled by monetary policy will be anemic, and it will be deleveraged at some point in the future.

Many analysts are claiming this is a “one-off” and 4.1% cannot be sustained.  The evidence they use is a surge in soybeans and other products above the year-over-year numbers as suppliers are afraid of Chinese retaliatory tariffs.  (This evidence is substantial:  last year’s soybeans sales increased 4.8% in the second quarter… this year was a record-setting 29% increase in sales).  But such anecdotal data ignores the larger trends and off-setting data, such as potentially increased soybean sales to Europe in the next quarter as part of a larger EU/US trade negotiation.

So, what are the primary reasons for optimism that 4.1% growth is just the beginning of great things to come:

Top 5 Reasons 4.1% GDP Growth Could Be Just the Beginning

  1. “Energy stocks did well in second quarter”: Headlines included “Energy stocks put up blowout numbers in second quarter” (CNBC) and “Energy topples tech as top sector” (Wall Street Journal) rippled across the media as the second quarter drew to a close.  The irony being that higher oil prices – typically bad for the consumer – can also provide at the same time positive signals, such as growing demand and stock appreciation for energy companies.  Gas prices can dampen consumer sentiment, but we are not at that inflection point.  The inflection point we are staring at is rising consumer demand, rising energy output, and rising valuations for energy stocks.  That is the win-win sweet spot which can give market watchers optimism in quarter number three.


  1. “Wages had their largest increase in over a decade”:  Keynesian followers who regularly preach in the media the “secular stagnation” argument harken back to the 1970’s to claim that as the last period the American worker saw an actual increase in wages.  This is, of course, untrue.  But, it does not mean that American workers rightfully recognize that their dollar does not stretch as far as it used to, and it has been more painful and difficult to “get by” as a middle-class family.  But at the end of June real wages had risen by 2.8%, their largest such increase in over 10 years. (US Dept. of Labor; BLS)  Simply put, most people made more money and had more disposable income in their pockets.  Those are real world numbers with a real-world impact – wages outstripping inflation.  This is strong data to support an ever-expanding GDP number moving forward.


  1. “Tax-reform has worked and is working”: Case in point #4 above.  Make no mistake, tax reform has allowed companies to pay workers more, to hire more workers, and to invest in capital expenditures.  We would have preferred flatter rates, combined with government reform needed to bring down spending.  But the basic, fundamental expectation of tax reform was to free up capital and labor for business expansion.  That did, and has, worked, and the after-effects are just now rounding into shape.  Tax reform will continue to increase GDP numbers for the remainder of the year.


  1. “De-regulation continues”:  Just one word, a hyphenated word, but one word can best describe the mountains of cash companies have made in their earnings reports, and are bringing home from overseas, and in monthly increases in consumer spending.  The repeal of Dodd-Frank empowered small regional banks to start lending again.  Energy – the most dynamic and vibrant of all sectors of the economy through the second quarter, greatly benefitted from deregulation and the lifting of drilling restrictions.  You could almost say “it’s morning in America again!”  If large sectors of the economy are free from government intervention, then this will keep the upward GDP momentum going.


  1. “Consumer confidence is driving business sentiment”: There will be no greater driver of continued GDP growth for the remainder of 2019 than business sentiment.  Whether to invest in capital, invest in new hires, increased wages, inventory expense, business expansion…..all is driven by what the business owner believes is waiting for him/her in the future.  Consumer confidence was up in the last quarter, and that was seen in the retail sales number.  If sales are up, business sentiment will be up, that is the business cycle in micro form.  If businesses are feeling good, expect a good second half to 2019.


Trade conflict and foreign policy concerns could derail upward GDP numbers, as could a negative outcome from the Mueller probe.  Inflation and gas prices can move beyond the inflection point and begin to damage consumer pocket books.  But our top five reasons are strong indications that GDP growth could easily top the 4.1% mark we saw in the second quarter as we move towards the end of 2018.

Call now to get your money in a place where it can achieve growth with this excellent economy but still maintain downside protection. (877) 912-1919