Your savings didn't do so well this past decade.

In the 10-year time frame ending Sept 30, 2009, this chart shows how the U.S. stock indices (and your money in them) performed - not a pretty picture.  Your "certified" financial planner has probably told you that over a decade stocks increase 12% on average.  Now you know what kind of advise you have been getting.

By keeping the interest rate low, the Federal Reserve has created all sorts of problems for the U.S. economy.  Not the least of which is depriving hard working, hard saving American families of a safe investment vehicle, such as FDIC insured bank accounts, in which they could deposit their money and earn a decent interest in return.

Without real interest-bearing accounts, Americans deposited their savings and retirements in the U.S. stock market and have lost an entire decade. 

So a penny saved is a penny earned but not much more.  For many Americans this means that retirement is much further off then they thought.

U.S. Markets Head for A Crash

U.S. stock markets and institutional investors and traders wanted desperately to forget about Oct 2008 and the year-long pain that ensued. For them the Dow was back up and they wanted their bonuses. They did not care that careless decisions made by banks and insurance companies had brought the U.S. economy to the brink of total collapse and resulted in the greatest economic downturn since the Great Depression of the 1920s and 1930s.

The likes of JP Morgan Chase and Goldman Sachs had off-loaded bad loans to the government (i.e., Bear Sterns) and had changed their form of incorporation to benefit from the government bailout (as did Goldman when it gave up its investment banking classification to become a commercial bank) and they were sailing free.

Then in December 2010 came the election for a U.S. Senate seat in Massachusetts held by the Kennedy brothers for half a century. When the results were in, a Republican had won and joined the all Democratic Mass delegation.

The election served as a wake-up call for the President who realized that his financial advisers (Larry Summers and his protege Tim Geithner) were out of touch with the anger the American people held for what the banks had did to their jobs and retirement savings. The president realized that the people correctly saw that the banks were sailing free while they, the people, were feeling the pain.

The president remembered the words of a past Chairman of the Fed Reserve (Paul Volker) who had argued for the reduction in the size of banks and for the elimination of "casino-like" operations at the banks. The president called a press conference to let the banks know we was ready for a fight to change their ways.

The bankers realized they weren't smooth sailing yet.

The champions of the banks (Bernake, Summers, Geithner) started to worry about their jobs.

And the markets and investors headed for the exits.

Observers started to wonder if we would see a crash when markets opened on Monday.

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US Market (Dow) past 1 month (as of 1/22/10)












US Market (Dow) past 1 year (as of 1/22/10)

U.S Govt Tries Again, This Time FDIC Gets Involved

W.C. Fields is supposed to have said: "If at first you don't succeed, try, try again. Then quit. There's no point in being a damn fool about it."

This quote came to mind today as I was reading the new plan announced by the U.S. Treasury of Secretary Tim Geithner to buy what has been dubbed "cash for trash", the trash being mortgage-backed securities.

The new plan now gets the FDIC involved - why jeopardize the stability of the FDIC? The only reasons I can think of are: 1) everyone else is already involved - U.S. Treasury, Fed Reserve, Fannie Mae, and Freddie Mac; and 2) it's a source of new cash, i.e., the FDIC's credit lines with the Treasury which ultimately means more sales of U.S. Treasuries.

But how much more borrowing can the U.S. do?

As President Obama said on "60 Minutes" last night: "The limit is our ability to finance these expenditures through borrowing. . . . If we don't get a handle on this, and also start looking at our long-term deficit projections, at a certain point people will stop buying those Treasury Bills."

Private investors are cheering, sending the U.S. stock indices skywards today. And according to a source quoted in "The New York Times":

"One institutional investor said he was surprised that the government was lending so much of the money, saying that private investors have been willing to buy up pools of mortgage-backed securities with less “leverage” or outside borrowing than the Treasury proposed on Monday."

Now, the investors bidding up the stock market aren't the same ones buying U.S. debt. The stock market investors are happy today because the new plan gives them terrific leverage to make more money. Here's the example the U.S. Treasury gave today:

A pool of bad residential mortgage loans with a face value of, say, $100 is auctioned by the F.D.I.C. Private investors submit bids. In the example, the top bidder, an investor offering $84, wins and purchases the pool. TheF.D.I.C. guarantees loans for $72 of that purchase price. The Treasury then invests in half the $12 equity, the private investor contributes the remaining $6.

So for just $6, private investors will leverage $100 with backing from the tax payers. The only thing they have to lose is $6 but if that $100 loan package goes up in value to say $110, they benefit from $10 in profit. Of course some will go down too. But let's say it's 1/2 down, 1/2 up so that's $4 profit in this exmaple between the two, won't the govt get some of the upside? Well, AIG, Bank of America and other s paid out big bonuses but did they repay any of it to U.S. taxpayers? No. So the likelihood of any of the upside being shared is pretty low.

Stock Market Keeps Falling and Falling

All U.S. stock market indices fell again today. The Dow is now well below 7,000, down more than 50% off its all time high. Lots of "smart" talking heads on TV are wondering about how low it can go.

Let's look back to 1929. The chart to the right shows that after hitting a peak on Sept 3, 1929, the stock market did not bottom out until June 1932, some 30 months later. When the carnage stopped, the S&P was off by more than -80%.

How low will the stock market go this time around? We're about 17 months into this bear or down market (peak in October, 9 2007) so we may not know for some time to come.

[Chart: NYT.com]

Consumer Confidence All-time Low, Stocks Rise Sharply

American consumer confidence hit a historic low today. Or at least so says a survey.

(Background: The Conference Board reported today that its February consumer confidence index fell to a historic low. The survey is based on a sample of 5,000 U.S. households. The monthly survey is conducted for The Conference Board by TNS, a very large Dutch media company.)

How low is confidence? The # cited in the survey is 25, in 1985 it was 100.

Another survey of sorts, the stock market, rose sharply this afternoon. The Dow Jones Industrial Average rose 3.5% (and climbing) as of around 3pm Eastern Time (US). Yes, that's a huge turnaround from yesterday.

Was there any other news? Yes, one thing, Fed Reserve Chairman Bernanke said he doesn't think banks should be nationalized even though the biggest among them (Citi and Bank of America) are worth less than the billions the U.S. government gave them as part of the TARP plan.

Mr. Bernanke had no other solution to offer.

So what's going on here? Answer: no one really know. Sure there will be a lot of talking (heads) on CNBC and Bloomberg and headlines in tomorrow's newspapers about the stock market rebound, but there really is no reason for enthusiasm. The insolvent banks are still insolvent and there is no solution on how to make them healthier.

“The measures taken by the Federal Reserve, other U.S. government entities, and foreign governments since September have helped to restore a degree of stability to some financial markets.” - Mr. Bernanke

With what can only be called "irrational exuberance" Mr. Bernanke's comments seems to be following in the footsteps of his predecessor - blind belief in the ability for things to work themselves out.

Still Holding Stocks? Financial Advisers Now Say Selling Not Bad Idea

"But if you see your portfolio shrinking, there comes a point somewhere between comfortable retirement and needing to eat dog food where your circumstances tell you to stop the bleeding."

- Quoted in in SF Chronicle business column

After years and years of telling average investors to stay in the market, the financial advising community has now started to change its tune. It's a little late for that.

Will the Stimulus Bill Create Jobs?

"Technology that helps fewer people get more work done may be good for the economy in the long run, but it makes extra workers redundant."

- Saul Hansell, Bits columns, New York Times

Saul's quote is from an article he wrote on whether the money going into rural broadband building as part of the $787 billion stimulus package will create jobs.

I think the answer depends on smart industrial policy - something the U.S. does not have and is the only industrial country that does not. It was not always the case.

U.S. industrial policy at one time built the telephone system, Social Security system, interstate highway system and Internet superhighway. It is also what the U.K. recently announced as part of "Digital Britain". And what France announced in bailing out its domestic car makers. The reason the U.S. doesn't have a smart industrial policy is because of almost 3 decades of unbridled free market economics also know as Reaganomics.

Free market economics as practiced by the U.S. is now dead. It has ruined the global economy thrown millions out of work and destroyed prosperity. All hope now rests on the Obama government or more accurately on Obama himself. His job is to convince Americans that a new way must be charted. It will not be easy. He is off to a good start.

As I'm writing this blog the U.S. stock market fell in intra-day trading to the 7200 level today. That's 7,000 points off the 14,165 all time high reached on October 9, 2007. Lot's of people have made money during this fall; their names end with with "Madoff" and "Stanford".

[See chart above.]

Speculators have existed from the days of the Silk Road. But today crooks and their accomplices have caused more harm to the lives of millions of people than any natural disaster. It doesn't have to be this way.

A smart policy about how to spend the $787 billion can direct money into job creation and arrest job loss. Governments as far away as France, China and Singapore know how to do this. Surely we can too.

The stimulus money can create jobs, but it needs a smarter more well-coordinated industrial policy to accompany it.

The Lost Decade - Where Did My Savings Go?

Unfortunately, we all tend to learn our lessons after the fact.

The one we are learning now is that "investing" into stocks is risky behavior. For many Americans, looking at their retirement account is like 1995 all over again - all those gains have evaporated.

I think we'd all be better off if we called "investing" by what it really is: buying financial products.

The word "investing" puts a twist on "buying" that takes all common sense out of our decisions. We start to think that when we "invest" we are doing something more grand, more guaranteed if you will, with less chances of failure.

If someone said to you: "Jane, would you like to buy a mattress" you would ask a lot of questions. How does the mattress compare to others on the market? Is there a guarantee against defects? Who makes the mattress? Now think about how many questions you ask when a "financial adviser" says you should "invest" in a stock.

Now if you would just substitute "financial advisor" to "salesman" and "invest" to "buy" think about how that changes the dynamic. You'll ask a lot more questions and keep more of your money.

Everyday more of us are realizing that the stock market is not a strategy for retirement at all, it is a Ponzi scheme which leaves hardworking savers holding the bag.

How did we become so enamored by the stock market? We'll cover that next time.