Now that the effects of the first economic stimulus package are wearing off and consumer spending is dropping like an anvil, taking America’s economic prospects with it, how long will it be before we see the next brilliant economic stimulus package? The government seems intent on avoiding a recession at all costs, so it seems almost inevitable that a second stimulus package will be unleashed, especially if Obama takes office.

Democrats in House are pushing for more economic aid to be sent out, but in this version they want to see money sent to local governments along with infrastructure improvements and assistance to certain families and workers in need, according to the Economist. Their proposal totals around $50 billion. So far President Bush seems intent to avoid another stimulus package, but who knows if he will change his mind or not. In all likelihood, though, nothing would happen until early next year, under the new President’s leadership. Since Obama has been pushing for a second stimulus package, it seems that if he is elected we can pretty much expect to see one next year, unless the economy makes a miraculous recovery in the second half of 2008 (not likely). McCain, on the other hand, seems opposed to one for the most part, but with Democrats expected to rule in both chambers, according to the Economist, he might be easily swayed if elected.

If I had to guess, I would say chances are more likely than not that we will see another stimulus package. The question that always comes up in my mind though is, “Who’s going to pay for it?” It seems rather silly to tax people in order to give them money back via an economic stimulus, which means we are going to rack up some more IOUs. What’s another $50 billion when you are already $9.9 trillion in the hole, right?

Labels: Barack Obama, Bush, economic stimulus, economy, John McCain

So what do you get when you start adding to, and then increasing, an investment component in houses? A recipe for a real estate crash, according to well-known investor Peter Schiff. In an article this week, Schiff talked about how during the housing run up people paid increasing prices for homes not because of the shelter piece that they offered, but rather for investment purposes. He offered a rough estimate that during the peak, a $500,000 house might have offered a $250,000 shelter component and a $250,000 investment component. According to Schiff, the shelter portion represented the utility and desirability of the house and the investment side represented the future appreciation. Needless to say, the investment portion is in serious question right now, and since houses still offer the same utility, the investment side is the one that is losing value.

Without the prospects of enormous appreciation like we saw during the bubble expansion, home values still have a ways to fall. If we figure that Schiff’s estimates are accurate, and that at the height of the bubble half the value was shelter and half was investment, then prices could fall as much as 50 percent. Right now they have fallen around 20 percent, which would mean we could be facing up to another 30 percent in declines. Granted, I seriously doubt we will remove the investment piece entirely, so at least in my mind, another 30 percent in declines is probably unrealistic; another 15 to 20 percent, though, wouldn’t be out of the question.

If you want get the full scoop on the other reasons why Schiff says real estate is still not ready to recover, read his article: It’s Time to Get Real about Real Estate. But I do want to point out one other point he makes at the end of the article. Many people think that this housing correction is just one big doom and gloom scenario, and that the people writing about it are simply pessimists. In reality, however, this news isn’t bad for everyone. The fact that housing is becoming more affordable is great news for the millions of people who were stuck renting because they didn’t want to take on an outrageous mortgage payment. It is also great news for all the young people out there who are trying to buy their first homes. If this correction did not happen, it would be nearly impossible for many of these people to ever buy a home, so the fact that homeownership is now a possibility for them has to feel good. Sure, for existing homeowners who are seeing their values decline this news is hard to swallow, especially considering that most of them mortgaged their properties to the hilt, but it most certainly is not bad news for everyone.

Labels: housing bubble, real estate

New York Times columnist Andrew Ross Sorkin proposed that Fannie Mae and Freddie Mac should merge in an article titled, "And They Could Call it Frannie." He stated that by merging, the new company could save billions each year on overhead, among other advantages. The article started by saying this is a “bold” idea, and I would certainly agree with that statement. I for one am certainly not a proponent of a Fannie and Freddie merger, but let’s take a little closer look at Sorkin’s arguments.

Sorkin estimated that “Frannie,” as he calls it, could save around $1.2 billion annually on overhead costs. That savings, in turn, would add about $18 to $19 billion in market cap to the new company overnight. The next savings opportunity comes with foreclosure servicing, where Sorkin estimated that the company could save an additional $300 million annually thanks to economies of scale. Of course, as Sorkin pointed out, one of the results of a merger would be the loss of hundreds--if not thousands--of jobs, but he also claimed that these job cuts are coming one way or another, as Fannie and Freddie look to cut expenses. The biggest benefit, in Sorkin’s mind, is that this merger would lower the likelihood of a government bailout and would cost taxpayers nothing.

Now here is the problem with Sorkin’s plan as I see it: Current circumstances have already shown us that these companies are too big and too powerful. The government has no choice but to back their debt; if they don’t, they know that the mortgage market will collapse, taking the real estate market and economy with it. Fannie and Freddie have repeatedly demonstrated that they operate knowing this government guarantee is there, which leads them to take excessive risks. In addition, both companies have suffered from leadership issues over the years. By combining these companies into one giant company, some risks would be increased. If the two companies individually already had too much power, how much power will they as a merged company have? How much increased leverage will this mega company have over the government of our country? The leader of this new company would instantly become one of the most powerful people in America. What happens if this leader turns out to be bad? If this company failed, it would most likely be a death blow to the economy and would pose a serious threat to our political stability.

We don’t need one mega company; instead we need to split these companies up. Just as it is good to diversify investments in order to spread risks, we need to think in the same way about these companies. We need to make it so that if any one of the companies fails, it doesn’t have as much impact on the country as a whole. We need to spread out our risk. Sure, this plan would likely lead to increased mortgage rates, as the smaller companies would lose the government guarantee, leading investors to demand somewhat of a premium on the debt, but the government shouldn’t be guaranteeing this debt anyway. In the short term this plan would require some adjustments, but considering the long term, it is the best solution.

Labels: economy, Fannie Mae, Freddie Mac, real estate

The New York Times published a compelling opinion piece this weekend written by Alan Blinder, an economics professor at Princeton and Democratic advisor, titled, “Is History Siding with Obama’s Tax Plan?” In his article Blinder uses historical figures to make the statement that Obama’s tax policy will be better than McCain’s. On the other end of the spectrum, the Wall Street Journal published an opinion piece this morning by Martin Feldstein and John Taylor, economic professors at Harvard and Stanford and advisors to McCain, titled, “John McCain Has a Tax Plan to Create Jobs.” Both articles make great points, but the authors are obviously biased. So who are we to believe? Which Presidential nominee ultimately has a better tax plan?

Of course, what candidates say in a campaign and what they do in office can be completely different, but even if we assume that the winner will follow through on his tax promises, we can only make an educated guess. McCain plans to keep the existing Bush tax cuts in place, which will help wealthy Americans and investors who pay capital gains taxes. McCain also wants to cut business taxes among other things, which Feldstein and Taylor believe will create jobs, spur growth and benefit virtually everyone. That certainly sounds lovely, but Blinder makes some great points that seem to counter such praise of McCain’s plans.

Blinder makes the case in his article that Democratic Presidents have greatly outperformed Republican Presidents while in office, economically speaking. From 1948 to 2007 the U.S. economy has grown 1.64 percent per year under Republican Presidents and 2.78 per year under Democratic ones. Blinder estimates that this difference in growth over an 8 year period would mean an additional 9.33 percent of additional income for every American. Blinder then goes on to point out that income inequality widens when Republicans are in office and shrinks when Democrats are in office. This point of course is fairly obvious given the policy of Republicans and Democrats, but worth noting nonetheless.

So where exactly does this leave us? One article focuses on the future, while the other focuses on the past. Can one really look at the past as an accurate predictor the future? The past certainly does not guarantee future results, but by what other means can we make projections?

Blinder’s article had the bigger impact on me because he actually supports his points with statistical facts. Whether or not they accurately represent what the future holds for Obama or McCain, they do give us a basis for conjecture. Feldstein and Taylor claim that jobs will be created, but they don’t support this claim with anything. Though the logical side of my brain tells me that tax cuts for businesses will lead to job creation, where is the proof? After reading Blinder’s article one is certainly left to wonder.

Another interesting piece of information I learned watching I.O.U.S.A. was that the national debt has tended to increase at a much faster pace when Republicans were in office. This coincides well with the GDP growth mentioned in Blinder’s article, but also, as pointed out in the movie, is a result of tax cuts. This again leaves one to wonder and even rethink one’s perceptions about the validity of certain tax policy reforms, though one must still question whether the past performances of a few Presidents can accurately predict future results.

Are McCain and Obama likely to follow in the footsteps of past Republican and Democratic economic performance, or are their plans different? Voters must decide for themselves, and I urge anyone who hasn’t yet read these two articles to do so, as they might encourage readers to think more seriously about this issue.

Labels: Barack Obama, John McCain, politics

The popularity of alternative investments has grown tremendously over the past few years. This helped spawn the creation of NuWire Investor, along with many other alternative investment focused companies. No matter how Wall Street tries to slice and dice it, the stock market just doesn’t cut it for every investor. There are lots of investors who want more control over their investments, or the opportunity to invest in things that are outside of the mainstream. Alternative investments are certainly not for everyone, but they are great for the right kind of investor. Since many alternative investments fall outside the mainstream, locating them can sometimes be difficult…enter NuWire Investor’s Opportunity platform.

Our Opportunity platform is still new, and we admit there are some kinks still to be worked out, but it offers a place for Investors and alternative investment providers to come together (for FREE I might add). If you are interested in alternative investments, or if you sell alternative investments, I encourage you to take some time to visit our Opportunity platform.

Once you find an alternative investment you like, then the next question for many people is how you are going to finance it. Some of the more mainstream investments, such as domestic real estate, are fairly easy to finance, but it can become a little trickier with today’s lending climate. Some opportunities that you can find on our site, though, have made arrangements with hedge funds and the like in order to offer investors incredible financing packages. A couple developments are offering 90 percent LTV investor financing (even for stated borrowers) at decent rates. Try getting that from a local bank:

https://www.nuwireinvestor.com/opportunities/go-zone-investment-opportunity--500-nuwire-special-51879.aspx (This developer even offers a $500 discount for NuWire readers--We like those!)

http://www.nuwireinvestor.com/opportunities/walt-disney-world-good-neighbor-hotelvilla-orlandofl-investment-opportunity-in-51873.aspx

In addition, there is also the possibility of using one's retirement funds to buy alternative investments; this structure is called a self-directed IRA. There are several providers that can set up these account structures, with the main difference among them being whether or not you want checkbook control. The largest custodial self-directed IRA provider is Entrust and the largest checkbook self-directed IRA provider is Guidant Financial Group, who recently made the Inc 500 list of fastest-growing businesses, at #384. (Full disclosure: Guidant Financial Group and NuWire, Inc. are owned by the same parent corporation.) Typically, the drawback to the checkbook account is the cost, but some creative developers are offering to pay for clients' self-directed IRA accounts:

http://www.nuwireinvestor.com/opportunities/free-self-directed-ira-account-to-invest-in-orlando-51907.aspx

http://www.mexicorealestatetours.com/mexico-real-estate-ira

Alternative investments are here to stay, and if you happen to be one of those investors who prefer to take more control over their investments, or who just prefer to stray from the ordinary, I urge you to monitor (and add to, if you sell these investments) our Opportunity platform. The more involvement we get from the alternative investment world, the better this website will become. If you choose to take up one of the offers, I also encourage you to come back after completing the transaction and let the NuWire community know how your experience went. You can do this by leaving a comment on the opportunity itself, or by simply sending us an email at info@nuwireinvestor.com and we can pass on the message. We are excited about this new Opportunity platform and hopefully as an alternative investor, you are, too.

Labels: investments, self-directed IRA

The recent news that the U.S. economy grew 3.3 percent in quarter two this year came as a shocking, albeit pleasant surprise to Wall Street. The government had estimated a 1.9 percent increase for Q2 and economists surveyed by Dow Jones estimated a 2.7 percent increase, according to the Wall Street Journal. Has the economy finally turned the corner? Can we finally put this economic mess behind us? Well, not exactly; that thinking is still a little premature.

The economy certainly performed much better during Q2 than expected, but it is hard to say exactly what short-term impact the stimulus package had. In addition, another main driving force behind the growth was exports. With the dollar now gaining value against other currencies and the rest of the world beginning to feel their own financial hardships, it might be a stretch to think export growth will continue at its present pace. Richard Fischer, president of the Federal Reserve Bank of Dallas, was certainly not very optimistic in an interview he had with the Wall Street Journal Monday, “'Growth will taper down...to a snail's pace in the second half,’ and it ‘may be anemic for a while,’ Mr. Fisher said, adding that he ‘could see us approaching’ zero growth during the latter half of the year due to the ‘enormous stress’ created by financial markets, which remain strained.”

It is great news that the economy grew as it did, and especially that our export numbers are up. I, for one, was not predicting the economy to grow this much. I thought the stimulus package would have an impact and that we would show some growth, but my expectations were probably more in line with the government’s 1.9 percent estimates than the actual 3.3 percent that was recorded. That being said, I’m still concerned about the economy and feel as if the worst is yet to come. I see a deficit that is still growing out of control, a struggling housing market, a declining job market and low consumer and business confidence.

The economy is still fragile and any number of things could set it off in the wrong direction. So I’m going to take this news with a grain of salt. I’m happy that we saw some good growth and I hope that we can continue to grow the economy, especially our exports. I’m not going to hold my breath, though, and I’m still going to take due precautions with my investments.

Labels: economy

In a move that already has some getting their mu-mus in a twist, Alabama state has instituted a new annual fee for obese state-workers to offset lost productivity and high insurance costs. The fee is only $25 dollars for the year, which is half of what some smokers pay per month at companies and in state offices around the country because of their habit. Still, some are calling the new policy oppressive, even “Big Brotherish,” which I think we all can agree is hyperbolic and malapropos, not to mention ironic: By name alone, Big Brother would seem a kindred spirit to the “Big Boned” lot.

To other state workers, however, this sort of kick in the rump is long overdue; Alabama is at critical mass, with over 30 percent of the adult population now obese, second only to Mississippi and eking just ahead of Tennessee in third place. If weight is not curbed soon, this generation and those that follow will be facing astronomically higher incidences of obesity-induced diseases, bringing higher health-care costs to companies and the state, higher mortality rates and less productivity. In areas where the economy is already sagging like an unsightly mudflap, the situation is dire.

The issue at hand only becomes more complex, larger and jigglier as one considers it, for the bathroom scale only tells a portion of how obese individuals’ eating habits impact their lives. Most overweight people are not packing on the pounds by eating leafy greens and fresh fruit, but rather high-fat, low-quality foods. One must remember that this is often not by choice; poorer communities have the least access to fresh, healthy foods and frequently subsist on fast food and pre-packaged snacks which per serving have 1 percent of one’s daily required nutrients, 100 percent of one’s daily fat allowance, and 1000 percent of the trans-fats, pesticides, rat hair and roach droppings that one would ever wish to consume. In other words, obese individuals may ultimately be accountable for their own weight, but the infrastructure and culture that surrounds them makes it all too easy to pack on those costly pounds.

There is a lot of sensitivity surrounding the issue as well, and those who will be affected are already lowing at the gates about the unfairness of the situation. The main complaint among the policy’s detractors is that obesity is caused by health problems and heredity over which obese individuals have no control; therefore, these individuals should not be hit with a sort of “fat tax”, unlike smokers, who choose their unhealthy habit.

This argument is particularly weak, but I can see both sides of the issue. For kicks and giggles, let’s look at a point-counterpoint breakdown of some of the controversy surrounding obesity.

In the end, the fee is so minimal that no one’s wallet will be hurting for it, though a few feelings may be hurt. As the fee is also only annual, it will soon be forgotten and thus provide little motivation to people to lose weight. Furthermore, the fee is discretionary, and if an individual is putting forth a genuine effort, it can be waived.

The one last worrying aspect of this is that it creates one more precedent of what one might call a lifestyle tax. Though I personally would like to see fees levied against people who overuse the word “synergy” or sound effects in Power Point presentations (the mental anguish caused by these infractions does indeed cause lost productivity), I wouldn’t legislate these things for fear that I might one day be nickel-and-dimed by my own foibles and lifestyle choices. After all, if I want to drink a little paint when I kick back and play Russian Roulette at the local leper colony, I may be putting my health at risk, but that’s my business, thank you very much.

I’d love to hear from huskier readers what they think. Is this sort of policy motivational or degrading? Leave a comment and we’ll chew the fat.

Labels: Alabama, fat tax, healthcare, insurance, taxes

In a bit of bright news for the ever-gloomy housing market, Freddie Mac’s debt sale yesterday went better than planned. Freddie was able to sell $1 billion of 3 month bills and $1 billion of 6 month bills with relative ease, according to Reuters. This debt sale went over much better than the company’s last offering earlier this month, despite all the talk about a possible nationalization. This is great news for the real estate market because a poor showing at this debt offering would have led to higher mortgage rates for borrowers, which would have led to even more pressure on the floundering market. Fannie Mae’s debt offering is scheduled for tomorrow, so we shall see soon if they share a similar success.

Personally I have not been very high on Freddie Mac or Fannie Mae, and while it is a good sign for the companies that their debt offerings are still attractive, It does not cure the bigger problems plaguing the companies. The own a lot of mortgages on properties that are losing value. If values don’t correct soon, then they are going to face a huge number of defaults. I think we’ve seen pretty clearly that when people are upside down on their houses, they lose the incentive to pay their mortgages. The trend of how many people are going under is alarming, as evidenced in yesterday’s post about underwater homebuyers.

As long as the companies can continue to sell their debt at cheap rates, they should be able to weather the storm. The question is, how much longer will investors be willing to buy their debt? It is certainly encouraging for the companies that investors seem as confident in the debt offerings as they are despite the negative publicity, as this latest offering has shown. Investors must be under the assumption that the government will step in and save the companies if need be while still honoring each company’s debt obligations. The majority consensus about financial minds seems to be that if the government ends up nationalizing the companies it will indeed honor the debt, but would probably wipe out shareholders.

The result of this latest debt offering was definitely a positive for the housing market, but we will have to see if investor sentiment remains strong through the next wave of bad news.

Labels: Fannie Mae, Freddie Mac, housing bubble, mortgages, real estate

2006 marked the peak of the housing market, and those who bought a home in 2006 likely owe more on the home than it is worth. According to a report issued by Zillow, 45 percent of all 2006 homebuyers are underwater, and almost 60 percent 2006 homebuyers in the West are upside down in their mortgages. The Western region of the U.S. has been hit the hardest, followed by the South, Midwest and Northeast. Of all the homes across the country--not just 2006--13.9 percent now have negative equity. The West leads with 18.2 percent of their homes having negative equity. The scary thing is that these numbers are expected to rise.

Zillow’s report predicts the peak for the percentage of homes with negative equity will be sometime around quarter two of 2009. According to their projections, the country will peak at around 16 percent. In the West, they foresee the peak at around 25 percent. This is an incredible number to think about. This would mean that one in four homeowners, regardless of when they bought their home or how much they put down, would be upside down on their home. This is obviously going to have a dramatic impact on people’s perceptions of their financial well-being. That will lead to lower spending, increasing the pressure on our economy, as well as more foreclosures as people cut bait and walk away.

On a positive note, existing home sales rose in July, exceeding expectations, but inventories grew and prices continued to drop, according to the Wall Street Journal. So the positive is that demand for homes is starting to return somewhat, but with more homes entering the market, that demand is not going to be enough to raise prices.

I think that the new housing bill, with its homebuyer tax credit and other aids, will help the market rebound, but it isn’t going to be enough to right this ship. This correction still has some fuel in its tank. There are also a few potential catalysts that could add more fuel to the fire, such as a Freddie and Fannie rescue/collapse and a possible recession with large job loss. If either of these things were to happen, not only would the predictions of a 2009 housing market bottom fall short, they could fall short by years.

Labels: economy, Fannie Mae, Freddie Mac, housing bubble

I had the pleasure of attending the premier for the film "I.O.U.S.A." last night, and it turned out well. Obviously the message they were trying to get across is that the country’s economic situation, specifically our debt load, is perilous and something needs to do done quickly to address it. What is echoed throughout the movie is that if something is not done, our kids and grandkids are going to be the ones paying for our indulgences. The film does a good job of pointing out the four main problems which are going to create the deficit and it was interesting to hear some of the solutions proposed in the round table discussion afterward.

The four main factors contributing to the deficit, according to the film, are budget, savings, trade and leadership. I think most people reading this blog are probably already aware of the budget and trade deficits, but the other two garner less attention in relation to our debt problem. Savings, or should I say the lack thereof, are a huge issue in this country. For the last couple years, our savings rate has actually been negative; as a country, people are spending more money than they make, which is a recipe for disaster. Not only is this going to leave us ill-equipped for emergencies or retirement, but it also means that we are becoming that much more reliant upon other countries. If we aren’t saving, that means we are going to continue to increasingly need savings from other countries to finance our expenditures. The problem with this is that it leaves us politically vulnerable, along with everything else that comes with debt.

The biggest of the four factors, though, is leadership. This point was hammered in again and again throughout the movie and in the round table afterwards. In order for us to effectively address this problem, we need to get leadership in place that is committed to solving it. The most important leader, of course, would be the president, but leadership in Congress is also vital. How are we going to get leadership in place that is committed to this? The people have to empower them. We live in a democracy and the people have the power to elect to office individuals who represent their values. Until we demand action, there will be none. Right now all that leadership is hearing is that we want lower taxes and any other handouts we can get, and until the people change their view, leadership will not change theirs. Ultimately in a democracy leadership echoes the voice of the people. For much of the movie, the filmmakers followed the “Fiscal Wake-up Tour” which is dedicated to bring the message of change to the people. As the movie showed through interviews with numerous people, the reality is that the average American has no clue how bad this problem really is. Before the people are going to stand up for change, they first have to understand why change is needed. This is the goal of the “Fiscal Wake-up Tour” and really should be the goal of every American.

I think this movie is a great start towards alerting the public of the problem. Unfortunately, I think the people watching it are the ones who already understand the problem. We need to figure out how to get this message to the masses who otherwise don’t know or don’t care. I think a start would be making this movie freely available on the Internet so that it could be sent around virally and hopefully get the attention of enough people to make a difference. I think that the movie will do a better job than any other medium out there at getting people fired up about this topic. I applaud the makers of "I.O.U.S.A." and I sincerely hope that their film is distributed to enough people that it can make the impact I think they are hoping for. If you haven’t already seen it, the film is definitely worth the time to go see. When you go, though, make sure to bring some less financially savvy people, too; it might be just the wake-up call they need.

Labels: economy