Undressing the Financial Markets
In writing this particular post I have drawn from my considerable experience in the Financial Services Industry. This is an industry that I worked in for over 25 years. As many of you know I am currently a licensed mortgage loan officer in the States of Nevada and Washington and this article is something that I feel very strongly about.
So, what’s going on with our economy and the financial markets? Hard to believe that oil is pushing $100 dollars and that gold is over $800. With the U S economy visibly shaken by the mortgage markets you would think that oil prices would be heading down. However, the U. S. Economy is no longer the big dog in the world. China and India are growing and their demand for oil continues to increase. The world economy is actually doing better than ours.
The dollar has been in a free fall since 2002 when the index stood near 120. Currently, it is trading at about 75. The Canadian dollar is now worth more than the U.S. dollar for the first time in 50 years. The British pound is over $2 and the Euro which in 2001 was at .85 to the dollar is now around $1.46 to the dollar.
Now there is concern that the Chinese and the Japanese may purchase less of our Treasury securities. I doubt that we will see the Chinese abandon our securities and sell them since they own so much of our debt. They can only harm themselves by doing so. They need our trade and technology. However, it is disconcerting to find ourselves in this situation; we seem to be losing control of our destiny.
Free trade can be great but you need to have an even playing field and that is clearly not the case with many of our trade agreements. We have been running up huge trade deficits and the decline in the value of the dollar can make that even worse if we are not allowed to sell our products overseas in a competitive environment.
Our products and services are much more affordable to the world with a lower dollar. I just hope that we have a business plan in place to recognize whether in fact free trade is actually happening. (Laissez-faire does not mean that you can assume everything will be okay)
The “American Spirit” seems to be lost in greed. There seems to be too much power in too few hands. Let’s look at the mortgage market and collateralized debt obligations as an example of this greed; this is reminiscent of Michael Milliken’s high yield junk bond fiasco at Drexel Burnham Lambert.
Let’s suppose that I have $2 billion worth of mortgage loans. This package of loans has both prime and sub prime loans. Banks, insurance companies, and pension funds are not allowed to invest in non-investment grade bonds (sub-prime loans) since they are risky investments.
Let’s say that I repackage these loans selling $1.6 billion in loans, however, I pledge all $2 billion. The securities are now over-collateralized. Now the rating agencies, which get a fee, come in. They view this over-collateralization as a positive and they rate the bonds as AAA. So, here we are in a situation where low quality mortgages can be more easily sold. Packaging sub-prime loans like this was done by many of our larger financial institutions. Who does this favor? Who has it hurt? The power of greed is not a pretty thing to see.
We can also ask the question as to why after 30 years since the previous oil crisis have we done so little? Instead of new technology we get the SUV. Great it saved our automobile industry, but at what cost.
Thinking about the past or the future will do little to help the situation. We need to focus on the present and what we can do to turn this country’s economy around.
We may have to raise interest rates to attract investment in the U.S. (our Treasury Securities) and this can and will hurt us in the pocketbook.
It should be noted that Alan Greenspan has recently made comments that the 10 Year Treasury Note yield may need to be increased to 8% or higher to offset future inflation (right now the yield is at 4.3%). His reasoning is that inflation will be a major problem due to high oil prices, the increasing cost of imports from countries like China, and the decreasing effect of Globalization.
Remember, we moved our manufacturing facilities abroad in order to take advantage of cheap labor. Now Greenspan is saying that the flow of cheap labor from the farm to the city will eventually lessen and that the consequence of that will be higher labor costs.
We seem to lack foresight. This instant gratification society that we have looks for profits at any cost without considering the costs of our actions.
It has been said that the U.S. has triple the Saudi oil reserves in oil shale. Some of the environmental issues associated with oil shale are getting handled with new technology. You can view the article from Fortune magazine on the internet just Google Fortune and Oil Shale. We need to accelerate many aspects of what is good for the environment at the same time, but we may have to sacrifice in the present to create some excitement about this country and the great resources that we have.
We can’t be spending trillions of dollars on wars. We have to work together. We are all part of this thing called humanity. Perhaps, it’s time to work with the rest of the world instead of continually pressing the issue as to who is right and who is wrong. Tolerance and acceptance of others values, whether we like it or not is the key to a world in peace. There is always that 5% who ruins it for everyone else, but why is it that the other 95% just choose to sit on their hands. It does not mean that we have to be in conflict with each other it just means that we have to work together for the good of humanity.
So we have problems. How do we stop the oil producing nations and the exporting nations, with trade surpluses, like China, from buying up real assets in the United States? How do we provide for the coming retirement of the baby-boomers? If we just continue to print money to cover our deficits we could be in for more problems, especially if other nations desire less of our currency. We are at a juncture where we can no longer just hope that things will get better. We need to accept some of the cost in the present so that we can overcome the problems that we are currently facing.
In the short term, I expect that mortgage rates will stay pretty much the same with a slight bias to the downside if the market continues to be hit. I know that there are many saying that the world economy will help our corporations. They say that price to earnings ratios are too low and that a large drop in the markets is not in the cards. However, this just feels different to me and I think that we may have a real problem with the financial markets. This is especially true given the “traders of the world”. Look what they have done to the oil markets.
Maybe, a hit to the market will push investors into investments that are creative, like oil shale, solar power and electric or fuel cell technology.
The last time the market tanked investors moved aggressively into real estate maybe this time it will force investors into creating a better world and a better living for the people of this country.
What I am saying is that we need to make our voices heard. We need to hear our politicians respond to these types of issues. They may not have all the answers but dialogue will help us find the answers.
