Monday, February 23, 2009

Gov't Entitlement Programs - Ticking Time Bomb

As suggested in the chart above (courtesy of the Tax Policy Center , a joint venture of the Urban Institute and Brookings Institution) our government is facing a fiscal nightmare as the ratio of workers to Medicare/Social Security beneficiaries continues to decline. The ratio has shrunk from 4.3 in 1962 to 3.3 today. As the baby boomer generation begins to retire, actuaries project a rapid steepening to a ratio of just 2x by 2030. According to David Walker, CEO of the Peter G. Peterson Foundation, these unfunded entitlement obligations add another $53 trillion to the mere $10.8 trillion reported as our National Debt. If this doesn't cause concern over the future hegemony of the US dollar, I am not sure what will.

Wednesday, February 18, 2009

The Case for Gold

According to the Federal Reserve, M2 (currency in circulation + savings deposits) grew by approximately $730 billion in 2008. However, only 2,500 metric tons of gold were mined In 2008, equaling about 80.4mm ounces (2500 metric tons* 32,150.7 ounces/metric ton). At today’s price of $980/ounce that equates to about $78.8 billion of gold reserves being introduced into the global economy. As such, for every dollar unit of gold being mined, the US is printing $9 of fiat paper currency.

Another way to think about it (though similar conclusion) is that M2 grew by 10% last year ($7.4 trillion in 2007 --> $8.2 trillion in 2008), whereas the supply of gold only increased by 1.5% (2500 metric tons vs. existing stocks of 160,000 metric tons). Under this framework, paper currency is growing nearly 7 times as fast as the supply of gold.

While the functional utility of gold is suspect, when viewed as an inflation hedge these stats provide a pretty compelling case for the yellow metal. Even more alarming is that I am probably underestimating the growth in paper money vs. gold since I am only including the US dollar (including all paper money would most certainly increase this ratio). However, since I am not sure what percent of the world’s paper money is composed of the US dollar, I can’t determine the ratio. With that said, I would guess that ~20% is an appropriate ratio since that equates to the US share of global GDP (perhaps with a bit more research I can determine a more precise answer).

Suffice to say, with the US government expected to run a $1.2 trillion deficit in 2009, coupled with an $800mm billion stimulus package, it is not hard to see why gold has steadily increased in 2009. While I make no predictions as to how high it can soar, it is worth noting that in the last inflationary spell to hit the US, gold topped out at an inflation-adjusted price of over $2100/ounce (see chart).

Tuesday, February 17, 2009

Lennar Mortgage Program

This job protection program being offered by Lennar is very scary and demonstrates the sketchy incentive programs homebuilders are using to continue perpetuating the housing bubble. Apparently, the company is offering up to 6 months of mortgage payments (max of $2,500) to homebuyers that lose their job.

Lennar offers peace of mind with payment protection plan
Saturday, January 31, 2009

With the goal of providing its new home buyers continued confidence in their purchase decision, Lennar has introduced its "Peace of Mind" Mortgage Payment Protection Program at selected new home communities nationwide.

Lennar continues to be a leading innovator within the home-building industry by being one of the first home builders to offer a program of this magnitude that provides buyers the assurance they need to buy the home of their dreams today.

"With an unpredictable job market and economy, buying a new home can seem like an overwhelming decision," said Sean Chandler, division president. "But now home buyers can rest assured because Lennar and UAMC now have a program to help ensure that your mortgage payments will be made, even if you lose your income."

Designed to offer some security and comfort in the event of a job loss, Lennar's program provides assistance to those who experience financial difficulty because of job loss.

Qualified homeowners enrolled in the Peace of Mind Mortgage Protection Program can have their mortgage payments of up to $2,500 per month paid for up to six months.

"We pride ourselves in being responsive to our home buyers' needs," said Sean Chandler, division president. "And what people need now is a sense of security in moving forward with their lives and making major purchase decisions — that is why we are offering this brand new program."

Sales representatives at each participating new home community can provide complete details regarding the Peace of Mind Mortgage Payment Protection Program, which is available for a limited time.

Since being founded 55 years ago, Lennar has grown to become one of the nation's leading home builders. With hundreds of communities nationwide, their product offering is extremely varied, with homes catering to first-time, move-up and luxury home buyers alike.

Lennar has long distinguished itself by simply including the most desired features and upgrades as standard at no additional charge.

The builder's motto is, "Everything You Want, Everything You Need, That's the Logic of Lennar."

For more information about the Peace of Mind Mortgage Payment Protection Program or a complete list of communities in your area, call (877) 205-8460 toll free or visit

UAMC is an equal housing lender.

Saturday, February 14, 2009

Select Programs From the Stimulus Plan

Here are some of the key spending programs contemplated in the $800mm stimulus plan (detail courtesy of the Wall Street Journal). I am particularly encouraged by the $19 billion allocation for healthcare IT and the computerization of medical records.

Friday, February 13, 2009

Charter Communication Bonds

The above chart on Charter Communiation 10.375% 2010 bonds provides a pretty compelling case for some of the deep value opportunities that were created as traditional high yield investors ran for the exits last November. Despite the company filing for bankruptcy yesterday (a suprise to no one who followed the credit), the bonds have rallied from a low of 28 to nearly 80 cents on the dollar. Pretty remarkable given how there has been almost no fundamental change to the story over the last 2 months!

Wednesday, February 11, 2009

E-Books: Harbinger of Death to the Bookstore

The Wall Street Journal ("Grishman is Close to an E-Book Deal") reported today that John Grisham is close to signing an agreement with Random House that would make his books available on e-readers. As one of the most prolific and well-known authors over the last decade, this serves as a big step in validating the importance of the e-reader trend (and follows one day after Stephen King announced he would make a book initially available exclusively on Amazon’s Kindle). Currently, industry estimates suggest that less than 1% of book sales are made through e-readers. However, as authors continue to embrace the inevitably of a digital world, I suspect that we will see a significant ramp up in this percentage (not unlike what swept through the online music world, where Apple is now the largest “retailer” of music). Rather than express a view that Amazon, Sony, or some other company linked to e-readers will win in this new world, I feel more comfortable calling out the obvious losers. As a long-term short, I have to believe that Barnes & Noble (BKS) and Borders (BGP) will face significant secular pressures as e-readers become more ubiquitous. Just as no pure play big-box music retailer exists today, I am hard-pressed to envision a world where there are 50,000 square foot stores selling primarily books. The bricks and mortar bookstore model has been under pressure for some time; with the introduction of the new Kindle and several future products in the works, the next few years will likely not be kind to BKS and BGP.

Thursday, February 5, 2009

Personal Consumption as % of GDP

While everyone (including myself) always seems to marvel that personal consumption represents approximately 70% of GDP, I was surprised to learn that for much of our nation’s history this figure has eclipsed 60% (See Federal Reserve Data). Interestingly, the only time personal consumption dropped below 60% was during WWII, when much of the nation’s spending was directed towards national defense (see second chart above). Perhaps even more intriguing is during the worst of the Depression (1932-1933) personal consumption jumped to over 80% of GDP. After combing through the data, it appears that this was more a function of private investment coming to a complete standstill (2.2% in 1932 vs. 16% in 1929) vs. any real strength in consumer spending. Nonetheless, I think it important that when we talk about the consumer being 70% of GDP, this should be framed within the context of our nation’s history (which I suspect most people fail to appreciate).

Wednesday, February 4, 2009

Household Wealth Destruction

Here is a chart I pulled together of household & non-profit wealth tracked by the Federal Reserve (latest data available through Q3 2008). Since hitting a peak in Q3 2007, household net worth has declined by $7.1 trillion over the last year. Most of the declines can be attributed to housing ($1.1 trillion), equities & mutual fund investments ($3.6 trillion), and pension fund reserves ($1.6 trillion). Despite this steep drop from the peak, I was surprised to see that household net worth still remains 21% above 2003 levels. However, with home prices down another 10% and equities down over 20%, we could see another $5-$6 trillion of wealth destruction in Q4 alone. The midpoint of this estimate would leave household wealth 20% below its peak of $63.6 trillion.