Monday, January 26, 2009

Timothy Geithner, the Law of Supply and Demand, and Better Days on the Horizon

Soon, we will begin to see the outlines of the Obama plan to aid the banks. The administration has said that after Secretary of the Treasury-designate, Timothy Geithner, is approved by the Senate he will describe the administration's programs aimed at unfreezing the banks. In recent weeks, the idea of an "aggregator bank" appears to be gathering steam. The aggregator bank would buy the bad assets, or toxic loans from the banking system at heavily discounted prices, which would then allow the banks, sans the toxic loans, to get back to banking. This may sound much like the original TARP plan, but that plan was scuttled after it became clear that the economy was slowing much more rapidly than anyone had thought. This necessitated that the banks first be provided with more capital to allow them to withstand the increased loan losses that were hitting all their product lines. The aggregator bank would operate along the lines of the Resolution Trust Company (RTC) which was very successful in cleaning up the S&L crisis of the late 1980s and early 1990s. The idea of the government getting more involved in the banking system is a scary thought, especially when congressmen and women all speak in a four-word mantra: loan money or else. Forced lending on housing by the government is one of the reasons we have a credit crisis. There are also fears that some banks will be nationalized, or taken over completely by the government. All of this combined with just awful earnings from the banks to send stock prices scurrying to recent lows. Timothy Geithner is a name we are all going to hear about on a daily basis. Let's hope that he has a better stage presence that Henry Paulson. I'm not as down on Mr. Paulson as many people, but I do agree with his detractors that the TV cameras were not kind to him, making him come off as winging it too often. In fairness to Mr. Paulson, since he was seeing things on a daily basis that he had never seen before, maybe winging it was all he could do. I continue to believe that far too many investors are betting that a depression type decade is ahead of us. I simply cannot get there based on what I see. We have a massive bank bailout plan combined with a massive fiscal stimulus package for the economy. Taken together they could total over 10% of GDP. That magnitude of underpinnings for the economy will have an positive effect. If it does not, then the laws of supply and demand have been rescinded. That cannot be true because the law of supply and demand is what brought us the banking crisis we now face. I continue to be more optimistic than the headlines you are reading on most media. Remember this: no one thought the tech boom would ever stop and therefore investors bid tech stock P/Es up to triple digits. The law of supply and demand has now reduced tech stock PEs to the mid teens, a painful recalibration. No one thought that real estate would ever fall in price, thus no price was too high to pay for a square foot of prime real estate. Today it was announced that the price of of the average house in the US had fallen by nearly 15% from a year ago. There is no shortage of bad news, but the laws of supply and demand have not been rescinded. In today's bad news about housing there was some good news that got very little press:
  • Jan. 26 (Bloomberg) -- Sales of previously owned homes in the U.S. unexpectedly rose from a record low, propelled by the biggest slump in prices since the Great Depression as foreclosures surged.

The second part of the news story got lots of ink. The first part, which is just as important, got very little ink. Yes prices are falling, and we are still immersed in a real estate correction, but just as certainly are the bargain hunters now in the game. Last month there were 4.74 million previously-owned homes sold in the US, up 6.5% from the same month a year ago. In addition, the Conference Board's index of leading economic indicators also rose modestly. The first rise in six months.

The real estate market will not turn in a made-for-prime-time, high-definition broadcast captured by old news and new news alike. It will turn in a ragged, ugly, halting manner, but it will ultimately turn. It's good news that more houses are are beginning to sell around the country, even if prices are still falling. There is life in the housing market. The oversupply of housing has driven prices down to meet demand. In a few months, the government will announce that prices have stopped falling. That will be a happy day for all of us. My prayer is that Timothy Geithner plays a big role in causing that good day to come swiftly.