What’s Next, Mr. Bernanke… Free Money?

The Federal Reserve surprised a lot of people today, including us, here at RoutingByRumor.

They announced another cut to the target federal funds rate, this time it was 50 basis points, or 1/2% (read the Fed’s announcement, here). That is on top of the 75 basis point or 3/4% emergency cut announced eight days ago. This brings the overnight bank rate down 125 basis points in the past week, to 3.00%. The only member of the Federal Reserve’s Open Market Committee to vote against the latest rate cut was Richard W. Fisher. There’s a black sheep in every herd.

The Fed must be very, very concerned about the economy. But they can’t repeat these tricks forever. Eventually, they will run out of string, and “eventually” is sooner than you may think. Just think about it… Another two cuts like those in the past week, and money will almost be free.

Have you ever come across a vending machine that was set up to dispense product without having to insert any money? You can find these machines in some company cafeterias. I can still remember the time that I accompanied my father on a trip to a company he did business with. I must have been seven or eight years old at the time. That company had such a soda machine. Like any young child, I would push the buttons on every machine I’d come across, trying to get free gumballs, candy, soda or whatever. And don’t forget to check the coin return for some free money. Of course, I had to press every button on this soda machine, too. Every time I’d hit a button, another can of soda would be dispensed. I thought I hit the jackpot. The man who had to put all those soda cans back into the machine was not as amused as I was.

Now, if the Fed keeps lowering the funds rate, we figure that pretty soon, the banks might set up their ATMs to dispense free cash. It would make the kid in me very happy. I could just stand there all day, pressing buttons.

What’s next, banks giving away free toasters, blenders and TV sets? I remember those days too. Actually, I could use a new television, since in February 2009, when broadcasters stop transmitting analog signals, my current televisions will no longer work (at least not without a digital-to-analog converter box). Gee, Mr. Bernanke, maybe this was a great idea after all.

Then again, maybe not.

In fact, maybe black isn’t such a bad color after all. I like black better than red. Black goes with everything.

Maybe following the herd just leads you to the butcher sometimes.

So, they’re making money cheap, which should encourage people to start buying homes again… and cars, and televisions, and computers, and everything else we don’t make here any more.

Who will be hurt the most by these aggressive rate cuts by the Fed?  People on fixed incomes and retirees.  You can’t depend on the stock market these days.  Putting your nestegg into stocks, even if diversified,  is just slightly less dangerous than playing Russian roulette.  Inflation was already outstripping anything you might hope to earn from a bank CD or insured money market account.

With the rate cuts in the past week, bank rates have fallen through the floorboards.  I just checked Bank of America’s website… Putting $10,000.00  into a 1-year CD or a money market account will currently get you an APR of slightly more than 2%.  To add insult to injury, if by some miracle you manage to earn a few dollars in interest, it’s taxable income.  That dismal rate of return is sure to go even lower over the next few weeks and months, especially if there’s another Fed rate cut.  Just a few months ago, 1-year CD rates of 5% were commonplace.

Make no mistake about it.  The faltering stock market and  plummeting interest rates on instruments such as certificates of deposit,  are very bad news indeed.  You will see increasing numbers of elderly Americans, who thought their golden years would be reasonably secure, now faced with loss of their homes, or worse.

Time to start stuffing the mattresses.

President Bush delivering his final State of the Union Address on 1/28/2008

credit: whitehouse.gov

In his State of the Union Address two nights ago (read the full text here), President Bush touched on the need to increase exports. Funny, but I didn’t catch him mentioning the need to limit imports. In fact, President Bush never mentioned the phrases “trade deficit” or “imports” even once during his State of the Union Address. Rather, he said “we are pursuing opportunities to open up new markets by passing free trade agreements“. That’s wonderful. Just what America needs. More jobs going overseas. More cheap imports flooding the U.S. More unemployed American workers. The imbalance between U.S. salaries and those in most foreign countries is so great that we will never be on the winning side of any free trade agreements. Have any free trade agreements we’ve signed in the past resulted in a trade surplus (I think that’s what you’d call the opposite of a trade deficit, but since we never hear the term, I’m not sure that’s correct). Have they ever even resulted in balanced trade?

Thank God for term limits. Could you imagine four more years of this? Our trade deficit is already so lopsided, that unless we put limits on imports, we can never hope to make a dent in the trade deficit.

Cheap money will allow very few people who are at risk to avoid foreclosure on their homes.  For the few it might benefit, our advice is to postpone the celebration, because  cheap money won’t last forever. Maybe until the next election. Then what? Americans who can’t find decent paying jobs will use cheap credit to increase their spending and their debt. Then, when interest rates inevitably rise again, look out. If you think things are bad now, you ain’t seen nothing yet. Pity all those families who are convinced that lower interest rates mean that this is now the perfect time to buy a home. If you think there have been a lot of foreclosures recently, just wait a while and see what happens.

We’ve said this before, and we’ll say it again… If America continues to be flooded with cheap imports that are sucking good paying jobs out of this country, our economy will continue to get worse, no matter how many interest rate cuts the Fed delivers. Can you say “quick fix”?

Wal-Mart might be the biggest employer in America, but they can’t employ all of us. And even if they did, we couldn’t afford to shop there. Minimum wage doesn’t go very far. Especially when you need medical care, and your employer doesn’t provide health coverage.

So thank you, Mr. Bernanke. It was very gracious of you and the Federal Open Market Committee to give America this latest gift. We don’t want to seem ungrateful, but could we exchange the gift for something we really need? Perhaps the creation of good jobs that pay decent wages. Imagine being able to go shopping and actually finding products that say “Made In USA” once again, not to mention having the money to buy those products without going into debt. How quaint.

Thank You.

– Sincerely,

RoutingByRumor

Bloomingdale’s Warehouse Fur Sale – Proof That Even Luxury Goods Retailers Are Hurting ?

You are more likely to find us at a PETA meeting than in the fur salon at Bloomingdale’s, and we usually don’t pay much attention to advertising for fur coats. Besides, who needs fur, when you already have, well… fur! (see our picktur). But with everyone’s preoccupation these days with the economy, and the fears of a prolonged economic recession, I guess we have fine tuned our radar to keep an eye on advertising and retail trends.

We just heard a radio commercial advertising Bloomingdale’s warehouse fur sale. Now perhaps they have this sale every year, but I can’t recall hearing or seeing this in the past. If this is a new marketing gimmick by retailers of high-end products, we think it is confirmation that the economic slump has finally reached the luxury goods market.

RoutingByRumor’s economic rule of thumb # 1: You know it’s really a recession when the luxury goods market is hurting, or when you can’t unload your mansion at any price. What’s next? Buy-one-get-one-free deals from Rolls Royce? A De Beers warehouse sale? Buy one Learjet, get the second one for half-price?

Now don’t go running out to your nearest Bloomingdale’s store. The advertisement indicated that the sale is taking place at their fur warehouse, which is actually the Danish furrier Birger Christensen’s warehouse. Birger Christensen / BC International Group (BCIG) appears to be the largest fur retailer in the United States. (As an aside, I stumbled across some interesting info about an action that BCIG brought against another retailer to gain control of the Internet domain “maximilian.com”.)

We’ve read that Bloomingdales is not Birger’s customer, but rather it’s landlord. Birger Christensen leases space in Bloomingdale’s stores and operates the fur departments with their own employees. This, coupled with the fact that the “warehouse sale” is taking place at BC’s warehouse, tells us that it is not Bloomingdale’s holding the warehouse sale, but Birger. It would be our guess that the inventory is owned by Birger, and not by Bloomingdales (or by any of the other retailers where they operate their fur salons).

With BC’s purchase of Evan’s, Inc. almost ten years ago (see this article about Evans’ history), they operate the fur salons in Bloomingdale’s, Carson Pirie Scott, Dayton’s, Filene’s Basement, Goldsmith’s, Hudson’s, Lazarus, Macy’s, Marshall Field’s, Rich’s, and Saks Fifth Avenue stores (see related article, circa 1999, so this list may have changed somewhat). We don’t know if any other retailers use warehouse sales to move luxury product inventory. Our guess is that even if they haven’t in the past, you might start seeing them doing so now, as the economy continues it’s downward spiral. See this New York Times article about a disappointing holiday season for the nation’s retailers.

As the downturn of the U.S. economy continues, we think you’ll see indications that more and more retailers are in trouble, across the board. As we wrote yesterday, we doubt the U.S. economic stimulus plan that was announced yesterday will do much to stem the tide.

If the IRS hurries up with those tax rebate checks, perhaps you’ll get yours in time to run down to the “Bloomingdale’s” warehouse fur sale and do your part to stimulate the U.S. economy. You’ll look stunning in that new chinchilla.

– RoutingByRumor

Chinchilla

Aw, he’s sooooooooooo cute. Maybe we’ll get a faux fur coat instead.

 

2/26/2008 Update – Here’s more proof that high-end retailers are feeling the squeeze… This article from CNN indicates that Nordstrom’s sales were down almost 9% in the last quarter.

 

Stimulus, Schmimulus ! Why The U.S. Economic Stimulus Plan Won’t Have Much Effect

They are saying that the President’s economic stimulus package might be agreed upon today. Woo Hoo. Happy days are here again.

But wait a minute… I can still hear that “giant sucking sound”,  and it’s getting louder (oh, how I wish I could have found a clip on youtube of Ross Perot coining that wonderful phrase). What will the U.S. economic stimulus plan actually accomplish? Will it lower the U.S. trade deficit or increase it? Will it lower the unemployment rate? Will it have any effect on the crumbling real estate market? We believe that the proposed U.S. economic stimulus plan will not work. It is an attempt at a quick fix. It is an ill-conceived band-aid approach to what ails the U.S. economy, proposed by an administration that does not seem to grasp the root causes responsible for the American economy being in deep, deep trouble.

What the United States needs now is something along the lines of the Works Progress Administration (WPA), which put Americans to work and helped pull the country out of the Great Depression. The WPA existed between 1935 and 1943. A chicken in every pot, and two hybrid (or electric) cars in every garage wouldn’t be a bad idea either. (We’ve copyrighted that new twist on an old campaign phrase, so if Rudy, Hillary, Barack or John want to talk, you know how to reach us.) It’s quite likely that many of the government buildings and infrastructure projects in the American city or town where you live today were constructed by the WPA during that period. The WPA was one of President Franklin D. Roosevelt‘s New Deal programs.

Taking the money the U.S. government is proposing to distribute as tax rebates, and putting it into a massive infrastructure improvement program would have several benefits, both immediate and long-lasting. It would…

– Provide long-term employment for millions of Americans

– Stimulate spending by reducing the unemployment rate, and giving the currently-employed higher incomes

– Repair or replace our crumbling infrastructure, particularly bridges

– Provide an infrastructure that will facilitate future economic growth

– Keep the money in America rather than giving the recipients of the rebate checks the ability to buy even more imported goods, a major reason we’re in this mess to begin with

Let’s say, for argument’s sake, that every taxpayer in the United States gets a check for $1,000 (although it looks like many, if not most Americans will receive far less). Let’s say that Americans will spend every one of those checks rather than putting the money in the bank. Where will that money go?

If you’re about to loose your home to foreclosure, chances are good that that rebate check wouldn’t even allow you to make a single mortgage payment. Even if it does, that’s just postponing the inevitable for a few more weeks.

Perhaps you will take that rebate check and go on a shopping spree at Wal-Mart, K-Mart or Target. Wal-Mart is already America’s largest retailer and largest employer, but bigger is always better. If Wal-Mart grows, that means more low wage jobs for Americans. It means more Americans with little or no healthcare coverage. It means paving over more open land for new parking lots and big-box stores. It means more tough times for the few American manufacturers left, who are already being squeezed by the way Wal-Mart deals with their vendors.

About the only place you can spend that rebate check where the majority of the products are made in USA is at the grocery store. Unfortunately, for most Americans, eating is not a discretionary activity, and the amount of money you spend at the grocery checkout is unlikely to be influenced to any measurable extent by your rebate check.

Ben Bernanke will probably tell you that buying goods is exactly what you should do with your new found windfall. But wait a minute. As I’ve pointed out in this blog, and what you already know, unless you’ve been in a coma for the past few years, is that the vast majority of consumer goods you’ll find on retailer’s shelves are imported, overwhelmingly from China. In fact, we think that China will be the real winner if Americans go on a shopping spree. If you doubt this, just wait a few months and look at how our trade deficit with China increases as a result of this plan. Go to the mall and try to find clothing, shoes, toys, hardware or housewares made in USA. You won’t.

How is buying foreign goods supposed to help the U.S. economy? The U.S. national debt is being increased substantially by the stimulus plan in the first place. Buying foreign goods will only increase the trade deficit. Few American jobs will be created by this plan. That’s because we manufacture few products here any more, with the notable exception of food products, and even those are increasingly being imported.

With the cost of heating your home and filling your gas tank becoming an unaffordable luxury for many Americans, perhaps all of us should use our rebate checks to buy fuel oil or gasoline. The oil producing countries would love that more than oil itself. The American oil companies would support that too. Despite the fact that the oil companies have been raking in record profits, you can never be too rich, or too thin. On second thought, I think we will just cash our rebate check and ask the teller to give it to us in one dollar bills only. Then we’ll take the cash home, and use it as kindling in our fireplace. That’s one way to stay warm this winter, and it should reduce our heating bill slightly. Is it illegal to burn money?

About the smartest use we think you could put that rebate check to would be as a down payment on a hybrid or other low-emission or zero-emission vehicle. That would reduce America’s dependency on foreign oil, while helping the environment at the same time. The only problem is that very few low-emission vehicles, and almost no zero-emission vehicles are being manufactured today. And chances are good that your next car will be a foreign make that might not even be assembled in America anyway. So much for stimulating employment.

The biggest reason that the economic stimulus plan will not have any significant or long-lasting effect on the U.S. economy, is that it does nothing to address the two underlying causes of our economic problems; loss of jobs (particularly loss of good paying jobs) and the U.S. trade deficit. Until those issues are addressed, the administration can throw all the money they want at the problem, but it won’t go away. The deepening economic recession will turn into a depression, as sure as Winter will be followed by Spring.

I just came across a posting on the AFL-CIO’s website outlining their views regarding what a U.S. economic stimulus plan should include. Unfortunately, it looks like a couple of their suggestions which were originally announced by the President as being part of the package, have been eliminated in the final draft. Although I have never belonged to a labor union, I was struck by how many of their ideas match my thinking on the subject.

Maybe those rebate checks should come with the stipulation that they are not to be spent on food, imported goods or foreign oil, gas-guzzling vehicles, and may not be burned.

– RoutingByRumor

The Great Bernanke Pulls A Rabbit Out Of His Hat

What might have come to be known as Black Tuesday 2008 (yesterday) was averted at the last minute, when Ben Bernanke and Company delivered a 3/4% cut to the overnight bank rate. Tuesday’s rate cut was the largest one-day rate cut ever by the U.S. Federal Reserve Bank.

As any great magician will tell you, timing is everything. The Federal Reserve waited until just before the markets opened Tuesday to announce the latest rate cut. Here at Routing By Rumor, we were way too conservative in our predictions for yesterday. We forecast the Dow dropping 200 points within the first hour of trading. In fact, the Dow dropped 464 points within minutes of opening. We predicted a loss of over 700 points on the day, which did not happen, thanks to the intervention by the Federal Reserve yesterday morning. The Dow lost just over 1% on the day, closing down 128 points. Not a good day, but much better than everybody was expecting, for a trading day that resembled nothing as much as a wild roller coaster ride. We have little doubt that had it not been for the Fed’s action yesterday morning, there would have been a bloodbath on the floor of the New York Stock Exchange yesterday, just as there was on world markets earlier in the day. Instead, there was controlled bleeding, and a market that was touch-and-go all day.
That was a pretty big rabbit that Mr. Bernanke pulled out of his hat. He will only be able to pull that trick off a couple of more times before he is fresh out of rabbits. Then what? Mr. Bernanke’s rabbit arsenal reminds us of the bluff the United States pulled off in World War II. The dropping of atomic bombs on Hiroshima and Nagasaki prompted the surrender of Japan a few days later. Things might have turned out much differently, had the Japanese known that we used the only two atomic bombs we had. We were fresh out.

This is economic policy driven by crisis, rather than by plan. The Fed is putting out fires, rather than addressing the reasons why the U.S. economy is faltering. But the policies that are responsible for America’s economic problems are not controlled by Mr. Bernanke and his friends. There is little more he can do than loosen and tighten the tourniquet now and then.

Hear that giant sucking sound? We do. Ross Perot did, way back in the 1990’s when he was warning us about NAFTA. That’s the sound of jobs leaving the United States. I’ve written about the problem in this blog recently. As long as we are importing most of the goods we consume in America, our economy will continue to disintegrate right before our eyes, no magician necessary. Quick fixes and slight-of-hand will only work for so long.

So what’s ahead? Look for another wild ride when the markets open later this morning. The stock market futures are pointing to a 250 point drop on the Dow and a 35 point drop on the S&P this morning, Wednesday, 1/23/2008. Don’t look for any more rabbits, at least not for a while, despite hints by the Fed that another rate cut might come at their scheduled meeting next week. We view that as an attempt to maximize the mileage they get out of Tuesday’s rate cut. And even if we’re wrong about another rate cut, don’t expect another whopper. If there are any more rabbits in Mr. Bernanke’s hat, they’re likely to be a lot of smaller rabbits, rather than another 2 or 3 bunker busters.

….And the bad news keeps rolling in. Iraq, layoffs, foreclosures, energy prices, bankruptcies, inflation, unemployment, just to name a few. As the Bernanke effect starts to wear off, we believe the markets will trend lower in the days and months ahead. Expect to see a lot of volatility in the markets, similar to what occured yesterday.

– RoutingByRumor

U.S. Stock Markets Plunge At Start Of Trading Today, January 22, 2008

Well, it looks like the market futures, the pundits, and of course, the financial gurus at Routing By Rumor (RBR) were right on the money, so to speak.

We are now a few minutes into the trading day, and the Dow Jones (DJIA) has lost more than 400 points within the first five minutes of trading!  If that isn’t a freefall, it’s awfully close.  Stocks have recovered slightly in the last couple of minutes, but the Dow is still down by more than 300 points.

The White House has just announced that perhaps an even more robust economic stimulus plan is needed.  It looks like President Bush might actually be paying attention.  Finally.

Today should be a very interesting day.

– RoutingBuRumor