THE MUFTIC FORUM

 For Ted's resume, see "About Us"...the short form: Harvard MBA, 25 years Wall Street experience, currently chief investment officer for a private equity group

In answer to the question of whether Bernanke's "stimulus" to print more money will result in inflation, Ted's answer.  

November 10, 2010

I don’t think the Bush tax cut for the rich for two years will have any meaningful impact on the dollar, growth and the US economy.  But Obama will agree to them nonetheless. 

I just don’t think Obama wants to be blamed going into the ‘012 election if he doesn’t do it and the Republicans can again pin the blame on him if unemployment remains high (which it will) .  Managing the deficit vis a vis inflation and the dollar is a 5-30 year problem right now, and the administration must come up with a solid bi-partisan plan to handle it.  That could have the effect of causing dollar to strengthen .   This is all in the fiscal area.

The other key area is the monetary area – which is the Fed’s bastion.  There we are heading into some of the most unchartered waters ever for a major reserve currency.  In emerging markets, hyperinflation has been caused by a central bank printing money to fund a Gov’t budget deficit and social spending.  This has led to massive and severe devaluations of currencies.  But these were economies very dependent on commodities, exports and low value –add products and services.

The U.S.  is running at way below “capacity” right, meaning that there are few constraints in the production of goods and services, factories are running way below full utilization and there is room for a lot more employment.   We have a ways to go before there is structural inflationary pressures. 

The thing is,   is that Bernanke wants to avoid Japan-style deflation where there is widespread sentiment that asset values only go down and that therefore investing is dumb and saving is smart.  This is a very dangerous cycle. So by sending a signal that the Fed is going to do “whatever is necessary” to spark inflation may be just enough to turn the psychology around and get banks lending and folks investing again.  He hopes to do this without killing the dollar’s value and to be in a position to reverse stimulus prudently when it is time—But NO ONE has ever done it before and it is theoretical and experimental, so the there is heck of a lot of uncertainty in the markets.   We are starting to see an inflationary “spark” in commodities which are all up in value a ton this year.  But will this be enough to start to get banks lending again and jobs increasing without any further fiscal help? 

The Republicans want to cut taxes and not offset that with proportionate sand credible spending cuts, and yet want to keep the deficit down.  This is nuts and can’t happen.

The Democrats don’t have the spine to argue that near-term fiscal stimulus is good because they are going to get killed in the pols by the  simple, uninformed and misguided logic coming out of the Tea Party, which says “you need to run a $14 trillion economy like you would your household bank account.”

So my guess is that fiscal stimulus will be non-existent, and Bernanke seems to think that too… that’s why the Fed really is now fully and only in charge of the economy.

What happens now will be talked about generations from today.  For me, I am going to put my money on Bernanke and not the politicians.  But God help us all if the Tea Party tries to start and get more control over the Fed……Why do you think Bernanke has been so quiet and out of public view…these are very dangerous times too.

October 5, 2010

I think there are some green shoots in the economy.  Moratoriums on foreclosures will act as a back-door tax cut for a lot of people who now think they have six months to a year to live in their house rent and mortgage-free. The hotel sector is rebounding and airline travel has picked up recently and we are seeing some improvement in commercial real estate.  Let's see how next month's data pick up, but we may ironically avoid a double dip in the economy by creating a double dip in housing...mood is slowly lifting... I agree with Obama and Volker.  Aim stimulus at where it will have most impact.  Wealthy won't be spending..but saving..its what they are doing anyway.  They don't really feel like having that fourth house in Aspen these days.
 

April 7 2010

Ideas regarding a VAT tax:

A national sales tax:  The idea is percolating. And I think it has merits, but it must be part of broader discussion on real tax reform.

http://www.cnbc.com/id/36217192

A national sales tax (collected very easily at the point of sale)  can be made progressive by proscribing certain goods and services that are used heavily by the poor.  In addition, it can help to curb our excessive zeal for overspending and over-borrowing and, with adjustments made to investment and R&D, we can have a much more sensible national economic policy geared at innovation and export…

The time has come for a multi-pronged tax reform.

·         We should simplify greatly our income tax system which has become a real nuisance both in terms of loopholes and dis-incentives (esp. for small business owners who get taxed at very high rates for providing jobs). 

·         We can go to three brackets with top one being 28%. 

·         We should go to simple flat tax for businesses, say 18-20% and eliminate a bunch of bull loopholes that frankly keep more lobbyists employed than hard working middle class Americans

·         We should cut capital gains taxes for long, long term- holdings, say three plus years – make 10%

·         We should implement national sales tax and make it as progressive as possible.

·         We should tweak around the percentages, brackets and projections to see what is best to close the budget deficit in ten years (including the new health care bill)

I truly believe that with a more simple/fair tax system that rewards people for hard work, long-term investments and innovation, more people will be willing to pay taxes, more revenue will flow into the treasury, more jobs will be created, more growth will be attained, and less anger, frustration and tea parties will hold sway in our great country.

The time is now……

March 26, 2010

(regarding Obama's plan announced today to help deal with the foreclosure crisis)

This could work to stem the tide -- but we should not give a dime to the banks to compensate since they are coming to their own realization that this is the only way to deal with a problem that is completely overwhelming their ability to manage. If they don't stop this death spiral we will have another major crisis and everyone knows it. Lower home prices beget more negativity equity which begets more foreclosures which beget more negative equity and so on and so on right down into the toilet bowl. They may also be able to write down prinicpal to a level which is now higher than what they would get through foreclosure sales or short sale -- so don't assume that all their motives are for the common good. Their behinds are getting toasted. It is just a question of medium rare vs dark and crispy.

March 24, 2010

Why the 13 AGs suit against the health care mandate will fail.

The best analogy is car insurance which is mandated by every State.

The opponents of a health care mandate say that car insurance is different because you have a choice to drive or not to drive, and if you choose to drive than you have to buy car insurance. It is tied to a choice and not to just being a "citizen". Sounds good..right...but it is not quite the right argument.

At one point in our past, there was no mandate to buy car insurance. If you wanted to drive, thought you were a good driver, and wanted to take a chance..you could drive and not buy car insurance..and if there was an accident you could pay for the damage.

But guess what? Accidents happened. And sometimes you totaled your car and someone else's car and maybe even killed someone. And people did not have the cash to pay for the damage to the other person's car. If the other person was not at fault, and had car insurance, their car insurance covered their damage because risk was spread between all the people who had car insurance with the same insurance company. But what if there were so many accidents happening and not enough "not at fault drivers" with car insurance to spread the risk -- guess what?? Car insurance premiums started to sky rocket and soon people demanded that something be done.

So every state made it a mandate to buy car insurance becuase there were a lot of drivers who just turned out to be not very good at taking the chance at not buying car insurance.

Today..there are folks who still think they are good enough drivers, or folks that are too poor and cannot afford car insurance or have such a bad driving record that they are even denied car insurance -- and yet they choose to drive anyway. And guess what, if they get caught, they have to pay a penalty and may even get thrown in jail!

Now....I can assume that there are a lot of people who think they are young enough,healthy enough, and rich enough to not buy health insurance -- that the chances are heavily in their favor that they never need it and therefore chafe at the idea of being forced to buy it.

But...accidents happen...they get sick...maybe they really have unhealthy habits, bad genes, bad luck or an accident that is totally not their fault. They don't have money to pay for the services of a doctor, or pay for the hospital or pay for that device that will keep them alive. Now truth be told..society could just let them die or suffer or rot..but for the greater good, for a sense of protecting our own humanity and doing all to protect a life, society does the right thing, the moral thing.

But morality in this case has a financial cost. A cost that is borne by those with health insurance who see their own premiums skyrocketing to the point that they decide to take a chance and not buy health insurance and soon there are just too many folks taking a "chance" and the system breaks down.

So...why won't the states now mandate health insurance like car insurance ostensibly to solve similar problems of reckless risk taking or arrogant feelings of invulnerability? [And in the case of health insurance it is even worse because it truly is a free option, a win/win situation. You can take the risk of not buying insurance because while you may have to pay to fix your own car..you won't have to pay a dime to stay healthy..]. I don't know why. Politics? Jobs? Insurance lobby? Bribes?Stupidity?

Truth be told that the States have had the chance for decades to step up and deal with this insurance conundrum like they did with car insurance. But they haven't..and now the Federal govt is going to step in and take over from the States. And either under the "Interstate commerce" clause or the "right to tax" clause or many other clauses in the Constitution, the Federal Gov't has every right to take over when the States have failed on their own to act for general good -- Anyone remember the Civil War?

So..I don't know what these AG's are doing? Maybe we can save that for later.

March 15, 2010

On  Sen. Dodd's financial services reform bill

This bill is not a game changer in our financial system at all.  It shifts some regulatory responsibility around, reduces the number of banks supervised by the Fed and gives the government more regulatory powers – the success of preventing another meltdown will rest within essentially  the same regulatory framework and regulators that got us in this mess in the first place – and there are still no guarantees that political ideology will not play a role going forward in moving the regulatory bar one way or the other.  Also, the consumer protection agency will be buried in the Fed.  And this systemic risk council sounds like an opportunity for a swanky lunch for its member every now and then.

The derivatives part of this is good -  transparency and regulation and much needed sunlight

The Volcker Rule, which was strongly objected to by the financial services industry, was completely ignored – and, in my opinion, offered the only real tangible game-changing ideas to minimize the risk of casino-like gambling with our economy.

On balance, I am not impressed.

This bill will not eliminate too big to fail. Financial institutions still have all the incentive to try and get as big as they can. When they fail...the Dodd bill provides competely un-tested and new mechanisms to un-wind these firms in an "orderly" manner. But no financial panic is ever easy to unwind and there can be serious un-intended consequences that may make the actual application of these mechanisms very messy at a time of great uncertainty.....I still believe that right way forward is to re-install Glass Steagall and eliminate financial behemoths. Let insurance companies be insurance companies, let securities companies be securities companies, and let banks be banks -- it worked so well for more than 50 years. The Volker rule would be an ok compromise too.

March 12, 2010

Why retail sales up: money freed by foreclosures

With the number of foreclosures and the growing shadow inventory of seriously delinquent mortgages, people are not paying their mortgages, many are still living in their homes and many are now renters at lower monthly costs than their previous commitments. 

No wonder consumer sales are going up…A lot more discretionary spending now freed up to buy stuff made in China….

But be aware that the problems of our banking system are just getting kicked down the road and we still have a long way to go before capital starts to free up for loans to small businesses and job creating ventures….  This is a picture of an economy that is getting “stimulated” in all sorts of ways but the underlying causes of its funk have not been addressed.

http://finance.yahoo.com/news/Feb-retailsales-report-offers-apf-1987239262.html?x=0

January 27, 2010

Ted Muftic recommends that you read

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Jan.21, 2010 Intrawest foreclosure

Power is shifting here to the creditors who provided money to Fortress
Investment Group for Fortress's acquisitions.  Given the size of the
facility ($1.4B), there are probably 14-28 major debt holders. The largest
of these will be trying to set up some sort of creditor's committee to steer
the course for the next several months.  They may even force a receiver in
to run FIG's operations.  I strongly believe that as long as WP has a viable
business model with stable cash flow, that the creditors will do nothing to
impede value, and, in fact, as equity owners, may be willing to bring fresh
capital and fresh approach to the resort if they believe that the worst is
behind the resort and better days are ahead.  No need for your fellow local
citizens to panic.  Usually the worst in terms of job losses, cost cutting,
and operational restructuring come just before the creditors take over as
the current owners try in desperation to squeeze as much cash out of the ops
to stay alive as long as possible.  New owners (aka the creditors who take
over) hopefully have a very different mindset which is how best to maximize
value of the asset over the medium term in order to be able to sell or find
new equity without losing par value on their debt.  So, in many cases, a
foreclosure can actually have a beneficial impact on the operations....a lot
depends on who are the creditors and what is their modus operandi and
objectives.

Ted Muftic

Nov 1  2009

Oct 30 Wall Street Journal reports that fed will allow  banks to keep loans on their banks even though the assets that secure them are worth less than the amount of the loan. Ted comments:' More examples here of the "answers" to mortgage problems. Obviously just more kicking the can down the road which increases the likelihood of a double dip recession just in time for 2012 election cycle... Who is advising Obama?"

Dec. 19, 2009

Ted fumes at lobbyists powers (re: health care reform)

Nothing will ever be done right in Washington until the pervasive culture of big money lobbying is banned altogether. 

What kind of democracy do we have when special interests with the money and power to fight their cause consistently win the day against basic things that provides the average American with a break?

Is it any wonder that populist demagogues are on the ascendance?

I am not against capitalism and big companies, but our leaders need to lead for all the people – and it is a shame that the Democrats have the one chance in to do the right thing, and can’t even do it.

I was hoping for affordable and reasonable health care…but I think I am going to go out and buy stock in health insurance companies so that one day I will have some money at least to pay for me and max.

I am sickened by this bill – If we have no public option, no Medicare buy-in, no control on premiums, no control on what % of premiums should be spent on actual healthcare, and the same darn cabal of scumbag insurance companies in control,  then we have nothing except another transfer of tax payer dollars to the insurance companies.  This blows!

October 27, 2009

Ted on breaking up commercial banks from investment banks

  I am for splitting investment banking and commercial banking again, but Wall Street is griping that it is “too complicated”

I just don’t believe that financial behemoths are good for democratic capitalism and the economy.  Not any proof in my mind of the benefits of scale past a certain size.  In fact, specialization and focus are better in the long run since it is easier to manage risks if you know where to look.

I certainly don’t believe that there are benefits to size in trading…in fact it becomes a burden when you are trying to move large positions around.

Banks like size if they can borrow from Fed at zero…their profits per employee sky rocket – aka Goldman Sachs, which is direct beneficiary of all fiscal and monetary policy designed to stabilize the system for all…not for them to enrich and gorge themselves at the trough….

Ted's response to a question from Felicia: Why the high 9.8% unemployment figures. October 5, 2009. Banks have been busy making money, but not lending or contributing to job growth. Why....because nothing concrete is being done to resolve all the losses the banks have...and no one politically wants to do what is necessary in the admin which will involve serious money to close down all the zombie banks. Until the losses in the financial system are realized and finally made transparent...there just will not be a return to putting money into productive job-producing sectors or ideas. In Florida...every single bank is insolvent. You can say the same thing for Arizona, Nevada and California, and add Michigan...and soon others. So...no credit, no consumer spending, no job growth, anemic recovery....for at least five more years.
Fyi - 85% of all mortgage issuance is the US is still being funded directly by the Fed..."Printing money"...there is no effective private market still. Without fed, there would be NO housing market...none. We are far from out of the woods here. 

Ted's comments on the Obama wall street reform proposals

September 15, 2009

Obama goes nowhere far enough as far as I am concerned.

Forget band-aids and regulatory nit-picking.. If you want real reform, you need to undo at least a decade of crappy legislation.

Here are some good ideas from Barry Ritholtz, the author of” Bailout Nation “which I would highly recommend that everyone read

• Reinstate Glass-Steagall Separating banks from brokerage firms guarantees that "when Wall Street hits the wall… it doesn't cause the banks to do the same,"  says Ritholtz, who claims the Act was a major reason why the economy didn't come crashing down along with stocks in October 1987.
• Repeal the Commodity Futures Modernization Act  This rule "allowed derivatives to be exempt from all the rules that affect every other traded financial instrument," and was a root cause of AIG's problems, he says.
• Overturning the so-called Bear Stearns rule allowing leverage beyond 12 to 1 The SEC's 2004 rule change, which eliminated some leverage restrictions on investment banks in favor of capital requirements by type of asset was a mistake, says Ritholtz.  "Without overturning that, give us 5-10 years, we'll be right back where we started."
• Continuing to allow high-risk trades to be compensated regardless of profitability This issue is one already being addressed by the so-called Pay Czar Kenneth Feinberg.  
• Regulating the non bank sub-prime lenders and mandating (and enforcing) lending standards This one is pretty self-explanatory and one few argue as a key reason for the subprime debacle.

Sept. 4, 2009    This is the single biggest challenge to Obama….

IN looking at the shape of the curve of this current recession, we should not really bottom out for another nine months – and recovery back to pre-recession levels will take several years….if ever.

In response to asking him what he thought of Bernanke  being renominated for fed reserve chair, Ted wrote:

"Good. The guy will turn out to be a hero in history"

 Blog posting: Ted wrote in response to my question why Freddie and Fannie stock is showing so much activity when they are virtually worthless. Ted answered:

FNMA and Freddie stock price moves are foolish speculation and easily manipulated penny stocks.

"From all that I see, house prices have bumped up recently due to increasing demand, but, more importantly, a freeze in supply as banks are getting swamped working through problems in their REO and now prime loans.

The shadow backlog of homes that are in distress or in foreclosure, or owned by banks is huge and will keep a lid on prices for many years….

A fool’s rally….".

Take a look.  Here is the problem.  Look at the number of loans that are delinquent – not just those in foreclosure.

Inventory levels only reflect homes that are LISTED.

None of these are listed.

Nearly 15% of ALL US mortgages are delinquent or near foreclosure.  This is the Shadow inventory which will continue to swamp banks and cuase the recovery to be slow and painful…..

That is nearly 6.6 million homes in distress!   And that number is growing..

July 29, 2009 Blog posting: Failure of TARP concerning toxic mortgages will come back to haunt Obama

In lee county banks have been canceling more than 80% of all foreclosure sales on the courthouse steps since TARP. If they go through with sale, they have to recognize the losses on their marks. So they are hiding their troubled assets more and more and trying to drive asset prices of homes up by reducing supply -- so there is huge overhang of foreclosed homes and recent spike up in home prices cannot be trusted. But in long run, they are just playing games because their assets are not being maintained properly and will be worth even less in the future. Sadly, I think the second financial crisis may come in late 2011 -- hurting Obama's chances...the banks have absolutely no incentives to modify, restructure or cure troubled mortgages thanks to changes in mark to market accounting -- the single biggest mistake of this crisis.

Recommendations for Pres. Obama on the economy:

blog posting July 8, 2009

·         The problems in the economy are deeply structural.

·         About 66% of our GDP is based on consumer spending  -- which over the last 20+ years has been fueled by a huge expansion in credit.

·         The huge expansion in values of almost all asset classes helped to underpin the credit.

Now we are in credit crisis -  and an unwinding of 20+ years of bad habits

·         Policy towards banks is supposed to get back to a “normal” flow of credit – i.e. get credit back to support consumer spending

·         Fiscal stimulus is meant to create jobs – i.e. get consumer spending back up.

 Both these things are usually ok ideas…

·         But actual policy towards banks today is designed right now just to “buy time” – to avoid crises – and wait it out (i.e. Japan solution --instead of real hard medicine of fundamental restructure a la Swedish model = heavy pain up-front, but better recovery of credit at end)

·         And fiscal stimulus is good idea, but where is our “financial flexibility” as a country?  We have none – Bush blew it away and made the gov’t act like a drunken consumer on debt. The gov’t can’t continue to borrow and spend its way out of this mess without debasing the dollar and debasing our national credit.

·         AND consumers are going to be real hard to “stimulate”  -- they are now changing their behavior in a FUNDAMENTAL way -- saving and not spending --and no matter how much credit you throw at them and how much you try and get them to “feel good and spend”  -- they aren’t buying it because they know that and are worried about future tax increases.

So – we are headed for a decade of low to no growth – time to pay the piper for all the craziness of baby boomer stupidity.  There will be no “V”, there at best will be a “U”

And the jobless rate will stay high for a long long time.

If the Gov’t is hoping for a consumer led recovery, forget it.

Our best hope is for an export and investment led recovery – we need to export more goods and services abroad.  We need other countries with surplus to step up to the plate and get their consumers to spend.  We need to create conditions of peace around the world and we need as a country to promote American companies abroad and proactively integrate deeper into the world economy.  We need to take a break from being the world’s economic engine while we repair our broken system – this may be 10 years, it may be a generation.

Politically, Obama needs to get realistic with Americans about the problem.

He needs to get away from defining success only based on the unemployment rate.

He needs to talk about the new American paradigm and the reforms to move us back to a more balanced economy with decreased reliance on consumer spending and the need for greater economic integration with the world.

He needs to focus on things that he can deliver and on economic (but not Job) growth.

If he constantly wraps his economic policy around “jobs, jobs, jobs”  he will look stupid because structurally there is little IF NOT A SINGLE THING any policy can do at this point to bring the unemployment rate down in the next few years.  We just don’t have the tools in the tool kit nor do we as a country have the money to buy enough jobs to make a difference.

And he should embrace the new saving paradigm as a way to create incentives for investment and export-led initiatives.  Get the American saver to participate in the new economy for the next ten years.  They aren’t going to be buying stuff, but their money can be put to good use…..like good ole’ fashioned war bonds that help to the government wage “war” to  get the ROW to buy American stuff, to bring value-added manufacturing back to the US, to create more high-tech exports, to invest in energy at home – re-direct our savings in these areas.  

Accept it, embrace it, plan for it, and sell it.

Also-  please see CNBC video below (link provided)

http://www.cnbc.com/id/31775633

Blog posting on the Geithner stress test May 4-14 2009

More of the same head/sand/chicken etc."