Last post - I have a job again

Sorry for not updating this. I finally found an investment analyst job in November and as such will not be making anymore posts. Since this is the last post, and because my stock ideas now belong to our clients, I will keep this very high level.

The Irony is Getting Ridiculous! - Although I almost always vote Republican, I am increasingly unhappy with both parties. This rant will focus on the democrats however. Specifically, I am talking about financial reform. Let me back up and start with a premise that I think is accurate. The aggregate level of loans on bank balance sheets two years ago reflected a level of underwriting that we all now consider foolish. To put it another way, bank had made too many loans. The US Congress passed TARP legislation to support the banking sector and prevent a catastrophic collapse. Old news. Jumping to today, the democrats are howling that banks are not lending enough while at the same time basing their drive for financial reform on the premise that the banks are responsible for the Great Recession because they were reckless lenders. And the proof that banks are not lending enough? Their loan balances are shrinking. So just to be clear, banks caused this whole mess by making bad loans, but they are damaging the economy by letting their balance sheets shrink. Getting back to my original premise; if we all agree that underwriting standards were too loose, then it follows that there should be fewer loans outstanding going forward (at least until population growth and economic growth support higher debt levels at better underwriting standards). Unless we want banks to go back to making stupid loans, then we should expect their loan balances to be shrinking. And to add to the irony, the democrats have attacked TARP recipients to the point that the nations largest lenders are desperately trying to repay the money. If we want these banks to be lending, does it really make sense to attack them until they feel forced to return capital? I don't think the democrats can have it both ways.

Even more troublesome (and that is saying a lot) is the amendment to the Wall Street Reform and Consumer Protection Act of 2009 that passed the House on Friday. The specific amendment I am referring to would allow a Congressional watchdog group to audit the Federal Reserve's monetary policy decisions. Lets think about that for just a moment. Do we want politicians to have a say in where interest rates are set? Do we want the Federal Reserve Governors to be making economic decisions based on their ability to defend them to politicians after the fact? I absolutely do not want that! Even more frightening, what about emergencies? Thinking back a year, who would I have wanted calling the shots when SIVs started to have trouble rolling their ABCP, and when auction-rate security auctions failed, and when dealers started raising haircuts on repo financing, and when the OTC derivative market faced the prospect of losing a major couterparty, and when a run started on money market mutual funds? Can you imagine your Congressman or Senator handling that situation better than the Federal Reserve? Politicians make decisions that are good for their constituents and that will get them re-elected (maybe not in that order). The independence of the Federal Reserve should remain firmly in place. The good news is that I am fairly confident that this politically driven amendment will be stripped out of any final bill, but the fact that it passed the House shocked me.

After talking about ironies, this will probably sound ironic. One the one hand, I think the current political environment (rampant spending, hostility toward financial institutions, and attacks on our free market institutions) is frightening and has the potential to spiral out of control. Even though I have not participated, I understand the unease which is driving investors to buy gold and make bets on hyper-inflation etc. While I share many of their fears, I still think this will most likely end well. The economy has a very long history of cyclicality and even the current political environment will have a hard time over-riding that pattern. As such, I think we are at the beginning of an economic recovery. Jobs are about to start returning on a net basis as inventories rebuild on firming consumer spending. Inflation is unlikely to rise given the excess levels of labor and production capacity. Aggregate leverage needs to come down and that will keep this recovery more modest than it otherwise would be, but that is okay. Based on that view, I still want to own stocks, not bonds.

With the jobs number approaching zero, I opened my Prosper.com account and am waiting on a CD to mature so I can fund it. These are risky unsecured consumer loans, but from a macro perspective, I think now is a good time to invest there. Job losses should decline which will lower the odds of default. Additionally, credit card companies are being forced to raise rates on their customers in anticipation of new government regulation that will prevent them from raising rates later. This means there are a lot of credit-worthy borrowers that could benefit from a Prosper.com debt consolidation loan and I intend to participate. I will also be looking to fund small business loans because I know many banks are still short of capital and can't make them. In both cases, I think there is disruption that creates opportunity. Again, these loans are risky, so make up your own mind on how much risk you can accept.

Thanks for reading and I can't tell you how happy I am not to be able to write about individual stocks anymore. This was fun, but having a job is better.

John