Swine flu’s impact on the economy 

 April 28, 2010

Whether the swine flu outbreak in Mexico spreads quickly to become a worldwide epidemic, or ends up being something much less, we’re starting to see the potential economic impact unfold.  There are confirmed cases here in the United States and a number of other countries around the world, and already we’re seeing travelers reconsider their itineraries and trade barriers start to go up—at least temporarily.   

Russia announced a ban on meat imports from Mexico, Texas and California, stoking the concerns of officials in Washington.  Other countries are following suit.  U.S. Trade Representative Ronald Kirk said, “We want to make sure that a handful of our trading partners don’t take advantage of this and engage in behavior that could damage the world economy.”  Agriculture Secretary Tom Vilsack told Americans and the world that pork products in this country are safe to consume, because the virus is not food-borne. 

Meanwhile, the outbreak has hit America’s $770 billion travel industry already feeling the pinch from the recession, as more people cut back on both business and leisure travel.  Mexico vacations had been a bright spot, because they tend to be cheaper than other vacation destinations.  Some airlines, hotel chains and cruise lines are allowing American travelers-- heeding the Centers for Disease Control warning to forego non-essential travel to Mexico-- to cancel or delay their reservations. With all this in mind, let’s take a look at some potential economic winners and losers in this swine flu outbreak: 

1.  America’s travel industry could lose a lot in a health crisis.  As mentioned earlier, U.S. travel companies have already started responding to concerns about travel to Mexico, which only accounts for a small percentage of overall revenue.  The real concern for the industry going forward is the fallout the flu scare could have on domestic travel, which accounts for almost 90% of total revenue. 

2.  U.S. agriculture exports could suffer.  As with Russia’s recent example, many countries responded with bans on U.S. meat imports when small outbreaks of mad-cow disease and foot-and-cow disease led to some culling of herds in this country—bans that took years to overturn.

3.  Some pharmaceutical companies could make out just fine.  Many drug companies could benefit from an upswing in demand for vaccines if swine flu turns out to be a bigger problem than it already is. 

Having said all that, I wouldn’t advise all you day traders out there to rush out and buy pharmaceutical stocks, or short airline stocks.  This swine flu crisis could go the way of the last two big health scares, the SARS outbreak of 2002 and the avian flu scare in 2005.  Those two incidents turned out to be relatively limited events, after initial fears of massive epidemics spreading around the globe.  Still, we should be concerned about this swine flu scare, and not just because of the potential health consequences to us all.  If swine flu does develope into a worldwide crisis of epidemic proportions, the current global economic recession will get much worse, and it will take much longer for world economies to recover.

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Save It.

February 12, 2009

People are saving their money again. So much so, in fact, that economists are starting to get worried for the health of the economy. Now that’s pretty funny because, not long ago- and I’m talking within a year here- many economists were actually concerned that Americans were spending too much and saving way too little. Oh how a recession changes things…

Let’s take a look at how Americans have changed their savings patterns, and why that might be cause for alarm.

1. U.S. savings rate has risen from just 0.8% last August to 3.6% in December. Now if the amount people earn was rising steadily, this drastic increase in savings wouldn’t be cause for concern. But in the past 6 months, the average American income has been steady, if not a little lower. So where are people getting the money to save? By cutting their spending. And such a big decrease in spending over such a small period of time could spell disaster for retailers….who happen to employ a huge segment of the population.
   
2. People are saving more because of unrest in the economy. Before the economy started really heading into a tailspin, people were out spending. A lot. In fact, the savings rate was at historic lows, averaging 0.5% from the beginning of 2005 to April 2008.  Sometimes the savings rate even dipped below 0%, meaning that people were spending their savings or buying on credit. But once the housing market and stock market bubbles burst, consumers got scared about their job security and the availability of credit. (Which is to say, it’s not available.)
   
3. A high savings rate is not necessarily a bad thing for the economy, but it is when the savings rate rises so drastically and banks don’t keep up the pace making loans. By historical standards, our current rate of savings is not that big of deal. From the mid-1950s to the mid-1980s, the savings rate was much higher: from 8% to 11%. The problem is how quickly Americans have changed their attitudes. In the 50s through the 80s, banks would usually take the money people saved and dole it out as loans for small businesses and people looking to buy houses, cars, or education. That investment spurred further economic growth. Nowadays, though, banks are scared to make those loans. So as a result, the money people are saving is sitting in a vault, hoarded because banks executives don’t trust that people seeking a loan can pay it back.

The combination of fewer bank loans and increased savings is strangling businesses: they can’t get the loans they need to cover costs, and they’re not getting money from consumers either. That leads to store closures and layoffs, as businesses have to cut costs just to stay afloat, which in turn leads to even less spending. Such a self-reinforcing cycle is exactly NOT what we need in the middle of a recession.

So what’s the solution? That, my friends, is what all the hubbub in Washington is about.

Bank Bailout 2.0  

February 10, 2009

Today Treasury Secretary Timothy Geithner unveiled the Obama Administration’s new and improved plan for the Troubled Asset Relief Program. The $700 billion program- also known as TARP- was originally approved back in October. The first half of the TARP funds was distributed by the outgoing Bush Administration, and very few people were happy with how it went down.  

First off, the government never actually used its money to purchase any “troubled assets.”  Instead, most of the funds went to buy up stakes in the nation’s banks.  Critics complained that the Treasury demonstrated no clear method in deciding which banks to invest in.  In turn, those banks stand accused of hoarding the cash, instead of using it to issue new loans and help jumpstart frozen credit markets. Meanwhile, those toxic assets-- mostly securities tied to the collapsing housing market-- continued to fester, weighing down the banks’ balance sheets. 

Finally, many people complained that the bank bailout did a lot to help out Wall Street, but did very little to help out “Main Street.”  Practically no bailout funds went toward stemming the tide of home foreclosures that continues to sweep through the nation.Needless to say, Geithner and Obama have their work cut out for them.  Let’s take a look at the major points of the new spending plan, which Geithner dubbed the “Financial Stability Plan”. Get credit flowing again:  Financial institutions that receive government capital will have to meet conditions to ensure that “every dollar in assistance is used to generate a level of lending greater than what would have been possible in the absence of government support.”  The Fed will also launch a Consumer and Business Lending Initiative using up to $1 trillion to encourage lending again, which should help make auto, car, and small business loans more readily available.

1. Purchase troubled assets:  A newly formed Public-Private Investment Fund will buy up toxic assets off of the banks’ balance sheets. Getting private investors to help pick up the tab is a way to reduce the potential exposure to American taxpayers.  Private sector involvement can also help put an agreed upon value on some very illiquid assets.
   
2. Increase transparency and accountability:  Geithner restated that every financial institution that receives government funds will have to provide information on its spending and meet certain government-imposed conditions. To increase transparency and accountability, the Administration will post this information on a new website, FinancialStability.gov. 
   
3. Provide aid for homeowners:  Geithner was very vague on this front, noting that a new initiative to reduce mortgage interest rates and lower mortgage payments is in the works, with “details of this plan in the next few weeks.”  Stay tuned.

The backdrop for this of course is Obama’s stimulus package making its way through Congress, which includes some $838 billion in tax breaks, benefits and big projects to help boost the economy.  Geithner knows that in order for any stimulus package to work, credit has to start flowing again.Lending is the engine that helps drive our economy, and consumers and businesses need credit to grow.  But with lawmakers up in arms about the cost of the stimulus plan, stabilizing the financial system is no simple matter.  Geithner wants to be seen as reigning in the excesses of the original TARP bailout— while moving to hold down costs to American taxpayers. 

Stimulus Help for Americans Without a Job

February 5, 2009

Last week the House passed an $819 billion economic stimulus bill, and this week the Senate is debating its own version with a price tag that could reach as high as $900 billion.  President Barack Obama hopes to sign a final piece of legislation into law by the Presidents’ Day holiday, predicting his economic rescue package would create up to 4 million new jobs in the next two years.  But, the measure as it stands also provides many benefits for those who can’t find work right now.This is important, because every indicator out there shows that the job market is getting worse. 

Last week, the initial jobless claims number surged to 626,000, the highest in 26-years.  At the same time, 4.8 million workers continued to collect unemployment benefits.  Job layoffs jumped in January, and a Congressional report predicts that a lot of those infrastructure jobs the stimulus package promises may not materialize until next year, because of planning and logistics issues.That means a lot of Americans will continue to be without jobs, no matter how hard they search for work. 

So, here’s some of the help the stimulus package could offer America’s unemployed:Bigger checks:  Workers collecting unemployment benefits could see a rise of $25 in their weekly checks, paid for by federal funds.  In addition, current benefits would be extended through 2009.

1. Expanded coverage:  The package provides $7 billion for states to expand the ranks of jobless who would qualify for unemployment benefits to include part-time workers and those who quit their jobs because of a family medical emergency.
   
2. More access to heath insurance:  The bill allows many laid-off workers to continue to collect medical coverage, by subsidizing 65% of COBRA premiums for up to a year.
   
3. Help state unemployment agencies:  The plan would temporarily reduce costs for states forced to borrow federal money to pay out jobless benefits, because of shrinking budgets and an upsurge in layoffs.
   
   Such help could put more money in the pockets of a lot of Americans under distress.  Remember, people at the lower end of the pay scale tend to quickly spend extra money on things they need.  Spending more to help America’s jobless can be an important way—in addition to tax breaks and big projects that create jobs—to boost consumer spending.  That would have a huge impact, because our economy is really one big engine that gets a greased when Americans spend more.

 What’s in a Stimulus Package?

January 29, 2009

On Wednesday, the House passed the highly controversial $819 billion economic stimulus bill. Not a single Republican voted for the measure and even 11 Democrats opposed the legislation, which has been criticized for its huge price tag.  The House had rejected a Republican-backed amendment to scale back the bill’s spending and expand its tax cuts.

1. The Senate version of the bill includes a $69 billion proposal to shield millions of middle-class Americans from the Alternative Minimum Tax. This proposal is meant to sweeten the deal for Republicans and has been adamantly pushed by Iowa Senator Charles Grassley. AMT was originally intended to prevent high income taxpayers from using loopholes to avoid paying taxes all together…and thus to make sure they pay a minimum tax. Unfortunately, when the AMT was cooked up 40 years ago, inflation wasn’t considered, and now many middle-class Americans are forced to pay higher taxes under its provisions. The House actually rejected adding a similar Republican amendment to expand the bill’s tax cuts.  
   
2. Both the Senate and the House versions of the bill allocate billions to create jobs across many industries. That includes $90 billion for construction projects, like repairing roads and bridges; $142 billion for education projects, like modernizing schools; and $54 billion for renewable energy projects, like updating the nation electric grid. Opponents of the spending say that many of these projects will take too long to implement, meaning the jobs they aim to create won’t materialize anytime soon.
   
3. The bills also include huge chunks of cash for “safety net” programs that will help American weather the rest of the recession. These provisions include $43 billion for unemployment benefits and $20 billion for food stamps, school lunchs, and similar food programs. Opponents say that, with the legislation getting more and more expensive, the focus should be on creating jobs, not on cushioning people from the economic downturn.

THE FINANCIAL ROAD AHEAD

January 21, 2009

On Tuesday, President Barack Obama took the reins of an economy riddled with problems. Luckily, he seems poised to face the current economic downturn- the worst since the Great Depression- head-on. Since winning the election, President Obama has spent a large amount of time conferring with some of the greatest economic minds in the country. He has worked closely with outgoing President Bush to smooth the transition between administrations. But it will all ultimately come down to what policy changes and key decisions he makes once he is in that Oval Office that will shape the years to come.

Let's take a look at some of the most pressing issues the new Commander-in-Chief will need to face within his first 100 days in office:

1. President Obama needs to pass a large economic stimulus package.

President Obama has been extremely cautious talking about his stimulus plan, making it clear that no piece of legislation is going to magically cure what ails the economy. Still, last Thursday House Democrats released an $825 billion stimulus plan with a focus on creating new jobs and aiding those who are most economically vulnerable. Now it's just a matter of getting it passed.

2. President Obama needs to decide how to distribute the remaining $350 billion in TARP funds.

As I wrote in my last post, Americans were very concerned how the Bush administration spent the first $350 billion of the government bailout of the financial sector. President Obama has vowed to increase transparency and oversight of every investment the government makes and to demand more of the banks receiving government aid.

3. President Obama needs to stem the current flood of foreclosures.

President Obama's economic officials have committed to spending between $50 billion and $100 billion of the TARP funds assisting homeowners who are in danger of foreclosure. That would be the first step in trying to turn a dismal housing market around.

The road ahead of President Obama is perilous indeed, and gaining support for some of his proposed economic solutions is sure to be one of the greatest challenges. We should take solace, though, that we now have a leader who is willing to be so proactive where the economy is concerned. With a firm hand at the helm, perhaps we might even make it through this.

HARPING ON TARP

January 15, 2009

When Congress approved the $700 billion Troubled Asset Relief Program last October (TARP — popularly known as the “financial bailout”), it immediately released $350 billion to the executive branch, but included a clause that the president would have to come back to Congress in order to seek access to the rest of the money.Now that half of the bailout funds have been doled out, there is plenty of criticism of how the Treasury has been spending.

As the name of the legislation implies, the TARP funds were originally intended to be used by the Treasury to buy up toxic assets — including mortgage-backed securities, credit default swaps and other complicated derivative securities tied to the housing market — from struggling financial institutions to help clear up their balance sheets.In the end, though, most of the money was used by the government to buy equity stakes in those firms; and, some of that money actually ended up in the hands of Detroit’s automakers — a sector for which the funds were never intended.

Now that Congress is looking at how the second $350 billion will be spent, lawmakers are taking their cues from their constituents fed up with the opaque way the banks and other firms have used the first $350 billion. Take a look:

1) 62 percent of Americans say Congress should block the remaining bailout funds until the incoming Obama administration provides more details on how that money will be spent. The poll, conducted by the Gallup organization, suggests that a majority of Americans don’t completely trust the Treasury to act independently with such a large amount of money.

2) Americans from all political walks share concerns on where and how the rescue money is being spent. The Gallup poll found sentiment among Republicans, Democrats, and Independents is pretty consistent on this issue.

3) Congressman Barney Frank has just introduced a so-called “trust and verify” bill, which would place tighter restrictions on how the remaining $350 billion can be spent. Frank, the House Financial Services Committee Chairman and Democrat from Massachusetts, is seeking to include measures to increase oversight in the proposed bill, and ways to steer funds to help Americans facing foreclosure.

It’s a complicated predicament. On one hand, the Treasury needs some wiggle-room to work effectively in changing circumstances, especially given the unpredictable nature of the current financial meltdown. On the other hand, legislators need to know what they are approving and maintain its check on the executive branch.At the very least, it’s clear from the Gallup poll that people across the political spectrum are in favor of more oversight on the remaining $350 billion of the bailout money. In other words, Americans want to know what’s going on underneath that TARP!

THE JANUARY CRYSTAL BALL

January 7, 2009

OK, YOU LOST YOUR SHIRT. Here's what you have to do.

Reposted from Anderson Cooper 360

You could not have escaped 2008 unscathed.

*The Dow ended the year 33% lower
*The S&P 500 ended 38% lower
*The NASDAQ was down more than 40%

Even if you followed all the rules and diversified your savings, you lost 30-40% or more in 2008. Virtually nothing could have saved you.

But history tells us that big opportunities follow those kinds of
declines. And you can start building - or rebuilding - your wealth right away.

Friday’s massive market rally is a perfect example of why you can’t be trying to wait out this market turmoil.

You have to be in this market, period. A lot of people don’t want to hear that but unless you have a rich uncle who is about to pass on and leave you a small fortune, the markets are the only real (legal) way to create wealth. And you can take part in them without become a trader, and without buying a single individual stock. Spend just a few hours learning about how markets work, and how they can work for you, make a few tweaks to your 401(k) or IRA, and you’re on your way to a more secure financial future.

YOU HAVE TO DO IT.

Take these 10 steps right now to become a better investor:

1. Pay off any debts costing 10% or more per year before investing for retirement.

2. Take a “risk tolerance” test to find out what kind of investor you are, and don’t put money you’ll need access to within five years into the market.

3. Tax-advantaged savings plans - especially those to which your employer contributes - are just about the only “free money” you’ll ever get.

4. Asset allocation - the appropriate distribution of your money
across several types of investments - lowers your risk AND earns you
a higher return than if you just invested in one or two types of assets.

5. Understand how different “asset classes” work. Take a few hours
to learn the key features of stocks, bonds, cash equivalents and
alternative investments.

6. Mutual funds, index funds and Exchange Traded Funds (ETFs) give
you instant diversification, with less risk than owning individual stocks.

7. Keep your investment costs low. Fees, commissions and expenses
can eat a big chunk of your returns over time.

8. Rebalance your portfolio at least once a year. Keep your portfolio aligned with your “asset allocation” by selling some of your winners, and buying more of some investments that have suffered.

9. If you leave your employer, roll your 401(k) over into an IRA immediately. It’s the only time you can convert your 401(k) into a retirement vehicle with many more options.

10. Remember that investing takes discipline, but it allows you to
control your financial future.

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