Will bank downgrade rock recovery?



Kyle Harrington: I'm very concerned. I think this market has already priced in this downgrade, hence the reason the market is already priced up a bit today. I have been saying since January that the market is going to have trouble, there is going to be continued volatility going into the November election and I stick with that point. I believe that the banks have severe problems, lending to small businesses is going to continue to be a problem and they are going to need to look at other ways, whether it is ATM fees increased, quarterly statements that they are going to have to charge for in order to keep solvent.

Gary B. Smith: I agree Lori. To me it was kind of silly. I agree with most of Kyle's points, but this is kind of after the fact. Basically, Moody's came out and said that banks are going to be having trouble. They won't be making as much money as they have in the past. Big deal! Who the heck doesn't know that. I mean Captain Obvious to the rescue! Kyle made the good point, I mean I do think the economy is in trouble. We spent almost a trillion dollars in stimulus. We still have high unemployment, it's not going anywhere, we have tax increases coming if the Bush tax credits expire. We really have seen nothing good out of this economy and until people get back working that is going to start everything. I don't see that leveling off or picking up anytime soon. That is what has me worried.

Tobin Smith: Well, it could be but remember that the banks aren't lending as much as they have. They were just starting to go there. If you look back at the numbers, small business lending actually is up quarter over quarter if you get to that point. Now, these downgrades, without getting all the criteria, they have to take some of that cash out of the piggy bank and they have to put it up as collateral for all of the stuff that they have been doing. What I think you are going to see happen though is I think you are going to see these regulators move to goalpost in so that they get extra time to absorb this because this is a political age and right now this is the one thing that could take us down.

Jonas Max Ferris: It's the old mandate of the banking system, you have to lend money to losers. You have to play it conservative and hoard up some cash. Look, investors started downgrading these banks about five years ago. That is why bank stocks are the worst performing industry group pretty much anywhere. The bank stocks were actually up Friday because nobody cares what Moody's has to say anymore. They are about eight years late on this ratings downgrade. I will say that the danger is that banks-you want banks to get a little recklessness points so that you can get an economy going so that people can get a little money down to buy some real estate, start a business-that is how you get things going. You play it safe and you only lend money to the triple A rated credits, people out there who don't need to money, then you don't get the money from people refinancing. That is not going to get us out of this slow growth economy. We want banks to get a little more mid 2000's.

David Mercer: Nor does it signal that the economy is going to implode as well, and we shouldn't be taking the recent downgrade as an indicator that you throw the baby out with the bathwater. Look, we have created 4.2 million private sector jobs so let's not forget that. We have created 435,000 manufacturing jobs. That is where I put my money and my bets on. We should be encouraging and raising the flag on that and not raising a white flag because the bank has got a downgrade and packing our bags and saying that the economy is going down the toilet. That is not at all the case. I feel like to Governor of Ohio or Rick Scott of Florida championing all the positive trends, yet the Romney campaign is asking me to downplay those successes.


Gary B. Smith: It would be getting rid of the individual mandate and leaving everything else. Look, I'm not in favor in any way, shape, or form of Obamacare. I think the whole thing is unconstitutional but the whole point of the individual mandate is that everyone pays in. The reason that is important is that the people that the insurance companies have to take with the terminal illnesses are being covered by this great pool of money. If you take away that pricing power then what happens is if I have a terminal illness and I decide at the very last minute that I am going to get health insurance everyone that is already paying has to pay more. So what is going to happen? Its inevitable that costs are going to go up across the board for everyone that is paying for insurance right now it is absolutely horrible.

David Mercer: Well fortunately Gary is not a constitutional lawyer sitting on the Supreme Court, that is for sure. For a lot of people that do have pre-existing conditions I am sure they are cheering that he is sitting right where he is with us and not on the Supreme Court. I do believe that we will see it held up, that being the individual mandate in large part because of this-that is Newt Gingrich, Mitt Romney, Heritage Foundation, everybody was for the individual mandate before Obama was for it. They are going to find out that the economics of insuring 30 million more people under coverage, which allows the costs to be spread over a larger population will be the defining notion that allows them to go ahead with the individual mandate and also those very popular benefits like pre-existing conditions being covered or kids from 18-25 staying on their parents insurance rather than having to go out on their own and getting it. For those reasons, we are going to see a positive result come out of the Supreme Court, if we don't, we are going to see a lot of costs accruing to those who are already covered.

Tobin Smith: Lets talk about the economics, the actual facts of this. Let's use New York State. There is this idea of guaranteed issue. If the mandate goes away but we still have to offer health insurance to everyone who is already previously ill that is not health insurance-that is prepaid health care. That is a big difference, that is not health insurance. If you look at New York, they went to this guaranteed issue community rating where everyone has to be offered healthcare at the same price. Life insurance you wouldn't do it, auto insurance you wouldn't do it. If you have accidents you pay more, if you drink and smoke you pay more in life insurance. To put this type of rate fixing into the system will take just like New York. We will be up 25 percent in premiums the very first year and our premiums will double over the next 10 years.

Jonas Max Ferris: It is actually apples and apples because the Massachusetts plan from Mitt Romney works because it has a mandate. Insurance always works because there are a lot of people who have insurance who don't get sick and they don't light there house on fire and they don't get in car accidents. If you only have people who have a lot of costs then everybody's premiums go up 400 or 500 percent. Im not a lawyer, I don't care about the constitutionally but if everybody in the whole country has insurance then the people who do get sick are going to make the costs go up marginally and that is how it works. Take that away and it doesn't work.

Kyle Harrington: There is no question, I mean Gary and Toby are 100 percent right, government needs to get out of the way of any kind of pricing power with respect to healthcare. Obamacare has been a complete disaster. The whole thing will become overturned.


Tobin Smith: It proves that supply and demand works. We got the extra supply and we have got prices coming down and our economy, particularly consumer economy, has stayed afloat. The one thing we have to do is keep upping the supply. Demand has come down because we are buying smaller cars, driving less, so on and so forth. The supply is the key thing. If anybody doesn't recognize it-we are the first time in the United States we actually have more oil in the world than less. That is why it is down and as long as we have more oil than supply it will stay down.

Jonas Max Ferris: Well, it is true in the short run. We might be filling up with sub $3 gas into the summer if Europe keeps collapsing that is the bottom line. Now, in the longer run what is the smart policy? Well, its not to start drilling into a crashing oil market. We aren't going to start selling off oil royalties like Clinton did in the 90's at $10 a barrel. We want to make money from government and push smart policy like Russia does. We have like a $100 a barrel royalty and then you can insure there are going to be supplies coming on when the price is high. But now it is $20 or natural gas which is already in the toilet. Lets not forget that the government owns basically all the oil that is left in America. All the private land has been drilled. So, they need to sell into it at a price that will make money for taxpayers rather than give it away like they did for taxpayers in the '90s.

Gary B. Smith: I guess the sweet spot will always be determined by the markets. Lori, I hate to be evasive on it but I do know one thing though and I have to answer Jonas. I don't think any goal should be for the government to make money. That just raised the hair on the back of my neck when he said that. Look, let the market determine there is a demand for oil. Oil is a tax on every person, every industry, every company around the world. If the oil companies want to go drill, let them go drill for crying out loud! If they want to store the oil, let them store the oil. If they want to sell the oil in the open market then let them sell.

Kyle Harrington: More drilling, lower prices. They need to readdress the issue of the keystone pipeline. By the way let's not leave out the fact that the job market will soar if we can put more people back to work as a result of more drilling.

David Mercer: If I might say to those going on vacation for the summertime, spend baby spend! And, we now know that drilling baby drilling is not the end all be all either. Higher prices or lower prices, there are speculators, there are the geopolitical scenario or horizons. There are other players in this, but we are very happy to see those prices coming down and it also proves that you don't need a keystone pipeline as the way to getting lower prices.


Gary B. Smith: Pfizer (PHE) up 30 percent in one year

Tobin Smith: Verisk Analytics (VRSK) up 25 percent in one year

Jonas Max Ferris: SPDR S&P Biotech (XBI) up 25 percent in one year

Kyle Harrington: Kimberly-Clark Corporation (KMB) 10 percent gain by next summer