Let’s put ourselves in the banker’s chair. Suppose the credit situation is getting more strung out. People are not paying on time and charging more on their cards. How could you hide it? Ans. by issuing more cards. This would make the debt per person seem reasonable and at the same time your creditors would loan you more to do the same thing, give people free money to buy more stuff.
What we have is a balloon that is inflating ever more rapidly. The reason it’s inflating more rapidly, is that it’s a real Ponzi scheme. As long as the credit card companies can pay the interest and the defaults haven’t killed them, they are still in business. More “new” customers keep the game going (how many cards do you have?).
The credit card companies shouldn’t have much of a problem paying the maintenance fees, to service the debt. They are charging 18% interest to the credit card borrowers. So they need to give their lenders of good faith 7% off of the top. That leaves them a net of 11% return during good times. So as long as times are good, the lenders to the credit card companies are getting a 7% return and the Credit card companies are getting 11% for managing unsecured debt.
Notice as with a Ponzi scheme, it’s the float that keeps the thing going. As long as there are more investors putting money in, there isn’t much worry. It’s when loan renewals stop exceeding cash demands that a problem arises.
What happens when big money decides not to renew their loans to the credit card companies? It could be considered a contraction of the money supply. That 11% float would be used to pay off any called loans. Its when you realize that the 11% in good times might only be about 3% in bad times with credit card write offs.
So let’s see, 2 trillion of unsecured credit card debt. Now, if you are a retirement fund manager and decide the risk is too great, and decide to not renew your note with a credit card bank, what happens next? Remember, how the sub prime and alt-A 100% loans disappeared? Hmmmmm!!!!
It was the banks in 1929 that bit the dust, this time “it’s different,” it could just be the credit card companies. The government is not going to bail them out. That amounts to paying off Joe Six-pack’s wide screen Plasma TV and the sex change operation.
The real problem at this point, is the problem created by giving everybody a credit card. The amount owed on a lot of the issued cards will probably not be paid. The interest on the debt was the only concern of the consumer. When payment is called for, it’s just not there. There is cash to pay the interest, but nothing to pay the principle. The people who loaned to the credit card companies have secured debt. Secured by 'what' is kind of a joke. It’s kind of like a rock, paper, scissors game, only this time its rock, paper, scissors, and caca.
Nah, it’s probably just my imagination running wild again. . . . … . .
Tuesday, March 27, 2007
Saturday, March 17, 2007
The Investing Crisis
Let’s examine two types of investments; the investment of cash into a new venture that creates a product and employs people and the second, the purchasing of the stock of a successful business like IBM.
Investment capital used to create a new enterprise; creates jobs and stimulates the economy. Society benefits from the use of the new product. It could range from building a home, a swimming pool, a county highway or what ever. Notice money was borrowed from the investor and repaid to the investor with an investment profit. Jobs were created and product produced.
In the second investment consider the purchase of IBM stock. When you buy IBM stock, you don’t buy it from the company; you buy it from someone who already owns it. IBM is out of the loop. They have a transfer agent that follows the current owner for dividend payments. Notice that the price people are willing to pay is determined by the free market. Investors in the stock are not creating any jobs or product for consumption.
The thing to realize is that your investment savings are being borrowed and used to back credit card consumption and to speculate in an already overpriced stock market. There is no investing that is stimulating employment and the economy. This tremendous unsecured credit card debt can’t do more than get worse with all of the new cards being offered.
Just as rents could end up determining the values of real estate, so could dividends determine the price of stocks. IBM at $94 only pays $1.20 dividend. So as a retiree holding a million dollars of IBM stock you would receive $12,766 per year in dividends. That kind of sucks doesn’t it?
Let’s see, it’s almost tax time and you have to send in that IRA contribution to get credit for last year on your taxes. So, with credit card in hand, do a cash advance for the IRA and pay your taxes at the same time, that’s quick and painless!
The stock market ought to climb a couple of hundred points with all of the new money flowing into all of the retirement funds during the rest of March and April. If you want to buy Google or IBM you’re just going to have to pay more for it!
I haven’t heard the word bubble when it comes to the stock market, but I have heard of the phrase “house of cards” mentioned. Remember when housing prices could never go down? It would be real bad timing for a real estate type fiasco. The Baby Boomer is in the cross hairs!
Investment capital used to create a new enterprise; creates jobs and stimulates the economy. Society benefits from the use of the new product. It could range from building a home, a swimming pool, a county highway or what ever. Notice money was borrowed from the investor and repaid to the investor with an investment profit. Jobs were created and product produced.
In the second investment consider the purchase of IBM stock. When you buy IBM stock, you don’t buy it from the company; you buy it from someone who already owns it. IBM is out of the loop. They have a transfer agent that follows the current owner for dividend payments. Notice that the price people are willing to pay is determined by the free market. Investors in the stock are not creating any jobs or product for consumption.
The thing to realize is that your investment savings are being borrowed and used to back credit card consumption and to speculate in an already overpriced stock market. There is no investing that is stimulating employment and the economy. This tremendous unsecured credit card debt can’t do more than get worse with all of the new cards being offered.
Just as rents could end up determining the values of real estate, so could dividends determine the price of stocks. IBM at $94 only pays $1.20 dividend. So as a retiree holding a million dollars of IBM stock you would receive $12,766 per year in dividends. That kind of sucks doesn’t it?
Let’s see, it’s almost tax time and you have to send in that IRA contribution to get credit for last year on your taxes. So, with credit card in hand, do a cash advance for the IRA and pay your taxes at the same time, that’s quick and painless!
The stock market ought to climb a couple of hundred points with all of the new money flowing into all of the retirement funds during the rest of March and April. If you want to buy Google or IBM you’re just going to have to pay more for it!
I haven’t heard the word bubble when it comes to the stock market, but I have heard of the phrase “house of cards” mentioned. Remember when housing prices could never go down? It would be real bad timing for a real estate type fiasco. The Baby Boomer is in the cross hairs!
Tuesday, March 13, 2007
Root Canal, an Economic Indicator?
Last week, I went to the dentist and told him about a possible abscessed tooth. He referred me to a specialist. Yesterday, I went in for an x-ray and consultation. The Doc looked at the x-ray and confirmed my worst suspicions and left the room. The receptionist came in and told me; “If I could wait 20 minutes, the doctor would fit me into his schedule.” (Usually after the consultation, you get an appointment a week away and suffer every night until the appointed day.) I nodded yes and gave her my credit card; I really wanted to run out to my car and escape!
45 minutes later, the root canal was done; I was finishing up my paperwork and talking to the Doc in the reception room. Another patient came in, and discussed his root canal problem with the doctor.
As I was just getting up to leave, I heard the receptionist say, “If you can wait 20 minutes the doctor can fit you into his schedule.” He too, said OK.
My wife pointed out, that this could have been a bad day with cancellations. But I was never offered same day service on a root canal before. Two people in a row? Talk about fast service and I wasn’t even ordering a hamburger!
Are people starting to tighten their belts? $900 dollars for a root canal could definitely make one pause for thought. I had to pay the $100 deductible with my insurance.
I could be way off the mark on this one, often times you see what you want to see and this could be just such a case. So, if anyone out there is going for a root canal consultation, be forewarned, have a good excuse ready, as to why you can’t wait around for 20 minutes.
45 minutes later, the root canal was done; I was finishing up my paperwork and talking to the Doc in the reception room. Another patient came in, and discussed his root canal problem with the doctor.
As I was just getting up to leave, I heard the receptionist say, “If you can wait 20 minutes the doctor can fit you into his schedule.” He too, said OK.
My wife pointed out, that this could have been a bad day with cancellations. But I was never offered same day service on a root canal before. Two people in a row? Talk about fast service and I wasn’t even ordering a hamburger!
Are people starting to tighten their belts? $900 dollars for a root canal could definitely make one pause for thought. I had to pay the $100 deductible with my insurance.
I could be way off the mark on this one, often times you see what you want to see and this could be just such a case. So, if anyone out there is going for a root canal consultation, be forewarned, have a good excuse ready, as to why you can’t wait around for 20 minutes.
Monday, March 12, 2007
What's in a Year?
This blog's title "the Great Depression of 2006," has come under some criticism from a few people who suggested that I change the year in the title, since it "Didn't happen in 2006."
Most of what I have been addressing, is what is not apparent at the present, but will be visible at a later time in history. The Depression or Severe Recession that we are entering is not an obvious place in time with an entry point and an exit point. If you buy the concept, we're IN and going DEEPER.
No one, in 1929 even knew they were in a depression. It's referred to as the depression of 1929 because of the stock market crash. From a historical point of view, it probably started with the hurricane season in 1928 that wiped out Florida's land speculators. It wasn't until 1931 and 1932 that people of the time saw the depression for what it was.
History never really repeats itself by going full circle, it more or less analogous to a spiral that when looked head on is a viewed as a circle but when viewed from the side it looks like a coiled spring. There is similarity to the past cycle but yet a little bit of difference. Time would represent the length component of the spring.
One gentleman suggested that I change the year on my blog every year until I get it right. I guess that perception is the real issue here, 2006 is where I peg it.
36 lenders have just bit the dust and the 100% loan is gone. Congress didn't have to act, investors just refused to buy the 100% loans. Isn't it a little like credit card debt? No questions asked just sign here and spend? They're probably the next problem child. We're at the top of the roller coaster and just beginning the first downward roll. Oh goodie!! I only told you when the ride started, so hold on!
What's in the drop on the way down? Maybe a bank failure from credit card debt, or a hedge fund collapse. Go out and shoot 36 lenders and claim no collateral damage, you're either blind or selling into this mess. We are well on our way to our California foreclosure prediction of 20,000 units for May 1. That would be a double from February 1. It could happen as early as April 1 with present data plotted.
It looks like a lot of what we are watching is accelerating. The speed is picking up. It doesn't quite give you that warm and fuzzy feeling (every muscle is taunt). Panic is in the air. Enjoy the ride!
Most of what I have been addressing, is what is not apparent at the present, but will be visible at a later time in history. The Depression or Severe Recession that we are entering is not an obvious place in time with an entry point and an exit point. If you buy the concept, we're IN and going DEEPER.
No one, in 1929 even knew they were in a depression. It's referred to as the depression of 1929 because of the stock market crash. From a historical point of view, it probably started with the hurricane season in 1928 that wiped out Florida's land speculators. It wasn't until 1931 and 1932 that people of the time saw the depression for what it was.
History never really repeats itself by going full circle, it more or less analogous to a spiral that when looked head on is a viewed as a circle but when viewed from the side it looks like a coiled spring. There is similarity to the past cycle but yet a little bit of difference. Time would represent the length component of the spring.
One gentleman suggested that I change the year on my blog every year until I get it right. I guess that perception is the real issue here, 2006 is where I peg it.
36 lenders have just bit the dust and the 100% loan is gone. Congress didn't have to act, investors just refused to buy the 100% loans. Isn't it a little like credit card debt? No questions asked just sign here and spend? They're probably the next problem child. We're at the top of the roller coaster and just beginning the first downward roll. Oh goodie!! I only told you when the ride started, so hold on!
What's in the drop on the way down? Maybe a bank failure from credit card debt, or a hedge fund collapse. Go out and shoot 36 lenders and claim no collateral damage, you're either blind or selling into this mess. We are well on our way to our California foreclosure prediction of 20,000 units for May 1. That would be a double from February 1. It could happen as early as April 1 with present data plotted.
It looks like a lot of what we are watching is accelerating. The speed is picking up. It doesn't quite give you that warm and fuzzy feeling (every muscle is taunt). Panic is in the air. Enjoy the ride!
Saturday, March 10, 2007
Simple Math
You have no savings and buy a house with 100% financing. Investors have money to invest and want a good return. Who gets burned? Who has a chance to lose money? It doesn't seem to be the home buyer, does it?
Loan qualifications are changing and it's a little too late. The damage has been done. If you have nothing, and borrow 100%, you still have nothing. At this point, if facing foreclosure, you the home owner might wonder, why not just wander away, what can they possibly get out of me?
The real question,if you are an investor, is, "Whose money was that?" The irritating part of that sentence is the verb "Was."
There were winners in this fiasco and they were probably on commission. The losers are beginning to understand the math. The only trouble here, is that a lot of people don't even know that they were in the game---yet.
Loan qualifications are changing and it's a little too late. The damage has been done. If you have nothing, and borrow 100%, you still have nothing. At this point, if facing foreclosure, you the home owner might wonder, why not just wander away, what can they possibly get out of me?
The real question,if you are an investor, is, "Whose money was that?" The irritating part of that sentence is the verb "Was."
There were winners in this fiasco and they were probably on commission. The losers are beginning to understand the math. The only trouble here, is that a lot of people don't even know that they were in the game---yet.
Tuesday, March 06, 2007
You though it couldn't get worse!
We can’t help but notice, the lenders that are biting the dust, are in sort of a rush to jump off a cliff. There is the Bakersfield Bubble blog and the Implode-O-Meter blog that have been covering it.
What is not really being thought through, is the idea that each lender had a pretty good idea of what was going to happen 3 to 5 months out. The problem is, the loan manager is out of the loop at this point. The loan has been packaged and shipped to an investor. It’s only when the investors start returning the packaged loans that the problem is perceived and enjoyed for what it is; a bad loan, a survival problem.
If you take a lender like HSBC and realize that they are writing off 10 billion this year, it makes you pause. If this is the tip of an iceberg, they’re already compromised in a bad way. Probably the most commonly heard phrase in HSBC right now is, “I don’t know how bad it is, we are trying to determine if our situation is survivable.” Just wait until the loans from 2006 reset. Most of the damage that they are trying to recover from is probably from 2004 and 2005. The big stuff from 2006 is still “floating around.”
The loan market is winding down. There are fewer people that can qualify for a loan. The loan requirements are getting stricter, and the amount you can borrow is decreasing. There aren’t too many people that can afford a house at these prices.
What investors don’t realize is that the bond market is 10 times the size of the stock market. If you can envision the collapse of major market makers in the bond market, it doesn’t take much to connect the dots and figure that the stock market has a problem that won't go away.
What is not really being thought through, is the idea that each lender had a pretty good idea of what was going to happen 3 to 5 months out. The problem is, the loan manager is out of the loop at this point. The loan has been packaged and shipped to an investor. It’s only when the investors start returning the packaged loans that the problem is perceived and enjoyed for what it is; a bad loan, a survival problem.
If you take a lender like HSBC and realize that they are writing off 10 billion this year, it makes you pause. If this is the tip of an iceberg, they’re already compromised in a bad way. Probably the most commonly heard phrase in HSBC right now is, “I don’t know how bad it is, we are trying to determine if our situation is survivable.” Just wait until the loans from 2006 reset. Most of the damage that they are trying to recover from is probably from 2004 and 2005. The big stuff from 2006 is still “floating around.”
The loan market is winding down. There are fewer people that can qualify for a loan. The loan requirements are getting stricter, and the amount you can borrow is decreasing. There aren’t too many people that can afford a house at these prices.
What investors don’t realize is that the bond market is 10 times the size of the stock market. If you can envision the collapse of major market makers in the bond market, it doesn’t take much to connect the dots and figure that the stock market has a problem that won't go away.
Sunday, March 04, 2007
Credit Card Looting
When you examine our markets, you’ll notice two types of clients, market investors and consumer borrowers. These two groups are at odds with each other (you could be in both groups at the same time).
The Market investors are looking for investment return on their capital. Consumer borrowers’ are looking for a way to consume and consider paying back what is borrowed at a much later date
The investor is willing to take more risk for higher returns; the investment plans are many and quite structured. The borrower on the other hand is consuming at a rate that is often higher than earned income. No Structure, forget the interest and spend until they cut you off.
On a micro level example, we have a consumer in bankruptcy and/or foreclosure with 5 to 10 credit cards maxed out. The consumers’ plight is very visible and as layoffs increase, the group is going to get bigger. Use that plastic while you can! It’s only money (somebody else’s).
The investor has been removed from the reality of all of this. That is, until a month ago. The Alt-A and sub prime market started to implode, triggered by real estate. No worry there, the hedge funds are coming to the rescue. The tooth fairy might also make an appearance.
So what’s the consumer to do? If bankruptcy is the final play, then why not max out the cards? That can give you and extra 3 to 6 months of the good life. So, the credit card companies are doing great. Two trillion in accounts payable with an average amount owed of $9,149 at 18% interest. This gives new meaning to “Creative Financing.” Two trillion of unsecured debt; it’s a bad joke when you realize the size of it.
Thinking of filing for Bankruptcy? The question arises, why bother? Bankruptcy lawyers cost money. Just write the credit card company and tell them you are broke and to go fly a kite (the kite part is optional). You can’t squeeze blood out of a turnip and debtors don’t go to jail.
What’s the investor doing? They’re probably sitting at Starbucks having a cup of Moca, reading the Wall Street Journal on their laptop. No problems, everything is under control.
They haven’t got a clue!
It will be interesting to see how the DOW holds up this week with the Asian markets in free fall.
The Market investors are looking for investment return on their capital. Consumer borrowers’ are looking for a way to consume and consider paying back what is borrowed at a much later date
The investor is willing to take more risk for higher returns; the investment plans are many and quite structured. The borrower on the other hand is consuming at a rate that is often higher than earned income. No Structure, forget the interest and spend until they cut you off.
On a micro level example, we have a consumer in bankruptcy and/or foreclosure with 5 to 10 credit cards maxed out. The consumers’ plight is very visible and as layoffs increase, the group is going to get bigger. Use that plastic while you can! It’s only money (somebody else’s).
The investor has been removed from the reality of all of this. That is, until a month ago. The Alt-A and sub prime market started to implode, triggered by real estate. No worry there, the hedge funds are coming to the rescue. The tooth fairy might also make an appearance.
So what’s the consumer to do? If bankruptcy is the final play, then why not max out the cards? That can give you and extra 3 to 6 months of the good life. So, the credit card companies are doing great. Two trillion in accounts payable with an average amount owed of $9,149 at 18% interest. This gives new meaning to “Creative Financing.” Two trillion of unsecured debt; it’s a bad joke when you realize the size of it.
Thinking of filing for Bankruptcy? The question arises, why bother? Bankruptcy lawyers cost money. Just write the credit card company and tell them you are broke and to go fly a kite (the kite part is optional). You can’t squeeze blood out of a turnip and debtors don’t go to jail.
What’s the investor doing? They’re probably sitting at Starbucks having a cup of Moca, reading the Wall Street Journal on their laptop. No problems, everything is under control.
They haven’t got a clue!
It will be interesting to see how the DOW holds up this week with the Asian markets in free fall.
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