Depression 2006 no Travel Agent Needed

This blog “The Depression of 2006” gets a suggestion now and then to change the year until "I get it right." The year picked might not seem like much, but is important. It leaves room for perspective. Everyone can remember the 1929 depression from history class. The fact overlooked by the history books is that no one in 1929 thought they were even in a recession. Prosperity had reached a permanent plateau. The economic machine had been fine tuned and there would be no more economic dips. The word recession had not been invented. Technology had blossomed. New to this generation were, the telephone, the car, electric lights, the airplane and indoor plumbing. It wasn't until 1931 that everyone knew they were in a depression.

Here we are in 2007. Two weeks ago there was a 10% chance of a recession, now this week it’s more like 50%. Do you get the idea that a recession is only something you can see from the rear view mirror? The government will never make the call that a recession is in our midst. They have to deny it at all cost. Otherwise it could become a self feeding downward spiral.

Right now we have governors running around trying to save over leveraged home owners. This is really hard to figure out. The homeowner today can walk away from a home and probably not even have to consider bankruptcy. Get them to stay in that “home” an extra two years and enjoy the 200K drop in value. That’s an even worse mess. In six months we have progressed from “Canaries in coal mines” to “Horses and barn doors.” To top it off, the politicians are getting ready to pass laws to protect the homeowner from being looted ever again. There is nothing your politician can do to stop people from doing stupid things, that’s how they got elected in the first place!

We have a stock market that’s down 200, up 400, down 200. If you had a car that ran like that, your nose would be broken from hitting the windshield repeatedly. This is what you could label a bear market. Burn the Shorts until they fade away and then it is down we go forever (it will seem like that unless you're under 30 and have some time to burn until retirement).

Now we hear that a Florida State investment pool has suspended withdrawals. They had 27 billion two weeks ago and now have 18 billion, with 3 billion drawn out yesterday. This is where the cities, counties and school districts parked their spare cash before payday to earn a little more. The question comes up, will the teachers be paid this payday? We’re lucky that that didn’t happen in Kalifornia (methinks I should keep quiet). For the short bus crowd, this is a run on the bank. The SIV bailout or the homeowner refi, was going to be done with OPM (other people’s money). Now everyone wants to take the “my money” out of OPM.

So we have “The depression of 2006”, it’s just like 1929. Let’s see, add three years, and that would make 2009 as the year to watch. You will know then that you have arrived. The only damn problem is, no one wanted to take the trip. Talk about ingratitude, the depression of a life time, what an experience! No ticket needed, front row seats for everyone. And you thought you needed a travel agent!

Bernanke, the Sheep Herder

Through the ages we have had Sages that could read the future from animal entrails. Bernanke does a pretty good job at this, it’s an acquired skill, learn as you go, and go with the flow. If you are not sure, be vague.

There is only one problem. Things are beginning to go wrong and Bernanke is being blamed. That doesn’t make much sense. His interpretation of goat entrails or what ever, is a defined process and hasn’t changed much. The joke is the suggestion that this guy even belongs in the loop. As long as economy was running OK, there was no problem, his wisdom was unquestioned. Now, that things are off course, Bernanke seems to be the guy that could have saved us, if he had only read the entrails correctly.

Today’s new stock trader has been brought up on the idea of the Feds are in control. These "couch experts" are afraid to even question that premise for fear of appearing uneducated or over medicated. You hear a statement that the Feds are pumping liquidity to the banking system. Ask anyone jumping up and down, what that means, or who gets the money, they haven’t got a clue. The visual abstraction of pumping money into anything is kind of vague. You are left with the feeling that things are under control. The Feds supply the who, what, why, when and where, but you can’t drive there. Useless information that's suppose to mean something to everyone!

It’s kind of like your daughter going out on a date, and you ask what they did. The reply, “We went to the movies.” That’s all fine and dandy, until the hotel calls up and says they forgot to pay for the porn movie rental. In this case, the "pumping" is more a visual than an abstraction.

The dollar is dropping in value, and the interest rate on T-bills is decreasing. This is the equivalent of losing your brakes and steering while driving down a mountain pass (minor problem). As the dollar depreciates against foreign currencies, foreign capital leaves the country. Interest rates have to rise to attract capital back. Interest rates won't be attractive to foreigners if the dollar is dropping like a Bear Sterns CDO (the new Confederate Dollar). The odd thing is that "scared money" wants to be in T-bills for security. This is driving rates down. The expected reaction, of interest rates rising, isn't happening. This has to be big. Banks only insure 100K. T-bills insure every depositer. A rich man doesn’t have to stop at 600 banks to insure 60 million. T-bills are the McDonald's equivalent of a drive thru; fast bank insurance, for the super rich.

The only thing that can be deduced from the market right now, is that Economics 101 is not functioning as expected. Business models are falling apart. The estimates as to how bad things are, have doubled in size in the span of three months.

All of this money that has been lost, it doesn’t belong to anyone. It kind of makes you wonder if Bernanke and Company are rewriting our fairy tales for Christmas. Put some "Christmas Cheer" in your tank while you drive your Hummer to the Poor House, stop by Star-sawbucks and order up a "Bernanke Latte" (Ethanol, no cream).

Deutsche Bank's View on the Housing Crisis

Here is part of an article "The Subprime Mortgage Crisis and its Wake," dated November 15, 2007, that was emailed to me by a reader. It discusses the present housing crisis and appears to have been put out by Deutsche Bank. I'm not sure if this was meant for public consumption. It seems legit.The bank has been accused of being one of the biggest homeowners (by way of foreclosure) in the U. S.

Page 6 displays their view of the future housing problem.

Double click for larger picture. Source: Deutsche Bank.



Page 28 lists the CDO and SIV exposure for banks in US and Europe. Where is Asia????

Double click for larger picture. Source: Deutsche Bank.



It does seem to confirm my contention that the banks know pretty well what's happening three months from now, right now.

Pipe Dream Bankers

Let’s see it was July and all was well, and then Bear Sterns had two hedge funds go poof. Financial funding for housing dropped dead. Now three months later you read the headline “Bear Stearns Says Worst Is Over After Writedown”. Seems as if the damaged has been contained.

The housing foreclosure rate during the present one year period has exceeded what took three years, the last time these values were reached. The sub prime resets are just beginning. We have Bear Sterns with no problem four months ago now saying that the worst is over. I submit that what we know today they knew three months ago. So to fast forward three months from now, Bear Sterns as well as the rest of the crowd could be going parabolic on losses. What they know now, we won’t read about, until January rolls around (keep quiet keep your job).

Then to top this off, Citigroup, Bank of America and JPMorgan Chase (the Larry, Moe and Curly of finance), have formed a triumvirate to bail out the SIV’s with a 100 billion dollar fund. Where do you get money like that for such a lost cause? (I can think of two sources, Visa and Master Card) It’s kind of like a hooker with VD. You get a great rate today, but you pay later (it gives new meaning to “Share what you have”).

100 Billion, that's more than 5 General Motors Corporations. Where do you get that much money from? It's a little like the joke about the psychiatrist examining a patient who asks "What would you do if a tank came rolling toward you?" the Patient say "I'd hop in my Porsche and drive away." The shrink says "Where did you get the Porsche?" The patient says, "The same place you got the tank."

The only problem I see, is that this might not be Monopoly money when they begin the program, but it could live "up" to our expectations, given time.

Rose Colored Glasses

The dollar index has dropped from 120 to 75.Doesn’t seem possible does it? No big Presidential announcement like when Nixon devalued the dollar. No wonder Gold, Silver and Oil jumped in price. I’m sure Congress will “Round up the usual suspects.” It’s your regular Bogart movie run amuck staring Bernanke and Greenspan. It has a lot to do with the money we borrowed from other countries.

Japan holds 586 billion in T-bills and China the second biggest holder has 400 billion. The United Kingdom is third with 244 billion. If you add up all the other countries holding our paper it comes to a grand total of 2.231 trillion dollars. The good thing about all of this, it’s not our problem (it’s not our money). The bad thing is we spent it!

Foreigners have “invested” 2 trillion in T-bills. Our banks are holding 1 trillion in credit card debt and maybe another 2 trillion in USA’s (Up in Smoke Assets). And then there is the Social Security Trust Fund (another USA IOU). On the plus side, the stock market was worth 15 trillion dollars last week. Hamburger could be on sale next week (bull burgers).

The 5 year T-bond is trading at 3.75%, the Fed funds are at 4.5% and inflation is roaring in at 4% to 10% (choose your own value, I’m easy). One article suggested that the 2 trillion dollar foreign investment in Treasuries has shaved about a percentage point off of our T-bill rate. That alone indicates to me that not everyone on steroids is in sports.

So much good news is floating around; the housing disaster seems to have disappeared, the CDO’s are water under the bridge. It seems as if everything is under control, we have decided to live with $100 a barrel oil. I guess that it is the current lack of bad news that makes the financial picture seem so rosy. It’s amazing how, given a little time, we adjust to our new environment and carry on with life.

Just don't try reading your latest 401K quarterly report over dinner. You're going to choke!

Money From Nowhere Going Somewhere

Private industry and government both contribute to the economy. An economist uses a rule of thumb that private investment has a 5 to 1 multiplier effect on the economy; whereas government expenditures contribute at a 2 to 1 ratio. So, to stimulate the economy, private investment is the most cost effective and transfer payments the least.

Here is where I get shot for simplification again. Divide the government into five areas of financial involvement; administration, infrastructure, defense, education and retirement.

Administrative tasks produce nothing and could be considered transfer payments. It comes from our taxes and goes into a paycheck (government, police, fire etc).

Infrastructure and defense purchases by government create jobs where something is produced for the economy. Congress spends billions dollars on the Iraq war. The money is not shipped off to Iraq. Private companies build new war machinery. This mirrors private investment returns at a somewhat lower scale.

Education is kind of a necessary lubricant for the whole system. It has returns that benefit the economy; they are not as visible. When a sales clerk can’t make change for a $20 bill, the need for education becomes very apparent.

Retirement and government health care are also transfer payments. Our tax dollars go into a retiree's bank account. This stimulates consumption but no new product was added to the economy. I know someone will say, “Hey that Social Security money is mine, I paid into the system.” How about if we cut your benefits off when you exceed what you contributed? The fact is some guy, who died after 35 years on social security, probably consumed all of your contributions and ten other people’s as well.

So let’s go one step further. Home equity loan withdrawals are another form of transfer payments. Notice, the money extracted from mortgage equity withdrawals (MEW) was not earned by building something new for the economy. Housing just doubled in price; it’s free money (this is the way the government does it). Of course, the homeowner is supposed to pay it back. It looks as if that concept has a “few” holes in it.

Step back and look at the big picture. Government can issue checks for retirement and health care costs by increasing the national debt. This is what the homeowner was doing with a MEW. The American consumer has been on a buying binge with US monopoly money. Where did all of this stuff that we didn’t make but we needed to purchase come from? Here's a clue “lead paint.”

Looks like this Thanksgiving, we are giving China the bird. Just maybe they will give us a goose for Christmas (triple pun intended).