Sunday, November 11, 2007

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!



Clearly, the UK hasn't loaned Uncle Sam a quarter trillion for financial advantage, so it must be love! Especially when we can't make our own books balance, either. Curiously, nobody much over here seems to think our massive increase in holdings of Treasury stock is anything to make a fuss about. Not even the Shadow Chancellor, whose office I alerted this summer.

My current speculation is that disaster will be deferred at all costs, for a year or so, but America will start to clean house at the start of the next administration.

Jim in San Marcos said...

Hi Sack

I don't think that we have the luxury of another year. It could be all over just in time for Christmas.

As for cleaning house,probably half of our Representatives belong in jail but that won't happen.

Anonymous said...

Jim, in your opinion, is the current "housing crash, CDO, SIV, MBS, HELOC, etc..." enough to send our economy into a recession?

Can the government and central banks diffuse this situation, or is it too big?

If they try to inflate our way out, is there a possibility that there could just be a "small" reduction in the standard of living, or has it went too far?

Otherwise, is there any hope?

Jim in San Marcos said...

Hi Anon 6:47

If government gets out of the way, this whole thing could be over in less than a year. Mark it to market, take the loss and start over. This is what happened in 1907.

Government intervention and et all made this mess.

Inflation could lead to ruin of the savings of the middle class.

I am not sure where we are heading but when our Congress says that the money is in the bank for retirement, it just isn't there.

As to the recession bit, we have arrived, depression next stop.

Anonymous said...

I've been reading Galbraiths book on the crash of 1929. Back then, the president kept making statements about the good health of the economy even after the crash. I've noticed a similar trend now. In fact, there are more similarities to 1929 than 1987. Should we be scared?

Jim in San Marcos said...

Hi Anon 5:14

I read his book (its a good one) and others dealing with 1929 era. The theme of this blog is not about what is going to happen, but rather the fact that no one will realize what has happened for several years.

The great depression started in 1928 and it was not realized by the people living then until 1931.

When I was a little kid driving with my dad through Coral Gables Florida, he pointed at all of the houses and said, back then you could have your pick of any one of them for $200. I am beginning to understand what he meant.

Fear isn't in the equation. There is money to be made when we hit bottom. The trick is having cash in reserve.

Anonymous said...

Jim, this is Anon 6:47 again, I keep reading about how the GCC is thinking about pegging their oil to a basket of currencies instead of the U.S. dollar, in the post to Anon 5:14 you said:

The trick is having cash in reserve.

I do have a little cash put back but with the "real life" inflation going on, and this talk by the Arab group of depegging, I`m worried that I might be saving in vain. If you have time could you give me your thoughts on this?

Jim in San Marcos said...

Hi Anon 6:47

Keep what ever investment plan you have. I'm only suggesting that now is not the time to go into debt. Plus make sure you have 3 to 6 months earnings saved up. Life is less stressful if you have a cushion in the bank.

The government still has to make the choice inflation or deflation.

Inflation is favorable to the debtors and ruins your savings. Deflation makes your dollar go further.

So either your paycheck increases so you can afford the gas and the higher priced housing or prices drop back to more affordable levels.

The only investment advice I would give is don't be greedy and avoid the concept of "Investing to get rich," it's a sucker bet.

Anonymous said...

Thanks Jim,
Anon 6:47