Saving for a Rainy Day

Even governments should save for the anticipation of lean times. The collective attitude of Congress is “Why bother.” Iceland went broke as a country in October. They were consuming like us, only they were borrowing foreign money. We as a country have a hedge on this; the rest of the world holds US dollars as a form of emergency currency. If the dollar drops in value, our exports become cheaper in other countries. Conversely anything that has to be imported will cost more. Foreign creditors are left holding the bag. "Full Faith and Credit," is kind of like a prayer.

Presently the current long term interest rate in the US is about 2.6% for the 30 year bond. Using the rule of 72, it will take about 28 years for your money to double. With the present inflation rate of 12%, a savings account in a US bank is a pretty worthless investment; you end up with a negative 9.4% return. Using the same rule of 72, it would take about 7 years for you purchasing power to drop 50%. So if your savings depreciate 50% every 7 years and double in value every 28 years, you can work your way to the poor house.

Something is out of whack. Our government is 10 trillion in debt and borrowing 3 trillion to keep the show going. Isn’t there a point where interest rates have to rise because there is a risk of non payment? But the government guaranteed everything. They had to, the risk was so great that the system would collapse without government support (do you sense a catch 22 here). Interest rates are not rising. Doesn’t that imply that the system has already collapsed? Everyone owed a dollar will get a printed one. The system will be back in balance, everyone will be made whole and no one looses a dime. Who are we kidding here?

If our government had built up some cash reserves over the years instead of spending beyond their means; we wouldn't have to tax our children's future. Borrowing one to three trillion dollars at these low interest rates seems acceptable, but think again. Our total debt is approaching 13 trillion dollars. An interest rate of 10 percent would put a severe crimp in our budget; it would take 30% of the government tax revenues to finance just the interest on the debt. Total tax collections for next year could be rather anemic to say the least and that money has been already counted and spent (not collected--yet).

Government has assumed too many responsibilities. Social Security and Health Care are going to have to undergo major modifications that the “Entitled” will hate. From here, we as a nation are broke. Collective economic greed got us to where we are today.

Our government is being looked to, to clean up this financial collapse. Responsibility means saying "no" when it's all too easy to say "yes." If compound interest is the 8th wonder of the world, then the 9th wonder is probably, “How will we pay for all of this?” Decreasing tax receipts and increasing interest rates could be the next perfect storm. And now a new set of politicians gather in Washington to fix the economy. What scares me is the assumption that they can "fix" it.

Copyright 2008 All rights reserved

“Government Owned” Real Estate (GORE)

Fannie and Freddie own close to a half million /million (choose one) foreclosed homes. These are now owned indirectly by the Fed and even more indirectly by you and me. Let’s say each one has a note for 200K on it. The cash was paid out, the money was spent and the bank was hung out to dry.

In a regular real estate deal, the buyer goes to a bank and negotiates a loan. Right now the banks are a tad short of cash. They are trying to convert non paying IOU’s into performing home loans. In order to borrow real money from a bank, persons need to prove that they really don’t need it (having a last name like Rockefeller or Buffett also helps). To top it off the banks are asking for something unheard of, a down payment and proof of financial responsibility!

Why not look at foreclosures? Hmmm. Uncle Sam will loan the full purchase price plus all fees and maybe some money up front for “repairs. “ ----Just multiply the wannabe’s gross salary times five. This determines the bottom line bid amount with 100% financing.

This new program is what I call the “Hamburger Flipper Dream Home Loan Program.” This is a recast of the old “Fog a Mirror Home Loan Program.” The government will sell you a 200K home for 100K. They (you and me) eat 100K but the real estate loan is back on line being serviced by a new owner.

From a homeowner standpoint, if you can sell your present home for more than you paid for it, the gain is yours, if not the loss belongs to the government (you and me). Our government has guaranteed that there will be no losses on the sale of home loans by the banks. Such generosity!

Maybe next year, the government will throw in a free car (GM, Ford or Chrysler--your choice) and a chicken with every home loan. It kind of brings you back to that old Hoover election ditty saying “a chicken in every pot and a car in every garage,”—prosperity’s right around the corner.

It might be a good time to buy a home (I’m lying). If prices drop, the buyer can always walk away from it. The neat thing with this arrangement, the government indirectly guarantees the down side. If they print too much money, the house will be very easy to pay off with worthless dollars. One thing to consider here, is the fact that a home is a sitting duck as far as government taxation goes. Any property tax obligations would keep up with inflation.

This government housing program is a little like a hooker run funeral home. They’ll get you coming and going.

Copyright 2008 All rights reserved

Stimulate the Economy?

My wife came home and matter of factly said she had been out “Stimulating the economy” (she had bought gas and groceries). It wasn’t a splurge to satisfy a whim, just everyday stuff for consumption. You have to pause when people start to joke about stimulating the economy. The hand writing is on the wall and everyone can read it.

The car companies need twenty to thirty billion to stay in business till April of 2009. Kalifornia needs 30 billion to meet payroll up to July 2009 and they don’t have it (of course its only 18 billion right now—just wait a month or two). Sadly the only place to cut is in public services; fire, police, social programs and education. Government can raise taxes, but it does not increase incoming revenues, it does the exact opposite (the legislature will figure that out given enough time). The thing that irritates me is that some of us bloggers saw this coming and we were laughed at. Now when the reality of the situation is quite apparent, these same people have a solution that will work? Who are we fooling here?


It seems rather obvious that the government can’t spend us back into prosperity. The real problems of the 1930’s depression revolved around the failure of government to provide adequate services. The State and Local governments literally stopped functioning because of a lack of funds. The federal government should abandon this vendetta to save the banks and concentrate and focus on keeping local and state governments functioning on a realistic level.

It’s a little like old age, you can’t stop it, but if you can understand it, you can live accordingly. We can’t print our way out of this, there will be nothing left to buy unless we produce product for consumption. Printing money does not plant crops or build automobiles. But if you are a Congressman, you can save the world and redeem Democracy. The only trouble is we need real money to do it with. Of course if you subscribe to the Madoff philosophy, Congress can dazzle the world with little or nothing in the bank, and ruin millions that had millions.

Copyright 2008 All rights reserved

Look for Opportunity in Times of Crisis

Here is post pulled from the comments section of my last missive "Recipe for Failure" that summarizes our current situation

Written by: Anon on a California Mountain:

It is indeed unsettling for many to consider the fact that the force of this current deflationary motion (continually feeding upon itself as it spirals downwards, gathering more and more momentum) may at this point be unstoppable. The Fed and US government will do everything and anything to prevent it (destroy what is left of the dollar—hyper inflating a la 1930's Germany; turn us into a socialist or minimally a "government or central bank controlled capitalist state"; and so on) but at this juncture the forces may be too great to mitigate or hold at bay.

Our government (one administration after the next) has been able to avoid, cover up and push economic maladies forward for decades... refusing to face the unworkability of the systems and stubbornly attempting to prop up the status quo and "protect it" from the natural forces and laws of economics.

Maybe amidst this current insanity of ad hoc government groups throwing out unusual and arbitrary solutions, and every tool they have in their tool box—no matter how dangerous the future ramifications are of their usage—and by possibly inventing new "tools", can prop things up for another decade or generation. Maybe they'll "work the magic" and postpone the threatening debacle again.

Natural market forces just want to punish excess, errant behavior and unusual solutions (unusual solutions always become tomorrow's problems). Earlier, these forces wanted to purge the system of these unusual solutions. Now they may want to destroy the whole system so we can start anew... hopefully with ethics, a responsible view of the future and coming generations, and solid economic fundamentals.

(Keynesian economic theory was written when we were on a gold standard and before we had floating foreign currencies. It's obsolete theory! Government spending to stimulate the economy was only supposed to be an occasional tool, not de rigueur.)

The public's complete loss of confidence in the government, academia, corporate leaders, and the resultant crash of the system would be the necessary fodder for the creation of a "new civilization" as it were.

Unpredicted natural forces have unwittingly been put into play by actions implemented as early as 1913... such as: poor monetary and fiscal policies, government interference in business; the Marxist concepts utilized by FDR; Keynesian economics; corruption; excess of debt and consumption; de-industrialization; etc. etc. etc. ad infinitum.

We have made ourselves terribly "crisis prone". These multiple forces are beginning to bombard us all at once, forming a "perfect storm". In my opinion, the government's actions over the next 1-2 years (or sooner) will let us know what direction America is headed towards for the intermediate and long term: a deep and long recession, like Japan's "lost decade"... or a depression.

Being a boomer, I’ll bet that the majority of boomers (raised in affluence and security) never thought there would ever be a depression in their lifetime. We have a 50/50 chance of depression at this time. Such a collapse will not bring us into a "dark age". Of course there will be chaos and pain in the short interim. Yet, I believe that a collapse will manifest into a long needed evolutionary step—an opportunity for integrity and knowledge to flourish, raising us up to a more responsible, civilized and survival oriented status with a long term world view.

This old Chinese proverb is quite relevant: "within each crisis lies a great opportunity". We must stay positive and focus on peace and prosperity no matter the current conditions... and discover that opportunity.

Copyright 2008 All rights reserved

Recipe for Failure

Picture a small economic model where everyone works and produces a product and they get paid a fair value for what they produce. Let’s assume that the total amount of product adds up to one Trillion dollars. The cash eliminates the need to barter what you produced for someone else’s product.

Here is where I get shot again for oversimplifying, just imagine that the government steps in and spends 4 trillion dollars to bail out the economy. The net effect, you now have 5 trillion dollars chasing 1 trillion dollars worth of goods.

A lot of people have spent a lifetime saving for retirement. This introduction of new money is an effective 80% TAX on savings in the bank (using this model). If you are in hock up to your eyeballs, this is called debt relief. You borrowed hard dollars and pay back easy ones. It nice to know if you weren’t greedy and kept a level head through this whole mess you get to pay for the clean up.

The auto industry is caught in an impossible situation. Car sales are down drastically and with the layoffs, more used cars will be on the market competing for buyers. Financing will be the real issue. GMAC is not in the best of shape. Rumor has it some Bernanke "Fairy Dust" could turn them into a bank and make them eligible for a CRAP/TARP(your choice)loan.

Even with a government bail out of the big 3 autos, all the government is bailing out is the workers retirement pension plan. It’s these benefits that have put GM and Ford into a death spiral. An employer can promise the employees the moon and if the company goes bankrupt doing it, the government isn’t obligated to honor those commitments.

UAW president Gettelfinger is nothing more than a very slick poker player. He bet the farm on a government bailout and it looks like he may get it. We keep on hearing about how massive the unemployment would be if we let them fail. Question, do you still build cars if no one wants to buy one? If consumption of cars drops to 50%, doesn’t it follow that massive layoffs are in the future as a given? Unemployment is a function of consumption. The bail out will not stimulate car sales.

The whole theory of financial collapse has to do with the misallocation of resources. An example of that was the cattle speculation in Africa 30 years back. Everyone was breeding cattle and becoming wealthy (the more cattle you owned the wealthier you were considered). Then feed prices went up and the farmers couldn’t afford the cost of feed and started selling the cattle. The market collapsed, the cattle starved to death and the farmers followed them to the grave. A government feed subsidy would have only allow the problem to continue longer.

We have two problems here, misallocation of resources and the confiscation of real savings by printing money. Both are keeping the game going. California's state sales tax income from new car sales and the property assessment taxes collected on homes are both dropping fast. Public employees are being laid off. Congress needs to help out the state budgets; we need the police, firemen and teachers, the hell with Wall Street and Main Street! These bailouts for the car companies and the banks are a little like a hooker with VD. You’ll pay now for what you get, and pay later for what you got.

Copyright 2008 All rights reserved

Government Embezzlement

Dec. 12 (Bloomberg) -- The Federal Reserve refused a request by Bloomberg News to disclose the recipients of more than $2 trillion of emergency loans from U.S. taxpayers and the assets the central bank is accepting as collateral.
Bloomberg filed suit Nov. 7 under the U.S. Freedom of Information Act requesting details about the terms of 11 Fed lending programs, most created during the deepest financial crisis since the Great Depression.

Let’s just take a guess where the money is, maybe 1/3rd was loaned to the very big banks, 1/3rd was used to buy credit card debt instruments and 1/3rd was used and is still being used to keep the stock market from tanking.

Consider each bank consolidation, not as an opportunity to increase in size, but rather as a payback to the federal government for money lent. As a fair guess, most of the big banks probably have 10 to 30 billion of negative net worth. Consider every bank on this list below as doomed.


The second place that the government has to cover is credit card transactions. This is the new system of economic commerce. Everything is done by credit cards. If there is no cash to loan out (everyone is in zero percent T-bills) that part of the system would lose its liquidity and seize up. Assume massive cash infusion to keep the market from locking up.

The third place is one I really worry about. Bear with me on this one, it is pure conjecture on my part. Paulson once headed of one of the biggest brokerage houses in town. Why not create several very big brokerage accounts in these troubled banks (don’t divulge the purpose of them to anyone) and make computer trades on the DOW just like the big boys. The goal is to be a super market maker. Keep the markets from taking the big plunge by injecting liquidity and buying when there are no buyers. There is a need for complete secrecy; Cheney has been all but invisible since October and in this proposed theory of what is going on, would be the man behind the curtain.

The problem is Two Trillion is not enough to handle the current situation. It could be enough to keep the credit card system functioning and the banks, so I could be in error here suggesting that the stock market is being manipulated. But I have never seen a market like this. If they were manipulating the market, figure another 2 trillion. My best guess at why Bloomberg got refused the information, was that the figures are absurdly higher than what is assumed, rather than because of who received the funds.

We saw today part of the house of cards collapsing that the Government and all of the king’s horses can’t fix. Ponzi schemes like Bernard Madoff’s fund are the first of many to hit the fan. In the past I have suggested that probably 50% of the 10,000 mutual funds world wide are insolvent or broke. The monthly statement is done on a computer and printed out and mailed to the subscriber, how gullible can they get?

The information everyone is getting is what they want to hear. The problem is, the information being withheld could spell your ruin. As I have stated in the past, a rich man and his embezzler can go to the same resort, the only difference is the rich man has no idea that he is broke, the embezzler knows whose money he is spending, and they both will have a great time.

Copyright 2008 All rights reserved

Rotten Fish Smell With T-Bills

My wife yesterday pointed out to me that our last T-bill renewal for $10,000 only paid $7.50 for three months. I told her not to renew the damn thing, we can convert it to cash and put it in a safety deposit box. No sense in letting the government borrow it for one of their ill begotten schemes. Here is last weeks auction results.
If you want to talk about safe assets, is cash one of them? I have to question even my own thinking. Why give anyone a loan in these troubled times unless the borrower wants to pay a real return. Risk money should be at about 12 to 18 percent. Just look at what your credit card wants for financing, 18 to 30 percent interest annually.

Here is what the Fed was paying last year and it was reasonable:
There is a conundrum here, why loan money at such low rates? I have no answer except the the words "Bernanke and Paulson." We are not renewing our T-Bills, the government can "Go Fish!"

Copyright 2008 All rights reserved

Time to Take Our Medicine?

Here is a comment posted yesterday to my October 20 article on Invisible Taxation. I thought it deserved more circulation and it is well worth the read.

From Anon on a California Mountain:

I don't think there is anyway to predict economic futures in our present day. There is too much government interference; too many manipulators; the power elite; the new global economy; and many unexpected and unknown manifestations and reactions hitting us due to all of the fiddling the government has done with our economy over the last century (Fed Reserve, central banks, fractionalized banking, New Deal, off the gold standard, ERISA, etc. etc. etc.).

If the government were a person it would be arrested and sentenced to life in prison for all of its crimes and insanity.

Today we have a contraction of credit, contraction of wages, contraction of employment, spiraling deflation, we've been de-industrialized, etc. yet our misguided government leaders are attempting to solve our situation by cutting rates and offering credit ("stimulating" the economy) in order to make consumers borrow and spend?! What sort of idiocy is that? That is what got us into this trouble in the first place. The logic... if someone is drowning you pull them out of the ocean, give them a glass of water and throw them into a swimming pool? If someone is dying of hunger you put them on an austere weight loss program? You take an obese person who is sick due to food related issues and buy them a double bacon burger, fries and a milkshake? This sort of logic only belongs in a lunatic asylum.

The sad thing is that we the people have made this mess. We are the ones who elected the representatives and legislators who have built and administered this government. We are the ONLY ones who can change it. When you get down to it, it's not "the government" ... it is you, it is me. We are the cause of it all.

If we American citizens (the building block of our society) aren't educated, free from apathy, constantly alert and continually defending our rights, then the great experiment put here by our founding fathers will be a failed experiment.

We are complacent and atrophied. We've succumbed to the Super Bowl, TV, medication, Haagen Dazs, entertainment, fast foods, Disneyland, etc. etc. We've been manipulated through "bread and circuses" (a repeat of the fall of the Roman Empire). Our morality and integrity have been usurped by the negative influences existing in this decaying and degraded society.

We need to snap out of it, roll up our sleeves, get educated, draw on history's lessons, become active in our government, salvage our youth and create real leaders. Otherwise we are doomed.

When we consider the mess we are in, the first and smartest thing we can do is to go and confront the culprit that is responsible for it. And that is done by standing in front of a mirror.

It kind of reminds me of being a little kid that did something wrong waiting for Dad to get home for the anticipated spanking. Will Mommy (Congress) step in and save us from our deserved spanking? We get punished as a group for the actions of our peers.

A hat tip to: Anon on a California Mountain, thank you.

Copyright 2008 All rights reserved

Spin is the Name of the Game

Last Friday CNBC.com ran this page. "Stocks have best 5 days in 75 years." Sounds great, but the 1933 market was at about 45 (it had dropped from a high of 380 in 1929). That historic 20% increase was about 9 points up (a real barn burner). Double click for a larger view.



Then they go on to add--- "Citigroup shot up 18 percent. The stock has more than doubled this week, ending at $8.29 a share. Still, the stock is down more than 39 percent for the month."--- If you were to go back a year, it would be more like a 75% decline.

Then we have this gem--- "Auto makers rallied again, with General Motors jumping 9 percent and Ford soaring 25 percent."--- These two companies are walking Zombies. The jump in Ford seems rather spectacular (for a penny stock). Poor GM was at $50 a few years back, it's lost 90% of its value. How much longer will it be a part of the Dow Jones Industrial average?

If this is a rally, would they describe a stopped up toilet as "A forced accumulation of disposable assets?" Do you get the feeling that Wall Street doesn't want the average investor to pick up their toys and go home?

Copyright 2008 All rights reserved

The Fed to the Rescue

So the Fed saved Citigroup—saved it from what, for how long? Unbelievably the stock doubled in price. There is some real value there (if you have been doing designer drugs). I guess that they will shoot anyone trying to make a withdrawal, so there will be no run on this bank; “By God Citigroup is sound and the FDIC even said so.” Do we invoke “A curse of locust on non believers?”

If you know the difference between preferred stock, common stock and bonds, (as far as the feeding order goes in a bankruptcy). The bonds are paid first, then the preferred and what is left over goes to the common stock. I’ve got a real nice worthless certificate of some 2,000 K-mart shares to prove it.

What we are looking at here is not one bank collapse but several big ones in the future. As I have stated in the past, this didn’t just happen. The Fed had to have known about Citigroup’s problem three months ago. People are going to bail out of Citigroup. You don’t fiddle with an unknown. Especially if the Federal Government is propping it up.

The real issue here to understand is that banks run on faith. That is what makes them work. When you destroy the faith, it doesn’t matter that the bank is financially OK, depositors vote with their feet. The Fed can’t bring faith back into the markets with these bailouts. It’s a little like a hooker telling all; at that point, future clients will avoid being compromised.

Citigroup is Toast. Don't expect the Fed to "butter" your breakfast muffin. Just don't choke when they hand you the bill.

Copyright 2008 All rights reserved

It's All Good (Reprinted)

Here's a reprint of mine from over a year ago(October 7, 2007)on banks. Things haven't changed much. Look for Bank of America and JP Morgan Chase to be next in line behind Citi Group. It is hard to believe Paulson and Bernanke when they say, "Everything is under control." They can't possibly be referring to the banks!



The Wall Street Journal came out with an article on write downs tied to mortgage debt Saturday. Their bar graph (left) displays about 20.7 billion in 3rd quarter losses. Washington Mutual with 1 billion of charges this quarter didn't even make the list. The amount shown for the Bear Sterns doesn't really reflect what happened when this mess started (BS had a 1.6 billion hedge fund bankruptcy). Of course Amaranth is long forgotten.

The above chart is mixing brokerage houses with banks. So these write offs or what ever, could be coming from several different places, bad housing loans, credit card debt and hedge fund investments. Don't worry everything is "contained." Yea, right!


Here's a list of the top world banks. The banks in the top picture seem to have a handle on projected losses if you compare their net holdings (left) to declared write downs (top). But this is just third quarter losses. So do we multiply this by four to come up with a yearly total? It sounds logically conservative and nightmarish. [Note: Morgan Stanley in the top pic and JP Morgan Chase in the one at the left are not the same company, the first is a brokerage house and the latter is a bank, they were one entity at one time]

HSBC wrote off 11 billion in March, Citibank plans to announce earnings October 15 and refers to earnings as "abysmal" in their news release last week. Two banks not saying much are Bank America, and JP Morgan. It could be an eye opener when they report quarterly earnings.

Now mix in 2.46 trillion dollars of credit card debt. Here is list of the top ten issuers of general purpose credit cards:

1. Bank of America
2. J P Morgan Chase
3. Citigroup
4. American Express
5. Capital One
6. Discover Card
7. HSBC
8. Washington Mutual
9. Wells Fargo
10.U S Bancorp


The puzzle is starting to come together. We know who the players are. Citigroup made all three lists, which doesn't sound too good. They might have company, if Bank of America and J P Morgan "measure up" in the next week or two when they announce earnings. The real problem is the three month time frame this mess transpired in. How can we believe that things are now OK?

The stock market is still going up, go figure. I guess you could call it herd (heard) mentality. Follow your favorite stock commentator over the cliff.

Copyright 2008 All rights reserved

The Santa Claus Effect "Something For Nothing"

“The new President will hit the ground running.”
“This will be the smoothest transition of power ever.”
“They will get the country going.”
“The President’s choices of personnel are pure genius.”

The newspapers are full of these quotes. Is this a religious event? Is there going to be a miracle? Who writes this blather?

Three car manufactures just hit the wall. Congress went on vacation. 401K jokes are not funny anymore. There is no housing bailout. The banks don’t have any money and the stock market is behaving like a mad dog.

The consumer can’t be anything but confused. The extreme optimism that the newly elected president and his entourage will save the day, defies common sense. This country has lost a hell of a lot of money so far in this last year and there is more to follow. The easy money times are gone.

Dreams are a great thing to have, but to dream that the punch bowl will be returned to the party isn’t being real about the present situation. You hear people in the stock market saying, “Don’t get out of the market, no one can call a bottom, you’ll lose when it goes up” (talk about greed). If you bought in 1929, you were probably dead before the market returned to the same level in 1954. So yes, the stock market will go up again after it is finished going down.

People fail to realize that the world has changed and the assumptions they use as a measure haven’t. The housing speculators weren’t stupid, the real estate world change while their perception of it didn’t. Things are not going back to the way they were. The country is broke and the people in it are broke (only they don’t know it yet). If you live from paycheck to paycheck, you won’t even feel it; you’re already there.
Who ever is in control, is going to try hard to address the situation. To suggest that we are, “Going to get things going again,” doesn’t mean the same exact thing to the person standing next to you. Each one of us has different needs and that statement will fail a lot of people (like those who end up unemployed). I can see optimism if you are getting married or having a baby, but when they go out and shoot three car manufactures, the warm an fuzzy feeling just isn’t there.

I think that the biggest mistake being made right now is by Congress. They think it is business as usual and it isn’t. “Let’s wait until next year when the new government gets sworn in. They blew it on the 700 billion dollar bail out and the 150 billion dollar tax stimulus. Have you ever heard of spending money you haven’t even collected and pay it to people that you normally tax? Let’s call it the “Santa Claus Effect.” You put nothing in and get something out.

Copyright 2008 All rights reserved

More Bad News to Come?

Anyone figure out why the upside down home owner must be saved rather than prosecuted? They got free and clear 100 to 400 thousand dollars out of their home. They weren’t stupid when they withdrew the equity and they certainly aren’t stupid by giving the house back to the bank. Now Congress is upset because the banks haven’t taken the bail out money and helped out the homeowner. You can’t accuse the banks of being stupid on this call.

The average bank robber gets a couple of thousand dollars and some prison time. Consider the housing bubble a bank robbery of massive proportions. The reality is, that not only wasn’t the money recovered, it was spent! Let's prosecute these liar loans as grand theft fraud.

In today’s paper they talk about these poor people that are losing their homes. From a realistic point of view they are only losing a mortgage not a home. In a lot of cases, they had more than one to lose. Kind of boggles the mind. One guy had 8 properties that are now in foreclosure. It’s not like you have to pay the money back, just give the bank the house.

What the government is trying to do with REO housing is rather pathetic. Imagine the Dutch government trying to keep the Tulip Bubble going? They could have discounted million dollar bulbs (in inventory) to 100k apiece and provided financing to boot. Such a deal!

The housing boom is over. Somebody’s hard earned money financed these dreams that went bust. There is a hidden story here. We know the money was spent. It’s not where it's suppose to be anymore and we know that also. Just whose savings are gone? Do you get the feeling that the really bad news, isn’t news ---just yet?

Copyright 2008 All rights reserved

Congress is on Slow Simmer

Listening to the "Congressional Inquisition" up on the Hill, the last two days, it looks like the TARP program is turning into "CRAP." There is hope that Congress may see the light on this blank check bailout.

Copyright 2008 All rights reserved

The Great "Picnic" of 1929

You read about how Ben Bernanke studied The Great Depression. You never really hear him say "Things look similar to 1929", and cite an example or two. Here is a few historical items he has failed to point out.

The Investment Trusts of the 1920’s were the hedge funds of their time. A 1936 issue of Time Magazine stated;

In the twilight of the 1920's, some $7,000,000,000 worth of investment trusts were floated, according to SEC figures. Their total assets were worth about $2,000,000,000 by the end of last year (1935).

That’s a loss of 71 percent!

One of the players of that time was Goldman Sachs a very familiar name today. John Kenneth Galbraith, in his book "The Great Depression of 1929," wrote;

During 1929 one investment house, Goldman Sachs & Company, organized and sold nearly a billion dollars’ worth of securities in three interconnected investment trusts – Goldman Sachs Trading Corporation; Shenandoah Corporation; and Blue Ridge Corporation. . . . . .All eventually depreciated virtually to nothing.

So the losses in 1930 just from investment trusts would have been about 5 billion. In today’s money, that figures out to somewhere around 500 billion. (I’m using a multiplier of 100 here. Rental housing in 1928 was $20 per month and rent per month in San Marcos (if you’re real lucky) is $2,000 per month).

As for car manufacturers probably a couple hundred bit the dust. The Dusenberg and the Stutz Bearcat were nice little items in their time.

Bank losses from 1929 to 1933 were about 1.3 billion, so that would be about 130 billion in current dollars.

Before the stock market crash of 1929 stocks were valued at 89.7 billion dollars. In 1932 their value had sunk to 15.6 billion. 74 billion dollars vaporized, in today’s money that would be about 7.4 trillion.

Then if you factor in the fact that the population is 2 ½ times bigger today than in 1930 you could realistically double the amounts we are throwing about. So if we look at 1929 in today’s values, they had a loss of between 8 to 20 trillion dollars.

Normally with this sort of discussion there are charts, graphs and tons of supporting documents. Well this was done on the back of an envelope. We have calculated what the Depression of 1929 cost in today’s dollars.

Do you get the feeling that if things get worse, our "recession" could be worse than "The Great 'Picnic' of 1929?"

Copyright 2008 All rights reserved

Car Companies 3 : Government Zero

Let’s see, the car companies have between 50 and 100 billion in retirement benefits to pay out and no one is really in a car buying mood (this is a guesstimate, most current figures are very vague).

The California governor wants to raise the sales tax rate to 10%. That would be $3,000 on a $30,000 car purchase. The sales tax in this state is starting to get toxic. There has to be a tax dodge on this. Maybe the Indians will lease cars off of the reservations (you get to gamble away the tax savings at their slot machines).

The government is in a catch 22. If GM, Ford and Chrysler are not bailed out and are allowed to go bankrupt, the government (we the people) gets to take over their retirement pension plans paying reduced benefits. If we bail them out, we still fund the pension plan and the salary structured business at full benefits (upper management would just love this plan, it keeps Christmas real if you believe in Santa (Uncle Sam))

To put it in very simple terms, it’s a basic case of Blackmail by the car companies. If the government does nothing, the big three get to shed their pension plans to the government and the companies can be reborn anew after bankruptcy. That’s not a bad way to go in theory. It pretty much trashes the support manufactures for the auto industry and unemployment gets worse from there.

Therefore, Congress in their infinite wisdom, will probably want to save the car companies with a bailout hoping to only have to pay out 30 to 40 billion. It kind of makes sense (if the end product sells for about 100K). The trouble is, you can’t force people to buy cars or force banks to loan to people without jobs.

Then we have President Bush and Future President Obama both agreeing that the economy is in bad shape and the government has to act now. It sounds great, but there isn’t much you can do if you’re broke. We have decreasing consumption, increasing unemployment, decreasing tax revenue, and gigantic government expenditures that are buying nothing but bad debts. I wonder if Fannie Mae will be accepting car loans any time soon?

Copyright 2008 All rights reserved

No Winners this Election

It's hard to forecast the election one way or the other for tomorrow, but do get out and vote. The rest of the world has no real idea what the election is all about. It has no meaning to them. They will be waiting to see what our reaction to the election is. That will be Wednesday.

Then you have all of the Federally appointed employees in Washington. If the Republicans lose the election tomorrow, they are all unemployed in 76 days. This tends to make you wonder if this will be like Saddam Hussein pulling out of Kuwaiti, lighting the oil wells on fire. Paul and Ben could leave nothing but scorched earth for the Democrats. Obama would get to be the next Herbert Hoover.

With a Republicans win, the people in power will try to stay the course and that won’t work either. The country is broke, there is no money left to spend.

Whoever gets elected gets a tax base that will probably decrease by 20-40 percent over the coming year. I don’t think Congress will accept the fact that revenues are down. They will continue to spend.

So if you think you are having fun now, just wait a year!

Copyright 2008 All rights reserved

Parallels from 1929

When the stock market collapsed in 1929 it didn’t just fall off a cliff. There was a large drop October 24th, some more the 28th and then the major plunge October 29th. The market recovered somewhat in the following few weeks. From there on out it was a slow death spiral until 1932 to where most stocks had lost 90% of their value. An investor buying the dips, lost all the way down. When the dust settled, no one was interested in stocks. It doesn’t mean that no one owned them; every stock still had an owner at this low price. The mood in the country changed. Any sort of investment was considered a scam. A dollar invested in the market had returned a dime. The average worker knew his savings weren’t going anywhere stuffed in a mattress.

In the 1929 crash, stock market trading volume tripled. The dramatic increase in trading was a sign of capitulation; people had thrown in the towel and given up. This hasn’t happened in today’s market. Volume ranges just around 5 to 7 billion shares a day. A high volume day of about 20 to 25 billion shares with a dramatic drop in prices hasn’t happened yet. A 900 point swing last week on average volume makes you wonder if the shorts are just being squeezed big time. If you had been short VW you got eaten alive.

The stock market could be compared to a large herd of Buffalo on the run. Go with the flow. When times are good everyone wants a piece of the action. Even if the cliffs are ahead, the herd is not going to stop, greed has blinded them.

To separate the stock market from the other markets, the economy, the housing bubble and the banking fiasco, won’t work for long. It is all interrelated. 401K’s have lost 40% of their value. When the chairman of General Motors proclaimed 60 years ago, “What’s good for GM is good for America.” I don’t think he was referring to bankruptcy.

Markets world wide are dropping and the news is getting worse. What we are looking for in a market crash is extremely high volume and a large drop in the DJIA to say 6000 and then a quick recovery that recaptures 3/4th ‘s of the loss. From there, prices and volume should drop slowly over a protracted period of time.

The present period in time differs from the 1929 era. Real estate had started collapsing in Florida after the 1926 hurricane and was trashed by 1927. The whole country had interest only 5 year renewable home loans (sound familiar). The market crash of that time imploded the investment trusts like the Shenandoah Trust and the Blue Ridge Trust (both created by Goldman Sachs) (these were the equivalent of a mutual and hedge fund combined). From there it got worse.

Look at the visual aid from my April 6, 2008 article. If we compare the 1929 Depression with today,there was one difference; they didn’t have the big green bubble.


I tend to think that Ben and Hank are right, "It's going to be different this time around." The green bubble needs more air.

Copyright 2008 All rights reserved

Socialism, the Cure for Our Mistakes

The economy and the money supply are contracting. Corporate earnings are abysmal and people are selling assets to raise cash. The government has nationalized the banking system (GM and Chrysler are next). They have loaned AIG 143 billion dollars and now the company teeters on bankruptcy (it could stop being a loan real quick). Incompetent Ben and Hank are the fools in charge. Hundreds of billions in loans will never be repaid, and no one is listening. No jail time here. Ask yourself one question; “What horrific disaster occurred that prompted the government to spend these massive sums of money?” Was it an earthquake, a hurricane or a famine?

The government right now wants to help everyone who bought a house that is left holding the bag (upside down). The Seller is in “Retirement City” enjoying the price they got for that "Fixer Upper." The taxpayer will cover the new buyer’s losses as the home’s value drops; such a deal!

Let’s see if I have it right. It’s OK to make money. But if there are massive losses in the private sector, the government will cover the losses. Free enterprise is for profits and socialism is for the losses. It's so simple even a caveman (Congressman) can understand the principle.

Last month half of all houses sold were foreclosures or REO’s. That doesn’t sound very promising for the economy. Enter the government who now provides “liquidity” to the banks for home loans. There is only one question on the new bank loan applications; “Do you have a job?” This is a tad more selective that the previous “Fog a Mirror” test for a home loan. No need to check the buyer out too closely, the loan will be government insured;

Senator Barney Frank wants to make sure that the banks are loaning the money for home loans rather than fixing their bottom line. "A dollar down" moves you into an REO and of course there is a bonus check up front (for needed repairs). The lien holder [insert nationalized bank name here] gets 50 cents (a guesstament) on the dollar payoff on the old loan. From here, the bank sells the new loan to Freddie or Fannie.

The program makes sense, to those that never did well in math. No closing costs, no money down, cash back and live rent free for 8 months then move back in with Mom and Dad. The people who have lost homes to foreclosure probably don’t qualify yet (Senator ‘Sesame Street’ Frank will probably fix that). Just wait for your kid to come home and give you the good news, “Dad I just bought a home for a dollar down!”

Frank wants the banks to loan more money (pushing on a string comes to mind). You'll need more that a toaster for bait. Nobody, right now, is in a hurry to buy a house, but there are a couple of million people wanting to sell you one before prices drop even lower.

You kind of wonder what we are getting for 4 trillion dollars, besides an education. I guess there is no real reason to worry; no one was ever serious about paying off the national debt, it just wasn't supposed to get this big. It is utterly amazing how this financial meltdown has produced so much destruction with very little physical damage. Nobody saw this coming, but to say the cure is obvious doesn't ring true. Welcome to the world of socialized finance. Our kids get the bill and Congress has exceeded our wildest expectations of gross incompetence.

Copyright 2008 All rights reserved

Dow 6000 Next Week

Relax, no reason to panic. In today’s WSJ everything is just rosy. There is a years worth of bad news in just one issue! CALPERS lost 21% of it fund since June (48 billion dollars). They even mentioned that 63% of their stocks were in the global market (talk about dumber than a sack of rocks). They might have to ask California employers for a 4% increase in contributions on top of the current 13%.

Then on the same page there is an article projecting state budget shortfalls for next year ranging from 2 to 10 percent depending on the state. Let’s just triple that to be more reasonable 6 to 30 percent. California was projecting 5% so we will figure 15%. What part of the state budget gets cut first? CALPERS employees: Teachers, Police, Fire, Highways and all sorts of government services. This is going to be fun for everyone!

Page 3: Chrysler will slash 5,000 white collar jobs. GE is going to cut their budget by 500 million. Christmas is just around the corner and Santa is at a hock shop pawning his sleigh. Talk about putting an "X" in Xmas!

Then on one of the back pages was a list of the top Mutual Funds. Notice the figures are as of 9/30/2008. The last 24 days didn’t do much for this years returns. (Double click on picture for a more irritating image)


Some stock analyst on one of the networks stated that there was 6 trillion dollars on the sideline waiting to get into the market. In order for that money to be absorbed by the market, they have to overpay for the stocks purchased by 6 trillion. Every stock has an owner even if money is on the sideline waiting to buy.

Denninger called for a collapse last Friday and it looked like a sure thing. The surprise was the massive buy programs that kicked in after the market dropped about 550. This had to be a coordinated group effort. Ben and Hank have been awful quiet the last 4 days, they probably had a hand in Friday’s outcome. I would bet that most of the hedge funds have redemptions of at least 50% to unwind in the next 65 days. Look for the Hedgies and Mutual Funds to sell into any rally with a vengeance to raise cash.

Examine the age of those commentators on the business news channels; there hasn’t been a bear market in 33 years. These people haven’t been alive long enough to experience one.

World markets are dropping. There is no "up" from here, only how far down are we going. Of course if you listen to "Damage Control," now is the time to buy. I foresee the Dow at 6,000 or less by November 5.

Copyright 2008 All rights reserved

A Dollar Down Moves You In

It's a great deal. For one dollar, you can buy a California foreclosure (here is some paperwork forwarded to me by a friend).



This is a 3 bedroom 1.75 bath 1250 square feet and built in 1961. Zillow states that the previous tax assesment was $1765 for 2007. Indicating that it was valued at/or purchased for about $175,000. This REO was sold for $125,000, no down payment.




I could be wrong but it looks like Christmas came early this year.



So looking at the docs, it was purchased for one dollar. And the bank is going to kick in 25k for closing costs and repairs. Can you believe this? This beats the hell out of renting; you don't even have to come up with a deposit.

So if you want to buy a house in California no money down, have we got a deal for you! Isn't that how we got into this mess in the first place? Nah, it must be my imagination acting up again.

Copyright 2008 All rights reserved

Invisible Taxation

Everyone is saving their earnings or paying off debt. People have stopped consuming new product. How do you get people to spend to stimulate the economy? The government can’t very well tax us more. The US taxpayer is stretched out already.

Here is the way it is done. Picture a pecan pie sliced into fifths, 5 pieces, one for each member of the family and one for the government. If the government consumes that piece, it is considered taxation. Just suppose the family members don’t want to eat their share of pie, they want to save it. 4/5ths of the pie is left. Now the government takes one slice of the pie and divides it up into 4 pieces for the family members to eat (a check from the government to spend as you choose). Now there are only 3 pieces of pie left but the family members believe that there are still 4 they trust the government. By giving the family members a piece of a piece of pie, they(the government) got some of the pie eaten.

This is what the government is doing. The pie represents our collective savings. The government can give us a slice of our own pie back to us and this is inflation. We didn’t get anything real; it was already ours. The number of slices left have to be re divided to reflect the amount each person is entitled to.

When the government decides to spend tremendous sums of nonexistent money, they are actually spending our savings by taxing them by way of inflation. People are scared to death that they will lose their savings and are willing to take zero percent interest in T-Bills. In essence, they are being eaten alive by inflation that is now probably close to 25%. Your dollars are safe; your purchasing power is shot.

This dichotomy of printing money and declaring our savings fully intact is kind of like a snake feeding on its tail. There comes a point to where the absurdity of the reality has to set in.

I think that people are starting to wonder if Paulson and Bernanke are incompetent. I believe they are. That won't stop them from doing what they are doing. They are going to write some history at our expense.

Copyright 2008 All rights reserved

Buffett " The Financial World is a Mess"

In today's world, wealth is considered a measure of a person’s intelligence. Thus, when Warren Buffett speaks everyone listens. Here is a condensed version of his October 16th investment advice from the NY Times. Click on this Link for the full report.

The financial world is a mess . . . . Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise; business activity will falter . . . . .

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. . . . . But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. . . . . But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. .. . What is likely, however, is that the market will move higher . . .

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent.

I like the guy, but I think he’s off in left field. After the crash of 1929 and the fall to July 1932 the market didn’t come back for 25 years. That’s not much comfort if you are 60 years old already. Your retirement vacation plans could become just dreams. What happens to your portfolio of investments presently, will determine your lifestyle for the rest of your life. Retirement is not a time to invest in the future.

Warren mentioned the fact that the Dow advanced 30 percent by the time FDR took office, that’s about 12 points (a real barn burner). The market dropped from 381.17 September 3, 1929 to 41 on July 8, 1932. The Dow dropped 90 percent never to get back to that 1929 high until 1954.----25 years to break even, gee whiz I'll be 87 hoping that I don't need day care!

What's everyone is saying? “Don’t panic!” I emphasize, there has been no panic--- YET! People have figured out that things will get worse and are willing to settle for far less that the full amount. The panic starts after the first 20% in line get their money (80-50% less than anticipated). At that point you have 80% of the remaining investors fighting over the 20% that is left; now that's a panic.

The government angle, if everyone stays in the game, the game can continue. But the question arises “Who lost all of this money?” If you can take your funds out and put it in a shoe box, you can answer “Not me.” Step one, get a shoe box.

John D. Rockefeller, after the market crash in 1929, announced that stocks were undervalued and he was buying more. It was joked that, he was the only one that had any money left to buy stocks.

Buffett is suggesting that we invest in America. It sounds nice. But when a government starts "investing" in banks, it's time to realize that the game is almost over. To get to where we are today, took a lot of "common sense" and the desire to get rich. The normal reward for stupidity, greed and incompetence in business is bankruptcy. Paulson and Bernanke are trying to keep that from becoming a financial reality.

Warren's right, the market will recover (after it tanks)--just not in my lifetime.

Copyright 2008 All rights reserved

Doom and Gloom

The Dow goes up 1,000 points. Sounds a little steep for one day doesn’t it? I was at the supermarket today and was looking for the cottage cheese. The real cheap stuff that I buy was $2.29 a pound. It was $1.69 one month ago. Boneless chicken breast is now $6 dollars a pound. I went to a dollar or less store and they were busy ripping the 60 cent stickers off of the cans and putting 80 cent stickers on them. I bought a few that still had the 60 cent stickers.

Inflation is appearing in the food chain. Everybody has to eat. From shopping over the years, I have noticed an awful lot of people don’t look at prices when they shop. They just put it on their credit card and go on their merry way.

Bernanke and Paulson are going to get the system working again with massive loans to the banks. The trouble is, the people that want the credit can’t even pay their present credit card bills. It’s kind of hard to figure out how this will work out for them.

Did you notice that the Fed has now bought into several large banks? Another 250 billion dollars was borrowed using the “Good Faith and Credit of The United States.” Real investors might demand some REAL money and gold comes to mind.

Printing money on this scale is “Taxation without representation.” We fought a war to stop that and became a country in the process. Now we are doing it to ourselves, go figure.

The Fed is throwing money around in extreme fashion more and more frequently. Look for a cataclysmic collapse of the Bond and Stock market within the next 15 days. That would put an end to their spending fictitious dollars and could stop those two nuts from hyper inflating us into ruin. If not, we are toast.

Copyright 2008 All rights reserved

The Crisis is Over???

Yesterday someone declared that the stock market has hit a bottom “It’s going to be up from here.” The guy probably didn’t get his life boat seating assignment yet.

In the 1929 and 1987 stock crashes, there were tremendous surges in stock volume (there is nothing hard about picking them out on the following two graphs).

Double click for a larger image.
Friday saw close to 11.5 billion shares traded on the NYSE. It was high volume but not a triple of the normal volume. That’s what you need for a body count in a real panic (the far right side of the graph below is Friday's close).


The way the market gyrated within a range of 1,000 points leads one to conclude that the stock market is on life support. The day traders probably got creamed. At the market close, it looks as if “unknown market makers” bought everything that would have hit the fan. That means that the Fed gave some humongous loans to cover the "surplus purchased inventory." Everyone expected a sell off at the close. Friday's market makers wouldn’t normally want to carry a large amount of stock forward into next week. The Fed is renowned for its banking shenanigans and rule changes made on the weekends.

What we are looking at is a loss of faith in the economy. There is a lack of credibility. Our leaders claim everything is under control. The irritating thing is that they keep repeating it, after each new disaster. The graph below more or less shows a stock feeding frenzy that has gone hyperbolic on volume. There is nothing to worry about, Bernanke and Paulson have it under control. How come that doesn't calm my mind?

Let's face it, these graphs ought give a hedge fund manager spasms of the lower colon. Next week, look for a dramatic drop in the stock market. A tremendous surge in daily volume will indicate a temporary bottom. The only way to raise capital right now is to sell stock. The banks are not loaning money period. The mutual funds and IRA’s will be selling because of redemptions. The fund managers are in a catch 22. They want to buy into this panic, but they are forced to sell to raise cash for share holder demands.

After the volume surge, then comes a steady decline in trading and the slow slide down hill for 2 to 3 years. I think I’ll mosey on down to Wal-Mart and pick up a job application; there is no line--yet.

Copyright 2008 All rights reserved

Call It a Disaster

The Pundits suggest that there is still a chance of avoiding a recession. Institutions are dropping dead everywhere. Our government is spending 700 billion that it doesn't have. Banks are not lending money. Home owners are walking away from their homes. The Governor of Kalifornia is begging for an 8 billion dollar loan to keep the State operating. Maybe it's my imagination, but aren't we a little past the word recession?

If you don't like the word recession or depression, how about the word DISASTER. That way, we don't have to worry about whether or not we are "Politically Correct."

Common sense suggests that this whole ball of wax is in meltdown mode. There is a very good possibility that several European banks may fail in the near future (like this weekend). The Euro cannot survive unless it can be inflated. That isn't going to happening. Do you give the "Spend thrift Italians" 100 billion Euros and the "Frugal Germans" nothing --I think not. Nationalism will kill the Euro. The Euro is based on principles that don't allow for politicians to inflate the currency. No Paulson type bailout for them, look for a collapse.

Has the world ever experienced a financial crisis of this magnitude anywhere in history? Not to my knowledge. The real certainty is that no one knows what will happen next. It's not hard to figure, what ever is next, won't be something pleasant that will leave you with a warm and fuzzy feeling.

Asian markets are taking a beating. It looks like the Dow is about ready for a blindfold and a cigarette. It's a little like Christmas in reverse. What you wanted, you didn't get. What you got, you didn't want.

Copyright 2008 All rights reserved

Today's Program Guide

This could give you some idea what may happen today with the stock market.



Copyright 2008 All rights reserved

Where To From Here?

Right now we are beginning to see the effects of the economy grinding to a halt. It is controlled by the financial interaction of the markets. The real estate industry is unemployed as are the homebuilder and it is spreading throughout the country.

Don’t for a minute think that government can fix this mess. It doesn’t work that way. Picture your wife paying the monthly bills year in and year out. That’s our government in action. Now when the husband tells the wife he has lost the house, don’t expect her to come up with some plan to save the family home. That’s just not the role of government.

There is no problem starting over if you are young, but that may not be the case for a lot of us. Today the government said that retirement funds have lost over two trillion dollars already. The stock market is getting a little bit green behind the gills. I hear pundits say “Don’t panic and sell and get out of the market you’ll lose money when it goes up.” It makes me think; maybe these guys were selling real estate two years ago. Greed will get you every time ("Stay in there, you’re going to get rich").

What happens from here? Things are going to get a lot worse. If you have expensive toys, unload them now, prices are going to drop fast on items like big boats ("yachts" if you paid more than a $1,000 a foot). Try to keep living in the home you occupy even if you are upside down, the banks will probably welcome you as a renter while they go through the foreclosure process (that could be two years of low rent). The schools offer free lunch programs for your kids.

Sadly you can’t believe anything that the government tells you. We know that we are about to lose a lot of our saving. So if we diversify into different things, we have a chance of limiting our losses. The trouble is, we have an awful lot of people with nothing to lose already (they’re already broke). That is the scary thing that we are facing.

Where to from here? Congress will finally "grow up" and rewrite Social Security and Health Care benefits. It ain't going to be more, but less. The silver foxes will get a free walker and a life time bus pass. Life is funny, it seems like just yesterday that I could hardly wait until I turned 18 to buy beer. Now I can cry in it with sincerity.

Copyright 2008 All rights reserved

Congress Creates New Religious Order

Congress just passed a 700 billion dollar funded religious organization bill called “The Church of the FDIC.” Paulson is to be ordained Pope with Bernanke as head priest. Their Wall Street Bible will be published shortly, by Goldman Sucks Inc. Their motto “Hand basket to Hell or Do It My Way!” They have a great supply of hand baskets to choose from (for slackers).

This new religious order is going to cure the sick, and raise the dead. We are not talking souls; we are talking non living institutions.

Our retirement accounts are on their way to hell anyways, why do we have to buy their hand baskets?

Double Click for a larger picture.

Where to from here? Dow 2000! It won't happen right away, you can buy the dips all the way down, but by 2010 you will have learned a financial lesson that will last a life time. If you are like me, age 62 is not the time to be looking for a good paying job.

Copyright 2008 All rights reserved

Interest Rates Will Jump to the Sky

The government claims that the small businessman can’t borrow money and consumers can’t purchase new cars. Bernanke needs 700 Billion to fix this liquidity crisis. Interest rates rose a bit yesterday, 3 month T Bills are paying a little better than 1% per year (not per month). New car loans are under 7%. Do you get the feeling that just maybe the consumer stopped buying?

What happens when there is a shortage of funds for borrowing? Interest rates rise. They sure don’t seem to be rising. Inflation is roaring in at 10% and everyone is hunkered down with a bank deposit just under 100K. If I didn’t know better, you would think that the banks were flush with cash and nobody wants to borrow money.

If banks were to pay a decent interest rate, money would become available. 12% interest on cash might be better than holding on to the yellow metal which pays nothing. Of course if a banana republic printed up 700 Billion Pesos, gold might be the currency of choice. The wisdom of owning gold boils down to one thing, you can mine it, but you can’t print it. The government is out of the loop on Gold.

Remember back to the last housing slump from 1992 to 1998? It was 6 to 8 years in length depending on where you lived. Here we are into one year and one month of this crisis that started with the implosion of Bear Stearns and we need 800 billion. What will we need next year? You kind of have to wonder about year six, using year one as a measure. If we were to do that, it looks rather grim.

The one thing that really keeps a market going is confidence, there is none. The opportunity to make money with borrowed funds is pretty much gone. We can’t borrow a dime from the banks unless we can prove we don’t need it. Whereas the lenders that are broke, are given unlimited loans on bad debt.

This bailout mess is kind of like having flatulence contest in a crowed elevator with the winner getting a government cash award. It takes a real "Stinker" to win.

This could be the last part of the “Perfect Storm.” We the people ( AKA government) have 10 trillion in debt. If the interest rates climb to 10%, that’s one trillion a year of the budget for interest only. If interest rates go higher, the game could be over. If Paulson injects the new found funds, institutions will fight for the cash by offering higher rates for real money deposits.

Next week Bernanke and Paulson will be sponsoring the "Wall Street Iron Man Enema Competition." You don’t have to participate in the event to be “Cleaned Out.”

As a post note:

This was written before the Bail Out was passed. In my humble opinion, Congress raised no funds to pay for this from their tax base. The fact that Congress said they must do something to fix this crisis is a joke and a travesty. They did nothing. No real money was added to the system. The Fed could give counterfeiters a bad name.The fact that they spend 800 billion (that they didn't have) sounds impressive. Don't be fooled by the smoke and mirrors--I feel disappointed and let down by what has happened.

Copyright 2008 All rights reserved

A Prayer for the Future

Our Congress can spend days on spending 100 Billion on education or the war in Iraq. But yet there is no question that 700 billion spent on stuff already deemed worthless by investors unwilling to buy it, will save our bacon.

Two weeks ago there was no problem. Today we have experts from nowhere that positively state "This will solve the problem."

I question their training. Two mixed drinks and a hooker on your lap might make you a Congressman but don't make us pay for it. 700 billion dollars would buy an awful lot of infrastructure that is dearly needed by every city in the country.

We can print the money and pass the debt on to our kids, and in my opinion only a pervert could do something that rotten.

Let's face the music and take our lumps like men. We need to take responsibility for our past actions and bite the bullet. We screwed up, let this mess collapse and we can rebuild anew. We can fix it by doing nothing, don't pass it on to the next generation.

Copyright 2008 All rights reserved

Crash Defined

A crash is pretty much just a redistribution of wealth, from the rich to the poor. The very rich stand to lose 90 percent of their wealth. With the poor, 90 percent of nothing is still nothing.

The bail out is a tax on everyone in the country ranging from $5,000 to $20,000 depending on the fool talking. For a family of 4 that’s $20,000 to $80,000. If you consider that 3/4ths of the population pay little tax, this is going to be a very heavy wagon to pull.

If we do absolutely nothing to fix the mess, there will be a blood bath. The top 10% of the population get their lunch in Spades. After that, Mr. Rich guy is going to be looking for a job.

This doesn’t mean that we silver foxes walk away Scott free. We are going to get burned badly. That would have happened after the bail out failed anyway. We can’t print our way out of this mess, but can't we let the idle rich implode into nothingness?

If the government wants to do something, let the house of cards collapse. Then print money to keep people in food and shelter; this is a transfer payment I understand (plus it is a government responsibility). There should be no bail out support for the super rich. Paulson kiss your absurd 700 million dollars goodbye.

This event if understood for what it is, is a great redistribution of wealth. With the government buying failed assets; it doesn’t make them worth any more. What good does it do for the government to own them? Private industry has a loss, let them eat it!

We have survived one House of Representatives vote, we need to make sure that they understand, that we understand that printing money won’t solve the problem. This cannot be pushed into the future. The money is not there even if it was an option.

If you have a moment click on THIS LINK and express your concerns to your Congressman. Do we give the rich their money back? ---Or do we say “Suffer with the rest of us!” Vote now, and write your Representative a letter. I really think that we are being listened to, take the time to give your Representative your view; we are not billionaires, just voters.

Remember one thing, for government to pay the bills, we the people have to earn it. There are no quotes around the word earn. This next election could be all about, “Toss the Bums Out.” We don’t need a President as much as we need Congressmen that have some testosterone.

Please do me a favor and click on the link and give your Congressman you view, we can’t print our way out of this mess.

Copyright 2008 All rights reserved

Bailout Mystery--It's the Retirement Funds

All of a sudden we need 700 billion to save us from impending doom? Everyone up on the Hill in Washington understands what is going on. You’d think that they would explain what changed their minds to make them go along with this bailout. Plus you'd like to think that they would inform us of the problem. All you hear is that this will put confidence back into the financial system. People will be able to borrow again. The last I heard, it’s hard to force someone to borrow money if they don’t want to. It’s a little like that saying, ”You can lead a horse to water, but you can’t make him drink it.”

We know two things. This action is going to restore confidence and the perceived problem is simple enough for a Congressman to comprehend. The impending calamity has to be big, simple to understand and easy to project the outcome of impending doom without creating a general argument.

Our government is already insuring the banks and anything else on Wall Street that sneezes. The housing market, they bought it. But there is one thing that hasn’t been touched and it fits the description above, Retirement Funds.

From my understanding, retirement funds can project out what will be drawn from the fund and can buy complex financial securities that guarantee the desired cash flow for future redemptions. This way they keep fully invested. This model could have a severe break down if the complex financial securities lock up and cease to be fungible (can’t be sold). In this situation, the fund would be forced to sell stocks to raise cash for retiree redemptions. I would suggest that Ben and Paul have been getting calls from retirement income funds advising them that the present situation is in an extremely bad way. It seems to follow that many of these funds could have been burned holding hedge funds to boot.

Here is a link to an earlier post of mine from last year with some background on mutual funds. It gives more information on the holdings of these funds and the redemption criteria.

Maybe the government is about to supply the needed liquidity for the retirement funds to cash out a lot of their bad paper. The Fed is probably hoping that the people cashing out will be putting the money into a FDIC insured bank, which is good for the economy. This increases the money supply and helps keeps interest rates absurdly low.

Why the panic in Congress? We probably have a full blown RETIREMENT FUND RUN IN PROGRESS. A lot of Silver Foxes could be quietly withdrawing their retirement funds to safer places. I think this is Ben and Paul’s little secret. If a retirement fund fails, it could start a major panic of redemptions. And if you read the link, you know that the funds own 23% of our stock market. A sell order of that magnitude could be “Game over” for stocks.

This could be an interesting week.

Copyright 2008 All rights reserved

Squirrel Economics 101

Imagine a group of squirrels saving nuts for winter and depositing them in a bank (one nut one credit in their account). Let’s imagine that a truck pulls up and helps themselves to 80 percent of the nuts. The bank now has a problem. It can’t cover all of the deposits. But notice, if there isn’t a run on the bank, there is no real problem. Squirrels are depositing and withdrawing nuts with no problem.

In this little example even if there was some form of bank insurance, what ever it was, it could not replace the nuts (their winter food supply). The amount left for all of the squirrels is pretty much set to the 20% remaining plus net deposits made until winter. In this case, there is no inflation (you cannot print the squirrels food supply). The squirrel has no idea of the life or death consequences of what the bank has done until winter arrives (retirement).

The real estate market is the truck that pulled up to our personal savings and looted the bank. In this case, we have government insurance to “make us whole again.” The money taken was spent. Notice that every dollar deposited had to be worked for (a squirrel nut).

Labor created some product. By not consuming this nut and saving it, you were putting this towards retirement consumption. The money from the boom (real estate loans) was spent on many lavish toys and is forever gone. Now we have financial institutions with only 20% of capital left. In actuality, there is only 20% of product produced left (the nuts). The rest has been consumed. It is rather academic whether or not the government prints more money to make us w(hole) again.

We have a choice, leave the banks with the 20% which will buy the 20% of produced product left or we print enough money to restore everyone’s bank balance.

I am sure this little analogy could get me shot again or could be picked apart easily. I present it as an illustration of how money relieves us from the bother of having to barter for services and goods. Once you accept the convenience of money vs bartering, the concept of just printing it, is the equivalent to stealing.

So if you are a squirrel, “It’s grab your NUTS and RUN!

Copyright 2008 All rights reserved

The Bail out Simplified

Here's my guess of what is being told Congressmen

Worst case Scenario:

If we do nothing and let the market take its course, people with debt would pretty much have 90 percent of it forgiven and those with savings would lose a big portion of it. The debtor would get title to their home for almost nothing and their debts written off. The unemployed would still be giving their house back to the state for unpaid taxes. The banks drop dead and the economy attempts to rise from the ashes. With 11 trillion in debt the government collapses.

Bail Out Scenario:

Debtors would still have to pay their bills on the books and our savings would only be diluted 50% for now and probably the full 90% when the whole thing unravels. A person with a retirement plan or bank savings, would recover half for the present. Government stays intact. Benefits paid out drop to zip. Social Security and health care reduced drastically.
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In my opinion, this bail out is an attempt to preserve the current debt structure (what’s left of it). Government figures that it is better to buy the crap that is already spoiled and try to harvest what can be saved. This is what is being fed to Congress and it might not be the whole picture. Most of the interest only loans haven’t even started to reset. So the bail out could balloon drastically.

My view: We could come out OK by doing nothing. I’m just guessing that maybe 75% of our problem debt is foreign held. So everyone gets their house paid off and debts forgiven; that’s a good thing. The banks don’t collapse but the dollar goes to hell. That’s really not a problem; the rest of the world takes the proverbial “hand basket to hell” group charter. Look for inflation at 15%. Even with severe inflation, our government could afford to cover limited Social Security and some retirement benefits. Joe 6 pack makes out like a bandit and the "Real Rich" join the "Not so Rich" (call it tough love). The real loser here could be the stock market; it still stands to lose 60 to 90% either way.

The one thing I like about doing nothing is that it gets rid of the 75 trillion dollar derivatives market. That turkey is a bill that will never be paid. Let’s try to keep it that way.

As a footnote, I could be off by a country mile. This is what blogs are all about, we try to anticipate the future not report about the past.

Copyright 2008 All rights reserved

Wall Street to Close

Paulson and Bernanke can pull the strings and control the banking and financial markets, but they really can’t do much with the stock market without destroying it. Even in a poker game, change the rules in the middle of a big hand, the game is pretty much over after that, you're going to lose.

Foreign investors will be repatriating their funds back to the homeland next week. We were nice enough to insure everyone. It’s called the “Leave no foreign investor behind" plan. The international value of the dollar (the soon to be American Peso) is in question right now. The Treasury auction this Tuesday could be an eye opener. One percent interest when you’ve just written a blank check (backed by the full faith and credit of a printing press) seems a little paltry.

Cash is being sucked out of the country. It might be possible for Congress to save our FDIC insured accounts and maybe the private 401K retirement plans. But we can’t be the lender of last resort for the whole planet. The rest of the world has to take a big hit in order for us to survive. Here’s hoping that Congress drags their feet on this bailout (give the foreign banks some time to collapse).

Over the last 6 months, we have been watching mutual fund runs, bank runs and hedge fund runs. They have all been controlled by Ben and Hank with massive cash infusions. Wall Street is a different animal, it can't be controlled in the same manner.

This week, look for a serious drop in the DJIA of 4,000 to 6,000 points and the close of the stock market for a week or two. Never happen? Well it happened in 1914 for 4 months. Several things are at play and things are snowballing at a fast rate. Major market-makers for the exchanges might be real scarce. Most people have sensed something is seriously wrong with the markets and are heading for the exits (even the President said so). With the automated computer trading system in place, this could be very fast and furious,--sleep late and wake up broke.

Monday morning at the brokerage houses you’ll hear; “Sell everything; I didn’t sleep a wink the whole weekend.” It will be a group effort. The weekend to weekend adventures of Bumbling-Ben and Monkey-Wrench-Hank have stressed everyone passed the breaking point. If it isn't in your wallet, Ben gets to spend it!

Copyright 2008 All rights reserved

Interest Rates are the Key

A government spokesman today said something that made everything click together. The statement went something like, “We don’t have to sell this stuff, we can wait until it matures and get the full value.”

With mutual funds and retirement plans, they both buy long term bonds that could mature 15-30 years out say paying 3% interest. If a fund has a lot of redemptions, the problem arises of raising cash. Selling bonds in an illiquid market is not easy. The standard procedure is to discount the face to make it attractive to investors. A 100K 2038 bond yielding 3% if discounted 50% would be sold for 50K and pay 6% interest. In 2038 you would get the full 100K. So if a fund needs money today, they discount the bond until they get a buyer. That is not happening.

The bonds are not being dumped on the market. I could be wrong, but what if the Fed is buying them and redeeming them possibly in full, to “put liquidity” back into the market? Our Government is going to hold them and get the full value when they mature.

The thing to realize here is that if this stuff was allowed to be dumped on the market, the yield on 30 years bonds might jump to 20%. That is not happening. The Fed is “saving” us. Isn't inflation at about 10%? Nah, it must be my imagination.

The neat thing about interest rates, the current price of a bond is very easy to determine, if you know the rate the bond pays, and the current interest rate. Divide the smaller interest rate by the larger one and multiply that by the face amount of the bond. That would be the current sale price on a 30 year bond. The closer the bond is to the redemption date the more they approach the face value. So if you are holding 3 month T-Bills this won’t even bother you. Waiting 30 years for your cash back is a lot of water under the bridge.

Step back for one moment and look at the national debt. Figure it is somewhere between 6 and 10 trillion dollars. What would be the interest payment on the national debt if long term rates went to 20%? Do you get the feeling that high interest rates could be the punishment that the Fed is trying to avoid at all costs? Could we afford to pay 500 billion to one trillion in interest each year on the debt? Even your Congressman can understand the math here.

I remember people saying “Housing prices will always go up.” I haven’t heard that in a while. Have you heard this one,”When capital is scarce, interest rates rise.” Could it be the problem isn’t really liquidity? Maybe interest rates are way too low. How could that be????

Common sense dictates that there is no reason to put money in a retirement fund if it’s losing money or if the banks don’t pay any real interest. Why not just spend it? People could turn to gold as an investment option. The government might have to once again make gold illegal to own.

I guess, we all need to tune into the Ben and Paul show on Monday to see what we bought over the weekend.

Copyright 2008 All rights reserved

Government Yells "FIRE" in Crowded Movie Theater

Stock market is going ballistic. It might just be time to head for the exits.

FDIC Assurance Insurance, a Failure

Federal Deposit Insurance is flawed. The original purpose of the insurance was to keep people from making a run on a bank or banks. It was to give people confidence in the system. Their savings would always be there and were safe. If you update that statement to the present day world, the word “safe” needs quotes around it.

Well, the system works for the United States and anyone else in the world that wants to open up an account in a US bank. The depositor is insured for 100K. The reason our interest rates are falling, is that the rest of the world wants our bank insurance (if you buy T-Bills there is no 100K limit).

In the 1930’s the collapse of the banking system reduced the money supply and interest rates rose. Remember too, the dollar was pegged to gold so a high interest rate for the time would have been about 4 to 5 percent. The wealth of the nation dropped 80 percent. A run on the banks dries up liquidity. The result, less money in circulation.

In today’s world your money is insured but that is really quite misleading. The banks are not collapsing because of runs. This time it is a lack of liquidity from very poor investments. The bank depositor will get his dollars back, but their redeemed funds will purchase a lot less than when they were first deposited.

With FDIC insurance, the bank money in circulation is guaranteed to remain the same. The depositor will be made “whole.” If this plays out the same as the 1930’s, a 100 dollar bill will lose 80% of its purchasing power. In this case there is no run on the bank but the effect is the same except for one thing you are not waiting in line. More money is printed to replace the money lost. The guy in 1930 lucky enough to draw his funds out of the bank had real buying power. It’s not going to work that way for us. FDIC insurance a socialistic approach to modern banking, enjoy the haircut!

The one place that the contraction cannot be controlled is in the investment markets. Look for the collapse of the stock market. This could contract drastically. The thing to understand here is perceived value. If you need cash fast, perceived value is the price you can sell it for. It does not represent the true utility of the instrument. IBM at $10 dollars a share has the same ownership value as the same share selling at $130.

In normal times a stock going to one dollar indicates a stock in BK. In distressed times, it would more often suggest not much market interest for the product or a hell of a lot of shorting. There will be some money to be made here. This time however, the aspect of the FDIC keeping depositors whole will make bargain basement priced stocks a hedge against inflation.

Here is your program guide for the DJIA market for tomorrow, it could prove interesting




Dow 2000 anyone???

Copyright 2008 All rights reserved