Tuesday, January 06, 2009

90 Day T Bills, Smoke and Mirrors

The interest rate on 90 day T-bills is effectively Zero. The absurdity of it boggles the mind. To carry it one step further and suggest that the people buying them are scared to death over the return of their money is crazy. It sounds logical and financially preposterous at the same time. Investing in government treasuries doesn't guarantee future buying power.

I would even go so far as to suggest that the people doing the investing are banks. If there weren't enough bidders at the T-Bill auction, rates would climb. This would make the housing mess even worse and at the same time increase the interest on the national debt. We are only talking 20 billion a week on 3 month T-bills, so the net investment is only 200 billion (if you roll over the first 20 billion on the third month). Bid zero and keep the rates low. Lets face it, if the are banks bidding these T-Bills to nothing, it’s probably TARP (Trouble Asset Relief Program) money that they haven’t been able to loan out yet.

Common sense suggests that a bank in trouble has to pay more for investor’s deposits. This enables them to stay in business. What happens when they are propped up by a TARP/CRAP loan? They don’t have to raise interest rates.

Here is a recent email I received. This missive suggests that there is some opportunity here on loans that have gone sour. You may be tempted to buy this package. Just don't sue me for showing you what the rich and stupid might be buying. Double click for a bigger pic if you're tempted.

Here is just 30 of the properties on that list. The housing crisis is only one year old and there are problems that are beyond comprehension? Just look at these prices!

Alt A paper is paying as high as 50% interest a year. That is the discount that you are looking at here. Right now, first trust deeds in the Detroit area are not even marketable. Do you even wonder why?

We are looking at a conundrum, invest your money with a possible 50% return or for zero interest with Treasury's. The conclusion that people are interested in preserving their principle sounds great, but think about it. It makes no cents/sense. Even one percent interest, using the rule of 72, means that your money might not double in your life time. On a tax test basis, I could offer my son a rate like that and even the IRS would question it. Why would any one in their right mind give our government an interest free loan?

The new government is going to SAVE us. I have no idea what that will mean from a financial perspective. But figure it this way, you will pay more for less. Perception is the name of the game.


Dan Mac said...

"On a tax test basis, I could offer my son a rate like that and even the IRS would question it."

That puts it into perspective perfectly.


So Jim....have you figured out where to put your $ ? Thinking of taking a swing on some discounted mortgage notes/property packages?

Sackerson said...

Not that I pretend to understand it, but Brad Setser reckons a lot of it is selling of Agencies to buy Treasuries. How much of that it the US Government itself buying bad debts, e.g. from Fannie and Freddie?

Anonymous said...

So where does one put their money?

(My working capital is temporarily at EverBank right now in an FDIC money market account yielding 3.43%, waiting to be deployed.)

The government is punishing the prudent and productive people (savers) and rewarding the non-productive and incompetent. So where does one put their money?

No place! No cash equivalent vehicle will return anything of significance (and won't for a long time to come). Forget passive earning.

The only thing one can do is pull their money out and deploy it into some sort of active business/money making activity. It is the only way to keep from losing one's purchasing power (and to get some income).

This may be hard for retirees, as well as others due to the recessionary climate, but if you want to stay afloat you'll need to put on your thinking cap... find and activity that you can make money with... pull your nest egg out... and put it to work.

It will be hard work to locate a lucrative activity but that is what you need to do.

Jim in San Marcos said...

Hi Dan Mac

I'm still in cash. I'm waiting for interest rates to jump to 12% and then pounce on 100K 30 year 3 percenter for 25K. The neat thing is if the interest rates drop to 6% in a short time, the bond would double in price. In the stock market, it is very hard to get a double in value. It's real simple with bonds and very spectacular.

I do think that in the coming year, real estate prices in California will come down enough to where we will buy a home and maybe pick up another rental.

I do think that money in the bank is going to be pretty worthless, in the near future. You can print money, but you can't print the things we buy with it, there is the rub.

Those discounted property packages like the one I used as an example are worthless.

Florida could be the place for a real deal right now--Detroit sucks!

Good luck

Jim in San Marcos said...

Hi Sack

Thanks for dropping by.

It looks like presently, that the government is only booking 1.6 trillion on Fannie and Freddie as being bad. This seems reasonable with those two holding 5.4 trillion on the books (Harpers Magazine Jan 2009 pg 34).

The thing that is hard to figure are the "Too big to fail bank loans." We could be talking 4 Trillion there.

It doesn't look good

Jim in San Marcos said...

Hi Anon 1:36

Everyone is asking the same question, where to invest? Sometimes it pays to be last in line. I wouldn't be in any big hurry.

It doesn't hurt to pull 10k out of your savings and put it in a safety deposit box or for that fact buy a little gold and silver.

Putting money in a deposit box keeps the bank from loaning it out (reduce the money supply). Gold and silver are a bit of a diversification. They might be a real good hedge against inflation.

I would be very careful of anyone offering an investment solution to our present dilemma, they might just be lining their own pockets.

There is no real good answer to your question. It's a guess at best.

Thank you for your post.

Anonymous said...

Response from Anon 1:36 to your response...

I'm not talking about putting money into investments... forget that, as all vehicles are too volatile, unpredictable and they are all deflating. I say stay away from all mainstream investment vehicles (unless you are in the 2% bracket of highly skilled traders and those that know how to thrive in down markets and crisis.)

I'm suggesting some sort of business activity that can generate some decent profit. Something that you can control. The point I'm trying to make is that I don't think that we can be passive investors at this time... we need to be active.

One maybe should not let their capital sit in treasuries, bonds, CDs, etc. because in a few more years it may well be worthless due to hyperinflation. I'm saying that retirees may need to "go back to work" or "light out on their own" (put their investment capital or nest egg to work to create and finance a small business). In other words, use the money to create a money making machine... otherwise that money is just going to sit, not earn anything and eventually lose most all of its purchasing power. A retiree can't sit with their money in the stock or bond market any longer and expect the income they need to live out their years... that avenue has been destroyed (it may be able to happen again but not for some years, possibly many years).

And there is also the maxim that "no investment comes near the return one gets from a successful business that they own".

I think we all need to snap out of denial and realize where all of this is going. These are different times that call for different actions. If we don't act NOW we very well may be in a position where most of our capital has been lost and any remaining capital has very little purchasing power and we can't survive as retirees (let's face it... taxes and the cost of living are going to soar in the not too distant future). Otherwise a great many retirees better start practicing the question, "Would you like fries with that burger?".

I'm trying to push myself out of denial by forcing myself to liquidate all my assets (mostly real estate) into cash and finding a business or businesses that I can start or buy with my cash. A business that will be able to operate during recessionary/depressionary times. Let's face it, when assets become worthless or don't give any return, the only asset that will be left standing is a business that delivers a product or service that allows you to put food on the table and a roof over your head. That is the real gold.

Yep, I'm moving from passive into active. Studying business, looking for something to start or buy; set it up as a good system and then train and put a manager in charge who will profit share (to create incentive and loyalty) so that this doesn't become a full time job for me (I'd rather just handle management and oversight actions). This is the only solution that I can see for the upcoming storm.

I'd appreciate your honest assessment of this philosophy and strategy.

Anonymous said...

I'm one of the nutty people who put their money in treasuries. Last Winter I moved almost all of my 401K into the "Stable Value" fund which is cash/treasuries/bonds. The fund increases about 0.01% per day. Granted, that's not much, but it sure beats the beating all my coworkers took in 2008. Right now, I'm in a "capital preservation" mode, less inflation.

We have limited choices in our 401K fund; either Stable Value or a whole host of stock-based funds that all tanked badly. Withdrawal fees and penalties make it impossible for me to put that money to work on an outside business.

-John in Texas

Jim in San Marcos said...

Hi Anon 1:41

I see assets as the place to be. Cars, Real Estate, Gold, Shares of stock etc. Something you can point to. Money in the bank is an abstract asset.

This should be a two step event, first deflation and then massive inflation.

Everything we own should drop in value. This drop will make it seem like we should get rid of these real assets. Then I think that inflation will take off and cash will lose it's value fast.

I can see where a business to get into might be a hock shop, dental clinic, or funeral home--not for everyone. As for assets to pick up for peanuts, a small plane or sail boat or that car you have always wanted.

The next 6 to 8 months should be a time of great liquidation. I would look to buy what everyone is selling.

I would keep real estate for the simple fact that you won't be able to sell for a good price. It is a very good hedge against inflation.

Every year at this time I put $5,000 into my IRA for tax purposes. This year I'm just going to buy some silver and use my rebate to pay the extra taxes.

A true measure of value is the utility of the object in question. Currency has some heat value if you burn it, other than that, it's just paper.

Just an edict from the government to limit cash withdrawals from bank accounts to say $2,000 per month could crimp any plans we have to circumvent these clowns in office (this was done in the 1930's). So plan accordingly. The only thing I recommend is to diversify.

Nothing is certain except for the decreasing value of paper currency. And that should start about 9 months out. I could be wrong so be careful and good luck.

Jim in San Marcos said...

Hi John

I did the same thing as you and am in the same boat. I can't draw it out without a penalty. I think that I can pull it out to buy a house and in a few more months, that may become an option I exercise.

Anonymous said...


We're gonna have a 1.2 trillion deficit (and that is not counting Obama's stimulus package of between 800B and 1T; and not counting the auto bailout and any other bailouts that will occur).

Obama just stated that trillion plus deficits will continue into the future.

The production, unemployment, retail sales and housing figures are deplorable. And they are all going to get MUCH WORSE.

We can't see when the last time the majority of our statistics were as low as they are now because records don't go back that far. Yikes!

We've never had times like these in our lifetime. I don't think the average American has any idea of what is going on and where his economy and country are headed.

What sort of condition does one have to be in... what situation does one have to be in to survive this tsunami of mass destruction?

Does anyone have any idea of what one can do to not get killed by the tsunami?

Become a monk and join a monastery (that grows its own food)?

Anonymous said...

There is actually a decent deal in US Treasuries, and that would be inflation protected ones ie. TIPS. I like the 2015 ones. If held to maturity , about six years, you get a guaranteed approx. 3% per year. Plus, if inflation picks up you get more. So, basically one is decently protected in case of deflation or inflation, plus the rock solid safety of US Treasuries.

Personally, I always advocate being diversified, thereby always having some Treasuries, and these are decent.


Jim in San Marcos said...

Hi Anon 2:50

I have to laugh when they say we will pass this debt on to our kids. Technically they are right. This is called a close. You buy the statement, they just sold you the car.

Figure about 6 trillion more in debt puts the country into bankruptcy. We would then need 2 trillion a year to service the interest on the debt.

If they keep this up, it looks like the currency will be trashed. All of our savings will be gone. No debt either.

You refer to it as a tsunami, There will be no death and destruction. We are going to destroy the collective savings that people have worked a life time to accumulate. Retirement is not going to be fun.

Not to scare anyone too much, in the long term, it means that the $20 bill will purchase what the dollar does today.

I wouldn't go quite so far as becoming a monk. I'm not about to trade in the wife. Planting a garden might be the way to go. I've got a small yard, I guess I'll let the dog "fertilize" the tomatoes.

Jim in San Marcos said...

Hi Joseph

I agree the TIPs appear to be a good bet. I question the present inflation rate as valued by the government. I see the current rate at about 9-12% inflation. It doesn't mean I am right though.

Watch out for the belief in "The rock solid safety of US Treasuries." With the trillions that the government is going to spend, there is implied a certain absurdity here.

At these interest rates, gold and silver seem like a better bet. No interest but guaranteed buying power.

Thank you for your comments.

Anonymous said...

Figure about 6 trillion more in debt puts the country into bankruptcy.<<<<

Depends what the debt is used for. If it is true investment, like upgrading our infrastructure, developing better energy, upgrading the education of our workers and potential workers, improving the health of US workers, and things like that, it could actually be a good thing - setting the stage for a really robust recovery even if it takes time.

Greatness is determined during adversity. America has always been an optimistic society, even during tough times.

Bankruptcy for the US is remote. The US still has massive value. And, it isn't necessarily the things which trade as assets. Abt 29% or so of Americans over 25 have college degrees (BA/BS or above). Plus, so many other things, which can be enhanced with investment.

Like the US or not, the world needs us.

I do think that this downturn will be worse than all post WWII recessions, but we have just had the greatest economic boom in the history of the planet, so we can handle the tough times, in my opinion.


Anonymous said...

I see the current rate at about 9-12% inflation. It doesn't mean I am right though.

Watch out for the belief in "The rock solid safety of US Treasuries." With the trillions that the government is going to spend, there is implied a certain absurdity here.

At these interest rates, gold and silver seem like a better bet. No interest but guaranteed buying power....

I recommend this site for tracking inflation, Shadow Government Statistics...


Yes, CPI understates inflation, but according to this site, using older CPI metrics, inflation is about 4+%, dropping quite a bit from where it was, likely heading lower. I didn't say TIPS offer great inflation protection, but to both offer deflation protection along with some inflation protection is a pretty good combo, as part of a diversified package of investment.

As for Treasuries not being rock solid, the only risk I see is if they got downgraded from AAA. Sure, it could happen, but to have nothing in Treasuries is a bif=gger risk, in my opinion. I would think if we were ever faced with some financial Armageddon, the US would back Treasury dollars at least partially with gold. The world needs US Treauries to hold up.

Remember, the stock market has lost about $7T and RE probably more if you include commercial. So, mega trillions of US dollars have already evaporated. So, even a few Trillions of dollars spent now is fine, as long as it is spent wisely. We actually have a few years to get our budget in shape, with little risk.

Yes, as part of being diversified, I will always own some gold and silver. But, I really don't care what happens with it. I look at it as just having a small insurance policy on our currency, just being diversified, but maybe only about 2% or so. If someone wants more, maybe 5%, I think that is OK.


Jim in San Marcos said...

Hi Joseph

I disagree. We have a debt of 10 trillion and 4 trillion is off the books. When we get to 20 trillion dollars, we cannot tax the general population and raise the amount due for just the interest.

I don't know where you are coming from. Printing money does not make programs more affordable.

Your quote " upgrading our infrastructure, developing better energy, upgrading the education of our workers and potential workers, improving the health of US workers, and things like that, it could actually be a good thing." doesn't mean much if there is no real money to fund it with.

Anonymous said...

Jim & Joseph,
The government soon will not be able to generate the revenue it needs for its spending obligations. The jig is up. This budget imbalance is beyond repair... AND will get worse.

Obama will dig us deeper in the hole with socialist/FDR type actions. Trying to salvage a system that has proven to be deeply flawed.

What does he mean by this American Recovery and Reinvestment Program? What are we going to recover to... the mega-bubble economy that caused this crash? What does he mean by reinvestment? You need to have a viable, going concern if you are going to reinvest, and you need profits/cash to reinvest. How does a person or country with massive debt and poor production statistics reinvest?!

It is all one big euphemism for "transfer of wealth".

Infrastructure like roads and bridges is wrong: we need a national electrical rail system and the same type of mass transit in our major cities. Infrastructure for education is wrong: our educational system is the system that produced our business managers (MBAs), politicians, economists and financial engineers = the guys that caused this whole mess.

Don't know how you guys can talk about TIPS, etc. Are you kidding... investments and currency will soon be dog food and worthless.

No one seems to understand what is coming down the pike.

Anonymous said...

Anon 1:11AM is exactly right.

The whole concept of investment is going to change. Our fiscal situation makes most investment moot. If some people had bit the bullet and taken the 30% 401K penalty, they still would have been ahead. There are certain things you do not want to learn in hindsight.

The thing to do now is to acquire LONG LIVED assets and put the rest of that money to work. At some point, the money isn't going to go as far, so people need to make while it can and stock up.

Jim in San Marcos said...

Hi Anon 1:11

We are not waving red warning flags. But if you follow a little more closely, what we are suggesting is a first step of deflation and then rampant inflation.

We probably have about a year before inflation starts to take hold. Its at this point you might want to acquire real assets like real estate, gold, silver, boat, car, plane etc.

I agree with you, currency is going to be bad to hold as a safe haven of wealth.

Joseph Oppenheim said...

I don't know where you are coming from.<<<<

Well, Jim, my blog ID gives a better idea of where I am coming from. I really only started a blog to document my tracks, for my own information. But, since the financial markets have been super interesting recently, though my strategies remain basically the same, I will document more.

I just started reading your blog, and I do like it.


Anonymous said...

Look... we're basically in a depression already. If you don't believe it then the continuing downslide over the next 6 months will finally convince you.

You know that government statistics are disingenuous to a very high degree. Unemployment is much higher than you think (consider all the people who's unemployment has run out; who have given up looking for jobs; who need a full time but are currently in a part time; etc.)

Unemployment is probably over 10% easily and will soon be over 12%. We have a stock market that is down by close to 50%. The CPI is negative. Wages are stagnant. Housing is down nationally by 40%. Lenders and businesses are going under all over the country. Production and export statistics are the worst in decades. It's a depression. If you don't agree... you will in 6 months.

We have ignorance... denial... complacency... disconnectedness... the frog in the boiling pot syndrome, etc. going on with Americans right now.

Anon 5:34 is so right when he says "If some people had bit the bullet and taken the 30% 401K penalty, they still would have been ahead. There are certain things you do not want to learn in hindsight."

That is the mentality that is needed right now and only a few have it. While everyone else is now rearranging the deck chairs on the Titanic the smart ones (sole survivors) will be those who jumping ship NOW.

I'm the guy that said earlier... get completely out of the stock and bond markets, liquidate, get all your cash together and buy or start a business(es) and buy rental properties so you have cash flow to survive (altho there is still the risk that the cash you receive from your business and rentals is worthless).

It is a shame that only a very minute amount of people are going to act now to preserve what they've got and set themselves up for the tsunami. The rest are going to be swept away. Just like the Jews in Germany who thought, "Nah, this won't continue, they'll stop this madness".

I'm spending a lot of time working out my strategy now and getting ready to jump ship. I hope some of you understand the urgency and do the same.

Anonymous said...

Anon 11:47 posting again...

I strongly recommend that you, and any of the inquiring minds that read your blog, read Gary Gibson's "Compounding Error: Your Tax Dollars At Work"


It is a succinct explanation of where we are at and the role government has and is playing in our existence. Real insight into the fact that a government is a perverted and criminal extension of the individual.

All the "creative destruction" (Adam Smith) that the government has and will continue to bundle up and hold off is coming to bear upon us. We have no idea of what these resultant complexities, that are about to rain down upon us in a life destroying deluge, are. These "bundles" can never be understood due to all the years of intervention, the engineering, the side effects, the hidden effects, the never before seen newly created effects, etc. We the people have created a government that is in effect "public enemy #1".

Anybody have any feedback on this article?

Using the analogy of being on the Titanic... what is your plan? Sit tight for a while longer? Rearrange the deck chairs? Pray to your god? Jump ship?

Jim in San Marcos said...

Hi Joseph

My choice of words was horrible "where are you coming from" and I apologize. Its a little like getting into a car accident and the first thing you ask the other driver is "What is your problem?" I was getting ready for work and was short of time.

I question how we can pay for this, our children won't pay it anymore that we paid what was passed on to us. At best this sort of debt spending is severely inflationary.

Looked at your blog, your favorite book is one I have read and quoted from several times.

Thank you for your comments.

Jim in San Marcos said...

Hi Anon 11:47

I agree with you, but I think you are ready a little too soon. You want to buy when no one wants it. That gives you a good idea of a bottom. I suggest that you hold on to your cash and wait a year.

I wouldn't recommend starting a business, unless it's a funeral home, times are tough.

I agree that things look pretty dismal, but if its anything like my last root canal, my imagination got the better of me, it wasn't quite that bad.

Thank you for your comments.

Jim in San Marcos said...

To your second post Anon 11:47

If you were on the Titanic after the life boat launch, there were no options. There was a certainty of what was about to happen.

We still have a chance if government will stop meddling in this mess, trying to fix it.

Anonymous said...

Anon 11:47 again...

Thanks for the responses Jim. No, I wouldn't buy rental properties now. I'll wait for the bottom for sure (I'm an old real estate investor).

Preserving the cash I have and amassing more is the correct phase to be in. I'm not involved in any money making activities now and really need to be. (I was last building spec houses—which has since become an obsolete venture. I sold my last house, and a lot that I was going to build my next spec house on, back in July of 2007. Luckily I found a buyer for that last spec house which sat on the market for 11 months. Got the lot sold to. Got out of the market just in time, with a decent profit, and never looked back.)

I haven't come up with a new business activity yet. I'm sitting here with 200k in cash looking for a way to put it to work in an active manner—not a passive investment manner. I've got to come up with a way of making and amassing money so that when we hit bottom I can buy some good income properties at pennies on the dollar so that my wife and I can have income to take care of us for the remainder of our lives.

Got to find some income generating activity despite the economy. It isn't easy! I feel like one-legged guy in an ass kicking contest.

Funeral home, eh? Hmmm... I'll have to think about that one.

Tyrone said...

I feel like one-legged guy in an ass kicking contest.


We have a challenger for 'Jim Analogies'!

Joseph Oppenheim said...

I question how we can pay for this, our children won't pay it anymore that we paid what was passed on to us. At best this sort of debt spending is severely inflationary.

Looked at your blog, your favorite book is one I have read and quoted from several times.<<<<

Actually, I have been Depression-minded since childhood. The one thing I made certain when I was a kid was to grill my parents about the Great Depression for their first hand experiences.
Some things I never forgot, was how people who had new stock concoctions, similar to mutual funds and ETFs, were clobbered, how my patenal father dabbled in RE and lost everything there, how my maternal parents lost their home, and how being in debt was catastrophic.

So, anyway, that is why I have essentially a permanent plan, although I exited RE a few years ago, so I probably a little less inflation protection than I really like, but I do have some protection there. But, I was fortunate enough to get out of RE near the top. But, definitely no debt.

So far, I doubt this downturn will be as bad as the Great Depression. But, I do think it will be deeper and longer than any of our post-WWII recessions, so I would call it a likely upcoming Depression. Heck, we still had about 17% unemployment in the early 1940's, with my college-educated dad a business owner having to work about 12 hours per day, seven days a week, with a half day off every other week.

So, the real question is exactly how this will play out, and I really think it is more dangerous to guess than just have a well-rounded permanent plan for most contingencies. Plus, always staying conservative.

As for the books I listed on my blog, there aren't necessarily my favorites, just the ones I have read recently and think are pretty good, and provide some insights into the financial mess we are in.

By the way, the book I have just started is Harry Dent's "Great Depression Ahead". The reason I am is because I read his book back in 1993, "The Great Boom Ahead", and still remember how clever he was in recognizing some macroeconomic things back then. So, I am curious about his thinking now. A lot of people were gloomer doomers back then, but he was smart enough not to follow them, so I think he might be more open-minded than most. I'll see.

Anonymous said...

I question how we can pay for this, our children won't pay it anymore that we paid what was passed on to us. At best this sort of debt spending is severely inflationary.<<<<

Getting back to this, which is really the big question, and I do agree with you of it being a legitimate worry.

However, where I disagree, is that there is a way to navigate the problem, if done right. As for whether it will be done right, all I can say is that Obama is off to a pretty good start by surrounding himself with pragmatists, not ideologues.

There is a difference between our gross debt and net debt. Like I alluded to in a previous post, there are many assets which don't show up on our balance sheet, but really are there.

What is reported is the gross debt, but the net debt includes all kinds of things and is not reported -but could, like the gold in Fort Knox, government oil/ mineral lands, other properties, etc. Plus, intangibles like our educated work force -plus investments which would strengthen our work force, infrastructure, energy, etc. By the way, there will be a podcast of Gregory Ip of the Economist's appearance on C-Span's Washington Journal today, where he covered this. I think he's a very sharp guy.

So, even if there is no hard asset backing to US debt, it still has plenty of implied backing.

As I said, there is no problem using a few $T now in stimulus since already mega $T in dollars have been elimated recently, however, we must also have a plan to pay it back. That is the big challenge, but it certainly is possible. e.g.....

About 60% or so of US coporations pay no income tax, plus the super rich people can afford more taxes. So, increasing taxes on these sectors, especially if delayed maybe a year or two could be done.

I hope Obama and Congress don't cave in to the ideologues who want tax cuts for the wealthy and well-off corporations, as part of the stimulus package.

Plus, all the investments which creates or saves jobs, not to mention a national health plan. Even if the government offers a single payer plan (just offer Medicare to everyone, voluntarily, with premiums based on one's income), it would cost the government more, but save people more money since the current system is the most costly in the world and delivers subpar care to the masses.


Anonymous said...

Lord! Obama's team aren't pragmatists. The guys that created this whole mess started in the Reagan Era, through Clinton and forward. Obama (actually his puppet masters) has just assembled all these guys together. These are the ones that caused this mess! There is no change happening here at all. It's the same old same old... attempting to use stimulus fiscal and monetary policy to avoid a correction (a correction which is so sorely needed to purge the system of all of the disease). Obama is a Marxist. The power elite have been working for years to set him up for the presidency and had McCain as their back up to do their bidding if Obama didn't get in. They pulled off a real coup by getting Obama because he will now swing the Democrats into contributing to the motion of the power elite... the motion to transfer all the wealth to them and have a one world currency and government.

There is nothing the government or politicians can do to stop this crash and coming depression.

It isn't what you see. It is the invisible... what is going on BEHIND the scenes that matters.

Wake up America!

Shift said...

There is not enough tin foil in the world for the statement:

"Obama is a Marxist. The power elite have been working for years to set him up for the presidency and had McCain as their back up to do their bidding if Obama didn't get in."


I think the loony bin needs to better manage their loonies (too much internet time).

Jim in San Marcos said...

Hi Joe

I see it a little different. Business has never paid taxes and it never will. It is passed on to the consumer.

Obama hasn't even taken office and there are claims he's cured world hunger and solved all of mankind's problems including health care. One term in the Illinois legislature and almost a full term in Congress and very little to show for in accomplishments. I haven't seen this much hype since the time I got suckered into see the movie Batman.

The idea that government can solve our problems is false. Health insurance is expensive. Somehow by making government pay for it, it becomes more affordable?

When resources are finite, price determines how much of it you will consume and it is a very good regulator. When price is not the issue, you have rationing and black markets. Just take your kid to Disneyland and see what unlimited rides means--a two hour wait for each ride.

A Democracy is not socialism. The government induced inflation (printing money) is taxation by confiscation (government counterfeiting).

This disaster is coming to a head probably within the next 6 months. I don't see a political solution.

Anonymous said...

There is nothing the government or politicians can do to stop this crash and coming depression.

It isn't what you see. It is the invisible... what is going on BEHIND the scenes that matters.

Wake up America!<<<<

It isn't about stopping this "crash", "depression" or whatever you want to call it.

It is about moderating it. All one has to do, is look around the world historically, to see that governments do have an effect during downturns. The US survived and eventually prospered quite well, and I would argue Japan and Germany's governments chose a worse path for their countries, during the last global depression.

Sure, we have a lot of unknowns, probably even having to deal with another major terrorist attack on the US.

One worry I do have is that the financial community did finance quite a bit of Obama's campaign and I do think that affected his healthcare plans, to keep the insurance companies a part of it.

Plus, I certainly don't like Congress just raising their salaries.

Sure, there are a lot of crosscurrents, and some will always see the half-empty case rather than the half-full one.

However, I do see the half-full case, and America by its voting, at least picked the best of two choices, in my opinion. America is not asleep, in fact they more likely awoke from an 8 year stupor, at least a solid majority did.


Anonymous said...

This disaster is coming to a head probably within the next 6 months.<<<<<

Define disaster.

Jim in San Marcos said...

Hi Anon 5:21

Define disaster? OK.

Interest rates are at zero percent. Who is going to loan this country one Trillion dollars for free for the new government bail out???

What investor would buy 30 treasury bonds that pay only 3 percent to support a housing market that has collapsed into a pathetic mess?

Interest rates will have to rise to bring in real dollars to fund the bonds. The problem is that 12 trillion of our 19 trillion in savings has been squandered. It's not there. As interest rates rise, that 12 trillion will try to move into better returns. Real rates should be about 12% right now and they aren't.

The seven trillion still left in savings is enough to keep the ponzi game going, but if rates rise, it is all over.

At 12% interest, the government can't meet the interest on the debt. That is on the assumption that total debt including the Fed window is about 14 Trillion dollars.

I would expect to see interest rates surge to 15% in the next 6 months.

This would imply a full collapse of the financial markets. Smoke and mirrors just won't cut it.

Anonymous said...

I would expect to see interest rates surge to 15% in the next 6 months.<<<<

Well, it will be pretty soon to see if you are right or wrong.

The stimulus package(s), bailout(s), etc are structured to induce some inflation.

However, with unemployment pretty high and rising, certainly wages won't inflate, since there is a surplus of workers, for at least the intermediate term.

Anyway, I can see some increase in interest rates as the economy is stimulated.

As I have said, the key for the government (Obama's team and Congress) is to lay out some plan to address the high deficits it is instituting. The key, is as long as there is some unified concrete plan to address the deficits, it should calm the markets somewhat. That was the key when Clinton took office. He immediately met with the Fed Chief, Teasury Sec, and Congressional leaders to make sure the main players were on the same page to eventually turn a budget surplus and begin paying down the national debt. That is what kept the bond/interest rate markets in check.

Sure, the economy is in worse shape than back then, but it is too soon to write off our new leadership yet. Heck, there usually is about a 100 day honeymoon for a new president. I suspect it will last for maybe 200 days this time because the markets know there is so much to tackle.

And, sure, there is always a risk of some geo-political event, a major terrorist attack, etc which certainly could spike oil prices, etc.

Like I have said, what many people are missing is how many trillions of dollars (and debt) have already been wiped out. There are so many less dollars, the money supply has shrunk quite a bit, and that is the key to what drives inflation, interest rates, etc. So, I see a window.

Runaway inflation is not out of the cards, but I would rate it about a 10% chance. But, certainly bad times are ahead. I'm OK with calling it a depression, but don't see it as bad as the Great one.


Anonymous said...

You guys that are espousing "hope" are in denial. Why do you insist on validating and attempting to maintain a system that has failed and proven it is is obsolete? (Our days as a powerful, rich country based on debt, happy motoring, suburban sprawl, excessive consumerism, complacency, arrogance, isolationism, etc. etc. etc. is OVER.)

Everything has gathered into creating the perfect economic storm.

The worst depression in US history is coming and will be in its full glory in about 2-3 years.

Obama/Government will just continue to worsen things, and by attempting to solve (hold off) our problems, are just bundling them up into a major planet buster bomb.

The good news is that this corrupt and unworkable system is finally collapsing. A new third party will arise to rid us of the Fed, central banking, fractional-reserve banking, Keynes/Friedman/Krugman, a criminal Congress, a criminal financial system, errant business practices and policies, socialism, etc.

We are evolving. And there will be pain, upheaval and a complete change of lifestyle for us Americans.

Wake up!

Anonymous said...

I hope there is enough Mnt. Dew to go around.

Anonymous said...

You'd better stock up on Mountain Dew now because they'll probably be out of business soon.

Don't forget people, there were many strengths that America had back in the Great Depression and they still got nailed and couldn't get out of it until WWII (The Gov, Hoover, FDR, etc. weren't able to get America out of it.)

Think about it... back in the 30's people had savings; we were on a gold standard; not that many people had mortgages; we had a manufacturing base; there wasn't a trade deficit; people didn't have huge consumer debt and credit cards; there was a much higher ratio of workers to retirees; social security and medicare didn't exist; we were a creditor nation not a debtor nation; our government wasn't huge with gigantic deficits and huge entitlement obligations; we weren't in two wars; etc. etc.

The above, and many more differences, makes it clear why this will be The Greater Depression.

Wake up! And smell the coffee, the eggs, the toast, the oatmeal, the jam and the orange juice.

Anonymous said...

Hi Jim,
I don't know much about bonds and have a question about your statement below:

"I'm still in cash. I'm waiting for interest rates to jump to 12% and then pounce on 100K 30 year 3 percenter for 25K. The neat thing is if the interest rates drop to 6% in a short time, the bond would double in price. In the stock market, it is very hard to get a double in value. It's real simple with bonds and very spectacular."

Does this mean that when interest rates shoot up, that a 30 year bond paying 3% will sell cheaply on the secondary market for $25,000... thus, the new owner will receive $3,000 in interest per annum on his $25,000 investment, (which is a 12% return) for however many years are left on the bond until maturity?

If this is so, then theoretically, one could take their $500,000 cash nest egg and buy up a bunch of these and have a $60,000 per month income for many years?

If I understand you, it sounds like a good idea. Something to consider.

Only downside is if we have hyperinflation, $60,000 won't even buy you your groceries for the month.

(I remember back in 1972 or so when 30 year bonds were 18%. My father was making 3 million per year through his construction company. I told him if he'd just put 1M into those bonds he'd get $180,000 per year for 30 years that he could just reinvest into more bonds and then he'd never have to worry about his retirement. He didn't do it—he was a gambler and owned race horses and his philosophy was "wine, women and song". He wound up dying broke.)

Let's say down the road the government issues new 30 year bonds at a high rate of let's say 18% again. Wouldn't it also be smart to put your big cash nest egg into those bonds and have 18% for the next 30 years? Do what my father didn't do?

I guess the only risk would be in super hyper-inflation, or the government modifying the terms of the bonds... or defaulting on them, correct?

Inquiring Mind

Anonymous said...

Wake up!<<<<<

Go to sleep.

What you suffer from is what is known scientifically as "probability neglect".

Also, from mania.

Will the world, as we know it, come to an end sometime? Sure, dinosaurs once ruled the world, and their time came to an end, be it from a meteor or whatever. However, planning for such an event is nonsensical, maniacal, whereas wearing seatbelts in a car, and other safety equipment like air bags, anti-rollover braking systems, driving responsibly, etc reduces significantly one of the biggest risks most Americans face, which result in 40,000 deaths and 4,000,000,000 injuries each year.


frakrak said...

The movie “doctor Strangelove” comes to mind here. If you substitute Slim Pickens with G. W (in the scene where he rides the nuclear warhead down to ground zero)! And with a little adaption, imagine Barack (our hero) swooping in with the aid of some fantastic Hollywood CGI, dislodges G. W, and frantically tries to disarm the device before impact! Now the audience is totally focused, when we have an announcement of intermission and the candy bar is open!

We all have time to speculate for a brief moment (hopefully with friends) on how the movie will end! One comment is: Why would anyone put them selves in such a hopeless position, unless he has secretly negotiated the code to disarm the bomb before hand!

We don’t have long to wait, as the movie resumes we see Barack go straight for the control panel, he opens it and punches in a code and the missile’s safety is activated! It lands eloquently on the White House lawn. He dismounts this pacified beast only to hear it resume its countdown (to his surprise), this time the control panel gives him further instructions to keep it safe …….

Jim in San Marcos said...

Hi Joseph

I guess the 4 billion in injuries is inflation adjusted ;>)

Jim in San Marcos said...

Hi Frakrak

I see some satire there.

What cracks me up is that they are going to hit the ground running. What can a politician do to an economic mess, tax it?

Most people don't understand the severity of the problem. The government has just given everyone $500. They have given the banks TRILLIONS. Do you get the feeling that we have been robbed? It's what I call moron economics---keep em in the dark and feed them crap. We are going to grow a super crop of mushrooms this year.

Jim in San Marcos said...

Hi Inquiring Mind

You have it right. Buy the 3% 30 year bonds at when the interest rates hit 12% and buy the 30 year 12% at par.

The real money maker here is the fact that interest rates don't stay high for very long. So as rates go down, you have capital gains from a rise in the bonds perceived value, plus the interest income flow.

Jim in San Marcos said...

Hi Anon 10:34

I think you are right, but there is the hope that we could be wrong on this.

Being right doesn't solve the problems. Lets hope our 401k's are still an item when we go to retire.

Thank you for your comments.

Anonymous said...


Re: your comment...
"I would expect to see interest rates surge to 15% in the next 6 months."

If that happens, does that mean that money markets and CDS will give good, high percentage yields again?

Anonymous said...

I suffer from "probability neglect and mania" and should go to sleep?

You aren't a member of the lumpen proletariat are you? A sheep being led to the shearing? A cow to the slaughter? A lemming to the ocean? C'mon, you're smarter than that.

If one looks at the true statistics and current events without bias, one can see the future. Current events always predict the trend. It is obviously deep deep recession time and eventually everyone will be calling it a depression. You can't borrow or spend your way out of this debt destruction and deflationary momentum (the government will not be able to stop this). We couldn't do it in the 1930s when we were much stronger, how are we gonna do it now?

Also, Clinton had nothing to do with the surplus. The surplus came about because of all the capital gain taxes and tax revenue the government got from the stock market and investment boom. The presidents, their administrations and Congress from Reagan forward are the ones responsible for this economic fall out we are now having (altho Woodrow Wilson is the real culprit for allowing in income tax and the Federal Reserve and the central banking system).

Also, we didn't have the greatest economic boom in the history of the planet. It was a fraud, based on inflated asset values and easy credit and the swindles of Wall St. (Greenspan set us up for this fall.) All that "growth" was a fraud... smoke and mirrors. That is why we are having a correction (recession > depression).

Bankruptcy for the US is remote? Uh... we are already bankrupt. If a person had the debt and obligations of the US, the budget imbalance, the trade deficit, no job, and diminishing income, and was borrowing just to pay the interest on his/her debt, and his budget had quadrupled in the last 10 years... I think that would be bankrupt.

There is no hope with Obama. There is no change. Politicians can't and never have solved economic problems. Obama is our next problem... he will push us forward into a socialism that you never thought could exist in America. Jefferson is rolling over in his grave. If he were alive today he would hang Bernanke, Paulson, Clinton, Bush, Obama and Congress.

You are looking at our current state of affairs through rose coloured glasses my friend.

Again... wake up!

Anonymous said...

Read this:

And this is coming from mainstream, conventional media, not conspiratorial or marginal sources.

If even the economists (who are a bunch of losers) have changed their contraction projection in a month's time from 1 to 1.5%... do you realize how rapidly things must be unwinding?

And it is just the beginning. 2008 was the appetizer. We haven't yet had our soup... entree... dessert... or cigar yet.

The next 20 years are going to be much different than the last 20 years.

I'm more concerned than I've ever been in my entire life about my financial future and I'm scrambling to figure out a way to protect what I have and to be able to take care of my family over the next few decades.

Anonymous said...

I guess the 4 billion in injuries is inflation adjusted ;>)<<<

Yeah, I meant 4 million not billion. Sorry.


Anonymous said...

one can see the future.<<<<

Fortune tellers are covered in MacKay's "Popular Delusions and the Madness of Crowds.


Anonymous said...

If even the economists (who are a bunch of losers) have changed their contraction projection in a month's time from 1 to 1.5%... do you realize how rapidly things must be unwinding? <<<<

I certainly do. I do think it is reasonable that we likely will have a depression. But, exactly how it will play out, really is only speculation. I think it is best to be diversified, in quality assets.

I'd like to know if anyone on this board had forecast that oil prices would have collapsed to around $32 a barrel recently.

Plus, all kinds of commodities collapsing recently.

Sure, they might inflate again, and probably will to some extent, but like I have said, the US has been given a window.

Don't forget, this is the nation that created the Internet, oh yes, one reminder, it was our government which created it.

And, sure, we now likely import most or all of our shoelaces, rather than having saved our shoelace manufacturing base, and I guess that must anger Ron Paul supporters.


Anonymous said...

I think the smartest thing to do when real estate finally bottoms (but before hyperinflation kicks in) is to buy up single family homes, big homes to convert into boarding houses, and small apartment buildings all at super discount prices (buy them as foreclosures and REOs). Shelter will always be in demand and the income from these properties will sustain the investor for the rest of their lives. That is my basic plan. I'm liquidating all of my under-performing and "at risk" investments for cash, earning more cash, and holding it all in readiness to strike when we reach bottom and acquire good income properties to give me financial independence.

Anonymous said...

"Fortune tellers are covered in MacKay's "Popular Delusions and the Madness of Crowds."

We're not talking about fortune telling or voodoo here.

One doesn't need to know the specific configuration and details of what is going to happen. One just needs to know the basic laws of economics and the general condition things will be in. It is called "logical extrapolation". History, current events and laws or principles can give one the information necessary to make a fairly accurate prediction.

If you have 1/8 of a tank of gas and the sign says "next gas, 310 miles", then you can pretty well guess you are going to run out of gas.

If your friend has been spending more than he makes for the last 10 years and hasn't saved anything. And he has lost his job and is now paying his bills with credit cards and paying his credit card bills with other credit cards. And his home is in foreclosure. You can pretty much assume he is going to be bankrupt and in need of personal assistance from his friends and family.

You can't spend money you don't have. You can't print money to create wealth. You can't produce nothing and expect a return. You can't violate the natural laws of exchange and economics. You can't borrow your way to wealth. You can't not regulate in order to avoid corruption and fraud. You can't make financial obligations you can't keep. You can't increase your spending while your revenues are diminishing. That is why the USA as we know it will be history.
That is why we will be Obamanation.

We either become a socialist state and descend into a modern dark ages... or, the people are hurt so badly and lose all confidence in government, business leaders and college professors that it opens the door for a new party to rise and push the Dems and Repubs out and dispense with the old obsolete system and replace it with a workable one. Time will tell. And that time ain't too far away.

Anonymous said...

If you have 1/8 of a tank of gas and the sign says "next gas, 310 miles", then you can pretty well guess you are going to run out of gas.<<<<<

Sorry, maybe you would be on a road like that, but not me.

By the way, the internal combustion engine has long been an obsolete technology. Like I said, we have a window. What has made our country unlike any other, is our ingenuity. I'm not ready to write that off. Logic is great, however the great thing about math, is that it is an art, not a science. That is why they grant BA's in pure math, not BS's.

Two terrific mathematical concepts are infinity and mathematical paradoxes. Believe it or not, opposite realities can exist at the same time, not to mention infinite possibilities.


Anonymous said...


"Sorry, maybe you would be on a road like that, but not me."

I'm wasting my time. You are just arguing for the sake of arguing.

Even though your comment is irrelevant, the funny thing and the irony is...

You ARE on that road.

You, and all of the others that are in denial or lacking knowledge and vigilance, just don't know it.

But you will.

Jim in San Marcos said...

Hi All

Can't believe how big this thread has grown.

Presently I am working out some dental issues; two crowns, a root canal and some deep cleaning.

I don't like to be sitting in a dentist chair, but it does give me a glimpse of reality, fix it while it hurts or fix it later and lose your teeth.

I think that government figures that they will keep everything going, no need to fix anything.

That logic works good unless you are talking about teeth that are in pain. If you have it pulled, the cost $100. Root canal and crown is $600 WITH INSURANCE.

I should have a post for Saturday, bear with me, I'm really not really in the mood to going to the dentist.

Shift said...

Dear Anon at Tuesday, January 13, 2009 12:06:00 PM:

That doom-n-gloom rant was pretty good.

It does seem that you could tighten up the imploding government part a bit. You kind of lost me there.

Dan Mac said...

JIm said - "You have it right. Buy the 3% 30 year bonds at when the interest rates hit 12% and buy the 30 year 12% at par."

So in a 12% environment, you would be buying what is left (time to maturity) on the 3%-ers at 1/4 of face for an equivalent yield of 12%? And If rates dropped to 6% you would have a cap gain double and still be collecting 12% on dollars invested. You also say to buy the new 30yr at the 12%. On the drop to 6% you get the cap gain double as well and continue to collect the 12% yield. So what is the difference? They seem fungible and yet you say to buy BOTH.

Seems like the risk is that if rates continue higher, you are now holding til maturity (with possible slippage to inflation - i.e. real rate of return) or selling at a loss. Just trying to think it through.

Also - are there callable issues to be considered? ***

Jim - I told you months ago that I'm not a bond guy. So I hope my question IS just painful enough to make you forget your tooth.

Good luck. I hope you have very little discomfort.

Dan Mac

Jim in San Marcos said...

Hi Dan Mac

There are a few issues here. If you buy a 12% 30 year bond, you pay taxes on the interest and if you held them 30 years, there would be no capital gains. Also if the interest rate was to drop, they might be callable after X years.

If you purchased a 3% 30 year bond discounted to reflect the suggested interest rate of 12%, you would pay tax on the interest and tax on the capital gains long term or short term.

I wouldn't be out to buy both, I would choose the latter as my option. A 10% investment that is somewhat speculative on the future does pay off now and then, quite well.

The other thing to understand if you dabble in the private bond market, as company bankruptcies increase, the bond holder is almost first in line to get paid. I bought some Public Service of New Hampshire bonds back in 1988 when they went BK at about 4 cents on the dollar and sold them at 20 cents on the dollar 6 months later. In stressed times you can low ball a bond and get it, especially if they are thinly traded. If you are the only bidder, you are the market.

I don't play bonds long term. My suggestion of buying when interest rates hit 12% is on the hunch that interest rates would drop in 6 to 12 months to a more reasonable level. If interest rates go even higher, you would lose money on this play.

The root canal went OK it's my wallet that needs a shot of Novocaine.

Thank you for your comments.

Mark said...

"I would even go so far as to suggest that the people doing the investing are banks."

Exactly. People who are wondering, HOW IS THE TREASURY GOING TO FUND THE TARP? Well... there is your answer.

Effectivly nothing has happened except that now bank balance sheets look better.

Anonymous said...

Bank balance sheets look better and our money will be worth less.... or is it worthless?

Anonymous said...

Anonymous at Wednesday, January 07, 2009 1:36:00 PM:

EverBank is owned by the Bank of Shanghai (just so that you know).

Crashproofed said...

Hi Jim,

You mentioned you are renting and in cash, as I read you posts.
When will you be " acquiring real assets like real estate, gold, silver, boat, car, plane etc." ???

I'm not flaming you... just curious of your thought process.


Jim in San Marcos said...

Hi Crashproof

I bought gold at 300 an ounce and silver at $3 an ounce and I have a rental I bought in the last real estate down turn. So I am pretty well diversified at present. We are in cash right now waiting for the stock market to tank.

I don't look at gold and silver at the present time a very good buy, but diversity is the name of the game. A home, gold and silver are not investments, they are a store of value.

You tend to get the best value for your dollar when everyone is selling the item in question.

Anonymous said...


First of all, great thread!

I hope someone can answer a few questions I have regarding inflation.

How is the stock market affected during inflationary periods?
Do returns keep up with inflation?

For a market-neutral short-term stock trader that has been consistantly averaging about 5-10% per month for the past 4-5 years, what changes should I expect in, say, a 20% inflationary environment? Does the stock market become more volatile, and therefore, returns increase/decrease?(my monthly returns did increase in the last 4 months of last year).

Unfortunately, even though I got into trading about 8-9 years ago, I am NOT too well versed in macroeconomics. And the last high-inflation period I remember was in the Carter years of the 70's, but I was a teenager then and so don't remember the effect it had.

If dollars will be worth less, will stock traders be at a disadvantage in a high-inflationary environment??

Thanks in advance.

Mike D.

Sackerson said...

@Anon 21 Jan 5:09 - in an inflationary period, it may seem that the market rises, but when adjusted for inflation it could be continuing to sink. I think I showed this here:


But I'm open to correction.