Monday, January 26, 2009

Common Cents (Reprinted)

This is a reprint from October 30, 2006. Things are pretty much following the suggested script. It seems even more real after two years have passed.

Normally when you make a bad investment, you walk away from it and take the loss. But that can change, if the size of the investment is too big to walk away from. Your common sense thinking gets turned upside down.

When disaster strikes, there is the urgency to raise cash fast. In this sort of decision-making, you end up saving the crap for last. It doesn’t really sound rational, but there is the hope that the “dogs” will come back. So it appears that we have a lot of homeowners in this dilemma right now. Their situation is just now becoming obvious.

If we examine the group that holds the mortgages, it gets a little less visible. Large institutions can hide their problems just by being so big. Second, if the amounts of cash managed are large, the financial institution can use the cash to stall for time. It’s very easy to pretend that nothing is wrong. You will get caught, but probably just not this year.

Another thing that is quite invisible right now is embezzlement. Take an embezzler, he purloins the funds and the person bezzled, is none the wiser. In fact both can be at the same resort spending money, and having fun. The only difference is, the embezzler knows he's spending your money, while at the same time you think your money is safely tucked away. This can go on until the eventful day when cash demanded from the enterprise exceeds what they can cover. It's only at this point that the person embezzled will feel the pain. Knowledge will not only set you free, it can send your blood pressure into the stratosphere.

Notice that the perceive problem is the over extended homeowner. If you carry things forward, the rest of the systemic problems will become apparent. At that point, it will be too late. The assets will be non-existent.

We have yet to see a retirement fund under the stress that will be produced by the baby boomer’s retirement. There has been no real call for funds yet. Common sense suggests that the assumed assets are safely tucked away.

Q.E.D. The Tooth Fairy lives!!!


Anonymous said...

Two years have passed. The "overextended" homeowner has become the "underwater" homeowner.

The water is frigid and fast flowing. The homeowner can't hold out much longer, not with job losses pouring down.

The homeowner will let go of the house and everything else to save his skin, taking down anyone and anything attached to him.

If this is the prognostication, then the worst is yet to come. When the rate of drowning decelerates, we will have reached the bottom.

The majority of the population should be able to survive if the bottom is less than three years away, from Oct 2008.

If, however, the bottom is five or more years, even the above-water folks with jobs and cash piles now will experience suffering, perhaps even outright poverty.

The recession/depression appears to be global in nature. So if it's any comfort, know that our misery will be shared by people like the North Koreans and Gazans.

Tyrone said...

Ok, I'm entering a resistance phase, where I'm thinking the dollar can't collapse, we can't have rampant inflation, the bond market will be fine. Somebody slap me out of it.

Anonymous said...

By March 09 - we'll know if we are going to be able to survive... not gain wealth mind you - but we'll know if we are going to survive. Either way it is not going to be pretty and I still miss the bubble. Wow, I sound so gloomy...
Catholic girl

Anonymous said...

Nice call back in '06, Jim. I came across the following from GMO's Jeremy Grantham, who's been warning us for a while now of the danger of bubbles:

"The current disaster would have been easy to avoid by making a move against asset bubbles early in their lifecycle. It will, in contrast, be devilishly hard to get out of. But, we are deep in the pickle jar, and it seems likely that, in terms of economic pain, 2009 will be the worst year in the lives of the majority of Americans, Brits, and others. So break a leg, everyone!"

"Quote For The Week"

Grim stuff. Catholic girl... better get thee to a nunnery!

Anonymous said...

Intelligence is rearward looking. Genius is future looking. Good work. Now, please help spread the solution: debt cancellation on a grand scale. An economy unburdened by debt does not have to self-destruct!

Anonymous said...

I'm afraid that the correct mindset is: every man for himself... head for the hills... survival of the fittest... keep your powder dry... hang any gubmint revenooer that comes into town... stock up now on yer canned goods, seeds, water and ammo...
find your own personal solution to the coming debacle... get out of debt... buy a farm... et al.

Jim in San Marcos said...

Hi Anon 9:19

I think you're right but I hope we are wrong. It sure doesn't look good. The track of what is happening is predictable, the only thing not written in stone is the time line.

The third world whom we employed to make everything is really going to suffer in the coming mess. It's sad and unavoidable.

Thank you for your post.

Jim in San Marcos said...

Hi Tyrone

Enjoy the magic act. I like the part where that rope dances towards the sky and then someone climbs it and disappears.

You really have to wonder why Congress even bothers to tax us when they can just print money. A trillion here, a trillion there. I get the feeling that our lawmakers fart dollar bills.

This "new" money has a bad smell to it.

Take care

Jim in San Marcos said...

Hi Catholic Girl

What happens March 9th? I'm probably having another blond/senior moment.

Jim in San Marcos said...

Hi Boom to Bust

I agree it is getting worse, the thing that surprises me is the speed and acceleration with which it is happening.

I don't think it was intended but FYI Shakespeare's quote "Get thee to a nunnery," literally translates into "Get thee to a whorehouse." The Catholic church had some serious "issues" at that time.

I just mentioned that to keep Catholic Girl from grinding you a pound ;>)

Thank you for your comments

Jim in San Marcos said...

Hi Jubilee Year

Thank you for the complement.

I'd like to add two assumptions of mine to yours: A majority of people believe if you are rich, you are assumed to be very smart likewise, if you are poor, you are assumed to be stupid.

The government can't cancel our debts or even pay them off. We owe this money to people who chose to save rather than spend.

Now we have a real problem, how do we pay them back? Debt cancellation doesn't solve any problems unless you are ready to retire. If the government does this, your resulting massive coronary should be enough to put you to rest. From there, let the relatives sort it out.

Simple, cruel and politically correct.

Jim in San Marcos said...

Hi Anon 6:02

If everyone thinks for themselves and acts accordingly, there will be people that survive this mess in a variety of different ways.

I think that the herd instinct will do you in, you need to think outside the box.

We will all survive, but we may not be very happy with the outcome. My only suggestion is to diversify in the hopes that you get to keep something.

Thank you for your comments.

Anonymous said...

Here come the bank failures.

Here comes an historically huge cascade of more sub-prime as well as alt-a and prime foreclosures.

Here comes the biggest default ever on credit cards, auto loans, student loans and home equity loans.

Here comes the derivative implosion.

Here comes 10% unemployment.

Here comes the largest amount of bankrupticies and closures of large and mid corps as well as small and mom & pop businesses.

Here comes the national recognition and panic that we are in deep doo doo.

Here comes the national recognition that Obama (and his administration of Big Business-exClinton-Federal Reserve people) and his bailout and stimulus packages just didn't stand up to the giant avalanche of deflation, debt destruction, excess.

Here comes all of those high soaring bubbles that popped going down more steeply than they went up.

I could go on, but you get the picture.

Anonymous said...

Hi Jim...

We need a depression: we need to purge ALL the toxins from this system and bring housing and all other asset values down to real affordable levels.
It will be painful and disruptive to a terrible degree to most Americans, but it must be done. Creative destruction must occur on an unprecedented level.

Then the system needs to be overhauled for real. Only the foundation can remain, the rest needs to be fully replaced from the foundation up. Hopefully the depression will give rise to a new third party (a mix of Ron Paul, Libertarians, Green Party, etc.) that will initiate and expedite the overhaul.

Can't believe all of the faith that the people have in Obama (indicates the level of non-confront, desperation and irresponsibility that the average American has). What is this change he's talking about? His administration is composed of ex-Clinton people, Federal Reserve people and others that are many of the people who are basically responsible for getting us into this mess in the first place. The government, the Federal Reserve, the IMF... no one will be able to stop this tsunami. It will happen.

Looks like the power elite of our country have really screwed up. They have been manipulated too and have lost control. They decided to drill some holes and sink the ship, but afterwards had the big realization... "Hey, wait a minute... we're on this ship too!"

The next 20 years are going to be very interesting, eh?

An Inquiring Mind

Anonymous said...

I'll second the Jubilee concept. All debt becomes discharged. Then, in very short order, lending and borrowing will take place and the system will rebound quickly. Bond holders, debt holders, including our foreign debt sorry.

Anonymous said...

Jim... please read this excerpt from The Daily Reckoning:

"I can’t understand why the public isn’t gathering their pitchforks and rakes on this one… Or maybe, the media didn’t tell them about this… Hmmm. That’s probably more like it… Any way… Here’s what I’m talking about… Bloomberg reported this… American International Group Inc., the insurer that nearly collapsed because of losses on credit default swaps, offered about $450 million in retention pay to employees of the unit that sold the derivatives, according to two people familiar with the situation. About 400 workers at the financial products unit may get the money in two installments, said the people, who declined to be named because the payments were confidential. The business was responsible for about $34 billion in write-downs since 2007 as the market value of swaps AIG sold to banks plunged amid the subprime mortgage market collapse. The payments bring to more than $1 billion the amount AIG has committed to keep its employees from leaving. The New York-based insurer took a federal bailout in September to avoid bankruptcy and is selling units to repay the government. AIG disclosed the existence of the unit’s retention program in regulatory filings, including a quarterly report in August. People don’t get this stuff on their cable news or national news or even local news."

Our Congress took a pay raise; companies that got tax payer bailouts are giving bonuses to their executives, remodeling offices, buying planes, etc.




Anonymous said...

“If the American people ever allow the banks to control the issuance of their currency, first by inflation, and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property, until their children wake up homeless on the continent their fathers conquered… I sincerely believe that the banking institutions having the issuing power of money are more dangerous to liberty than standing armies.”
–Thomas Jefferson

“Owners of capital will stimulate the working class to buy more and more of expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalized, and the State will have to take the road which will eventually lead to communism”
–Karl Marx, Das Kapital, 1867

Anonymous said...

Hi Jim,
When has the Catholic Church not had serious issues:)? Oh well, it's nice to belong to the ancient Church... even though we are full of sinners... it makes me feel right at home.

You ARE having a blond moment... good thing I am a redhead, oh wait, that was 10 years ago...
It was March 2009( not March 9th ) I should have made it clearer for the blonds on the blog. In March 09 all the pension funds have to give an accounting...they will all admit they cannot sustain and fund the baby boomers retiring...
and here we go will be a massive drop in the Dow as we all psychologically and collectively come out of denial and know we are doomed. There will be talk of nationalizing our pensions and 401ks completely and people won't be will be a spread the wealth other words take from those who did not lose and give to those who did- and no body gets to retire in Florida and play golf...

Oh well, I am still in denial and loving it...hoping it doesn't happen and praying for the bubble to return:)

Seriously Praying...
Catholic girl

Anonymous said...

Catholic Girl...

Is this so? All pensions will have to make their accounting public?

Yikes! The book, "Rich Dad's Prophesy" is coming true just as predicted.

You are right, the knowledge that people won't be getting the pension they have been planning on will cause a huge, collective emotional drop across the whole nation. Another proverbial nail in America's coffin.

It will only take a few more nails to send us into social and economic depression.

Oh well, the sooner the better. Let's just get it over with. Here's to a new and better society.

Jim in San Marcos said...

Hi Catholic Girl

I feel at home with sinners, we have a common ground.

It sounds scary for March if you have a retirement fund.

I agree with your prediction for the stock market. But if the government tries to nationalize our pension system, it's time to run for the woods. Social Security is close to BK and now we put another straw on the camel's back? It looks dicey to say the least.

Jim in San Marcos said...

Hi Enquiring Mind

I agree the reception for Obama confuses me. Take an example like Schwartzkopf from the Desert Storm campaign. Hail the conquering hero---- In this case, no battle was fought and there are no previous merits to refer to. But yet this person with no credentials has what it takes?

In my opinion, the only thing you can gauge from this is the absolute gullibility of the public at large. They have a dream and the dream is that Obama will deliver.

Give it about 6 more months before we get to the real nightmare.

Jim in San Marcos said...

Hi Anon 1:51

Thank you for the quote. Interestingly, Congress had to cancel the pay raise they gave themselves during the great depression. Public outcry was deafening.

It is rather irriataing to figure that it is business as usual for Congress.

I don't know if a pitchfork is the proper instrumet for use by Congress. They like the smell of the warm stuff on the floor.

Anonymous said...

Who knows if it is true or not... who knows WHAT will happen. I hope my husband's pension and 401k are safe, because I was one of those "stay at home" moms for years...if something happens to him or his money I will have to dye my hair and try to find more money (men) and in this environment- it doesn't look good :):):) all the men are broke:)
At any rate, seriously, this is an article I found surfing around - LEAP 2020
Catholic girl

Global systemic crisis – New tipping-point in March 2009: 'When the world becomes aware that this crisis is worse than the 1930s crisis'
- Public announcement GEAB N°30 (December 16, 2008) -

LEAP/E2020 anticipates than the unfolding global systemic crisis will experience in March 2009 a new tipping point of similar magnitude to the September 2008 one. According to our team, at that period of the year, the general public will become aware of three major destabilizing processes at work in the global economy, i.e.:

• the length of the crisis
• the explosion of unemployment worldwide
• the risk of sudden collapse of all capital-based pension systems

A whole range of psychological factors will contribute to this tipping point: general awareness in Europe, America and Asia that the crisis has escaped from the control of every public authority, whether national or international; that it is severely affecting all regions of the world, even if some are more affected than others (see GEAB N°28); that it is directly hitting hundreds of millions of people in the “developed” world; and that it is only worsening as its consequences reveal throughout the real economy. National governments and international institutions only have three months left to prepare themselves to the next blow, one that could go along severe risks of social chaos. The countries which are not properly equipped to cope with a surge in unemployment and major risks on pensions will be seriously destabilized by this new public awareness.

In this 30th issue of the GEAB, the LEAP/E2020 team describes these three destabilizing processes (two of them are described in this public announcement) and gives recommendations to cope with the surge in risks. In addition, this issue also provides the opportunity to make an objective assessment of the reliability of LEAP/E2020's anticipations and specifies a number of methodological aspects of the analytical process used. In 2008, LEAP/E2020's success rate reaches 80%, and even 86% when it comes to strictly socio-econimic anticipations. In a year of major upheavals, our teal ise altogether quite proud of this result.

The crisis will last at least until the end of 2010

Evolution of the US money base and indications of related major US crisis periods (1910 – 2008) - Source: Federal Reserve Bank of Saint Louis / Mish’s Global Economic Analysis
As we already explained in GEAB N°28, the crisis will affect in different ways the different regions of the world. However, and LEAP/E2020 wishes to be very clear on that aspect, contrary to the dominant stance today (coming from those experts who denied the fact that a crisis was coming up three years ago, who denied that it was global two years ago, and who denied the fact that it was systemic six months ago), we anticipate that the minimum duration of the decanting phase of the crisis is 3 years (1). It shall be finished neither in spring 2009, nor in summer 2009, nor at the beginning of 2010. It is only towards the end of 2010 that the situation will start stabilizing again and improving a little in some regions of the world, i.e. Asia and the Eurozone, as well as in countries producing energy, mineral and food commodities (2). Elsewhere, it will continue; in particular in the US and UK, and in all the countries depending on their economy, were the duration could approximate a decade. In fact these countries should not expect any real return to growth before 2018.

Moreover no one should imagine that the improvement at the end of 2010 will correspond to a return of high growth. The recovery will take long. For instance, stock markets will take a decade to return to levels comparable to 2007, if they ever return to that. Remember that it took twenty years before Wall Street resumed its 1920 levels. Well, according to LEAP/E2020, the present crisis is deeper and longer than in the 1930s. The general public will gradually become aware of the long-term aspect of this crisis in the coming three months and this situation will immediately trigger two tendencies carrying with them socio-economic instability: fear of the future and enhanced criticism towards leaders.

The risk of sudden collapse of all capital-based pension systems
Finally, among the various consequences of the crisis for dozens of millions of people in the US, Canada, UK, Japan, Netherlands and Denmark in particular (3), there is the fact that, from the end of the year 2008 onward, news about major losses on the part of the organizations in charge of managing the financial assets supposed to finance pensions will multiply. The OECD anticipates that pension funds will lose 4,000 billion USD in 2008 only (4). In the Netherlands (5) as well as in the United Kingdom (6), monitoring organizations recently blew the whistle asking for an emergency contribution reappraisal and a State intervention. In the United States, growing numbers of announcements call for contribution increases and benefit reductions (7), knowing that it is only in a few weeks time that most of these funds will start calculating their total losses (8). Most of them are still deluding themselves about their capacity to build up again their capital after the markets turn around. In March 2009, when pension fund managers, pensioners and governments will become simultaneously aware of the fact that the crisis is there to last, that it coincides with the « baby-boomer » generation’s age of retirement and that the markets will not resume their 2007 levels until many long years (9), chaos will flood this sector and governments will reach the moment when they will be compelled to nationalize all these funds. And Argentina, who took this decision a few months ago already, will appear a pioneer.

All the trends described above are already at work. Their combination and the public becoming aware of the consequences they could entail, will result in the great collective psychological trauma of Spring 2009, when everyone will realize that we are all trapped into a crisis worse than in the 1930s and that there is no possible way out in the short-term. The impact on the world’s collective mentalities of people and policy-makers will be decisive and modify significantly the course of the crisis in its next stage. Based on greater disillusion and fewer beliefs, social and political instability will settle down worldwide.

Anonymous said...

It's really an uplifting article, isn't it? Wow I hope is isn't true. I need Florida- I need golf- I am serious, I am just not taking this all well.
Catholic girl

Anonymous said...


The responses you get from this site are getting better and better. You are picking up steam.

One suggestion: Start putting up more posts. Showing the past posts are a good idea, since this shows you have been on the right track. However, you need to get new stuff out more frequently.

I bet, that if you increase your output, you can start generating a large number of regular visitors. If you get enough hits on a consistant basis, you should be able to make some add revenues off the site.

Catholic girl: You can dole out the doom-n-gloom with the best of them. That is why I come to this site. Keep up the good work.

Take good care,

Jim in San Marcos said...

Hi Anon 8:24

I agree, brief and to the point.We have front row seats. Blink and you will miss something.

Thank you for your comments

Jim in San Marcos said...

Hi Shift

I don't make anything writing this column and believe it or not, each post takes me about 3 hours to research and compose. I do reprints to catch people up on posts that I thought were worth repeating (lets face it, no one scrolls back to the beginning).

Some people can write forever, I don't have that gift. Plus I have a full time job at Camp Pendleton as a computer tech which limits my time for writing.

This blog is more of a "Thinker's Corner" we can discuss the "what if's"

I have noticed more written traffic of late and it is still manageable to where I can respond and answer everyone.

Thank you for your suggestions, I know you have my best interests at heart.

Take care.

Joseph Oppenheim said...

1) When did the window open, the window being a time when assets (hence a form of money supply) depreciated to the point where the government actually should increase the money supply and/or debt to stimulate the economy, without risking serious currency weakness or serious inflation?

2) How long will the window be open?

Housing began to depreciate the beginning of 2006, unemployment began increasing in the beginning of 2007, the Dow started its decline in the middle/toward the end of 2007, and finally oil/commodities in the middle of 2008.

So, I calculate the approximate time when the window opened being the middle of 2008.

I would look for the first sign of the window closing being when unemployment starts decreasing. At that point housing prices probably would have stopped going down and begun increasing.

Obviously, there could be some unexpected event or series of events, particularly of a geo-political nature, which closes the window, but there is a window and it has been open for about half a year.

The bottom line is the window opened around the middle of 2008 and shows no immediate risk of closing, at least for a few more months, but likely longer.

Anonymous said...

"I just mentioned that to keep Catholic Girl from grinding you a pound ;>)"

Thanks for that, Jim.

I think I'd better review by Shaekespeare...

Anonymous said...

A little keyboard-tied today. I meant...

"I think I'd better review my Shakespeare."

Jim in San Marcos said...

Hi Boom to Bust

Think nothing of it. Mytypingisworsethanyours.

Take care.

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