Saturday, February 28, 2009

Great Expectations

The government announces tax hikes for the rich earning over 250k a year. The goal is to raise taxes and pay down the deficit. It seems that many people in government cheat on the taxes they owe. How do you overlook 100K in income as a future Secretary of the Treasury? Nationwide, a lot of people have lost their jobs, so there are fewer taxes to be paid. The taxes collected next year will be a lot less than what they were this year.

Increasing tax rates does very little. The same thing happened in the 1930’s. State legislatures back then figured that increased taxes would result in increased revenues. The results proved to be the exact opposite. People instead of hanging on, gave up from the added tax burdens and walked away.

California is doubling the vehicle registration fee; well I’ve got a car that will get sold. I don’t need it. Increased costs force everyone to rethink financial decisions. My cable TV rate went up I decreased to just the basic channels. The net effect, the government collects less by asking for more.

Car sales are in the dumps, that’s a big ticket item for state and county budgets. Raising the state sales tax by 1% is incentive enough to run a vehicle until it drops. Paying 9% sales tax on a new car kind of makes you choke while making General Motors cry (over lost sales). California could file for bankruptcy in the middle of July. They could file for stupidity right now, but sadly the route you take to arrive at bankruptcy is of no concern to the courts.

Where is all of this new tax money coming from with 10% unemployment? We kid about the Tooth Fairy saving us, but this seems a little too real. How do you spend your way out of a bankruptcy?

Sunday, February 22, 2009

The Next Tea Party

A lot of people think our present financial crisis can be blamed on one political party or the other. The Republicans did this, the Democrats did that, and from there you have a raging argument. Once you accept this premise, you vote accordingly, its payback time. Anybody with a political ax to grind has plenty of fodder and a good share of devoted listeners. Kind of a real waste of time.

If we jump back to a President that was qualified to lead in recent history, I would pick Eisenhower. The guy ran a world war machine that defeated the Germans. He knew what sort of logistical costs were involved in moving thousands of men to a foreign land. His concept of getting something done, had to have answers on how to keep these men supplied, logistics is the name of the game in any successful war plan. His decisions were weighed in men’s lives not political BS.

With the present financial mess, I think Ike would have come to the conclusion, we cannot successfully support the banks, it’s logistically impossible. They have to fail and be taken over. Too big to fail means that they should have never been given the chance to get that big. Pay now, or pay later.

We need to fix the present mess and doing nothing is a viable solution. Rick Santelli’s comments from CNBC put it out for everyone to see. Why do we have to pick up the bill for these losers? The rebuttal from the White House Press Secretary was in the clouds. He would have had more credibility announcing that his kids had just won a Posturepedic bed wetting contest. This press secretary needs to take some public speaking lessons, “um” is not something you slip in every third word. The guy reminded me more of a rest room attendant handing out towels; not sure of why he's there or what he's suppose to be doing.

The financial commentators on CNBC are not dummies, they have interview hundreds of people and in their own right, have good financial acumen. Mark Haines has been grilling some of these financial pundits and exposing their narrow comprehension of the situation. It's fun to watch.

I think that we are seeing a consolidation of what the financial commentators consider a solution. The crap has to be marked to market. The banks need to fail for that to happen. If the process is speeded up, it is the foreigners that have the most to lose; they are the ones currently pulling out their money with no loss.

Doing nothing is a solution. What do we have to lose? The country is broke as it is. The bail out money has to be printed and we all know that. Rick Santelli called for a "Chicago Tea Party." Here's a Link to it. Congress needs to wake up and read the tea leaves!

Tuesday, February 17, 2009

Warning: Government Will Change the Rules

Here is a bit from Karl Denninger, a You Tube expose which explains illiquid assets, it is well worth clicking on the Link I promise you.

The thing we need to understand right now is that the rules that we play financial games by are changing by the moment. Dare to short the bank stocks; they change the rules, no shorting. Right now, they can change the rules on just about any investment. Want to buy futures? Why bother they might close the stock market!

Uncertainty is the name of the game.. Gold could be illegal to own once again. Pre 1964 U.S. coinage is not in circulation. It's worth far more than the money it represented.

The other thing you have to look at right now is miss-information. The government can't spend 787 billion that they don't have. They might have a shot at borrowing an additional 100 billion more than the 400 billion they are presently borrowing this year, but come on folks we are broke. This money is coming from no where!

In the next three weeks, nations are going to start declaring bankruptcy; Spain, Portugal, Italy, Greece, and most of the Eastern block. This problem is not going to go away; it is getting worse by the minute.

Here is the next step. You give the clerk your credit card for a purchase and it does not go through. All credit cards fail to negotiate. The Banks are broke; it just doesn't seem real yet. You now have a Cash and Carry society, no CREDIT. It's a little like that last car on the freeway that causes gridlock, or that super cooled fluid that gets one fiber of dust in it and freezes solid.

The problems are real, the solutions are not. You can depend on the certainty of government to change the rules. That alone makes any investment risky. Sorry to be so pessimistic, it kind of looks like I am making sulfuric acid out of lemonade. I could be wrong and that would be a good thing.

Saturday, February 14, 2009

Stimulus Package?

Here was the morning headline. A 787 billion dollar bailout package. Look at the picture. The editor of the newspaper selected a picture of everyone laughing. There is an editorial statement here that speaks volumes silently ("Insanity strikes the Capital").
It Kind of reminds me of the Mad Hatters Tea Party in Alice and Wonderland.

Then down at the bottom of the page we have reality coming home. If 787 billion dollars wasn't enough to smile about, here is a real knee slapper!

You get to laugh with Congress and wet your pants without having to turn the page.

Too much spending got us into this hole, now we are going to spend print our way out? Notice how it is labeled a "Stimulus Package," it's not a "Titanic Spending Bill." Choice of words is what it's all about. A "stimulus package" has a subliminal link to the successful pretty little blue pill Viagra. A "titanic Spending bill" has a subliminal link to rearranging deck chairs and icebergs. What we have here, is a titanic blue pill with deck chairs, that's going to hit an iceberg and sink in the Atlantic.

Wednesday, February 11, 2009

The Credit Card Bubble (reposted from 2007)

Here is post from March 27, 2007 that bears repeating.

Let’s put ourselves in the banker’s chair. Suppose the credit situation is getting more strung out. People are not paying on time and charging more on their cards. How could you hide it? Ans. by issuing more cards. This would make the debt per person seem reasonable and at the same time your creditors would loan you more to do the same thing, give people free money to buy more stuff.

What we have is a balloon that is inflating ever more rapidly. The reason it’s inflating more rapidly, is that it’s a real Ponzi scheme. As long as the credit card companies can pay the interest and the defaults haven’t killed them, they are still in business. More “new” customers keep the game going (how many cards do you have?).

The credit card companies shouldn’t have much of a problem paying the maintenance fees, to service the debt. They are charging 18% interest to the credit card borrowers. So they need to give their lenders of good faith 7% off of the top. That leaves them a net of 11% return during good times. So as long as times are good, the lenders to the credit card companies are getting a 7% return and the Credit card companies are getting 11% for managing unsecured debt.

Notice as with a Ponzi scheme, it’s the float that keeps the thing going. As long as there are more investors putting money in, there isn’t much worry. It’s when loan renewals stop exceeding cash demands that a problem arises.

What happens when big money decides not to renew their loans to the credit card companies? It could be considered a contraction of the money supply. That 11% float would be used to pay off any called loans. Its when you realize that the 11% in good times might only be about 3% in bad times with credit card write offs.

So let’s see, 2 trillion of unsecured credit card debt. Now, if you are a retirement fund manager and decide the risk is too great, and decide to not renew your note with a credit card bank, what happens next? Remember, how the sub prime and alt-A 100% loans disappeared? Hmmmmm!!!!

It was the banks in 1929 that bit the dust, this time “it’s different,” it could just be the credit card companies. The government is not going to bail them out. That amounts to paying off Joe Six-pack’s wide screen Plasma TV and the sex change operation.

The real problem at this point, is the problem created by giving everybody a credit card. The amount owed on a lot of the issued cards will probably not be paid. The interest on the debt was the only concern of the consumer. When payment is called for, it’s just not there. There is cash to pay the interest, but nothing to pay the principle. The people who loaned to the credit card companies have secured debt. Secured by 'what' is kind of a joke. It’s kind of like a rock, paper, scissors game, only this time its rock, paper, scissors, and caca.

Nah, it’s probably just my imagination running wild again. . . . … . .

Saturday, February 07, 2009

It's Only Money

Possibly four million homes will be lost this year to foreclosure. A lot of those people will have also lost their jobs. The banks get more paper to hang in the executive bathrooms. Of course those who defaulted on their home loans will also be barred from the new car market. It looks pretty gloomy for the car manufactures and the airlines. Gas prices should drop, less consumption; unemployment eliminates the daily commute to work.

With people cutting back on consumption there is the paradox of decreasing consumption resulting in rising prices. Many companies are face with fixed costs that have to be passed on to the consumer; airlines, car manufacturers, gas, electricity, water, cable and phone to mention a few. Those costs are passed on to the decreasing consumer consumption base.

Two spirals are in play here. A foreclosed homeowner, out of a job, is selling assets to feed a family and provide shelter. Converting assets to cash starts a deflationary spiral as more people join in. A person could end up losing everything they ever earned. A byproduct of this, government gets less tax revenues; no income tax, reduced property taxes and reduced sales taxes.

The second spiral is the increasing growth of government entitlements while tax receipts are declining drastically. Government services need to increase to provide for unemployment insurance, food stamps and welfare. There are the addition outlays for Social Security, Medicare and Supplemental Security income. Add to that the government funding of the banks and our bankrupt retirement funds.

Pay no attention to this, it was added for its pretty colors. Double click for a more troubling view.Congress is going to pass a massive bailout spending package using borrowed money. Who could they possibly borrow it from and at the present interest rates? It seems like just last week, the politicians were bitching about the 40 billion spent on the Iraq war. It was too much money. Then, they gave AGI 80 billion in bailout money and no one even got shot. Now we are talking trillions of dollars. They need to check the water supply for Washington DC. At least if it’s lead poisoning, they have an excuse for this madness.

Here are the Federal Governments projected future revenues. Pay no attention to this either. It's not relevant anymore. The guesstimates for 2008 and 2009 have to be off a tad. What's a trillion or two among friends?

Thursday, February 05, 2009

Too big to Fail

There is some fuzzy thinking in Congress and government at large. The aspect of a super bank like Citi or Bank of America being too big to fail is a rather ridiculous assumption. When an institution starts out, growing in size usually means better efficiency through organization and utilization of resources. The company can double in size and probably handle three times as much business. This increased efficiency is what keeps organizations growing. There comes a point where this sort of return will fail to materialize. The returns will start to diminish with increased size.

Once we exceed certain limits, the benefits decrease with increasing size. General Motors increased in size, the item here that did them in was retirement benefits. Now they can’t sell cars and pay what they promised in benefits.

It’s rather irritating to see a super bank that has receive TARP funds declare that the money spent on the trip to Las Vegas or what ever, was not TARP money. What it tells one, is that the government lent them too much money. Take away the TARP money and let them collapse. Of course if the bank collapses, we don’t have to worry about setting maximum payout for upper management to 500K per year. We don’t have to worry about the money being spent on office furniture or corporate jets.

If a company has money coming in, their priorities don’t have to change. If they are broke, they have to change their lifestyle. Toys are not free. They have been removed as a consumer.

These companies are too big to compete on a realistic level, they need to fail. The reason they need to be allowed to fail is to show the world, you screw up, you’re toast. There is no reward for incompetence (I could be wrong, ask your Congressman). The one problem I have is that Congress seems to think that they are going to solve our problem with some legislation. They repealed the laws that allowed this to happen for a second time. Don’t expect the new administration to be our “White Knight.” It reminds me of a Will Rogers quip, “If stupidity got us into this mess, why can’t it get us out of it.