Monday, April 13, 2009

Economic Terpitude (Reprinted)

Here's a reprint from October 21, 2007. It still has a pretty good punch. Maybe it's a bit more creditable today.

Banks, hedge funds and what ever are taking billions of dollars in loan loss provisions. I have been suggesting for over a year, that a lot of this money may be coming from our retirement funds. Think about it. If your wife buys a new fur coat with your paycheck, now you can’t pay the rent, that is obvious very fast. If the wife turned a trick with the old geezer down stairs and bought the coat, you are stuck wondering how she did it. The reason I suggest Retirement funds, is that the losses suffered so far appear to affect no one. But bear in mind, retirement income funds deal with the future. Most people are not ready to retire so these funds should have plenty of time to recover losses (keep quiet, keep your job). The write downs are massive. Nobody even blinks an eye. What’s a 10 billion dollar loss? The perspective is beyond comprehension. This money has to be coming from somewhere. Whoever’s money it is, they don’t seem to need it--yet.

The money supply worldwide seems to be contracting. Usually this would imply a rise in interest rates. That doesn’t seem to be happening. Commodities are increasing in value, which could be an inflation indicator. If reserves are being added to the banking system, then this could explain why rates are not rising (using a truck is cheaper than using Ben's helicopter).

A lot of the new earned money entering into the economy is not being used to create new jobs, its being “invested” in financial instruments. Workers are not creating new product, investors are placing side bets on the financial markets. The profit is gone from home building industry. Investment in rental property is a losing enterprise. Consumption seems to be tapering off. Home remodeling appears to have hit the skids. Starbucks seems to be doing OK, you have to draw the line somewhere.

Interest rates are dropping but you can't force people to borrow money unless there is some sort of return (like a house appreciating at 20% a year). That would explain why the stock market as well as the commodity’s markets are still in play. Cramer the other night was forecasting Google at $750. Everything is still going up. The stock market had a little hiccup on Friday. Nothing to worry about, Google kept on ticking just like a Timex watch. Of course it can’t be a bubble, bubbles don’t get that big!

You have a bunch of banks forming a consortium to bail out the CDO and SIV holders . They are creating a new financial instrument called a "USA," which is short for “Up in Smoke Assets.” It ought to be a hot item if they can figure out a way to package it. It’s kind of like selling invisible goldfish. Give the buyer one or two extra for free, so he thinks he’s getting a real bargain and then sell him some invisible fish food to boot.

The economy’s current condition reminds me of the embezzler and a millionaire taking a vacation at the same resort. The embezzler knows whose money he is spending. The millionaire has no idea that he is broke, but hey, everyone is having fun. Are we broke yet?

8 comments:

Rob in NS said...

Jim

Your analogy about the embezzler and a millionaire taking a vacation is spot on with what is going on right now. I fear that it still will be five years from now as well. I just wonder how long the gaming of the economy can continue before the wheels fall off. The majority of voters don't set the bar too high for our politicians and it shows.

rob

Jim in San Marcos said...

Hi Rob

I think that the politicians are hoping for 5 years, that gets them re elected.

I am thinking that the wheels could fall off anytime right now. Every Thursday the banks have to come up with cash for the weekly payrolls and these paychecks are being used to retire debt, rather than stimulate the economy.

Interest rates could be the key here. You have to pay more for funds when you are short of cash. That could just happen at the T-bill auctions coming up.

Alt-A paper was great because of its return. Treasury Bills are great because of their security. Do you get the idea that that person who bought Alt-A is now buying Treasury's? Of course it's not his money, its yours!

I think that you and I will agree that common sense has nothing to do with what is happening.

Rob in NS said...

Jim

If the politicians in charge cannot convince me that things are alright then I doubt they will have much luck with a fellow like Jimmy Rodgers. I read in NYT today that the government is going to release report on health of banks. Am I missing something? Isn't that something the banks should be doing for shareholders without government help? It all seems a little surreal. I'm sure the people with money in this world can see thru the smokescreen. Governments know this but are more concerned with maintaining the veneer of prosperity so as to not roil the masses. If the masses do awaken it will be pink slips for vast majority of politicians in power and they know it. They are running scared and like you said the T-Bill auctions should at some point expose the sham for all to see.

rob

Anonymous said...

Jim,

Been reading your blog for a long time now. Everything you have said has come into reality. Seems like with the way things are going it is going to be up and down for a long time, more than 5 years. In the end I have a feeling we will go into a depression. This country can't run they way it is, as in digging a deeper hole than what we are in.

Politicians and some economists say it is getting better. How? Do they think we are stupid? Unemploment is on the rise and no new jobs are out there. Gee no jobs=no money for people to spend. Hmmm, common sense and nobody has it.

There is no way out of this mess we are in. We need to start things over, depression time. Instead of bailing out the banks, we need to bailout out the taxpayers that need it.

The banks say to refinance but you can't refinance your house while you are unemployed. Most people that are unemployed would really help from the benefits of that. Nothing has trickled down to the blue collar workers. Everybody forgets that the blue collar worker are the ones that run this country. Make it hard for us and see what happens. The U.S. is the titanic, we already hit the iceburg and we are sinking.

Josh

Rob in NS said...

Jim

NEW YORK (Reuters) - Royal Bank of Canada , Canada's largest bank, said it will take a charge of roughly $850 million (C$1.03 billion) because the value of its international businesses has declined, reducing second-quarter earnings by an equivalent amount.

Maybe the Canadian banks are going to join party afterall

rob

Jim in San Marcos said...

Hi Josh

Thanks for reading. We both think alike, it doesn't seem like common sense will save us, go figure.

Thank you for your comments

Jim in San Marcos said...

Hi Rob

I still think that Canadian banks are better off than their American counterparts.

I have no data to go by, but there was really no reason for your banks to get into the mess our banks got into. Weren't there laws that restricted where Canadian banks could put money?

Rob in NS said...

Jim

I think your right in saying that the Canadian banks are better off than their American counterparts. The regulations by government will likely save them going out of business. I do want to put a proviso on this though. I'm no expert on international finance, I work in rebar/structural steel industry, but I do worry about what they have been up to overseas. The bank in deal with (Scotiabank) has extensive operations in Caribbean and Latin America. Some of the others (TD and RBC) have operations in the USA. I just wonder sometimes if these international units are being totally upfront about the state of their business dealings.