Wednesday, May 20, 2009

The Absurdity of Reality

Bank of America is going to sell another 825 million shares of stock at $10 a share. What the Company is doing to the share holder, is about on par with selling a hooker lipstick that prevents VD (you have to be blond to bite on that one). The TARP money is no good? It’s kind of hard to figure that out considering that the banks don’t have to account for it.

Put it another way, Bank of America needs 8 billion dollars to stay in business. So if you are already a stock holder, the added dilution is welcomed. Something added to nothing gives you a few cents in the “Bank.” Both Citi Bank and B of A have a good chance of collapsing sometime this year due to an inability to finance their credit operation.

Congress in their infinite wisdom is passing a law on credit card usury rates. Look for your rates to jump sky high before the law takes effect. The Credit card companies are not interested in future business, they want the money they loaned out, back, and that just isn’t going to happen.

Everyday now, we hear the phrase, “We have hit bottom.” Things are going to get better. California voters just turned down a bunch of bond measures to fund the budget. I guess hitting bottom, means that the Governator is taking bids on recycling the copper plumbing in state offices.

What gets cut first? --- Prisons, welfare, mental asylums, schools, teachers, fire, health services, and police. So if you have less than 5 years to serve in prison, you’ll be released. If you’re under mental treatment, you get to go “home” (find a shopping cart). Less school hours and no jobs, the neighborhood kids will be ransacking your house while you are at work. The police won’t arrest anyone, why bother, they won’t go to jail. So what are they going to do? Write you a traffic violation ticket and generate some revenue. Do you get the feeling that a lot of us are about to become victims in this fall from grace?

The California budget has had to face reality which is a good thing. The reality is that Disneyland is in California, but Congress thinks that Tinker Bell can throw this Fairy Dust (TARP money) everywhere. Governor Schwarzenegger is not asking Congress for fairy dust, he’s asking Congress for real help.

The Grand Old State of Kalifornia could go bankrupt while the banks gorge on Tarp money. Go figure, and they don’t even "want" it!


Anonymous said...

Great comment...why can't California get "TARP" money? Maybe Ms. Pelosi should be thinking of the welfare of her state rather than trying to get extra govt. money to fly a larger jet to the East Coast...

Comrade said...

Well it looks like Russia has dumped the dollar as its reserve currency

Jim in San Marcos said...

Hi Anon 10:38

The biggest issue about California getting Federal aid, is that the rest of the states would want the same treatment.

From a tongue in cheek approach, I see Congress doling out some sort of state benefit based upon the number of Democrats in the state.

On the serious side, there will have to be some sort of Federal support for public assistance at the state level. People not contributing to the state tax base, will have a very low priority for services in any state budget.

California is about to do some budget cutting (slashing might be a better choice of words). It could "disturb" a lot of people.

Jim in San Marcos said...

Hi Comrade

I read the article and it is rather misleading. It looks like the Russian people have been converting Rubles into foreign currency. Naturally when you run out of one currency like the dollar, what you have left is now your reserve currency, in this case, the Euro.

American currency in the old Soviet block, is often a medium of exchange. There is a real problem here that isn't mentioned much. Counterfeiting US currency is a great business to be in over there. Most of the domestic currencies don't hold their value, whereas foreigners have faith in the US dollar even if it's fake. Plus there aren't many laws against counterfeiting foreign currencies. I've read that North Korea prints a very good C note ($100 bill).

Anonymous said...


The article is saying that the Russians are selling their USD based on demand, but instead are replacing it with Euro's. Why is that you think? It is because of the loss of faith in the USD.

Anonymous said...


What do we do now? Congress continues to speend money like there is no tommorow. The Fed/Treasury continues the 24 hour a day printing press. The media is focused on who won American Idol.

We could lose our triple AAA rating within 3 years, if not sooner; Our expenditures exceed our revenues on a scale that is frightening. When and if the you know what hits the fan, I wonder how all of this will be explained to the American people? Your thoughts.

crashproofed said...

And right on QUE for TGIF today ...a couple more random bank seizures, along with the Bank United in Florida. Shall we give pet name descriptions to all the different volume level of bank seizures that happen with regularity?! Every Friday 2 "mini's" is the pattern. By Monday all is forgotten without mention. Oooop there's a 3rd as type this! Ohhh Baby! Pffft. Total Disgust.

Anonymous said...

On an emotional level: I am worried about the government intervention going on. I hope that my family does not get hurt in this economic mess.

On an intelectual level: I want to see where the breaking points are. I want to see how much US government issued debt is needed for the treasury yields to spike upward. I want to see how much treasury debt the Fed can choke down. I would like to see what happens if the Fed goes insolvant.

I honestly want for everyone to be healthy, economicaly secure, and happy. I feel somewhat shameful for my curiousity, as to what I percieve as a very real possible economic disaster.

Jim in San Marcos said...

Hi Anon 11:55

Here is the way I interpret The Russian Central Bank. It is a clearing house for settling purchases made abroad. America wants to be paid in dollars and Europe wants to be paid in Euros. This clearing house is indicating that it's reserves in dollars is decreasing. Let's assume it goes to zero. At that point, you need dollars to buy American goods. Since the bank has no dollars and plenty of Euros, it would probably have to discount them to buy Dollars from another nation.

When the country as a whole increases Treasury bill purchases from 32 billion to 116 Billion, rubles get turned into Bucks. So they may run out of dollars for trade settlements.

People don't realize that the US currency is the real money of many nations. To name a few, Mexico, Armenia, Russia and most of Central America.

Jim in San Marcos said...

Hi Anon 5:53

Why wait 3 years? There is no triple AAA status anywhere except maybe in training bras.

What happens next is anybody's guess. But a collapse of the bond market could be the next big thing to hit the fan. I wouldn't even loan a relative money at these low interest rates.

Remember one thing though, this market is not running on common sense, so my thoughts really don't count.

Jim in San Marcos said...

Hi Crashproof

The peculiar thing that escapes observation, is that fact that the people doing the auditing of the banks are a tad bit short handed. So the number of banks going down could increase if the hiring of bank auditors picks up. Then we will really be cooking "with gas."

AIM said...

I realized when I was about 8 years old, and I had to pull my mother back onto the sidewalk to prevent her from being hit by a car as she was holding my hand in order to walk me across the street, that the adult wasn't as perceptive and intelligent as I thought. In one way it undermined my sense of stability... in another way it made me realize that it was up to me to take care of myself. It is the same thing with our Congress and our leaders... there is sure a lot of pretense... but it is still the blind leading the blind.

frakrak said...

The government debt in the UK has reached almost 100% of GDP! Perhaps a question that begs an answer is how could the country reach this level of insolvency in the first place?

What happens now, do the major creditors come in and take a few trident submarines, disassemble famous landmarks and ship 'em off to Beijing? A fire sale at the British museum perhaps?

Jim what is reality here? If a country can't pay back what it owes what does the creditor do to recoup their losses? The absurdity of the current reality maybe that the creditor could be the hardest hit by all this!

Jim in San Marcos said...

Hi Aim

Your story reminds me of my Mom when seat belts first came out. I was about 14 and buckled up and my mom didn't. She took a turn too fast and her door wasn't shut and she started sliding out the door (she was driving). I grabbed her and we made it around the turn without her falling out of the car.

I think that both of our examples demonstrate that we need to help each other to survive this mess.

As for Congress, I agree they do not have a clue on how to fix this mess or pay for the plan they are putting in place.

Jim in San Marcos said...

Hi Frakrak

I didn't realize that things were that bad over there.

As to who is going to pay for the mess, look at it this way. Those just starting to work in their 20's have zip in savings. Those that are ready to retire have saved up their whole life. So if the country goes bankrupt, we know who the creditors are. Its the people with real money in the bank. The only problem, the money they were counting on has been spent by the government.

Savings are normally proof that there is product out there that hasn't been consumed. Well, that's not the case, government consumed the product, and printing more money doesn't produce product for sale.

The irritating thing about this, is that you don't have to go to school to figure this out. Inflation could take off in the UK real fast (of course that can't happen in a depression). Deutschland circa 1923 comes to mind. Roll the presses and print more money.

The visual doesn't leave one with a "Warm and fuzzy feeling."

frakrak said...

Jim I agree with you 100%!

Speaking of the 100% ... re the UK debt GDP ratio, these figures were quoted by our national radio yesterday! After searching the web had trouble substantiating this. The closest I found were figures released a few months ago by the OECD that came in at 67%.

Not my place to mislead anyone, we'll leave that up to the politicians eh? My apologies ..

Jim in San Marcos said...

Hi Frakrak

I'll bet your mistake of 100% is closer to the truth than you think. Government statistics are suspect the day they are released. Unemployment statistics come to mind, just to cite one example. Once you exhaust your benefits, they stop counting you as being unemployed.

We need a Federal program to supply electricity to the freeway underpasses. That way the homeless (unemployed) could have some "creature comforts" in their new found living arrangements. Of course, that borders on Jonathan Swift's "Modest Proposal." We have been here before in time methinks.

Anonymous said...

Hey Jim in San Marcos,

Stocks are scary, bonds too, real estate too. It will be awhile before there is a bottom in any of these (and longer for any hope of profit). No yield on Treasuries. CDs are miniscule. And I'm nervous about the cash I have sitting in the bank... my bank may go under.

Nothing safe to invest in. For now or the future. This is bad news.

I guess the only thing is putting your money toward owning your car and home free and clear and then spending on education and developing skills for future employment.

These seem to be the correct (and only) investment for now and the future.

Jim in San Marcos said...

Hi Anon 4:55

The banks aren't going to go under so you're money is safe. There is the question of, why put it in the bank, at such low interest rates. A safety deposit box makes more sense, the bank can't loan it out and "stimulate the economy." That concept could raise interest rates to a more realistic level.

I think your approach to our present problems will keep you out of harms way.

I would caution on paying off the mortgage early. When times are tough, banks don't loan money unless you can prove you don't need it (I'm paraphrasing John D. Rockefeller here).

Thank you for your comments.

Anonymous said...

I don't have a job or a business. Was building spec homes 2 years ago and starting to make good money until the real estate market and economy began its collapse. Since then I've been helping the wife to start up a new business which will be operating shortly (offering services related to product development via a group of creatives that do model making and painting, prototypes, etc.) and taking care of an ill mother.

Luckily we have some real estate investments that have given us passive income to live on-- although that income had dropped by 50% because of the economy and now we are just getting by. I have 200k cash sitting in the bank that I can use for anything I choose.

I sort of have a clean slate and am open to do anything I want.

Not sure what would be the right move with this economy and where we are headed. The last post about education and building skills makes sense but I'm not sure what skills would be smart to build.

Rather than be negative about all of this I'm thinking that the glass is half full... I've got some business capital and I'm free to do whatever I want. But, like a chess game, I don't know what the true correct next move is.

Any input you could offer?

Concerned Citizen

Jim in San Marcos said...

Hi Concerned Citizen

You're taking care of mom, why not give her some companions. A friend of mine, his father started a 3 bedroom rest home out of his home. I haven't seen him in 6 years so I don't know how that has turned out.

There could be a lot of hoops to jump through for that, plus it's not for everyone.

I think that you need to realize that 200k in the bank can go poof if you stay unemployed for 6 years.

Of course you could fly to the Philippines and buy a nice yacht for 100k and retire on the other 100k.

I do give sailing lessons now and then. As for my investment advice, it has a lot to be desired. Everyone is different, what you ask is too hard to call. Sorry I couldn' be of more help. Here's wishing you the best of luck. Take care.

AIM said...

Con Citizen

Take the 200k and buy 4 nice rental homes cash for 50k each (easy to do with all the foreclosures and REOs available, people are doing so in Calif right now). Should easily be able to get close to 5k per month in total rent. Minus property taxes and insurance you should be able to get an income stream of close to 50k per year. Passive rental income doesn't require soc secur/med taxes and is the lowest taxable income; and the depreciation will cancel out any taxes on the income stream, so you'll get to keep that 50k per year. You should be able to comfortably live on that without ever having to work again. Then you can follow your passion and are free to do whatever you want with your time... and you life. (Also, any money that your wife earns in her business and any business that you start and make money from will all be extra gravy.) If you had a property manager handle your rentals for you, you could live outside of the country if you'd like in someplace like Mexico, Costa Rica, Panama, etc. where US dollars go much further. Your 50k per year in USD would be like 200k per year in Costa Rica. You could live like a king.

You have great potential for a good situation if you act intelligently and make the most of your situation.

That is pretty good advice, eh Jim?

Jim in San Marcos said...

Hi Aim

I did something similar when I bought my rentals in Colorado 25 years ago. I paid 60k and rented them $800 a month

I see a problem with it in today's economy. My renters are having a rough time making the rent payments.

I haven't ever had to evict a tenant, but my dad did. 30 years ago one of his properties was sublet to a chapter of Hells Angels. It took him a year to get the place back. They burned all of the wood inside the house to heat the place. I can still remember my dad describing the damage--it was comically unbelievable. The more he went into detail, the harder we laughed and the madder he got.

I do see one major future problem. Real estate is a highly visible taxable item. California is going to tax real estate with a passion sometime in the near future. There is no other place to get the money.

Another thing to consider as a landlord, you don't set the rental rate for your property, you only set the number of months you want it vacant.

Seeing a House with a rental sign on it in our neighborhood use to be a rarity, now there are three within a block of me. Months have passed and the signs are still there.

On the positive side, they would be a very good hedge against inflation. Plus at the present interest rates, are low and all you have to put down is 20%.

As you suggest real estate rental can be quite lucrative if it cash flows.

AIM said...

Hi Jim,
Right. California isn't a very landlord friendly state. I'd do this in a better state, in an area where rentals are, or will eventually be, in demand and where there will be enough economic drivers to enable a high occupancy rate. A good metropolitan area. Real estate is too volatile and uncertain right now (who knows what new rules the government will put into play regarding it) so I'd lay back (do a lot of research on the potential areas) and wait for a bottom and then I'd go after some nice rentals. All investments have problems and need attention so it might as well be real estate. You get tax advantages, income, you can control your investment, and its a good hedge against inflation (which will rear its ugly head eventually). I can't think of a better investment for the economy that we will be living in for the next 10-20 years.

Anonymous said...

Concerned Citizen,

My advice for your 200k...

Start a business that is sure to fail within the next 2-3 years. Our current government will not only guarantee your survival, but ensure you make a profit even when you do fail.

Of course you will have to look out for the Unions. These crooked folks will have their hand in your all of your pockets and ensuring none of your employees can get ever laid off.

But don't forget to say thank you to your friendly neighborhood tax payer. At this point, there are no more short sticks to go around.


Anonymous said...

concerned citizen,

study different franchises and with 200-250K n 1 million in total assets, you can pretty much open most any franchise, mcd, kfc, taco bell, jiffy lube, etc...the good thing is that these companies have the businesses down to a science, they know the stats to look for in a given area and the things necessary for a successful business.
try to pick a healthy eating place if you can, bc i think obama will go after junk food and fast food for extra taxes. just as clinton did with tobacco in 1990's.

just my two cents and good luck