Friday, December 31, 2010

Musings for the New Year

Another year has come and gone. We have gone from the year that was called the “Worst recession since the Great Depression,” To “The Great Recession.” The price of oil is up to 90 dollars a barrel and silver just hit 30 dollars an ounce (Ben denied printing any money on 60 Minutes).

The debate in Congress for the coming year will revolve around jobs. Of course the new hires will be off shore where there are no mandatory health care insurance premiums to pay.

Look for a Congressional investigation of the retirement funds, CalPERS will be center stage. A lot of life insurance companies could also be in very bad shape; not many annuity models were built on a 2 percent return on equity.

Several States will run out of funds for operation. Technically they can’t file for bankruptcy but they will be insolvent just the same (a vendor or a citizen can’t sue a state for non-payment). You might have to wait 100 years to get paid. Of course that won’t stop several hundred cities from declaring bankruptcy and adding to the frenzy. This could lead to local governments outsourcing emergency 911 calls to India.

Nationwide, expect the median price of homes to increase -- why buy a starter home when you can purchase a McMansion for 20K more ---with low interest and nothing down government financing.

Several European governments could collapse or repudiate their debts; Greece and Ireland come to mind. The problem not fully understood here, is that the real wealth of these countries is their educated youth. These people will vote with their feet if things don’t change and emigrate to other lands.

Iceland’s repudiation of its debt is kind of like a cat walking in front of a chained dog (i.e. the Euro Union). Will the Germans pay to keep the toilets clean in the rest of Europe? This could become another tea party movement, a goose-stepping one on steroids.

The idea that big is better in business, kind of falls apart during bad times. Fixed costs and tight profit margins can kill you. The A & P Tea Company, one of the nation’s largest grocery stores just filed for bankruptcy. Look for several more big names to file for BK this year.

The commercial loan sector is exhibiting severe signs of stress. A lot of non renewable 2 to 5 year loans are coming due. Bernanke is going to have a rough time trying to wall paper over this mess. More debt to add to the residential real estate bank losses.

Congress will have to deal with Social Security and Medicare. The new medical plan will be called Shaft-care---the Democrats and Republicans will unite together and shaft the silver foxes.

Look for oil to go higher and silver and gold to drop in price. It’s a normal reaction when you need to raise cash. Sell the good stuff and hold on to the dogs hoping they will come back. In reality people should be selling the dogs for what they can get, while they are still worth something. Retirement funds will save the garbage because it stays on the books at cost. Of course Ben and the Banks do the same thing.

Tomorrow brings in the New Year. It will be time to figure out how much we owe in taxes for last year. Thank God that we don’t have to pay for everything that Congress bought, where would we get the money?

Have a Happy New Year everyone, and God Bless.

Copyright 2010 All rights reserved

Sunday, December 26, 2010

Public Education Doesn't Teach Thinking

Lately everyone is blaming our poor education system for the state of our affairs. We are turning graduates out of high school that can’t read or write. I have no problem with that, we need people to man the hamburger stands. If they can get my order right “Double cheeseburger, no pickle,” they pass my education test.

When I went to school (in an era fondly referred to as the “Stone Age,” by my son) everyone had a pretty good idea where they fit in. There were three people that always got A’s on all of their exams, then a few more were B students and the rest of us were C students. There were a few D and F students that were destined to become auto mechanics. On the whole, everyone accepted the fact that they weren’t genius material, but we all knew where we stood in the group; if you had a B or an A in one course, you could think of yourself as “above average.”

The TV and newspapers back then provided the news with very little political content. Being a Republican or Democrat back then was kind of like being a Protestant or a Catholic, it wasn’t a big thing except at election time. There was an unwritten law that one did not discuss religion or politics. It was a waste of time, you weren’t going to change anyone’s views, just piss them off (notice how this hasn’t changed).

The high school students today are not much different than 40 years ago. Everyone gets an A now, so an employer needs to weed out the “Car Mechanics” before they hire someone. The big thing that has changed over time is the inability of people to think for themselves and challenge what they read or hear from the media or their acquaintances. The point I am trying to stress here is that people don’t question the statements made by the media anymore, they quote them and/or shop for the news they want to hear.

The other day an economist on the news, stated that gas prices were increasing because of Chinese consumption. If you make 20 cents an hour, how much gas are you going to buy? Are gas prices increasing or is the value of our dollar decreasing. Am I the only one rising up out of my chair in disbelief of what I am hearing?

A while back, a friend of mine made the statement that everyone on the Federal Reserve Board was Jewish and he even got on the Internet and pulled up the article to prove it. The word “everyone” made me somewhat suspicious. The Aryan Nation is not what I call a non biased news source. The concept of shopping for "documentation" on the Internet makes me cringe.

There is no questioning of the “facts” anymore. The more a “fact” is repeated the more valid it becomes. The idea that one can question these jewels of refined thought and laugh at them, as being absurd, is heresy. Using common sense to disagree with what is accepted by our peers isn’t acceptable behavior. Keep your mouth shut or the others will laugh at you. Our schools don’t teach thinking skills, where you question the material presented. You’re asked only for the right answer to each question.

It brings to mind the Rest-Home-Senility-Test where the applicant is presented with a bathtub half full of water and given the option of using a bucket, a cup, or a teaspoon to empty it with. The right answer is not the bucket; you would pull the plug to drain it.

At some point more of us will start to question the options government is shoving at us. No police services, no fire, no schools, no military, but don't cut one penny of retirement, Social Security or Health care. And if they refer to something as a “No-Brainer,” it is you they have in mind (with no brains) and your wallet is in the cross-hairs.

It's time to start questioning the answers we are being given. California can cut all services and still not balance its budget. But of course Ben Bernanke, "Keeper of the Federal Purse," still has checks in his check book so I guess we are OK for now—if we don’t think about it too hard. We don't want to upset an upside down apple cart--do we? Give it some thought--there really isn't too much to lose if we did, go figure!

Copyright 2010 All rights reserved

Sunday, December 19, 2010

Congress is not a Christmas Solution

Everywhere we turn, someone in a legislative body is passing a law to solve a problem. We have passed a laws handing out free health care, one for retirement benefits, one for a gay military, one for bank bail outs and there are several against drugs. Did it every occur to these lawmakers that laws just regulate people or their entitlements. They don’t solve problems, they create new ones.

The laws dealing with drugs backfire in an unusual way. You get caught dealing drugs, you go to prison. This is really an “Advanced Educational Training Camp” where you learn how to do it right. Plus you can pick up new skills, like lock picking, and identity theft. Let’s face it our high schools just don’t have the resources to offer these courses.

Then we have these wonderful laws setting up retirement plans. They have been working just great until a few people in government started to wonder aloud, where is the money coming from to pay for all of this? CalPERS states that it is making 7.75 percent interest on their investments; do we dare accuse them of lying or just laugh at their claim.

Congress cannot pass a law that will create jobs to replace the ones that were lost; most of those jobs are gone forever. They passed laws setting the minimum wage and demanded more taxes from these rich employers. The net result, whole industries moved off shore to produce their product and then import it. If you want your bread buttered for free, guess what, the butter isn’t going to be there for long.

Now it’s OK to be gay openly in the military. I can’t figure that one out. The last thing you would ever want to do is walk up to a marine and ask him if he was gay (you body probably wouldn’t be entitled to a military funeral). I guess you don’t have to be “A real man” to join the army now (that ought to be a real boost to enlistments). The only reason I bring this up is because of its insignificance. It’s not like half of the voters are gay, they are a very small part of the population and they get a tremendous amount of attention from Congress. The gay population can’t be more than 3% but it is at the top of the “To do” list for Congress. When you think about it, a bill on cancer research would get a “Ho Hum,” but a bill having to do with gay rights will get that Congressman’s name in the paper with a photograph. This program could work out real well with the Navy; the sailors wouldn’t have to come home every 9 months to be with “loved ones.”

Congress also reduced the Social Security tax by 2%. My only question is why? Isn’t this supposed to be money saved towards our retirement? (of course the Supreme Court said that it was a tax and not a retirement plan) So you get to spend it now instead of later—all $400 of it. It is very hard to raise taxes, and even when it has been done, and then reversed later in time, you feel the burn a second time, for the same thing. We know that Congress needs to raise taxes, but they seem more like clowns running a circus; “Vote for me, and get a free ride.”

The thing we really need to ask ourselves, are all of these new laws constructively solving our problems? The second question we need to ask, can they accomplish the task? The third question you need to ask is where is the money coming from? And the fourth question, does anyone really understand the bogus financing? If you have read this far, you know your up to your neck in quicksand, but hey, this is only a dream---- waking up could be a real nightmare.

Santa is coming to town next week and surprisingly he doesn’t look a bit like a Congressman. Just maybe we need to think about what we need for the coming New Year and sadly it is jobs. All I can suggest is help someone you know in need; God Bless and Merry Christmas to all.

Copyright 2010 All rights reserved

Saturday, December 11, 2010

The Gold & Silver Shortage---A Future Brick Wall

Commodities are the only game left in town. This is the one market that Ben can’t effectively control. And this could be his downfall. The real cost of borrowing money is zero if you factor in inflation. This has a win win effect for investors buying futures. In simplified terms, the future price of a commodity future one year out would have a premium. It would be the interest on the money for the term of a year, needed to purchase the commodity on the spot market, plus storage costs over the year before delivery. So a free ride with interest charges, with incidental storage costs and an add in for the volatility cost.

Commodities as a whole are rising in price. A lot of it is inflation related. Since there is no cash return for dollars in the bank; commodity speculation is the new frontier open to abuse. In the futures pit, one trader will sell the future delivery of one million barrels of oil, say for November 2011. At the maturity date for that trade, the seller delivers the oil or buys his contract back. All contracts are matched buyer to seller. If you are speculating, you never want to take delivery. The speculator sells naked contracts for delivery if he believes the price will drop and he buys contracts when he thinks they will increase in value. This person will close out the deal by selling or buying the opposing trade back. Margins are as low as 6 percent. So to control one million in gold, you need 60K in face money.

The commodities market has a valid justification for its existence; it helps take the risk out of business ventures. An airline would buy jet fuel futures a year or two out to limit upside costs. The company is not sure what the future market price will be, but buying a futures contract for later delivery, locks in their costs. If a gold company has production costs of $800 an ounce and plans to produce 1000 ounces of gold, they would sell 10 futures contracts for delivery say 6 months out at $1300 an ounce. This guarantees that they will meet their payroll and keep the bookkeeper happy.

For every 100 futures trades, only 10 are real (a commodity actually changes ownership from one holder to another). All the rest of the transactions are speculation. A problem can arise in the futures market if the prices take off. All of the buyers of gold and silver futures might demand delivery---especially if the price increased dramatically.

The Hunt brothers tried this in the 1980’s and successfully cornered the silver market. They were buying it and taking possession. Needless to say prices took off. The Hunts had a legal corner on the market and it was about to ruin a majority of the Chicago Board of Trade (who were opposite the trade). So the CBOT changed the rules on the Hunt brothers and limited the number of contract that could be held, to 10 million oz and all contracts over that amount, had to be liquidated. Naturally that saved the ass of every scumbag CBOT trader and bankrupted the Hunt brothers.

With a little thought, it doesn’t take much Gray matter to figure out that one can run the futures market with only a small amount of real gold changing hands, and at the same time have several million ounces of contracts being traded daily.

Many people have their gold and silver stored in bullion banks. IMHO, I don’t think even one of those banks could payout on a modest 10% run on the bank. That’s why it takes up to 30 days for delivery when you request it. They have to go out and buy it on the open market.

The question we need to ask is “Have we built a gold and silver bubble, or is this perceived increase in price, a measure of how bad this quantitative easing has gotten?” The futures market could turn into a tar pit if everyone decided to take delivery of their gold and silver.

Bernanke has tinkered with reality. Maybe, its gold and silver’s turn to tinker with Ben’s QE2. Do you know where your gold and silver are? They might not be where you thought they were.

The $20 coin at the left, was in circulation 100 years ago and has kept its value quite well. The old money is no longer in circulation; it's worth quite a lot more than the 20 dollar bill it represents today, go figure.

Copyright 2010 All rights reserved

Friday, November 26, 2010


Well they bailed out Greece and now they are going to bail out Ireland. This is proof that there is a pot of gold with every rainbow. Who bailed out Greece and Ireland? And with what from where? Now we have Spain, Portugal and Italy waiting in the wings. Grab a tin cup and queue up, it's free money!

These European government "train wrecks" are the result of borrowing and spending too much money in the past for things that they couldn’t afford in the first place. Many countries are broke and raising taxes is not an option. Ireland doesn’t need a bailout loan, they need to wipe the slate clean and start over. If they don’t do that, their citizens will leave the country in droves. Saving the financial world order will enslave us to our debts. Idealistic planning and dreaming got us into this mess. The good times are over. The world’s great social programs are underfunded or bankrupt. The people that benefited most from them could never be expected to contribute their fair share. When is enough too much?

In the United States, we are now spending money we never even dream of spending when times were good. The only way to pay the bills today, is to print dollars; it certainly won’t be raised in taxes. Four million homes in foreclosure and twelve percent unemployment, kind of suggests tax collections will be very lean in Obama-land this year and for many more years down the road.

Where all of these new found funds are coming from to bail out everyone? In Europe, it is the IMF to the rescue. Ever wonder who's in charge at the IMF?-- Ben and Tim!

In this country The Federal Reserve is buying Treasuries from Goldman Sachs; which is very logical when you think about it. The Fed needs to maintain interest rates of bonds already sold on the secondary market; therefore they have to buy every bond presented at par to maintain the interest rate. This insures that the rates at auction stay low without the perceived hand of government bidding at the auction. This could increase the money supply on a rather large scale (depending on how much is presented for redemption). The Treasury sells T-bills to China. China, later, dumps the bills on the open market and Goldman Sachs buys them for Bernanke at the Fed, keeping the interest rates low.

Are we really facing deflation or an end of “The good times?” The free-ride-gravy-train jobs are gone. In the 1930’s there was a measured drop in wages, people were desperate for work. The hourly wage didn’t keep dropping, there were limits as to what people would accept. The jobs that really took the hit were high paying ones, they disappeared (a lot of them were government jobs). Things returned to more reasonable levels.

Presently a lot of “million dollar homes” are slowly being revalued back to 240K. Is this deflation, or a return to reality? We could consider the release of air from the real estate bubble as a form of "deflation."

The Germans could be the key to this whole mess. Why should they have to foot the bill to keep the public restrooms in the rest of Europe clean? Their financial system has been through the wringer twice, once just before the Great Depression and again at the end of WWII. More debt is not a solution to solving the world’s financial crisis. The assumed financial responsibility to pay this borrowed money back is not there, "Just put it on our tab." The German’s are going to say “NEIN” to the PIIGS in Spain and that could spell the end of the Euro. This won’t set well with Das Über Führer Ben Bernanke.

Copyright 2010 All rights reserved

Sunday, November 14, 2010

Bernanke the Great Invisible Tax Assessor

QE2 used to refer to a luxury liner that sailed the ocean. In today’s world “Quantitative Easing 2” sounds like a euphemism for a bowel movement in a retirement home. Notice that no one has described this easing using the word “Titanic,” or the word “Gigantic.” The first portends an aurora of imminent doom and the latter suggests something that is going to cost a lot, like government health care. The average person has no idea of the financial impact on their wallet. QE2 is just another government program.

The idea that Ben Bernanke can take 20% of everyone’s savings without Congressional approval and spend it on bailouts is to say the least very upsetting. The average guy on the street has no clue as to what the Federal Reserve is doing. Their money is safe in the bank. Ben’s technique is called Inflation. We’ve lived with it all our lives. Nobody loses a dollar on the deal. Your $100 dollars only buys $80 of food after the fact. Debtors love inflation; you borrow real dollars and pay the loan back with cheaper inflated dollars later. Heaven help us if deflation was to creep into the mix—our savings would have more buying power. The biggest debtor that comes to mind is the US government ---HMMMM

The average worker making 40k a year, still gets 40K, but after QE2 it will only buy 32K of goods and services. The worker hasn’t seen the hand of the government messing with his pay check, but the price of everything went up. The bank depositor is a babe in Toyland. Oblivious to what is going on behind the curtain. The worker that saved up one million dollars now only has the buying power of 800K and he's clueless until he tries to spend it. Of course, the person without a dime to his name has lost nothing.

Add up the taxes, Social Security, Health Care, Federal tax, State tax, gas tax and sales tax. These are all visible. Then there is the dirty little Ben Bernanke tax (It’s not a tax, they are going to pay it all back—Guffaw, Guffaw).

The Federal Reserve's powers need to be curtailed. This institution was not created to perform the functions it is now exercising. Bernanke has been delegated tremendous power over our financial system without any Congressional say so. He needs to be reigned in and throttled down or maybe just throttled and fired.

Of course, between Obamas health care and Bernanke's bailout we have a plan that works only because nobody has to pay for it. This must be heaven. I'm sure this will become even more plausible after consuming a 12 pack of beer.

Copyright 2010 All rights reserved

Saturday, November 06, 2010

Payback's a Bitch

Now that the elections are over, the Congress and the President can get back to business. Or can they? The honeymoon is over and we are starting divorce proceedings. The Democrats, with the health care bill, snuck up on the Republicans and hit them over the head with a shovel. Now, the shovel is gone and Obama says he will work any way he can, with the Republicans to get us out of this mess.

Obama had to have known the repercussions when he forced the health care legislation through. In essence, he told the Republicans to go fly a kite; we don’t need your votes or your input.

So what happens during Obama’s next two years of office? Figure that, the Republicans will act like a mad crazed foreclosed home owner; concrete in the toilets, sell the appliances and trash the house. Forcing this health care bill through Congress in this manner was the wrong way to go. I would chalk his mistake up to pompous arrogance (let the GOP eat cake).

Revenge for the Republicans’ will be sweet. Obama will have his health care plan (without financing) and a non functional Congress. This could be a good thing. The economy is a mess and there is no political solution.

Tax revenues are decreasing as government expenditures are rising. More Social Security, Food Stamps, Unemployment, Health Care, Bank Failures, Freddie Crapola, Fannie Caca and the list goes on. Reality is right around the corner, along with Deck Chairs, Icebergs and Lifeboats.

The Republicans and Democrats in Congress are kind of like a husband and wife. There is a lot each of them might want to do, but if they’re not equal partners, there is no marriage. President Obama will figure it out; no new Democratic legislation unless he signs every bill the Republicans pass. How likely is that? It's a little like the wife catching the husband kissing the neighbor's wife. He's going to pay for that kiss a million times over.

Copyright 2010 All rights reserved

Sunday, October 24, 2010

The Fear of Deflation

During the Great Depression farmers poured milk in the streets rather than sell it for the price offered. And the result back then, Congress passed farm subsidies supports. Where is the deflation today? Don’t even mention housing, it still has another 50 percent to drop around here, just to get back to the year 2002 level. You don’t see oil refiners pouring gasoline in the streets to protest low prices.

In the 1930’s there were massive bank failures. The country lost 90% of its savings. There was no unemployment insurance or FDIC bank insurance. The deflation of that era was real, real money was lost. Measured by today’s values (adjusted for population and inflation), it was the equivalent of about 14 trillion dollars.

Anyone out there that thinks we are facing deflation, point to it, where is it? My wife just bought 4 new tires $750. Hamburger is four dollars a pound and Potato chips are four dollars a bag. Then there is Google at $600 or Apple stock at $300 per share and neither pays a dividend. The investor is chasing the wind.

The government is now dictating to private industry, like banks and health insurers, the prices they can charge (no deflation here). Not long ago, a business could charge whatever they wanted. Competition determined whether or not they survived and stayed in business. Now, by God, it’s a crime to make a profit (We need to punish these robber barons exploiting the masses)! Net result, the insurance companies are closing shop and moving their investment money to something offering better returns. Obama-care may be the only insurance left, with government “regulation” of private health plans. Do we hang these profiteers? Or recognize it for what it is, inflation.

Debt is money owed. As debtors default, the money loaned to them for that purchase normally goes up in smoke. The government process of saving debts like home loans, by buying them or guaranteeing their value is far from being deflationary. Deflation is impossible when the government prints the cash necessary, to redeem the bad loans the banks are holding on to.

The homeowner that sold his home for one million dollars got cash and the bank got an IOU from the buyer. Now the government is going to make that IOU good. Everybody wins???? Just how is that possible??? This isn’t deflation, it is massive inflation. The money received by homeowners who sold at the top is real money. The money paid by the government to reimburse the banks for the buyers that walked is printed money. The note is paid in full by the government with “thin air” funds (printed money). Instead of the funds entering the market from a home owner’s earnings for 20 to 30 years, it is printed and hits the market in bulk as a lump sum.

Deflation is where your dollar buys more and you work for lower wages. Wage earners today are getting paid the same amount per hour, and their paycheck buys less than it did last year. That’s not how deflation works. But it can’t argued, the government is saving us from the ravages of deflation. God bless them and their infinite wisdom. We just might not be very receptive as to how this plays out. Both roads, lead to the same ultimate destination, the poor house. Deflation is fast and furious; hyperinflation is slower and more painful. Congress has it figured out; if we are going to the poor house, why walk? Ride in style, take a limo!

Copyright 2010 All rights reserved

Thursday, October 14, 2010

Quantitative Easing Sucks

The term Quantitative Easing is familiar to everyone. It is now referred to as QE followed by a number. What is it? It is printing money! It’s a little like the euphemism, “Used Dog Food.” It doesn’t sound bad until you give it some thought.

Did gold jump 100 dollars, or did the Bernanke dollar lose value? We have a President that thinks that the banks, Wall Street, and the rich people of this world are responsible for the current mess we are in. And by God we will make them pay Rah! Rah! A President chooses to tax the rich as a way out of this mess? I don’t follow it.
Congress has always taxed the rich; no need to wave a flag while doing it.

No cost of living increase this year, just like last year, for Social Security recipients. That could make for an interesting election next month. The checks don’t go as far as they use to, especially when the government removed food and energy from the cost of living index. The only things still left in the index are Denture-Grip, Preparation-H and Desenex Foot Powder and that pretty much covers everyone from head to toe (from a government perspective).

This quantitative easing by the government is keeping interest rates artificially low. Even the retirement funds which depend on interest rates for their income are being hurt by these unrealistic low returns on bonds. (Double click on image below for a larger view)
Notice that the CALIPERS figures above are a few years stale and the present discount rate is nowhere near 4 percent. These figures suggest that they are still trying to lock the barn doors after the barn has burned to the ground.

Gold and silver use to be a very poor investment (they still are). They pay no interest but they tend to keep up with inflation. Cash is getting no interest in the banks (if you count in inflation). Of course that light bulb goes off in your head saying "borrow cash and by gold." Do you run with the herd? Caution could be the word that wins the day. A buying frenzy here, could result in government intervention.

Gold and silver are increasing in price. Is this the last bubble in town? Or maybe it’s just a reflection of the true value of the dollar. Quantitative Easing is the name of the game and everyone with paper dollars gets to play (shh ---it’s only a tax on our savings).

Copyright 2010 All rights reserved

Tuesday, October 05, 2010

The Freddie and Fannie Scam

So you want to buy a home. Where do you get the financing? Aren’t Banks just dying to loan short term funds at long term interest rates? Remember back to the Savings and Loan Crisis of the 1990’s, the Savings and Loan companies loaned short term funds at low long term rates. It worked great, until interest rates rose. It’s pretty hard to believe that banks today would venture to write 30 year paper at the lowest interest rates of the last 50 years. So from here, we can pretty well deduce that they won’t even attempt it.

Say you want to sell your home, the question arises, “sell it to whom?” There is no bank financing out there. What bank is going to do a home loan at 4 percent for 30 years when they can do a car loan for 7 to 9 percent for 5 years? Home loans are a lost cause. Of course, the car market isn’t on fire either, but on the other hand,  Freddie and Fannie are obligated to guarantee new home loans.

But wait one moment; it is different if you want to buy a home. Fannie and Freddie have a home for you with financing. Now how is that possible? They offer very low interest rates, with little or nothing down. The only catch, you have to buy one of their homes. The Federal government doesn’t have to write any new paper, they already own the homes, they guaranteed the loans.

The government people in charge of selling these Freddie and Fannie homes are unloading them onto anyone that can “qualify.” Remember way back in 2006, everyone was fogging a mirror, I guess this time it’s different. They even get to take it off their books once a payment is received. Of course, you have to remind yourself, all they’ve done is gotten someone else to take over the payments on a non-performing loan. Notice each sale reduces Fannie and Freddie's inventory. It’s kind of like selling life insurance in the suicide ward of a mental hospital—there is no problem with sales, but can you afford to stay in business?

Basically what we have here is a government program/scam that keeps prices artificially high by providing government financing at very low interest rates at prices close to what the home originally sold for. This way the government limits its losses on the GSE’s at the expense of the new home purchaser. The trouble with buying a Fannie or Freddie home is the fact that there is no real market, it is all artificial. The new owners have no skin in the game. These GSE’s are  praying for a miracle and increasing unemployment, is not the miracle they had in mind.

The quality of these new buyers is suspect, not to mention the price’s of the homes or the very low interest rates. And then there is that invisible inventory, I guess that’s the stuff that Fanny and Freddie don't own.

What would happen if the Congress tossed those two hookers (Fannie and Freddie) out in the cold? The taxpayers wouldn’t be buying any more homes in Detroit to bulldoze down. The present setup, is a little like charging a $1000 massage on your Visa card -- When your wife sees the bill, you get to pay for your mistake twice.

Copyright 2010 All rights reserved

Friday, October 01, 2010

Disasters Without Damage

Take an earthquake or hurricane, homes are destroyed and the infrastructure is broken. No lights, no gas, no food deliveries. Transportation cannot move and services are disrupted. A person could be stuck in their home for several days to a week. Emergency hospital care would be limited. Food and supplies pour in from unaffected areas.

Let’s picture an "Invisible" disaster. Suppose the value of our currency fell to zero. Money became worthless. At this point, is there any reason for a grocery store to stay open? Would the employees work on faith? Would gas stations feel the need to sell gas for the old dollars? Would the truck transporting toilet paper from Georgia to Los Angeles feel obligated to deliver it, if he couldn’t buy diesel fuel in Kansas? The supply of necessities to a  city would be a major problem. No cash, no product. Plus what would consumers use for currency to pay for it with, even if it was delivered?

In a real disaster, everyone is prevented from doing their job because of barriers created by the disaster. In a financial meltdown, it is a little different. Food and gasoline deliveries to major cities would stop. Why go to work, they can’t pay you. Since money would not buy anything, there would be looting. If you can’t buy it, steal it. The banks would be hit and your safety deposit box trashed. Figure that after two weeks of fires and looting, the National Guard would have a handle on it. There will be no fire department, police or ambulance service.

We take for granted the aspect of plastic credit cards and the concept of what is cash. An IOU is not cash. A credit card is a promise to pay. If the financial system collapses, it doesn’t matter how sincere your promise is to pay, it just won’t happen and it is no fault of the sincerity of the user. Of course this just can’t happen—can it?

With the collapse of the dollar, the government would have to print a new currency. Credit cards would be non functional. Banks would have title to assets like cars and homes, so not all depositors’ dollars would be lost. How fast the new currency could be deployed is a real question. Could people work at their present jobs without pay for two weeks? Without gasoline sales, most people couldn’t do it.

The only good thing about a currency collapse is that the nation debt would also be vaporized (If you are owed money, you get to cry). From there, it would be no big deal for the new government to hand out five thousand dollars to everyone to help kick start the economy and the country. The only trouble would be how to value this new currency. It would have to have a perceived value, otherwise how would one determine a fair price for a gallon of gas or a pack of smokes? At this point the government is going to have to pick a commodity or basket of commodities as a reference point of value. Gold and silver come to mind. Would the new dollar be worth an ounce of silver? Would your weekly paycheck equal an ounce of gold? [insert your guess here]

The thing not realized so far, is the fact that this whole discussion has been structured under the assumption that everything will be orderly. What happens if it is not? Social Security, all retirement benefits, and bank savings would be gone. A lot of people would be very upset to say the least! Bastille Day comes to mind for some odd reason. Would we still have a Democracy?

This article might seem like a lot of gloom and doom, but the scenario above, could be the reason Congress decided to spend a trillion dollars of nonexistent TARP money to keep the game going. What the hey, it's only paper money.

When you think about it, a financial collapse can be worse than any event ever thought up by mother nature,  it doesn't do any physical damage. It doesn't try to kill you, but rather just ruin your retirement and that just might kill you or make you mad enough to [fill in the blank/blanks].

Copyright 2010 All rights reserved

Sunday, September 26, 2010

Unintended Consequences (Reprinted)

Here is a reprint from April 10th, 2008 that I added a few paragraphs to that still hits home.

In 1939 we had “Appeasement” to keep from fighting a war with Germany. It kind of worked for a couple of years; we still had a war, but if we had nipped it in the bud, it would have been small. World wars tend to be large.

Congress gave a subsidy for growing corn to make ethanol, and the price of beef went up. Turning food into fuel is pure lunacy (IMHO). The funny part is the subsidies more than make up for the unprofitably of the venture. God bless Congress for their infinite wisdom, their group stupidity will kill us (if their kindness doesn’t). I would like to see the gas stations give you the quart of ethanol instead of mixing it in your gas. You’d be able to fill your tank and get tanked. The DUI would be an unintended consequence.

The Fed dropped the interest rate when the stock market took a dive in 2001 and the real estate market took off. The solution to one problem created a new problem; of course everyone knows that real estate has hit “bottom.” The Fed bailed out Bear Stearns and God knows where that is going yet. Ben’s 30 billion dollar loan will buy a lot of “Blue Sky” (assets with intangible value). B of A is about to throw away the sucked out dry carcass of Countrywide. I guess they get to keep CW’s loan servicing department. This outcome however, was far from unintended.

Congress a few years back passed a law that allowed farmers to depreciate heavy farm equipment over five years. Every business in the US bought a Hummer as a 50K write off! A great business expense when gas was $1.50.

Three paragraphs following, added September 26, 2010

Congress enacted a fine on airlines that could cost them a couple of million if they left a plane waiting the the tarmac for 3 hours. The net result,The airlines eliminate the possibility of a fine by canceling the flight. It's very upsetting to fly into Chicago and find out your flight to DC has been canceled--I remember it well!

Obamacare prevents insurers from putting caps on medical payments for children. The net effect, insurers will stop offering coverage for kids.

A few years back the Georgia legislature passed a bill against abusive loans by banks. The net result, you couldn't find a bank to borrow money from to buy a home, in the state of Georgia. That got fixed rather fast.

We need to accept the idea that the solution to one problem creates a new problem. If that wasn’t the case, we would have solved all of humanity’s problems hundreds of years ago. Once you realize this, you begin to understand politics. The problems are real, but the solutions are only trade offs. The whole mess will sort itself out with or without any intervention. Intervention will not change the final outcome.

It reminds me of the saying “give a man a fish and you feed him for a day, Teach a man to fish and you feed him for a lifetime. The unintended consequence here is you have a couple of guys in a boat drinking beer all day. The additional unintended consequence is a mad wife with a frying pan waiting for her drunk husband to crawl home. Ouch!

Copyright 2010 All rights reserved

Saturday, September 18, 2010

The Tax Cut, a Carrot on a Stick

Obama wants to raise taxes on the rich but not the middle class. Is it really a bright idea, to piss off the rich by singling them out? It is kind of like a pick-pocket walking up to you and telling you he is going to steal your wallet; at that point he has little chance of success. It sounds like a great statement to the masses, but when you look at the Health care bill that just passed, whose going to get the bill for that (I give you one guess)? So if you are rich, what do you do? Hop on your jet and move to the Bahamas where tax laws are nonexistent? Hmmm Of course I will have to admit, people who get rich quick assume it’s because they are more intelligent than those around them. That mistake can cost a lot if you buy the multi-million dollar homes and the toys that go with it. There is high tax maintenance on all of that stuff. The “Look at me, I’m Rich,” game cost money to play--- I’m just glad there are people out there that enjoy playing that game.

Obama’s idea that we are coddling millionaires is ludicrous. When I was a kid, the average wage earner might earn a quarter of a million dollars in a life time. Millionaires today are a dime a dozen now. Many people I have bumped into have matter a factly mentioned that they are millionaires. I don’t know who they are trying to impress, but when my dad earned 5K a year and our home cost 25K, a million dollars was something. In today’s world, the “air” part of millionaire is the only real part. Not too long ago a million dollars in the bank would earn 100K in interest a year and there were taxes to pay; but at 2 percent interest, your return from the bank is a paltry 20K. Many a person saving for retirement needs to consider the fact that a million dollar nest egg isn’t much if you end up in a rest home at 70k per year ( that goes double in spades if you are married). It will only last about 8 to 12 years. The concept of being a millionaire hasn’t lost its luster in the mind’s eye; everyone overlooks the reality that the bar has been moved up to billionaire, and that of course has nothing at all to do with inflation (cough cough).

If these George W Bush tax cuts expire, the rich escape,  the middle class gets hit and the poor get a free ride. And the funny thing is, it happens without Congress doing a damn thing; everyone’s taxes return to pre-Bush rates (Is "pre-Bush," "Democrat" spelled backwards?). The concept of making a tax cut permanent, runs against the grain of Congressional job security; it would be the last tax cut we would ever hear about. This way the tax cut expires and Congress can vote again to cut taxes.  It's a little like a furniture store holding their annual "Going out of Business sale," only in this case, Obama wants the rich people to pay full price. I guess millionaires don't shop at Walmart, do they?

Copyright 2010 All rights reserved

Sunday, September 12, 2010

Educational Loans, Student Slavery to a Bank

It school time, and a lot of our sons and daughters have headed on to college. This is where parents and the young who wish to improve their station in life seek out college loans to finance their great quest. Whether it is a trade school or college, the government will co-sign on these loans. What most people don’t realize is that a college and a trade school are businesses. Without customers who can pay for the services to be rendered, they cannot survive. Student loans are the life blood of higher education and more so for the fly-by-night trade schools.

There is one little snag to the whole warm and fuzzy idea of higher education. Nowhere does it say that you will be offered or even find a job after graduation. The other thing not mentioned is that your field of study might be flooded with graduates or technicians already looking for a job, X-ray technician and dental assistant come to mind. You might not like the idea of moving to Montana, Wyoming or Tennessee, they are not the greatest places if you’re single looking for a wife. Plus usually the single mom with kids, looking for a new career gets cornholed into a trade school that spits out plenty of hope but no real jobs.

So here is what happens, the student applies for these student loans and gets everyone of them. Your kid can run up 20K a year on student loans. So it is not uncommon for a college graduate to have 80K (or more) in student loans and the payments start 6 months after you graduate. Sounds just great doesn’t it, but what happens if you can’t find a job? Once you sign that promissary note, you can never file bankruptcy and wipe that student loan off of your slate. It follows you for life.

Here is a little story of what happened to me many, many years ago at Syracuse University. I graduated in June of 1971. My student loan came due six months after I graduated. The bank sent me a letter with a promissory note to sign for all of the money I had borrowed. The amount was for $4,000 which by today’s standards would be about $40K (inflation—go figure!). As a young padawan, I read the note and several things stood out. (This is from memory, so the wording is not legalese and it has been a long time—39 years) My debt to them was to be paid first even if I filed for bankruptcy. I thought that a little unfair if I owed money to other people, I thought everyone should get a slice of what was left. Then there was a passage that said if the US government no longer existed, I would owe the money to the new government. I thought that a bit strange also. Anyway, there were three lines of verbiage that I did not like, and took a ruler and a pen to and crossed them out. I signed it and mailed it to the bank. They called me and asked me to come down to the bank and I did. When I got there, they informed me that I couldn’t cross out items on their legal agreement, they wouldn’t allow it. The bank manager was saying “You can’t do this!” I explained to him that I already received the money, spent it, and if he didn’t like the agreement, I wasn’t going to sign another just to please him. They defaulted my loan even though I had never missed a payment.

To make a long story short, I paid the interest on the loan every month for 10 years. About that time I was making more money and they called again to see if I would increase my payment. I had been talking to this collection agent for several years and I asked him what the payoff was? He said something strange, “Offer 50 cents on the dollar and see if they take it. So I offered them $1,500 to pay off the $4,000 note and they countered with $1,800. I wrote them a check.

I don’t know if things are still the same, but when Congress offers money to students and these loans are excluded from the bankruptcy laws, they have enslaved our college students to the banks. My advice to students who receive a promissory note to sign, tell the bank to go fish. You already have the money. All they can do is ruin your nonexistent credit rating.

I'm not suggesting that college students walk away from their obligations. But the right to file bankruptcy would make these lenders think twice about the amount of money they would lend to a teenager who has never held a job.

Bankruptcy is a way we can preserve our right to prove to Congress that we don’t have to pay for their bumbling stupidity. College should be the door that opens to new opportunity, not one that leaves students prey to their trusting naive innocence.\

Copyright 2010 All rights reserved

Monday, September 06, 2010

Where's the Money?

A while back Congress came out with the 814 billion dollar stimulus program. In essence they borrowed money to pay others who lost money in the grand scheme of investment finance. Today Obama announced a 50 billion dollar work program. Isn’t it missing a zero? It seems rather paltry. And then on top of it he blames the Republicans for our current economic plight because they are opposing his plans for the country. From my vantage point, it looks like the Republicans only have an issue of how do we pay for all of this. It’s a little like taking 10 of your friends to a massage parlor and telling the Madam that the last guy is paying. If the lady of the house is a Republican, the last guy with the money, is going to move to the head of the line—naturally of course he can’t find his wallet.

The Democrats are beginning to look like dead beats in a restaurant with no money,trying to stall for time by ordering another entrée. The New York Times today suggest that the government should let the housing market collapse.

“Housing needs to go back to reasonable levels,” said Anthony B. Sanders, a professor of real estate finance at George Mason University. “If we keep trying to stimulate the market, that’s the definition of insanity.”

The further the market descends, however, the more miserable one group — important both politically and economically — will be: the tens of millions of homeowners who have already seen their home values drop an average of 30 percent.

The poorer these owners feel, the less likely they will indulge in the sort of consumer spending the economy needs to recover. If they see an identical house down the street going for half what they owe, the temptation to default might be irresistible. That could make the market’s current malaise seem minor.

Caught in the middle is an administration that gambled on a recovery that is not happening.
And then we have all of this stuff exploding around us, absurd government salaries, retirement benefits and States going broke. Unemployment is doing just great; too bad it’s not a stock. Most graphical comparisons to historical statistics are off the charts. One news article the other day, called this, “The worst recession since the Great Depression.” When you think about it, most things in life, start out small and get bigger. So we started out with a “small” recession and now it’s getting bigger.

The Democrats think that the solution lies in bigger government and increased spending. The Republicans are not quite so sure. The elections are coming up in November and they could prove quite interesting. California could be the state to watch Jerry Brown Dem vs. Meg Whitman Rep; one’s too old and the other’s too rich. The present Republican Governorator has been giving the Democratic legislature a wedgie, still no budget for the fiscal year that started in July.

The State of California will be writing IOU’s in a couple of weeks. I wonder how that works if your paycheck is direct deposited? The electronic transfer of an IOU to your bank account?? It looks like Halloween pranks are a little early this year.

Copyright 2010 All rights reserved

Friday, August 27, 2010

Interest Rates Suck Big Time

The going joke is “If you ask 3 economists their opinion on the economy, you get 5 different answers.” The question arises today, if economists have inside knowledge to the economy, why didn’t they spot this mess coming years ago?

And then we have the question will it be inflation or deflation. Out come the experts with all sorts of graphs and charts pointing to deflation. Meanwhile I went over to Wendy’s for my 99¢ bacon cheeseburger today and the price is now $1.29. That’s a 30 percent increase. And if that wasn't bad enough, my Gin went up a dollar to $14 for 1.75 liters (I'm not sure that at that price it is considered Gin, rocket fuel might be a better description).

The real question is this, the government borrowed 10 trillion dollars from all of us and we feel comfortable loaning it to the government for only TWO PERCENT INTEREST. I’ve heard of The Dumb Friends League, but investors aren’t dumber than pets, are they? What gives?

Borrowed money is one thing, printed money is another. When Ben buys one of Geithner’s T-bills, that is printing money (the Treasury sells Bernake a T-bill and the Treasury gets a bank entry for cash in the government account). No real dollars are printed; from there, the government just prints a Social Security check or an unemployment check. Of course, the government can tax and the Treasury can redeem Tim's markers at any time. The real question comes up, how much in markers does the Federal Reserve hold? I’m guessing, anywhere from 2 trillion to 10 trillion dollars. Just the management of Freddie and Fannie implies about 3 trillion right there. What they bought from the banks could be a rather absurd amount, possibly mind boggling. No saver has lost a bank dollar, but our government had to pony up printed dollars for the losses on all the failed banks' ledger sheets.

Look at it a different way, say you have one million dollars in the bank. Gee, that means you get 20k a year in interest. Let’s not all queue up at once to take advantage of this wonderful offer. It sucks so bad, why even put your dollars in the bank? Why not just spend it?

The government has printed money, borrowed money and spent every bit of it. The only reason there is no apparent inflation with interest rates is because the government has taken risk out of the market, all bank loans are insured against loss. Without risk, there is no need for higher interest rates. Of course one issue pops up. Gold had one hang up, it paid no interest. Today looking at long term, GOLD is better than holding government paper.

Ask yourself one question, where will the money come from to pay for all of the health care and Social Security benefits in the future? The money isn’t there; it will have to be printed. We couldn’t pay for it as individuals. What makes it more affordable as a government plan? Do we charge everyone a fair share for all of these new benefits? That doesn’t seem very likely. The absurdity of zero percent interest rates and a national debt towering over 13 trillion dollars should set off an alarm bell somewhere. Credit cards are charging 14 percent. No discount for taxpayers???--kind of figures doesn't it.

The thing we need to interpret from this mess, is that the information we are getting from our government is incomplete. The pieces of this puzzle are all there and they do not fit together as expected. Zero interest rates are similar to a hooker offering free sex. How you ended up in a closet nude, with your hands tied behind your back, is another story.

Copyright 2010 All rights reserved

Tuesday, August 17, 2010

The Impending California “Bankruptcy”

The State of California taxes its residents and provides services. The legislature which has a Democratic majority can’t quite come up with a two thirds vote needed to raise taxes (two Republicans need to vote with them). And of course since the Governor is a Republican, it’s all his fault. The State is running out of funds; expenses are greater than the incoming taxes.

One thing little noticed, in the last 20 years, because it has been so gradual, is the absurd rise in pay and retirement benefits for public employees. It used to be that you got your experience in the public sector and then moved into the private sector for a pay raise—government jobs used to be a joke.

Presently, we have a State that can’t produce a balanced budget without "creative accounting." The thing to remember is that California is supposed to pay education and bond interest first out of the tax revenues. Then there is this State retirement plan called CALPERS.

CALPERS assets dropped from 260 billion to 180 Billion in a span of one year. At the time, 260 billion was sufficient; dropping to 180 billion ought to set off an alarm somewhere. The implication here is that the State guarantees your retirement even if the investors at CALPERS screw up. These money managers bought boat loads California Nevada and Arizona real estate paper. All we need now is a stock market crash and CALPERS will be sucked down a drain. It is assumed the taxpayers of California will be responsible to make up the shortfall of the CALPERS fund. Profits belong to the retirees, losses belong to the taxpayers. That’s not quite right.

Two questions arise. CALPERS took some horrific losses; are these losses automatically insured by the California taxpayer? If the cities/counties declare bankruptcy, is the State liable for their incurred losses? The answer is no in both cases.

Here is where things could get quite peculiar. Bankruptcy laws don’t cover States. California as a State can’t file for bankruptcy (it doesn’t have to), but every city and county in the State can. Bankruptcy is a tool used by many to avoid paying their debts. Stating matter of factually that the State cannot file for bankruptcy kind of implies that the State is on the hook no matter what, and that is a very wrong assumption.

States can repudiate their debts, it happened in the 1840’s. The real issue is state sovereignty. The concept of bankruptcy revolves around the settlement of debts through the courts. The courts can’t force the State to do anything. The 11th amendment prohibits citizens from suing the State.

California created a retirement fund that guarantees benefits according to the wage earners salary and not on what the fund has available to pay out. These two facts point to the obvious, you can’t have it both ways. That and the 40 billion dollars that the State needs to keep going next year means that California is at the end of its rope. California will run out of money soon.

If the State is short of funds there is no bankruptcy dodge, it can decide who gets paid and when. California doesn’t even have to repudiate the debts; it just doesn’t pay them all. Investors will find out what the implications are, when loaning to a sovereign State. You can’t sue them. Plus if you’re a city in trouble, file BK and give your debts to the State, chuckle, chuckle.

With CALPERS, California will contribute its designated percentage for this year’s wages to the fund. But from there, CALPERS is toast. The State is not obligated to bail them out. So a lot of these 100k retirement plans now have some issues. The item that amuses me, does CALPERS have sovereign immunity just like the State?

Things are getting a little dicey; reality and retirement are on a collision course. It reminds me of the airline pilot who use to email me, he had a future 80K pension and bought a 300K house just before retiring. When his airlines came out of bankruptcy he had a 40K pension and lost the house.

The Great Depression of 2006—seems like a start, and it is 2010 and the show has hardly begun—everyone is dragging their feet, and I don’t blame them. I hate to contemplate what's next.

Karl Denninger has also written some material on this. Here is a link to it.

Sunday, August 08, 2010

Inflation the Path to Future Deflation

There are two ways a government can tax. The obvious way is with taxes, and the other way is by printing money. We hear all of this hoopla of “Tax the rich.” I can’t quite figure that one out. First of all if you’re rich, you don’t need to work and there isn’t much the government can tax except for your toys, like mansions, fast cars and yachts. Now if you’re earning quite a bit of money, then the government could get a good share of it. Of course that’s assuming that you’re dumber than a sack of rocks.

Here is a quote from the WSJ by Arthur Laffer
Just look at Sen. John Kerry’s recent yacht brouhaha. He bought and housed his $7 million yacht in Rhode Island instead of Massachusetts, where he is the senior senator and champion of higher taxes on the rich, avoiding some $437,500 in state sales tax and an annual excise tax of about $70,000.
(WSJ Aug2, 2010 page A13)

The government can try to levy a high income tax on the rich, but it will fail miserably. A tax accountant knows all the loop holes that the rich can use to their advantage to avoid taxes.

Inflation is one invisible tax that gets into everyone’s wallet. The eerie thing, is the poor (those living from paycheck to paycheck) never really experience the full blast of inflation. Those saving for retirement get hit the hardest 20 years down the road.

Figure an average taxpayer paying 20% in income taxes. His savings is being taxed by inflation rate of about 6%. Neat! huh? And the über rich, with bundles of dollars in the bank, are being taxed while they sleep. In 12 years they will have lost half their purchasing power from inflation alone. Of course if you’re unemployed and broke, you’re not very concerned about taxes or inflation.

In a depression unexpected things happen. Increasing tax rates brings in less revenue. Plus unemployed people generate less tax revenue. At this point, the government has to print more dollars to cover the short fall. It is the same with private business, the fixed costs are still there, the profit isn’t. This is where the herd gets thinned out, only the strong survive. Private enterprise can’t print their way out of this mess like our government can.

The quasi appearance of deflation will show up in items that we can do without; fast food, cable TV, Internet, sports tickets, advertising. The reduction in price of a taco at Del Taco from 59 cents to 39 cents is the final step before bankruptcy---sell them a taco and hope to make a buck on the soft drink. What we are looking at are institutions, that relied on a wild spending economy, to survive. Business models are collapsing. Can a basketball team afford to pay a superstar 16 million if the fans and advertising drop 50 percent? Do we need a Starbucks coffee shop spaced every half mile?

And with public services, we found out here in San Marcos what happens when everyone got together and cut down on water use during the drought, we got charged more for consuming less!

The real thing that bothers me is that the country as a whole is oblivious to the fact that the national debt is drastically out of whack. It’s the concept; “We did it yesterday and it worked, let’s do it again today.” Collectively we have 17 trillion in savings, and the government has borrowed and spent 13 Trillion of it. This is one of those plans that work until it doesn’t.

The deflation that we seem to be experiencing is coming from over capacity. Too many homes, too many restaurants, etc; lack of consumption is about to fix that. The inflation out there is real. My paycheck is buying less and less every day. The neat thing about inflation, the government doesn’t have to collect it as they do with taxes. Inflation generates more taxable income. The government finds it easier to pay off hard earned borrowed dollars with inflated ones in the future.

Real deflation (massive debt destruction) is still possible with this out of control unfunded government deficit spending. All it would take, is for interest rates to hit 8% and Uncle Sam would be insolvent; the national debt bubble would pop. Vaporizing 13 trillion in debt would be equivalent to what happened during the Great Depression. So its full speed ahead, the national debt be damned. We’re not sure where we are going, but we’re making excellent time.

Sunday, July 25, 2010

Inflation, It's There Somewhere

We went to Berkeley last week to see where my son will be going to college. The two pictures below are of a parking meter that was a block from the campus.

Notice the rates in the second picture. Two minutes for a nickel and a dime is good for 4 minutes (minimum transaction is 30 cents). The thing that surprised me was that it also accepts credit cards. Three of the cars parked in front of this "Revenue Raising Tax God" had handicapped tags swinging from the rear view mirror. If you're handicapped, you don't have to pay. Notice the bicycler chained his bike to the machine.

You have to wonder about this 12 minute minimum charge. The nearest public restroom is a 6 minute walk (if you know where it is).

30 years ago, a quarter would have bought an hour of time on the meter. Now it buys 12 minutes. So the quarter buys only 1/5th of what it used to. Put another way, our dollar has lost 80 percent of its value in 30 years.

The dollar's devaluation has been very gradual and spread out over time. California is about to raise the state sales tax to around 10%. If you study history, you'll notice that the sales tax was started during the Great Depression as was Social Security. These two taxes are approaching absurd levels and now we will face a health care tax.

Here we sit arguing over whether or not we are going into inflation or deflation and the real question is; have we had enough of incompetent government yet? The Mayor of Bell California was getting $787,000 until it was put in the press. The price tag for running a photo red light in California is $400, thats enough to start a divorce among young newlywed couples.

I would like to suggest that the reason we haven't seen any inflation is because of the obscene salaries of many people, they can't spend it that fast so they put it in the bank. As long as it is in the bank, there is no inflation effect, if the bank can't find anyone credit worthy to loan it to. Of course the little people like you and me don't have to worry about how to keep $250,000K FDIC insured in a bank (we don't have it to begin with).

Bernanke's goal is to stave off deflation. It's kind of like him going into a "house of ill repute" and slashing rates 50% and claiming it will bring in more business. He's right, but he's wrong. You'll get more business, but it is business you never wanted to see in a lifetime. Common sense rules when you have to work for a dollar the hard way. It is a shame that the government doesn't do it's COLAS off of hooker revenue. Minimum Social Security might approach 100K a year.

Copyright 2010 All rights reserved

Tuesday, July 20, 2010

It's Never Been This Bad Before (Reprinted)

I've been on vacation the last 10 days. This is a reprint from January 16, 2008 that is worth a second look.

Here is a little bit of history. It gives you an insight into real estate during the Great Depression from people who lived through it. Quoted from:

By 1927, according to Homer B. Vanderblue, most of the elaborate real-estate offices on Flagler Street in Miami were either closed or practically empty; the Davis Islands project, "bankrupt and unfinished," had been taken over by a syndicate organized by Stone & Webster; and many Florida cities, including Miami, were having difficulty collecting their taxes. By 1928 Henry S. Villard, writing in The Nation, thus described the approach to Miami by road: "Dead subdivisions line the highway, their pompous names half-obliterated on crumbling stucco gates. Lonely white-way lights stand guard over miles of cement side- walks, where grass and palmetto take the place of homes that were to be .... Whole sections of outlying subdivisions are composed of unoccupied houses, past which one speeds on broad thoroughfares as if traversing a city in the grip of death." In 1928 there were thirty-one bank failures in Florida; in 1929 there were fifty-seven; in both of these years the liabilities of the failed banks reached greater totals than were recorded for any other state in the Union. The Mediterranean fruit-fly added to the gravity of the local economic situation in 1929 by ravaging the citrus crop. Bank clearings for Miami, which had climbed sensation- ally to over a billion dollars in 1925, marched sadly downhill again:


And those were the very years when elsewhere in the country prosperity was triumphant! By the middle of 1930, after the general business depression had set in, no less than twenty-six Florida cities had gone into default of principal or interest on their bonds, the heaviest defaults being those of West Palm Beach, Miami, Sanford, and Lake Worth; and even Miami, which had a minor issue of bonds maturing in August, 1930, confessed its inability to redeem them and asked the bondholders for an extension.
This next bit discusses the dire straights of many states in 1933: Pg 285 America’s Great Depression by Murray Rothbard. Quoted from Agricultural Discontent in the Middle West, 1900-1939,Wisconsin Press 1951 p.448

As in most depressions, the property rights of the creditors in debts and claims were subjected to frequent attack, in favor of debtors who wished to refuse payment of their obligations with impunity. We have noted the Federal drive to weaken the bankruptcy laws. States also joined in the attack on creditors. Many states adopted compulsory debt moratoria in early 1933, and sales at auction for debt judgments were halted by Wisconsin, Iowa, Minnesota, Nebraska, and South Dakota. Governor Clyde Herring of Iowa asked insurance and mortgage companies to stop foreclosing mortgages. Life insurance companies protested that they were being very lenient, yet in many areas the courts would not enforce foreclosures for insurance companies, enabling many borrowers arrogantly to refuse to pay. Minnesota forbade foreclosures on farms or homes for several years.
So we can say without a doubt that we have never seen anything like this, but it did happen here about 78 years ago. We could be on our way to an experience of a life time. Are you ready?

Saturday, July 10, 2010

We Have Been Here Before (Reprinted)

Reprinted from 2/1/07.
Today we read that the savings rate in the US has dropped to a negative one percent. It is also mentioned that it hasn’t been this bad since the Great Depression years of 1932 and 1933. The following is an article from way back when, that appeared in the Saturday Evening Post, CCV (November 5, 1932), pp. 3-4 titled" What about the Banks." It was written by Frank A. Vanderlip, former president of the National City Bank of New York. Bear in mind that 1932 was three years into the Great Depression. So if we carry forward to today, this would have appeared in the future year 2012. So we are not really where he was at, when he wrote this.

The present economic disturbance has been so severe that it as make even some changes in our language. No longer is it an apt metaphor to say that anything is “as safe as a bank.” The word “securities” has almost become obsolete. An investment that drops in price to a tenth or, perhaps, even to a twentieth of its former range is not a security; it is a jeopardy. The page of stock-and-bond quotations might well be headed Quotations of Risks and Hazards. To call them securities in the light of their fluctuations is ironical.

In 1720, a financial debacle added to the English language a phrase which has persisted in common world-wide use for two centuries. A hopelessly exploded financial venture is to this day called a South Sea Bubble.

The South Sea Company in its time was the rival of the Bank of England. It was the ambition of the Tories that it should supplant the Bank of England. When the bubble burst, the extreme decline in the price of the stock was from 1,000 to 135. The company withstood the shock, however and continued in business for eighty years.

Here is an example from out own times: United States Steel and General Motors stocks, the two leading industrials of the country, declined from the high quotations of 1929 to 8 per cent of that price. The decline in the stock of the South Sea Company was only to 13 ½ per cent of its highest quotation. Take another: The stock of what has long been one of the premier banks of the country declined from 585 to 23 ½. That is to say, it fell to 4 percent of its highest quotation. The decline in the market price of this great American banking institution was therefore more than three times as severe as was the fall in the stock of the South Sea Company.

That illustration is by no means a unique one. There were innumerable American bank stocks which made a more distressing record. Between October 1, 1929, and August 31 1932, 4,835 American banks failed. They had deposits aggregating $3,263,049,000. . . . .

The decline in the price of bank stocks was only a minor phase of our debacle. The quoted value of all stocks listed on the New York Stock Exchange was, on September 1, 1929 $89,668,276,854. By July 1, 1932, the quoted value of all stocks had fallen to $15,633,479,577.

Stockholders had lost $74,000,000,000. This figure is so large, that not many minds can grasp it. It is $616 for every one of us in America. It is, roughly, three times what we spent in fighting the World War (WWI). . . . . . .

Not only did our investments shrivel in the last three years but we even frequently lost our pocketbooks. Cash in hand, left for safekeeping in a bank, often went the way of our investments, and worse. Almost $3,000,000,000 of our daily-used cash funds were sequestered in the doubtful assets of the 4,835 insolvent banks. Widespread communities were left with only the mattress as a safe depository, and with little to put into it. People became so frightened in regard to the safety of the banks that they locked up in safe-deposit vaults, or secreted elsewhere, more than $1,500,000,000.
In the Great Depression there was a very good reason for feeling negative about life. The interest only mortgage loan had ruined many banks. If you had any money invested, it was probably gone by then. Age 65 ready to retire, it must have been very depressing to some.

This bit of history was full of pain, the players from that era are just memories. The show will play again and we will be the actors upon the stage. The trouble is, we are not willing participants.

Saturday, July 03, 2010

Invisible Inflation

Some prices seem to be declining, and others are increasing. So if one looks for inflation or deflation, it doesn’t take much searching to find an example to fit either argument. There are two different things happening here. One group of items that have been produced for retail sale, are also being resold by end consumers to raise cash. When you have consumers reselling into the market against retailers, prices will drop. The second group of items is pretty much just for consumption without a resale option. These prices are rising dramatically; food, beer, cigarettes, gasoline, drugs, and health care.

With prices rising the consumer has a choice, pay the higher price or switch to an off brand or generic. Blue Goose Vodka at $35 a liter doesn’t have quite the bang of a generic 1.75 liter bottle of the store brand at $10. Of course, then there is the nagging sleight of hand trick where the product size gets reduced and the price stays the same. The family size bag of potato chips now fits in a lunch box.

It’s not hard to notice the decreased consumption of optional goodies; cable, cell phones, internet, the second car, eating out at restaurants. This decreased consumption has a peculiar effect on public utilities. If everyone decreases their water consumption, water bills increase (this happened in our area). Why? Every company has fixed costs that don’t decrease when consumption decreases. With government services, the costs will increase or stay the same, even though they lay off police, firemen and teachers. You get less, so you’re really paying more for it.

What we are going to see from here in the coming year, is a concentration of thought, on how to enjoy our lifestyle by spending less. By shopping more carefully we get better prices from everyone. Some of us know how to do it, the rest of us will learn by going hungry now and then. The real question to ask is, are we able to buy more with our paycheck (deflation) or less (inflation)?

If you buy the premise that Bernanke and the Federal Reserve are saving us from deflation, then you’ve bought into the assumption that printing all these dollars is good for the economy. If you buy the premise that raising the national debt level passes these costs on to our kids, you have bought into the assumption that it’s free for now, and you’ll struggle with the morals of this despicable act of passing our debts onto future generations. If you reject both, you realize that we have a debt problem that will never make it to the grandkids. Our government has borrowed every penny in our banks and spent it.

One of my readers (Rob) commented that the candy bars he purchased had gotten smaller. My half gallons of ice cream are now 1.75 quarts and they take up more space in the freezer. The gallon bottles of ammonia for a dollar are now half gallons. If you have gotten on an airliner lately, there is a new seating section called “cattle class.” What is happening to us is almost invisible. It is a little like sawing a quarter inch off of Grandpa’s walking cane every week; sooner or later, he’s going to catch on. Old Ben Bernanke might convince Grandpa that he’s growing taller and sell him a new cane.

Sunday, June 27, 2010

This Great Depression is Different

During the Great Depression of the 1930’s the banks, trust funds, and stock market lost 90 percent of their value. If you had a thousand dollars saved up or invested back then, you were left with one hundred dollars. If you lost your job there was no unemployment or Social Security. Deflation became a very serious issue; nobody had any money left to speak of. If you had been living paycheck to paycheck, all you could lose was your job (a rather anemic understatement).

March forward to today. No depositor has lost a dime in the banking system. All of the foreclosures will be bought by the government. Unemployment is collectible for two years. There has been no 90% loss of savings. The government has printed dollars to cover all bank failures.

Millions of people are collecting unemployment and not producing anything, but they are consuming product using their government check. At the same time, tax collection revenues have been decreasing at an alarming rate while government expenditures have been increasing geometrically.

Our government has no increased tax revenues coming in unless you count the new health care. They are printing money to pay the bills. At some point this leads to inflation. Deflation cannot happen, everyone has their dollars. The unemployed are consuming the products we savers chose forego, when we deposited our money in a retirement account. Our savings were a way to defer consumption into the future.

As long as retirement redemptions are minimal, inflation does not even enter the picture. The product produced matches the printed dollars spent. We will see inflation when the baby boomers decide to spend some of their deferred consumption.

The Economic rhetoric from Bernanke claiming his actions will save the country from a deflationary spiral, is pure nonsense. The Emperor is wearing no clothes, claiming otherwise changes nothing. Inflation is the name of the game, and hyper inflation is our destination. It cures all of Fannie Mae’s and Freddie Mac’s problems. They don’t have to mark down to market; they get to mark up to market.

At one point the government had a choice of deflation or inflation to solve this bubble. If we had done nothing, we would have had the 90 percent haircut and deflation just like the 1930's did. We chose to solve the problem differently with a printing press.

What’s it mean? The government can’t stop the inevitable; they can only slow it down. Our dollar will be the new dime of the 21st century. We still get the 90 percent haircut. The money borrowed was squandered on consumption. It is gone, it can't be undone. This is not something that can be reversed with a printing press. The government is only increasing the number of dollars chasing a decreasing inventory of product.

Where to from here? 15 trillion in debt and we have a President who keeps on saying “We are not out of the woods yet.” If you owe 15 trillion dollars, why get out of the woods? Stay there and hide!

Wednesday, June 23, 2010

Robbery Royale at Fannie Mae

Karl Denninger of the Market Ticker had a bit today on Fannie Mae giving everyone the green weenie. It’s worse that what he stated. Fannie Mae has a delaying tactic. They have a deed for lease program where you can rent back your property from them at the current market rental rate. Here is a Link. So, instead of a walk away home that gets stripped, you have a home that is being lived in by the previous owner. The lease is for one year and that could extend for many more if you read the tea leaves.

This program delays real estate from hitting the market in the form of a foreclosure. The inventory is eased into the market gradually instead of all at once. This is the hidden inventory that everyone talks about. The other thing is their great financing program for new buyers, here is a link.

If you read their boilerplate carefully, you don't need to pay for an appraisal, which costs dollars. My question, would the property appraise for what they are trying to sell it to you for? Probably not, it is called rip off the poor and uninformed, sell them that dream of home ownership. A dollar down moves you in. If you look this gift horse in the mouth, you would walk away.

Fannie will give you 3 1/2 percent of the home’s value for closing costs or whatever. You need to have 3% down, but you could get a check cut for 10% of the home’s value for repairs. Oh goodie free money.

Here is an article I wrote showing my frustration with what they were doing two years ago link . The couple that bought this home both worked at a movie theater making $8 per hour. They got $10,000 for repairs and spent it on a bike and a pick up. It ended up going back to the bank (Fannie Mae). It only cost them a dollar to move in.

The thing to take pause at here are the Realtors. Commissions are 6% so we know whose raking in the real money.

I use to sell VA repos, and that was on an auction basis. High bid won. Now we have a candy ass program; Fannie Mae will finance your dream, if you agree to pay their price. The people at Fannie Mae need some jail time.

Monday, June 21, 2010

The Low Bond Yield Conundrum (Reprinted)

This is an edited reprint from November 19, 2006 which demonstrates what large swings in interest rates can do of the bond market. Note the interest rates are off a bit; at the time of writing, there was less than 100 basis points between the 30 year Treasury bonds and the one year T-Bills. The 30 year interest rates have remained constant, the short term rates have gone to hell. Greenspan was the man in charge at the time.

The bond market is at a point right now that leaves an awful lot of long bond holders (buyers of the 30 year) very vulnerable.

With the coming vaporization of the second trust deed market, there should be a scarcity of funds. Add to that, marking to market of foreclosed homes adds even more to this up and coming "enterprise." Seventeen interest rate increases by the Fed and the long term rate comes out very little changed.

In Greenspans speech to Congress last year June 9, 2005 he is quoted:

Among the biggest surprises of the past year has been the pronounced decline in long-term interest rates on U.S. Treasury securities despite a 2-percentage-point increase in the federal funds rate. This is clearly without recent precedent. The yield on ten-year Treasury notes, currently at about 4 percent, is 80 basis points less than its level of a year ago. Moreover, even after the recent backup in credit risk spreads, yields for both investment-grade and less-than-investment-grade corporate bonds have declined even more than Treasuries over the same period.

What it really boils down to is; there is a very large demand for long term bonds. More than the market can supply. Otherwise interest rates would rise to attract buyers (this may not seem obvious, but as the price of a bond drops, its interest rate increases and vise versa). The Baby Boomers could be going to less risk in their portfolios. An insurance company locking in rates on an annuity for thirty years, this would be a smart call.

Where it gets kinky, is the fact that everyone is loaning 30 year money at close to the rate paid for the one year Treasury. Look at a 30 year bond issued today at say 5%.

Value of Face amount-------interest rate--------interest paid

No problem with the investment, but if the interest rate went to 10%, the dynamics change. Using that same 1,000,000 bond we now have:

Value of face Amount-------interest rate--------interest paid

What this shows, is that your market portfolio could, if marked to market have a haircut of 50 percent. Notice however, if you hold on to maturity, there is no "real" loss of principle. 30 years is a long time to wait if you are already 60 (I turned 60 yesterday).

The real pure play for the bond market is to buy when the market is at 10% and sell when it goes to 5%. That play, a reverse of the first example, would net a cool half million. This is where the money is made in the bond market. (Note if you were to buy at 10% and it swung even lower to 20%, your jaw could hit the floor rather hard.)

The only thing that makes today a buying opportunity, is the belief that the interest rate will drop to 2.5%, this would double your bond portfolio's value, and it just ain't going to happen.

Another thing that Greenspan mentioned, that people were willing to accept more risk with less reward. Everything except Delta Airlines Bonds are trading as if they are US Treasury's (admittedly an exaggeration, but the rates commanded are rather unrealistic if not pathetic).

We seem have a market running on the herd mentality of "If it works, go with the flow." At some point there will be a demand for funds that could raise the interest rate to quite a spectacular level, even if for a short period of time. It is at that point, that cash can buy into the bond market and make a killing.

A stock has to double to double your money. With a bond a 50% drop in the interest rate doubles your return. The thing to remember in a panic, it's like going into a pawn shop with a $10,000 wedding ring, you're not going to get list price or anywhere near it. You're are going to take what you can get according to how desperate you are for cash funds.

What you really have, is a mistake being made by retirement funds, that will take them 30 years to fully appreciate. Your clients only have 15 to 35 years to live. They just might need the money before the call date. The real culprit is unperceived inflation --your monthly retirement check might only buy a weeks worth of groceries. I guess this is how you get "saved" from a severe deflationary spiral--more government printing.

The Conundrum is, why invest in bonds? You're guaranteed a loss at present interest rates.

Wednesday, June 16, 2010

Read Between the Lines

Tuesday's San Diego Union Tribune ran a front page story; the county's median home prices were up 15.3 percent.

San Diego County home prices, which were falling at double-digit rates a year ago, are now rising rapidly as investors grab the last remaining bargains and upper-end buyers find deals to their liking.

It makes you wonder a bit about their chart below, until you look at the new homes for May 2009 and compare them with new homes for May 2010. [double click for a clearer image]

Looking at it realistically, the buyer lost $77,000 if they bought a new home last May (highlighted in yellow). And now there are a lot of 600K "used" homes that are now selling for 400K. The condo sales don't make much sense unless the new units in downtown San Diego (previously selling at 600K) have been reduced to move at 250K. Just try and find a banker that will finance a condo.

The other thing to realize is that used home totals are actual, new home sales are usually 2/3's of those listed; they are counted the minute the contract is signed and a lot fail to close. Another item to take into account, the tax incentive just expired so the totals for May stole from June.

You can't fault the newspaper for printing "Good News."

Thursday, June 10, 2010

The Anatomy of a Bubble

In order to understand a bubble, one has to examine two conditions of our environment. One, there is a randomness with the way we interact with our economic community; everybody works, but we all have different types of jobs. Two, our resources are finite; they can be exhausted by consumption.

The first step of a bubble is the severe misallocation of resources. Production focuses on one particular item. The misallocation, means that we are about to allocate most of our resources towards that one goal. This starts out gradually and then progressively consumes more and more resources.

In the second step of a bubble, a large group of people are no longer interacting with the economy in a random fashion; they are all pursuing the same wealth creation formula. This too, starts out with a normal amount of people employed in the bubble sector of the economy. As the bubble gets more robust, more people with a desire for riches join in with lost abandon.

As we enter step three, there is the comfort that everyone participating in the bubble, feels sort of group camaraderie (the herd mentality). Notice as people acquire more riches from their venture, they come to accept the fact that they’re just MORE intelligent than ordinary people. At this point greed and stupidity mix well; double your investment and in turn, double your profit.

Then we come to the final stage (step four) loss of control; the resources are exhausted and the bubble collapses. The damage has been done and it is real.

Examine these two bubble examples from the past:

A river boat ferry, in India 20 years back, was packed with 600 people. Two teenagers in love were going to jump off the boat and commit suicide (their parents wouldn’t let them get married). Needless to say 600 people rushed to one side of the ferry to witness the event. The ferry capsized with a very large loss of life. What happened was sudden and very unexpected by all involved.

The second case was in Africa 50 years ago. Wealth was measured in cattle. The more cattle you owned, the more wives you could afford (this also produced a lot of kids that had to be fed). Cattle production shot through the roof over several years, everyone was getting rich. Even the people growing the hay to feed the cattle were making money. The price of cattle feed started to increase; there wasn't enough supply to meet demand. The cattle were starting to exhaust their food supply. Farmers found it difficult to feed all of their cattle, so more went to market for sale. Prices started to drop and the cattle market collapsed. The livestock died off in mass and the general population faced the aspect of starvation. There wasn’t any drought that brought this famine on, just the misallocation of resources.

Identifying a bubble is at best, very difficult in the early stages. The housing bubble over time has become obvious. Medicare is a bubble in progress. Resources are limited more so than is apparent; high costs in the past have kept medical demands in check.

The national debt is also a bubble but the concept of what constitutes resources (real money) is one of those magic acts, that go on forever. An increase in the interest rate to 9% could spell doom for the US Treasury and the national debt (of course that could never happen).

The ferry boat (our Ship of State) is full and pushing away from the dock; I wonder if Romeo and Juliet are on board?

Saturday, June 05, 2010

Live Rent Free, Don't Give the Bank the Keys (Reprinted)

Here is a reprint from this blog back 3 years ago, September 6, 2007. The probability of it, has come to pass.

Everyone is talking about all of the foreclosures and how rental rates will rise because of the demand from all of the displaced owners. Maybe there is one item that has been overlooked.

When banks foreclose and get title, there is a year or two wait to complete the process. We are talking about the actual deed, not a note saying that the title was conveyed and it is free and clear. The paperwork takes a while.

In the mean time, the neighbor across the way trades out his broken dishwasher with the one in the foreclosure. In California, the air conditioner would probably grow legs in two weeks. In a year’s time, there might not be much left. I’ve seen places that the neighborhood kids would use and by the time they are finished with it, you really wouldn’t want it at any price.

This can even get worse. Consider a foreclosure in Colorado, the pipes freeze and break. In Florida, a closed up house might mold over like a loaf of bread. Some states have laws on the books that allow the foreclosed owner two years to redeem the house after the event. So, clear title could be a very long wait.

Considering the length of time needed to sell a house lately, a year is not an unreasonable estimate of time. The note holder has a chance to lose big time. His asset could be run through the local recycler without his knowledge, copper pipes and all. It behooves him to have the house occupied.

The foreclosed home owner can’t lose if he plays his cards right. Walk up to the lender handling the foreclosure, and offer to keep living in the house rent free until it is sold, on the condition that you take care of the lawn and the house in general. Sounds crazy, but who the hell is going to buy it in this market? At least nobody is going to steal the air conditioner before you have a chance to sell it. At the present time, things aren't quite that bad, so you might have to pay monthly rent payments.

An impossible pipe dream? People living in foreclosed homes and not being tossed out?? It’s happened before, just not in the last 75 years. States even passed laws so it could happen.

Post-note June 5, 2010:

The property tax arrears on these homes could become a nightmare. They are not being paid and the states depend on the dollars for their budgets. Just who owes the money is the real question. Some states allow you to pick up a home for back taxes, others don't. In California it looks like the bank pays the back taxes from the proceeds of the foreclosure sale. If the home is upside down, the FDIC, FANNIE, or FREDDIE become the indirect guarantor of the taxes. It's just another way of saying this is a free ride on the taxpayer.