Wednesday, April 30, 2008

Unintended Consequences

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. The funny part is the subsidies more than make up for the unprofitability 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.

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. Ouch!

Copyright 2008 All rights reserved

Monday, April 28, 2008

Will Congress be there when we need them? (reprint)

-----------Reprinted from 1/31/07

So let’s see, the housing market is going to hell. The tax base for that market is also going to take a dive. State governments are going to be in trouble. Revenues counted on are not going to be there as projected.

[Update 4/29/08: California's Governor Schwarzenegger has increased the projected budget shortfall from 10 billion to 20 billion.]

Let’s move to the Federal Government. Everything is moving off shore. The tax base has to be less than last year and the projection was for a better year this year. Transfer payments for Social Security, Medicare and Medical are increasing. There is that giant sucking sound coming from Mexico (A Ross Perot metaphor) is there a solution in sight?

Think about it from a Congressman’s point of view. 40% of his constituents are Republican, 40 % are Democrat and 20 % are lunatic fringe elements. (I classify lunatic fringe as people that vote left or right on one issue only, i.e. gun control, abortion etc). Divide all of these figures in half and you have the actual voters. So we have about 20% Republican, 20%, Democrat and about 10% hanging from the ceiling.

Let’s figure that you got elected to Congress. You want to get re-elected, who do you cater to? Answer: the 10% hanging from the ceiling; gays, lesbians, abortionist, pro life, gun fanatics, anti war demonstrators. What don’t you touch? Answer, the “Silver Foxes (AKA retirement central)” and any item that is still working. Why? If you mess with something, say a retirement program and things go wrong you will be blamed. Even though Social Security is in a bad way and the Medicare payments are escalating, there is no call to fix it. You cannot be a Knight in shinning armor unless there is a Dragon. So why fix it if it isn’t broke?

In effect, your Congressman isn’t going to do a damn thing. Inaction will keep him or her re-elected. To face the problems, realistically would be a grand vendetta, but in reality it would be political suicide.

So what do we have to look forward to? Answer, a country that might be fed up with Democracy. It happened to the German Republic in the 1930’s, voting got them nowhere. They threw the bums (Legislative body) out the hard way.

There is a humorous twist for buffs that think history repeats itself. Germany was the essence of Democracy in the early 20th century. Adolf Hitler, Austrian born became the leader of Germany. Today we have Arnold Schwarzenegger, born in Austria, governor of California, and there is a move to amend the Constitution so he can run for President. I don’t by any means mean to compare Arnold to Adolf, but the similarities jump out at you. The coincidence was too tempting to pass up, but it does make you wonder, what if---hmmmm

Copyright 2008 All rights reserved

Tuesday, April 22, 2008

Real Estate the Tip of the Iceberg

On one side you have the upside down home owner, who is about to walk away and give the bank the keys. But the other side, the bank paid the seller real money for the house and the new owner signed a note to pay the debt. Many suggest that this serves the banks right for loaning the money so carelessly in the first place. Think twice about that, the money paid wasn't the bank's, it belonged to a depositor. Banks don't lose money, people do!

Today the Bank of England announced that they are offering to swap 100 billion of government bonds for mortgage securities. Welcome to the Bernanke bailout party. Amazingly we are 8 months into this mess and still, no one has lost a dime.

If we can agree that real estate is only the tip of the iceberg, then it becomes apparent that the financial banking system, is in a very precarious position. Throw in hedge funds and the visual aid is no longer to scale, it's not big enough (use your imagination). The Iceberg represents real money borrowed from someone who works for a living or has money in an investment vehicle. It doesn't belong to a hedge fund, bank, IRA or 401k, it belongs to real people.

Industries are downsizing and laying off people. The big auto companies and the airlines have reset their pay scale to be more competitive. The housing industry has [fill in the blank]. More people are looking for work. These major events should raise some alarm, but curiously no one seems to notice. The unemployment numbers are starting to add up.

Look for a major bankruptcy's like the one in 1932 when Ivar Kreuger the famous Swedish Match King committed suicide. The guy was the "Warren Buffet" of his time.

This is a slow but methodical meltdown. Real estate is where all of the castles have been built, and the stock market is our sand box to play in. Maybe Icebergs are a little like our government, most of it is hidden from view.

To a majority of Americans "The Economy" is just a concept, little understood. Most people have never studied basic economics. The "Group Think" is that Congress can fix what is broken. Congressional solutions are a little like trying to use your clothes dryer to dry the kitchen dishes and glassware. When the buzzer goes off, you can rest assured that everything is dry! You end up getting what you were promised, but it's not quite what you had in mind.

Copyright 2008 All rights reserved

Thursday, April 17, 2008

Shooting the Moon

The financial institutions of the world have admitted to about 600 billion in loses so far. Uncle Bernanke coughed up 30 billion for Bear Stearns. If you figure that we are in a dive that will take the normal 6 years to pull out of, then we have a considerable amount of loses to be realized. It looks as if the loses could go hyperbolic. In real estate we are only 8 months into a situation, which normally takes 6 years to stabilize. The trouble is, we have already set records going into this mess that exceed the amounts from the last down turn, numbered in years, in months. It looks like we have 8 to 10 times the velocity of the last real estate slump. We are really moving.

Another thing to look at is the acceleration factor. Is it getting better or getting worse? Our government claims the brakes are on full (getting better). You have to wonder about that. The government is doling out 150 billion dollars to the taxpayers for doing absolutely nothing.

In a card game called Hearts, there is a maneuver called “Shooting the Moon” where one person takes all of the heart tricks. The player doing this has the option of adding 26 points to everyone else’s score or subtracting 26 off of his score (lowering his own score keeps the game going [more $$$] if one of the players is approaching the end of game point score say 500).

This tax stimulus could be called a “Governmental Moon Shot.” The government had the option to tax everyone and pay for the mess or print more money. To realize this effect, imagine that Congress passes a 10% tax on all money saved in banks or retirement funds (there would be riots in the street). But if they print more money, $10,000 in the bank, is still $10,000, but now it will only purchase $9,000 of yesterdays goods.

Giving away money in an election year isn’t a bad idea. You get $1,200 back, and think the government has given you something. You have been fleeced like a lamb. It’s a little like buying invisible goldfish as an investment, they’re not much to look at, but you’ll make money breeding them. Yea, right!

The real irritating thing about this mess is that we can count the 150 billion in the stimulus package and the 30 billion given to Bear Stearns. Whatever else the Fed is buying from the rest of the banks, is being done behind closed doors. It kind of makes you wonder what we’re going to get for Christmas this year. I just hope they're not going to give us our lunch!

Copyright 2008 All rights reserved

Saturday, April 12, 2008

The Social Security Healthcare Boondoggle

This is an edited reprint of "The Social Security Morass" 7/9/2006

F.D.R got Social Security going during the Great depression. If you examine the original idea, it wasn't too bad, only about 8% of the population at that point in time would ever live to collect it. Now over 60% of the population will live to "collect" it.

The Social Security tax is supposed to be deposited into a trust fund. To make the story simple, The Congress has written some IOU's and spent the money. Someone complained about this abuse. The Supreme Court ruled that the Social Security tax was just that, a TAX and the government could do whatever it wished with it.

How about Medicare and Medicaid? Why worry about Social Security, that's a nickel and dime game compared to free health care for the elderly.

There is another one called SSI (Supplemental Security Income). You can draw from this fund if your Social Security check is below poverty minimums. A lot of immigrants in this country legally, over the age of 65, qualify for this program even if they have never worked a day in their life. They are also eligible for Medicare. Imagine, a foreigner can qualify for a retirement pension of about $637 /month ($956 as a couple) with free medical, not bad! If I wait and retire at age 66 I will qualify for $767 per month from Social Security otherwise its $502. Go figure!

All of these benefits are Transfer Payments. The money doled out is spent on consumption. There is no real investment in new enterprises. These funds are being borrowed indirectly from your children before they have even earned it. There is no budget amount set aside for these future expenditures. It’s pay as you go. Doesn't it sound just like an interest only no money down housing loan, such a deal!

We are at a fork in the road, similar to the 1930's. Germany decided to hyper inflate and ruined anyone that had any savings. The US survived with deflation and ruined almost everyone with a bank account.

Will we be able to enjoy our future government retirement benefits? Hint: The tooth fairy doesn’t do seniors. Congress is not going to fix anything that isn’t broke. When it breaks, they want to get credit for fixing it. It’s kind of like a firefighter that moonlights as an arsonist. You get paid for doing something you shouldn’t have done, and get thanked for fixing it.

Copyright 2008 All rights reserved

Sunday, April 06, 2008

Bigger Bubbles To Pop

Everybody knows about the housing bubble. In nine months, it has gone from blog-talk to front page newspaper headlines. As for the Recession, our government has yet to forecast even one. What has been ignored is the intertwining of three major bubbles: Government Funded Programs, Private Sector Finances and the "Hot" housing market!

The degree of overlap between bubbles is meant to suggest that they have implied financial liability. Any thing overlapping the Government bubble would have insurance protection (ie [housing bubble, Fanny Mae] [Finance bubble, FDIC Bank Insurance]).

The financial markets supplied the easy money for the housing bubble. They also supplied the cash that funded all of our credit card debt and our soaring stock market. Where did the money come from? It isn’t hard to figure out; it came from someone’s savings account. Total US retirement assets are at 17 trillion dollars. Here is a Link with more information. This is Bubble Two and it is maturing at a rather fast rate. Just ask anyone who worked at Bear Stearns.

The biggest bubble is the promised government benefits to retirees in the form of Social Security, SSI and unlimited health care to seniors(estimated to be 50 trillion). Bubble One has popped (loss range estimates are one to six trillion). When Bubble Two pops, there goes our retirement savings (estimates range six to twelve trillion). At that point we are really going to need the benefits promised by Bubble Three (try not to laugh).

Bernanke is adding 30 billion to the financial bubble (a loan from Bubble Three to Bubble Two). More funds may solve an immediate problem but all this will do is buy time and increase the size of the mess. The road to hell is paved with good intentions. Ben's going to loan us his hand basket, such a nice touch. I guess he doesn't have to take the trip.

Copyright 2008 All rights reserved

Friday, April 04, 2008

Who Pays the Bills?

Here is a graph of the current losses of Swiss Bank UBS. The dashed line is my guess at a worst case projection. I have absolutely no facts to back it up. From my years as an engineering student we would often pencil in expected future results. It is more a test to see if your model is a working one. My model supports the theory that the banks are hiding as much as possible until it becomes obvious. If the facts were known, the problem would feed on itself. The nice thing about a blog is that we are not limited to just facts like a newspaper. We can manipulate our models and try to forecast the future.

Your average bank has a good idea what is going to happen three months out. They have to calculate what is being paid off in the near future in order to issue new loans. The graph projects an increase of 43 billion more in losses, three months out, as a worst case scenario. It could be way off, we can't measure the human psyche. Loss of faith in a bank is an abstract process. It doesn't have to be based in truth, but the results are always the same, people tend to vote with their feet. In this case, they have been doing a lot of voting with this bank.

UBS has 37 billion of losses, Deutsche Bank has 4 billion, Citi Group has 21 billion and Merrill Lynch 22 billion. That’s about 83 billion dollars in bank losses (skipping the Bear Stearns Tooth Fairy bailout). Look on the good side, it could be worse. On the bad side, it probably is worse. We didn’t spend it on anything that we really needed, like teacher’s salaries. Our money left the building and took an "Elvis walk." We are talking spirits here, 100 proof or better.

The US government gives 150 billion to the tax payers and 30 billion to JP Morgan. Didn't we cure the whole savings and loan fiasco of the 1990’s with 120 billion dollars? Na, must be my imagination.

This whole mess started near the end of July last year with the implosion of two of Bear Stearns’s Hedge Funds. Eight months after the event, our government is mailing us a big check to spend. That there, ought to be enough to make you sleep with one eye open. It's kind of like your wife getting you a hooker for your 60th birthday. What's the catch? Especially if you knew she would feed you through a blender for cheating on her. The check makes cents but no sense! The question not being asked, "Who ends up paying the bills?" "Congress" is not the right answer.