It's All Good

The Wall Street Journal came out with an article on write downs tied to mortgage debt Saturday. Their bar graph (left) displays about 20.7 billion in 3rd quarter losses. Washington Mutual with 1 billion of charges this quarter didn't even make the list. The amount shown for the Bear Sterns doesn't really reflect what happened when this mess started (BS had a 1.6 billion hedge fund bankruptcy). Of course Amaranth is long forgotten.

The above chart is mixing brokerage houses with banks. So these write offs or what ever, could be coming from several different places, bad housing loans, credit card debt and hedge fund investments. Don't worry everything is "contained." Yea, right!


Here's a list of the top world banks. The banks in the top picture seem to have a handle on projected losses if you compare their net holdings (left) to declared write downs (top). But this is just third quarter losses. So do we multiply this by four to come up with a yearly total? It sounds logically conservative and nightmarish. [Note: Morgan Stanley in the top pic and JP Morgan Chase in the one at the left are not the same company, the first is a brokerage house and the latter is a bank, they were one entity at one time]

HSBC wrote off 11 billion in March, Citibank plans to announce earnings October 15 and refers to earnings as "abysmal" in their news release last week. Two banks not saying much are Bank America, and JP Morgan. It could be an eye opener when they report quarterly earnings.

Now mix in 2.46 trillion dollars of credit card debt. Here is list of the top ten issuers of general purpose credit cards:

1. Bank of America
2. J P Morgan Chase
3. Citigroup
4. American Express
5. Capital One
6. Discover Card
7. HSBC
8. Washington Mutual
9. Wells Fargo
10.U S Bancorp


The puzzle is starting to come together. We know who the players are. Citigroup made all three lists, which doesn't sound too good. They might have company, if Bank of America and J P Morgan "measure up" in the next week or two when they announce earnings. The real problem is the three month time frame this mess transpired in. How can we believe that things are now OK?

The stock market is still going up, go figure. I guess you could call it herd (heard) mentality. Follow your favorite stock commentator over the cliff.

Models We Build and Use to Interact with our Enviroment.

Reprinted from June of 2006. I apologize, but of the three essays I've written in the last two weeks, they were too unfocused to publish.

A rather long title, and a concept that is almost transparent unless you look for it. Lets start with an example or two.

Clapping your hands keeps the elephants away. Its a valid model as long as no elephants show up.

A rabbit foot is lucky to hold. Also a valid model unless you are having a bad run of luck.

Stocks will always go up and we will get rich. Valid but more like a wish.

Gold is where to put your cash. Valid but arguable.

Mother-in-laws are good cooks. Arguable, but it is your world that you are viewing.

Real estate is a good investment. If it works, you will keep on doing it.

Now when you build your model that you use to interact with the outside world, it might include views on gun control, abortion, the environment, politics, religion and what ever.

In our thinking, (or lack of) each of us is unique. It is from this perspective that we are trying to live out our existence comfortably with the least amount of excess effort.

Some of us, because of the models we use, are becoming more aware of problems that may or may not be of concern anyone else.

Right now, the financial world (to me) seems poised to fall off of a cliff. The models and my perspective suggest that. But just as mine suggest that, another person's model may suggest a different perspective. The one thing that I can guarantee, is that every perspective will differ, some more than others.

Right now we are at a point in time where some of these models are starting to fail. For example, "Real estate is a good investment." This model worked for years, and now it doesn't sound so enticing.

There are two reasons for failure, the model has stayed the same and the environment has changed, or an elephant has appeared and hand clapping doesn't seem to validate the model. If your thinking has failed to recognize the change or your thinking has always been out of whack then the model was never really tested.

What really needs to be realized, what ever model you use, your goals are probably the same, to survive and exist comfortably. The way you go about it can be quite different than everyone else.

We may, or may not be, aware of the present possible failure of our model in the real world. This is just what happened in 1929. People were not stupid, they knew how to "turn a trick," the trouble was the game changed and their model fell apart

Perceived Reality reprinted

This originally appeared June 2006 and I thought it worth repeating.

Ever hear the story about the bum in New York City clapping his hands? When asked why he was doing it , he says, "To keep the elephants away." The listener replies, "There aren't any elephants in NYC!" The bum quips, "See, it works!"

In this case, the level of absurdity sets off warning signs and that casts doubt into your mind. But lets get to the not so obvious.
"Why rent and make the landlords house payment?"
"Owning a house is better than renting."
"Investing in Real Estate is the way to wealth."

People don't realize that the value and the validity of statements change over time. What was pure truth in 1964, is not so certain in the world of 2006. The human mind has a rough time with changes in perspective. We get stuck in a rut.

Go into your closet and make a mental note, "Tomorrow I am going to wear something I bought 20 years ago." Try it on. Does it fit? Would you feel embarrassed wearing it? Will it make you feel young again? Do you still like it? Did this exercise change your perspective about time a little bit?

A lot of our mental values fall into the same boat. We need to have the ability to realize that our perspective needs to change as we get older. Values that seem to be constant need to be re-examined.

Remember this, if something is repeated again and again as fact, then it must be true, and society will accept it as such. For 2,000 years people though the common house fly had 8 legs until someone decided to count them.

So how does this tie into The Great Depression of 2006? I am trying to point out, that you could get caught up in the coming mess, if your values don't change to accommodate the times, as they are-a-changing.

Calculating the Inflation Tax

This bit about government wanting to tax the rich has always puzzled me. In ancient Rome, if I remember my history right, every male was taxed. They had to give one month of labor to the government each year, or pay someone to stand in for them. The Romans were able to build a lot of roads. Notice that there wasn’t the concept “I can’t pay, I don’t have the money.” They wanted your ass and you were theirs for one month. As a government, you couldn’t go out and “print” another tax payer (worker).

When you fast forward to today, Congress’s idea of “Tax the rich,” is tax the guy making over 100K per year. Notice we are not taxing the rich people that don’t have to work. We are taxing people earning money. So if you work 3 jobs and are killing yourself, you pay more tax. If you are pimping, selling drugs or other illegal things, you pay no tax. If you don’t have enough earned income, you also pay no tax. In essence Congress taxes people more for working over 40 hours.

Examine the increase in the price of oil to $80. It is the equivalent of a $1,000 bill for every car owner who consumes 3 gallons per day. The census for 2004 lists 243,023,485 cars in the United States. Extend that forward and we get 243 billion dollars. Our government collected 2.2 trillion in taxes in 2006. This rise in oil prices is equivalent to 10% of our present tax base. With this tax, EVERYONE pays.

When it reaches into everyone’s pocket, it is inflation. The result on the economy is a contraction of discretionary purchases; movies, restaurants, Starbucks, fast food etc. As the price of oil rises, many countries face the prospects of recession. Oil taxes are across the board and affect everyone; especially those that can least afford it.

Notice, this whole computation didn’t take an office full of economists to calculate. It’s pretty basic math. Now, all Congress has to do is re-introduce the $1000 bill into circulation. The phrase “Banana Republic” comes to mind for some reason. “Chiquita Ben” Bernanke to the rescue! We’re going to drive to the poor house in style, mileage be damned!

Why a Rate Cut?

Why cut rates? It makes no sense.

Foreign money is flowing out of the U.S because of the excessive borrowing we have done. A withdrawal of capital by foreigners should lead to higher interest rates.

On the other side, the U.S. investor is buying treasuries because of a lack of confidence in the bond markets. This over supply of demand for treasuries drives interest rates down.

Lowering the discount rates increases the perception of inflation, and oil is at $82 Gold is at 723 and Google is at 546.

Every poor person in the United States is now paying $1,000 extra a year for gasoline. Thats $1,000 more than our own government can get out of them at tax time. That group can ill afford it, they get hit the hardest. So if you use 3 gallons of gas a day to go back and forth from work, you too are in the same boat.

Housing is shot, but they forgot to tell the guys holding the paper. A white Christmas with a lot of red ink and no jingle.

Then you have people in Great Britain having a run on the bank. Talk about a loss of confidence.

Bernanke burned the shorts on Triple Witching, I didn't think he would do it. They had to hop in and cover their short positions and the market took off. The short players are necessary for the market. When the market drops, they step in and buy back the stock and realize a profit. So let's see, the next time the market decides to drop there won't be very many shorts buying into the falling market. You could label this "greasing the chute."

Maybe the Fed knows more than they are telling. There could be something seriously wrong with our banking system. A lack of liquidity? Four banks borrow 2 billion. Na, couldn't happen. Believe that I have a house to sell you.

Maybe we have Visa'd, just one too many plasma TV's

CFC The Home Developer's White Knight

A couple of weeks ago 4 banks went to the discount window and borrowed 2 billion. Then B of A bought a preferred stake in Countrywide Financial for a coincidental amount of 2 billion. Now we hear that CFC has been advanced 12 billion and the discount window shows that banks took out another 8 Billion. The two may or may not be related, but it does raise an eyebrow or two.

Then, there is this guy out there with a real deep tan or a very bad case of jaundice waving a flag at CFC and yelling, "Come finance a loan with us." Here is an eye opener quote from KB Homes financial report:

KB Home operates through its 49%-owned subsidiary, Kaufman & Broad S.A. (KBSA), which also develops commercial and residential projects, such as condominium complexes. It also offers mortgage services through Countrywide KB Home Loans, its 50%-owned joint venture with Countrywide Financial Corporation. Through its wholly owned financial services subsidiary, KB Home Mortgage Company, KB Home provides title, insurance and escrow coordination services to its domestic homebuyers.

Several other home builders use CFC. So what happens here? The builders are going to sell new houses at below market price everywhere. Just try to sell an old house. Why not buy a brand new one? “What color granite counter top do you want in the kitchen?” says the builder (AKA Spider) to the buyer (AKA Fly). Sign right here Sir.

Did you see anyone last year waving a flag saying, "I have 12 billion to loan?" The phrase, “Fog a mirror,” was the only pre-qualifier you needed for a loan that I can remember. Now, there is a confidence issue. Can we get the suckers to line up and buy just like yesterday? Probably not. CFC is going to sell new homes. There is no market for used homes at these prices here in San Diego.

What happens next? The "stickiness" (greed and stubbornness) of the homeowners selling, will allow the builder to sell his constructed units below "home owner retail" (cost plus Realtor fees). His markup is probably 100K to 300K depending on the size of the house. The builder has room to deal, the home owner doesn't in most cases.

The thing not readily apparent, is that CFC and the home builders understand the time line delay, the home owner doesn't even have a clue. By the time the home owner is convinced his house has dropped 50K, the data is already 3 months stale. On top of that there is the wish "The market will come back."

Have no fear Congress will save us, once they realize that Fanny-Mae is not the hooker with the big boobs that they were jumping on last night.

Monopoly, a game from the Depression

I remember as a kid playing a game of Monopoly. One particular time, we ended up with the bank running out of money. So someone grabbed a note pad and made up some $1000 bills for the bank and the game continued. Chance, Community Chest, the Utilities and Luxury Tax were also deeded out and sold. We were putting houses on everything including the Railroads. Soon we ran out of houses and hotels, so we used chess and checkers set pieces for Mega Resorts. The game pretty much ended when two players got wiped out on Park Place and Boardwalk.

It kind of sounds a little like what has been happening world wide financially, doesn’t it? Japan should have been out of the game 15 years ago, but since they pledged to take all of their savings and invest it outside the country, they were allowed to stay (that’s not really what they did, but that was the end result). Now you hear whispers that the Yen carry trade is winding down. This, from my understanding, was a massive migration of cash from Japan to foreign banks.

I’m guessing that it’s far more serious than that. If it comes to pass that the Japanese were heavy investors in CDO’s and Hedge funds, they have a serious problem. It brings to mind the German Weimar Republic collapse where to purchase a loaf of bread, you needed a bushel basket of deutschmarks (Their funds had been sucked out of the country by a repatriation agreement settling World War I).

We will just have to wait and see what plays out in Japan. Will they land on Park Place or Boardwalk? It's time to roll the dice.

Been There Before, (In My Previous Life) Reprint

Reprinted from Feb 1,2007

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 2009. So we are not really where he was at, when he wrote this.
I had to type this in by hand, no cut and paste. There could be an error or two.

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 being negative in 1932 and 1933. 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 depressing to some.

Live Rent Free, Don't give the Bank the Keys

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.

Carbonizing Bread with a Toaster

I can’t quite figure this one out. Bush got on his soap box and said that we need to help the homeowner and Bernanke says he will save the economy. It kind of reminds me of a Bill Board I read that said in big letters "Jesus Saves" and down below someone had written "Green Stamps."

Let’s face it; the homeowners going into foreclosure are toast. They have pretty much exhausted their finances and ruined their credit ratings. Landlords will refrain from renting to them on top of all of their other problems. Congress mentions a 300 million dollar bailout, and that wouldn’t even cover the fraud stuff in Northern San Diego County. It also wouldn’t cover what they spent getting re-elected either.

How is Bernanke going to save the economy? Is this going to be some sort of religious experience??? Altering the interest rates doesn’t change the amount of debt in the country. If you were to mentally ask the question, “Why did he wait till now?” You have already made an improper assumption, in assuming that he can fix the problem. The Fed is just too small to move the world markets.

What we are dealing with is group psychology (i.e. everybody). It revolves around the group’s consensus of the general economy. It’s party time, enjoy yourself. The stock market seems to be the place to be and everyone is there. It's a little like the housing fiasco, 90% of the people in the market, have no idea of what they are doing—yet! Bernanke and Bush will hold your hand. Doesn't it just give you that warm and fuzzy feeling?

Confidence in the economy, that’s the name of the game, without it the game is over. The real game that is being played right now is a political one. Bush is a lame duck; the Democrats don’t want a solution to this mess right now. This is their ticket to getting elected; they will ride to the rescue. FDR gave us Social Security; I guess this time around we get Hillary and free health care.

Here is a cute little ditty from the Great Depression about then Secretary of the Treasury Andrew Mellon and President Hoover:

Mellon pulled the whistle,
Hoover rang the bell,
Wall Street gave the signal,
And the country went to hell

As for last month’s parties, The Jim Jones Kool Aid Party for Lenders was a real knockout. I wonder if Bernanke is going to wear a sorcerer’s costume to the Hedge Fund Halloween Meltdown Party that is underway? He’s going to have to pull more than a Greenspan out of his hat.