Why A Solution Escapes Us

Here is a Link to a reality that is little appreciated let alone comprehended. It is a rather long winded piece. To quote the articles main thesis:

The Misconception: When your beliefs are challenged with facts, you alter your opinions and incorporate the new information into your thinking.

The Truth: When your deepest convictions are challenged by contradictory evidence, your beliefs get stronger.

If you have ever been in a three hour discussions over several beers, you’ll know what I mean. By the end of the night, both of you are more ensconced in your personal beliefs. I use to enter into these discussions figuring that I could change the way people think, and by the end of the night, nothing had changed, but I hadn’t realized that. I’d figured that I had moved them somewhat. Now I know different. Don’t think for one minute that any argument you have, will ever change another person’s opinions, it will only push them to reaffirm and embrace their deep down beliefs.

My grandfather told me way back that discussions around politics and religion were a waste of time, you weren’t going to change anyone’s mind and I tend to agree with him now.

For politics, Congress comes to mind. There is no common ground anymore. Discussions seem to be rally around the flag parties. No mater whose talking, there is a flag behind them. Kind of reminds you of the Nazi party, with flags everywhere. Of course their mission statement was “Let’s get patriotic and kill someone.” It worked great, the three beer arguments just disappeared. If you weren’t paying attention you ended up on a cremation list for the following week.

With religion, the idea that a religious body can preach death and destruction to infidels runs against the grain of decency of everyone in the United States. Of course Allah’s 60 virgins as a reward, is worth it if you buy the whole package. It just goes to show that you can pimp virgins in the afterlife and have takers grabbing a number and dying to wait in line—maybe dying after a wait in line.

What we are looking at, is a world ready for war. Arguing isn’t going to cut it; people are willing to die to convey their beliefs on the assumption that the other party isn’t that gung-ho. The Funny thing is, both sides have no concept of how it will end.

What we need to examine, is the fact that just about everyone up to now, has been getting what they want out of life without compromising their beliefs. That is beginning to change. The economy has been thrown into a dumpster. And if you think about it, people with money can afford to have morals and scruples; lose your wealth and you’ll find how unaffordable principles and ideals are. Political beliefs and moral concepts do not feed a family. We can see the effects of that in the Middle East right now.

The Fall and Rise of Greece

Greece is in the middle of political turmoil. It has to move in 4 different directions at once; cut spending, cut benefits, increase taxes, and borrow from the IMF.

The population as a whole has nowhere to turn with all of the political rhetoric, and posturing. Any faith they have had in their Democratic institutions, is gone. In the coming weeks, look for a military takeover of the country.

This would solve all of their problems. Repudiate the debt, go off the Euro, and eliminate any government obligations to present retirees. They will get Greece back to work. The youth will be employed in the military, and since the debts will be gone, reasonable life can begin anew. It’s a little like Iceland, but in this case, it will revolve around military, not civilian rule. With control of the currency, they would be able to offer some sort of retirement benefits to the old, but don’t look for those sacred government pensions of before. You can be nice to old people, but they are too old to do any real harm without the right to vote. Greece will solve its problems and the outside world will not like it.

The IMF and the Federal Reserve think that they can increase world debt and solve the world’s financial problems. They have tied the hands of the politicians; elected officials will be the scape goats for the public anger.

No European country is paying any real money to fix this mess. A dictator will clear out the smoke and mirrors and offer immediate results. For a Greek to wake up and find out that all of their debts are gone, now that’s a bank holiday! Look for a new Greece; it’s a solution that will work for their country. Meanwhile Tim and Ben (the unofficial heads of the IMF) will be prescribing Epsom salt enemas for the rest of the PIIGS and moving them closer to the fan.

The DOWnward Slide

The Dow is at 11000 and its value represents the increase in value from way back in 1898, when the DJIA was started. It is a great little indicator; it gives the investor some perspective on where he has been and how far he has come. There is one major problem; the index has lost all perspective. It’s up and down movement don’t display current gains and losses; they reflect the historic gains and losses from when the average started.

A little understood concept, stocks bought and sold on Wall Street have nothing to do with the companies that own them. If an investor buys IBM stock, IBM doesn’t give a damn about the transaction. Upon the investors purchase, the transfer agent (another process) notifies IBM that there has been a transfer of ownership of shares to someone new. IBM makes a note that they have a new owner with an address to pay dividends to and also send proxy voting ballots when necessary. Of course if you buy 10 million shares, that’s a horse of different color.

At the present dividend rates, the Dow 30 Stocks are priced well and support their dividend rates. This is their only link to the real world. Stocks out there that pay no dividend are not linked to anything other than the greater fool theory. The South Sea Company bubble of the 1700’s reminds me of Google today (fabulous riches awaited the “well informed” investor).

Where is the money made on Wall Street? It’s in commissions for buying and selling. So a high volume day is one that generates lots of earnings (there is a buy and sell commission for every trade). The question everyone asks on Wall Street is; “How do you make a million dollars in the market?” The answer still is, “Start with two million dollars.”

What will happen to our market in the future? Probably it will be similar to what happened to Japan; their market went from a high of 39,000 in December of 1989 to 8,500 today. It took twenty years, to get there.

When times are tough, there comes the need to raise money for survival. The natural instinct with financial investments is to sell the good stuff and keep the dogs—in the hope they will come back. Of course when things get real bad, everything gets doggy. All of our retirement fund managers are doing just that, holding on to the dogs. It’s the only way for a manager to preserve his job. Sell and you will have nothing left to manage. Investors will move to "better performing funds."

Have you ever noticed that people run out of money very suddenly and become bankrupt (Bernie Madoff comes to mind)? In reality, it is a very slow process that reaches a point to where the individual gives up—that’s the sudden part of it. They really made no mistakes, it’s just that the financial rules changed over time and they didn’t adjust accordingly. They expected the old rules to hold firm.

How will this all end? The stock market is just like the real estate market. With one minor difference, when your neighbor sells his stock, it determines the present value of yours. There is no jingle mail with stocks. Watch for a big drop in stocks not supported by a dividend or ones that cut their dividend.

Of course the downward slide of your stock equity in non dividend stocks will be invisible. The Dow 30 will be untouched. Everyone is investing in exotic trades with more zing (index funds come to mind).

Bernanke and Geithner claim the damage from the PIIGS has been contained while the Treasury is paying zero interest in spite of the 8% inflation rate. This financial Ponzi scheme is worse than the housing crisis back in 2006. It's a little like using a hooker as a last chance sperm donor; it kind of works for all the wrong reasons.

The stock and bond markets are the last game in town, gather 'round and faites vos jeux.

Things Are Getting Better?

The NY Times ran the following in Monday's paper

US Postal Service Nearing Default as Losses Mount

The United States Postal Service has long lived on the financial edge, but it has never been as close to the precipice as it is today: the agency is so low on cash that it will not be able to make a $5.5 billion payment due this month and may have to shut down entirely this winter unless Congress takes emergency action to stabilize its finances.

“Our situation is extremely serious,” the postmaster general, Patrick R. Donahoe, said in an interview. “If Congress doesn’t act, we will default.”

In recent weeks, Mr. Donahoe has been pushing a series of painful cost-cutting measures to erase the agency’s deficit, which will reach $9.2 billion this fiscal year. They include eliminating Saturday mail delivery, closing up to 3,700 postal locations and laying off 120,000 workers — nearly one-fifth of the agency’s work force — despite a no-layoffs clause in the unions’ contracts.

The idea of laying off 120,000 workers, closing 3,700 locations and eliminate Saturday delivery kind of makes you wonder. If there is a light at the end of the tunnel, what is it, another train? Congress is expected to fix it? I doubt it! This is the first time, in my lifetime, I can remember reading about something so dismal being suggested as a solution. The Post Office’s problems are directly related to the success of the Internet; email vs snail mail.

On Thursday President Obama will address us on jobs. I’m not sure what he will say. The Postal Service is an American institution, and needs our support like it or not. Government sponsored entities like Fannie and Freddie need to be cut off at the knees. Choices have to be made. And remember, an awful lot of people in California, haven’t made a house payment in two years. It must be nice to be so poor, to be that rich; "Let’s go to the Bahamas this year,Fannie Mae is paying."

The Financial Storm Brewing

The US budget is 3 trillion dollars (I rounded the numbers to keep it simple). We have 300 million in population. Divide the population into the budget and we get a tax bill of $10,000 per person. Through taxes this year, we raised 1.5 trillion, so there is $5,000 loan per person being spent and added to the national debt for each and every one of us. Divide 300 million into the national debt and everyone owes $47,000. So a family of four owes 200K, and will have to pay the interest, but that's another story.

The neat thing about the National debt is that it is inheritable. It’s a weird concept, you die and a newborn somewhere in the US takes over your balance owed ---and you thought Congress didn't know what they were doing. We like to envision our passing where the kids get our assets, and the banks get to fight over our debts --- Not a chance!

Money in the bank is paying zero interest, but at the same time, Gold has gone from $1,000 to $2,000. The pundits suggest that silver and gold coinage is not necessary in today’s world. Of course if you go back 100 years, all of our debts were payable in gold and silver. In 1965 our silver currency was worth more melted down and disappeared from circulation. In 1982 the mint stopped producing copper pennies. The copper in the penny was worth more than its face value. We now have zinc, copper clad pennies. The words "deadbeat superpower" come to mind for some reason. The funny thing about gold and silver, they are a universal currency without a border or the need for a banker.

In 2006 everyone was buying houses with no money down with an 80/20 25/5 interest only loan with no PMI. Today, it is difficult to qualify for a home loan even with a large down payment. Plus the investment qualities of home ownership have evaporated. On top of that, everyone that ever dreamed of owning a home got one; and now they don’t know what to do with it. Real estate is going nowhere, which is kind of an understatement, unless its a mobile home.

A peculiar thing about real estate statistics is that when the market tanks, the average median sale price of housing tends to increase. What happens here, is that the rich buy houses when they feel like it. On the other hand, working stiffs with a poor credit scores can’t even get in the bank door to negotiate a loan. It is the low price homes sales in a good market that drag the median price down. Say normal sales are 10 starter homes to every high priced one. In bad times, the ratio could drop to 2 to 1. The new data would show prices are increasing when in actuality they're not; the number of low price homes in the data has dropped dramatically.

Politicians are commenting about the possibility of a double dip recession. Is the double dip reference, a car salesmen close? Accepting as fact; we have a chance of going back into a recession, implies we've bought the concept, that things have gotten better when they haven’t. The wheels were kicked off of the financial sector back in 2008 and it is not getting better.

We could be in the eye of a financial hurricane. The disaster hits and then calm and sunlight—and a sigh of relief. And then . . . . . . . that monster from your childhood years, that lurked under your bed or in your closet . . . . . . . I think it’s back, you can smell the fear in the air.

Government Intervention Is Not A Solution

Election time is approaching (next year). People running for office are pointing out that Obama has not produced enough new jobs for the unemployed. Voting for President is kind of like buying a washer and dryer and expecting the salesman to show up every Saturday to do your laundry.

This whole mess started with a housing boom. I remember back in 1998 selling real estate. We would prequalify buyers before we even showed them a house. If you didn’t have a down payment, your quest for a home went no further. Later, the phrase “fog a mirror “ became popular. When it all collapsed, government stepped in to keep the banks solvent.

As the housing boom took off, there was plenty of employment for everyone and the pay was good. The country was producing more homes than they could consume in 10 years. Everyone that wanted a home had one (or two), with the thought of buying another. Government gleefully raked in the additional taxes created by the economic boom.

Then the party stopped. How was government suppose to pick up the slack? There are no new additional taxes coming in. Tax payments into the government are decreasing and payments out are increasing.

The economic issues we face today stem from the previous mis-allocation of resources. We blindly built and financed too many homes in the name of greed. On top of that, Congress has turned a blind eye to the fiscal bubble created over time with entitlements. Common sense suggests that the debt crisis needs fixing now, but it always gets put off, until after the next election.

We have two real problems, unemployment which is the result of the housing crash. And we have an entitlement bubble that has lead to a crisis over the national debt. In order to stimulate job creation, we need to cut taxes. In order to cover entitlements, we need to raise taxes. If you can’t do either, then it’s time to print more money. Are we rich yet? As the gold bugs have pointed out, you can’t print gold. If you are retired living on a fixed income, you’ll come to find out that the government can’t print food or medicine either.

So when you hear a politician say vote for me, I can create more jobs, he’s not lying; if he wins, he gets a job. Ask yourself one question: Do we really need more government employees? Maybe if we cut government paychecks in half, the problem would solve itself. We could tolerate an inefficient bureaucracy better if we had to pay a lot less for it.

Bernanke the Wizard

Bernanke in remarks to Congress said that he would keep interest rates real low for the next two years. OK, tell me how? The only way to accomplish that is to buy every bond presented for sale on the resale market at full price. I wouldn’t pay full price for anything in this economy, it is counter intuitive. Every banker in town will queue up to the Federal Reserve to unload their dog eared bonds at full price.

People point to Japan over the last 20 years with super low interest rates, but the real game was obfuscated by international trading. The Japanese people were getting zero interest for their deposits but the country’s bankers were buying US Treasuries. These bonds were paying 7 to 8 percent so in actuality, we were subsidizing the banks in Japan. And by God they were patient, we made them whole over a period of two decades. The interest paid help bail out their failing institutions. They loaned us all of their savings for 20 years and we spent every dime. Of course, that’s another story.

Where do people want to put their money now? If you are super rich, it's in T bills. The money is insured by the full faith and credit of the US government. They are not worried about the return on their money, but the return of their money.

Bernanke has taken risk out of the market, all loans are guaranteed. The one market not under his control is stock market. It's looking a little sick lately. The real world is around here somewhere. Let's click some gold coins together and try to wake up--hopefully not in Kansas.

When You Thought It Couldn’t Get Any Worse.

Congress just passed the debt ceiling bill. In two years, they get to raise the debt ceiling 2.5 trillion dollars for which they promise to cut the budget by 2.5 trillion over 10 years. What would you say if a College professor announced that he had struck an agreement with the college chancellor; If allowed to molest two students now, he promises to cut down his future molestations by two students over the following 10 years. The analogy is rather obtuse, but Congress needs to stop borrowing. Has anyone accuse Congress of being responsible for inflation? Hell no! The remark “We have always had inflation” sounds more like the punch line to a blond joke. You can’t lose an election pumping printed dollars into the economy.

This increase in the debt ceiling was kind of like an 80 year old man successfully struggling to have a bowel movement. He’s happy, but nobody else knows why, and tomorrow he faces the same problem all over again.

Let’s look one year down the road. Figure a 20 to 40% reduction in taxes collected this year. Of course the States are just doing peachy-keen; California is going to have to start growing pot just to pay their bills. People aren’t buying anything on credit; they are too busy paying off their cards with 20 to 30 percent interest rates. Figure the Federal government will pay out 20 to 30 percent more in benefits next year in unemployment, SSI and other goodies. What does that leave Congress to cut? Put a different way, you have two slices of pie and you need three.

Congress is probably confused about our new bond rating of double A. A triple D is something they can get their hands around; unfortunately credit ratings have little to do with bra sizes.

Monday things may start to deteriorate. Greece is in the cross-hairs; the country is about to implode. Not much of a problem with that, but investors everywhere bought insurance on the impending Greek collapse. The trouble is, the insurance isn’t going to pay; too many policies were sold on that event. From here, insurance on future events could fall apart (Google “Panic 1907 Bucket Shops”). This 50 trillion dollar betting parlor has been writing business worldwide. “Trimming the Hedges” on Wall Street, in the following weeks will not be referring to yard work.

The government references to a possible future double dip recession is to keep everyone from panicking. Yesterday, someone stated that our present housing crisis has surpassed that of the Great Depression. If you read between the lines, they are passing out hand baskets and we have just won a free trip to nowhere or somewhere thereabout.

Things are bad and far worse than any recession of record. Who are we fooling when Congress farts into a bag and claims to have solved our financial problems? People are not stupid, the trouble is, they will all arrive at the same conclusion at the same point in time. This could be shipwreck-week on Wall Street; where everyone tries to sneak for the exits (sssh--don’t tell anyone, it’s a secret).

Bonds, A Future Investment Opportunity

Our bond market could offer some investment opportunities in the coming year if the Tea Party has its way. So here is a little insight in understanding the mechanics of bonds (as usual, I might get shot for over simplification).

If we were to buy a 30 year $10,000 bond at issue, at par, at an interest rate of 4.50% it would pay $450 each and every year for 30 years. Next year, suppose that interest rates jumped to 9%. Now if you were to buy a 10k bond at issue, it would pay $900 per year. That is double the interest rate of the bond bought the year before.

So if you are fleet of foot, you think, let’s sell the bond only paying 4.50%. Well guess what, the only bid you will get, will be for $5,000. It takes two old bonds to pay the same interest as one new bond. If you hold the lower paying bond to maturity, you will get your full 10k, but in the meantime, the newer bond by comparison paid twice the interest.

Several things affect the interest rate on a bond, the risk, and the length of the contract and market news. Another thing to consider is how low are interest rates? And will they go any lower Once you get to a yield of 3%, you can’t go much lower, but from there your risk of the rate going higher are almost a sure bet. Buying a 20 year Greek bond paying 33% interest means you get your investment back in 3 years (I'm lying, you're being robbed). The issuers of the bond are not paying that interest rate; it is the bond holders discounting the price, trying to unload a hot potato.

If we were to have a liquidity crisis, bonds offered for sale,would have few buyers, especially if they were small company bonds. As bonds prices drop, the interest rate paid, goes up.

Here is where the money is to be made. For example, a person purchases a 30 year 10K bond at issue with a 3% coupon, purchase price $10,000. Let’s figure that interest rates jump to 12% and that person needs to raise cash fast and decides to sell that 10K bond. The market would discount the bond to $2,500. That's the bond to buy. The new buyer gets 12% interest ($300) on his $2,500 investment. At maturity in 30 years, the bond pays $10,000, a capital gain of $7,500 on a $2,500 investment. The potential exists for higher rates; 12% though could be on the high side.

So as a rule of thumb with long term bonds, if interest rates double, the current value of the bond drops 50 percent. That could be the opportunity to take dollars out of the bank and buy bonds. Presently, interest rates are too low; risk and inflation have not been properly priced into rates. With the current budget crisis, the bond market is like a sleeping dragon---a loud Tea Party could wake it up.

As a side note of Interest

I have a sitemeter at the bottom of my blog and it gives me info on my viewers. I clicked on this one viewer in Washington DC and got a bit of a surprise, I just had to take a picture. Welcome to my blog whoever you are. Very few people use Apple computers.

Freeze The Debt Ceiling

Why raise the national debt level? Congress is not going to tax everyone more to make up the difference. It just gets put on bar tab, to be paid at a later date, someday (200 years from now). The phrase “Kicking the can down the road,” is the new euphemism in town. Reality is not about raising the debt ceiling; it’s about keeping the punch bowl full and the party going.

If Congress doesn’t increase the debt ceiling, our government has to face reality. You can wish, but if you don’t have the cash, it is only a dream. Our dreaming is over, reality is a necessary event. Below is a pic from from my blog dated 4/6/08 about bubbles, the big one is still there.


Of course, there is one item that needs to be considered. The Federal Reserve could be sitting on a giant Ponzi scheme that is invisible. Technically they give cash to banks and companies like AIG for collateral. So it is a zero sum game if the Fed sells the collateral (in theory)(but it could be worthless).The US government owns all of Fannie and Freddie’s real estate. The underwater home owners now hand the keys back to the tax payer. An extra 6 trillion hidden here would be a surprise that could change the color of an IRA fund manager’s underwear.

Obama the other day was pontifying “Raise taxes on the rich and rewrite the tax code to lower everyone’s taxes.” ---Sounds like a religious miracle in progress. How can you do both? The phrase “Used Car Salesman” comes to mind. Obama reminds me of the guy pimping his wife for drinking money. He comes home after partying and gets mad when his wife offers him the same rates everyone else paid.

What is happening in Greece is a little different. If they issued 3 percent long term bonds, these are probably trading for about 15 cents on the dollar. So if the IMF went in and bought 100 billion of them, it might cost them 15 billion face amount. But they could turn around and gift them back to Greece at 30 billion when they mature. It’s a little like your home going up for auction for nonpayment and your brother-in-law buys the place for peanuts and lets you live in it with the agreement that you pay him back. It keeps his sister happy and the jerk she married, on a leash.

The Congressional mentality, is to borrow until we can’t afford to pay the interest on the debt. That concept reminds of the two boys that were warned of the evils of masturbation, they were told it caused blindness. The one kid turned to the other and said, "Lets do it until we need to wear glasses." The real discussion right now revolves around serious cuts during the rest of Obama’s Presidency and it doesn't look like there are any. These proposed 10 year plans,are an euphemism for "Not on my watch."

The debt limit should be frozen where it is. Let’s stop this madness now. The Geithner claim that our debt rating will be hurt is pure hog wash. Our government debt is the benchmark for the rest of the world’s securities. Raising the Debt Limit allows the Treasury to be able to sell to the Federal Reserve that extra trillion the government doesn't need yet. Bernanke (the Fed) will buy Treasuries in order to keep interest rate artificially low. The neat thing about the transaction, the Federal Reserve returns back to the Treasury the dividends paid by the Treasury on the bonds held by the Federal Reserve. These purchases keep rates artificially low. Thus the bills purchased and held by the Fed cost the Treasury nothing.

Refusing to raise the debt limit, doesn’t change the final outcome. It’s just going to happen sooner, rather than two years from now. Our government is broke. Without the "New Money," the Fed cannot keep interest rates low by buying Treasuries, rates will have to rise. Greenspan and Bernanke will take the blame for this when the history books are written. They offered a flawed painless solution to a very painful problem. Unfortunately economists are more like coroners; they are better at diagnosing what went wrong and why, after the fact.

To a majority of Americans "The Economy" is just a concept, little understood. 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.