May 21, 2009
Jay Steele sends along a sell signal and sends along this link.
http://www.stockcharts.com/charts/indices/McSumNASD.html
Rich Kolon sends along this link to 'Jesus of Suburbia', by James Quinn of FinancialSense.Com. I quote it below.
...Neither foreclosure counseling, foreclosure moratoriums or magic pixie dust will keep housing prices from completing their roundtrip back to 2000 levels. Bubbles never burst halfway. They burst completely and the mess spreads everywhere.
...After reaching peak values, Japanese home prices declined by an average of 40%. In the country's largest cities, the declines were worse, averaging 65%. Homes in Tokyo lost 80% of their value and are still on the downward slide to this day. National home prices in Japan were $125,000 in 1985. Twenty years later home prices are again at or near the $125,000 level. If the U.S. follows this path, median home prices will be $143,600 in 2020, the same level as 2000. You won't hear any 'experts' making this prediction, because the economic implications would be too dire. A nice dose of runaway inflation could solve this dilemma. Are you up for it?
...The executives of Countrywide, Indy Mac, Washington Mutual, among others committed this fraud on a gigantic scale. CEOs, Vice Presidents, mortgage brokers, appraisers, and loan officers all knew they were committing fraud. Were these people raised by moral parents or Satan? None of them are in jail. How could trillions be lost and no one goes to jail? Angelo Mozilo is working on his tan on a beach in the Caribbean enjoying the $140 million he sucked out of Countrywide, when he should be in prison worrying what will happen during his next shower.
...'Geithner is covering up. Just like Paulson did before him. Geithner is publicly saying that it's going to take $2 trillion - a trillion is a thousand billion - $2 trillion taxpayer dollars to deal with this problem. But they're allowing all the banks to report that they're not only solvent, but fully capitalized. Both statements can't be true. It can't be that they need $2 trillion, because they have massive losses, and that they're fine. These are all people who have failed. Paulson failed, Geithner failed. They were all promoted because they failed. AIG was being used secretly to bail out favored banks like UBS and like Goldman Sachs. Secretary Paulson's firm, that he had come from being CEO. It got the largest amount of money, $12.9 billion. And they didn't want us to know that. And it was only Congressional pressure, and not Congressional pressure, by the way, on Geithner, but Congressional pressure on AIG'"
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About the banks
Banks recently posted surprisingly good numbers. How? They were allowed to relax the mark to market rule, for one. They were allowed to use the TARP monies in ways that seemed to show a profit. How could companies like Bank of America and Citigroup look so good so quickly? Well folks it is just looks. Reality is another thing. I have always said that while figures don't lie, bankers sure can figure. That so many investors took the bank numbers on faith is a good thing for the banks. They were going to have to raise money. It is better to do that in an up market than in a down one. Perhaps luck had little to do with it. This rally is too much too soon. There is a lot more bad news to come. The reduction of GM and Chrysler dealerships alone is horrible news for the jobless rate. Take each dealership and multiply by 60, and that's how many lost their jobs from these moves. Then multiply by three and that is the total effect on the general economy. Ouch!
My contacts at J.P. Morgan and Wells Fargo report that they never did want the TARP, and have repeatedly offered to pay it back. Not only did the Feds reject the idea of taking the monies back, they warned the banks that any payback that happened too soon would be punished by several methods which included loss of their FDIC insurance. That's some heavy duty arm twisting.
The stress tests were also a joke. All were treated the same even though each of the big boys is a very different animal than from the rest. They make their profits in very different ways.
How indeed could the banks be just fine now...but need $2 trillion to cover their losses?
How can banks be just fine now but report in the same breath that it is now much more difficult to find 'qualified' lenders. Why was it not difficult to find them three years ago in the go-go market? What has changed? Well, the lending standards of the banks have changed. Three years ago banks were handing out no-down liar's loans to warm bodies with the expectation that the borrowers would only be able to make the payments for the first year... and the bank would get the houses back and they would be worth more in twelve months.
Now the banks want borrowers to be qualified (as being able to make payments for many years into the future), and the banks want twenty percent down on a house. So, they get to change the rules and then get to complain that a lot fewer people qualify now. And oh yeah, even though commercial loans are down, and lot less people qualify for house loans, the banks are doing just fine and their profits are rebounding...and oh yeah they're going to need another $2 trillion. Confused by all this? Geithner is a banker. His partner in crime is Helicopter Ben. And bankers (and world class economists) can still figure.
May 10, 2009
Here are two links. The first is from Rich Kolon and is titled 'The Big Lie: Stress Test Optimism Just Wall St. Propaganda, Former Bank Regulator Says', on Yahoo.Com.
The next is a simple article that barely mentions what could be a huge problem going into the future. Here is a link to ' Can Gov't-Fiat-UAW Trio Save Chrysler?', by Scott Stoddard on Investors.Com.
The article barely makes mention of the fact that the Chrysler Bond holders got their arms twisted to take the deal by none other than the President of the United States. This is serious. In a bankruptcy the bondholders have senior claims to the assets of the corporation. But the bond holders were forced to take $2 billion for $6.9 billion in bonds. What a deal.
One of the bond holders was the Oppenheimer Fund. Do you suppose, after getting beaten up that badly, the Oppenheimer folks will be rushing out to buy corporate bonds now? Why would anyone want to buy corporate debt in U.S. corporations now that the 'gummit' has stuck its very large finger into the pot...now that the President and crew have ridden roughshod over corporation laws that are older than this country? The whole point of bonds was that the lender had a guarantee of being able to recover all or most of his original capital.
When I was 21 years old and living in the dorm at the University of Wyoming, my neighbors were two freshmen wrestlers. These guys were big into chew, and would spit all week into a three pound coffee can. On Friday night they would go out and consume all the beer and pizza their bellies would hold. Then they would return to the dorm and throw up the contents of their stomachs all over the floor of the common bathroom. Since maid service did not work on weekends, the rest of us would have to use the soiled bathroom that weekend, gingerly picking our way through the pepperoni. Invariably, the first wrestler through the door of the room next door would kick over the can of spit, and the next guy in would slip in it and fall down.
The Obama administration makes a lot of noise about restoring confidence in the markets. With the stress test it has announced that ten banks will be needing to raise billions in capital. It seems to me that the administration has already kicked the can over. We have only to wait now for those banks to step into the spit.
...Oh yeah, a side note: When did government ever need to do a much publicized stress test of the banks when the economy was doing well? What does the fact that this administration feels the need to do one tell you? It's not a good sign, folks. It is a frightening one. The administration is scared.
May 7, 2009
Here are two links to articles written by Mr. Practical of Minyanville.Com. 1. 'The Buying Stampede: Like Lemmings Over a Cliff?' I quote it below.
Even I know what that means: The money coming into the market isn't picking stocks on fundamentals, etc. It just wants to be in stocks."
...Debt issued by the government is soaring while debt issued by corporations is crashing. Notice that this is the one hole that is probably too big for the Fed to stick its finger in to plug. Corporations, due to lower cash flows, cannot issue debt at high Baa rates (the highest since the early 1990s) because the cost of capital is too high.
...Who knows where the rally stops, if it does? But the marginal buyer is taking higher and higher risk. The economy and the markets are a physical system, which hasn't changed for the better. Sure, you can get a low rate mortgage now but you better be able to put 20% down. That is reality.
Maybe the Fed never takes their fingers out of the dike and just destroys the currency; a likely scenario. But then your stocks will go up but be worth nothing in dollars [I think the author meant stocks will be worth nothing in real buying power]. But real lending will only start when real savers (private capital) sees real value at the right risk. That occurs at lower prices."
Here is a link to CNBC, to an interview Maria Bartaromo did with the CEO of XTO energy. Note in particular what he says about what natural gas prices: "gas prices will double by this time next year."
Finally, here is a link to a page with several great article on the future of capitalism.
May 6, 2009
Here are two links. The first is to 'Ten Signs That This Is Not an Economic Recovery' by Daniel Englander of Minyanville.Com. I quote below.
...As companies scramble to raise desperately needed capital, share prices are going up, not down. Today the New York Times reports Bank of America (BAC) needs over $30 billion of capital (either fresh capital or converting existing Pref shares, either of which massively dilutes common holders). The reaction? Stock up about 10%. Every major REIT has cut its dividend, is paying all the dividend it can in stock versus cash, and has done massive capital raises. Most REITS are up 50% over the past 2 months."
The next link is to an Eliot Wave technical artcle titled 'Has the S&P Topped?', by Sushil Kedia of Minyanville.Com.
May 3, 2009
The View from the Top
Nowhere else in the U.S. is the economy as good as it is in my state of Wyoming. So here is how it looks from the economic 'top'. Our growth has gone to nothing. It is not negative. We are not losing jobs. But we are not adding any either.
There is still drilling going on for Natural Gas. But oil drilling has been dead for months. Construction is still going on, but local contractors are complaining about the contractors invading from Colorado, doing the work for cost just to keep their hands busy.
C Y Avenue is the main drag on the west side of Casper. There are four empty commercial buildings on C Y. Two of those are restaurants. The empty McDonald's building on C Y was torn down this week (McDonalds built a new building further out).
I would describe the economy of Casper as on the edge of slipping into shrinkage.
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A long conversation with Lar on Saturday informed me that problems are brewing in the internet world. Lar tells me that 60 percent of all internet usage used to be folks downloading UTube. Now he says that internet backbone usage is rising by 60 percent per month due to IPTV. He says that now he can buy (he's in the business) a meg of bandwidth for a tenth of what it cost him in 1998. He says that the price was too high then and is way too low right now. He estimates that, even with the carrying capacity being added to the backbone, there will be no more empty bandwidth anywhere in two years and that prices are going to soar.
April 16, 2009
Rich Kolon sends a link to 'New Bubbles Brewing in Shanghai and Wall Street', by Gary Dorsch of FinancialSense.Com. It is a very interesting read. I quote it below.
Former Fed chief 'Easy' Al Greenspan and his prototype, Ben 'Bubbles' Bernanke, hold the view that deliberate bubble-bursting is something between impossible and dangerous, and thus, is best avoided. The Fed is inherently opposed to hiking interest rates, to prevent bubbles from arising in the first place. Instead, the Fed allows stock market bubbles to inflate into the stratosphere, and patiently waits for the bubbles to burst under their own weight. Afterwards, the Fed moves to cushion the meltdown, by slashing interest rates and flooding the banking system with liquidity, - the infamous Bernanke / Greenspan Put.
...Central bankers inflate bubbles in order to give households a fresh sense of wealth, encouraging them to borrow and spend more, and businesses to boost investments. The strategy is built around the massive expansion of the money supply. There are generally two types of bubbles, firstly, speculative excesses fueled by irresponsible bank lending. The second type of asset bubble is one in which bank lending plays a minor or no role at all, - usually related to the introduction of new technology or rapid industrialization that promises untold riches.
... In fact, the spectacular growth of China might not have been possible without the massive expansion of household debt in the United States. But this growth of debt, which sustained the US-economy and global demand for 15-years, is de-leveraging, and morphing into the biggest banking crisis since the 1930’s. As a result, China's vast export machine is grinding to a halt. Without the government's stimulus measures, the predicted growth rate for China would be closer to 2% this year."
April 13, 2009
Here is a link to 'More Meltdown', by Alan Abelson of Barrons.Com. I quote it below.
...Indeed, if anything, this whirlwind activity by the administration's economic team, this profusion of blueprints for recovery, so many of which are rapidly discarded or revised or embroidered, by all rights should be giving widows and orphans the jitters rather than prompting them to take the plunge. For it smacks of confusion or panic or both."
April 10, 2009
Rich Kolon sent along the link to this wonderful commentary: 'Nothing', by Terry Coxon of FinancialSense.Com. I quote it below.
Yes, we can. But we won't, because the decisions about our wealth and our freedom are being made by career politicians, for whom stepping aside is the only truly unacceptable plan. Nonetheless, even though the idea of government doing nothing in the face of credit crisis, bank insolvencies, and recession has been reduced to a hypothetical, such a policy deserves a little exploring, since it can tell us something about where all the big-dollar solutions coming out of Washington are likely to lead.
Untethered from the gold standard, the Federal Reserve was free to create new dollars whenever it saw fit. But the policy it drifted into wasn't steady inflation, day in and day out, it was rescue inflation. The Fed would step up the expansion of the money supply whenever it saw a risk of widespread defaults in credit markets. The unintended effect was to train both lenders and borrowers, by repeatedly rescuing them from damaging defaults, to appraise financial risk unrealistically and to regard what is in fact a source of danger as a manageable nuisance. It made the managers of financial institutions functionally crazy, and the longer rescue inflation continued, the worse they got. (When you read about investment bankers running a business with 30-to-1 leverage and tell yourself, 'Those people must be crazy,' you’ve got it about right. But they weren't born that way. They were trained.)
... So much for the hypothetical. Instead, with all the government efforts to make things right, we have:
April 7, 2009
There is a lot of good reading out there. Here are some links.
'Why this will not be a normal cyclical recovery', by Roger Altman on Financial Times.Com. I quote below.
None of that happened here. Instead, we saw a housing and credit market collapse that caused enormous losses among households and banks. The result was a steep drop in discretionary consumer spending and a halt to lending. To see why recovery will be slow, we can look at the balance sheet damage. For households, net worth peaked in mid-2007 at $64,400bn (€47,750, £43,449bn) but fell to $51,500bn at the end of 2008, a swift 20 per cent fall. With average family income at $50,000, and falling in real terms since 2000, a 20 per cent drop in net worth is big – especially when household debt reached 130 per cent of income in 2008."
Sent by Ben Smith: 'Noise & The 10 Best Days', by Mebane Faber his own site. I quote below.
The author does a great job on the paper, although comes to the unfortunate conclusion that it is impossible to predict when these rare bad months will occur. I agree it is very hard to predict, but a simple timing model can help protect you nonetheless."
'Economy Falling Years Behind Full Speed', by Louis Uchitelle of the New York Times. I quote below.
Recovery from the current recession could be similarly sluggish. New occupants have to be found for empty stores. Factory owners who are hesitant to ramp up production will wait until they are sure of demand. Hiring the right people for an operation will take time. And imports, entering the country in ever greater quantities, will slow any expansion by siphoning sales from domestic producers."
'Bulls and Bears Remain on Collision Course', by Michael Kahn on Barrons.Com. I quote below.
Last month, a rally was a fairly high confidence call when so many technical factors, including momentum, sentiment and market breadth, were lining up. Now, with a 24% rally under its belt and resistance coming up soon, the evidence is not so clear."
'663,000 Jobs Lost, Jobless Rate 8.5% With More To Come', by Scott Stoddard on IBD. I quote below.
He sees the unemployment rate peaking at 9.5% in October, while gloomier projections expect it to top 10% sometime next year.
A broader jobless gauge that includes discouraged workers and involuntary part-time staff hit 15.6% from 9.1% a year earlier.
Labor revised up its January estimate of jobs lost by 86,000 to 741,000. February's decline was unrevised at 651,000.
Meanwhile, the Institute for Supply Management's nonmanufacturing index fell 0.8 point in March to 40.8, defying expectations for a small gain. Readings below 50 signal contraction."
March 30, 2009
The Orange Section Responds to Red and White D:
Securitization has a lot of nuance to it, but lets focus credit quality. t it isn't the whole story. There was a whole shadow system of credit derivatives created with zero oversight of any kind that was used to transfer risk so that more conservative borrowers would continue to fund paper. (I used to work in those markets and when I say zero oversight I mean zero. There were professional hedge funds who were literally "making up" accounting systems as they went along to handle their portfolios. Among other things this means they didn't know entirely what they were holding.) Part of our current malaise is that we have lost this shadow system and the credit that it was providing, especially to lower quality borrowers. PIMCO has estimated that this system made up something like 30% of the credit market before it folded.
Consider that ~30% of the available credit in the US Market just up and disappeared, most of that being credit for lower quality borrowers. On top of this the more traditional borrowers have gotten burned so they have tightened their standards. Put these two together and you see why we have a housing crisis. The poor balance sheet borrower has lost his primary means of getting capital and the remaining lenders are pinching their pennies. The American Consumer will likely need to go through some balance sheet recapitalization before the housing market can recover."
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Here are links to some good reads:
' Housing Market: No Bottom in Sight', by Fil Zucchi on Minyanville.Com.
' An Even Bigger Bite Out of GDP? ', by Jack Lavery on Minyanville.Com.
' Morgan Stanley Says Sell Best S&P 500 Rally Since ’38 (Update3)', by Nick Baker on Bloomberg.Com.
' Banks Starting to Walk Away on Foreclosures ', by Susan Saulny on NYTimes.Com.
March 29, 2009
This link to 'Trust your government? Make sure it doesn't cost you', by Avner Mandelman of the Globe and Mail, was sent by Keith. I quote it below.
Because U.S. Federal Reserve officials' job is to preserve the system, not your finances, money sucked into the market now and over the next month or two is money the Fed needs to prop up the system, and would do or say anything to get. You think this point is too obvious to mention? You may be surprised to learn – as I was – how few realize this. Most are sure that financial officials are always on their side; but of course they are not.
...But remember that today's Fed is the same Fed, and its optimistic forecasts should be seen in the same light – likely tendentious, rather than factual, like those rosy outlooks put out by dot-com underwriters in the late 1990s so that they could sell new dot-com shares. Just as you now know that the underwriters were working for the issuer, not you, so you must grasp that the Fed is working for the banks, not you."
March 28, 2009
Red and White D takes on some of the things recently said by the Orange Section.
I am sitting by a nice fire reading Orange Section's comments again....and again.
A quote:
'Another point of rebuttal is the massive mortgage industry and the debt securitization boom that took place in the same time frame as the Author's view of history. This industry was highly dependent on low interest rates to generate the volumes we saw in the earlier part of this decade. This seems to go directly against the author's hypothesis with regards to usury. It also runs opposite to his comments about interest income vs. principal income.' [I was glad that someone caught this flaw of logic.]
Flaw of logic?
What was it these folks were 'securitizing'? Cheap mortgages! Taking cheap money and looking for higher yields, as in higher interest rates, not to mention their delightful origination fees?
In business it's the top line that matters....revenue baby revenue.
Banks and mortgage brokers call them 'spreads' and 'fees' today. The bank boys were, and still are, looking for the best spread they can find. Mortgage brokers still love their fees.
Enforceable usury laws would have helped keep this under control. After the wild speculations of the 1920s with banks risking depositor's money to speculate on all kinds of things, regulators came up with some ideas.....some good, some not so good...designed to manage the risk taking activities of the bankers. I repeat....manage the risk taking activities of banks.
We canned the dollar's tie to gold in the '70s during a Republican ("Your president is not a crook" Nixon) administration.
In the early '80s, and then again the early '90s we canned the rules enacted in the early '30s, during both democratic and republican administrations. (We all get to share the blame equally!) The bankers showed up with Brink's trucks filled with cash....more than once and bought the best congress money could buy.
Now, all we have to do is paper and ink our way out of trouble.....if only the rest of the world will just trust us.......
'Trust me!...The check is in the mail'. And, we don't even have to print the green money with pictures of dead presidents on it.....as long as the fed clears the treasury's checks they can literally speak money into existence."
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Here are links to some good reads:
'Housing Recovery?' What Housing Recovery?, by Andrew Jeffrey on Minyanville.Com.
'What a Deal', by Mr. Practical on Minyanville.Com.
March 24, 2009
The Orange Section wrote some good comments I thought I would share. Any words of my own appear in brackets.
Those were great comments on Mr. Geoghegan. If I might offer a more pointed rebuttal:
Usury as a law was designed to prevent banks from charging abhorrent interest rates. Contrary to the author's point of view in the article these laws have long been usurped in modern finance. When I was taking Finance 101 in school in 1998 they talked about how these laws were essentially unenforceable. Yet, why do we not see such high interest rates? [I think the author was actually referring to high interest rates on credit cards, which is a kind of tax upon poor and the stupid. And I think our economy would benefit from some moderate limits on those rates.] The answer is competition. Why would a company like Berkshire Hathaway pay more than the lowest interest rate offered to it? No firm would do anything other than that. The same is true of people who manage their money wisely. They are not going to borrow at 20%+ if they can borrow at a cheaper rate. To do so would be madness.
Another point of rebuttal is the massive mortgage industry and the debt securitization boom that took place in the same time frame as the Author's view of history. This industry was highly dependent on low interest rates to generate the volumes we saw in the earlier part of this decade. This seems to go directly against the author's hypothesis with regards to usury. It also runs opposite to his comments about interest income vs. principal income. [I was glad that someone caught this flaw of logic.] In the case of Mortgages and securitization, actually all Debt securitization, the banks were not interested in either the principal or the income stream. They were interested in the fees for writing the credit.
This last point on fee income for financial firms is really important. In the last decade there was a rush of new financial firms being created. We same GMAC, Ford Motor Credit, John Deer Credit, GE Financial, etc. All of these outfits were writing credit and ultra low rate to their customers, then securitizing their debt and selling it on the open market. They were interested in the fees for origination. This was a source of profits in the early part of this decade as the Dot Com bubble burst. So the comments about 40% of profits were from Financial or financial related activities is highly misleading. I don't think anyone thinks of GE or Ford as a Bank.
Big Labor is hardly innocent in the last 30 years. I think you can make an extremely compelling case for a firm like General Motors to go into Chapter 11 in order to eliminate contracts and pensions plans that are not sustainable for the company in it's current state. Yet, the Government has opted to throw billions of dollars GM's way. Why? Because Big Labor runs a powerful political lobby and their man is in office. One really must question if the bailout was to the benefit of the GM shareholder or the GM union worker. Now instead of GM's management and shareholder's paying for inefficient contracts and benefits the American Taxpayer is picking up the tab.
It readily obvious that this author has not attended Business School or taken any classes in Credit Analysis or Money and Banking."
And here is another comment by the Orange Section.
He makes an interesting read, but he is obviously biased towards big labor. One question I have, why not look at the costs of doing business in this country as a manufacturing firm where you are capital and labor intensive vs. a service firm where you are not. On % basis how much extra cost does the heavy fist of government regulation inhibit the manufacturer vs. the Service firm. This is in part why the economy transitioned to service based in the 1980s. [Here, here.] Bill Gross has argued that there was another transition to a finance based economy in the early 2000s, which was driven by fee based income and a never ending appetite for debt in the domestic market. We are seeing the latter unravel now, but I fail to see how high rates had anything to do with it, especially when compared to faulty credit analysis and politically motivated lending at GSAs.
On a side note, the big Financials have been beaten up beyond belief in this market. Some of them have some questionable balance sheets, but their valuations are driven more by fear and media hysteria than anything else. There are some great opportunities to be had. Last week you could have purchases Wells Fargo for $8 a share. This week it is nearly $18 a share. Citigroup traded at $0.97 and now is at $3.10. These are once in a life time opportunities to buy blue chip stocks at bargain basement prices. A lot of people got very rich last week while the media was counting the woes of big finance."
And here is yet another commentary by the Orange Section.
The current administration depends on looking good to the public to survive much more so than the previous. None of it's current policies would stand the type of acid test a low approval rating President would have to go through. The Democrats know this and that is why they are allowing Obama to stay in campaign mode 3 months after his inauguration. Additionally, the current administration had peddled fear, especially of banking and the credit system as a means to gain approval for it's current direction.
An overlooked aspect of the Volcker Federal Reserve was that Reagan told Volcker to do what was needed to fix the economic issues. Only after this happened did we see the 12% Discount rate needed to whip inflation.
I have found the constant braying about banks not lending TARP funds to be humorous. The issue with the credit system is not that they won't lend money. The issue is that with more traditional or even loosened traditional standards the banks cannot find qualified borrowers to lend to. What really makes this a joke is the fact that every night the sitting President of the United States is on TV telling everyone the Economy sucks. Is it really such a stretch of common sense to think that someone who has achieved a credit score over 700 would not going be all that interested in borrowing money during troubled economic times? To be honest this attitude about borrowers and lenders speaks to a great dysfunction in terms of understanding the private economy amongst the current power in Washington. That is not a good thing.
On top of this, the population has been conditioned for 25+ years to think rising rates are bad for the stock market and therefore bad for business and, most importantly, bad for 401Ks. And people think the Federal Reserve is above politics. [I think that moderate, but higher interest rates by the FED would be beneficial. Super cheap FED rates helped kill savings. Only higher rates will get Americans saving, and having a healthier outlook for the future. Keeping interest rates too low for too long at this time in history just affirms how paniced the FED really is.]
Something is going to have to give, as I agree with your assessment that rising rates and letting the recession take hold is the best cure for our tough times. Let Chapter 11 do the work instead of the Tax Payer."
March 23, 2009
For today, here is a link to 'Mini Hyper-Inflation?' by Mr. Practical on Minyanville.Com. I quote it below. My own words are within brackets.
...The velocity of money is falling so rapidly (people trying to save money), that the Fed has had to try to counteract that by creating more. Mr. Bernanke apparently needs a course in logic. If people have just a little savings and are in fear that they won't have enough to retire, the more they can earn on investments, the more they'll be able to spend. Earning zero on investments means they'll have to spend less and save even more. The problem remains that interest rates are too low. [Here, here. This is what I have been saying for a while now: INTEREST RATES NEED TO GO UP.]
And one more point: if an inflationary monetary policy in a fiat system played an instrumental role in creating the fertile background for credit expansion and implosion, it's unlikely the same procedures will result in a cure. More likely, upon a weakening of the traction gained on this latest move, given high-powered monetary units account for only around 1% of total global liquidity, the conditions will be set for potentially a complete loss of confidence in the financial infrastructure and capital markets.[Negating the validity of contracts will, of course, not help confidence...oh sure my bank promises me 2.85 percent on my CD, but Congress could change that at any time.]
To break the cycle of delation what needs to be done is to actually raise interest rates and let markets (you and me investing our own money) correct the immense imbalances. This will quickly destroy bad debt (bad times), but it will much more quickly right the imbalances that the government seems to insist on making larger not smaller. Equity, which is really already worthless, would get wiped out in big banks." [And why do we still have these things that are too big to fail? Why aren't we breaking them up and making them smaller?]
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I shorted AAPL today, and bought SKF, SRS, and SIJ. |
March 22, 2009
Here are parts of two notes sent by Rich Kolon.
I would add to it that the shift of concern from principal repayment to large interest payments also resulted in lenders trying to repackage the loans for sale to others to pawn off the risk of non-payments to the pension funds, hedge funds, or others who sought 'yield', while the sellers of these derivatives sought sales bonus incentives."
And the second note:
The inflation of the money supply was already accomplished by the excess bonuses that were paid when the previous debts were repackaged and sold with corrupt risk ratings to other entities. Those created the asset bubbles that have since busted.
When the buyers tried to collect on these defaults, the sellers could not make good on their insurance promises. Plus the principal was lost on those debts. This in effect contracts the money supply. That's why we went into recession.
In addition, banks got into trouble and reduced new credit, which reduced the ability of new money being entered into the system.
So we have seen the deflationary effect of the asset bubble busts.
Now the Fed is trying to reflate the money supply by directly buying government debt.
The government will be taking this approach to tackle their future problems. So I fully expect that one day, the Fed will likely buy up ALL government debt to be able to restart at ZERO debt. That means the Fed will pay off every bond holder with printed money.
That will cause an explosion of inflation, since the debt holders will no longer have new treasury notes to replace the old ones, and instead will have to invest their money elsewhere.
Some will go overseas. Some will go into stocks. Some will go into houses. New assets bubbles will occur. Everyone else owed money will be shafted by the price inflation caused by old bond money spent on consumption.
The inflation will cause taxes to soar. However the costs of government for real goods and services will explode. But the government won't be able to hand the taxes all back out on their future obligations, such as social security or medicare.
Owning real assets will benefit investors before these events happen. But I can't rule out the possibility that the government may confiscate them. Or you may lose them thru wars that happen as nations try to confiscate other nations' wealth."
'No man's life, liberty or property are safe while the legislature is in session.' ...Judge Gideon J. Tucker.
I am worried, that as Cogress and the Administration go around fixing things, that they will end up destroying all belief in contract law. AIG is but the latest example of government overriding specific element of a contract between employer and employees. Keep it up boys and girls, and then let's see if anyone will want to buy your bonds.
It seems to me that the whole 'too big to fail' mentality slipped into the credit system in large, if unseen ways. The amount of underwritten debt now equals many many times the gross domestic product, thanks to credit default swaps and the like. The big bankers just thought the system was too big too fail. When it gets that large it is not only too big to unwind without casualties, it is also doomed to fail.
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I will be looking to short AAPL this next week, and to buy SKF, SRS, and SIJ. |
