Monthly Archives: November 2008

A sign of times to come?

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Sometimes your environment is a great tell of what to expect in the future.  All may look great, but beneath the surface lurks a silent disease.  Enough with the metaphors…

I was in line this morning grabbing a coffee when the person in front of me being wrung-up paused at his total bill of $15.00 and change.  He seemed startled at how expensive coffee and food was.  Then the cashier was asked to go through the prices of each item.  Not only did he get coffee, he also purchased some baked goods, which totaled the $15.00 and change plus tax.  What startled me is what happened next.  He asked for paper and pen and then wrote out line by line each purchase and then added them up.  The total was $14.00 and change, which gave him pause because the two didn’t match up.  However, sometimes we forget tax, which he did.

He was mainly unnerved by the cost of everything, and proceeded to apologize to everyone in line.  Personally, it wasn’t a big deal to me, and I felt for the man.  To add up every purchase signed to me that he no longer trusts anything to do with finance.  He remarked about not trusting banks, and I’m concluding that he has lost faith in the system.

I imagine this is happening all over the country, but many aren’t vocalizing it.  They are only thinking in their heads either I need to put something back, walk away, or make the purchase with a cringe.

The holiday season will be a difficult one for retailers.

History in the Making

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This is going to be short and sweet… We’ve broken the lows from 2003. It is very possible that we go much lower from here. We may get a bounce, but there seems to be a major lack of buyers. I wouldn’t be surprised to see a gap down tomorrow as all the people who weren’t watching the market today realize what happened and decide to sell first thing.

Frankly, we are now in uncharted territory. It seems as though we’ve corrected (in the US equity markets) the excesses from 2003 – Present, but that leave the bubble up to 2000 that was never allowed to correct due to the cheap money thrown around.

My fear is that we are only part way there. Remember in the movie Titanic when the ship started sinking. At first everything was calm and orderly. Eventually panic broke out as it started to go down and eventually broke in half. Have you seen panic yet? I sure haven’t. If this isn’t panic then imagine what is.

More soon.

The case for inflation

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The following are responses that Richard Maybury gave in an interview with Investor Insight.

He makes a case for the coming of a great inflation. We haven’t seen the beginning yet as we are still going through a process of de-leveraging.

–Article–

Obama is a boomer, and I think an understanding of the boomers is a valuable tool for seeing what is coming. Boomers were raised in government-controlled schools and colleges where they were taught Keynesian and socialist economics. Neither Keynesianism nor socialism contains the concept of malinvestment, meaning the distortions caused by the government injecting massive money into the economy. These two forces, the injection effect and malinvestment, are the foundation of the economic crisis, and I’ve never heard Mr. Obama or his advisors say anything about them.

Money responds to the law of supply and demand just as everything else does. When the supply of dollars goes up, the value of each individual dollar falls, and prices rise to compensate. That’s inflation. Inflation isn’t rising prices. Inflating the money supply causes rising prices.

As prices rise, people become poorer and they demand relief. The politicians stop injecting money, people have less to spend, and business slows down, often causing a recession. The shakeout can be very painful, depending on how long the inflation has lasted and how many new dollars have been injected into the economy.

The government has only two ways to finance its spending — taxes, and printing money. Seven years ago the White House and Congress decided to finance the war by printing dollars instead of raising taxes. According to the St. Louis Federal Reserve’s MZM measure of money supply, the number of dollars circulating in the US on 9-11 was $5.3 trillion, and now it’s $8.7 trillion.

What is generally overlooked is the fact that the Federal Reserve has been inflating the money supply almost without pause ever since the Fed was created 94 years ago. So, underpinning the most recent seven years of injections and malinvestment, we have the residual from the previous 87 years.

Remember that I said events will control Obama much more than Obama will control events. Ever since the Great Depression, the way the federal government has dealt with shakeouts has been by re-inflating. They halt recessions by expanding the money supply further, which stops the shakeout. But that leaves a lot of bad investments in place, and it also creates a lot more. Of course, the so-called rescue pushes the day of reckoning into the future.

The interview continues and he mentions that eventually as the reserve currency the United States will have to do something to regain support of the dollar. He proposes this will be done through a return to the dollar being backed by some basket of currencies. Something will have to be done if the dollar isn’t to be completely destroyed. The entire interview is worth the read. Here it is: Interview.

Retirees are a threat to the markets

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Retirees a threat… reading that sounds absurd to me. However, take a moment to think about it. Say I’ve been putting money into my retirement savings for many years and I’m about to retire. The general prescription for retirement accounts is a variety of approved funds, unless you’ve elected to go with a self-directed account. Last I checked most are down by 20% or more for the year.

Imagine being in your late 60′s and watch 20-40%+ of your wealth vanish. Whoa… what do you do?

1) Keep your money invested because you hope the balance will recover
2) Sell to get cash so at least you can survive the future

Regardless you will be selling as time marches on to fund your retirement. As the market continues its descent and people’s frustration and anxiety grows the propensity of panic will grow as well. People aren’t panicking yet. They are anxious, full of anxiety, and want help from the government or at least some accountability. Once the people still holding on just want cash then we will see a capitulation pushing all the indices down further. Will there be bear market rallies… YES! We have already seen many.

The chop over the past couple weeks is forming a bit of a channel as the bears and bulls fight it off. People wanting to enter the market long in hope of hitting the bottom only sell at a loss later when the market continues it primarily downward trend. I’d love to say there will be a major (SUSTAINABLE) rally, but look at all the economic news. Citi laying off 50,000 people worldwide… WOW! If that isn’t yelling recession then umm I don’t know what to say.

Okay let’s pull this all together. Really bad economic news on many fronts all around the world. A large percentage of the US population is about to retire. The retirees are depending on their savings to retire. They face a choice of either holding on until they no longer can if things continue to deteriorate, or getting out now. Either way there is a downward pressure that the bulls will have to push through to rally for any serious amount of time.

Reward the incompetent…

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Will someone please explain why those who take undue risks get the most support? I’m not behind on my mortgage payment, I pay my bills on time yet I’m not getting any governmental support.

Troubled Homeowners: article

To qualify, borrowers would have to be at least three months behind on their home loans and would have to owe 90 percent or more than the home is worth. Investors who do not occupy their homes would be excluded, as would borrowers who have filed for bankruptcy.

People that put 10% or fewer down are getting help on their mortgage. These are considered a riskier mortgage because the borrower has much less collateral in their homes and it make it much easier for them to walk away. Unless of course your parents come in and throw you some cash to stay afloat. Where did this cash come from? You and me the taxpayer.

Since when has the United States become a country where we reward the careless. The responsible are punished and have to pay for other people’s mistakes.

Here is the best part… look what they get!

Qualified borrowers would get help in several ways: The interest rate would be reduced so that they would not pay more than 38 percent of their gross income on housing expenses. Another option is for loans to be extended to 40 years from 30, and for some of the principal to be deferred, interest-free.

Imagine if you are a plumber who took out an ARM that is adjusting and you have a relatively minimal income. Your payments are going to be absurdly small. You put little to nothing down and are now getting your house for practically nothing.

Is this really for the homeowner? Remember that when you have a mortgage you don’t own the house the bank does. The only thing preventing them from taking it is a contract, the law, and their desire to have a stream of income. Two choices exist for them if you can’t pay. Take the house or reduce your payments.

If they knew there was no chance of a bailout they would have been much more prudent in their lending practices because they aren’t setup to become sellers of houses. However, the implicit knowledge that too large to fail companies are bailed out enables them to do reckless things that the taxpayer gets to pay for.

Since where has there been a problem with renting? Not everyone is going to own a home. Get over it. Foreclose and go rent. I don’t want to pay for your loan. You took on too much risk. Just because you think it can’t happen doesn’t mean it won’t. Yes, housing prices fell when everyone said they wouldn’t. Do you buy a car thinking that it will always appreciate? No… why because you understand that a car loses value. Generally house prices increase in value, but there have been times in history where they fell. Do you take out a loan that adjust to an unaffordable rate in 5 years if you won’t be able to pay it? NO

Wake-up America these bailouts are for the careless. These bailouts are for those who took on inordinate amounts of risk. ultimately the bailouts are for major industry and banks at our expense. Are you okay with this? I’m not.

A potential future?

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I’ve had this nagging in the back of my head saying something foul might be looming out in the near future.  Normally I don’t watch Bush on TV or listen to him on the radio as I can’t stand it.  That aside I watched and listened to his speech today.  It sounded good… all this talk about suporting the free markets and free trade… mind you we have neither.  It felt like a pep talk to make everyone feel warm and fuzzy inside when the exact opposite was going on behind the curtain.

He mentioned revamping the current financial systems and having a organization oversee markets.  Without saying it he was essentially saying yeah free markets are great in theory, but this was all caused by free markets.  Therefore we are going to create more bureaucracy in the name of the free market to prevent a future failure.

Last time I checked business come and go, the economy goes up and down, and that is okay.

So what is this potential future I speak of?  …>

The election is over yet the transfer of power hasn’t occurred.  What could happen to delay the transfer? A major crisis of sorts would do just that. Why isn’t Obama going to the G20 meeting? Why is he so reluctant to play a larger role during the transition?

Did anyone notice how Bush was almost smirking when he was talking about the wealth destruction that has occurred in people’s retirement accounts. I had this sinking feeling that he was telling someone that it is time to initiate plan X (whatever that may be).  He said GLOBAL MELTDOWN in a very strange way.  He said it a couple times with an emphasis and as though it was a joke.  It really seemed as though he was telling someone something.

To create the larger oversight organizations on an international scale there will have to be a crisis of much larger magnitude than at present. People will have to be in full panic mode and asking to be saved. Once people are in that frame of mind the government will be able to usurp all the power they want. Best of all they won’t have to take it because the people are freely giving it to them.

What might cause such a ripple….
War: Iran, Russia, Pakistan…
Financial Crisis:
Domestic Riots:
Terrorist Attack:

These are a few and there exist others. Hopefully none of this will transpire, but I find it difficult to believe that our present financial panic is the last in a string of events that began with 911. From this perspective I think it prudent to see it as a real possibility if minimal, but possible. Really no different from preparing for an earthquake, hurricane, or tornado.

Lastly, war is generally considered the acceptable means to get out of a financial crisis.

Citadel in Trouble?

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Link

The hedge fund giant, whose flagship fund is down almost 40% this year, denied a Wall Street Journal report that banks were demanding increased collateral as its losses mounted. Gerald Beeson, the firm’s chief operating officer, said Friday that it was meeting its daily collateral requirements with Goldman Sachs, Deutsche Bank, Merrill Lynch and others without being forced to sell its assets to cover the margin calls.

Haven’t we heard this tune before? Wasn’t Bear Stearns reassuring the public that they were financially sound or how about Merrill, with a bit of Wachovia and then a touch of Washington Mutual.

Regardless of the rumors it makes no sense for them to actually come out and say we are in trouble and the ship is sinking get out. Sure they have the interests of their investors to look after, but they will probably goto great lengths to keep plugging holes until there are simply too many.

Withdrawal Symptoms

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If my emotional barometer is any indication of where people’s minds are at the moment then I can only label it as coming down or recovering from a major hangover. It is the Sunday afternoon after a big night out sipping on your bloody mary to ease the pain.

We have been living on credit and tons of it.  At some point it becomes unsustainable and the house of cards tumbles down.  

Getting back to my analogy, think of drinking a ton of alcohol or coffee.  You keep wanting more and more when you finally get to a point where your body is completely dependent.  Any reduction in the drug will cause mild to severe withdrawal symptoms, any increase doesn’t do anything. 

This is what happens with credit expansion.  Too much and everyone goes on a spending spree with all the cheap money.  Take away the cheap money and people stop spending, jobs vanish, incomes decrease, and the previously incurred debt can’t be paid off.

So, instead of going through withdrawal you decide to take a lesser amount of the drug to make your hangover go away or slightly abate. However, you are still hungover. This pattern will continue until either you are completely free of the drug or your tolerance is now much lower enabling you to start increasing the amount as it now has a new profound effect as it did when you first started.  

It seems to me that we are in the post-crash hangover stage, but we aren’t completely free from the addiction.  We have taken a bit of the drug to ease the suffering.  The more of the drug we took the more likely we are to repeat the cycle.  We still need the drug to continue, otherwise we are going to feel like crap.  Hence, we still have a ways to go before we can recover.

If all goes as planned we will have a new President tomorrow and no longer will have to listen to the political banter at least for a while.  One piece of the uncertainty puzzle will be put into place, and we can focus on other issues.

In a NY Times article:

“We don’t know if it’s the end of the bear market yet, but it looks as though the bear has taken a nap,” said Sam Stovall, chief investment strategist at Standard & Poor’s equity research. “So investors are thinking, let’s enjoy a bit of a relief, both from the market’s lows and from the endless pre-election rhetoric.”

Other factors seemed to be playing into the rally as well, including a continuing round of coordinated interest rate cuts worldwide, the ongoing thaw in the credit markets, and the increasing resiliency of the markets to the daily drumbeat of bad economic news. The extreme volatility of recent weeks has calmed in recent days, though trading volume remained light.

Yes, the bear is taking a nap, but we are still very hungover and have taken a bit of the drug to help relieve the pain.  People haven’t completely capitulated and given up on equities.  They are hesitant yes, but still hopeful that things will turn around.

There is a major bear lurking around the corner and it isn’t just in the US.  They are giving birth around the world and China is no exception.  In a Financial Times article:

Wen Jiabao, China’s prime minister, warned that high growth was needed to maintain social stability as fresh evidence emerged on Monday that China’s economy was slowing quickly.

…

“We must be crystal-clear that without a certain pace of economic growth, there will be difficulties with employment, fiscal revenues and social development . . . and factors damaging social stability will grow,” he wrote in the magazine, Seeking Truth.

So, while equity markets recover mildly on noticeably low volume, bears are growling from afar.  Manufacturing is way down, consumer’s aren’t spending, banks still are reluctant to loan, major exporters are slowing.  I’d call this a worldwide slowdown of massive proportion.  We still have credit cards right?

What lies ahead…?

Recession, higher interest rates, massive inflation, higher commodity prices, continued decrease in housing, rising unemployment, and eventual devaluation of the United States dollar.  When will all of these things play out?  

My crystal ball has a few cracks, but for inflation to take hold we have to complete the current phase of de-leveraging and disinflation (which is bringing down prices).  Once this phase is complete all the newly created money will directly cause inflated prices.