Category Archives: Bailout

Wednesday October 8, 2008

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This may very well be an interesting day…. Asia is taking a major hit as we sleep or well we are about to sleep as is my case.  Here is the latest Bloomberg headline:

Asian Stocks Plunge on Credit Concern; Indonesia Halts Trading 

I’ve been very cautious about the markets continuing on their tumble down and am unfortunately not surprised that this is happening.  It seems that the world has reached panic mode and is fleeing paper, which also is another indicator about why gold is so difficult to find.  

We just may have reached that point where the markets enter freefall.  It is similar to watching a stampede running towards you.  You have a few choices:

  1. Get out of the way!
  2. Get run over!
  3. Run like a mad-man and go with the stampede.

I’ll go with #1 or #3 or perhaps a combination of both.  When there is panic nothing is rational.  Even if things aren’t really necessitating a major sell-off the herd mentality will cause a major sell off.  It is self-perpetuating, a feedback loop.  Very similar to hyper-inflation.  Once the shakeout occurs what is going to happen with all newly created money floating around that nobody wants to lend at the moment, coupled with peak oil, and fiat currencies worth not a whole lot… That’s the trillion dollar question.  Not good is all I can say, not good at all.  

Imagine losing most of you wealth to the market as did happen similarly in 1929-1932, then due to a massive increase in the money supply prices take off and unemployment rises.  Don’t be surprised if the next President resembles Roosevelt and the New Deal.  If that ends up being the case I’m even more concerned.  He did want to raise taxes to 100% beyond a minimum income. That will halt any growth in an economy because people have no incentive.

On the bright side the amount of panic and fear in the air could be considered a contrarian indicator.  Why not…. when there is blood in the streets BUY… oh but wait… HOW MUCH BLOOD??

Look at the Fed Goooooooooooooooooooooo

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I found this on www.chrismartenson.com and couldn’t resist posting it here especially after my post about the dollar.  How the dollar is going to survive after this much cash is pushed into the system I really don’t know.  A inflationary depression seems to be looking more and more likely.  It would explain why gold is so scarce on the physical market.  People are losing faith in fiat currency and want hard currency that has some store of value.  Paper is easily printed, and as Voltaire said

“Paper money eventually returns to its intrinsic value – zero”

Is it just me or is that line going almost STRAIGHT up.  If that isn’t a sign of complete and utter panic well I don’t know what is.  They are going to put as much liquidity into the system as possible.  Will this mean that you house will go back up in value?  Perhaps, but your purchasing power will decline severely.  Jim Rogers said the US currency is doomed, and I agree.  It is only a matter of when, and not if.

 

The US Dollar gaining? What?

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Hyperinflation, inflation, deflation, depression, recession, stagflation… well which is it? I have no clue, but there is a massive monetary inflation occurring, and a looming recession.  Hmmm so does this mean a inflationary depression?  Yikes.

Last week I took a break from overwhelming myself about the markets and the state of the economy. The timing wasn’t perfect, but I had personal reasons.

Before I start on the quest of exploring our present situation of the potententional…”ion”s I want to make sure we are on the same page. Therefore lets have a defining moment:

Money: Easily exchangeable, is relatively scarce, and is a store of value.

Inflation: An increase in the money supply
Deflation: A decrease in the money supply
Hyperinflation: A self-perpetuating unstoppable (more or less) state of inflation
Recession: A significant decline in business activity, mainly a contraction in the economy or slowing of growth
Depression: A long-term economic state characterized by unemployment and low prices and low levels of trade and investment
Stagflation: A period of time characterized by high inflation and recessionary conditions.

I’ve been looking at calls for the vaious scenarios and needed some clarification as to what happens in the various situations.  For the most part it seems obvious, but I’ve been struggling with the increase in the value of the United States dollar.  Our national debt is above 10 trillion and rising rapidly as the recent bailouts continue, and the most recent increase in military spending added another $612 billion that we have to pay for.

Why is the risk of deflation so frightening that the Fed, Treasury, governments, and foreign central banks will do anything to stave it off?  Deflation is like the grim reaper knocking on your door for a fiat currency.  A fiat currency survives on debt and inflation (credit expansion).  Too much inflation and it can become worthless, and negative inflation (deflation) and it gains value.  That sounds like a good thing but it isn’t.  As the currency gains in value debt becomes more expensive, and thus more difficult to pay off.  Imagine taking out a $100,000.00 loan with todays dollars and paying it off with dollars from 1930.  Good luck! During deflation prices also fall due to the decrease in the money supply and as there is no longer credit being handed out for people to use to consume and invest.  The whole system comes tumbling down and the reaper walks in the door to say hello!

When credit is created (a loan) that is an increase in the money supply, and when it is paid off that is a decrease in the money supply.  Say the loan is $100.00.  That is $100.00 of money put into existance with a very small percentage actually backing it.  Now I repay my $100.00 loan and that credit is erased and the money supply contracts.  This is the normal situation that occurs daily.  However, if people don’t want to lend or borrow then we have a problem.

No credit means no ability to borrow, which means no abilty to purchase goods and services.  Everything is based on debt today.  The change began in 1913 with the Fed, and the ultimate shift to fiat money was in 1972 during the Nixon presidency when we abandoned the gold standard and thus savers were punished from that day forward.

Okay this leads to me to the strengthening of the United States Dollar…  Why I ask is it getting stronger.  Many argue that it is because Europe is weakening, which may be part of the picture.  However, I read something that made a clear point that because European banks are required to hold dollars for various toxic debt they hold denominated in dollars they normally use the interbank markets based on the LIBOR rate.  However, that market is seized up and nobody wants to lend so they start using the EUR / USD credit swap market.  As they purchase dollars its value goes up.  Notice today that the Euro gained against the dollar when the Fed decided to start purchasing short-term commercial paper.  They are stepping in and becoming the new mainstay for that market: which one?  EVERY MARKET <Interesting…>

And tomorrow is a new day!

CNBC says it perfectly

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NASDAQ @ 2:43 pm

 

I have CNBC on in the background and between reading and watching the events unfold one of the anchors labeled the situation perfectly.

He essentially said that a close of 200 – 300 (in the DOW) points down won’t send a strong signal to everyone that there really is a crisis.  However, if the market closes down sharply then that will send the needed signal that something “MUST” be done.  We are being spoon fed a load of crap.  

This bill will probably eventually pass…  With the amount of panic and amount of “wealth” lost today I wonder if the level of support will start to shift from negative to positive.

CNBC is also saying that Barney Frank said that they were going to monitor the market’s reaction after the vote. So, lets go through the motions and see how the markets react to a no go on the bill and then if they freak out we can make sure it will pass on the second go around.

Anybody ever been to a musical, a play, or a performance of any kind?  Well, there are scenes and each is carefully planned out.  First you lay the ground work and setup the plot, then there is a climax, and a resolution.  I highly doubt we are even close to the climax, which means we have a long way to go laying the groundwork.

Before the Bailout Vote

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Friday closed up perhaps on anticipation that the bailout package would go through, and make everyone feel warm and fuzzy inside.  We don’t have an agreed upon package and some interesting things are occurring in the market:

1) The Dollar is rallying

2) US markets are down severely

3) World markets are down

4) Bonds are up, yields are down

5) Commodities except Gold and Silver are down

Is this the beginning of the end?  The Fed pumped another $600bn + into the markets, which is a signal that the dollar will be inflated rapidly.  We don’t get to see the effects immediately, but one would presume that with that much money floating around the dollar would be falling, gold and silver rallying, commodities rallying, and even the markets would be rallying.  

CONCERN:

Everyone is watching and waiting to hear about the bailout news.  If it passes what will happen?  Some are saying that the markets are already to far gone, and the downturn is spreading into Europe.  

BAFFLED:

The dollar is gaining strength, which is ironic because of the amount of liquidity the Fed is creating.  Long-Term this can’t mean anything good for the dollar.  Short-term there has to be massive buying of the dollar to keep it from falling.  Imagine if the dollar fell at the same time the market fell… I’d want my shot gun at my doorstep just in case.  

Beyond this I don’t have much to say at the moment.  There is an amazing amount of uncertainty and fear floating around that if it all comes crashing down at once…  If this bill passes, which is vehemently opposed by much of the public, we will probably see a little rally.  I figured that when I woke up the market would be in full bear market correction, however prior to bed the futures markets were indicating the contrary.  

WILL SOMEONE PLEASE TELL ME WHY THEY THINK THE DOLLAR IS RALLYING?

Sometimes the obvious isn’t so obvious:

The dollar… other central banks around the world are also inflating their currencies.  How long this will continue I have no idea, but if everyone inflates in tandem presumably nothing changes.  Well, until there is a complete loss of confidence in once currency or another.  Then… <Fill in the blank>

1.8 trillion dollars worth of bailout funds!

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CNBC ran an interesting piece on the accumulated sum of the bailouts to date.  The 700 billion bailout is still in the works, but something is bound to pass through both the House and Senate now that WaMu is toast.  Here is a link to the article.

Beside the entire situation to be troubling I find it ironic that the Fed vowed not to help with the Lehman debacle, but hold on… 

—At least $87 billion in repayments to JPMorgan Chase [JPM  44.62    1.16  (+2.67%)   ] for providing financing to underpin trades with units of bankrupt investment bank Lehman Brothers [LEH  0.275    -0.052  (-15.9%)   ]. Paulson said over the weekend he was adamant that public funds not be used to rescue the firm.

… $87 bn refund to JPMorgan Chase?  What is really going on here?  

The rest of the article goes on to prove how we get to $1.8 tn in proposed bailout expenses.  How are we going to pay for this?  Backup a bit and look here.  A picture truly is worth a trillion words.

Force FED chickens…

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Ironic that WaMu’s collapse happens to coincide perfectly with this bailout proposal trying to be hurriedly pushed through Congress.  It will for sure pass now <that was my take last night><now we are seeing major hiccups in the process (thankfully)>.  We have been sold out by various individuals in the United States Government.  Very unfortunate indeed, and some say the greatest looting operation ever in history.  Mark my word it isn’t over and will continue to spread to regional banks.  I find it interesting that Goldman Sachs and JP Morgan are the golden children in this whole mess, not to mention that Paulson used to be CEO of Goldman.  Coincidence?

In the EXTREME case you are going to want to have food and water on hand.  A decent supply.  I don’t know if it will get to that, but there is a lot of uncertainty in people’s minds.  When they are fearful they do stupid things.  Besides it never hurts to be prepared for an earthquake. I’m concerned about a run on the dollar starting abroad than at home.

Yes, I realize I sound like a doomsdayer, but  I’m just taking a pragmatic approach to the whole thing.  Show me some good news in this mess and I might be willing to alter my view slightly.
Has it occurred to you that we were fed the same crap with respect to going into Iraq about weapons of mass destruction?  This administration has been credited with being stupid, but I’m starting to wonder if that was all a line.  They have systematically destroyed the dollar, taken us to a never ending war – Iraq, allowed the credit bubble to get as big as it did, and in the end who gets to pay the bill?   The taxpayer.

And I’ll now step off my soapbox :)

-T

And don’t forget about Voltaire!

“Paper money eventually returns to its intrinsic value – zero”

~ Voltaire – 1729

Auto Industry Bailout!

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While we all have our eyes on Bernake, Paulson, Bush and $700,000,000,000,000.00 what is another $25,000,000,000,000.00 for some automakers. There were signs of distress and as the Financial Times reports (article) they have been lobbying Washington for sometime for a “loan”.

The continuing resolution provides funding for $7.5bn, which is the estimated subsidy on the loans – in other words, the cost to the government of providing them at well below market rates.

Well it is a loan after all so we are only giving them $7.5bn instead of $25bn because they have to pay it back.  Where I ask did we get in the business of bailing out private industry? No it isn’t anything new unfortunately. 

Most American cars are crap.  They are ugly, fall apart, and aren’t worth the steel they sit on.  Would I choose to spend my tax dollars on helping out a flailing industry?  If the auto industry didn’t foresee higher gas prices, and thus a slowing of SUV sales well then they deserve to go out of business.

I’m leaving out the part about the autoworker.  This isn’t about Ford or GM it is about the laborer who would lose their job.  I think I’m going to have to do an article about Econ 101, but from and Austrian and NOT Keynesian perspective.  All we are doing by subsidizing and bailing out all these corporations is encouraging mediocracy and unnecessary risk taking.  

If I started an auto company and nobody liked my cars then I go out of business, my employees find other jobs, and life moves on.  Instead we take taxpayer dollars that we have no choice in providing to the government and prop up failing industry.  It is an easy sell because as Shelly Lonbard, and analyst at Gimme Credit, a corporate bond research company, told clients this week that

“blue collar workers are more sympathetic victims than ‘rich’ investment bankers. So it’s easier to defend loans designed to save close to 100,000 jobs in the shrinking US manufacturing industry.”

Question: Why is the US auto industry shrinking?  

Answer: Labor unions, pension benefits, poor products, and government subsidies.  Please add to this list in the comments as it isn’t all inclusive.  

Who is next?  Biotech, Johnson and Johnson, Microsoft, Amazon, Etrade… let’s just sprinkle some money to anyone who lobbies enough.  I’m sick.

Ron Paul clearly states the situation…

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Fox News did a ten minute interview with Ron Paul and actually gave him the time to clearly state what is going on.  If the anchors were actually listening I don’t know, and frankly they need to.  The present situation is dire and people are only barely starting to take it seriously.  Given that Bernake is a student of the Great Depression he thinks the only way out is government intervention through bailouts and inflation.  The issue with that is we have a problem: Excess has built up in the system and it needs to be corrected.  By easing the debt burden on the banks the problem doesn’t go away, but only gets pushed further out into time.  

According to Austrian Economics whenever a bubble forms due to excess credit it must be deflated.  During the deflation excess inventory is bought at cheap prices, and the economy then moves forward.  This allows the economy to go though a minor correction and then move on.  The mortages need to be sold off and housing prices need to come down.  Our fiat monetary system only survives on debt and credit, which we are finding out has its limits.  

Instead of letting the system correct the taxpayer might be on the hook for other people’s mistakes.  Why is it imperative that house prices go back up?  Let them readjust to a point where people can afford them.  We will survive, and in the short-term it might be rough.  The dollar is at the brink of destruction.  A bailout will necessarily ensure that the dollar will be dumped because nobody wants to hold worthless paper.  

Warning:  If you see interest rates rising and the dollar falling this is a sign that major players are getting out of the dollar.  This is cause for concern.

Bernake, Paulson, and Bush are selling this proposal as a way to avoid a catastrophe. A necessary evil that if not enacted immediately will be the downfall of the United States and its citizens will suffer. Bush in his address to the nation did comment on the credit problem, but then went for the jugular and instilled fear just as Bernake and Paulson have been doing. He said that he believed in the free-market, but tough times call for decisive action. If he truly believed in the free market the Fed would not exist, there wouldn’t be sugar tariffs and corn subsidies, and I could go on and on. If you believe that we went into Iraq because of WMDs (Weapons of Mass Destruction) then go ahead and believe him on this one.

I find it quite convenient that we have major swings in the stock market and then this proposal comes to light. The banking crisis isn’t something new. Its been going on for over a year, and why now must it be passed right before Congress goes to recess. Fear will induce irrationality and it is imperative that this bill does NOT pass. I would rather face major banks failing then have the government try to sort this out.

Watch this video it is right to the point!