Category Archives: United States Dollar

Lehman and the dollar sacrificed to save AIG!

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Taxpayers are bailing out AIG!

So, it looks like government officials are deciding to take a 80% interest in AIG, the nation’s largest insurer valued at about $85,000,000,000,000.00. Looking at these numbers it makes sense why the Fed or Treasury were unwilling to lend a helping hand to Lehman. They had to make a decision… if we can’t save em both who will rock the world’s financial markets more, AIG or LEH? The verdict is out and the 85 billion dollar answer is AIG. Do I have a problem that the taxpayer is now on the hook for another unknown sum of liabilities? Heck, at this point it is Monopoly money right?

AIG will pledge their $1.1 trillion in assets in collateral for the “loan”. What happens if their liabilities are greater than their assets? Doesn’t that mean they are bankrupt. Oh wait they are being supported… with money created out of thin air because last I checked we don’t have any surplus cash sitting around, quite the contrary.

Downgraded
After many talks to have private industry help AIG with their problems it came down to the USG. Once AIG’s rating was downgraded their ability to raise capital was further hampered. I sure wouldn’t want to lend them money. There are way too many unknowns with their sales of CDS – Credit Default Swaps and sub prime mortgage-backed securities holdings.

Lender of last resort
Had the government not stepped in tomorrow would be extraordinary in comparison to last Monday. I actually had a dream the other night about the Dow dropping over 1000 points. Perhaps this latest intervention will prevent that in the short-term. However, for the longer-term all this does is prolong the continued de-leveraging in the credit markets. Is there a possibility of a soft-landing as people like to say? Perhaps, but if so it is going to mean a serious about of liquidity introduced into the markets. We know what that means… the devaluation of the greenback.

The market will prevail, the dollar will fall
At the end of the day the Fed will probably resume its monetary inflation as prices continue to fall due to a recession. Unless I have been hard of hearing there is much fear in the air and it is growing. Excesses will need to be cleaned out, and it is going to be a matter of when. The how is fairly obvious as the tornado of destruction is just getting going. Paulson pushed the matter of Freddie and Fannie to the next Presidency, while the present administration tries to ride off into the sunset with their ego’s left in tact.

Let the carnage continue… Who’s next? Washington Mutual (WaMu)? Wachovia (WB)? THE US DOLLAR!

After the Bell Part (2) – Paulson

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Secretary Paulson just issued his press release and I gained absolutely no confidence in the current situation.  Actually I’m more concerned than before as he said that the “banking system is safe and sound“.  Will someone please tell me how the banking system is safe and sound when major institutions are failing?  Bank of America was just downgraded, which shouldn’t be surprising as Merrill (MER) isn’t in good shape.

So, Paulson’s main theme of his speech was that confidence and resilence in the economy is strong, and that they are working to maintain the stability of the markets.  He doesn’t take lightly putting the taxpayer on the hook for private institution’s mistakes or overindulgence in risk.  So, taking over Freddie and Fannie wasn’t putting the taxpayer on the hook.  Well, there wasn’t anything he could do about that because they were part of the hand he was dealt.  It was a congressional charter that mandated that takeover.  I see…

He mentioned that we needed major authorities to wind down major institutions such as Lehman (LEH).  I’m not really sure what that means, but to take a guess it means that other institutions are going to eat those about to fail.  Okay that makes sense, but it is starting to all look really fishy.  How many institutions are going to consolidate?  And which ones are going to survive and who chooses?  This is not how a free market works.

He also mentioned that additional regulations and authorities will be needed in the future.  More government regulations!  Yippie I can’t wait.  We’ve seen how well those work.

And last but not least there was absolutely no mention as to how we got here even though the question was asked numerous times.   Not once did he mention the loose monetary policies or the relaxing of required bank reserves or increasing of the GSE’s maximum loan size.  

If this isn’t a RED flag waiving in the wind saying get out I’m not sure what is.  Be ready for flows of money to start leaving the United States as people won’t want to hold dollars.  Initially, we are seeing a rush to safety in treasuries as their interest rate is falling, but if this continues people will flee to other currencies and hard assets.  Why hold a piece of paper that isn’t worth anything?  Once the confidence leaves the system it may be too late.

Black Monday 2008?

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Black Monday?

Really bad news, and I’m going to the store to get some consumer staples, and cash. If the banking system collapses then cash may not be good for anything. I don’t know if everything is going to crash in one day, but the next week is going to be very interesting. My blood pressure is rising. The entire banking system may be frozen next week… yes this is extreme I know, but look at the facts:

I love how HUGE matters occur over the weekend, and particularly on a Sunday. The market was listless on Friday. As I watched it fluctuate from positive to negative I had a sinking feeling in my gut that I didn’t do much about. Something told me this weekend was going to be big as far as news went, and it wasn’t probably going to be good. Just watching the prices of financial stock you had to wonder that something might be amiss. Merrill Lynch last week took a big hit, which concerned me.

  • Well the Dow December futures are down about 300 points
  • The dollar opened sharply lower on ForEx markets
  • Lehman is insolvent, and nobody wants to buy them
  • Bank of America may be merging (saving) with Merrill Lynch
  • AIG is doing a reorganization, and may sell off it airline insurance arm as well as trying to raise $40 billion in additional capital.
I don’t know about you, but this looks like a major issue. Oh and I haven’t mentioned that the ISDA (International Swaps and Derivatives Association) is saying that if Lehman doesn’t file bankruptcy by midnight tonight that the trades in credit, derivatives, commodities, and currencies will be canceled.
Yikes! What does this mean?
Well, at the moment dealers who had agreements with Lehman are trying to match up with each other. Essentialy for every trade there is someone on the other side. So, I’m long and trading with Lehman and you are short also trading with Lehman if we don’t match up with each other by midnight our trade is now gone. Thus, effectively taking Lehman out of the picture and now those trades are with eachother and not Lehman. At least that is the hope as traders only had from 2pm till 6pm EST today.
Checkout the Bloomberg article.

Probable Future Outlook for the United States

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What concerns me most is looking at the highly probable future outlook…

The gov’t is looking to bail out the Freddie and Fannie (dependent upon congressional approval), which will help out new, but not existing home buyers. By adding their debt the gov’t is using our tax dollars and inflation adjusted dollars to secure them. However, we are projecting a $500 billion dollar short fall this year in the budget, and the national debt is at about 9.7 trillion, and growing ever so rapidly. If we tack on unfunded liabilities now we are talking anywhere from 50-70 trillion in obligations. Effectively the government is insolvent. Now what happens when the gov’t revenues begin to decline due to the slowing economy, baby boomers starting to take their retirements, baby boomers soon to be taking Medicare, and the continuation of the Iraq war / Afghan war / maybe Iran war?

I’m failing to see the light at the end of the tunnel.

Consumers purchased houses as money was cheap. Everyone felt rich so they purchased more consumables, which had no productive value. These weren’t investments into something that would have future economic value, but only immediate gratification and immediate depreciation. Look at who is producing and who is consuming… we in the USA are primarily guilty of the latter and it is all funded through the rest of the world’s savings. At some point the rest of the world is going to tire of this. Then after our HELOCs were maxed out we started to use our credit cards.

What happens if the United States dollar loses its status as the reserve currency? Then everyone with dollars will flood the markets and purchase any tangibles possible. Money is a commodity just like gold and silver, but it can easily be created. However, due to the nature of its existence it is a exchangeable commodity and considered legal tender. As people want dollars the price rises and as people desire them less the price falls. Why would anyone want dollars when you look at the future for the US economy besides necessity and political reasons.

People are already losing their HELOCs because banks are worried that consumers won’t be able to afford them. Legal or not this is happening. I also heard from a Real Estate agent in Seattle that banks are asking for 25% down on new mortgages.

In an earnings call in late January 2008, Bank of America executives said credit card delinquencies in California, Florida, Arizona, and Nevada—states with high foreclosure rates—increased five times as fast as in other states, suggesting that consumers struggling with their mortgage debt are also finding their credit card bills hard to pay. “We’re focused on getting paid for the risk we take,” said Joe Price, chief financial officer. – US News and World report 2/28/2008 — Link to the story

The GSE bailout will help to prolong the issues that the financial industry is facing. The USG will do everything in its power to support the system through its tax system. It also gives individuals and institutions more time to pull their money out of the dollar. An immediate collapse would make that very difficult and costly.

And Gary North just posted this lovely article that illustrates that nobody has a clue as to the extent of what is really going on. Link to the article Unfortunately this is for members only, which I highly recommend subscribing to. I don’t get paid a dime on referrals.

I’m getting the sense that things could get a whole lot worse than any of us imagine. In that case I’d consider moving out of the county. Sure the dollar is rallying, and commodities are falling, but how long will this last? Peak oil has passed so we are biding our time before demand outstrips supply. Without oil or with really expensive oil life becomes much more difficult. Panic would ensue in the streets.

For those of us who believe in the concept of revision to the mean take a look at the Case Schiller index since 1890. Looking at the graph we have never seen housing prices rise so dramatically so quickly. Every boom period was followed by a bust or contraction and revision to the mean. We are beyond the mean… we are in outer space. Thank you Fed for the cheap money, and for removing banking reserve restrictions, and inflating the money supply. Hey it had to go somewhere and housing seemed the place to be. Then it went to commodities, which are now taking a fall as well. However, I see no reason that the long term forecast for commodities won’t be higher. The commodities I speak of in this case are precious metals, petroleum, and food. Essentially all the necessities to keep the world moving.

As for housing it will have to come back down to reasonable values. If we encounter a period of hyperinflation then housing will be a good asset to hold onto. However, if we have a depression I could argue the opposite. In a depression the purchasing power of your dollar increases. Depression means contraction of the money supply, which isn’t necessarily a bad thing. In fact part of the Fed’s charter is to contract the money supply when needed, but that hasn’t been the case as of late.


Full Story from Mises.org

And what’s next? Commercial Real Estate?
NEW YORK: U.S. commercial real estate prices are likely to tumble over the next 12 to 18 months as more borrowers default on their loans and regulators crack down on banks, pushing even more properties onto the market. Since the market’s peak in 2007, the availability of debt – the lifeblood of commercial real estate – has dried up and choked off sales.

Borrowers have resisted selling because of falling prices. Banks have not sold off their troubled loans, fearing a huge write-down of all commercial real estate loans. But it looks as if the clock is running down. “We’re going to see a whole lot more trouble going forward,” said Peter Steier, vice president of Inland Mortgage Capital in New York.
Link to the article

It continues:

Commercial real estate sales in the United States are expected to fall 66 percent this year from $467 billion to an estimated $159 billion. This is because debt, especially securitized debt in the form of commercial mortgage-backed securities, or CMBS, is either unavailable or prices are too high and the terms too strict for borrowers, Reis said.

“One of our biggest problem areas is pretty much the state of Ohio,” said Kevin Donahue, senior vice president Midland Loan Services, a CMBS servicer that steps in when a loan is showing signs of imminent trouble. “If we keep going, by the second quarter of 2009, I think the entire state of Ohio will become a subsidiary of Midland.”

I discoved this last bit from Chris Martenson @ www.chrismartenson.com.

Fannie Mae and Freddie Mac… A governmental department

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I was originally going to write a post about how we always hear about the “New World Economy” prior to any boom / bust period.  This time I think the rules have finally changed as the United States is losing if it hasn’t already lost its status as the number one superpower, we are now the largest debtor in the world, and continuing to bail out thee who fails.  

Whether or not this time is different and we will recover is debatable.  What concerns me is the continuation of the Feds backing up private industry.  Had the United States government let Fannie and Freddie fail what would have happened?  Well, the stock market would have surely taken a tank, interest rates would have gone up versus dropping about .5%, and the dollar would have probably fallen dramatically.  

So what do we get?  – The Dow rises 290.04 points or 2.58%, the NASDAQ rises 13.88 or 0.62% and the S&P rises 25.48 to 2.05%.  Wait a minute here… The taxpayers meaning you and I get to foot the bill for this.  At a minimum the treasury is ready to pump in $100 billion into each company… oh wait are they really companies or departments of the government.  I guess that is up for the next presidency to decide.  Nothing like passing along the responsibility of the crisis.  

So, I present a question about all of this.  This being the cancer’s on the balance sheets of financial companies, a negative GDP that is still positive according to the gov’t, a extremely high CPI, and declining production and consumption.  

– Is it possible that we are going to see extreme volatility in the markets until the elections?  Probable, but as we have seen with every governmental intervention since 2007 there is a quick boom, and then continuation of the contraction.  Contraction meaning declining stock market prices.  The USG lagged in making a decion on the Fannie and Freddie debacle due to the upcoming election.  The longer they take the closer the election takes place.  Due to the recency effect people recall things closer to the present then the past.  Let’s just say that the economy looks somewhat okay going into the election.  What are the odds that McCain will have a better chance of winning over Obama?  Considering the past two elections…

I didn’t mean for this to go into a conspiracy theory or that I believe there is manipulation in the markets, but nothing seems to make sense at the moment.  What does make sense is that my dollar is losing its purchasing power, my condo is declining in value, prices are rising, and the US is bankrupt.  Oh but wait we can continue to print dollars like in the Posted in Debt, Economy, Federal Reserve, Finance, Investing, News, United States Dollar | Tagged , , , , , , , , , | Leave a reply

GDP growth 3.3% annually? Up from 1.9%? Right…

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GDP cries foul!

When the numbers emerged today I was shocked. After my initial amazement sunk in I started to wonder what was “really” going on here…

My eighth grade science teacher (yes 8th grade was a long time ago) managed to prove through statistics that I and everyone else in the class didn’t exist. Fishy indeed! If I didn’t exist according to statistics, but was still sitting in the classroom with the other student and the teacher himself then one of two things were completely incorrect. One might have been an illusion (think The Matrix)… Well, we know it was the stats because I’m sitting at my computer writing this entry.

So, if we can prove something doesn’t exist through statistics, which are really just a mathematical representation of data, can we manipulate our results through statistics?

I highly doubt that the GDP is actually positive. Take a look at shadowstats.com, which undoes as much of the governmental massaging of the numbers as possible. At the moment we are actually at about a 9% annualized rate of inflation, and GDP is negative. Wait, GDP was just shown to be 3.3% annualized… again what does this all mean?

What recession?

We aren’t in a recession or at least that is the official figure. Of course we aren’t because to be in a recession requires two consecutive quarters of negative growth. Remember: We are in an election year! Interestingly according to shadowstats.com, we have had a negative GD since 2004.

I’m just skimming the surface and attempting to draw to your attention that what you see isn’t necessarily what you get. We are in a recession, and have been in a recession for quite some time now. However, the government wants us to believe that everything is okay, and that the economy will recover. My fear is that all this manipulation will lead to an even larger bust.

Look around you… are you seeing more for-sale signs of homes, more for-lease signs around town, people shopping less, more concerned about their jobs, etc…? These are not signs of economic growth, but fear.

So what?

Let’s make a prediction as these are always fun. If I’m right I get to stroke my ego a bit, and if I’m wrong… well I’m wrong.

The manipulation will continue as long as possible, but the market will prevail. Once it realizes the degree of major contraction in growth and productivity people’s sentiment will further shift as it is starting to now. Spending will dry up, credit won’t be lent, defaults will further, housing will keep falling, the US stock markets will free-fall, the dollar will resume its decline, and gold, silver, and commodities will eventually resume their bull market. Wow that is a mouthful. Might I be wrong…? Of course! If I could predict the future I would own an island and call it Gauntlett.

The election…

I’m going to go as far as to say that our markets are severely manipulated NOT by speculators, but by various government officials and policy. Going into the election with a perceived strong economy will give the incumbent’s party an edge that just might help them stay in office. We will know in November. After November the Fed won’t need to have such a loose monetary policy and might start to think about inflation and raise interest rates if the market doesn’t demand it sooner due to the risk of inflation to your savings and purchasing power. (Note: I didn’t say higher prices because what is really happening is your dollars are becoming worth less as more are put into circulation by the Fed.)

The Fed’s publications

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Who knew?  So, the Federal Reserve publishes all sorts of information that is free.  Yes, you can actually get soemthing for free.  Oh wait a minute of course there is a catch… You pay for it through taxes and inflation.  Guess we are back to the old saying that nothing is free.  Anyways I just ordered a bunch of publications to peruse.  

 

Check it out here: Fed Publications

Double Standards

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I’m pissed to say the least…  First Bear Stearns and now the Macs.  Why do I as a taxpayer get the privilege of helping these overextended companies stay in business?  It is bad enough that the Fed keeps “printing” money, which keeps the interest rate low and provides liquidity to an illiquid financial industry.  Each time they inject money into the system they are effectively stealing from each and everyone of us who holds US dollars.  

My original intent in this entry is to write about the gold standard… well, actually the lack of it.  Ever since we have been off the gold standard interest rates have swung wildly, and the boom / bust of the economy much more severe.  

When the “tech bubble” popped in 2000 interest rates were lowered (money supply increased) and it did nothing to prop of the tech market, but went to the housing market, which is now in drastic decline.  

The fed is what we need to be talking about in the news.  Instead people in the media are talking about speculators and manipulation of markets.  Today the SEC is preventing naked shorts on financial stocks.  Well, why do people short a equity in the first place?  Answer: They think it is going to drop in value.  Is there a reason financials are dropping in value?  YES  So, instead of looking at how we got to this point we are going to find a scapegoat (speculators) and continue what has been done over and over again.  What new regulations will be in place after all this is over?  Will the US gov’t now be in the housing and banking industries?  So, if automakers start to fail is the fed going to open the discount window to them as well?  As a taxpayer I’m excited to be loaning money to failing companies.