Archive for March, 2008

I’m from the government, and I am here to help.

Clinton has continued on the popular democratic theme, rob from the rich and give to the poor.  This time it is in the form of mortgages.

The thing that concerned me most was found at the bottom.  Clinton proposed that we freeze the mortgage rates of those who have borrowed using sub-prime mortgages. 

Let’s say that you had a CD at a bank, and you were given a 3% rate for the first year, and told that the rate would go up to 8% for the next 5 years.  Well, the bank ran into financial straits because of poor decisions, and could not pay you back the 8%. Can the government allow the bank to freeze the rate at 3%?  “Sorry, they can’t afford any more.  I guess you will have to start eating rice and rats.  It is for the public good.” 

That is what Clinton wants to let people do to the banks.  These banks make money on very small margins, but because they move so much money, they can make it happen.  When we destroy these margins, we destroy the banks. 

The other thing she brought up was forbidding lawsuits between financial companies.  The people who do the negotiating on the loans are expected to do all they can to ensure that the terms on the loan are honored by the investors (who actually end up lending the money).  Now Clinton want to remove the only method that the investors have to ensure that the contract is honored.  Nice.

Politicians continue to put a band-aid on the infection instead of letting the burning disinfectant permanently clean out the would.  We need to address real concerns, or we will just have a deeper trough.

 I also saw an article that did not make me feel secure about the inflationary pressure we are facing.  In China, service stations are running out of fuel.  The subsidized resource is falling short, because businesses can’t make enough, and don’t have any reason to expand because prices are held in check. 

One solution they are looking at is importing more fuel.   The price of goods in the US is influenced strongly by the price of diesel.  China is looking to import diesel directly.  Not going to be helpful to our trucking industry.

Despite this downturn in commodities prices, I still see the prices continuing to rise.  Railroads are going to get more popular as an efficient shipper of goods.   We will have ot see how much they can grow.

Good luck

Market Meltdown averted- For now

Banker From Monopoly

The fed has helped in averting a chain reaction that could have caused a meltdown in the markets. 

Bear Stearns made a lot of very risky investments in the derivative markets.  About 14 Trillion worth.  Holy crap.  $14,000,000,000,000.  Apparently, the fed pumped in the money to stabilize those investments.  The fed encourages risky behavior, and then proceeds to rescue big business from the results of that behavior.  All you have to do is put yourself in a position that if you go down, you take others with you.   It has almost become an art.  Who ever has the connections and the best sob story is insulated from disaster.  We are in what is becoming an Aristocracy of pull (thanks frisco).  It will be painful to live through the results, but we continue to placate the foolish, putting off the crisis, but ensuring that it will be worse.  I read that this happening after the S & L crisis in the 80’s proves that people don’t learn.  On the other hand, I think it proves that people learn very well.  Get deep into risky business, and tie others to you, and you are set.

Trading derivatives was once a vehicle that people used to eliminate future risks.  Farmers and food manufacturers traded corn and heat futures.  Miners, smelters, and steel companies traded metal commodities.  People used these to plan for the future, and make deals in advance.

Today, there is over $500,000,000,000,000 (not a typo) worth of derivatives in existence.  That is greater than the world’s wealth.  Instead of the stock market beign a place for people to enjoy partial ownership of large companies, it is the worlds largest casino.  Commodities markets are often worse.

We have been shuffling money around long enough, it is time for us to get back to producing wealth. 

$1000 Gold, $110 Oil, $4.00 gas, and low inflation. I promise.

Philadelphia Fed President Charles Plosser said he doesn’t think stagflation is a developing problem.  How does that work? 

The first question is, what is the situation on inflation.  To calculate core inflation, government does not include food and energy.  How does this work for your average American family?  How long can you go without driving or eating?  When we look at true inflation, at what prices have been actually doing at the grocery store and gas station, we find a much higher inflation.

One question is, how high is inflation.  The inflation of the Euro is around 2.5% per year.  In 2002 the it took $.8578 to buy a euro.  Now it takes $1.5904.  This means that the value of the dollar relative to the euro has dropped 10.8% per year, on average, over the past 6 years.  Combine these two facts and you end up with inflation of 13.3% per year.  I am getting slaughtered right now in the market.  The commodities are showing a lot of weakness based on the fact that the market is going to hell in a handbasket.  I still like real resources.   The full faith and credit of the US government does not do it for me.  The credit score of the government is dropping, and I hate to be holding too many of their checks.  Some one (Hulia) recently asked me what I think of keeping cash.  I still think you ought to set some aside to cover basic living expenses for 6 months, but I wouldn’t do too much more than that.  Holding an asset that seems to be depreciating at over 10% a year seems like a bad plan.  Gold and silver never really grow, but at least they have some intrinsic value. 

 Bear and Stearns is a pretty scary portrayal of what is going on in the market place.  People have made bad choices.  We think that the market owes us 15% a year.  Now we are seeing that if we demand those returns, the market gives them to us, but they turn out to be an illusion.  I had a rough day today finacially, but it does not even compare to the poor guy who lost a billion

Anyway, another amazing thing that happened is that I found myself agreeing with Harry Reid.   These big companies are in an interesting position.  If they crash, they will cause massive financial disruptions.  They then take aggressive risks, and if it pans out, they pocket the money.  If it doesn’t pan out, they tell the government that they have to survive.  A crash would be bad for the economy.  The taxpayer ends up insuring the big businesses.  Democrats believe in welfare for the poor (the projects worked out really well), Republicans believe in welfare for corporations (we sure learned our lessons from the savings and loan crisis). 

This money the Fed is pumping into the market is inflation happening before your eyes.   It is scary when we use fake economics to prop up the system.  Manufacturing continues to decline.  We can not consume more than we produce long term.  We have tried.

Inflation or Deflation?

Online, you will see people putting forth their opinions on whether we are facing inflation or deflation. You very rarely see them back them up with much.

The central case for deflation is that consumers have overspent. They have borrowed up to the hilt and have no more money to spend. When these stores sit with their doors open and no one buying, they will have to drop their prices. As the prices drop, people will delay their purchases for longer and longer. The store will continue lowering prices, and people will continue to delay purchases. This will spiral down into a disaster for many, with business being very depressed. Debtors will be especially hard hit, as the true value of their debt will go up.

On the other hand, we could have inflation. Some things in favor of inflation are large amounts of dollars abroad, our current spending habits, and government preference.

First of all, our dollars abroad. As the value of the dollar drops, people will want to hold them less and less. This will result in foreign and domestic spending of dollars. The chinese will not want to hold on to a currency that is rapidly losing value, and neither will Americans. That puts us in a situation of of people moving up their purchases, with more dollars chasing the same amounts of goods. Hello inflation.

American consumers always talk about how they are going to pay off those bills and get out of debt, but they rarely do something about it. Someone from work was talking about having too much debt, but they eat out frequently, and just bought a $2000 entertainment system. That is fairly typical based on my experience. People will continue buy as long as they can, knowing that if enough people get in trouble, the government will bail them out.

Oh, the government.

Successful politicians don’t care about logic or the future. They care about the next election. If they didn’t, they likely wouldn’t be in office in the first place. There are notable exceptions (Ron Paul), but as a trend, people are just looking for the next vote. Take the free money handout that the government is doing under the guise of a tax rebate.  They have just injected more dollars chasing the same amount of goods.  Inflation also helps debtors.  If a dollar drops in value by 10% in one year, your loan effective drops by the same amount.  Four years of such inflation, you would knock 34% off the value of the loan.   The government could use that to knock a few trillion real dollars off of national debt.

I think that given the situation, inflation is more likely.  Don’t keep too much money in cash.  A bit for buying opportunities is important, but make sure you are ready to take advantage of opportunities.  You don’t want to knock off the true value of your bank account by 34%

Good luck

Praising the Criminals

I saw a disturbing article that praises the rule of the mob.  This is not a good economic sign.  I was pretty disappointed with the tone that the article took.  We are moving more away from the rule of law to the rule of emotion. 

The basic store is that an activist group harrassed the leadership of countrywide until they renegotiated on loans.   They felt like borrowers should not be required to abide by their contracts.  They demanded that countrywide run their business in a certain way or risk continued harrassment of top executives. 

The result will be that banks will not loan money to the poor any more.  They are not worth the trouble.  Instead of being allowed to mitigate the risk risk of lending, they are being required to lose money.  Let me know how that works out in the next ten years.  If people follow ESOP’s model, the result will be driving out the good business in America.  If a company was using the same methods to coerce a contract they would have an injunction filed against them.  On the other hand, because ESOP is in favor of the “public good”, they have a carte blanch to do whatever they want and it is praised as gutsy, not illegal.   No wonder people want to live in gated communities.

These people seem like lobbyists that aren’t quite as slick as the ones in DC, but have a complete disregard for the rules, and could therefore be seen as even more dangerous.