I think we are in a watershed event that is going to lead to depression around the world, but even that situation will have an end. The Great Depression lasted 20 years, even though historians seem to gloss this fact over with nonsense about the New Deal and other socialist programs that basically were make work, survival programs and little else. But, even in that vein, one of the great bull markets in history occurred between 1932 and 1937, where gains were in the area of 400% on the Dow. What followed was a bear market that was also one of the worst. There was a difference then in the sense that they at least could debase the local currencies and leave gold for international settlement. That end of the game is over and the only thing left to do is move the currencies to zero as a solution. I doubt TPTB will allow that to occur, as it would mean everyone was bankrupt. Also, the impact of intentional deficit spending isn't new any more and won't have the impact it might have had then. the only solutions so far are to sustain prices and demand at unsustainable levels and massive resistance to let the situation finish adjusting and put the problems behind us, thus the heartburn might just turn into a heart attack.
The US is the demand for the world. Robert Rubin undertook this path in the late 90's in order to attempt to finish the Asian crisis and we forgot to stop it. Trade deficits exploded with the stock bubble, then florished with the housing bubble. It hasn't seemed to sink into the average Joe's head or the average analyst what impact this trade deficit going away is going to have on the rest of the world. This is demand fueled by credit from the US. It might be money loaned back by other countries, but the credit is made in the US and that system is reversing itself fast. I believe this mess has the capacity to balance the US trade deficit and there isn't 5 countries combined in the world that could replace the $600 billion or so in excessive demand that the US brought to the table and if there are, it is only due to the fact that the US is running deficits with them right now. This amount of credit would suck China dry in about 2 years. They won't be able to expand or maintain trade by shrinking the value of the medium of trade.
The idea of Peak Oil might turn out correct not because potential production has peaked, but because consumption has peaked. I think people now will be shocked to see how much less gasoline is used, how much less paper towel is used and so on and so on. Take away pricing pressure and you will soon see the shitcan the Arabs have put themselves into with all their financial commitments. India implodes and the financial backing in China disintegrates. Commodities collapse and the commodity exporting contries go with it.
It will be worldwide and the signs are already showing worldwide. One of signs of this will be oil and what is right now being viewed as a bullish development, the price coming down, is either a temporary respite or a sign that what I am illustrating is starting to occur. The price of oil in this area has been there too short a time to have caused much of the economic grief that has shown up on the scene and much lower prices would have to appear before there was any impact on the current conditions. Bullish or not, oil is a limiting factor on economic expansion due not to price but to supply.
If demand for oil is indeed falling and price follows, then at some price there will be a need to sell more oil, not less oil due to financial necessity. At what price does this occur? I am guessing under $70 and maybe under $55. Remember if you were there, that in 1980, we were never going to see oil at $13 again and yet we did on and off for the next 19 years. I think $55 is a much more substantial price than $13 was 25 years ago, due to the direction other assets are headed and the relative financial position of the exporters. It is also substantial in that instead of allowing consumers to keep there cash and pay down debt, it keeps the money in circulation and in bank accounts. The main reason oil prices are inflationary at this time is they keep the money coming, but the consumer can only send out so much before they are tapped.
I would guess the best way to tell that my prognosis is wrong is if the bull win enough rounds to keep this from occuring is that home prices quit falling and home starts tick up(this is probably a nonsense sentence, but I didn't know how else to write it and I hope you know what I mean in the form of demand). As long as these are inclusive of each other, this game is going to go on and it isn't a housing crisis to start, but a housing bubble. Without price increases, construction increases only prolong and make the problem worse. I think the other thing is that oil demand remains high. As long as the demand and price for oil are high, the bulls are still in the game, contrary to the news. The most bearish news right now is if oil keeps coming down. The bulls didn't need lower prices, they just needed a price where it would stop going up. I believe that if China isn't in full financial crisis by this time next year or apparently headed for it, depression will probably be avoided. I would watch to see how much it slips. A legitimate boom continuing in China probably precludes a depression, but I have to believe for the time being that China is booming toward over expansion that won't be profitable. There is a lot of money from around the world chasing Chinese assets that outsiders really cannot own. The return will be zero.
Now if you followed me closely, I might have made sense. But, if you got lost by your follow the press logic, you might be more confused than before I wrote this. I think most of us bears believe the US credit system has run its course and this will take down the world economy, but at the same time, we have our eyes on 2002. This time is different, as all the financial companies have impaired financial positions and there isn't any home equity left to leverage. The hedges are fully leveraged and before long there won't be a counter party to buy what they have to liquidate.
Thursday, July 24, 2008
Friday, July 18, 2008
Is the bubble done?
I have speculated for about 2 years that the oil rally would eventually end at a fibonacci number, $89 or $144 as it has appeared for the past couple of years. For one, I had an idea that the rally had fallen short in 2006 and that the low 80's figure was going to be the high. That was until the financial crisis left huge amounts of money unattached worldwide and the market ran past $89 to about $100. That too was a potential top, but once oil ran past $110, it was clear it was going to the $144 area, where for the time being it has stopped.
In such a market, the high of $147 or whatever it was interday was about as close to $144 as one could expect. The next move, if we do in fact go higher will be $233.
I have become attached to these fib numbers due to my knowledge of the movement of oil over time. For a long time it was $3 a barrel, even when $3 was a lot of money. In the 1970's, it moved first to $5, then to $8, then to $13 where it stayed for about 5 years. When the Iranian revolution broke out, oil then moved to $21 and then in a 2 price system to $28 and $34, with the Saudi's maintaining the lower price. When oil broke, it always settled in the $13 range before rallying back to $21 for about 2 decades, with some runs to $34 during times like the first Gulf War and early in the 2000's. Thus we saw moves to $5, $8, $13, $21 and $34, making 5 total moves. This time we saw moves to $21, $34, $55, $89 and $144 for 5 moves. Does this mean we are done? I think there is a real good chance we are, as there is coming something that few will understand, the fact that inflation causes deflation.
Here is what I believe and I will maybe change this, but for now I am going to stick to what I believe is happening. For one, the bust in the CDO market created a situation where $400 billion wasn't recycled to from one account to another and instead was funded by the banks writing what amounted to hot checks, leaving the money to circulate. Of course, the Fed had no alternative but to cover these checks, as word got out in the Fed funds market that maybe lending to XYZ bank might be a bad idea. Everyone knew about banks like Citi, which clearly had worldwide influence as was probably too big to fail, but much of this is still out there. There was the run on Northern Rock and the implosion of hedge funds, including some run by Bear Stearns, but this was lost money. The bank of England covered the funds drawn from NR with $100 billion. All this money was left to follow the only game left, commodities.
What has happened in the last year is quite interesting. For one thing, much of the $400 billion has been absorbed by deflation. I will elaborate here to the point that hopefully you can follow what I am talking about instead of reading the headline inflation numbers, primarily because inflation and deflation are lagging and not forward. First, much of this extra money went to buy oil because the demand for oil was burgeoning and it was something that would clearly store and play down the road. Second, much of this money ended up or was already in SWF (sovereign wealth funds) and much of this money went to recapitalize many of the weak financials. In this case, money kind of disappears. They say we have written off $400 billion worldwide, so that pretty much accounts for the $400 billion that didn't get recycled.
We are now seeing a pretty violent reaction on the oil price run up. The bulls think this is good news, but oil is a huge market. If this is indeed a speculator driven price hike, then it is clear that there are some huge speculators stuck in positions. There is only one way that speculators could have driven this market higher for this long and that is to roll their own contracts. In order to get out of the current months contracts, they would have had to have taken delivery or rolled sufficient enough long positions forward to entice the hedgers to move their short positions forward instead of making delivery at a loss, thus both moving their liabilities forward. Now that the shorts might have the upper hand here, it is quite possible they are going to force delivery of product the longs aren't prepared to take. I don't know where this oil may be hidden, but I woudn't be surprised to see it suddenly appear in inventory either here in the US or overseas. The point is that if speculators are indeed responsible for this bubble, then there is oil somewhere unaccounted for and if it is hidden by the longs, then it is financed and it and the borrowed money must be liquidated. This is a financial disaster awaiting the hedge funds and you can bet that OPEC itself has forward shorts in this market.
Amaranth supposedly lost $6 billion on their failed gas corner. To understand the size of their position, one must realize that gas declined about $8 from peak to bottom and that Amaranth probably paid around $10 for most of it on average. Realizing they got out at between $6 and $8 and that 1 trillion feet of gas sells for $1 billion a dollar then one might realize how huge their position was. Figuring they lost $3 per MCF, they had 2 trillion of the roughly 3 trillion in storage. I was wondering for some time how gas was staying as high as it was in light of how large the supplies in storage were. There just isn't a lot of places you can hide natural gas. This may not be true for oil, as I suspect there are storage facilities around the world that could hold a billion barrels or more and it not be inventoried. Imagine if there were 1 billion barrels of oil out there that suddenly needed to be liquidated? Even if the figure were 200 million barrels, we would be looking at the US supply of crude sitting out there somewhere. The large exporting countries have to have massive storage facilities for no other reason than to be able to manage production and demand over time. Countries like Indonesia where there used to be sizable exports could have large storage facilities that they could rent to allow the hiding of oil. The Japanese trader who ran the copper corner in the 1990's supposedly had copper in warehouses in LA and other areas that was bought on the LME.
In any case, the market could actually have been true rather than rigged as I suppose and there isn't a hidden surplus. I find that highly doubtful, having watched the oil market for decades. But, it has to be either a rolled contract game or an actual taken delivery and hidden game where continued pressure is put on the market by very sizable excess contracts being taken to delivery points over and over again. If a corner has enough long contracts over what could be provided to the market, they can always exercise a few deliveries and the shorts have to buy their way out of the rest of them. This gives the appearance of making a huge profit, which is really nothing more than postponement of a liquidation of long positions. All buyers have to become sellers in speculation and visa versa.
Where I part company with the bulls is I believe this to be highly deflationary. For one, the bulls think the consumer game will go back to normal while I believe that those that could still spend kept spending while those that couldn't used the rest of their credit just to survive this oil price run up. Thus, they won't be spending any time soon, if forever. Thus we have had a forced inflation in the short run out of this speculation which will cease and now the world will run without the credit inputs of high oil prices. You can consume for as long as you have room on your credit card, which could be as long as they keep raising the limit or the payments exceed income.
I am watching the money supply figures and they have weakened over the past 90 days. Not a decline in M-2, but a very weak growth, which in light of $160 billion in stimulous checks and the extra money that has been injected into some account by the credit used to buy gasoline is pretty sorry. Where would we stand without the stimulous checks? Bernanke was making light of this situation and the bulls seemed to take it as a signal of the bottom. I take it as the first true recognition that we are in recession and that we went into recession with Santa Claus gifts from Uncle Sam, huge booms in exports and 2% interest rates.
What I see now is maybe another huge short opportunity for the financials. There are again statements to the effect that the bottom is in on housing. It is going to be a damn flat bottom if that is the case. Suddenly Europe is slowing down and China is clearly going to be next, as it is paying massive premiums on everything it imports and its exports are losing traction with its customers economies on the slide. I sense the financials get a good month of reprive and then are back in the dumps again, just as we saw back in March. In fact, we really got to June before the financials started getting the truth out once more. First time it was C getting new capital, then it was Bear being bailed out along with MBIA and Ambac and now it is the implicit being made explicit in regard to FNMA and FHLMC paper. This won't in any way fix the problem.
I would watch the money supply figures going into the fall. I have to believe that we are going to see poor retail results as the stimulous money dries up and the price of oil dries up credit card spending. If inflation indeed turns to deflation, the entire world game is up.
In such a market, the high of $147 or whatever it was interday was about as close to $144 as one could expect. The next move, if we do in fact go higher will be $233.
I have become attached to these fib numbers due to my knowledge of the movement of oil over time. For a long time it was $3 a barrel, even when $3 was a lot of money. In the 1970's, it moved first to $5, then to $8, then to $13 where it stayed for about 5 years. When the Iranian revolution broke out, oil then moved to $21 and then in a 2 price system to $28 and $34, with the Saudi's maintaining the lower price. When oil broke, it always settled in the $13 range before rallying back to $21 for about 2 decades, with some runs to $34 during times like the first Gulf War and early in the 2000's. Thus we saw moves to $5, $8, $13, $21 and $34, making 5 total moves. This time we saw moves to $21, $34, $55, $89 and $144 for 5 moves. Does this mean we are done? I think there is a real good chance we are, as there is coming something that few will understand, the fact that inflation causes deflation.
Here is what I believe and I will maybe change this, but for now I am going to stick to what I believe is happening. For one, the bust in the CDO market created a situation where $400 billion wasn't recycled to from one account to another and instead was funded by the banks writing what amounted to hot checks, leaving the money to circulate. Of course, the Fed had no alternative but to cover these checks, as word got out in the Fed funds market that maybe lending to XYZ bank might be a bad idea. Everyone knew about banks like Citi, which clearly had worldwide influence as was probably too big to fail, but much of this is still out there. There was the run on Northern Rock and the implosion of hedge funds, including some run by Bear Stearns, but this was lost money. The bank of England covered the funds drawn from NR with $100 billion. All this money was left to follow the only game left, commodities.
What has happened in the last year is quite interesting. For one thing, much of the $400 billion has been absorbed by deflation. I will elaborate here to the point that hopefully you can follow what I am talking about instead of reading the headline inflation numbers, primarily because inflation and deflation are lagging and not forward. First, much of this extra money went to buy oil because the demand for oil was burgeoning and it was something that would clearly store and play down the road. Second, much of this money ended up or was already in SWF (sovereign wealth funds) and much of this money went to recapitalize many of the weak financials. In this case, money kind of disappears. They say we have written off $400 billion worldwide, so that pretty much accounts for the $400 billion that didn't get recycled.
We are now seeing a pretty violent reaction on the oil price run up. The bulls think this is good news, but oil is a huge market. If this is indeed a speculator driven price hike, then it is clear that there are some huge speculators stuck in positions. There is only one way that speculators could have driven this market higher for this long and that is to roll their own contracts. In order to get out of the current months contracts, they would have had to have taken delivery or rolled sufficient enough long positions forward to entice the hedgers to move their short positions forward instead of making delivery at a loss, thus both moving their liabilities forward. Now that the shorts might have the upper hand here, it is quite possible they are going to force delivery of product the longs aren't prepared to take. I don't know where this oil may be hidden, but I woudn't be surprised to see it suddenly appear in inventory either here in the US or overseas. The point is that if speculators are indeed responsible for this bubble, then there is oil somewhere unaccounted for and if it is hidden by the longs, then it is financed and it and the borrowed money must be liquidated. This is a financial disaster awaiting the hedge funds and you can bet that OPEC itself has forward shorts in this market.
Amaranth supposedly lost $6 billion on their failed gas corner. To understand the size of their position, one must realize that gas declined about $8 from peak to bottom and that Amaranth probably paid around $10 for most of it on average. Realizing they got out at between $6 and $8 and that 1 trillion feet of gas sells for $1 billion a dollar then one might realize how huge their position was. Figuring they lost $3 per MCF, they had 2 trillion of the roughly 3 trillion in storage. I was wondering for some time how gas was staying as high as it was in light of how large the supplies in storage were. There just isn't a lot of places you can hide natural gas. This may not be true for oil, as I suspect there are storage facilities around the world that could hold a billion barrels or more and it not be inventoried. Imagine if there were 1 billion barrels of oil out there that suddenly needed to be liquidated? Even if the figure were 200 million barrels, we would be looking at the US supply of crude sitting out there somewhere. The large exporting countries have to have massive storage facilities for no other reason than to be able to manage production and demand over time. Countries like Indonesia where there used to be sizable exports could have large storage facilities that they could rent to allow the hiding of oil. The Japanese trader who ran the copper corner in the 1990's supposedly had copper in warehouses in LA and other areas that was bought on the LME.
In any case, the market could actually have been true rather than rigged as I suppose and there isn't a hidden surplus. I find that highly doubtful, having watched the oil market for decades. But, it has to be either a rolled contract game or an actual taken delivery and hidden game where continued pressure is put on the market by very sizable excess contracts being taken to delivery points over and over again. If a corner has enough long contracts over what could be provided to the market, they can always exercise a few deliveries and the shorts have to buy their way out of the rest of them. This gives the appearance of making a huge profit, which is really nothing more than postponement of a liquidation of long positions. All buyers have to become sellers in speculation and visa versa.
Where I part company with the bulls is I believe this to be highly deflationary. For one, the bulls think the consumer game will go back to normal while I believe that those that could still spend kept spending while those that couldn't used the rest of their credit just to survive this oil price run up. Thus, they won't be spending any time soon, if forever. Thus we have had a forced inflation in the short run out of this speculation which will cease and now the world will run without the credit inputs of high oil prices. You can consume for as long as you have room on your credit card, which could be as long as they keep raising the limit or the payments exceed income.
I am watching the money supply figures and they have weakened over the past 90 days. Not a decline in M-2, but a very weak growth, which in light of $160 billion in stimulous checks and the extra money that has been injected into some account by the credit used to buy gasoline is pretty sorry. Where would we stand without the stimulous checks? Bernanke was making light of this situation and the bulls seemed to take it as a signal of the bottom. I take it as the first true recognition that we are in recession and that we went into recession with Santa Claus gifts from Uncle Sam, huge booms in exports and 2% interest rates.
What I see now is maybe another huge short opportunity for the financials. There are again statements to the effect that the bottom is in on housing. It is going to be a damn flat bottom if that is the case. Suddenly Europe is slowing down and China is clearly going to be next, as it is paying massive premiums on everything it imports and its exports are losing traction with its customers economies on the slide. I sense the financials get a good month of reprive and then are back in the dumps again, just as we saw back in March. In fact, we really got to June before the financials started getting the truth out once more. First time it was C getting new capital, then it was Bear being bailed out along with MBIA and Ambac and now it is the implicit being made explicit in regard to FNMA and FHLMC paper. This won't in any way fix the problem.
I would watch the money supply figures going into the fall. I have to believe that we are going to see poor retail results as the stimulous money dries up and the price of oil dries up credit card spending. If inflation indeed turns to deflation, the entire world game is up.
Monday, July 7, 2008
Where is the money going to come from?
Lehman came out today with a statement that FNM and FRE need a total of $75 billion in cash infusion to get through their current mess. I wonder how much Freddie and Fannie think Lehman needs. It isn't a matter of who has the $75 billion, but who is going to need Fannie and Freddie to produce more lending besides the Congress of the US? This isn't a $75 billion investment. The investment has already been made and it was clearly insufficient.
I continue to be a deflationist in the teeth of what appears to be raging inflation. All the stuff that is going up isn't necessarily stuff that the US is going to jump off the bridge if it goes up. Between oil and gas, the US produces near 20 million BPD equivalent, now selling for $2.8 billion a day. How many countries in the world have a $1 trillion economy, much less in one category? We haven't even touched coal or hydropower or atomic, just oil and gas. Corn is going up? Also a big US crop, in fact the US is by far the largest corn producer in the world. In any case, in the scheme of things, consumption of these products aren't rising much if at all in the US, only in the emerging world.
One thing is clear. The US consumer in his entirety has run out of the capacity to borrow more money. This doesn't mean all consumers are tapped out, but the ones that add to their balances every month are. A guy that charges up his card and pays it off every month is a convenience debtor, not a debtor in reality. Then again, how much monetary growth over the past 15 years can be attributed to these pay as you go debtors? How much of the current money supply can be attributed to the $3o billion a month extra being spent on gasoline alone? Figure half the people put their gas purchases on a card, due primarily to the fact that most don't carry enough cash with them to fill up entirely, there is $15 billion on average that exists just because gasoline prices are higher for those that pay their balances monthly. Those that can't pay monthlyare on their way to becoming prior consumers, as are those that are trying to live within their means and the pump is replacing their other expenditures.
Remember, the CRB is hitting China a lot harder than it is the US. It is hitting Europe especially hard as well and the weak dollar has to be hitting their economy especially hard. How does China sell a weak US economy with a low US dollar more goods? REMEMBER China has to get dollars to buy oil?
You guys that read my stuff around the web can point to this as evidence I have called a high in the price of oil. It might get to $150, as is widely expected, but the fibonacci's are lining up with the recessions and the drop in demand and all other items, as the $400 billion hot check is mopped up and put back in the bank as capital infusions. China won't be repeating their expansion of the prior few years any time soon. Neither will Dubai once they realize that they paid top dollar one more time. This is all going on due to the flow of dollars in their direction, not because they have some kind of economic miracle going on. Think they are going to abandon the dollar and let the Europeans fleece them next? No, they are going to go with what brung them as I think Yogi Berra used to say (might as well be Yogi, as he said about everything else).
We have heard rumors of recessions and estimates of recessions, but we haven't had a broken financial system recession like this one that is coming since the 1930's. The inflation that happened in the 1970's along with the bad recessions weren't because the financials were broken, but because the demand for capital credit was so high that interest rates had to shift with inflation. What are our capital interest rates today? Even before the Fed loosened, capital rates had trouble running above 5% on risk free money and 6% or so on top credit lines. This is market, not rigged money. What will it be when there is no demand to build box retailers and speculate on stock in China and India or buy GOOG or 10 houses to rent and become a millionaire in 3 years?
The problems are multifold. America needs a pay hike and they can't get a pay hike because the jobs are going overseas if Americans get a pay hike. So, we have fat cats that get their money out of small cats that are going into debt to line the pockets of the fat cats who went long the ABX then short the ABX and now pretty much have no ABX to fleece the small cats who are out of credit and if they aren't subprime, can't sell their small home any more to someone that is so they can move closer to the fat cats. So one group pays off their debts and pulls in their horns because they can't keep spending money like drunken sailors and keep their penthouses in Manhattan on Central Park. The other group can't borrow any more and loses their job at Walmart because they can't spend and borrow any more at Walmart. The autoworker who has been building SUV's loses his job because they don't need that many people to build the mopeds that the poor guy who had a subprime auto loan on an SUV is now driving due to the fact the repo guy got the SUV he can't afford to put gas in any more and can't sell.
I have understood for years that we couldn't have a real bear market without some kind of credit mess. At one time, I supposed that the bear market would cause the credit problems, but instead I have come to understand that it is the expansion of credit that causes the bull market and the credit problems that result and with the credit game over so is the bull market. The 1970's, even though inflationary and a bear market, really were a bull market after the inflation really started and as it subsided, took off and carried the bull to amazing heights. The problem was the necessary switch in money, as was the switch in the 1930's. What is going to be the switch this time that saves the market from deflation?
One think I am beginning to notice is the restaurants are starting to look bare and the DFW area is a better economy than most. The shine is off Starbucks. It will soon be off the cellphone game, the PC game and the AAPL game. We are about to see a decline in the number of Visa cards for the first time in history and a lot of people are going to be forced to cash. I think the fact that we are seeing some growth in cash outstanding from the Fed is evidence that folding money is being carried for the purpose of buying gasoline in ever greater dollar quantities as many don't have credit any more. The price of gas will decline, but with the decline won't go the availability of credit. If anything, it will cause a drop in cash balances.
I think we are about to see an amazing decline in credit availability. Kudlow for once had some guys that were hitting the nail on the head. Joe Bataglia (sp) and another guy who don't agree too often were right on the money while Kudlow, Dennis and some other guy were in just pretend the price is higher a few years from now and all will be okay, as there won't be any write downs. The point is that the banks have to have capital to expand the money supply and I doubt many want to go to jail for covering up insolvency for long. Come clean now and they are all standing under the same mess, a subprime game that is no ones fault because the rating agencies said the risks were good. The world is standing still while it runs in place faster and faster.
I continue to be a deflationist in the teeth of what appears to be raging inflation. All the stuff that is going up isn't necessarily stuff that the US is going to jump off the bridge if it goes up. Between oil and gas, the US produces near 20 million BPD equivalent, now selling for $2.8 billion a day. How many countries in the world have a $1 trillion economy, much less in one category? We haven't even touched coal or hydropower or atomic, just oil and gas. Corn is going up? Also a big US crop, in fact the US is by far the largest corn producer in the world. In any case, in the scheme of things, consumption of these products aren't rising much if at all in the US, only in the emerging world.
One thing is clear. The US consumer in his entirety has run out of the capacity to borrow more money. This doesn't mean all consumers are tapped out, but the ones that add to their balances every month are. A guy that charges up his card and pays it off every month is a convenience debtor, not a debtor in reality. Then again, how much monetary growth over the past 15 years can be attributed to these pay as you go debtors? How much of the current money supply can be attributed to the $3o billion a month extra being spent on gasoline alone? Figure half the people put their gas purchases on a card, due primarily to the fact that most don't carry enough cash with them to fill up entirely, there is $15 billion on average that exists just because gasoline prices are higher for those that pay their balances monthly. Those that can't pay monthlyare on their way to becoming prior consumers, as are those that are trying to live within their means and the pump is replacing their other expenditures.
Remember, the CRB is hitting China a lot harder than it is the US. It is hitting Europe especially hard as well and the weak dollar has to be hitting their economy especially hard. How does China sell a weak US economy with a low US dollar more goods? REMEMBER China has to get dollars to buy oil?
You guys that read my stuff around the web can point to this as evidence I have called a high in the price of oil. It might get to $150, as is widely expected, but the fibonacci's are lining up with the recessions and the drop in demand and all other items, as the $400 billion hot check is mopped up and put back in the bank as capital infusions. China won't be repeating their expansion of the prior few years any time soon. Neither will Dubai once they realize that they paid top dollar one more time. This is all going on due to the flow of dollars in their direction, not because they have some kind of economic miracle going on. Think they are going to abandon the dollar and let the Europeans fleece them next? No, they are going to go with what brung them as I think Yogi Berra used to say (might as well be Yogi, as he said about everything else).
We have heard rumors of recessions and estimates of recessions, but we haven't had a broken financial system recession like this one that is coming since the 1930's. The inflation that happened in the 1970's along with the bad recessions weren't because the financials were broken, but because the demand for capital credit was so high that interest rates had to shift with inflation. What are our capital interest rates today? Even before the Fed loosened, capital rates had trouble running above 5% on risk free money and 6% or so on top credit lines. This is market, not rigged money. What will it be when there is no demand to build box retailers and speculate on stock in China and India or buy GOOG or 10 houses to rent and become a millionaire in 3 years?
The problems are multifold. America needs a pay hike and they can't get a pay hike because the jobs are going overseas if Americans get a pay hike. So, we have fat cats that get their money out of small cats that are going into debt to line the pockets of the fat cats who went long the ABX then short the ABX and now pretty much have no ABX to fleece the small cats who are out of credit and if they aren't subprime, can't sell their small home any more to someone that is so they can move closer to the fat cats. So one group pays off their debts and pulls in their horns because they can't keep spending money like drunken sailors and keep their penthouses in Manhattan on Central Park. The other group can't borrow any more and loses their job at Walmart because they can't spend and borrow any more at Walmart. The autoworker who has been building SUV's loses his job because they don't need that many people to build the mopeds that the poor guy who had a subprime auto loan on an SUV is now driving due to the fact the repo guy got the SUV he can't afford to put gas in any more and can't sell.
I have understood for years that we couldn't have a real bear market without some kind of credit mess. At one time, I supposed that the bear market would cause the credit problems, but instead I have come to understand that it is the expansion of credit that causes the bull market and the credit problems that result and with the credit game over so is the bull market. The 1970's, even though inflationary and a bear market, really were a bull market after the inflation really started and as it subsided, took off and carried the bull to amazing heights. The problem was the necessary switch in money, as was the switch in the 1930's. What is going to be the switch this time that saves the market from deflation?
One think I am beginning to notice is the restaurants are starting to look bare and the DFW area is a better economy than most. The shine is off Starbucks. It will soon be off the cellphone game, the PC game and the AAPL game. We are about to see a decline in the number of Visa cards for the first time in history and a lot of people are going to be forced to cash. I think the fact that we are seeing some growth in cash outstanding from the Fed is evidence that folding money is being carried for the purpose of buying gasoline in ever greater dollar quantities as many don't have credit any more. The price of gas will decline, but with the decline won't go the availability of credit. If anything, it will cause a drop in cash balances.
I think we are about to see an amazing decline in credit availability. Kudlow for once had some guys that were hitting the nail on the head. Joe Bataglia (sp) and another guy who don't agree too often were right on the money while Kudlow, Dennis and some other guy were in just pretend the price is higher a few years from now and all will be okay, as there won't be any write downs. The point is that the banks have to have capital to expand the money supply and I doubt many want to go to jail for covering up insolvency for long. Come clean now and they are all standing under the same mess, a subprime game that is no ones fault because the rating agencies said the risks were good. The world is standing still while it runs in place faster and faster.
Saturday, June 28, 2008
More they inflate, the more it deflates
I keep wondering if my assessment is going to be wrong, but I am going to stick to it until it is clear that I am wrong. Otherwise I will go nuts trying to figure out what I think I understand. There is a lot of inflation screaming out there, but I suspect we are looking at the last hurrah with stocks and housing in decline and commercial real estate sure to follow as recession sets in. The world is being driven by a one time event, the emergence of China and India into the realm of rapidly developing countries. This is a big event because in the case of China, auto sales are almost as high as those in the US for a country that didn't have auto sales to speak of 10 years ago. I am really kind of amazed to watch this market, as oil goes higher and higher and demand keeps skying in these 2 countries, despite the fact the bill for oil is way out of reach of the typical income in these countries. Americans that make many times more money are to the point of having to park their autos and take the bus.
My spin on this matter is that the world has moved too far too fast for the commodities markets to supply and now that commodities are the only game in town, the huge piles of money on the asset side of the accounts is chasing what amounts to a marginal surplus, creating what appears to be a shortage. They are building massive developments in Asia and I don't believe they are going to be feasible for a long time. In fact, they are building massive developments here in Dallas and I don't believe they are going to be feasible. Dubai is absolutely amazing, phenominal and sure to be a white elephant. China depends on exports to the rest of the world to raise money and I highly doubt they can stand on their own should their export partners enter a sizable recession. The emerging poor are paying double for the materials they need.
My point is that demand worldwide has been fueled by Wall Street finance and this animal is on life support. The most recent spiral has more to do with the failure of Wall Street finance and the breaking of the dam of pent of money creating through formerly recycled dollars being replaced by bad checks covered by the Fed. I believe there was $400 billion or more dollars unleashed on the world to clear out the SIV's and other off balance sheet games that was flat the entities lending to themselves. The Fed is now covering these funds in a variety of innovative and fraudulent lending games that are supposed to be temporary. They succeed in mopping this money up and the commodity bubble collapses. So do the American banks, which don't have the liquidity to pay their debts.
The whole world is focusing on inflation and I am looking toward deflation. The average American home has lost 18% of its value, some $4 trillion. The SPX is down 300 points, another $2.7 trillion plus another $1.3 trillion in the other stocks. That is $8 trillion in the US alone and we aren't even into the commercial real estate market or the debt markets, where there are several trillion in bad debts not even mentioned. Sub-prime is the tip of the iceberg, as we are going to see huge problems in corporate debt and the balance sheets of US corporations, which have been allowed liberal accounting rules to keep their balance sheets solvent.
The lending capacity of the American financial system is collapsing in the midst of screams about inflation. The game is going to center around who owes and who is owed by the financial system. The people that owe don't have the ability to pay and the collateral held is diminishing in value every day. For inflation to continue, money creation has to continue and I don't believe the last couple of months is a good omen for what is about to transpire. I read the Credit Bubble bulletin and I have noticed Doug's figures surrounding M-2 are growing slower and slower every day. I have also noticed currency has grown, but that is the result of the system needing more cash to buy gasoline for those that don't have checking accounts or those that don't carry a card. The money market accounts have grown, but there is massive hazard surrounding these accounts and I am not educated to the point of knowing what these funds are going into since it appears that commercial paper has declined.
The worldwide problems have been caused by excessive dollars getting into the hands of those that need them to buy capital goods and expand infrastructure. I don't expect the flow of dollars to continue for long and in fact, I expect them to literally cease, as the customers at Wal Mart are out of credit and up to their neck in the cost of surviving. But, this isn't a commodity price crisis, but a long cycle financial crisis that could be terminal.
At some point American banks are going to have to mark to market. So are European banks, which seem to be coming cleaner than the American counterparts. Goldman Sachs, not a bank, but somewhat an equivalent, hasn't even started to recognize its losses, maybe enough to wipe them out. It is kind of like 20 guys going to a whorehouse and 19 of them coming down with something and the 20th not catching anything, though he was with all the women. There are fictions going on.
Everything is down. I cannot buy into the idea that there are any good sectors on Wall Street worth holding at this time. There are stocks I think are almost giveaways, like PFE that I cannot bring myself to touch. The stock market is one of the last liquid games out there, even if the prices are down and people and entities are going to have to start raising cash. They talk one minute on CNBC about brokers reducing leverage while in the next breath hyping the market. I don't know how we are going to get from point a to point b if the gas isn't in the tank, which is what leverage is, gas in the tank. We are about to go from borrowing to expand to borrowing to stay afloat to struggling to get out of debt to keep from sinking. This is how deflation goes and it is a mathematical phenomenon.
People single out the US for collapse, but I don't get how the US collapses and the rest don't fall with it? The game is uphill and losing the US would be like losing 33% of your horsepower on an uphill climb. Being the dollar has backed all the currencies in the world, the rest also go to zero if zero is the case. I sense we are about to see a lot of goods on the market and no buyers.
My spin on this matter is that the world has moved too far too fast for the commodities markets to supply and now that commodities are the only game in town, the huge piles of money on the asset side of the accounts is chasing what amounts to a marginal surplus, creating what appears to be a shortage. They are building massive developments in Asia and I don't believe they are going to be feasible for a long time. In fact, they are building massive developments here in Dallas and I don't believe they are going to be feasible. Dubai is absolutely amazing, phenominal and sure to be a white elephant. China depends on exports to the rest of the world to raise money and I highly doubt they can stand on their own should their export partners enter a sizable recession. The emerging poor are paying double for the materials they need.
My point is that demand worldwide has been fueled by Wall Street finance and this animal is on life support. The most recent spiral has more to do with the failure of Wall Street finance and the breaking of the dam of pent of money creating through formerly recycled dollars being replaced by bad checks covered by the Fed. I believe there was $400 billion or more dollars unleashed on the world to clear out the SIV's and other off balance sheet games that was flat the entities lending to themselves. The Fed is now covering these funds in a variety of innovative and fraudulent lending games that are supposed to be temporary. They succeed in mopping this money up and the commodity bubble collapses. So do the American banks, which don't have the liquidity to pay their debts.
The whole world is focusing on inflation and I am looking toward deflation. The average American home has lost 18% of its value, some $4 trillion. The SPX is down 300 points, another $2.7 trillion plus another $1.3 trillion in the other stocks. That is $8 trillion in the US alone and we aren't even into the commercial real estate market or the debt markets, where there are several trillion in bad debts not even mentioned. Sub-prime is the tip of the iceberg, as we are going to see huge problems in corporate debt and the balance sheets of US corporations, which have been allowed liberal accounting rules to keep their balance sheets solvent.
The lending capacity of the American financial system is collapsing in the midst of screams about inflation. The game is going to center around who owes and who is owed by the financial system. The people that owe don't have the ability to pay and the collateral held is diminishing in value every day. For inflation to continue, money creation has to continue and I don't believe the last couple of months is a good omen for what is about to transpire. I read the Credit Bubble bulletin and I have noticed Doug's figures surrounding M-2 are growing slower and slower every day. I have also noticed currency has grown, but that is the result of the system needing more cash to buy gasoline for those that don't have checking accounts or those that don't carry a card. The money market accounts have grown, but there is massive hazard surrounding these accounts and I am not educated to the point of knowing what these funds are going into since it appears that commercial paper has declined.
The worldwide problems have been caused by excessive dollars getting into the hands of those that need them to buy capital goods and expand infrastructure. I don't expect the flow of dollars to continue for long and in fact, I expect them to literally cease, as the customers at Wal Mart are out of credit and up to their neck in the cost of surviving. But, this isn't a commodity price crisis, but a long cycle financial crisis that could be terminal.
At some point American banks are going to have to mark to market. So are European banks, which seem to be coming cleaner than the American counterparts. Goldman Sachs, not a bank, but somewhat an equivalent, hasn't even started to recognize its losses, maybe enough to wipe them out. It is kind of like 20 guys going to a whorehouse and 19 of them coming down with something and the 20th not catching anything, though he was with all the women. There are fictions going on.
Everything is down. I cannot buy into the idea that there are any good sectors on Wall Street worth holding at this time. There are stocks I think are almost giveaways, like PFE that I cannot bring myself to touch. The stock market is one of the last liquid games out there, even if the prices are down and people and entities are going to have to start raising cash. They talk one minute on CNBC about brokers reducing leverage while in the next breath hyping the market. I don't know how we are going to get from point a to point b if the gas isn't in the tank, which is what leverage is, gas in the tank. We are about to go from borrowing to expand to borrowing to stay afloat to struggling to get out of debt to keep from sinking. This is how deflation goes and it is a mathematical phenomenon.
People single out the US for collapse, but I don't get how the US collapses and the rest don't fall with it? The game is uphill and losing the US would be like losing 33% of your horsepower on an uphill climb. Being the dollar has backed all the currencies in the world, the rest also go to zero if zero is the case. I sense we are about to see a lot of goods on the market and no buyers.
Tuesday, May 13, 2008
What is going on?
I have been busy with other things, but I sense that the government statistics coming out have been cooked. The Fed keeps funding more and more liquidity toward entities that are illiquid and the market takes it as new money. No, it is cashing bad checks already written. The latest thing seems to be the retail statistics, which I believe to be down significantly instead of being as reported. For one, auto sales reveal more about what is going on than about any other item in the news. We are now down to normal, after being in a bubble for a decade. Next we will fall to depression levels and at some point we are going to see trouble in the retail commercial real estate sector.
I am getting a conflict and I just posted something about it on the Prudent Bear board. I saw where imported goods were up in price 6.8% for everything and 15% if you include metals and energy. What does Wal-Mart sell that isn't imported? I am having a hard time with this one because I doubt when you exclude food and candy that 10% of what they sell is domestic. 3% adjusted by fictional US CPI numbers would be a significant decline. Also, I just calculated the US oil bill to have increased by $21 billion a month roughly, using 14 million barrels a day and a $50 increase, which isn't that exaggerated. Why isn't our trade deficit worse? It isn't that big an increase in sales to overseas, as it is clearly a decline in imports other than oil and minerals. Someone ate a $21 billion slice taken by one product, oil. Maybe we are looking at 12 million barrels and $18 billion or maybe 12 million barrels and $40 a barrel times 30 for $14.4 billion, but there is a magical $15 to $20 billion missing a month which in retail means $500 billion a year once it is marked up or maybe 5% to 8% of all sales. The figures are a lie. In any event, the financial picture of the American consumer isn't that pretty at all.
Getting back to the consumer, it really amazes me that we have reached the point that either we attempt to spend our way to prosperity or we go broke trying. In any event, we are broke if we don't and broke if we do and the rest of the world goes down the drain with us. Why is a good question?
Lets take oil demand. If speculators are really running this market, they had better be hoarding their profit in the good they are trading. There is no way this is going on other than them taking delivery and running a corner on the surplus supply of oil by holding enough contracts to take delivery on the surplus. There is a problem if this is financed, as oil is a very inelastic good on the short run and just a minor surplus could cause the price to collapse. 5% of 80 million barrels a day is 4 million barrels a day, which is $400 million a day or $12 billion a month. It wouldn't take long for a corner to collapse, as it would run out of where to put this much oil together with the fact that it would take a huge position to squeeze the market. To carry such a position they would have to have enough cash to threaten delivery.
What I am saying is a 5% surplus in oil would cause the market to collapse in time. The US constitutes probably 30% of the consumer goods demand in the world. We are reaching a point where the US could temporarily collapse, which in a matter of weeks would cause the price of everything to collapse because the rest of the world doesn't have the interest, much less the income to consume this amount of goods. It would provide a domino effect in layoffs world wide that would cause a deflationary spiral beyond comprehension. I don't think we can avoid it.
Next is this banking mess. I have noticed the M-2 figures for the past 4 weeks and 3 of the 4 weeks have shown significant declines. We are in trouble here, as the Fed loans to the banks are for checks already written, not for lending purposes. The US credit machine is broken, which means the credit machine for the world is broken. When is China going to line up to buy more CDO's full of subprime mortgages? If there is no real subprime market to even approach the one we saw the past few years, how are consumers going to get cash out of their homes? It is the subprime demand that created the appreciation that allowed for cash out refinances and for cash producing sales. There is a lot more here, as this financing was piling up in accounts of corporations and speculators. Throw an extra trillion in free cash out there and see how sweet it gets. It won't ever be this sweet again for people my age. How is a consumer dependent economy going to get across the next street without the free money of the past? It won't and the boom in Asia will go down with it.
There are 2 camps out there and the first has to either be morons or lucky, the short or no recession camp. The really brilliant people are calling for a big mess. I am talking about Volker, Buffet, Soros and even Greenie. How can we not have a mess when the financial machine has lost its wheels? Maybe the government checks give us a bump, but the more likely thing is we just let it pass.
There is something besides normal inflation here. Inflation works when the money produced actually creates an additional demand, but when it only allows for the purchase of something at a higher price, the reason for financing goes out the window. I think that is what occurred in the late 1970's, and when this occurs, something is done to stop it. I think it will stop itself, as the wherewithal to pay isn't going up with the prices and credit this time.
I am getting a conflict and I just posted something about it on the Prudent Bear board. I saw where imported goods were up in price 6.8% for everything and 15% if you include metals and energy. What does Wal-Mart sell that isn't imported? I am having a hard time with this one because I doubt when you exclude food and candy that 10% of what they sell is domestic. 3% adjusted by fictional US CPI numbers would be a significant decline. Also, I just calculated the US oil bill to have increased by $21 billion a month roughly, using 14 million barrels a day and a $50 increase, which isn't that exaggerated. Why isn't our trade deficit worse? It isn't that big an increase in sales to overseas, as it is clearly a decline in imports other than oil and minerals. Someone ate a $21 billion slice taken by one product, oil. Maybe we are looking at 12 million barrels and $18 billion or maybe 12 million barrels and $40 a barrel times 30 for $14.4 billion, but there is a magical $15 to $20 billion missing a month which in retail means $500 billion a year once it is marked up or maybe 5% to 8% of all sales. The figures are a lie. In any event, the financial picture of the American consumer isn't that pretty at all.
Getting back to the consumer, it really amazes me that we have reached the point that either we attempt to spend our way to prosperity or we go broke trying. In any event, we are broke if we don't and broke if we do and the rest of the world goes down the drain with us. Why is a good question?
Lets take oil demand. If speculators are really running this market, they had better be hoarding their profit in the good they are trading. There is no way this is going on other than them taking delivery and running a corner on the surplus supply of oil by holding enough contracts to take delivery on the surplus. There is a problem if this is financed, as oil is a very inelastic good on the short run and just a minor surplus could cause the price to collapse. 5% of 80 million barrels a day is 4 million barrels a day, which is $400 million a day or $12 billion a month. It wouldn't take long for a corner to collapse, as it would run out of where to put this much oil together with the fact that it would take a huge position to squeeze the market. To carry such a position they would have to have enough cash to threaten delivery.
What I am saying is a 5% surplus in oil would cause the market to collapse in time. The US constitutes probably 30% of the consumer goods demand in the world. We are reaching a point where the US could temporarily collapse, which in a matter of weeks would cause the price of everything to collapse because the rest of the world doesn't have the interest, much less the income to consume this amount of goods. It would provide a domino effect in layoffs world wide that would cause a deflationary spiral beyond comprehension. I don't think we can avoid it.
Next is this banking mess. I have noticed the M-2 figures for the past 4 weeks and 3 of the 4 weeks have shown significant declines. We are in trouble here, as the Fed loans to the banks are for checks already written, not for lending purposes. The US credit machine is broken, which means the credit machine for the world is broken. When is China going to line up to buy more CDO's full of subprime mortgages? If there is no real subprime market to even approach the one we saw the past few years, how are consumers going to get cash out of their homes? It is the subprime demand that created the appreciation that allowed for cash out refinances and for cash producing sales. There is a lot more here, as this financing was piling up in accounts of corporations and speculators. Throw an extra trillion in free cash out there and see how sweet it gets. It won't ever be this sweet again for people my age. How is a consumer dependent economy going to get across the next street without the free money of the past? It won't and the boom in Asia will go down with it.
There are 2 camps out there and the first has to either be morons or lucky, the short or no recession camp. The really brilliant people are calling for a big mess. I am talking about Volker, Buffet, Soros and even Greenie. How can we not have a mess when the financial machine has lost its wheels? Maybe the government checks give us a bump, but the more likely thing is we just let it pass.
There is something besides normal inflation here. Inflation works when the money produced actually creates an additional demand, but when it only allows for the purchase of something at a higher price, the reason for financing goes out the window. I think that is what occurred in the late 1970's, and when this occurs, something is done to stop it. I think it will stop itself, as the wherewithal to pay isn't going up with the prices and credit this time.
Tuesday, April 22, 2008
Wall Street fairy tale
I wasn't going to write anything tonight, but a visit to Calculated Risk http://calculatedrisk.blogspot.com/ got me started. For those of you that found me from this site, I am glad you came. For those of you that know me from my outrageous posts and my refusal to join the inflation goes on forever to the sky crowd, I am glad you are here.
The news gets more confusing all the time, but the truth leaks out from time to time. The truth is the world has reached the tower of Babel level once more and the tower is about to topple. The size of the world economy has reached a level that is too large for the existing resources to support and too large for the United States credit machine to fund. We have run out of coal to put on the fire, as our housing was the last vestige of a consumer asset we had left. Now we are left to sell our multinationals and our food stuffs, which won't go on for long as the rest of the world could very well buy up the US food supply many times over with the amount of money floating around in the system.
Calculated risk had a short article about Shiller and his forecast that the housing problem might be larger than it was during the depression. There is no doubt that housing has had the means to be inflated onward and upward for several decades. The US isn't like Hong Kong or England, where prime real estate is centered in one special spot, but instead has a wide variety of housing markets, leading not only to more supply, but a harder to drive price spiral. The US has had, for a great number of years, the means to have a housing bubble, but the wide supply range has kept this from occurring.
Not this time. The credit bubble blows bubbles in all directions. What we have today is an unsupportable debt bubble that creates one group, unpayable debts that support through intermediaries, unpayable deposits. The middle men, banks, Savings and Loans, credit unions, brokerage firms and insurance companies to name a few are obligated for the difference between what is collectable and what is owed to depositors. In the meantime, the depositors are stuck with excess cash yielding insufficient interest rates seeking higher returns. The problem is that the buyer and seller merely trade cash and it never leaves unless it becomes the temporary property of the debtor who then puts it out of existence by paying their debt.
This is how bubbles get started. Since high prices lead to higher prices and high prices for assets always lead to low yields, the seeking is for a capital gain and not for an investment. An invetment would imply that the asset purchased could actually carry itself financially. Any examination of speculative real estate will find that it will rarely if ever rent for the payments and if we are talking about paying cash, sometimes it will barely bring back the taxes, insurance and maintenance. It is hard to call a total hedge against inflation as an investment, as there is no return against inflation.
But, once the game is spotted, it becomes a bigger fool buying from the previous bigger fool until they run out of fools. Sometimes the fools they run out of are the fools that finance the stuff, as they eventually are the ones that have to stand for the loss. When this stage is reached to any significant degree, we enter a new game called make believe.
The game of make believe works like this. It beckons back to yesteryear when the outlook was bright and cheery and everything always came back. Every thing always comes back as long as it isn't killed. That is what is different between speculative cycles and bubbles. The cycles always have worked out the make believe, where as the bubbles are a series of make believes come true that turn into a nightmare that doesn't end. The bubble has burst after decades of housing slowdowns being followed by booms and more slowdowns. Each was accommodated by easier credit, as they began to create statistics to show that only occasionally do housing markets get into trouble and they are almost alway local and center around the economy. Well, what happened when the stock market went bust in 2000? A recession? Not in housing there wasn't. Every record that existed in home sales prior to 1997 was decimated every year we were supposedly in a slow economy in the 2000-2004 period. Thus we had a downturn that was a boom in housing. When we should have taken a breath, we sped up. That is what a bubble does, defies economics. It defies the laws of supply and demand, the laws of the business cycle, the laws of risk and return and all the laws, and most certainly the law of reason.
What we are seeing today is the government attempting to keep the bubble going. Previously existing home sales are close to 5 million. This blows away the pre-1997 record of 4 million, but we are hearing about a housing bust, not a housing boom. This means in securities terms that people are buying falling knives and the government is trying their best to finance the speculation. Remember this when you look back at the carnage that occurred from events after this bubble burst because it will have been facilitated by the greatest cover-up in history.
What is the cover-up? I think the real cover-up is that honest inflation is over and deflation starts once the cat gets out of the bag. I am going to pick on Goldman Sachs as an example because I know just enough about Goldman to be found to be ignorant of the entire picture. But what I know is there is something rotten in NY. Goldman paid its 30,000 employees somewhere in the neighborhood of $21 billion last year. That would be a fine place to work with an average paycheck of $700K per year per employee. A good part of this was performance bonuses, I would say likely earned on what are called today, Level 3 assets.
This is a smoky term. Rather than take the write downs that Merrill Lynch and Morgan Stanley took, Goldman mysteriously moved something like $30 billion from Level 2 to Level 3 assets. I think Level 3 derives its value from, well lets look back and use our imagination. Well, I know of some damn nice land that I wish I could get a loan to buy using my imagination of what I think it should be worth. I think I could put 100% of what it costs in my pocket, plus buy a 5 year annuity to make the P&I payments. But, I couldn't sell it for anything close to what I could imagine it to be worth. This is one of the things that makes land investment such a torture. In any case, Goldman paid huge bonuses for stuff that probably bankrupted the company.
What would happen if the auditors went in and declared a spade a spade and Goldman was broke to the world? The world supply of toilet paper would be drawn down in half by noon on such a day and the sewers flooded with you know what. What would break Goldman? The revelation that what they held to be good securities on their books were actually junk and not collectible. Goldman has something like $60 billion of this doubtful crap on their books, twice their net worth. The idea the housing market is going to walk again very soon and walk like it isn't crippled is all that is holding this stuff up to the world as potentially worth anything.
There are a bunch of them out there not coming clean. I think the banks coming clean are doing so only because they want to get the capital infusions ahead of those that might be too late for the willing parties to infuse anything. But, if Goldman came clean, then they would have to give back those huge bonuses that were earned off profit making losing propositions. I am wondering about Wells Fargo, another bank engaged in subprime lending and large in the mortgage business. Where are their losses? Are they God and too damn smart to make bad loans in a market where everyone else pretty much went bust? Hear no evil, see no evil, speak no evil? It goes on and on.
Then we have the import market, the domestic market and the stock market. The US consumer binge has been run off home equity. So has the education system and the stock market. Do you think the earnings of SPX companies are going to sustain themselves in a debt deflation? I think the stock market could fall 90% before this one is done and home prices 50%, enough to wipe out the mortgage lending business.
There is a whole lot at risk here. For one, the deposits in banks don't go away as bank liabilities when their assets go bad. In a sense they do go away with the bank because the only means to pay the deposits is with the deposits. No one else has any money to collect or should I say to pay into an insurance fund. You could say inflation, but what if the value of all deposits in the US fell without any new deposits being created? It is clear with all the junk debt companies out there that debts never die and I would venture there will be a system of digging up corpses to get the gold out of their teeth before this one is done, but in any case money disappears when debt is paid. If we suddenly saw the dollar lose 50% of its value without any new lending, do you think we would have inflation or deflation over a longer term?
There is no doubt in my mind that we would see a huge deflation even though logic would scream inflation. For one, who would be able to borrow money at 100%? Second, the reason we are in this trouble in the first place is debt is going bad, not because it is safe to lend to all comers and all securities can now be made to perform as AAA. That was what got us in this and it won't be done again for maybe 300 years. Third, those with cash balances would likely hoard what they had and not spend it at all for anything other than necessities, leaving consumer goods unsold. People forget those that have cash have it because they didn't give it up. They won't throw it out because they suddenly feel poorer, unless they use it to acquire some asset for sale by some debtor so he can use the money to get out of debt and extinguish it.
Then there is the GSE's. I am getting the drift that the US is done selling the world any kind of debt that doesn't say direct obligation of the US treasury. This means that the indirect guarantees mean nothing. Why buy them if you can get the real thing? It is clear that suddenly if they aren't buying Sallie Mae debt, then the debt of the GSE's, FNM and FRE and their dreaded link to mortgages isn't going to be appetizing for the world markets. We are about to see the Fed have to buy up the credit line of FRE and FNM due to the fact they can't move their own paper. This can't go on for long.
The point here is that we are stuck. Either we enter into mutually assured destruction or we take a chance the market will work its way out of this with new brokerage companies, new bank accounts and some fashion of keep from starving socialism to float the bankrupt. In either case, the country is broke and the world is broke along with the country because all that is owned by the rest of the world was borrowed by the United States. The inflation game has no solution at this point. There is no way that demand can be sustained by inflation, as the only inflation machine in the world is the US. The inflation cookie jar is American housing and American housing is collapsing in price during a boom. What happens when housing sales go back to normal, in the 3.5 million range? It appears to me that we then have as many as 2 years supply of homes on the market and the only remedy for those that have to sell is foreclosure. There are vacant existing homes in the US that exceed 2 years supply at this time, meaning that to solve demand, no one would have to move for 2 years and all the housing needs could be solved. This isn't a situation where we have a 90 day down period and the sales pick up with the economy. In fact, the economy is hitting on all cylinders, except the housing bubble has burst. The only reason we are selling 5 million units a year is the economy is booming. A recession takes home prices to the depths of hell and sales maybe down to 2.5 million, half of what we see now. It also destroys the fairy tale Wall Street has read to us.
The news gets more confusing all the time, but the truth leaks out from time to time. The truth is the world has reached the tower of Babel level once more and the tower is about to topple. The size of the world economy has reached a level that is too large for the existing resources to support and too large for the United States credit machine to fund. We have run out of coal to put on the fire, as our housing was the last vestige of a consumer asset we had left. Now we are left to sell our multinationals and our food stuffs, which won't go on for long as the rest of the world could very well buy up the US food supply many times over with the amount of money floating around in the system.
Calculated risk had a short article about Shiller and his forecast that the housing problem might be larger than it was during the depression. There is no doubt that housing has had the means to be inflated onward and upward for several decades. The US isn't like Hong Kong or England, where prime real estate is centered in one special spot, but instead has a wide variety of housing markets, leading not only to more supply, but a harder to drive price spiral. The US has had, for a great number of years, the means to have a housing bubble, but the wide supply range has kept this from occurring.
Not this time. The credit bubble blows bubbles in all directions. What we have today is an unsupportable debt bubble that creates one group, unpayable debts that support through intermediaries, unpayable deposits. The middle men, banks, Savings and Loans, credit unions, brokerage firms and insurance companies to name a few are obligated for the difference between what is collectable and what is owed to depositors. In the meantime, the depositors are stuck with excess cash yielding insufficient interest rates seeking higher returns. The problem is that the buyer and seller merely trade cash and it never leaves unless it becomes the temporary property of the debtor who then puts it out of existence by paying their debt.
This is how bubbles get started. Since high prices lead to higher prices and high prices for assets always lead to low yields, the seeking is for a capital gain and not for an investment. An invetment would imply that the asset purchased could actually carry itself financially. Any examination of speculative real estate will find that it will rarely if ever rent for the payments and if we are talking about paying cash, sometimes it will barely bring back the taxes, insurance and maintenance. It is hard to call a total hedge against inflation as an investment, as there is no return against inflation.
But, once the game is spotted, it becomes a bigger fool buying from the previous bigger fool until they run out of fools. Sometimes the fools they run out of are the fools that finance the stuff, as they eventually are the ones that have to stand for the loss. When this stage is reached to any significant degree, we enter a new game called make believe.
The game of make believe works like this. It beckons back to yesteryear when the outlook was bright and cheery and everything always came back. Every thing always comes back as long as it isn't killed. That is what is different between speculative cycles and bubbles. The cycles always have worked out the make believe, where as the bubbles are a series of make believes come true that turn into a nightmare that doesn't end. The bubble has burst after decades of housing slowdowns being followed by booms and more slowdowns. Each was accommodated by easier credit, as they began to create statistics to show that only occasionally do housing markets get into trouble and they are almost alway local and center around the economy. Well, what happened when the stock market went bust in 2000? A recession? Not in housing there wasn't. Every record that existed in home sales prior to 1997 was decimated every year we were supposedly in a slow economy in the 2000-2004 period. Thus we had a downturn that was a boom in housing. When we should have taken a breath, we sped up. That is what a bubble does, defies economics. It defies the laws of supply and demand, the laws of the business cycle, the laws of risk and return and all the laws, and most certainly the law of reason.
What we are seeing today is the government attempting to keep the bubble going. Previously existing home sales are close to 5 million. This blows away the pre-1997 record of 4 million, but we are hearing about a housing bust, not a housing boom. This means in securities terms that people are buying falling knives and the government is trying their best to finance the speculation. Remember this when you look back at the carnage that occurred from events after this bubble burst because it will have been facilitated by the greatest cover-up in history.
What is the cover-up? I think the real cover-up is that honest inflation is over and deflation starts once the cat gets out of the bag. I am going to pick on Goldman Sachs as an example because I know just enough about Goldman to be found to be ignorant of the entire picture. But what I know is there is something rotten in NY. Goldman paid its 30,000 employees somewhere in the neighborhood of $21 billion last year. That would be a fine place to work with an average paycheck of $700K per year per employee. A good part of this was performance bonuses, I would say likely earned on what are called today, Level 3 assets.
This is a smoky term. Rather than take the write downs that Merrill Lynch and Morgan Stanley took, Goldman mysteriously moved something like $30 billion from Level 2 to Level 3 assets. I think Level 3 derives its value from, well lets look back and use our imagination. Well, I know of some damn nice land that I wish I could get a loan to buy using my imagination of what I think it should be worth. I think I could put 100% of what it costs in my pocket, plus buy a 5 year annuity to make the P&I payments. But, I couldn't sell it for anything close to what I could imagine it to be worth. This is one of the things that makes land investment such a torture. In any case, Goldman paid huge bonuses for stuff that probably bankrupted the company.
What would happen if the auditors went in and declared a spade a spade and Goldman was broke to the world? The world supply of toilet paper would be drawn down in half by noon on such a day and the sewers flooded with you know what. What would break Goldman? The revelation that what they held to be good securities on their books were actually junk and not collectible. Goldman has something like $60 billion of this doubtful crap on their books, twice their net worth. The idea the housing market is going to walk again very soon and walk like it isn't crippled is all that is holding this stuff up to the world as potentially worth anything.
There are a bunch of them out there not coming clean. I think the banks coming clean are doing so only because they want to get the capital infusions ahead of those that might be too late for the willing parties to infuse anything. But, if Goldman came clean, then they would have to give back those huge bonuses that were earned off profit making losing propositions. I am wondering about Wells Fargo, another bank engaged in subprime lending and large in the mortgage business. Where are their losses? Are they God and too damn smart to make bad loans in a market where everyone else pretty much went bust? Hear no evil, see no evil, speak no evil? It goes on and on.
Then we have the import market, the domestic market and the stock market. The US consumer binge has been run off home equity. So has the education system and the stock market. Do you think the earnings of SPX companies are going to sustain themselves in a debt deflation? I think the stock market could fall 90% before this one is done and home prices 50%, enough to wipe out the mortgage lending business.
There is a whole lot at risk here. For one, the deposits in banks don't go away as bank liabilities when their assets go bad. In a sense they do go away with the bank because the only means to pay the deposits is with the deposits. No one else has any money to collect or should I say to pay into an insurance fund. You could say inflation, but what if the value of all deposits in the US fell without any new deposits being created? It is clear with all the junk debt companies out there that debts never die and I would venture there will be a system of digging up corpses to get the gold out of their teeth before this one is done, but in any case money disappears when debt is paid. If we suddenly saw the dollar lose 50% of its value without any new lending, do you think we would have inflation or deflation over a longer term?
There is no doubt in my mind that we would see a huge deflation even though logic would scream inflation. For one, who would be able to borrow money at 100%? Second, the reason we are in this trouble in the first place is debt is going bad, not because it is safe to lend to all comers and all securities can now be made to perform as AAA. That was what got us in this and it won't be done again for maybe 300 years. Third, those with cash balances would likely hoard what they had and not spend it at all for anything other than necessities, leaving consumer goods unsold. People forget those that have cash have it because they didn't give it up. They won't throw it out because they suddenly feel poorer, unless they use it to acquire some asset for sale by some debtor so he can use the money to get out of debt and extinguish it.
Then there is the GSE's. I am getting the drift that the US is done selling the world any kind of debt that doesn't say direct obligation of the US treasury. This means that the indirect guarantees mean nothing. Why buy them if you can get the real thing? It is clear that suddenly if they aren't buying Sallie Mae debt, then the debt of the GSE's, FNM and FRE and their dreaded link to mortgages isn't going to be appetizing for the world markets. We are about to see the Fed have to buy up the credit line of FRE and FNM due to the fact they can't move their own paper. This can't go on for long.
The point here is that we are stuck. Either we enter into mutually assured destruction or we take a chance the market will work its way out of this with new brokerage companies, new bank accounts and some fashion of keep from starving socialism to float the bankrupt. In either case, the country is broke and the world is broke along with the country because all that is owned by the rest of the world was borrowed by the United States. The inflation game has no solution at this point. There is no way that demand can be sustained by inflation, as the only inflation machine in the world is the US. The inflation cookie jar is American housing and American housing is collapsing in price during a boom. What happens when housing sales go back to normal, in the 3.5 million range? It appears to me that we then have as many as 2 years supply of homes on the market and the only remedy for those that have to sell is foreclosure. There are vacant existing homes in the US that exceed 2 years supply at this time, meaning that to solve demand, no one would have to move for 2 years and all the housing needs could be solved. This isn't a situation where we have a 90 day down period and the sales pick up with the economy. In fact, the economy is hitting on all cylinders, except the housing bubble has burst. The only reason we are selling 5 million units a year is the economy is booming. A recession takes home prices to the depths of hell and sales maybe down to 2.5 million, half of what we see now. It also destroys the fairy tale Wall Street has read to us.
Tuesday, April 8, 2008
Who has the free money to get us out of this?
There is a guy on the Prudent Bear board who calls himself Raven. Raven comes along every rally and tells the bears they are going to be buried by a record move in the market up. He isn't the only one out there calling for a massive rally to bury all bears and make all that are in rich. CNBC parades these guys across the stage every day. Monday, April 7, 2008, Washington Mutual received $7 billion in new capital for essentially 50% of is stock. The new price was $7 per share though Wamu was trading for around $11. Bulls had another one fixed, at least they think so.
After examining the Wamu deal, I had a sneaking suspicion that quite possibly the buyers found a place to cover their shorts. That would be an innovative deal, to short cut someone else causing a run on the stock by putting up money and thus making it impossible to exit a winning trade. This is a novel idea, especially if the players had use of the short sale money. Under the idea of repurchase agreements, it isn't beyond the realm that this very thing happened. Should a group have shorted this stock at lets say $30 per share and up and built a large position, they would now be in position by taking $7 of this $30 per share and buying 100% of the stock they were short with the funds they received from the repurchase agreement. Instead of putting in $7 billion, they would be walking out with $23 billion. This is a far fetched idea, but with all the scams that go on this day and time and the thieves lurking in the securities game, I wouldn't be surprised.
But, this is a theoretical idea of where to get some money. In any event, a capital infusion in a bank goes into outer space. A bank can only use money as a balance sheet entry and it ceases to exist as soon as it is paid into the bank. This means there is now new debt out there with no mathematical solution. Selling what you don't own to get money and creating money in a fashion that it can only exist in the minds of men and nowhere else are pretty wild ideas. But, where does the consumer who has to either own equity positions in what he sells or go to prison for conversion, get his money?
Greenspan was on the TV today. Greenie didn't have good news and Maria Bartaroma knew it and kept changing the subject. Greenspan was there to defend his record which is getting worse all the time after earning the name Maestro for his management of the Fed. For those that don't understand the system of banking, Greenspan might as well have been using Greenspeak. But, he was amazingly clear on what he was saying. What he was saying is don't look for things to turn around very fast.
The bulls are treating it like it is past and better times are ahead. Greenspan said exactly the opposite. He pretty much said the banks and Wall St. firms had a lot of deleveraging to do. Now, how do banks and Wall St. firms deleverage other than taking loans and securities off their books? Would it be possible that the massive run up in money supply has been through the massive need for money to carry the crap that the banks and Wall St. firms got stuck with? I think it is very possible. Not only possible, but very probable. In fact, I think it is pretty much the case. How much credit can a firm like Goldman carry if they go 15 to 20 to 1? A trillion dollars? $500 billion? Multiply that times 3 or 4 and you might get the idea if it has all been piling up instead of being passed through? Of foreign countries, how many want any debt marketed by Wall Street after this debacle? How much do you think they lost on CDO's? I bet it is many times what the banks have reported. You think they want more of them?
In any case, they either take in capital and make the money represented by the capital disappear or they cut their loan portfolio to deleverage. There is a lot to be sold and no money to buy it, so it will have to be marked down. What do you think these Fed loans are? They are funding loans the banks made to themselves that they expected to borrow from another bank instead. The banking system was insolvent or at least the very largest lending banks were. They are continuing to allow for the use of credit cards, but then again, credit cards are fee generators. But, the prime lending is getting tougher and tougher. With inadequate capital, few banks are in position to take the risks.
What we had was a subprime boom. We have been riding subprime for a lot longer than people think and we have been living off home equity for at least the past 30 years. Now the ball is rolling backwards. There won't be any subprime to get us out of this. This is what the bulls are missing, no subprime, no bull market.
Greenspan said the players were now insisting on re-regulation. We get the idea it was the people that wanted it, the Congress, but he says it is the investors and the banks themselves that want it. This is very important because it is going to restrict the leverage employed and most likely remove so many derivatives from the game. There are those that think the game is going back to normal, but no one wants the products the last game produced. We probably haven't seen the end of the game yet.
Greenspan also said there would be losses as long as the housing market was down. It was reported today that pending sales hit an all time low. What they left out was the all time low was since 2001. The Realtors Association is using bubble data and calling it all time low type stuff. It is missed on this idea that housing has been in a bubble since the mid 1990's, at least the sales have been there. Prior to 1997, we never sold the minimum number of homes sold in a year since, including 2007. This is new or preowned and we are still close to 5 million in preowned home sales. The market had never done 4 million prior to 1997. Thus we are still in a boom, taking on risky buyers in the sale of real estate.
This is not a new paradigm and it won't go on much longer. The PMI companies are getting killed. Next it will be the GSE's and the private label mortgages, which have already been waxed very badly. There is a lot of crying going on when in fact the industry is operating at boom levels and prices are declining despite this fact. To base data against a fiction is deceptive and this is what is going on. People would be stunned if they took this year out of context and compared it to those years prior to 1997, to find that the sales are records against the non-bubble years.
What does this all say? I believe it means we have real troubles. For one, the bulls have been diving into the home builders and the financials. They have also been hot on the gadget companies like Apple. The homebuilders can undersell the market until the market drops to where they can't build at any profit whatsoever. I think we are headed there, quite possible with 2 years supply of homes on the market before this one is done. Every subprime sale that occurred in the previous decade won't occur in the next decade. Before it is all done, FHA, FHLBB, FHLMC and FNMA will all need to be bailed out. So will the PMI companies. Where does the industry go if the zero down game is done?
How important are homesales? Well, when a home is sold, it frees up a lot of cash. Should a 40 year old sell a home he bought when he was 30 for twice the money, quite likely he will take this money and pay his credit cards or put it in the market or save it for college and get a maximum mortgage on his next home and take advantage of the home interest deduction. So, a $200,000 sale will free up maybe $80,000. This might be as much money as this guy makes in a year or 2. The consumer spending boom is dependent on such a game.
I don't know if you know where I am going with this, but Who has the free money to get us out of this? The bulls seem to think it is coming. I don't know where they are going to get the buyout financing that drove the market last time? I don't know where they are going to replace the stock buyback money that was coming out of the financials? Who is going to replace the easy credit given creditless people? What is going to happen to corporate earnings if activity declines even 2%? Have any of you ever examined the earnings of an automobile company during a recession and the boom afterwards? With a very marginal increase in sales, they go from going broke to record profits. What finances China and India? Don't you realize that the US has created all the basis of credit in those countries and without extra dollars, they cannot expand their economies? Does anyone recall what happened to Japan in 1990 after the US sneezed?
The question that keeps getting asked is why isn't the market lower with all the shoes dropping? For one thing, they haven't allowed any shoes to drop. They are all dangling and we haven't yet to see what the impact of keeping these shoes in the air from hitting the ground. What few realize is what the Fed is getting for all this cleaver financing is the capital base of all of these companies. Also, they don't realize that we haven't seen the earnings impact that is going to occur from this mess. Every prediction has been wrong so far because they aren't operating in reality. Reality is there are 3 to 4 million preowned sales in a good year, not 5 million in a bad year. Reality is that people are spending good credit, not soaked in subprime credit. Reality is that AAA means AAA, not junk bond CDO's leveraged to the moon. Reality is that trade is roughly balanced, not out of balance by $700 billion every year and rising.
The market is propped because there isn't anything in the US that foreigners can buy other than the corporations and treasuries. Who wants the crap that Wall Street presented us? What is going to happen when the interest rates rise enough to induce the solvent banks to trade their cash in on t-bills and leave the insolvent ones perpetually propped up by cheap Fed credit in return for their performing assets? When is the market going to value itself according to risk instead of derivative portfolio? We are looking at a risk free rate of return out of the SPX and it will go negative as soon as earnings adjust to the new financial reality
After examining the Wamu deal, I had a sneaking suspicion that quite possibly the buyers found a place to cover their shorts. That would be an innovative deal, to short cut someone else causing a run on the stock by putting up money and thus making it impossible to exit a winning trade. This is a novel idea, especially if the players had use of the short sale money. Under the idea of repurchase agreements, it isn't beyond the realm that this very thing happened. Should a group have shorted this stock at lets say $30 per share and up and built a large position, they would now be in position by taking $7 of this $30 per share and buying 100% of the stock they were short with the funds they received from the repurchase agreement. Instead of putting in $7 billion, they would be walking out with $23 billion. This is a far fetched idea, but with all the scams that go on this day and time and the thieves lurking in the securities game, I wouldn't be surprised.
But, this is a theoretical idea of where to get some money. In any event, a capital infusion in a bank goes into outer space. A bank can only use money as a balance sheet entry and it ceases to exist as soon as it is paid into the bank. This means there is now new debt out there with no mathematical solution. Selling what you don't own to get money and creating money in a fashion that it can only exist in the minds of men and nowhere else are pretty wild ideas. But, where does the consumer who has to either own equity positions in what he sells or go to prison for conversion, get his money?
Greenspan was on the TV today. Greenie didn't have good news and Maria Bartaroma knew it and kept changing the subject. Greenspan was there to defend his record which is getting worse all the time after earning the name Maestro for his management of the Fed. For those that don't understand the system of banking, Greenspan might as well have been using Greenspeak. But, he was amazingly clear on what he was saying. What he was saying is don't look for things to turn around very fast.
The bulls are treating it like it is past and better times are ahead. Greenspan said exactly the opposite. He pretty much said the banks and Wall St. firms had a lot of deleveraging to do. Now, how do banks and Wall St. firms deleverage other than taking loans and securities off their books? Would it be possible that the massive run up in money supply has been through the massive need for money to carry the crap that the banks and Wall St. firms got stuck with? I think it is very possible. Not only possible, but very probable. In fact, I think it is pretty much the case. How much credit can a firm like Goldman carry if they go 15 to 20 to 1? A trillion dollars? $500 billion? Multiply that times 3 or 4 and you might get the idea if it has all been piling up instead of being passed through? Of foreign countries, how many want any debt marketed by Wall Street after this debacle? How much do you think they lost on CDO's? I bet it is many times what the banks have reported. You think they want more of them?
In any case, they either take in capital and make the money represented by the capital disappear or they cut their loan portfolio to deleverage. There is a lot to be sold and no money to buy it, so it will have to be marked down. What do you think these Fed loans are? They are funding loans the banks made to themselves that they expected to borrow from another bank instead. The banking system was insolvent or at least the very largest lending banks were. They are continuing to allow for the use of credit cards, but then again, credit cards are fee generators. But, the prime lending is getting tougher and tougher. With inadequate capital, few banks are in position to take the risks.
What we had was a subprime boom. We have been riding subprime for a lot longer than people think and we have been living off home equity for at least the past 30 years. Now the ball is rolling backwards. There won't be any subprime to get us out of this. This is what the bulls are missing, no subprime, no bull market.
Greenspan said the players were now insisting on re-regulation. We get the idea it was the people that wanted it, the Congress, but he says it is the investors and the banks themselves that want it. This is very important because it is going to restrict the leverage employed and most likely remove so many derivatives from the game. There are those that think the game is going back to normal, but no one wants the products the last game produced. We probably haven't seen the end of the game yet.
Greenspan also said there would be losses as long as the housing market was down. It was reported today that pending sales hit an all time low. What they left out was the all time low was since 2001. The Realtors Association is using bubble data and calling it all time low type stuff. It is missed on this idea that housing has been in a bubble since the mid 1990's, at least the sales have been there. Prior to 1997, we never sold the minimum number of homes sold in a year since, including 2007. This is new or preowned and we are still close to 5 million in preowned home sales. The market had never done 4 million prior to 1997. Thus we are still in a boom, taking on risky buyers in the sale of real estate.
This is not a new paradigm and it won't go on much longer. The PMI companies are getting killed. Next it will be the GSE's and the private label mortgages, which have already been waxed very badly. There is a lot of crying going on when in fact the industry is operating at boom levels and prices are declining despite this fact. To base data against a fiction is deceptive and this is what is going on. People would be stunned if they took this year out of context and compared it to those years prior to 1997, to find that the sales are records against the non-bubble years.
What does this all say? I believe it means we have real troubles. For one, the bulls have been diving into the home builders and the financials. They have also been hot on the gadget companies like Apple. The homebuilders can undersell the market until the market drops to where they can't build at any profit whatsoever. I think we are headed there, quite possible with 2 years supply of homes on the market before this one is done. Every subprime sale that occurred in the previous decade won't occur in the next decade. Before it is all done, FHA, FHLBB, FHLMC and FNMA will all need to be bailed out. So will the PMI companies. Where does the industry go if the zero down game is done?
How important are homesales? Well, when a home is sold, it frees up a lot of cash. Should a 40 year old sell a home he bought when he was 30 for twice the money, quite likely he will take this money and pay his credit cards or put it in the market or save it for college and get a maximum mortgage on his next home and take advantage of the home interest deduction. So, a $200,000 sale will free up maybe $80,000. This might be as much money as this guy makes in a year or 2. The consumer spending boom is dependent on such a game.
I don't know if you know where I am going with this, but Who has the free money to get us out of this? The bulls seem to think it is coming. I don't know where they are going to get the buyout financing that drove the market last time? I don't know where they are going to replace the stock buyback money that was coming out of the financials? Who is going to replace the easy credit given creditless people? What is going to happen to corporate earnings if activity declines even 2%? Have any of you ever examined the earnings of an automobile company during a recession and the boom afterwards? With a very marginal increase in sales, they go from going broke to record profits. What finances China and India? Don't you realize that the US has created all the basis of credit in those countries and without extra dollars, they cannot expand their economies? Does anyone recall what happened to Japan in 1990 after the US sneezed?
The question that keeps getting asked is why isn't the market lower with all the shoes dropping? For one thing, they haven't allowed any shoes to drop. They are all dangling and we haven't yet to see what the impact of keeping these shoes in the air from hitting the ground. What few realize is what the Fed is getting for all this cleaver financing is the capital base of all of these companies. Also, they don't realize that we haven't seen the earnings impact that is going to occur from this mess. Every prediction has been wrong so far because they aren't operating in reality. Reality is there are 3 to 4 million preowned sales in a good year, not 5 million in a bad year. Reality is that people are spending good credit, not soaked in subprime credit. Reality is that AAA means AAA, not junk bond CDO's leveraged to the moon. Reality is that trade is roughly balanced, not out of balance by $700 billion every year and rising.
The market is propped because there isn't anything in the US that foreigners can buy other than the corporations and treasuries. Who wants the crap that Wall Street presented us? What is going to happen when the interest rates rise enough to induce the solvent banks to trade their cash in on t-bills and leave the insolvent ones perpetually propped up by cheap Fed credit in return for their performing assets? When is the market going to value itself according to risk instead of derivative portfolio? We are looking at a risk free rate of return out of the SPX and it will go negative as soon as earnings adjust to the new financial reality
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