Financial topics

[Higgenbotham]

There aren't many people left who lived through the Depression, but I know a man who was born in 1915 who still has all his faculties.

There's one story he has repeated through the years I've known him (20 years). He starts out by talking about how the Depression dragged on for years and he says, you know, for a young person it seemed like forever. Then he says that in 1937, he was walking down the street and saw a headline on the newspaper in 2 inch high bold letters that said "THERE"S LIGHT AT THE END OF THE TUNNEL". He then says I remember that just like it was yesterday and he thought it was finally over. But it wasn't over. The economy fell back into Depression.

I've asked him over the years how this crisis compares with the Depression. First, he considers it a crisis era that will be worse than the 1930s in his opinion. The primary problem he sees is that the people today are less moral and less competent than the people of his era. In his words, the stock of people who built the great manufacturing cities of this country is gone and it will not come back. He believes current generations of Americans are incapable of building anything as great as the America he knew.

Which gets back to our topic from yesterday. I am also a believer that our nation has become deficient in a lot of ways compared to earlier eras. It seems to me that the generations who were alive during the 1930s would be able to recognize the Lehman Brothers, BP oil spill and other events as crisis events and make permanent changes in behavior to help alleviate the crisis. Whether this is true or not may be a key as to predicting how severe this crisis will be compared to previous Fourth Turnings.

I'm amazed by what I see and hear almost every day. Today I am reading about how there are critical shortages of drugs and nobody really knows why or what to do about it. I'm a GenXer and agree it's a characteristic of GenX to blame and not want to be part of the solution.

[Higgenbotham]

John,

I happened on the (your) first post in this financial topics thread and copied this excerpt. While it sure is evident to me that we're in the midst of a worldwide financial crisis, we have found out it's not evident to everyone or even the majority.

John » Sat Sep 20, 2008 1:01 pm

After several years of warnings on the Generational Dynamics web
site, it's now evident to everyone that we're in the midst of
worldwide financial crisis, and that this slide is occurring exactly
as predicted.

I've been thinking a lot about that in the past day. There are those who think that absolutely nothing has changed since the pre crisis era and therefore stocks should be valued at about let's say 1500 on the S&P. They strongly believe stocks are going there and anyone who doesn't believe that is crazy. On the other hand, there are those of us who are sure this is a crisis era and stocks should be valued at about let's say 500 on the S&P. Meanwhile, stocks seesaw somewhere between those numbers but on the higher end because most are convinced that nothing has changed. Perhaps at the July low of about 1000, we might be able to guess that no more than 50% thought we had entered into a crisis era. The rest may have been pessimistic at the time but thought it was a normal non crisis era market selloff.

[weak stream]

I think there are two distinct groups in our society. Those that understand the financial system and those that don't. Those that don't simply believe what's being broadcast by the mainstream media. Those that do are (and are bullish about the markets) are disregarding the degree to which we have surrendered the fundamental concept of private property. And the degree to which economic growth hinges necessarily upon it. The debts that the government are racking up will cripple future investment and therefore economic growth through both direct taxation and inflation. Both government debt and inflation violate the concept of private property. Fraudulent accounting practices at banks continue to rip off the investing public as they are lured into further bad investment in these corrupt entities. " A Critique of Interventionism" by Ludwig Von Mises offers a very detailed explanation as to what the eventual fate of this system will be. This system will be with us until the government collapses.

[rolivier79]

There seems to be a new monster hiding in the municipal bond market: Variable Rate Demand Obligations, long term bonds (eg 30 yrs) with interest rates that reset periodically (eg every five years). This would all work fine IF (BIG IF) for a fee big banks agree to periodically re-guarantee these debt instruments when the interest rates reset every so many years.

A new article in the Wall Street Journal today is questioning this +$50 Billion annual market that resets these rates.

http://online.wsj.com/article_email/SB10001424052748704307404576080322679942138-lMyQjAxMTAxMDEwNDExNDQyWj.html

With the market for municipal bonds tumbling, cities, hospitals, schools and other public borrowers are scrambling to refinance tens of billions of dollars of debt this year, another sign that the once-safe market is under duress. The muni bond market was hit with the latest wave of bad news Thursday, prompting a selloff that sent the market to its lowest level since the financial crisis.

Yields on 30-year triple-A rated general obligation bonds shot higher to 5.01% on Thursday, reflecting a spike in perceived risk, according to Thomson Reuters Municipal Market Data. The last time those bonds yielded 5% was Jan. 30, 2009, during the financial crisis.

Many municipalities scrambled to convert the debt into other instruments, including variable-rate demand obligations, which are long-term bonds with interest rates that reset periodically. For a fee, big banks guaranteed many of these deals.

"Think of having a 30-year mortgage, and then someone suddenly says you have to pay your house off in five years," said Janis Schmees, executive director of the Harris County Houston Sports Authority,

Now because there are fewer buyers for these shorter term Variable Rate demand obligations, these demand obligations can't be re-approved, or re-insured. Hence there is a short term cash crunch that should have been long term.

Hence the chart illustrates that,

The market has fallen every day this week, and investors have been net sellers of their holdings in municipal-bond mutual funds for nine straight weeks, according to fund tracker Lipper FMI.

[burt]

I think there are two distinct groups in our society. Those that understand the financial system and those that don't.
Those that do (and are bullish about the markets) are disregarding the degree to which we have surrendered the fundamental concept of private property.

Could you please educate us on which argument you know that somewhone understand the financial system?

And the degree to which economic growth hinges necessarily upon it.
The debts that the government are racking up will cripple future investment and therefore economic growth through both direct taxation and inflation.
Both government debt and inflation violate the concept of private property. Fraudulent accounting practices at banks continue to rip off the investing public as they are lured into further bad investment in these corrupt entities.
"A Critique of Interventionism" by Ludwig Von Mises offers a very detailed explanation as to what the eventual fate of this system will be. This system will be with us until the government collapses.

Here you say that we have the kingS who manipulate the population and the rest of the world?
If I'm correct it has always been the case, no?

[weak stream]

Yes, absolutely Burt. And I think that the modern day oppressive force which seeks to take our private property, autonomy and identity is a political class armed with central bank/fiat currency/legal tender laws. As they influence, to a greater or lesser extent the decision making within ALL transactions within our system we have capitalism in name only. What we have throughout the US and Europe would best be described as interventionism. Because various interventions both fail at their original objectives as well as cause many unintended consequences, more, greater and farther reaching interventions become necessary. Whether this results in fascism or socialism is unimportant. They are both anathema to the US constitution and the enlightened folks that created it. From a generational dynamics perspective, it's my observation that during an unraveling period, this slide toward socialism/totalitarianism makes great strides because GenX and previous Lost Generationers are the most intellectually superficial of all the generational archetypes. Thus, selling them easy fixes becomes easy pickings for sly political types.

[burt]

This is political, why not, but you asserted they were people who understand the financial system, and I'd be happy if you could tell us a little bit more on that.
Regards

[weak stream]

When I say "understand" the financial system I'm referring to specific knowledge of how the transactions are made. For example, how bond auctions are conducted, how the Federal Reserve conducts interest rate controls, how IPO's are instituted as well as how currency swaps between central banks are made and many others. This knowledge and understanding, however, is not necessarily a knowledge of economics. Likewise, a bank robber doesn't so much understand banking but understands guns, time locks, employee schedules and so forth. Much advantage of these various mechanisms is taken by financial intermediaries to secure profits. Thus from an analytical point of view, learning how to "work the system" rather than genuine economic analysis takes precedence. The fact that the rest of society is being effectively "skimmed" is obscured by the accumulation of government debt and inflation. It is an economic ignorant that somehow believes we will not have to pay these debts. From a Generational Dynamics perspective ( and really, at this point, we have only Boomers and GenXers in control) I think Boomers are inclined to fantasy/denial while the GenXers simply don't care how bad this gets as long as they "get theirs". "I'll be gone, you'll be gone" is the mantra of GenX.

[Higgenbotham]

Before this forum existed, I discussed with John the idea that this is a larger unraveling cycle where each saeculum of the larger cycle has unraveling or third turning characteristics. Therefore, as we entered into this fourth turning (we hadn't yet at the time) it would have third turning characteristics. That appears to be the case, but my idea at the time was that was the reason we were seeing a second bubble after the first bubble burst in 2000. Now we are clearly seeing a third bubble. I thought two was enough. I don't know why I would have thought that. Most people used to think one marriage was enough. But if one marriage is not enough anymore, why would two be enough?

The S&P 500 is now earning about $90 in round numbers. I would estimate 1/3 of that is fraudulent accounting, 1/3 is due to government money (borrowed money), and 1/3 is legitimate. But even the legitimate earnings are being fed somewhat by the excess money floating around due to fraud and government borrowing.

This type of unraveling situation has not been seen since the advent of the Industrial Revolution. The last time it was seen was in the period after the War of the Spanish Succession when a lot of debt was built up. Likewise the Cold War resulted in a huge debt buildup and bureaucracy that never went away. When the South Sea Bubble burst in 1720, the next several decades were all crisis all the time. That culminated with the French Revolution, the American Revolution and the beginning of the Industrial Revolution.

I read last week that Harry Schultz, an old time financial observer, published his last newsletter at the age of 87. The story was on marketwatch.com. Harry opines that this financial catastrophe dwarfs the Great Depression and will last for decades.

If we are in a larger unraveling period similar to the early 1700's and this crisis era is exhibiting unraveling characteristics, then another panic during this crisis might be possible, even though it is not usual to see a panic well into a fourth turning. The South Sea Bubble was followed by one gigantic panic and crash. That was before the Industrial Revolution, though, so the large cycle was different yet.

Ben Bernanke is the reincarnation of Jon Law. A bubble was wanted or at least tolerated and he helped preside over the second one (his first) and cheerlead for it. Now he has given us a second one and the cheerleading continues. I hope Bernanke has a good wig, a nice dress, and a pair of high heels he can disguise himself in when the bubble bursts. He's going to need it because all the idiots who wanted to follow him are going to be very angry.

[Higgenbotham]

When I say "understand" the financial system I'm referring to specific knowledge of how the transactions are made. For example, how bond auctions are conducted, how the Federal Reserve conducts interest rate controls, how IPO's are instituted as well as how currency swaps between central banks are made and many others. This knowledge and understanding, however, is not necessarily a knowledge of economics. Likewise, a bank robber doesn't so much understand banking but understands guns, time locks, employee schedules and so forth. Much advantage of these various mechanisms is taken by financial intermediaries to secure profits. Thus from an analytical point of view, learning how to "work the system" rather than genuine economic analysis takes precedence. The fact that the rest of society is being effectively "skimmed" is obscured by the accumulation of government debt and inflation. It is an economic ignorant that somehow believes we will not have to pay these debts. From a Generational Dynamics perspective ( and really, at this point, we have only Boomers and GenXers in control) I think Boomers are inclined to fantasy/denial while the GenXers simply don't care how bad this gets as long as they "get theirs". "I'll be gone, you'll be gone" is the mantra of GenX.

A lot of people who never really predicted this financial crisis are given credit for predicting it. Yet, you never hear about Nomi Prins. Nomi Prins was a Goldman Sachs employee who wrote a book in 2004 called "Other People's Money". She was a whistleblower of sorts who got disgusted with Goldman and quit, and her book told about what she saw. She also predicted that the financial games would collapse.

Getting to your point, to promote this book, Nomi had to go to alternative media outlets and she did a wide ranging interview on financialsense.com. She talked about how Glass Steagall was gutted and why that led to the speculation. The interviewer asked if her former coworkers were concerned about any of this. She said no, they are only concerned about making the next deal. The interviewer asked her if they understood the larger problems. She said no.

From her web site:

"Nomi Prins is a journalist and Senior Fellow at Demos. Her latest book is: It Takes a Pillage: Behind the Bonuses, Bailouts, and Backroom Deals from Washington to Wall Street (Wiley, September, 2009). She is the author of Other People’s Money: The Corporate Mugging of America (The New Press, October 2004), a devastating exposé into corporate corruption, political collusion and Wall Street deception. Other People's Money was chosen as a Best Book of 2004 by The Economist, Barron's and The Library Journal. Her book Jacked: How "Conservatives" are Picking your Pocket (whether you voted for them or not) (Polipoint Press, Sept. 2006) catalogs her travels around the USA; talking to people about their economic lives.

Before becoming a journalist, Nomi worked on Wall Street as a managing director at Goldman Sachs, and running the international analytics group at Bear Stearns in London."