Financial topics

[mosullivan]

I don't know...the more I do the math (realizing the dollar as the world currency-meaning all these positions are tied up with dollars) I see the dollar (ST TReasuries) as the only thing left "to fight" with. I mean I own gold but the gold market is puny in comparison. Personally, I am a holder of ST US T Bills (2 years or less) physical bullion and cash.....

I hope this may open up a lively discussion!

[mosullivan]

I wanted to pose this question as I am trying to run through scenarios in my mind...

If we are in the process of unwinding multi-trillion dollar (globally intertwined) derivatives market (which is obvious) and the dollar is the world's reserve currency...meaning all of these unwinding toxic-assets need to be settled in dollars in order to put them to rest/bed....and knowing how toxic they are, isn't that going to place a higher-demand for US Dollars?

This isn't a pro-US Policy statement and personally I see fractional reserve banking, vis-a-vie, Wall Street as damaging,,,,but in order for the dollar to "crash" or lose its value, especially go to zero, as the Peter Schiffs and Jim Rogers of the world proclaim, wouldn't there need to be a stronger currency that would take its place and perform this process? Well we have the Dollar, Euro and Yen..

Again, given the size of derivatives, there isn't really a way gold can perform this function....perhaps if gold is revalued much higher and even that would strengthen the dollar...

I'm not stubbornly saying this but I'd like to see other alternatives...where the dollar "crashes"

Best regards, MIke

[John]

Dear Mike,

> If we are in the process of unwinding multi-trillion dollar
> (globally intertwined) derivatives market (which is obvious) and
> the dollar is the world's reserve currency...meaning all of these
> unwinding toxic-assets need to be settled in dollars in order to
> put them to rest/bed....and knowing how toxic they are, isn't that
> going to place a higher-demand for US Dollars?

Yes, and that's exactly why we're in a deflationary spiral, why the
dollar will deflate, and why the dollar will not inflate, and
certainly not hyperinflate.

Sincerely,

John

[mosullivan]

Dear Mike,

> If we are in the process of unwinding multi-trillion dollar
> (globally intertwined) derivatives market (which is obvious) and
> the dollar is the world's reserve currency...meaning all of these
> unwinding toxic-assets need to be settled in dollars in order to
> put them to rest/bed....and knowing how toxic they are, isn't that
> going to place a higher-demand for US Dollars?

Yes, and that's exactly why we're in a deflationary spiral, why the
dollar will deflate, and why the dollar will not inflate, and
certainly not hyperinflate.

Sincerely,

John

John,

Even if I wanted to "argue" the inflation (much less the hyperinflation) side, I don't know I could given the fact that world asset markets have declined $40 Trillion with no end in sight. It seems pretty clear that we did have inflation (Especially from 01-07) and once the corner was sharply turned in 08, enter deflation.

I read your article 'Can a country go into default on its debt? Can the US?:' which underscores my personal decision to stay in shorter term Treasuries.

Let's assume we default on sovereign debt held by China, Japan, etc. I can see that happening...How will we deal with the increased SSI/Medicare obligations, given business will continue to slow and thus tax revenue decline as well. Could we face the prospect of inflation at that point or is it too hard to tell at this point?

Enjoy your site here....as always...Mike

[freddyv]

I came across an article that expresses, for the most part, my view on how we should deal with failing banks:

A better idea is nationalization of the banks that can’t function combined with fresh capital for lending, perhaps in new institutions or newly managed ones built from the wreckage of the failed.
As Nobel prize winning economist Joseph Stiglitz points out, the United States has an existing process to deal with failed banks.

“You have to have a certain amount of capital and if you don’t have enough capital you are going to be shut down. We have a legal framework and we should use that legal framework,” he said in an interview on Saturday at the World Economic Forum in Davos.

“What you need to do is carve out the narrowest thing that you need to carve out to preserve the payment mechanism. We are engaged in re-writing the rules and the question is: ‘For whose benefit?’”

Both bondholders and derivative counterparties — people who entered into a contract with a bank for payment if certain external things happened, such as the default of a third party — look to be the big winners in preserving the existing banks.

I would also be very interested to see where the cash from bailouts of banks and their complex international obligations flows. It seems to me pretty possible that in rescuing banks, you are bailing out their derivative counterparties, channeling cash to many people and institutions who were speculating, who took risks on the strength of the bank counterparties they were using but who had no contract with the U.S. government for these risks to be insured.

Many of them inevitably will be abroad and some may be unsavory. The political fallout could be huge.

As this article lays it out pretty clearly the TARP money is going to the very people who speculated recklessy and caused the majority of these problems. The problem we face is systemic and deep and the cure will be painful and drawn out.

Using tax money for a bailout or a stimulus is simply creating more of a debt burden; it is taking money from the future and placing it in the present, at it's simplest. To a certain extent that is good in that it allows our economy to exand but past a certain point it is not only harmful but is deadly. Not only have we passed that point but as with all the other economic indicators the problem appears to be accelerating and so they say we need more TARP and more stimulus as our housing, industrial production and employment problems get worse. Is it just me or is the obvious solution to scrimp and save and work harder and to spend any time we have left going after the people who committed crimes and then cleaning up a system that has run amuck?

At its heart America is a violent nation, once we are pushed to the edge. I have to wonder if at some point we don't see a French Revolution type of scenerio becoming a reality. One of the things that makes me think this way is that Obama seems quite willing and eager to place the blame for all the problems we are facing on other people and standing behind him are two of the most unprincipled politicians imaginable, Harry Reid and Nancy Pelosi. Barack Obama is a smart man but he does not appear to be overly principled or courageous and so I wonder if he is the person to provide the true leadership we need rather than just flittering about, as the prevailing mood blows us towards some sort of catastrophe that we can't even imagine.

--Fred

[freddyv]

If one takes this article at face value our current unemployment rate would be somewhere between 12.6 and 17.6 percent.

When trying to compare historical and contemporary employment and unemployment rates, it is important to note that US employment and unemployment figures are now calculated differently than they were during the 1930s and 1940s. In general, current unemployment numbers would be between 5% and 10% higher if calculated in the same way as in the past; conversely, the numbers from the 1930s and 1940s would be 5% - 10% lower if calculated using our contemporary methods. One, but not the only, major change is that workers are no longer considered "unemployed" if they become discouraged after being unable to find a job and stop searching. These workers disappear from the numbers.

Even if you don't accept the idea that unemplyment rates should be 5% higher or more we are pretty much moving along at the same rate as in 1930 in the rate of loss. As this chart shows we have already lost more jobs than in any post war recession.

http://blogs.wsj.com/economics/2009/02/ ... g-so-long/

[ojavaid]

I am wondering if you should take the public advice of anyone from Goldman Sachs? Abby Jo had the SPX at 1800 by the end of 2001. They had oil to $200 by the end of last summer. It appears they are top callers more often than target callers. The gold game is an interesting one in that higher or lower is a coin flip short term, but collapse is in our future. It is clear that misguided economics, taught in every college in the country is for nothing more than serving the banker class and the result of this is we are going to spend trillions bailing out bankers, their shareholders and bondholders rather than let them take the bath that everyone from Nortel and Lucent shareholders to Worldcom and Enron shareholders and bond holders. Why do the bondholders and shareholders of Citi, JPM and Bank of America and others get a free ride out of this. The government should put together a bad bank and give it to these entities and put together a good bank and give it to the depositors.

The housing game has a long way to go. I like the fact this guy sets it at 1997, because I do also. I saw a houing crash here in DFW back in the 1980's and we barely got out of it by the time this one was going good. There have been 3 million people move into DFW since 1970 and 2 million since the crunch hit, so the economy and growth here has absorbed a lot of the excess. But, the figure I watch are the preowned housing sales reported by the NAR. These figures were kept by someone, but for some reason, the only figures ever kept by the NAR were bubble figures, like they need to keep it a secret that we aren't selling homes at a bust pace, but at a boom pace when you take the 1997 to 2006 period out of the mix. The current sales level of 4.6 million they reported last week would have been a record high in 1997. The level of new home sales shows a bust, but the preowned sales are going like we are at an economic peak. This tells me there is even greater speculation going on now than at the peak and we are just in the beginning of this process. I am in the business of renting homes, a family business composed of roughly 20 free and clear suburban Dallas homes and have spent most of my post college time in real estate of some sort. The speculaion is greater today than it was at any time I have seen and there are a lot of foreclosures going on in rental property.

The big deal that was mentioned was the cost of building a home. I have drawn a conclusion that there was such a huge profit margin in building homes in a lot of the US that the housing industry has remained intact despite losing billions. In the 1980's, a couple of bad years busted US home and General Home, 2 companies that had been the largest builders in the US for the bulk of the 1970''s. This bust is a national crisis and not a single major home builder, much less the 2 largest have gone bust. They may be right around the corner, but support is coming from somewhere. I recall the new home market here could undersell the preowned market of recently completed homes by 10% to 20% once it went bust here. My brother in law builds from time to time and $500K was a pretty substantial home here around 2000, well done 5000 feet on a nice lot and he could gross around $100K out of a home like that. I would venture there were spec areas of the US where $1 million might have cost $300K to build plus the lot max and having the lot was the gig.

I read data this week that there were something like 19 million vacant homes in the US right now. That is a 10 year supply. We are going down a lot more than 1997 levels, plus inflation. I saw $100K homes sell for $35K down in Houston and it happened damn quickly. And Congress didn't seem to give a damn either. It appears that NY, Florida, Nevada and California carry more weight than Texas. It has been that way for years, which may be why we have a state government that might have a chance to finance itself.

I totally agree -- look at SoCal -- the houses here, including the one is the $900k-1.2M range in San Diego were of such poor quality you would consider a lawsuit. Their margins must have been huge.

[Barion]

In reading these forums, the blog, and the articles, I've been trying to ascertain how things will play out for people like me, and I still don't really have an idea. It seems like most, if not all, of you who participate here are people with assets and investments, and so you're trying to figure out what to do with your money when all hell breaks loose someday. I'm someone who basically lives "paycheck to paycheck" (albeit very comfortably) with a moderate amount of revolving credit debt and student loans currently in deferment because I'm in grad school. I have no investments, no assets, I rent an apartment, I make enough each month to pay my bills and get by, and barring something completely unforeseen, this pattern should hold steady for several more years until I get a Ph.D., after which I will have to find a job in my field (academic psychology--most likely professor at a university). So if the "Greater Depression" hits while I'm living this current lifestyle, I don't have a lot to lose. I don't have to worry about a stock market crash. I never bothered to sign up for a 401(k). For me, deflation has been nothing but good news because my dollar is going further than it has in a long time. The housing bubble isn't a problem, and actually is a bit of a boon for me because rents are also dropping and people flee California (like in 1992-1993), so if I decide my current rent is too high compared to the local market, I can just get a new place to live.

Is it possible that people like me actually thrive in economic downturns? I remember living incredibly well back in the early 90s for similar reasons. Back then I was in the Army, so all my basic needs were met, and my income was pure spending money for me, which I promptly spent...and then I got out and received a nice monthly stipend in the form of the G.I. Bill and Army College Fund while I went to school to earn my B.A., so I simply never felt the effects of the recession. Similarly, I never suffered one bit during the little recession we had at the beginning of this decade.

Or should I be worried that, unlike before, and right now, things will get so much worse overall that I no longer am immune and, because I have no assets and investments, I will be vulnerable where the rest of you have a layer of protection that I do not?

[Higgenbotham]

I make enough each month to pay my bills and get by, and barring something completely unforeseen, this pattern should hold steady for several more years until I get a Ph.D.

From reading your post, I really can't answer your question. I'm assuming that you are a teaching assistant in the California university system. What is your source of income and what is it based on? For example, if you are a TA, is it based on undergraduate enrollments in the psychology department of the university you attend?

[John]

-- CNBC Earnings Central Stats As of Friday, February 6th:

Earnings Central Stats

As of Friday, February 6th:

The blended earnings growth rate for the S&P 500 for Q4 2008,
combining actual numbers for companies that have reported, and
estimates for companies yet to report, fell to -40.6% from -35.2% due
in part to downward estimate revisions for Financials such as Wells
Fargo and Prudential Financial.

On July 1st, the estimated growth rate for Q4 was 59.3%, and by
October 1st, the estimated growth rate had fallen to 46.7%. (Data
provided by Thomson Reuters)
http://www.cnbc.com/id/15839135/site/14081545/



Date 4Q Earnings growth estimate as of that date
------- -------------------------------------------
Feb 6: 50.0%
Jul 1: 59.3% Start of previous (3rd) quarter
Oct 1: 46.7% Start of quarter
Dec 5: 10.0%
Dec 12: 5.9%
Dec 19: 0.5%
Dec 26: -0.9% End of quarter
Jan 2: -1.2%
Jan 9: -15.1%
Jan 16: -20.2%
Jan 23: -28.1%
Jan 30: -35.2%
Feb 6: -40.6%