Archive for August 23rd, 2011
It would be a good idea to become grounded in it folks, because it’s coming, and it’s not going to be fun if you’re not well-grounded in the facts.
Let’s take a few examples, some of them from the forum and some from my own personal experience, and flesh them out.
Take many if not most allegedly “middle-class” and “upper middle-class” business owners and managers. They live in a nice 3,500 sq/ft house in the suburbs with a manicured lawn and the service that comes once a week. Their home is immaculate and full of granite counter tops and Viking appliances. There are two $50,000 automobiles in the driveway – and perhaps another one, or some sort of recreational vehicle (a boat or RV) in the garage or a nearby storage area.
Now look at how much actual wealth they have, on a balance-sheet basis. Their home is likely underwater or has limited equity – 10 or 20% of the current market value at most. Their vehicles are not owned outright, they all have notes on them. There’s $100,000 or less in their retirement accounts, but they’re middle-aged – in their 40s.
On the spending side they have a $200/month cellphone bill for themselves and their kids ($2,400 a year), spend $300/month on utilities ($3,600 a year) and pay $5,000 or more in property taxes and hazard insurance. Between these there’s more than $10,000 that goes out the front door, plus their income tax burden. This family also eats out a couple of times a week ($200/month or $2,400 a year) and in general treats money and credit as though it’s something they have access to and thus will use.
This prototypical family manages to make it work predicated on being paid by the government for the use of leverage through the mortgage tax deduction. This has induced them to (among other things) refinance serially, since as a loan amortizes the interest percentage drops and so does the tax write-off. To keep that “extra” $3,000 a year in deduction the family has buried itself in debt – intentionally – through serial refinances, while stripping every dime of equity they could get their hands on to spend on their lifestyle. What they don’t admit to is that they’re simply pyramiding debt upon debt, goaded on by a tax system that has encouraged profligacy, immaturity and a mathematically-inevitable economic collapse.
As they head toward “retirement age” their children have gone off on their own. They treated their kids as chattel during the time they were kids, smothering them and yet at the same time showering them with “things.” A car at 16. An extravagant prom experience. Travel-team soccer at hundreds of dollars a month. New clothes from the latest trendy place – several times a year. A college that costs $20,000/year. None of this was earned by Junior, it was “deserved” because the little darlings “should have the best.”
These people will argue, to the last man and woman, that they’ve done “everything right all their lives.”
They’re deluded, and if you’re reading this you’re probably one of them.
The fact is that the bubble that made possible the appearance of rapid accumulation of wealth was just that – a bubble. It was a fraud. This prototypical family, and the majority of Americans live like this even today, having learned nothing from the last few years, is literally one disruption in the ability to put leverage upon leverage from a full-blown economic disaster.
But bubbles always pop.
It’s not a bubble eh? Care to rethink that in light of this chart?
If you want to know where that came from, look right here:
When did the market start to take off? Right after 1980, right when the government, industry and you set forth upon the path of borrowing more and more money to spend beyond your means, saving nothing, investing nothing.
This drove asset prices higher. But this game must eventually end, because every dollar you borrow comes with interest, and eventually you are unable to borrow any more, since your borrowing has outrun your earnings capacity.
That’s what happened in 2007. It is why all the games with QEx have failed – all they did was create more “excess reserves” that could be loaned out, but the economy’s ability to absorb more loans and pay more interest has been exceeded.
Pressing that bet further and further will not work. It cannot work.
Now we’re in trouble, and lots of it. We’re faced with the reality of what we’ve done because when that leverage comes out of the system and it will the market is likely to go right back where it started – or fairly close to it. Contemplate that, and read the Ticker I posted yesterday, because that’s the macro economic impact of that leverage being removed.
But on a personal note the impact is going to suck too. In no particular order you might want to consider all of the following:
- Americans have levered themselves up to the gills. Despite claims in the media, that leverage has not been taken down. Think about yourself, your family, neighbors and friends. Would you be ok if you had no credit cards, in fact no credit of any sort, no government handouts and no job – for six months. Very few families would be able to survive such a thing without ending up in the street, yet without that ability you have excessive financial leverage in your life. You have not removed that leverage. You had better start – now. If you didn’t believe in the risk in 2007 when I started writing about this, the 2008/09 market collapse should have convinced you. If that wasn’t enough this latest swoon should have underlined the point. If neither of those two events has made clear what you must do – right now – then like it or not you deserve what’s going to happen to you, despite the fact that I’m sure I’ll get hate mail for saying it.
- Can you make it in “retirement” – by whatever means, including continuing to work, without government support? If not, you’re not unlevered. You’ve simply believed the lies told to you by the political establishment that it could lever itself up on an indefinite forward basis and give the benefits to you despite the fact that the demographics – that the Baby Boomers were going to retire en-masse and overload the Medicare and Social Security systems – has been known for more than 30 years. The government did nothing about it because fixing this would have meant curtailing forward promises of benefits or massive tax increases thirty years ago. Today, that problem cannot be solved with tax increases as the money is not there and cannot be extracted from the economy. As a consequence major benefit cuts are going to happen, irrespective of the political demands placed on the government. You must be prepared to survive and continue onward without any government support. Figure it out, right now and alter your lifestyle today, or suffer the consequences.
- Did you successfully transition your relationship with your children (if any) from one of dependence to one of mutual respect? This doesn’t always work, by the way. Kids are independent human beings, and no matter how you parent them some percentage will be anti-social jackasses as will some parents. This is reality. However, it doesn’t help if you treated your kids as chattel or worse, abused them or worse, or showered them with all sorts of “entitlements” as kids, because now they’ll expect the same as adults! Historically the solution to getting older meant living in extended family units. It will again – if you didn’t ruin those connections with your children. If you did, I hope you’re wealthy – truly wealthy – or you’re in lots of trouble. Begging sucks as does apologizing for your previous acts along with repairing broken family relationships but it beats the hell out of starving and/or freezing to death. Choose wisely and choose today.
- Got faith? There may or may not be a God, but it’s a fact that there’s a congregation in the corner Church on Sunday. Consider that if the Zombie Apocalypse comes knocking your local faith community may be the best option for mutually-arranged self-defense, the patching of any holes that might get made in places you’d rather not have them, and the provision of basic human needs, including most-particularly something hot to put down the pie hole. Is faith practical? You decide, and consider this along with the following indisputable fact: Once you know for sure if there’s a God it’s too late to change your mind.
- Resolve self-regulation issues – now. The majority of Americans are overweight or obese. A minority exercise three times a week for 20 minutes at a moderate to intense level of activity. One of the Christian “seven deadly sins” is gluttony, and it’s not just found in the bottle or the dope bag – it’s also found in the grocery store, at the fast-food joint and on the couch. America has enjoyed the ability to call “911″ any time and have an ambulance magically appear to whisk you to the hospital when you feel that nasty tightness in your chest. In fact, an amazing number of municipalities have managed to vote into place ridiculous tax increases (including my local area) to pay for exactly that. Instead, a volunteer fire department would be sufficient without the “ALS” ambulance service at a quarter of the cost – and the average homeowner, who pays $250 a year or more for that “enhanaced” level of service, could buy more than enough running shoes and save five times that much or more on food not consumed – and not need the EMS! The same thing happens in the doctor’s office every day: “Doc, do you have a pill for that?” Guess what – we can’t afford to pay for your pills, the EMS, or the hospital – you can’t cover it individually and we can’t cover it as a society. Therefore, either solve your self-regulation issues or suffer the inevitable consequences. It’s time to grow up America.
- Come to grips with your mortality. If you prefer to use faith, that’s fine. If you don’t believe in God, that’s fine too – Darwin will do as well. Nonetheless we are all mortal and we are going to have to deal with the fact that we cannot have medical services we are unable to personally pay for. This is a major shift after the idiotic moves of the last 30 years, but it is nonetheless a fact. Leverage enabled the pulling forward of demand for medical services into today that were promised to be paid for tomorrow, but now tomorrow has come and there’s no more ability to pull that demand forward. See the “Self-Regulation” bullet point above and consider that your success or failure in dealing with that will materially change your interaction with this point, then choose. If you believe that with the global finance ponzi collapsing you’ll be able to demand a pair of $100,000 hips, a $90,000 prostate cancer treatment or $250,000 for bypass surgery from “society”, you’re wrong. The money doesn’t exist any more, which means you either earn and stash it yourself during your productive years, do what you need to so those things are unnecessary (to the extent you can), or face the fact that we all die and your time might be now.
If you’d like the above in a “religious” format someone on the forum posted a link to the a sermon tracking much of the above. Yeah, it’s 45 minutes. But it’s pretty much spot-on in Christian terms.
Time is short; choose wisely.
Goldman Sachs Plunges in Late Trading on News CEO Blankfein Hires High-Profile Defense Attorney; Perjury Regarding Testimony Before Congress Proposed
Shares of Goldman Sachs hit the skids in late trading so much so that people were asking “what’s up?”
GS – Goldman Sachs 15-Minute Chart
Reuters explains in Goldman CEO hires high-profile attorney
Goldman Sachs Chief Executive Lloyd Blankfein has hired Reid Weingarten, a high-profile Washington defense attorney whose past clients include a former Enron accounting officer, according to a government source familiar with the matter.
Blankfein, 56, is in his sixth year at the helm of the largest U.S. investment bank, which has spent two years dodging accusations of conflicts of interest and fraud.
The move to retain Weingarten comes as investigations of Goldman and its role in the 2007-2009 financial crisis continue.
The U.S. Securities and Exchange Commission scored a $550 million settlement against the bank in a fraud lawsuit in July 2010, but other investigations continue.
“Why do you bring in someone like that?” said the source, who was not authorized to speak publicly. “It says one thing: that they’re taking it seriously.”
Blankfein has not been charged in any civil or criminal case, and it was not immediately clear why he hired Weingarten.
One former federal prosecutor, who was not authorized to speak publicly, said Blankfein may have hired outside counsel after receiving a request from investigators for documents or other information.
The Senate report raised questions about inconsistencies between testimony from Blankfein and other Goldman executives to Congress and emails unearthed in the Senate investigation. The subcommittee’s chairman, Senator Carl Levin, has said the question of whether Blankfein and others committed perjury is up to the relevant federal agencies.
The former prosecutor cautioned that perjury cases were difficult to prove, adding that prosecutors would not bring charges unless they had a “rock solid case.
GS – Goldman Sachs Monthly Chart
Whatever the reasons, Goldman Sachs is revisiting a share price last seen in 2009.
I truly hope they nail Lloyd Blankfein and the New York Fed along with him. Do [not] count on it. No one has paid a price yet.
Note: That was supposed to say do “not” count on it. I accidentally left out the “not” and just added it in.
Mike “Mish” Shedlock
Hiding commercial real estate losses by laundering bad loans through the Federal Reserve. Trillions of dollars in bailouts were made while banks told the public all was well.
Part of the massive challenges facing our brittle financial system is the opaque and secretive nature of the Federal Reserve. It is difficult enough to confront a challenge with all information present but make it purposely convoluted and dark and we have a crisis of historical proportions. The recent market volatility is simply a dire reflection of a system unsure of what is going on. Markets despise distrust and that is what we are finding. A few years ago we were told that the banking system was fine yet we now have data showing over $1.2 trillion in emergency loans were made to countless too big to fail banks. In other words we were being lied to by both the Federal Reserve and the giant banks that largely created and spread this financial crisis like wildfire. As more information leaks out we are starting to get a grim picture of how the Federal Reserve assisted and is assisting banks not only to hide residential real estate loans but also toxic commercial real estate debt. Over $3 trillion in commercial real estate (CRE) values has evaporated since the crisis took hold yet banks continue to tell the public all is well while shifting these toxic bets onto the taxpayer balance sheet.
The collapse in CRE values
CRE values have already experienced a lost decade and are likely to remain depressed for years to come. Many of these properties were developed with lofty aspirations and with future growth in mind yet an economy that is contracting has little use for more commercial space. It is also the case that many of these CRE projects were designed for high flying easy money days. Take for example some of the condo mix projects in Las Vegas. Many now sit empty when they were once envisioned as selling for millions of dollars to high rolling aficionados. Those days simply did not materialize because austerity is taking hold across the world because the debt bubble has burst. The chart above is data collected monthly by MIT on CRE values. It is rather obvious that the trajectory of CRE values has imploded since the crisis hit. Yet somehow the Federal Reserve is openly shifting CRE debt onto its trillion dollar balance sheet even though it knows these are failed projects. Why? To aid and protect the banks it serves, not the nation’s economic wellbeing.
Read the rest at My Budget 360
I hope you are.
Today (August 22, 2011) proved one thing – oversold doesn’t mean jack. The ~20 handle pop into the open was sold into immediately, despite the market’s severely-oversold condition.
A condition that is worse than during the height of the 08/09 crash.
Drill that into your head folks: The government doesn’t get it, exactly as they didn’t get it in early 2008. They are, right now, squandering the opportunity to take effective action. I know this for a fact because the Republican Caucus has refused to address the issue and I know they’re aware of it.
This weekend I listened to McCain with his condescending bullcrap on talk TV. Let me remind you, this is the same Senator McCain who I sent this letter to in 2008 predicting what was going to happen in the election if he did not act. He did not, and he lost. In fact, today he still claims that he couldn’t see it coming. Not only did he see it coming, his campaign manager was in receipt of that letter and Governor Ridge personally told me at that campaign event that they knew full well it was all driven from greed and scams. In short, not only did he lie about what he knew at the time he’s still lying.
This is the GOP. This is what it has done and is doing. The GOP is proving time and time again that it will not get in front of these issues because doing so means kneecapping the banksters that have trashed our economy and continue to do so today.
Not that Obama, Pelosi and Reid are any better, of course.
The GOP doesn’t care, the Democrats don’t care, and you’re going to get creamed.
There is no way to avoid what’s coming. We have added roughly $4.5 trillion in debt to the Federal balance sheet trying to paper it over and have failed. Even the “good” banks like JP Morgan and Goldman are failing to make progress. The poorer ones such as Citibank, Morgan Stanley and Bank of America are seeing their market prices collapse. The XLF, the composite of the large banks, is back to where it was in the summer of 2009. Should it break below these levels it is likely going for the spring 2009 lows.
All the fraudulent accounting games, shifting Granny’s earnings on her CDs to the banks through zero-interest rates and money printing have been used up as policy tools. There are few if any weapons left in the arsenal to combat what is coming.
This is where we are, and where we’re going.
I’m sure this will be scoffed at. We’ll see. Go have a look at 2000 if you’d like. It’s pretty similar. Through the mid-bolinger on the monthly, a bounce back, often off or near the lower bolinger, then a collapse that loses half or more of the market’s value. Twice, and now we’re setting up for it again. It’s as clear as day and the reasons for it are just as clear now as they were before.
The time in that chart is probably not quite to scale, but I bet the price move is.
Impossible? Oh no it’s not. The Nikkei stood at 40,000 before it collapsed. It now trades under 10,000 – a 75% loss – decades later. It has not recovered and neither will we because we refuse as a nation and as a government to force recognition of bogus debt that cannot be paid while destroying capital formation and interest margins with zero interest rates.
400 is roughly where the S&P was before the “great bull market of fraud” began in 1995. To think we can’t return there when the fraud collapses is utter folly. We not only can, we probably will.
But instead of putting a stop to the games we choose to allow crazy derivative schemes, balance sheets that do not reflect reality and the repeated asset-stripping from savers and productive members of society, all to protect the “gilded ones” on Wall Street from the just consequences of their own 30-year old foibles and scams.
Now let me explain what happens “down there”, because it is my unbroken opinion, going back to 2007, that’s where we’re headed irrespective of attempts to stop it (and we’ve already seen how fast those attempts unwind when they fail, haven’t we?)
- Every pension fund blows up. All of them. Many doubled into the decline and will be utterly destroyed. Chief among them will be big municipal funds like CALPERs. If you have a pension of some sort, ask the pension administrator what happens to your pension if the S&P goes to 400 and stays there. He’ll poo-poo your question – but I bet he won’t answer it.
- Annuities and insurance companies blow up. You don’t think they can pay when they’re figuring on an 8% annualized return, do you? Well, no they can’t. Oh yeah, your state insurance on those is $100,000 in most states – the rest of your principal is “at risk.” This, of course, assumes the State has the $100,000 too. Did you know this in advance or are you learning it now (let’s not hope the latter is true!)
- The FDIC has no prayer of covering it. The good news is that if they act now they can shut the banks that are exposed and cram down debt to equity. The bad news is that they have a horrible record in doing that in a timely manner and of late the losses have been anywhere from 20-40% of assets, which is both a violation of the law (“Prompt Corrective Action” is supposed to prevent this from happening) and they have no way to cover it should it become a widespread problem. It will. Oh yeah, you can’t sue the government either. Have a nice day.
- The government Ponzi blows up. Unemployment will reach 20% or more. Tax receipts will get cut in half. Deficit spending will be impossible. Instead of a 40% “draconian” cut in government spending we will have to cut spending by 60% or more. Entitlements will be decimated; retirement entitlements will go last, but go they will. Food stamps, Section 8, Medicaid, all gone. Bet on it.
- All the other things that depend on the government Ponzi blow up. Medical care as we know it, education, state programs, all gone. We will return to a simpler time whether we like it or not, and we won’t like it. That much I’m sure of.
- Best guess on whether civil order is lost. In some places I’m sure things will be fine in that regard, likely in places where self-defense is recognized as the unalienable right that it is. In others? Not so much. If you live in a big city – or an “unfriendly” place in regards to self-defense, you need to be thinking about this quite-seriously. Yesterday would have been a good time to consider it and figure out what you’re going to do about it.
- Short-term and minor to moderate disruptions in what would be considered “essential” goods and services are likely. Go down the list and figure out what you must have and what you can do without. Be realistic. Most people won’t be, which will put you one step in front of them.
- The world will recognize the Depression we have tried to cover up. This is not a US-centric story. The Eurozone will get the unemployment and tax consequences too. Germany will be forced to choose between propping up the entire rest of the Euro (which it can’t) and detonating it and going back to the Deutsche Mark (which it will be forced to.) There is a very high probability of war that comes out of this, although the exact trigger is not something I can forecast. War is the classical solution to these problems, and it is unlikely to be different this time.
This is going to be a rough time folks. Our government has refused to deal with the basic mathematical constructs that underlay all economies and debt. It’s not a matter of competing theoretical ideas – it’s a matter of basic mathematical laws. We are now running into the end game where entire nations are coming unglued along with their various patrons and parasites, as the cold, hard mathematical facts run into the fantasy conjurations of people like Bernanke, Geithner and Obama, along with the chortling harpies on Wall Street.
If they manage to “sticksave” things once again, and you can bet they’ll try, you’ve lost nothing by being prepared. But even if they do pull another rabbit from the hat, instead of a burning stick of dynamite, there are a limited number of rabbits, there are sticks of dynamite in the hat, one will eventually be inadvertently selected and the games will end.
The only real choice is whether that option will take place voluntarily and now, or involuntarily and later.
Either way it’s going to suck, but a voluntary acceptance of reality will both suck less and be over sooner, along with being able to be mitigated. An uncontrolled event – which is what we’re headed for at the present time – will be most unpleasant.
PS: Yes, this is an update to the “What’s Broken” ticker…. The last time they reached into the hat they got a rabbit – and made the problem worse. How many more pulls do you think they’ll get before the burning stick of dynamite pops out?