One reason why the US is bailing out everything

Why is the US government continually bailing out everybody (and Republicans and Democrats alike are all for it)? In September, Treasury head Paulson threatened Congress with the idea that there would be riots in the street and martial law if Congress didn't approve the bailout package so maybe that scared some of them to support it. But there seems to be more to it. Since the US debt has become the next bubble (i.e. pyramid scheme) the US government wants to delay the collapse for as long a possible. Here is an excerpt that explains what could be going on and why both parties in Congress are willing participants in the bailouts.

It has become evident that as China continues to purchase our debt, the US government directs those assets to various industries. The areas that funds are directed to are the areas that could cause harm to counterparties and thereby raise the spectre of default on US Government debt.

Here’s a couple of examples: Fannie Mae (FNM: 0.76 +0.07 +10.14%) and Freddie Mac (FRE: 0.73 +0.04 +5.80%) are two “quasi” government agencies. They were not considered “direct” obligations of the US Government, but it was implied that the USA would support them in the event of a possible default. Foreign governments owned large amounts of FNMA and FRE. When it looked like they would fail, USA stepped in and backed them. AIG (AIG: 1.57 +0.01 +0.64%) is a another institution with huge counterparty risks. The USA stepped in and supported them. GMAC, GM (GM: 3.20 -0.60 -15.79%), and Chrysler all companies that carried huge exposures. The USA stepped in with all of them. Why?

The reason why the Treasury is supporting all these entities is that they cannot give any credence to the theory that the USA might let those major entities fail and create problems for the counterparties. Why? The perceived increase in default risk would bring into question the likelihood that the USA might actually default on its own debt. I think that most of the bailouts that we’re witnessing are being done to demonstrate to the rest of the world that we will not let default happen. Counterparties are being kept whole. If counterparties were forced to take actual losses as entities (AIG, BS, FNMA, FRE, MER) were allowed to fail, those same counterparties would become skeptical of the USA and the foreign appetite for US debt would start to shrink.

The USA needs to continue to demonstrate to the world that they will not default at all costs. As soon as the world perceives increased risk of default, the game is over and we will not be able to sell our debt. We will not survive as a country at that point. It’s a terrible and scary situation.

http://www.dailymarkets.com/stocks/2008/12/30/some-predictions-for-2009/

Housing market to continue crashing for years

Here is a good blog posts on why housing in California (and most likely many other places that are similar to CA) are going to continue to crash for at least a couple of years. I don't know if the CA housing industry will ever recover. Probably not. I have always thought that housing in CA has been horribly overpriced for decades - maybe this crash is the unwinding of the housing bubble not for the past 5 years but the bubble of the the last 25 years. Even before the crazy increases in the past five years it never made sense to me why a house in California should cost 50% more than a house in other parts of the country. I don't know if the CA housing industry will ever recover. Probably not. It's going to be a very hard landing.

http://www.mybudget360.com/the-miseducation-of-the-california-housing-market-5-reasons-why-california-housing-still-has-3-years-before-hitting-a-bottom/

And some interesting comments in this blog's post:
http://mrmortgage.ml-implode.com/2008/12/30/the-scariest-housing-related-chart-ever/

States to begin selling spree of assets

It looks like many states are going into desperation mode and will begin selling assets such as roads and parks to make a little money in the short-term. Long-term this will be a disaster. I can't believe (or maybe I can) just how short-sighted today's politicians are. There is an amazing reluctancy by politicians to decrease government spending or reduce government programs.

http://www.dailymarkets.com/economy/2008/12/30/more-bad-choices/

Household net worth dropped $7 trillion in past 12 months

Here's a good article - I agree with his assessment. 2009 will prove to be a very difficult year:

http://articles.moneycentral.msn.com/Investing/SuperModels/an-ugly-unrecognizable-recession.aspx

The mediocrity of the recovery would stem from the decline in household purchasing power: Falling asset values, both households and retirement portfolios, have caused household net worth to drop more than $7 trillion over the past 12 months, compared with a $2.8 trillion loss during the dot-com bust. Yeah, it’s nearly 2 1/2 times worse this time. The historical relationship between net worth and disposable income has Rosenberg looking for the savings rate to rise to 4% as households rebuild their balance sheets, which ought to result in a four-alarm calamity for retailers.

Indeed, during the third quarter, nearly $30 billion in consumer debt was repaid. This is the beginning of an epic change in the way society views financial profligacy and prudence. As a result, a recovery in housing, autos and other consumer discretionary categories will be long and painful. And without some stability in the housing market, it will be difficult for the incoming Obama administration to stabilize the financial system while trying to spur enough government spending to offset the newly frugal American consumer.

Anyone hoping for a gigantic stimulus package to bail out the economy will be very disappointed, because when you combine a massive housing downturn (5% of GDP) with a massive business spending downturn (10% of GDP) and add a massive consumer spending slowdown (70% of GDP), you would naturally need an incredible amount of new spending to emerge just to create an offset. If fiscal spending amounts to $600 billion next year, it would only replace the amount of private-sector spending expected to withdraw from the marketplace in 2009, not add anything really new. Merrill Lynch has calculated that just to keep the unemployment rate from topping today’s 6.7%, a 15-year high, a stimulus package of $1 trillion would need to be added on to the $1 trillion deficit the U.S. is already running.

These are among the many reasons that I expect 2009 to be a challenging year again for the stock market. As you know from my column two weeks ago, I see the potential for a low by midyear below the November low, as corporate earnings decline by 10% or more in the face of a global consumption slowdown and price-to-earnings multiples shrink as investors collectively decide to pay less for every unit of earnings.

The Obama transition team has been talking so far about an $800 billion stimulus spread over two years, the largest on record. That would be around $400 billion per year. Yet look at the recent $350 billion that’s been poured into just the banking sector in the past two months by Congress and the Treasury. It may be too early to judge, but most banks are in even worse shape now than when their own private stimulus package was launched. Now just a little more stimulus is going to be spread across the entire economy, and that’s supposed to totally rejuvenate the nation?

My guess is that consumers will have the same response as banks: They’ll hoard most new funds that come their way or pay down debt rather than buy more stuff. Obviously, a lot will leak into the economy, but probably not soon enough to make a huge difference. And meanwhile, consumption growth in the rest of the world, on which our large multinationals depend for earnings growth, will sink.

US $53 trillion in debt

Most of the debt has occurred in the past 20 years. $53 trillion is a hard number to even conceive - it's a really big number. When will the Ponzi scheme crash? Who will be the last sucker to play? From Jesse's American Cafe blog:

America has become more a debt 'junkie' - - than ever beforewith total debt of $53 Trillion - - and the highest debt ratio in history.That's $175,154 per man, woman and child - - or $700,616 per family of 4,$33,781 more debt per family than last year.Last year total debt increased $4.3 Trillion, 5.5 times more than GDP.External debt owed foreign interests increased $2.2 Trillion;Household, business and financial sector debt soared 7-11%.80% ($42 trillion) of total debt was created since 1990,a period primarily driven by debt instead of by productive activity.And, the above does not include un-funded pensions and medical promises.

America's Total Debt Report - Grandfather's Economic Series

http://jessescrossroadscafe.blogspot.com/2008/12/ponzi-nation.html

Gold at $750 could be a good buy

As all the fiat currencies collapse with the bailouts and stimulus plans (i.e. printing money) gold will end up coming back strong. Gold may dip down in the $700's or even the $600's but once inflation kicks in from all the money printing from around the world gold will be a good hedge investment. China may increase their gold reserve holdings from 600 tonnes to 3000 or 4000 tonnes (they have $1.9 trillion in dollars that they may want to convert before the US dollar becomes worthless). Interesting article on gold here:

http://www.moneymorning.com/2008/12/03/gold-prices-4/

Peak Oil and why low oil prices are bad

Chris Nelder (http://www.getreallist.com/) provides a lot of good data and interesting analysis on Peak Oil such as the article below. Peak Oil will become a reality if a new energy source isn't found very quickly and can be implemented on a very large scale. Solar - not feasible yet on a very large scale. Wind - not quite there yet. And both of these have issues with how to store the energy. Transmission of the energy is also an issue. Nuclear - I don't see that as viable for the US - too political. Fusion - won't happen anytime soon (might take another 100 years). Oil is going to be needed (and lots of it) for the foreseeable future. But if you read articles on Peak Oil it's starts to get kind of scary. We'll see how Peak Oil plays out over the next 20 years (or much sooner according to people like Chris).

......
Therefore it will take some years before investment returns to the levels needed to support future supply flows against what we know to be serious decline rates. Lead times for oil and gas projects are long, and industry responses to economic news usually lag by six months or more.

Under-investment is precisely what the IEA warned about in its recent World Energy Outlook report, in which they said the world would need to invest over half a trillion dollars per year for the next 22 years just to maintain current supply levels. (See “IEA Oil Report: ‘Time is Running Out’” for my analysis of the report.)

I find it hard to imagine any scenario under which that sort of investment is made in current production while the world is going through a global recession and economic contraction…let alone the $35 trillion the agency believes will be needed to meet energy demand and carbon control targets by 2030.

This recession will ultimately set up an “air pocket” in supply. As the global economy recovers, say 18 months from now in mid-2010, and energy demand returns, we could find ourselves without the ability to increase supply because we didn’t make the necessary investment today.

By 2010 we will also have reached global peak oil (the “all liquids” peak). The earth will finally say “She can’t take anymore, Captain, I’m givin’ ‘er all she’s got!”

http://www.getreallist.com/why-low-oil-prices-are-bad.html

Merry Christmas

Today is a good day to not read any newspapers or news websites and to enjoy Christmas with loved ones. Everyday can be a good day if one chooses to do so. Be happy. It is a choice.

And Christmas is a day to not complain. Here is an interesting article on how to stop complaining:

http://www.stevepavlina.com/blog/2007/08/how-to-stop-complaining/

WalMart not busy on Christmas Eve

I went to WalMart this morning to do a little shopping and as an experiment to see what the Christmas Eve business was like. The WalMart I went to was not busy at all - more like a typical Tuesday afternoon in June. My guess is that the Christmas sales numbers are going to be extremely poor this year for the retailers - and worse than predicted.

Article on sales slump from NYT 12/4/08:

The nation’s retailers turned in the worst sales figures in at least a generation on Thursday, starting the holiday shopping season with double-digit declines across a broad spectrum of stores.

For many chains, the precipitous sales drops that took hold in September and October got worse, not better, in November, despite relatively strong sales in the few days after Thanksgiving.

The International Council of Shopping Centers, an industry group, described November’s figures as the weakest in more than 35 years. Declines were recorded in every retail segment the group tracks, with the biggest coming from department stores, with sales down 13.3 percent compared with November a year ago, and specialty apparel retailers, down 10.4 percent.

http://www.nytimes.com/2008/12/05/business/economy/05shop.html

Mandelbrot on Wall Street analysis flaws

Interesting article from Scientific American written in 1999 by Mandelbrot (father of fractals) on his opinions on how Wall Street analysis is flawed. As he states, the analysis used by Wall Street essentially eliminates the need to address rare events - in Mandelbrot's words:

The risk-reducing formulas behind portfolio theory rely on a number of demanding and ultimately unfounded premises. First, they suggest that price changes are statistically independent of one another: for example, that today’s price has no influence on the changes between the current price and tomorrow’s. As a result, predictions of future market movements become impossible. The second presumption is that all price changes are distributed in a pattern that conforms to the standard bell curve. The width of the bell shape (as measured by its sigma, or standard deviation) depicts how far price changes diverge from the mean; events at the extremes are considered extremely rare. Typhoons are, in effect, defined out of existence.

http://www.sciam.com/article.cfm?id=multifractals-explain-wall-street

Well, we just had a typhoon in the markets in October 2008 (and there have been several typhoons in the financial markets over the past several hundred years).

Ponzi schemes can work for quite a while (just ask Madoff). However, once the cat gets out of the bag all hell breaks loose and it's pretty much impossible to get the cat back into the bag - and even if you do most everyone knows that it's a cat that's in the bag (instead of a wonderful piglet). There will be very few suckers to be found again to play the con with the same scam.

The Ponzi scheme that's been run by the US government for the past decade is unwinding - the cat is out of the bag. GDP growth was a fantasy based on increasing personal (and public) debt. Also, the increased money supply that Greenspan pushed for 15 years created an asset bubble in the housing market. Other bubbles occurred at the same time - student loans, car loans, credit card debt, inflated stock prices, and others. The cats all came out of the bags at once - all the bubbles popped together - a typhoon of financial disaster. On a global scale.

The government can print lots of money (trillions it turns out) and try to get the same suckers to play the game again (spend money they don't have and go deeper into dept) but there just aren't going to be many players. Deflation is going to happen likely followed by high inflation. People are losing their jobs (maybe we will see double-digit unemployment) and these people are not going to start buying a bunch of stuff. Millions of people who have jobs are worried about losing them soon - they are going to cut back and save. Millions are deep in debt as it is - with banks cutting back on credit lines, increasing late fees, etc., these heavily indebted people aren't going to be able to spend much more. And even people with relatively safe jobs are going to have salaries and benefit cuts (elimination of 401k matches, small or no bonuses, salary freezes, etc.) and these people are going to cut back their spending too. So who is it that is going to increase their spending to keep deflation (i.e. market correction) from happening? Almost nobody.

Deflation, then inflation

Every day I read something about the worry of deflation followed by inflation. Looks to me like there isn't much that can be done to get off of this path, especially since people are horribly in over their heads in debt - there is no way that these indebted people can just start spending again no matter how much money the government prints up.

Here is such an article by Jim Kingsdale on deflation/inflation:

http://www.dailymarkets.com/economy/2008/12/23/on-the-road-to-deflation/

. . . When people defer purchases because they expect lower prices later the economy slows further and thereby causes the lower prices people expect. That reality convinces more people that prices are falling and induces more deferral of purchases, etc. This virulent feedback loop cannot be reversed by standard Fed policy tools of lower interest rates and added liquidity. The only hope is to reflate via massive government expenditures. Unfortunately, the Bush administration has left the U.S. with gargantuan debts and deficits piled on during good times, so adding massively to them now is dangerous. That’s why deflation has put fear in the heart of the Fed and the Treasury.

What is the rational investment position to take during a deflation? Cash makes sense as do bonds because deflation, by definition, means that debts must be paid off in more valuable dollars. But there are two problems with owning bonds during a deflation. One is a heightened risk of bankruptcy for all entities, corporate and governmental, which could endanger the value of the bonds. Secondly there is some risk that the enormous expected efforts by the U.S. and other governments to re-inflate the economy could push us into inflationary times again. These two risks argue for cash. In a deflation your cash is worth more in terms of purchasing power as time goes on so there is some inherent return to cash even if there is little or no interest income.

Inflation, the opposite problem and the one with which we have more experience, is favored by governments because it allows them to pay back their debts in less valuable dollars. It is also favored by investors and has been the primary condition of the economy during nearly all of the period since 1982 during which stocks have experienced superior returns. A mild inflation makes it cheaper for corporations to borrow to fund their operations because they pay back the debts in cheaper dollars. Inflation also helps them show growth. Both conditions increase earnings more rapidly. So as a general rule, it makes sense to own stocks during a period of gentle inflation but not during a period of deflation.

New DOE head Stephen Chu

I found a couple of links to learn more about Stephen Chu (Obama's pick to head the Dept. of Energy) and his beliefs on climate change. The first is a presentation he gave in 2007 and the second is a paper that he co-wrote:

http://gustavus.edu/events/nobelconference/2007/chu-lecture.php
http://www.interacademycouncil.net/CMS/Reports/11840/12039.aspx?returnID=12161

The dude is brilliant. He also seems to be pragmatic, down-to-earth, well-rounded, can describe science in layman's terms very well, and is an excellent communicator. He presents his ideas like a scientist should - from facts. Very refreshing. One of his best questions (and strategy) is to ask how the US can reduce their energy consumption without affecting their lifestyle (which is very different from so many other climate change loons who want everyone to immediately ride bicycles and become vegetarians or other ridiculous culture changes that just aren't going to happen anytime soon, if ever).

Obama picked a good DOE head - I hope he can provide the US with a decent and obtainable energy policy that the US has been lacking for decades. Good luck to Stephen.

Where are the tax revenues going to come from?

I have heard almost nothing about the tax revenue shortfalls that are going to occur in 2009 (and beyond). We have heard a little - such as 41 of the 50 states will be over their budgets this year in 2008. I did read this:

The mayor of Detroit says the city's deficit is approaching $300 million and he has ordered all departments to reduce their budgets by 10 percent. (AP news)

This is only the beginning. State, county, city, and other tax revenues are going to crater next year. There are cities in California already going bankrupt. With all the foreclosures and massive devaluing of houses coming next year property taxes are going to crater. Nobody is buying anything so sales taxes are going to crater. People aren't traveling as much so airport taxes, hotel taxes, taxi taxes, and the like are going to crater. Higher unemployment and fewer bonuses and fewer stock option exercises are going to significantly drop income tax revenue. And we know that most government entities do not save up money - they usually spend as much as they can and expect and plan that the next year's tax intakes will be bigger than the year before.

I'm sure we will see big increases in traffic fines (speeding tickets, red light cameras, etc.). We will see attempts to increase property taxes, hotel taxes, gas taxes, and any other type of tax these governments can think of, and I'm sure they will try to get their hands on some bailout money from the US Treasury also (we'll see just how deep that well is next year). Where is all the tax money going to come from?

There will be screaming and crying when these state and local governments start reducing services and laying people off. Too many people think that everything is an entitlement anymore - healthcare, transportation, a house, a job, a college education, you name it. It's going to get very ugly when these local governments cut their budgets. Fewer police, less road repairs, less public healthcare, and everything else.

And charities are going to get cratered as well - and all the services they provide will decrease dramatically too.

Is the US population able to become self-sufficient again and stop expecting the government to take care of all their problems? I have my doubts.

Update: New York State is planning 137 new taxes and fees including "obesity" taxes (e.g. soda), hotel tax increases, state college tuition increases, car registration fee increases, you name it:
http://www.washingtontimes.com/news/2008/dec/23/states-set-to-impose-bevy-of-new-taxes/

GM (and Chrysler) get their free money

I guess Bush just didn't want GM going bankrupt during his presidency. $17 billion isn't going to make any difference - except delay the inevitable. The car market over the past decade, where people could easily buy cars they couldn't afford and the banks let anyone who asked get a loan regardless of risk, is now over. The car market that was on a foundation of BS has now disappeared - the credit bubble and housing bubble have popped. There is no longer any demand for all the new cars. The party is over. The politicians just don't get it. Printing trillions of dollars won't get the party going again. There will be massive job losses and plant closings regardless of what the US government does - the car market of the past decade is GONE and won't be coming back any time soon, if ever.

If I were a member of the UAW I would take the next three months to find a job somewhere else - even if it meant moving to the South and working at a non-union shop. Except that Toyota, Honda, Nissan, and the rest have had their sales crater too - there aren't going to be too many new jobs around anywhere. I would be looking to find a new skill - the car industry is not a good place to be.

A lot of rocks have been thrown at the UAW over the bailouts, but another area that is horribly inefficient and bloated is the Big 3 dealer networks. Management, engineering, R&D, lobbying, UAW, dealer networks, etc. are screwed-up - the whole system is a mess. Even if the demand for cars miraculously returned (and they won't) there is no way the Big 3 can turn their business models around in a few months.

The party is over. It's just a matter of when someone finally turns off the lights.

Soft skills over hard skills

I'm thinking of joining Toastmasters in 2009. Since soft skills seem to be replacing hard skills in what companies are looking for it would be advantageous to improve my speaking skills. I read recently in an IT mag that the top skills IT departments look for these days have little to do with IT (although I'm not in IT anymore). Number one skill looked for is problem solving. Then comes skills like communication, ability to work in a team, project management and others. The hard skills like coding, application support, database skills, etc. are now way down the list, if listed at all. Becoming a better speaker is a valuable skill and one that one can always get better at doing. I can't think of any reasons why not to do it. Pros versus cons - pros win hands down.

Who's going to buy it?

I don't understand the logic behind the Big 3 bailout. Okay, so they get billions to build more cars . . . that nobody is going to buy. Do the cars just sit there on giant lots rotting away? How does that really help anybody? It seems like a huge waste of materials and labor. Why continue to build things that nobody will buy? The credit bubble and housing bubble popped - the market the Big 3 enjoyed for the past decade is GONE and won't be back for a long time if ever. There are so many other industries in the same boat as the Big 3, just not on the same scale (and they may not have such a powerful union like the UAW lobbying Washington either). Do we bail out house builders so that they can continue to build houses that people aren't going to buy? Where they will lie vacant and decay too? How about boats? Or furniture? The market just isn't there anymore, and won't be for a long, long time. Giving these companies taxpayer money to keep building things people don't want to buy anymore just seems like insanity - or maybe more like good intentions with no chance of a good outcome.

And then you have people like Sen. Hutchinson wanting to take the $25 billion DOE money which was supposed to be used for R&D on new efficient and green engine development and other energy related R&D and use this money to keep the Big 3 up and running for a few more months. Talk about being short-sighted. I find the whole thing disgusting. The government has no idea what to do so they go about problem-solving in a knee-jerk, random action methodology. What's the first step in problem-solving? Determine what the problem is. I don't think any of the "leaders" in the US government can accurately define what problem it is they are really trying to solve. Deflation? Unemployment? Sorry, but the consumer economy based on runaway debt is over (at least for a while). It's a different game now.

I was complaining about the Big 3 over 5 years ago when the genius execs at the Big 3 announced that they had a new plan - to focus on making large SUV's and trucks. All I could think of was that they wanted to run their companies into the ground and destroy the UAW. It was pure idiocy. Well, here we are, but now the government wants to spend taxpayer money to keep these dinosaurs alive. Why? The management has been terrible for decades. Just go back to the EDS buy-out by GM in the 1980's and how Ross Perot tried to help them. GM management didn't want to change anything and bought out Perot, who had a seat on the board, for $700 million. Perot had said when they approached him with a buy-out he gave them what he thought was a ridiculously high number that they would never go for - but they did without hesitation. Advice from quality gurus like W. Edwards Deming went mostly unheeded as well. And the UAW has been a disaster for decades as well as helping to make sure that the Big 3 remain uncompetitive. The designers at the Big 3 have helped destroy the companies too. The Big 3 are all disasters from top to bottom and from all angles. These dinosaurs need to die.

When the Big 3 die other companies and new companies will start up and buy the plants and start designing and building cars people want. Will 1000's upon 1000's of people lose their jobs? Sure. But that is going to happen anyway - even with tens of billions of dollars in bail-outs. All the bail-outs do is prolong the inevitable. I would rather my tax dollars go toward the DOE R&D efforts for the future.

One other random thought - China. And all the toys they make. If China tries to prop up their toy making industry like the US is trying to prop up the Big 3 then who is going to buy those toys? Not the people in the US - they already have stopped buying them. And that's the problem. The toys are specifically designed for the US. Many of the Chinese don't even know what they are building, let alone would buy the stuff themselves. So inventory will stack up and rot. Again, how does that really help anybody? Unlike the US (at least for now) the Chinese I guess could force the people in China to buy some of the stuff. Maybe it will become mandated by the US government in the near future that every American family who makes over x dollars MUST buy a Big 3 auto - for the good of the nation. It's all getting too crazy to even think about.

First random thought

Just wanted a place to put my random thoughts. We'll see how it goes.