The Thin Red White & Blue Line
Metaphors For A Broken EconomyBy
James Macfarlane | 20 June 2008
Bill Cosby used to tell an anecdote about driving in San Francisco for the first time, and how he got stuck at a red light atop a steep hill. He figured that by the time he got his foot off the brake and onto the gas he would have rolled backwards into the bay and drowned. On the basis that dying in such a manner would not qualify for entrance into Heaven, his solution to the dilemma was to not move. Instead he hollered to the guy behind him;
"Come around idiot, come around!" This didn't work however because the guy behind him was too busy shouting
"Come around idiot, come around!" to the
guy behind him. And so on.Bill's conundrum, that the person downstream from you is unable to comply because he is in the same jam as you, is a metaphor for the current state of the US economy, which is a short step away from a recession the likes of which we have not seen in our lifetimes. The trouble with the economy— well, there's actually more than one— but one of the biggies boils down to a single word—
leverage. Let me explain.Leverage Works— Until It Doesn'tTo be leveraged, in an economic sense, means you control an asset by putting up fewer dollars than the asset is actually worth. Leverage has existed ever since there were systems of monetary exchange. In modern times, a home loan is an example. If you buy a house for
20% down and make payments totaling
25% of your income, you've got reasonable leverage (with the bank supplying most of that 'lever').
Leverage in this case is a good thing; a tool used to create a thriving economy by enabling you to 'purchase' a home to live in while you are still young enough to take most advantage of it.However moving into a house you buy for 0% down and making payments totaling 50% of your net income might be a bit too much leverage. Everyone of course is aware of the sub-prime mess.
But not everyone is aware that over-leveraged investments have permeated every facet of our economy, from personal credit to commercial credit... in the US and across the globe. Leveraged economies get into great trouble when the assets being leveraged lose value.
That's happening now.Most of us understand, either anecdotally or through personal experience, what this means for say, a 'highly leveraged' home loan. The property can suddenly be worth less than you paid for it. Ouch! Try refinancing your way out of that Adjustable Rate Mortgage that just adjusted
upward, while the property has just appraised
downward. But we have peaked out on leverage across the board, and the process of
de-leveraging, if you will, is going to be painful. More so than the mainstream financial press is letting on.
It's something you may want to get ready for.It Ain't Just HousingThe issue with leveraged investments extends well beyond bad loans from the so called sub-prime crisis. It has now morphed into 'the global credit crisis'.
Everyone is leveraged. Consumer debt is at an all time high... savings an all time low. What's more, we consumers are leveraged in ways we are not even aware of. Sub-prime loan risk long ago left the local bank where the mortgage or loan was born, and has leaked into investment vehicles typically considered safe.
Even if you personally do not have a troubled sub-prime mortgage, your investments/retirement plans may well be dependent on the returns from such loans, and they stand to sustain a loss if those 'free-rent' borrowers default.How could that happen? You have perhaps heard the terms credit derivatives and credit swaps? These innocent sounding names refer to financial instruments used to 'redistribute risk'. The terms went mainstream earlier this year as the press broke the news on the Bear Sterns debacle and other credit nightmares. When money is as cheap and plentiful as it has been, 'sub-prime' loans were made with as great a frequency as sub-prime mortgages.
The banks have always known though that these loans were risky. To 'deal' with that risk, they 'sliced' and 'diced' them and repackaged them into groups (aka, 'tranches') of 'investment' vehicles called credit derivatives. The derivatives were then eventually sold to a buyer who
[was supposed to] earn an income stream from the mortgage/loan payments contained in the derivative.
In return for 'fees', the packager of these mortgages/loans into derivatives guaranteed that if any of the loans in the group were defaulted on, the 'packager' (or his agent) would handle the details of the foreclosure process. But since there could be 'slices' from several thousand mortgages/loans in any one package, a few defaults would hardly have much impact on the value of these packages (and, moreover, the riskier mortgage/loan packages were supposed to carry the highest interest rate and were generally bought by hedge funds who were willing to take on the added risk for the added interest rate). It's kind of an insurance policy, wherein the price of (interest paid on) each policy (derivative) is based on the supposed credit worthiness of the loans as a group.
That all sounds good except...The problem with these derivatives over the past few years is that they have been traded around and repackaged so often that the true risk of the underlying loans has become obscured [[and, in any case, was grossly underestimated: normxxx]]. Moreover, although they are packages of long term mortgages/loans— 5 to 30 years, they have been traded freely over-the-counter, and so have a
present value which is only remotely in line with their eventual total return (which, since it is highly dependent on how many of the packaged mortgages/loans eventually default, is largely unknown at this time)!
Early on, such derivatives often ended up with a far higher credit rating than they warranted [[and, today, they probably have lower credit ratings than warranted— but no one knows: normxxx]].
And investment in these questionably rated instruments is pervasive. For example they are widely owned by just about everyone— from townships in Norway to most pension funds (and, much to their chagrin, even the bond insurers Ambac and MBIA).
And those hedge funds that bought the more speculative packages (or 'tranches', as they are known in the lingo) are in turn widely held by pension and similar conservative plans due to their "higher than market" yields. - [ Normxxx Here: The whole notion was, if you had a whole lot of these risky investments, the total would be less risky, because only a certain percentage would go belly up— so the high returns earned by the other risky investments would more than make up for the losses. The statistical models that proved this were mathematically impeccable! That is, except for one thing. All of the models assumed that the individual risks were 'independent'— that there was little or nothing in common among these risks, so that if one failed there was no reason to believe that the probability that any other would fail would be greater. In other words, the academic 'quants' who dreamed up these models in their ivory towers simply had no notion of the common effects of a recession— or even of a brief market panic, such as last August. They were to learn! ]
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When the 'true' value and impact of such funds are eventually accounted for on the books, many people will be receiving shocking balance statements in the mail. An example of how ubiquitous these derivatives are is that discount broker E*Trade and monoline insureres Ambac and MBIA and many other highly conservative businesses are teetering on the verge of bankruptcy because they tried to get a little extra yield on their static funds by investing in— guess what— …derivatives.
Who knew?We now return to Bill Cosby's dilemma and how it applies to the current state of affairs concerning bad loans. Financial institutions are required to maintain a certain level of equity, or 'margin', on the loans they took out at lower interest rates to buy these
"high yielding" derivatives. But, if the properties backing the loans drop in value, the financial institution must come up with enough cash to reestablish a minimum level of equity.
It's called a 'margin call'. What happens is that the phone rings one day and a voice on the other end of the line says something to the effect of "Hey, you idiots have to come up with a pile of $$ to cover these loans!".(... pause . . .)Shit! They weren't expecting that. Why? Because investments like residential and commercial real estate have been going up in value for so long [[pretty much the lifetime of most investors today! : normxxx]], everyone pretty much forgot that one day they might go down.But that's just the first domino to fall. The borrower doesn't have a pile of money lying around— or any place handy to get it quickly, if at all. Why? They're over-leveraged. They bet the farm on the premise the investments would continue to rise. But wait. Hold the phone.
Although a home mortgage/loan can not receive a margin call, the financial institution may have granted certain loans that do require a minimum amount of equity be maintained. If such loans are using depreciating assets such as real estate for their margin/collateral, they have likely dropped in value as well. So the financial institution, needing some quick cash, picks up the phone to issue a margin call of its own.
We know what will be said when the phone is answered. "Hey, you idiots have to come up with a pile of $$ to cover this loan!". But alas, the line at the
other end is busy.
I Wonder why?Answer. Everyone is over leveraged. A version of the above scenario played out recently with global investment banking firm Bear Sterns. Bear Sterns was up to its neck in 'bad' derivatives
[[i.e., those containing lots of defaulted and defaulting mortgages/loans: normxxx]]. As the diminished value of the depreciated loans were reflected on the books (a process called 'marking to market'), Sterns came due for the dreaded margin call. It could not produce the required funds however, so the Federal Reserve stepped in to provide the needed liquidity.
This was unheard of, but if the 'Fed' had not bailed them out, the dominos would have started falling BIG TIME. Sterns was considered too big to fail.All this over-leveraging has gone on for many years now, and the chickens are finally heading home to roost. Meaning, major cracks are appearing in the financial credit markets/system, and their continued functioning is in question
[[and, without it, we'll all be reduced to barter: normxxx]].
Bear Sterns was hardly the only bad boy on the block. Other banks are in similar trouble and we will be hearing from them shortly [[and many of the "NOT too big to fail" have already failed, so the FDIC is running out of funds: normxxx]].
And it won't just be investment banks, but rather banks with names you will recognize [[like, perhaps, your checking or savings bank, around the corner! : normxxx]].
Are you familiar with the term "Fractional Reserve System" from high school economics? It's the system that allows a bank to keep only a fraction of its deposits in reserve. The rest of the deposits can be lent out. Meaning, not everyone can take their money out of the bank at once; but if enough people try to do so, we have a bank run
[[which the Fed was set up to backstop: normxxx]]. Kind of an important system. So how are bank reserves doing today?
Take a look at the chart below:
Click Here, or on the image, to see a larger, undistorted image.The banks have negative reserves! This is not to be taken lightlyThe chart is a not-so-pretty picture showing that the amount of bank reserves has actually fallen way into the negative. Ouch. That's more 'leveraging'
[[and a fancy way of saying the banks are insolvent! : normxxx]], and just like Cosby's line of stuck cars, all the banks are in the same jam. By the way, this chart was not made by some dufuss with a copy of Photoshop.
It's from the Federal Reserve itself. The insurer of these banks, the Federal Deposit Insurance Corporation (FDIC) is aware of this sad state of reserves and has beefed up its staff, including calling employees out of retirement, to prepare for the onslaught of bank bankruptcies it is expecting. Banks have failed en mass before during recessions, and we have gotten through it. But it must be recognized that due to all the overleveraging, the crisis upon us now could be much worse than any previous one.
Put simply, the FDIC can only cover about 1% of all insured deposits [[but fear not, the Fed can always print more IOUs— aka, Federal Reserve Notes— and lend them as much debt as they need: normxxx]].
Can you imagine what would happen if a financial shock took place such that large numbers of depositors rushed to the bank to become withdrawers? The music is going to stop and not everyone will have a chair. Would you want to be at the end of that line? Have you ever seen the movie It's a Wonderful Life with Jimmy Stewart?
Do you now believe that I'm not just being paranoid in sending out this warning?What we have been living out for the past 20 years— about since the beginning of the [Federal Reserve Chairman] Alan Greenspan era— is a version of one of the oldest con games in the world: the Ponzi scheme. The Ponzi system works great and makes everyone money… right up until it doesn't. It has to break down at some point. The Dot-com bubble of 2001 gave way to the housing bubble, which gave way to the credit bubble. It's become a bubble economy.
But in the end the bubble always pops. T
he party must end. There is a boom. Then there is a bust. We should have had a more serious bust (recession) after the Dot-com bubble. Instead, interest rates were lowered [[effectively below zero, if you subtract inflation; and we are there again now: normxxx]] and a housing/credit bubble was encouraged in order to forestall an economic downturn (yes, the sub-prime mortgage fiasco was no accident, but that's a different article). Our economy at this point is akin to a forest that has not been allowed to burn for many a year. We know what happens to such forests.
All it takes is one single incident, one match, and... poof. What should have been a natural, periodic, and predictable process— a 'slow burn'— totally explodes and gets completely out of hand.
The longer the 'natural' burning is suppressed, the worse the damage when it finally cannot be longer surpressed.Our economic system, i.e. our way of life, is a tinderbox. This is not an exaggeration. The Federal Reserve most certainly knows this, and it's why
they did something in March of 2008 that has never been done in their 95 year existence— they provided funds to a non-Federal Reserve bank. The Fed bailed out Bear Sterns. Sterns owed money it couldn't pay and had lied about that fact right up to the end.
Its debts exceeded its assets to the tune of trillions of dollars of devalued derivatives (that's trillions, with a T). If a derivative pool of that size had been defaulted on, one of the most important elements that glue an economy together would have burned to the ground right there: Trust. The only reason institutions are willing to lend money to each other
[[in various guises: normxxx]] is if that they trust the monies will be paid back.
Money is not [normally] lent if there is no reasonable expectation of it being returned [[hah! Explain that to those 'mortgage/loan originators': normxxx]]. Without these loans between financial institutions the economy is crippled
[[and, the Fed has been fighting since last August to get the banks, in particular, to trust each other again: normxxx]].
Capitalism runs on capital.From the Federal Reserve's point of view, Bear Sterns had to be bailed out. If it hadn't been, we may well have reached the tipping point that would have commenced the giant, painful process of
instantaneous de-leveraging of the economy
[[euphemistically referred to as the system "freezing" or "seizing" up: normxxx]]. The Fed is pulling out all the stops to forestall that day. So as it stands, the dominos remain upright... for the moment.
This blessing gives you and me time to take precautions.So Where Do We Stand?Funny, things do seem a bit better now, don't they? Bear Sterns was saved. 'Precautions have been taken'. 'Adjustments have been made'. 'Measures have been put into place'. The stock market came back. We're probably out of the woods, right?
Wrong. Here is what my research has revealed:
There are a whole bunch of Bear Sterns out there. Way, way too many to be saved by the Federal Reserve. And it's not just the financial and investment houses. Everyone is leveraged,
and asset prices are falling. The math has turned against us. The party has gone on for far too long. The booze (easy money) should have been cut off years ago. But our then bartender at the Federal Reserve, Alan Greenspan, would not hear of it.
Let the good times roll, said Greenspan. Make a toast to Uncle Al, the borrowers'/freeloaders' pal.You need to know that right now a lot of effort is being made to convince Americans [[and, indeed the 'masses' the whole world over: normxxx]] that the worst is over. There are loads of newspaper articles inferring so. There are fewer ugly stories about financial Armageddon
[[that one's easy: the public is tired of hearing about it, and anyone who continues to warn is swiftly denigrated (Swift Boated?): normxxx]].
Most importantly, a truly unbelievable amount of money is being spent to convince you, the American consumer (not to mention the world), that the worst is over. The stock market is being propped up by these funds[!?!] The price of gold is being forcibly manipulated downward by this money (google
'plunge protection team')
[!?!] It's a dog and pony show designed to do one thing; make it appear the worst is over. Everything is all right now. It's ok to keep pouring the low interest loans and continue the party. But beware the man behind the curtain.
His powers are limited. And there is a steep price to pay for what he is doing.What we are going to see over the next few months and years are a series of gradual revelations regarding the truth about the economy as events force these truths to the surface. They can be suppressed no longer. Where we stand is that the trends we are seeing in the first half of 2008, higher energy and food prices, shortages, rising unemployment, reductions in our standard of living, etc. are going to continue.
Here's why:Inflation And The Falling DollarThe aforementioned issue of trust when lending money now goes a step beyond the question of "Will I get paid back"? The question has been amended to
"Will I get paid back with anything of value"? Dollars are worth less and less these days.
This is the other shoe dropping, and it will have far reaching consequences which have already begun.Inflation is back. It's standing on the front porch, and is poised to bust through the door. But like the Shark in the old Chevy Chase/Saturday Night Live skit, it's been disguised to look far more innocent than it truly is. Meaning, the rate of inflation reported in the news vis-à-vis the government sourced Consumer Price Index (CPI), is a deception.
Inflation is much higher than reported. To begin with, the cost of food and energy has been removed from the usually proffered index. Think about that.
What if you removed food and energy from your monthly expenditures? Two of the three most important expenses in our daily lives (shelter being the third) are not factored into the cost of living index. Hello? Additionally, there is reason to believe that even the items still remaining in the CPI are being fudged. The true rate of inflation is far higher than stated by the government (try
10-15%, depending on your 'market basket').
That of course should be no surprise to the person paying the bills in your household.Where does inflation come from? It's partially due to more and more people worldwide bidding for a relatively finite (or even decreasing) amount of goods per capita.
That's supply and demand 101. But inflation is greatly exacerbated by Federal Reserve policy. The Fed has the power to set short term interest rates, and the artificially low rates we have seen for years now causes the supply of money to rise
(exponentially, due to more loans being made under the fractional reserve system and the fact that we have gotten into the habit of using debt as money). A basic law of supply and demand states that more $$ chasing the same amount of goods cause prices to rise [[That's supply and demand 201: the more plentiful that money is— relative to everything else— the less its value: normxxx]].
With the Gross Domestic Product (GDP) running only about 1% this year (1% more goods), while the money supply has recently been increasing at 12-25%, the difference will result in more inflation— above and beyond any 'normal' increased scarcity of goods.There's more. As most folks know, this country continues to spend money far faster than it takes it in. The war, natural disasters, tax rebates, missing money from the Treasury (4 trillion or so), homeland security, entitlement financing, the bailout of troubled financial firms, and all our other expenses are taking their toll.
As a general rule, any debts not paid for by taxes or borrowing is paid for simply by printing more currency (this is known as monetizing the debt— and feeds directly into monetary inflation because of supply and demand 201).The US dollar is in near freefall
Inflation also has an impact on the US dollar overseas, as its value drops further and further. The dollar is the world's 'reserve' currency. This means more trading is done around the world in US dollars than any other currency.
Remember that most consumer goods are now purchased from overseas. A falling dollar makes foreign goods more expensive. It keeps taking more and more dollars to buy those foreign goods. The above chart measures the US dollar in relation to a
mix of other currencies
[[in proportion to their importance to us as a trading partner: normxxx]]. It is one of the most widely watched of all economic indicators.
Notice the direction of the trend.Don't forget that most of our oil is imported now. The price of oil rises in lock-step to a falling dollar— again, above and beyond normal market forces. These factors add to the fires of inflation even further because a critical commodity like oil is used in so many products, a rise in its price alone is going to force prices of nearly everything else up further.
The rocketing price of oil is one of the biggest cracks in the dike.Adding It All UpWe've reached a critical point in our experiment in our democracy. The Achilles Heal of free enterprise and 'pure' democracy is greed— and we are seeing insatiable greed manifested on an unparalleled scale, as everyone fears that his neighbor is profiting more from the system than he is
[[it has traditionally been the downfall of many old European cultures, where everyone was so afraid that his neighbor was gaining some advantage, that he would himself gladly suffer the worst conditions if he could only be assured that his neighbor was no better off! : normxxx]]. The price of freedom is eternal vigilance, yet we have unfortunately allowed the foxes to guard the hen house. We simply haven't been paying attention.
Basic freedoms are slipping away. We're out of money. In the last 20 years America has gone from the world's greatest creditor nation to the world's greatest debtor nation. America now owes more money to more people in more places than anytime in its history (or, indeed, for any nation any time in history). The interest on the nearly
10 trillion dollar national debt is pushing one half trillion dollars a year (third largest federal budget expense item). Yet we have been told for years that deficits don't matter.
Oh yeah?At some point the Chinese (and the rest of the world) will not be willing to buy any more of America's debt. But again, The Federal Reserve has made it crystal clear what it will do when it comes to providing needed liquidity to the economy; they will then simply print money.
The Fed will print all the money required to bail out every Bear Sterns that comes out of hibernation to 'fess up' about how much they have lied about all the bad paper on their balance sheets [[Check out the recent history of Argentina, who tried this ploy most recently: normxxx]].
And, they will print money for anything else related to keeping the economy afloat. The current Fed chairman, Ben Bernanke, wants the same thing Alan Greenspan wanted; keep the party going at all costs. Don't let the forest burn. One thing is almost certain however... the forest will eventually burn.
I have written this article because I believe we are close to that day, and if precautions are taken you won't get as badly burnt as the guy down the street.Now it's hard to tell exactly how and when an economic bombshell will manifest itself. The future is always in motion, so the key is to focus on the well founded trends that are likely to continue. What's really interesting by the way, is that the future can be considered as especially unpredictable right now. A lot of the old rules don't apply. We are in unchartered waters, with
many changes coming upon the earth.
Climate changes, geologic changes, social changes, changes in our solar system, and more [[Doom! Doom! Doom! And to think, just a few short years ago— under that much reviled Bill Clinton— we thought that we had never had it so good!: normxxx]].
Therefore it's important to factor that in to planning for the future. What I am trying to say is that while the state of the economy alone necessitates precautions be taken, the overall unpredictability of the near to intermediate future not only does not invalidate the need to take precautions, it
underscores the need to do so.
For the thinking person, uncertainty begets contingency planning. - Could The Great Depression Occur Again?
You should also know that a key piece of legislation put into law under FDR after the Great Depression has been systematically dismantled. The 'Glass-Steagall Act' placed certain restrictions on Federal Reserve banks, and kept mortgage banking and investment banking separate in order to mitigate the chances of another mutual collapse and depression. The law was systematically dismantled begining with the Nixon era and finally given its coup de grâce under the Clinton administration.
That's called Human nature! Once we are sufficiently removed from a disaster (in time and/or space), we simply assume it can/will never occur again— so, why put up with all of those silly annoying safeguards?
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The Trends Tell Us Our Immediate FutureHere is a list of what we can likely expect as the future moves into present time (now through 2012):
- Inflation up
- Long term interest rates up
- Gold and silver up
- Energy prices up
- Unemployment up
- Volatility way up
- Food prices up
- Personal and municipal bankruptcies up
- US dollar down
- Real estate down
- Equity markets down
- Personal freedoms down
Inflation will continue to rise, at least for certain sectors of the economy. The action of the Federal Reserve dictates it will likely rise substantially over the next couple of years, starting yesterday. Don't forget that the CPI (Consumer Price Index) is compromised, and does not tell the true story of inflation.
Increased demand for resources will drive prices up even further as literally hundreds of millions of people around the world move from poverty to the middle class, and will want the same things we want.Long term interest rates will rise as lenders become convinced inflation is here to stay. Lenders will not lend money at a loss (although short term rates may be artificially tamped down by the Fed for the moment, the Fed has little control over long term rates) [[until they start buying those long term bonds in earnest: normxxx]].
Precious metals are just that; precious. There is only so much gold and silver, and that is why these metals are such a reliable store of value. Real inflation of our currency was not possible until gold was disconnected from the dollar. A currency not tied to a solid commodity such as gold is doomed to fail
[[largely because its amount is then free to increase without limit; see supply and demand 201, above: normxxx]]. History tells us that. And as high as gold and silver have climbed so far this decade, they are destined to go far higher.
Inflation guarantees that [[maybe not; other things— such as oil futures— can be substituted for 'money': normxxx]].
Energy prices will likely go higher, though probably not in a straight line. Energy pricing is affected by both monetary inflation, a declining dollar, and natural supply and demand. The
perceived shortage of crude oil and other raw materials is causing the price of these goods to rise.
This perception may or may not be correct, but it's perception that counts.Unemployment will continue to rise as the economy continues to contract. High food and energy prices, and the global credit crisis, are two big factors. Unemployment begets more unemployment as out of work Americans buy less. This also increases foreclosures. Leveraged loans go into foreclosure quicker. With a glut of empty houses on the market, the building trades, lumber industry, et al start to recess. More unemployment. It's a house-of-cards.
The government can't stop this. They can make it worse.Volatility will reign supreme. The markets have much to digest as the various economic forces battle it out. For a period of time, perception that the world economy as a whole is slowing will drive the price of raw materials and finished goods down (less demand).
At other times real or perceived shortages of the same items, due to hording or actual demand, weather, war, or politics (a form of war), will send prices through the roof.Food prices are subject to the statements in the previous paragraph but are a special case for several reasons, not to mention that we need food every day to live. There are a number of forces at work that may make food not only expensive, but many items outright hard to buy at any price. That's scary, but you must understand that we live in a
"just-in-time" economy. Costco does not make its products at the warehouse store.
Food is not grown in the back yard. It comes from other states, and other countries— sometimes only hours before it is displayed and purchased at retail. There is a complex pipeline that gets food from the field to the grocery store, and there are cracks throughout the system, from the genetically modified seeds planted in the ground to the rising cost of getting products to market. The food supply line is very tight at present. Take wheat. Although a record wheat crop is projected for 2008, we currently have the lowest inventory of wheat in the US in 60 years.
The entire world has only a 60 day supply.Personal bankruptcies will rise as a down economy leaves many with no choice. City government bankruptcy filings will go up dramatically as bad investments and a reduced tax base break an already strained system of delivering basic services.The dollar will continue to fall, again due to the action of the Federal Reserve. It won't be a straight line down, but the overall trend is down, down, down.
This means the prices of imports— especially oil— is up, up, up.Real estate may not come back for quite a while. This is one sector that is deflating, not inflating. Rising mortgage rates, a population with less money or no money and maxed out on credit, combined with a serious oversupply of housing means we may not see new highs in residential real estate for the foreseeable future.
Commercial real estate is not far behind.The stock market is due to come down dramatically. Stock prices are ultimately based on a company's earnings, and a slowing economy means lower earnings. Although the market currently seems to be looking ahead to better times (as of the first half of 08), think about all the warnings stated earlier in this article. There is good reason to believe
[!?!] that the equities markets are being propped up with large sums of money, making us believe that investors value these companies higher than they actually do.
There is currently a very unusual divergence between consumer confidence numbers (down) and stock indexes (up); further evidence that the stock market might be weaker than it appears [[but, fortunately(?) only a very small percentage of higher income consumers are also investors! : normxxx]]Personal freedom is likely to become even more restricted. I believe that the threat of terrorism has been used as an excuse to abrogate our rights. Keep your eyes open and be prepared to exercise your right to protest.
(Hint: google "RFID human rights" and/or "national ID card" for starters).Finally, let me underscore one last time that it is the action of the Federal Reserve that sets the biggest [inflationary] trend of all. The Fed can be counted on to bail out failing institution after failing institution and prop up the economy with inflated dollars. That's not good.
It could lead to hyper-inflation and/or a total breakdown of the all-important trust factor. But the Fed just refuses to let the party die. [[So far, despite all of this purple rhetoric, the Fed has only bailed out a few really, really big banks; the rest have been left to 'dangle in the wind'— which is NOT to say that 'BB and the gang' really know what they are doing…: normxxx]]To continue the metaphor, the Fed is supposed to be the designated "party-poopers" of the nation. They are supposed to card the people entering the bar, and cut off the booze when lampshades start getting unscrewed. Meaning, they are supposed to crank up short term interest rates when inflation rears its head.
Fed Chairman Paul Volker did this in the 70's to kill off what is known as stagflation (a recession with rising prices). It worked. 20% interest rates hurt like Hell, but the economy— just as the proverbial forest allowed to burn— recovered strongly. But the current Fed, supposedly a team of professional party-poopers, have turned out to be party-promoters— and now it may be too late.
Example: The Fed is now swapping US guaranteed securities in exchange for 'junk' debt as a way to get this garbage off the street [[and keep the current holders 'solvent': normxxx]], thus transferring the burden to the US tax payer! [[True enough, we are ALL bailing out the banks! Too bad no one is trying to recover those hundreds of millions and billions of dollars in 'compensation' that those directors and executives responsible for all of this simply walked away with. Maybe a little old fashioned 'vigilante justice' is in order!: normxxx]]If the trust in our system fails, we will wake up to an economic nightmare. Everyone will head for the exits at once. Meaning, people will try to sell their stock before the other guy does. Folks will try to get their money out of the bank ahead of everyone else.
Families will try to buy and hoard food and other commodities, forcing governmental control and rationing into play, as with the rice shortage scare.What To Do?All we can do is hope for the best and plan for the worse. As a point of reference I will share with you the best advice I have run across.
- Lighten up on equity investments (securities)
- Buy gold and silver
- Buy and store non-perishable food
- Become a farmer
- Stock up on the non-food basics (toilet paper?)
- Keep some cash on hand
- Take additional security precautions; beef up your home security
- Buy a super-high gas mileage vehicle like a motorized bicycle, and don't let its tank go below half full
- Conduct a "disaster preparedness test"
Securities, once a safe bet, are not so secure anymore. A number of things could bring about a bear market, with many already noted throughout this article. Many believe we are already
in a bear market.
Several likely events could cause a sudden, precipitous drop in the markets [[e.g., any financial "accident": normxxx]]. The reverse is less likely [[e.g., the discovery of a cheap and plentiful substitute for oil! The rising cost of energy is a big part of out present problem; and the reverse would also be true— even the onrushing problem of a shortage of potable water is no problem if we had a source of sufficiently cheap energy. : normxxx]]. The best take on the stock market I have heard is that we will undergo a stair-step drop in prices over the next few years; i.e. a sharp drop in stock prices, a sideways consolidation process, then another stair-step down. So, you may want to think about allocating a portion of funds, including any retirement funds you have direct control over, to alternate investments.
There are a couple of thoughts below, but if you have a substantial nest egg I suggest you seek out a financial investment counselor not wearing rose-colored glasses.When paper money loses its value people turn to real money. This means gold and silver. History teaches us this.
Buy gold. In fact, I was speaking with a fellow investor a few weeks ago, and we both agreed that if we could only invest in one single vehicle, it would be
gold/
silver. Repeat, although a bit contrarian even with today's relatively elevated precious metals prices, gold and silver are probably the safest investments you can make. You will almost surely preserve your wealth, and possibly multiply it, if it rises faster than inflation
[[but beware, once upon a time, the same was said about real estate! : normxxx]] So.
Did I mention...? Buy gold.Stock up on food. Fill the pantry with foodstuffs that have at least a 1-3 year shelf life. Fill the garage if you want. What will it hurt? If it's business as usual over the next few years, your car gets a little oxidized from being out in the elements and you have a bunch of food to eat (should keep you from the 'free' food pantry for some months if you lose your livelihood). But seriously, I often hear advice that at least a six month supply is wise.
Plant a 'victory garden'. There's a novel idea. I remember moving into a new house in suburbia as a six year old, and noting that my parents went to great lengths to get rid of the various vegetables that would sprout up like weeds through the backyard lawn each year— in a prior incarnation the back yard had been a vegetable garden
[[WWII Victory garden?: normxxx]].
Everything old is new again.It would also be wise to stock up on staples in general. Toilet paper, candles, soap, gasoline, propane, medicine, water— the stuff you take camping— remember, these can also be used in place of worthless paper money to get things you've run out of or forgot to stock. Solar panels and solar (or magneto) battery chargers are a great idea. Also think for a moment about the security of your family.
If there is an interruption of power and/or food and/or water for more than a few days, there are unprepared people who will begin to get desperate. Desperate people do desperate things. In the event of pervasive disaster, the local authorities and rescue centers— even the hospitals— will be quickly overwhelmed and can't be counted on. And don't assume you can get cash out of the ATM
[[or gasoline from a gas station using electric pumps— which is ALL of them! : normxxx]].
Keep some on hand.Finally, think about conducting a disaster preparedness test. Take a weekend home and see what it is like to go without power and transportation. Yeah, turn off the lights. The purpose of the test is to see if you have all the stuff you need to survive off the grid if need be. It's seems weird to talk about power interruptions, but the electrical power infrastructure is one more thing that's in a precarious, maxed-out state.
The more self-sufficient you become, the better you will weather the coming storm.Final ThoughtsSo what is the thin red white & blue line? It's the distance between having enough food on the table... or going without. It's the space between having the choice to drive your car as far as you choose... or gas rationing. It's the difference between having all the freedoms Americans have enjoyed for generations... or seeing them evaporate under the guise of 'government protections'. There used to be a wall between these extremes. An impenetrable shield between the thinkable and the unthinkable.
But the wall has shrunk to where we can now peer through it— it's virtually transparency [[and, modern technology has had more than a little to do with this: normxxx]].
To be fair, one could certainly point out that the stage has been set in the past for some kind of universal disaster to befall us... yet it did not occur. Y2K would be an example. However, the reason I feel it's more likely to happen this time around is that things, including potential disasters, are getting more complex
[!?!] There is a change in the wind. Many people I talk to feel it. The world is changing… people are changing. We seem to be approaching… who knows what?
[!?!] Even nuclear terrorism is no longer unthinkable. I urge you take precautions even if it appears for a time that we are out of the woods.I believe also that the future is somewhat malleable. We tend to create our own realities… our own futures. Although it seems impossible that we Americans, or even the entire human species, can avoid some amount of disruption and discomfort over the next few years; regardless, we must keep a strong positive attitude. It's important that we all do so. We must envision that the world is going to end up OK
[[well, anyways, it always has in the past such 'transition' periods: normxxx]].
It's just that we have reached an apex of selfishness and greed, and it appears that an overdue 'cleansing' is coming.The wisest words I heard lately are these: In the next few years it's not going to be about where you live, but about whom you live with. Make friends with your neighbors.ߧ
Normxxx ______________
The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.
"Catching The Falling Knife"
Louis XIV (1638–1715), by Hyacinthe Rigaud (1701)
The point of maximum stress could unfold if the ECB carries out a second rate hike to 4.50% in September. That would put enormous pressure on Bernanke to hike US interest rates to defend the dollar. On June 13th, the godfather of the US sub-prime debt crisis, "Easy" Al Greenspan warned, "If you’re going to keep inflation rates down, the Fed is going to have to put increasing pressure on the money supply and reserves, and as a result we’re going to see interest rates rising."
Peter Fitzgerald, a former U.S. senator from Illinois, founded Chain Bridge Bank in McLean. Because of the trouble in home-equity and commercial real estate loans, he says, "you will have some economic Darwinism" among banks. (photo by Gerald Martineau— The Washington Post)
The institutions most at risk in this new phase of the credit crisis are regional and local banks, many of which stayed away from subprime mortgages. These firms are key drivers of economic activity in communities across the country. Without them, consumers would lose a source of personal loans. Small businesses would struggle to stay afloat. Construction companies often can't finance local projects without these banks.
"Check out the table I stumbled across this morning," responds Chris Mayer to our coverage of global inflation yesterday. "It’s from the shareholder letter of QB Partners. It shows you the annual money and credit growth of a number of currencies.
