Theft Without Guns or Sirens (Editorial)

  Years ago, in the middle of the Savings and Loan debacle, in the 1980’s, a friend of mine who worked at the Home Loan Bank Board repeated something an insider in the industry said to him.  The Bank Board regulated the S&L’s, and money was running through their hands to create huge losses.  He said, when a bank is robbed there is often shooting and violence, the police appear with sirens blaring, shots may be fired, the guilty are pursued, arrested and prosecuted, and order is restored.  A bank robbery yields to the robbers a few thousand dollars,  including an exploding dye packet to track them down.  But when billions of dollars disapear from an S&L nothing happens except the Treasury writes a check to cover the losses.  No one ever asks who is responsible, no matter how large the loss is.  Officials of the S&L are rarely prosecuted, and the whole matter is forgotten as soon as possible. 

The first president Bush, cast a blind eye at the S&L crises because he was running for president in 1988.  This had the effect of increasing the damage to the treasury from 100 billion dollars to over 300 billion dollars, when Bush finally got around to putting the screws to the high flying S&L’s.

  In the wake of the credit meltdown, since the Bear Sterns bailout, likewise where are the investigations by the  SEC, the FBI, or New York State attorney general, to lay bare the origins and cumulative damage that has occured.  Apparently the bigger the losses, the less likely the police are inclined to take an interest in the case.  The authorities seem to be stunned into silence and lethargy by the audacity of the perpetrators of billions of dollars of losses.

  The Reagan Revolution brought deregulation of the S&L’s and  banks, leaving the investing and saving public where the devil takes the hindmost.  Clearly it is time to apply regulations that will prevent such coniving.  These parties have proven beyond any shadow of a doubt that they cannot be trusted in the short or long term with the public’s money.   Through the dubious financial instruments that bundled dubious real estate loans, the perpetrators have poisened banks and investment houses around the world.  The damage for practical purposes is incalcuable.  While this bad news makes a cop’s eyes glaze over, one way or the other, the public vote will with their feet, to avoid such chaos, and return to honest banking and investing.

We have had four bubbles since the 1980’s; the S&L debacle, the high tech meltdown, the housing blowoff, and the credit catastrophe.  Clearly we are in the same place that Great Britain found itself after their great bubble disaster in the 1770’s.  We need legislation to protect against anything remotely like a future bubble, today or a hundred years from now.  The total nominal value of the credit bubble we are going through now is greater than the national debt of the United States.

  We are sadly without leadership at this moment of greatest peril.  President Bush seems immobilized by the size and danger at hand in our bubble economy.  Controlling bubbles is the only defense that the public has to fend off the damage flying about, with the economy full of the flotsum and jetsum we are experiencing now.   Now is the time to let the president, the congress, the FED and SEC that we need regulation now, and forever, or at least until theivery is banished as a human trait.

 

The Housing and Credit Juggernaut (Editorial)

The dictionary defines a juggernaut as a massive, inexorable force that crushes anything in its path.  Today we are experiencing deflation, the rapid collapse of prices simultaneously in the housing market and the credit and investment world.  Deflation is half of the juggernaut, and it is the natural consequence of largely unreggulated selling to unqualified and financially unable people who were trying to cash in a housing market that had no top.  This poisen very rapidly fed into the credit and investment sector, encircling the world, thus tainting whole currencies, and virtually the entire banking and secondary investment sectors.

One way to measure the impact this juggernaut has already had on you, is to find out the current value of your house.  Housing in many cities has dropped in value by 20% to 35%.   If it has declined by more than $20,000, you may want to look more closely what an inflation rate of 3.2% to 12% a year could do to your cash assets and investments.  This isn’t just happening to others, it is happening to you and your loved ones.  At the same time your house is decining in value, inflation is running on a monthly rate of 3% to 12%.  This is the other half of the juggernaut that you have to worry about.  The price of oil has broken the back of the economy.  The price of wheat, rice, gold, silver, copper have increased steeply, and show no signs of backing off.  One question to ask yourself, is where is the breaking point for yourself and for the economy in general.  How high can oil and wheat go?

President Bush and the Congress’ response to this terrible news was to pump 100 Billion dollars plus into the hands of American taxpayers.  So far it has caused barely a blip in the economic behavior of 130 million people.  The jauggernaut is still hanging over America, Europe, Japan, and many countries who peg their currencies to the dollar.   Our day to day drama is the relentless rise of the price of oil on the one hand, and the lurking , grasping, vaporizing  effect on the currency and savings in the economy caused by generalized inflation.  We are experiencing stagflation, or better said, part of the economy is being deflated and the rest of it is being inflated away, like the wheel barrows full of worthless German marks in the 1920’s.  The increasing price of  oil is a leading indicator of the present and future rate of inflation, in the U.S. and around the world. It shows lttle signs of stopping all by itself.

The push me/pull you affect of the current fix we are in simply outweighs the capital and determination of the economy and our government to defang the jauggernaut.  Where will we go and who will guide us through this?  These unanswered questions will work themselves out for better or worse.  But beware of the ‘wise men’ who are thrown up by the media almost daily, telling us its not as bad as it obviously is.  The only way you can protect yourself is to understand what you are dealing with.  This jauggernaut does not care how much own,  or how you well you will or will not protect your property.  Each day it proceeds relentlessly, until it has run its course.

Ask yourself, a year from now, how much worse could it get?  And what steps can you take to protect your personal wealth?

Bush Rebuffed by Saudi King

President George Bush ’s trip last week to the  Middle East, with his hand to Saudia Arabia to increase the production of oil, provoked a meager response from King Abdulla.  Latter the Saudi oil minister announced an enemic increase of 300,000 barrels a day.  The markets didn’t buy this as much good news, where the price of oil went up $2.17 a barrel to $126.29 barrels a day.  So much for Bush’s oil policy

Michail Abramowitz, The Washington Post, May 17, 2008, p A-1.

Deflation Strikes Hard at Housing Bubble

  “For the first four months of this year, home sales in Detroit, excluding suburbs, totaed 3,360,  up 48%  from a year earlier. . .The average price dropped 56% to just $20,514. . .In California’s Sacramento County. . . The median sales price was $226,250, down 34%. . .Some homes that sold for more than $400,000 a couple of years ago now go for $225,000, to $260,000.”

James R. Hagerty, The Wall Street Journal, May 27, 2008, p A-3. 

The Cost of the Housing/Credit Bubbles

In the last twenty years we have experienced four bubbles. 1) The Savings and Loan Debacle. 2)The High Tech meltdown. 3) The demise of the Housing market. 4) The Credit and Investment deflation that the housing bubble provoked.  One might well ask, where and when will the next bubble begin to appear, given this rocky history.  Another question is exactly how much damage do these bubbles do to investors pockets and the economy in general.  In the case of the condominium of the housing/credit bubbles have produced an astounding dent in the world’s economy.  One question is when and how will the bubble economy strike again, and how much damage will it do?  The investor, George Soros, in his new book helps put things in a clearer picture.:

  “The (housing/credit bubble) market grew exponentially until it came to overshadow all other markets in nominal terms.  The estimated nominal value of CDS (credit default swaps, the face value for the securities that werer bundled up with bogus mortgages and related investment vehicles that were in turn sold to investors around the world) contracts outstanding is $42.6 Trillion.  To put matters in perspective, this is equal to almost the entire household wealth of the United States.  The capitalization of the U.S. stock market is $18.5 Trillion, and the U.S. Treasury  market is only $4.5 Trillion.”

George Soros, The New Paradigm for Financial Markets, Public Affairs, Philladelphis, 2008, p xix.

Ukraine Seeks to Fight Inflation

  “In a sign f the growing price pressures through out the developing world, Ukraine moved to strengthen its currency on Wednesday by revising its long standing peg to the dollar. . .Ukraines’ decision is part of an effort  to reign in double-digit inflation.  The shift could reverbrate in countries from Saudia Arabia to China, which are also  grappling with rising prices and the consequences of linking their currencies to the dollar.  ‘Ukraine’s’ inflation ‘is’ currently running at more than 30%.  A stronger currency helps combat inflation by making imports cheaper, bringing down prices.”

Wall Street Journal, Joanna Slater and Lidia Kelly,  May 22, 2008. p c14.

“Bubble Bubble, Toil and Trouble” –McBeth

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“Bubble, Bubble, Toil and Trouble” MacBeth

Large speculative financial delusions for hundreds of years have been known as bubbles.  To be a real bubble, speculation must involve a broad section of the investing public, including institutions such as banks, brokerage houses,  governmental agencies, the media and many private investors.  A bubble represents a large part of the financial scenes investments, profits and losses.  Bubbles have a historic importance, because they represent a significant part of the investment world while they are in play.  And they leave a large dent in the collective wealth of the society, which occurs when hyper inflation kicks in, luring trillions of dollars in wealth which is redidtributed from the losers to the winners.  Hyper inflation comes into play when speculation drives out investment, otherwise carried out in traditional, conservative methods and mentality.  When you see crowds forming to plunk money down in a bubble, zip up your pockets and run for the hils.

We have experienced two bubbles in the last twenty years; one in the hi-tech meltdown in the 1990’s, and the real estate meltdown we are presently in the middle of.  Prior to that we had the 1929 stock market crash which ushered in the Great Depression.  These three bubbles have left us with a new economy based on real estate, finance and insurance.  The tech bubble left $7 trillion dollars in imaginary and fictional wealth accrued during the life of the bubble.   What will the next bubble be.  There are signs that it is already beginning to fall into place.

Harper’s, Eric Janszen, Feb. 2008, 39

Continued Oil Price Spikes Feed Inflationary Future

  “Wholesale prices excluding food and energy rose at the fastest pace in 16 years as oil prices neared $130 Tuesday, fueling concerns that inflation pressures will keep building even as the economy slows. . .Yet the central bank has stuck to its prediction that slower growth evemtially will cool inflation.”

Investor’s Business Daily, Scott Stoddard, May 21, 2008, p A1.

How high is high when it comes to the future of the price of  oil?  Beware all the happy talk that oil can’t go any higher.  The ratcheting affect of higher oil prices sparking a new round of inflation has no arbitrary or natural top.  Clearly the world’s addiction to oil has not diminished as of this writing, and it seems to have plenty of energy to keep on rising.  It is time for the pointy headed accountants who seem unable to grasp this basic push/pull effect of higher oil prices bringing in its wake, higher inflation, should start crunching the numbers and tell us what oil prices will do to the economy at substantially higher levels than $130 per barrel.   How will it affect manufacturing and farming, and the overall economy?

Gulf Ponders Currency Ties to the Dollar

Inflation is hitting the Gulf/oil states partially because the decline in the value of the dollar.  Inflation is 10% in Saudia Arabia, nearly 15% in U.A.E., 9% in Kuwait.  For most of these economies as the dollar inflates, so goes these currencies with it.  There is a push-pull of inflation/oil price increases at play in such countries.  As they increase oil prices they make the dollar to which their currencies are tied, automatically worth less.

“Inflationary pressures have intensified discussion in the region as to whether the (Gulf Cooperation Council) countries should revalue their currencies or adjust their exchange rate regimes. . . Breaking ties with the dollar would let Gulf central banks use interest rates and other tools to control inflation or prompt growth; the fixed  exchange rate essentially puts Gulf monetary_policy decisions in the hands of the U.S. Federal Reserve.”

At the end of the month Treasury Secretary Henry Paulson  will visit Saudia Arabia, the U.A.E, Kuwait and Qatar.  These Gulf nations are discussing forming a common currency, but it does not look as though they will do so by the 2010, the date set to have it in place.

“In the end, the currency question is as much political as economic.  The link between the dollar and the riyal (or dirham or dinar) in large part reflects the links between the U.S.  and the countries  that both supply American oil and depend on American might. Keeping the riyal stuck to the dollar is ‘the implicit way of paying back the provider and guarantor of security,’ says John Sfakianakis, chief economist of Sauida British Bank in Riyadh.”

The Wall Street Journal, Michael M. Phillips, May 19, 2008, A3 

Just Waiting for the Next Bubble

Bubbles have been popping up with enough regularity, that Princeton Universities, Economics Dept.  has put in place an ongoing project to study bubbles in the economy and the investment world.

   Bubbles emerge at times when investors profoundly disagree about the signigicance of a big economic development. . .Once they get going, financial bubbles are marked by huge increases in trading, making them easier to identify. . .Manias can persist even though many smart people suspect a bubble, because no one of them has the firepower to successfully attack them.