Monday, October 29, 2007

Crisis of Confidence

Two things up front before tonight's missive. A while back I recommended filing out the online petition backed my Karl Denninger at Market Ticker blog. The petition is well written and covers the main areas of concern regarding the economic future of the US economy. In his post tonight, Karl shares his disappointment with how many signatures the petition has obtained:
The suspension of MarketTicker's daily run down of the markets and macro banking analysis is a real loss. I ask any readers here to please go and sign the petition. One minute is not too much time. Yes, there is an email verification process, but I can vouch for the fact that absolutely no further contact is made by the host. I leave it up to you.

Second, I wanted to thank all those that voted in my current poll. 32 votes as of now, and I am very happy about that. 50% of the readers come to this blog on a daily basis, and that is very exciting. To the one guy that was looking for porn, sorry about that. Even a Google search for PFU DNA polymerase, an enzyme I use in my work, will return a porn hit! I am working on a new poll, and hope to have it up tomorrow night. Thanks to all that voted. Lets try to get some of the comments sections buzzing. I am always looking for information for new blog posts, and suggestions are very welcome.

Crisis of Confidence
Right now there is a major Economic Disconnect with regards to what is reported in the mainstream media and what the real facts on the ground in the financial world are. Slowly, ever so slowly, like molasses in wintertime, the average person on the street may be beginning to have doubts about many things. When reality is bashing you upside the head daily, it eventually will seep in if only by osmosis. I want to highlight 3 major points which should have by now caused a great wake up call for all Americans.

Iraq War and WMD
NOTE: First off, this is in no way a political blog. I would characterize myself as a fiscal ultra conservative and a social mega liberal. This means I never have anyone to vote for! I know I ask for comments, but do not start political discussions here. The point of this discussion is how the situation will relate to a crisis of confidence, and nothing more.
The US spends tons of money, and rightfully so, on maintaining a military. The government also has the CIA for gathering intelligence, space satellites up the wazoo, planes outfitted with cameras and eavesdropping equipment, and the some unknown number of analysts and staff. When those whose job it is to know believe that Iraq had a fairly developed WMD capability, you expect them to be right. I truly believe that President Bush and the upper level leadership were convinced there was an active program in Iraq. The point here is not that Bush lied or somehow outsmarted the Congress with false evidence (can he be so dumb as to outsmart the congress? What does that say about the congress?) the point is that with all the means available, the US government did not know anything concrete for certain. That is the take home point. The agencies and systems we believe are protecting us had no real idea what the heck the situation was. Add to this that it was standing US military policy to field a force sufficient o fight 2 major global theater wars at once, like in WWII. Instead we cannot even deploy 200,000 troops to Iraq without stretching the military to the breaking point! Our men and women in uniform deserve so much more than that, and the US taxpayer does too. Truly, these revelations are troubling.

Home Ownership
For years the average joe was inundated with the idea that home ownership was the path to financial freedom. It was indeed that for the longest time, but only viewed in the correct way. It has been a major tenet of Economic Disconnect that the main utility of home ownership was that it functioned as a forced savings plan for people that either cannot, or will not put money away. Only over a reasonable time frame would the equity built up be boon to the homeowner. Home ownership as a short term financial vehicle is an absolute loser, that's the fact. I will not run through all the garbage related to the current housing bust in this post, but the take away message is that home ownership was so diluted and spread to so may people looking to make a quick buck over the past few years that the very structural appeal of buying a home will be lost for the next 5-10 years if not more. With foreclosures skyrocketing and prices collapsing, the promise that was home ownership is now just a promise to lose.

The FED, the Dollar, and the Banks
The August -September time span was very illuminating to anyone that stopped to watch. The FED showed its true purpose is to save the banking industry and wall street. In an overt effort to add liquidity to a system badly in need of a major correction, the FED showed where they are focused. As the dollar has taken a beating due to the easy money of the past 4 years, even regular folks are starting to see a problem. When they travel abroad the dollar is toast in an exchange. With oil now almost at $100, the winter will be a long one for oil heat buyers. The rampant inflation at the grocery store is also impossible to miss. As the ginormous losses continue at the mortgage lenders and the big banks, the public is only now getting a look at the unbridled greed and total lack of care the banks showed in lending money to anyone that wanted it. The FED and the banks are supposed to be all powerful and smart. Instead they are increasingly looking foolish and greedy.

So what does this all mean? Today, probably nothing. I think that over this winter though the public may start to do some real thinking on what has gone on. High home heating bills are really going to shock people. A turnaround in housing will not materialize even after aggressive rate cuts. Banks will continue to lose tons of money, and yes that is your money they are losing. One way or another you will pay. Eventually confidence in a system that has produced not only the 3 major points outlined above, but many others will weigh on the trust in the system.

I realize that someone somewhere writes something just like this all the time going back 50 years. It is my belief that with the rise of the Internet and new channels to get information (like blogs) never before has the inner workings of a broken system been so exposed. Take a marketwatch headline form Friday that reads "Countrywide on the path to profitability in next quarter", if that was your only news source it sure sounds good, but go around the financial net and you will know that headline is silly at best.

When will a crisis of confidence occur? I dunno. It is very hard to pinpoint such inflection points. The weight of evidence that the average joe has been suckered is really getting hefty. It will not be long and will not take much to crash the system. I think it will be a long winter indeed.

As it is only Monday, I will try not to write too much about the monster game on Sunday between the Patriots and the Colts. On the airplane ride back to New England after the AFC title game loss last year, Bill Belicheck and Tom Brady were plotting revenge for a blown game. The plan included adding receivers that can actually catch a football, and designing an offense that can outscore the Colt modified west coast underneath pitch and catch system. Enter Randy Moss, Donte Stallworth, and Wes Welker. This is the game that the new offense was put together for. On Sunday we will see if it was the right idea.

Have a good night.


BradH said...

The crisis of confidence among the financial sector occurred in July\August, when it was revealed that no one wanted to by Bear Stearns' MBS assets. Everyone realized they were almost worthless.

I think the two main things that will cause a crisis of confidence to occur among the general public is either a big decline in the stock markets, and/or layoffs become widespread.

While the three things you mentioned are causing un-ease, I don't think they will they cause the crisis by-themselves (although they should if people paid attention.)

When the crisis will hit, I don't know either, but my guess would be Q1. I don't think the earnings of the few companies that reported good earnings in Q3 will be able to do that in Q4. Plus the effects of the credit-crunch will be felt more deeply by businesses.

Plus the stock market can't defy reality forever. If it goes down hard in Q4, then things will pick up speed.

Romana said...

Ummm... I guess I was in the same position before the Gulf War II that you feel like you're in now. The folks in Washington can be manipulated and "fooled" into thinking they are doing the (politically) right thing by trusting the president who trusts his VP, who has wanted a war in the ME for a decade. It's called 911 and the world changed... or at least the media did.

"...[T]he intelligence and facts were being fixed around the policy."- Downing Street Memo 2002

I had to laugh to keep from crying as poor Colin threw himself on Bush's hand grenade. The bio-terror trailers were hilarious, and debunked just as thoroughly as the aluminum tubes were well before Powell even went before the UN. No scientist who honestly looked at the evidence could come to any conclusion other than: either they're telling us all they know and it's a pile of crap, or they can't tell us what they really know, but they must know something because nobody would be stupid enough to start a war based on such thin lies.

Hmmm... guess they were that stupid, and you know it didn't turn out that bad for them. I'm sure future presidents will be tempted to do the same thing, because if the peacekeeping had been merely competent everyone might have considered the invasion of Iraq a success. It's only the Katrina style bumbling that ultimately led to the current debacle. When you're a super power you get multiple chances to screw up.

The congress and the media can be fooled the same way they are now. Of course the senior WallStreet guys know what's up, and that includes the secretary of the Treasury so stop your belly aching and invest the way Cheyney does. You have the web at your disposal.
I've done quite well after joking with my husband that we ought to buy Haliburton since Cheyney would make sure his options were worth something, and he said "yes we should!". I bought in a bit over $9 (well off the bottom) in 2002 in the run-up to the war for a 5x gain over 5 years. He's also in foreign denominated bond funds, I-bonds, and oil services, so we are too. Guess what they'll do great!

Now I wish I'd been betting on the ABX and CountryWide to plummet, but I don't have the balls to play that kind of option game. Interesting to watch from the sidelines though. I hope we don't have to flee the country with Cheyney and his ilk, if things get really bad.

donut-san said...

it'll be a totally different game if/when patriots play the chargers again at the end of the season. patriots is still a better team, but wouldn't be able to walk on chargers like they did... anyway, patriots is a better team than indy, and if sd can beat indy after ne, then sd might get another by :-P