Saturday, August 2, 2008

Insolvency on Steroids

The tennis match went very well this morning. I can remember when I was a younger man and I could play tennis all day long. Now 2 hours of playtime and my feet are killing me! When you are young all you want to do is get older. When you are older all you dream about is how you were physically when you were young. I know this is a well known fact, but today reminded me of it. Strongly.

General Motors: The Unthinkable
It is a terrible thing to see GM (or Ford for that matter) face issues so severe that going forward may not be possible. Friday's rather blinding "earnings" report was so bad the stock of GM went to levels not seen since the year 1954 (corrected for splits, etc). This is telling us something, but what is it?

Could GM close up shop? I would say that will never, ever happen. But the current operation of the company also cannot continue much longer. A complete overhaul is on the way, and of course it is going to require government sponsorship and tax dollars. Wonderful. Perhaps a "Hope Now" program for the American auto makers will get passed by the super smart congress.

I have no position in GM (or any carmaker) and I would very much like to see them get to a better place, but things look pretty bad. What is good for America is good for GM, or so the saying goes. If there is a correlation we are in worse shape than we think.

Insolvency on Steroids
Nouriel Roubini gave an interview to Barrons (you can see video at The Big Picture site, and Barry has a TON of great material up this evening so check it out) and he gives some dollar amounts for banking losses that shocked even me. Mr. Roubini estimates losses on various credit instruments to reach 2 TRILLION dollars over the next 18 months or so. 2 Trillion, wow.

The US banking system right now is effectively insolvent, so what does another 2 trillion down the hole mean? There is going to be bank failures. The FDIC is going to be very busy. How the dollar makes it out of this stretch will be interesting to see. Deflation certainly is in the cards, as deflation is a contraction in credit. Banks cannot loan money they cannot even pretend to have anymore.

So what does this mean? Quite a bit I would think. As a homework assignment I want you the loyal readers to sketch out what 2 trillion in losses will mean for this country going forward. I want to get some feedback and ideas that I will then collate and put into a longer post on this topic as I think it is very important. One will need to position themselves in a way to stay safe and maybe even get ahead. You can only make money by correctly identifying a macro environment ahead of time and positioning for it before it happens. Lets try to get some ideas going. A blog is a great tool to put my own ideas out there, but I would also like it to function as a sounding board for solid thinking from around the world. Do not be shy! Use the comments section to get started.

Saturday Night Entertainment
Comic relief as it relates to the presidential election:
cat
more cat pictures

Try out Iron Maiden and the great song "22 Acacia Avenue":


From the obscure, here is Armored Saint with "Can U Deliver" complete with terrible video:


I remember how visually wild this video was when I first saw it, and the song itself is pretty heavy duty. Here is Tool with "Sober":


Final song for the night. I was thinking about this song I had heard a LONG time ago, and I was able to find it on YouTube. Listen to this oldie by Commander Cody and the song "Hot Rod Lincoln". "Son you're gonna drive me to drinkin if you don't stop driving that hot rod lincoln" too cool:


Have a good night.

7 comments:

Anonymous said...

Deflation is a contraction of credit AND money. There is no doubt that we are in a credit contraction, however, the government is doing a good job (so far) of filling the gap with the various Fed lending facilities and the monetary stimulus package.

Expect the government to spend money in true Keynesian style. Bill Gross of Pimco postures for a one trillion dollar budget deficit to be just the shot in the arm needed, in his expected Obama Presidency, with the current administration projecting one half of that, already, for this fiscal year. (see July 2008, Investment Outlook, Bill Gross, http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2008/IO+July+2008.htm)

Can they pull it off? They have for the last twenty-eight years. At what cost? Expect a good hit to the value of the dollar, as we go deeper and deeper in debt, which we currently will never be able to pay back, adding an additional eight hundred billion dollar increase to the national debt ceiling attached to the Fannie Bail Out.

I expect gold and precious mining shares to be the best performing asset in this environment. And if the fall in the dollar is not controlled and things really fall apart, the added insurance that gold offers makes it that much more attractive to hold.

Anonymous said...

The link got chopped in the above post to Pimco

http://www.pimco.com/LeftNav/Featured+Market+
Commentary/IO/2008/IO+July+2008.htm

watchtower said...

@ GYSC
I hear you on the getting older part, in my late 20's and early 30's I used to Mountain Bike race which required a lot of training.
I still ride hard today but the point that I'm trying to make is that now that I'm in my 40's I just can't recover like I used to.

Looking at the macro side of the economy I can't help feeling (reading too much Nyquist I guess) that we are going to have problems with China/Russia.
Hope I'm wrong but they could put a dimension on our current economic situation that would not be beneficial for us.

What can you say about the big 3 except that they wrote checks to the unions that they don't seem to be able to cash in this current enviroment.
I totally believe the American worker can build first rate autos(take N. American Honda for example)if given the chance, but the blame can be divided up by both the unions and management in this case.

David Ferreira said...

One important aspect of raising new funds to bolster balance sheets:

What is going to be the policy of US Regulators to International Sovereign Wealth Funds and overseas investors to holding ''Large'' stakes in US Financial Institutions??

Anonymous said...

Small Florida bank is 8th U.S. failure this year:

http://tinyurl.com/6p26tm

Let's say I appreciate the local early warning as a prelude for more to come.

G

PS: I like the recent lower prices on you know what. Buying with both hands.

watchtower said...

My brother-in-law is a union bricklayer here in the midwest where housing has only collapsed 10% (or so I've read). Yesterday he was laid off for the first time in approx. 15 years.
He said he went to the union hall and there were about 350 bricklayers ahead of him for a callout.
His wife has an excellent job so they will be OK for now but will have to start cutting back.
I guess you see where I'm going with this.
The snowball is starting to roll pretty close to home now, and I'm starting to see the effects of the housing collapse firsthand.
The scary part is that I probably haven't seen nothing yet.

Hey G how's it going

Anonymous said...

Hey W.T.

Things are going okay. The current job (just glad I have one) is paying the bills and still leaves me with enough to get the shiny metals currently on sale. (FIRE SALE!!!) You know thinking back to my youth I miss being able to bench 300lbs and attend karate classes a few times a week. But if I knew then what I know now... heh... things would be different.

VIRUS: Your economic system has detected a virus to be running in memory and is infecting all openly trading accounts and storage drives of wealth. System failure is eminent... Please contact your government system administrator(s).

Resistance is futile.

G

PS: 2+ trillion in losses will mean total system wide failure.