Thursday, January 29, 2009

Bigger, Badder, Better!

It was fun chopping ice for an hour this evening after some of the ice from yesterdays storm had melted during the day and made my walkway an Olympic ice rink. Did you know that all of the gold ever mined in history would only just barely fill two Olympic sized swimming pools? crazy stuff.

Is There Anything the Credit Bubble Cannot be Blamed For?
The debt and/or credit bubble has had ramifications all across the financial spectrum. The most visual culprit we have was the housing bubble. As I work in Biotechnology, many of my coworkers ask me what is the difference between the Nasdaq tech bust of 2000 (which nailed biotech badly) and the current bust as they see all the bailouts and such.

The answer is both simple and nasty. Here are the differences:
Technology Bust of 2000
Who was hurt: Mainly retail investors that bought Abbie Cohen's tech stocks and the general public who held the worst stocks at all time highs.
Policy Action: Tough break. The free market can be rough. Hang in there!

Credit Bust of 2008 (ongoing)
Who was hurt: Big banks and large investment firms that are stuck with worthless mortgage assets and other toxic credit derivatives.
Policy Action: Holy sh#t! This free market is dangerous! Start up the bailout machine and keep that baby running! Save the financial system!

Remember these key differences when the powers that be tell you they are trying to get credit to you to help the economy.

This bust is also different because regular people were able to get access to obscene leverage to buy homes, leverage never available to buy stocks or options. Hence the bigger bust.

But I digress. Another little tidbit came by the way of Bespoke Investment Group and their chart showing the money that Mexican workers send back to Mexico. These payments back to their country are called remittances. With all the houses built in California, New Mexico and Arizona during the credit boom, there was also a boom in money flowing back to Mexico. I think you can guess how that is going now;

you do not need a sharp eye to see the blow off top coinciding with the housing bust. I am not certain, but I am pretty sure that this does not include illegal immigrant workers, so imagine those numbers!

See, there is nothing we cannot blame on the credit bust! Soon we will have to bail out Mexico which will certainly face budget issues if this keeps up.

Bigger, Badder, Better
It seems nothing can stop the runaway train of bailout proposals. Each one gets bigger and more insane as the days move on. There seems to be no way to make the government stop and think about what they are doing, only a race to "do something" no matter what. I saw this headline on Calculated Risk (from CNBC) tonight and did not feel surprise or even a mild shock:
Bank Bailout Could Cost Up to $4 Trillion: Economists
The cost of restoring confidence in U.S. financial firms may reach $4 trillion if President Barack Obama moves ahead with a "bad bank" that buys up souring assets.
The figure far exceeds even the most pessimistic estimates of how great the loan losses might be because there is so much uncertainty about default rates, which means the government may need to take on a bigger chunk of bank debt to ease concerns.
Goldman Sachs economists said ideally the public sector would step in to remove the hardest-to-value assets, which would alleviate nagging worries about future losses and hopefully help get lending going again.
"Unfortunately, with an unprecedented meltdown in mortgage credit and a deep recession in the broader economy, there is a great deal of uncertainty about the value of almost every asset," they wrote in a note to clients.

I have a memo for Goldman Sucks, I mean Sachs: The PUBLIC IS BUYING THE BAD ASSETS ALREADY! Who do you think the "government" is Goldman? I can assure you the only money the government has is taxpayer money, also known as PUBLIC MONEY. With minds like these no wonder Paulson and Geithner are so smart. More article:
Goldman Sachs estimated that it would take on the order of $4 trillion to buy troubled mortgage and consumer debt. That number could shrink if the program were limited to only certain loans or banks, but it could also grow if other asset classes such as commercial real estate loans were included.
New York Sen. Charles Schumer has said that a number of experts thought that up to $4 trillion may be needed to buy the bad assets, an estimate that a Senate aide said was based on informal conversations with people in the industry.
Stephen Stanley, chief economist at RBS Greenwich Capital, said although that sounds similar to the sort of financial engineering that spawned the credit crisis in the first place, it would be structured so that the central bank or whichever agency oversees the program is last in line to take losses.
"If things turn out so bad that the Fed ends up on the hook for $1 trillion in losses, then the financial sector, the economy, and everything else will be dead anyway," he said.

NEWSFLASH Mr. Stanley! One Trillion is hopelessly optimistic on the loss front. I guess everything is dead!

I have covered my thoughts on all this very clearly before. Not to rehash old posts, but I feel the following ones are very meaningful in the current environment. If you are bored or just think my writing is the greatest thing since the Sham-Wow then take another look at these posts:

25 Billion Here, 300 Billion There, Another Trillion Here and Pretty Soon You Are No Longer Talking About Real Money
Discussion on why the numbers are no longer causing concern as they are just too big to wrap one's mind around.

Does the United States Have a Debt Chandrasekhar Limit?
Is there a theoretical limit to US debt issuance? We should really find out. Fast.

There is No Going Back to a Free Market
The government will NEVER get out of the loan business. They should have thought about this a little harder.

Have a good night.

7 comments:

Lisa said...

You writing is better than the ShamWow LOL Just got in and that ice on top of the snow is really pretty, unless you have to go somewhere! I'm sick of winter and sick at heart over what's happening. Heard a guy tonight talking about The Sons of Liberty. This kind of talk is being heard more and more often. It's going to be quite a show tomorrow with the Q4 GDP...

GawainsGhost said...

I live in deep South Texas, about 20 miles from the Mexican border. You have no idea how bad things are over there, and it's only going to get worse. Violence, gang wars, kidnappings and murders are rising dramatically. Tourism is falling off the cliff. Remittances are the least of Mexico's worries.

Mexico is a failed state run by narco-syndicates. But that isn't even half of it. The reason why Mexico is a failed state is because it was built on the European model--they have French (Napoleonic) law and a ruling pure Spanish aristocracy. Do you know how many families own 60% of Mexico? Try 40. Yeah, out of a population of 170 million. Think about that.

If the US were to actually seal the border, and I mean seal it shut, and shut off remittances, the entire economy of Mexico would collapse in a month. There would be violent civil war, and the repercussions on this country would be severe.

By the way, we got a repossessed home last month, a nice house in a gated community. We sent our A/C guy over there to check out the system. Want to know what he found in the crawl space by the duct? A box with 20 forged passports, all from Latin America.

Obviously, the situation south of the border is dire. And as the economy worsens, as it will, things could get real ugly real quick. These are perilous times.

Anyway, as to the housing boom and bust, believe me I've seen it all. What I notice is the quality of the homes built during this escapade. Back in the day, 30 years ago, homes were built with 4x8 oak wood frames, plywood drywalls, and brick. These were quality homes built to last for decades.

Over the past five years or so, most of the homes were built with 2x4 pine wood frames, sheetrock for drywalls, and porous concrete. These homes aren't built to last a year. If a hurricane, or even a serious storm, hit, none of them would be left standing.

Cheap labor, most of it immigrant, cheap materials, cheap construction, cheap homes sold at obscene prices so the builder could pocket the profit. Throw in cheap credit, no-documentation loans, mortgage fraud and appraisal fraud, and you have the recipe for the current economic crisis.

But, hey, it's like I say. If you bought a new home recently, and there's a fire, don't worry. Just walk through the wall.

Anonymous said...

GawainsGhost,

FREAKING AWESOME POST! Please post here more often!

G

Anonymous said...

Ghost,
I don't know about walking threw the wall but back in the 60's when my Dad owned his one and only rental and a woman threw her husband threw a wall. Took Dad 3 months to get them evicted back then because they had kids and by the time he got them out that place was trashed. I will always remember that. LOL

Kevin

Lisa said...

Gawains,
Saw my first cheaply thrown together McMansion in 1988. The house was only 4 months old and the tiles were falling off in the kitchen and bath areas. This was in Kansas City, Missouri!
Totally agree with you on Mexico.

watchtower said...

Ice storm is kicking our butts around here, am posting by generator power.

Here are a few thoughts:

Cash is king...no power = no plastic. My cash folding money that I set aside is proving to be a lifesaver for my family members who did not listen to me and stock up when the getting was good.

!!!ALWAYS!!! try to keep your gas tank 3/4 full, I've witnessed full blown panic here where I live!

Generators are awesome!

Put 3 times as much gas back as you think you will need.

As for me personally, a woodstove will be going into my house (piss on putting that thing down at the garage, it's going into the house) ASAP.

You can never have to much food put back or batteries, I can promise you that your loved ones do not know what you do and therefore did not think ahead...CONSIDER YOURSELVES BLESSED IF YOU ARE READING GYSC's WEBSITE. You will be head and shoulders above the rest when the SHTF for real (whatever that event might be).

This icestorm is the best thing that ever happenened to my family, I think they will finally act upon what I have been telling them.

getyourselfconnected said...

Gawains Ghost,
thanks for the excellent additonal content. One of the best things about writing this blog is the great feedback the readers supply. The information you wrote does not shock me, but it still makes me sad things have become so bad.