Monday, March 2, 2009

A Good Portion of the World's Money Does Not Exist

Over 15 inches of snow between yesterday and today. FIFTEEN inches! At least I got the day off from work! It took three trips outside to finally clear out all the snow. One can hope that was the last of the white stuff, but you know how well hoping has been working!

AIG Obscenity Perfect Example for What Ails Markets
The latest, greatest AIG bailout was announced today. You can find the details just about anywhere. In summary the government deems AIG to be too huge and too enmeshed worldwide to fail and thus will commit any amount of money to keeping the failed firm operating.

So if AIG got bailed out, would that not be "positive" for the markets? With the government stepping in and becoming the worlds largest insurer why the vicious market action to the downside? Consider that AIG is in so much trouble because they were writing massive insurance notes that were to have protected counter party's from a major market meltdown. Now it was clear to anyone that looked that AIG had neither the capital base, nor the income generation ability to ever make good on these policies should something go wrong. Nobody cared. The illusion was tolerated and even traded on and leveraged up many times over.

The game is up.

A Good Portion of the World's Money Does Not Exist
AIG insurance is not real. The government can give loans and provide "backstops" all they like, but the damage has been done. The so called protection sold by AIG does not exist.

Mortgage backed securities by and large do not have much at all backing them up. Anything written in the years 2003-2007 are basically zeroes.

Stocks finished today where they finished the day in 1996! Thirteen years of "profits" vaporized.

Bank of America and Citigroup both in the low single digits and reliant on government backing to survive. The large multinational bank behemoth does not exist.

I could go on and on.

While the term "Deflation" can be used to describe what is happening right now, it fails to capture the very essence of the tectonic shift of perception. Right now across the world financial players are coming to grips with the fact that most of the "financial engineering" that has been done over the past decade was all built on assumptions. Well, you know what happens when you assume just about anything!

Deleveraging is happening on a scale never seen. Without leverage fiat money programs die. Without expanding credit fiat money dies. Without ever inflating prices for assets fiat money dies. When entities want to hold cash fiat money dies.

The US government will continue to try and craft newer and more size able bailouts over the next couple of years to stem panic and promote speculation. Too bad they are wasting their time and our money. The somber realization that A Good Portion of the World's Money Does Not Exist has finally taken hold and there is little that can be done to help.

So what does this mean? Sadly, lots of bad things. Just a few off the top:
-FDIC Insurance will be tested soon as people really want to know if it exists
-The vaporization of the stock market will have pension plans looking to the government for help
-Bloated state budgets that counted on money that does not exist will face serious trouble
-Lending will drop off even further as the extent of the new reality (money does not exist) means anyone with money will hold onto it
-The government soon will be the only lender in the game and all the terrible things that come along with that reality
-Stocks are dead money for a while
-When bondholders finally are faced with taking "haircuts" due to massive money shortfalls, another entire sector of capital will leave the room taking their ball with them
-Sovereign wealth funds after getting toasted will stop playing, and the regional economic meltdowns in various countries will cause the home governments to take the funds cash anyway for local use
-The government will have their ability to play bailout bonanza cut off when the market for Treasuries dries up; All hell will break loose at this point

Sunny sentiment, huh?

It's ugly. It is real ugly. It reminds me when in 2000 the sudden realization that fiber optic lines were not going to return trillions in dollars of revenue for tech firms. Or that Cisco giving money to firms they sold stuff to so those firms could pay Cisco maybe was not so great a business idea. When the Tech Wreck happened, many pie in the sky dreams died with it. They simply ceased to exist.

Now try to imagine the same kind of total repudiation as the Tech Boom had, only for all things banking, investing, insurance, and lending and you can get an idea what I mean.

We are coming to a point where there will simply be no more tolerance for things that do not exist in the real world. It will be put up or shut up time. What this means for a country like the USA that must borrow for everyday operation is hard to know, but surely will not be much fun.

Rereading this post I really feel that it is not expressing what I really want it too. I am not able to fully translate into words the picture I have in my head of all this stuff. Leave some comments and let me know what you think.

Have a good night.

79 comments:

Anonymous said...

GYSC

I tought you did a good job painting that picture and I agree, unfortunatly it ani't no Birmingham.
http://www.youtube.com/watch?v=axtDBFda70A

Kevin

getyourselfconnected said...

Thanks Kevin. I feel like I know exactly what I want to say, but cannot put it into words in a clear way. Maybe I will try to write down som more fleshed out ideas.
Anyways, pretty ugly day all around.

watchtower said...

GYSC, that was quite some "hunch" you had there awhile back, I'd say with the S&P dipping below 700 on intraday trading today you are rounding 3rd base and heading for home : )

Lisa said...

You wrote what is in my head, too.

watchtower said...

In case anyone is wondering what "hunch" of GYSC that I am talking about, it is from his Feb. 16th post and goes like this:

"It feels like we are coming down to "the moment" at last. I have had this feeling two other times over the past 6 months, so maybe I am off as usual..."

George said...

The problem is that you are trying to describe a negative. The point is that once you get past all of this great and glorious financial world there is precious little out there. We have spent the past two decades building homes that we connected with fiber optic cable so that we can sit in those same homes and surf the net to find out where we wanted to eat and shop. An entire generation of businesses developed around all of that. We outsourced all of the actual manufacturing to Asia leaving us with nothing but this incredibly interconnected supremely advanced consumer society.

The only thing that saved us is that everyone else in the world was happy to finance all of this because they made profits.

Now what?

That is what you are trying to capture. That big gaping hole at the end of that question.

Do we all just become steelworkers again.

I do not think so.

Because of fears of hostile takeovers, most corporations these days do not really have a big pile of cash to ride out the tough times. (That made them a takeover target). So they are dependent upon financing.

Unfortunately we have car firms that cannot make a profit making cars. Airlines that cannot make a profit transporting people by air. Manufacturing companies that cannot make a profit except for outsourced work to Asia. Aside from healthcare (which is really just a pure expenditure ad does not really "create" productive capacity) we have no growth engines.

We are no different from the Soviets in the end. We will lie to ourselves about the productive capacity of our conglomerates instead of recognizing that they are flawed. We will just do it using teams of lawyers and accountants to somehow make ourselves feel like it is "real" or maybe just to fool foreigners into giving us more wealth.

This will not end until the last speculator has finally realized that he/she cannot make a living. Only when we really drive away all of the hype and return to the fundamentals of what makes a business tick. Reasonable profitability will we ever return to something approaching "normal." And I do not mean this as some ideological "green" "sustainable" fantasy. I doubt that this will be likely. I suspect it will be something much darker.

watchtower said...

Oops, I just looked at a chart and it did not break 700 on the S&P.
I heard (or thought I heard) that it did break the support level in intraday trading today.
Sorry about that.

Lisa said...

Watchtower,
The S&P did break 700 in intraday trading by a hair, 699.70.

watchtower said...

Thanks Lisa : )

Anonymous said...

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