Friday, May 8, 2009

Iterations of "X"

First super nice day of the year here today. Upper 70's, nice breeze, and abundant sunshine. Makes you want to get the fishing gear together and get after 'em. There will need to be 2 solid weeks of warmer weather to get the fish into the spawn, and then another week or so until they are done. I do not fish and cannot stand fisherman that target spawning bass on their beds!

Loyal reader Kevin pointed me towards a fun blog called Illusion of Prosperity and the writer Stagflationay Mark, while providing a good site, has the best tastes in both film and music. Stop on by if you are so inclined.

Loyal reader Watchtower informed my via the comments that he purchased a muscle car while I was on vacation, then never told me what he bought! Come on Watchtower, spill the beans so I can drool!

Sign of the Apocalypse: I am with Kudlow!
First I found myself agreeing with a bunch of what Paul Krugman has been saying, and now I find common ground with uber bull Larry Kudlow! What's next, me liking the Beatles? (Never gonna happen; I am ultra 2X short BETLS stock)

Writing about the NY FED head resignation, Mr. Kudlow offers some choice words about the TARP:
A parting thought: This whole Friedman episode looks like yet another unfortunate example in a long line of growing TARP corruption. Make no mistake: TARP is a corrosive, corrupting, and demoralizing influence on our banks and the rest of the economy. It is a symptom of the slippery slope we are sliding into with Team Obama’s big-government, bailout-nation vision and agenda. The Friedman mess is merely symptomatic of this growing problem inside our system.
It is time we all opened our eyes to the mess before us. Enough already. We can do much better.

In total fairness to the president, this stuff was in full swing under Bush so the blame is not all Obama's.

A History Lesson with William Black
Associate Professor of Economics and Law at the University of Missouri - Kansas City William Black does not pull punches. The man has strong opinions and he lets them rip without candy coating. There was a time long ago that clear thinking smart people like Mr. Black actually worked in the government! I know, shocking!

In comments about the stress test results Mr. Black is as confused as I am that the gullible investor public have lapped up the "all clear" from the same cast of clowns that brought the following timely predictions:
Fannie and Freddie: In July 2008, Treasury Secretary Paulson testified that Fannie and Freddie were "adequately capitalized" under the test. In August 2008: "even in [Freddie's] most severe stress tests, [show] losses ... less than $5 billion." Actual losses: 20 to 40 times greater.

AIG: "It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those [CDS] transactions." AIG claimed in 2008 "Using a severe stress test ... losses could go as high as $900 million."
 Actual losses: 200 times greater.


IndyMac: Sold over $200 billion of "liar's loans." Actual losses: 160 times greater than its tests.

Rating Agencies: Their stress tests gave AAA ratings to toxic waste. Actual losses: more than an order of magnitude greater.

Not to worry, I am sure those saying losses are now "containable" have it right this time!

On the Possibility of a "W" Move in the Markets This Year
One of my favorites sites on the web is Miyanville and one of their best writers is Todd Harrison. Mr. Harrison has been as close to spot on over the past two years as one can be, and thus I give serious thought to his observations. Mr. Harrison has been using an idea that I wanted to spend a minute on.

The possibility of a "W" shaped move in the markets in a good possibility says Mr. Harrison. What I take that to mean is that the current rally may have legs still, but a downturn would happen maybe this summer which would bring stocks to spitting distance of the old lows. This would be followed by another ripper to the upside for a round trip journey.

Now understand that Todd Harrison has forgotten more about markets than I am ever likely to know. Thus, I give this strong credence. Whether or not this does play out, I wanted to make a point about IF is does come about.

The markets bottomed around S&P 666 and DOW 6800. Should the rally run to the 1000 and 10,000 mark respectively I would venture that plenty of people breathe a huge sigh of relief. If the markets then collapse anywhere near the old lows again, only to rip to the upside ANOTHER time in a year I think the following will happen:
-Equity buying will be seriously depressed for up to a decade in the 30-50 year old age bracket as the 3rd world market gyrations will scare the jeepers out of anyone
-Near retirement equity holders are going to quit the markets for good
-Market volume will be even more made up of banks trading to each other, making price distortions a chronic issue

Suffice to say I think a "W" move in the markets will have serious long term consequences.

Iterations of "X"
The current consensus is that not only is the US economy close to coming out of the recession, but a "V" shaped recovery is on the way (I know, plenty of letters tonight!). I wanted to flesh out a thought concerning what kind of economic activity is expected by market players and what level of activity is likely.

Assume (uh oh) that an average, sustainable economic activity level is X. This encompasses auto sales, home sales, retail sales, the whole lot. Right now during the credit crunch and unemployment picture say that economic activity is running at 1/3X. For comparison, during the credit boom and real estate money machine mania activity was running at 3X. I arrived at these numbers using really rough estimates, not hard numbers and math because math makes my head hurt.

So if lending standards return to normal, credit flows easier but not out of control, and sales of cars and homes come up to levels around their long term averages economic activity would then be at level "X". This would be a great stabilizing force and things could calm down. So whats the problem?

The problem is that for the super leveraged banks, over expanded malls and chain stores, inventory "challenged" auto and home markets, and many other businesses to to well "X" simply will not make the grade. While a level of "3X" would be ideal for these sectors, a good "2X" is maybe a minimum level needed to be widely profitable. And there is the problem.

It is not going to happen absent insane monetary policy

While not the fastest learner, the American consumer has been burned severely on their biggest purchase (their homes) and that is going to leave a mark. While I do not envision a "thrifty" consumer I do see a move towards not reaching for the stars and going into the kind of debt that one cannot ever escape from. Surely some will still do this, but as a whole I am confident a new era of "controlled overspending" that will limit hot money flows going forward.

It will be the primary mission of the Federal Reserve to make sure this does not happen.

I think this is going to take time to play out. Maybe up to 2-3 years. In the end I am thinking that the FED, confronted with a consumer that will not spend and take on credit at a level consistent with "3X" economic activity, will attempt to force the issue by leaving interest rates at zero (forever?) and perhaps actively devaluing the currency to force spending instead of saving.

If you think I am crazy just consider the current programs (tax incentives up to $15k to BUY a home) and others like it to force buying. While there has been no dollar devaluation as yet, that was surely a disappointed for the FED as dollars became in demand for deleveraging. I am sure there is a secret chapter in the back of the best Keynesian economic textbooks titled:
"Forcing Those that do not Understand Economics to Overspend: The 3X solution in 3 Easy Steps"

Friday Night Entertainment
After a week hiatus, the fun is back on!

Classic Scenes
This scene scared the heck out of me as a kid, and still gives me the chills today. Enjoy Quint tell the tale of the USS Indianapolis in the immortal "Jaws":


From a film which will be regarded as an all time classic in the future (turn up the volume to appreciate the wonderful music coupled with surreal filming) enjoy Paul Newman's last great performance in this scene from "Road to Perdition":


Rock Blogging
Friday is music night to set the weekend up right!

I do not often feature newer music on the blog for two reasons; I do not like many new songs and almost all new music is "embed disabled" on YouTube. I do really like this newer song from O.A.R Titled "Shattered" and it was available:


In the old days performers made their money going out on tour and playing live. In this era of "studio only" artists, take a listen to a small TV show performance by Heart of "Magic Man" and know Ann Wilson can sing without any help from a mixer:


I must be on a ladies night theme, but I love Joan Jett and Cherry Bomb (song starts at 27 second mark):


One of my all time favorites is the Scorpions. Enjoy "Rhythm of Love":


Last one for the night. One of my favorite Iron Maiden songs is called "Stranger in a Strange Land"; great guitar, drums, and lyrics that are totally rocking:


Have a good night.

30 comments:

Anonymous said...

GYSC

I had to laugh at your "I do not often feature newer music on the blog for two reasons; I do not like many new songs"

That's a sign of old age brother.

One of the aids from one of my senators called today about a letter I had written in regards to our banking crisis and the greatest fleecing of the public in the history of the world so I let it rip from bank bond holder cramdowns, hyperinflation, dollar collapse and the US becoming nothing more then a banana republic. She agreed with me on every point but I don't think it will change a damn thing that's the sad part.

Kevin

watchtower said...

I doubt if you will be drooling over this but I took delivery of an 09 Mustang "Bullitt" (inspired by the 1968 Steve McQueen movie of the same name) (pretty cool car chase scene in that movie too) while you were on vacation.
It's plain but that is what I liked about it.
The Bullitt package includes such goodies as factory cold air induction, 3.73 gears, special handling package which includes a lower stance than a regular GT, and recalibrated computer to enhance performance, etc.
Oh, last but not least the same dark Highland Green paint as Steve's Mustang was painted in the movie (which I really liked).
I had been eyeing it for almost two years and with the economy the way it is Ford just kept adding incentives and the dealers went from charging a premium over list, to selling the car below invoice (even getting into their holdback money to move it).
I finally succumbed.

Why not the new 426HP SS Camaro?
With dealer markup the one I wanted was going to run very close to 40k.

I did see my first new Camaro on the road yesterday, it was sharp.

Why didn't I buy an old one and fix it up?
Helping my brother with his current "restomod" '72 Firebird has cured me of that and quick, 40 year old (almost) cars are mostly nightmares in the rust department, especially around here where they salt the roads on a rumor of snow.

Apologies for the long post.

watchtower said...

BTW, your Friday Night Entertainment section is a home run IMO, loved that movie "Road To Perdition" not to mention Heart, Jaws, etc.

Lisa said...

I'll leave a longer comment tomorrow. For now, know that I read your post and loved it all. Good night all :)

Anonymous said...

If Citigroup -- recipient of $45 billion in bailout funds and constant visits with Treasury Secretary Tim Geithner, and longtime employer of former Treasury Secretary Bob Rubin -- is supposed to be the government's friend, it's quite the underminer. Today the bank emailed borrowers who took out student loans with Citigroup encouraging them to write to Congress opposing the administration's student loan proposal.

Obama has been talking about overhauling student loans since at least 2007, echoing GAO estimates that banks had been taking in $15 million a day peddling and securitizing private student loans without taking on any risk, since student loans are guaranteed by the government and cannot even be discharged in a bankruptcy. The "most controversial" aspect of his proposed legislation, according to the New York Times, would cut out the proverbial middleman so all students could borrow directly from the government. Any "controversy," of course, is likely to be fomented by the banks that make money off the arrangement -- as Citigroup's letter would seem to indicate.
http://tinyurl.com/quezgo

I'm going to have to go out and punch something again this blatant theft is really starting to piss me off.

Kevin

getyourselfconnected said...

Kevin,
in the words of Indiana Jones "It aint the years, its the mileage" that makes one old! New music is pretty bad, but the song I had up tonight I do like. Try not to get too angry, one time I punched a wall in frustration (in high school) and I went through both drywalls and dented the outside wood panels of our house! My mom was not amused!
Watchtower,
1st off stop saying sorry! the comments are a forum for my readers and I strongly encourage participation! Loved the Biden-No shirt link!
Second: OMG!!!!! What a hot car! I am so jealous!
The cold air intake; is it cowl induction or a curved runner near the front of the car??
3.73 gears should make you very hot on the line, though they will give up at higher speeds; but who cares? the most fun in a car is in the 30mph-80mph range and how fast you can get there in my opinion. As far as restoring old cars, it is WAY labor intensive and the newer makes have better...well just about everything. Congrats on the buy, I think you did well and probably got a sick low price!
Lisa;
you usually are a night owl, I look forward to a comment tomorrow!
Great participation tonight everyone, I did miss you all!

getyourselfconnected said...

From the dept of no kidding, stress tests were "in play" and negotiated:
http://www.calculatedriskblog.com/2009/05/wsj-report-banks-negotiated-concessions.html
wow I am surprised.

getyourselfconnected said...

anyone play chess? I could go for a game.

watchtower said...

"The cold air intake; is it cowl induction or a curved runner near the front of the car??"

The latter.

About the Biden link, the long running joke between my brother and I is that when he completes his Firebird I am going to buy him one of those tacky shiny black satin jackets with a "screaming chicken" embroidered on the back for him to wear while he is "cruising" : )

I guess that is why I found that "Onion" link so humorous.

Anonymous said...

Just checking in...

G

PS: I have something new in the works. Less wait for this one to give a yes or no.

watchtower said...

Hey G where have you been? Staying well I hope.

getyourselfconnected said...

Hello G, I wish you good luck! Good to see you again.

Watchtower,
I was thinking about car films and it seems the king of car films is Burt Reynolds. He was in Stroker Ace, Cannonball Run, and Smokey and the Bandit.
I forgot to ask if your new Mustang was an automatic or a manual transmission? These days most of the automatics have a "sport shift" function that can shift gears like a stick, but I do prefer the old clutch pedal work when it comes to muscle cars!

Stagflationary Mark said...

It seems I was a bit late to the Friday Night event. I do have an excuse though.

At the risk of exposing my "best tastes" I must admit a guilty pleasure.

I was finishing up season 3 of Dexter on DVD last night until 4:30am. I must have a dark side about me, because I find that show about a likable serial killer 100% addicting! It could very well be my favorite TV series of all time. Seriously.

I see that you listed "No Country for Old Men" as one of your favorites. Awesome movie! I grew up in a small farming community so I could very much relate to the mood and the pace. A friend found the movie pointless, but to me that's what makes it so great (just like Seinfeld in a way).

Further, I very much enjoyed the idea that we are not in control of every single thing that happens to us, no matter how much we would like to think so. This was true even as an audience member. I refer to how one of the main characters had something pivotal happen to him off camera (and I'm sure you know what I mean). Holy cow! That takes serious director courage, lol.

I have added your blog to my favorites. I'll be reading what you've had to say over the months. I'm somewhat scared and terrified that you said, "I am with Kudlow!" Hahaha!

On the other hand, "Not to worry, I am sure those saying losses are now "containable" have it right this time!" is excellent use of sarcasm so I see much promise in your writings. ;)

watchtower said...

The Mustang "Bullitt" only comes in manual, a 5 speed Tremec, very enjoyable to shift although a bit tiresome in stop and go traffic, but I knew it would be that way, guess I'll just have to "man up".

Stagflationary Mark said...

G,

"I think this is going to take time to play out. Maybe up to 2-3 years. In the end I am thinking that the FED, confronted with a consumer that will not spend and take on credit at a level consistent with "3X" economic activity, will attempt to force the issue by leaving interest rates at zero (forever?) and perhaps actively devaluing the currency to force spending instead of saving."

I completely agree with this theory. My last big investment (about 1/6h of my entire portfolio) was buying the 20-Year TIPS about a year ago. I locked in 1.75% (bought at a discount, so was actually 1.8%) over inflation long-term. So far, it hasn't worked out that well. Real yields rose in that time frame. However, I'm holding until maturity and still have 19 years left. Further, as a saver, my plan hasn't exactly hurt me much. The only thing I have really lost is opportunity cost. Interest is still coming in. The TIPS still adjust for inflation. No big deal. The same cannot be said for stock market investors though. That's a crap shoot.

A good 25% of my investments are in long-term I-Bonds. I locked in much of that starting in 2000. The ones bought then are earning 3.4% over the CPI and are tax deferred for 21 more years. Thanks to the power of compounding, they are already up more than 75%. If we head into actual deflation and stay there, I'll still do fine. I-Bonds cannot earn negative interest, so are just as good as cash. Ideally, my I-Bonds would love a toggling of inflation and deflation (Greenspan's Age of Turbulence). Each inflationary step would raise their value and each deflationary step couldn't lose their value. Win combined with no lose is looking pretty good to me, especially in this environment.

Of course, the government finally figured out the error of its ways. It lowered the annual cap from $30,000 to $5,000 on I-Bonds recently (although you can get $10k by buying in both paper and electronic forms) and sent I-Bond rates into the toilet. My horse is mostly outside the barn doors though. Whew!

Stagflationary Mark said...

G,

Since I am new to your blog please forgive me for being a bit out of step and nearly spamming this thread.

I've been digging through some of your old posts and came across this gem from February of last year.

http://economicdisconnect.blogspot.com/2008/02/coming-apart-at-seams.html

"His track record for predictions aside, where was the follow up question of "if indeed we enter into stagflation, what can/will the FED do about it?" I would love to know his answer to that one."

Indeed! Fortunately, we now know the answer. It involved the implementation of a top secret global economic death ray that took down the "there is no bubble to go bust" housing market and inhibited all global shipping and trade.

The official response tells a slightly different story of course. Something must have broken somewhere and there's no way anyone could have seen it coming!

Sarcasm, it isn't just for breakfast any more. ;)

Lisa said...

Dear GYSC,
Laughed out loud at your Beatles reference! Thank you! I agree with your take on the "W" move in the market. I've been hearing people talk about being glad they have recovered some of their losses, but if the volatility continues (and we know it will), these same people will flee the market.
I'm not fond of most new music, either, and I hear a lot of it. I have a teenage boy :) O.A.R was good, and my son liked them, too. Except for Iron Maiden (not my favorite), your video picks were the greatest. Wilson and Jett-great talents! Road to Perdition was a really good movie, but it was hard for me to watch Newman as a bad guy. I loved him.
I'm glad you're back!

watchtower said...

@ Stagflationary Mark

I can't speak for GYSC but I really enjoyed your 3 posts that you contributed, I hope you will continue, but of course I wish everybody who reads Economic Disconnect would post their thoughts, you never know who will bring that nugget of info that you are looking for.

getyourselfconnected said...

Wow, 18 comments and running! I love it when there is this kind of reader feedback.
My thanks to Stagflationary Mark for visiting here. I think your comments show that you have plenty to offer the readers here and I thank you for taking the time to post.
Lisa,
Paul Newmann as a bad guy is a bit hard, but the film showcased moral ambiguity very well I thought. Newman was "bad" but you had full sympathy for his character. That film will be a classic.
Thanks to all for the great participation!

GawainsGhost said...

Wow, Watchtower, great car. I almost bought one myself when it first came out, but I didn't. Similarly, I had to restrain myself from buying a Camaro SS (my father would have been all over that car), but again I didn't.

Right now I'm leaning toward a Mazda RX-8, but I just can't seem to take the leap. I hate debt, and the last thing I need is a car payment in these times of economic uncertainty.

I've been driving the same 93 Ford Ranger since I bought it. I special ordered it from the factory, with the off-road package, 4-wheel drive, an extended bed, but not the extended cab. It was in fact the first new Ranger sold in Texas that year. Of course, I know the owner of the Ford dealership down here (he's been a friend of the family for decades), so I got a hell of a deal.

It's been a good truck, although I did have to rebuild the engine a couple of years back. Fix Or Repair Daily, you know. But it's never failed to start or get me to where I need to go.

Still, it is 16 years old and has over 200,000 miles on it. So I'm going to have to buy a new car eventually. I really like the RX-8, and I'll probably get one soon. I suppose I could pay cash for it, but that would drain my savings account, and I'm certainly not going to do that.

Most likely, I'll put 20% down, order from the factory, and take delivery in a few months. To me buying a car is like buying a suit, tailored is the only way to go. I don't buy off the lot or off the rack. I want a custom design that fits my specifications. But that's just me.

I'll keep the old truck for business of course; the new car is just for pleasure, going on dates and driving to Cowboys games. Fun. Zoom zoom zoom. If I could only rationalize the debt and depreciation, I'd have one today.

Howbeit, so GYC, you just couldn't resist taking one last stab at the Beatles. That's okay, we still like you, or I do anyway. Mainly because you Don't Let Me Down.

http://www.youtube.com/watch?v=riOnVUJAo3k

I love the Beatles, always have, always will. I saw their first appearance on the Ed Sullivan Show when I was 3, and I've been a fan ever since. And I'm certainly long BETLS stock.

But they're not KISS, who incidentally are starting the North American leg of their Alive 35 tour this fall. I'm even longer KISS stock, as I live by Keith Richard's dictum, "If you can't play it live, you're not a band."

http://www.kissonline.com/

This is one concert you definitely do not want to miss. I've seen them 15 times, the first time in 77 at the opening show of the Love Gun Tour, and they're just as good now as they were then. This tour they play the entire set from Kiss Alive and follow it with an encore. So if they come anywhere near where you are, you should go.

Incidentally, I've been reading an interesting book that I would highly recommend, Cocktail Economics by Victor A. Canto (FT Press, 2007). It offers sound advice for an above-average return, cyclical asset allocation investment strategy. Canto distinguishes between price smoke and price signals, elastic and inelastic companies, economic shocks and trends, beta and alpha. He includes real world examples that illustrate his principles. It's a very good read.

http://search.barnesandnoble.com/Cocktail-Economics/Victor-A-Canto/e/9780132432733/?itm=2

We're all seeking alpha these days. This book shows you how to get it.

getyourselfconnected said...

Gawains,
Does the Rx-8 still come with the rotary Wankel engine? Those motors are so cool.

Great comments section, an all time record for Economic Disconnect!

GawainsGhost said...

Yep, the RX-8 still comes with the rotary engine. It's a sweet ride, and now it has those extra doors that make it easier to get in the back. I believe this is the last year of production though, which is why I am strongly considering taking the plunge and buying one.

My father had one of the original RX-7s, and it was one of the best cars he ever owned. But he was a car freak, and traded it in for a new Corvette. Now that was a car, the last of the Stingrays. Talk about acceleration.

I never followed in my father's footsteps though. I mean, I love a good ride, but I just never went over the top on cars. I just want a reliable vehicle that will get me where I need to go. However, I am my father's son, and the RX-8 looks to be about the best car for the money out there to me these days.

watchtower said...

@ GawainsGhost

The RX8 is an awesome car, the kind of car that would have me looking for those twisty roads that I love to drive.

Thanks for the thumbs up on the Bullitt.

If you have had your Ranger for 16 years my advice is to never sell it, you won't believe how much you will miss it after it's gone, I'm still grieving over my old rustbucket Firebird that I used to have and sold in the late 80's for next to nothing.
Bad mistake on my part.

getyourselfconnected said...

In college I had a really old school Hyundai Excel (a 1993 model I think). That car was made out of plastic and it was a constant problem vehicle, but I got it for cheap. One day at work about 30 miles from my house I got in the car, turned the key, heard a clunk, and noticed a round object rolling away from the car. I got out and found the object: It was the entire pulley assembley WITH the front nose of the crankshaft still attached! It had just fallen clear off! I will never miss that particular car. Today Hyuandai actually makes a very solid vehicle, but I remember my old crapper.
If you like to take corners, I suggest a test drive of the Infiniti G35X. As I own one I can promise you that car is about the best in corners I have ever driven.

Lisa said...

Gee, all this car talk, I must chime in. I've owned a Ford Fairlane, Borg-Warner truck(60-something), Pacer, Volkswagen wagon, broken down Subaru, some sporty 240z thing, old Mercedes of some kind, BMW wagon, and now a Scion TC. As long as they can get me from point A to point B I'm happy. Well, I'm just a woman, what do I know :) Glad you have a record-setting comment section GYSC. You're the best and so are your readers. I love the long comments from all of you.

GawainsGhost said...

Watchtower, you have no idea how close I came to buying a Mustang Bullitt when it first came out. I love that car! Mainly because Steve McQueen is my favorite actor. Besides, I know the dealer and I could have gotten a great deal, bought one at cost.

But like I said, I hate debt. Been there, done that. Not going there, not doing that again. When I got out of graduate school (MA Romantic poetry/Medieval literature/Humanities, if you can believe it), I was flat broke and up to my eyeballs in debt. It took me three years to get that monkey off my back, and I have no intention of ever going through that again.

I had to resign my teaching positions (high school and college) six years ago when my father got sick and ultimately died of cancer. Went to work for my mother, who owns a rather large real estate company down here, just to help her out. Responsibilities of the first-born son, you know. We deal mostly with repossessed homes, so needless to say we've had a lot of work to do these past few years. But we make very good money.

I'm certainly not hurting. Cash in the bank, assets generating income, ownership of a corporation. Hell, I could drive just about any car I wanted. But I hate debt. It's not that I'm afraid of debt, it's that I hate it.

That old truck, it's paid for. So is my condo. The only debt I carry is one student loan that I took out for my master's degree. Other than that my only expenses are food, utilities, insurance, association fees, and taxes. Well, and licensing fees and board dues, other business expenses.

Every year I fly my brother down from Maine and take him to a Cowboys game. He put the fan in fanatic, and I take great pleasure in treating him. I just spent several thousand for reservations to the Falcons game at the new stadium for me, him, and a few friends of mine. Those guys will pay me back, but for my brother it's all on me.

This is what I'm talking about. Yeah, I need a new car, and that RX-8 sure looks sweet. But if I buy it and take on the payments, I might not have enough disposable income to fly my brother down for a game next year. I suppose I could, if I tightened my belt, however I don't like belt tightening.

This is my dilemma. I need a new car, I love the Mazda, but I'd rather fly my brother to a Cowboys game. And keep eating USDA Grade A prime steaks for dinner. I don't skimp on food. I can live without a lot of things, but food is not one of them.

The thing is that, in real estate, there's an awful lot of inventory on the market. Repos are the only thing that moves in a down market, and we certainly have enough of those to sell. But lending is tightening and sales are slowing, so I'm hesitant to take on debt for what is essentially a toy.

Incidentally, this last Tuesday was repo day, when the houses in foreclosure are put up for auction on the courthouse steps. ACORN was there protesting, causing problems, bidding 99 cents and what not, just generally being a pain.

"This woman has a right to stay in her home!" they shouted.

Finally, I turned to one of them and said, "Hey, why don't you take some of that money the government gave you and make her house payment?" Jerk.

I'm fearful of the path this country is taking and especially of the direction this administration is leading it in. I don't see a sustainable recovery on the near horizon, certainly not in home prices. And only a fool would buy into this sucker's rally on Wall Street.

I strongly encourage all of you to read Canto's book and pay attention, because your investment strategy depends on it.

That said, I'll most likely be driving a new Mazda in a couple of months. Got to have it, and it certainly won't bankrupt me. I'll just have to play it a little closer to the vest for a few years.

getyourselfconnected said...

Gawains,
I am an ardent opponent of debt, but manageable debt by the prudent is ok. Plus, what good is money if you cannot have a little fun? You cannot take it with you! Go for the RX-8, it seems to really be on your mind and enjoy it. Gotta have a little fun, yes?

Lisa said...

I have a lot of respect for you, Gawains. A lot.

Stagflationary Mark said...

watchtower,

Thanks for the warm welcome! I doubt I'll be able to continue at the pace of my initial (out)burst though, lol. ;)

In other news, I have always loved the look of the RX-7. Unfortunately, I'm 6'3" tall. I think I'd probably have to experience a "Saw" event in order to fit comfortably. D'oh!

Anonymous said...

Even if you assume that the “risk-weighted assets” of the banks are about two-thirds of their total assets (as the stress-test does), we're still looking at $7.8 trillion in total assets at risk in these banks, and despite being on the edge of insolvency only weeks ago, we are asked to believe that they will need less than 1% of this amount – $74.6 billion – of additional capital even in a worst case scenario. How do the stress tests arrive at this conclusion? 1) They underestimate potential losses by minimizing the horizon over which the losses would have to occur, excluding potential mark-to-market losses and restricting the loan losses to “cash flow” losses only; 2) They define capital well beyond tangible sources, to include about double what is available as Tier-1 common; 3) They include $362.9 billion in “resources other than capital” – essentially pre-provision net revenue expected to be earned by the banks over the coming two years to absorb potential losses; 4) They report the capital buffer that would be required after massive dilution in the common stock of these banks has already occurred.

As an example, Citigroup comes in with $119 billion in capital ($22 billion as Tier-1 common). Total assets are over $2.1 trillion, but the stress test assumes “risk weighted” assets of less than half that. Citi projects losses in 2009 and 2010 of $104.7 billion in a scenario where the unemployment rate reaches 10.3%. Citi assumes that it will earn $49 billion during that period which would partially absorb those losses, and that it will obtain $87 billion in Tier-1 from other capital sources, presumably including $33 billion of preferred that it would be willing to convert to common. Of course, Citi's entire market cap is only $22 billion, so the “$5.5 billion” that Citi is reported to need under the stress test is what it would require after a 5-to-1 dilution in its common stock (87+22/22). Essentially, we've got a company with a common equity buffer of just over 1% of total assets, that just 8 weeks ago was on the verge of receivership, and investors are urged to believe that there are enough voodoo dolls in the vault to make the company solvent even in a further weakened economy.

Great. Then no more government money should be needed. Outstanding. Not a dime more of public funds beyond what remains in the TARP. No need to use public money to buy toxic assets either. Believe me, I would be overjoyed if the madness of public bailouts of private bondholders was to stop. Unfortunately, I don't believe it for a second, because our regulators have clearly demonstrated that they do not want accurate public disclosure of losses (witness Ken Lewis' testimony a few weeks ago, the watered-down mark-to-market rules, and the “negotiated” results of the stress test). Our regulators want confidence. And they're willing to fudge the numbers to get it. If there wasn't a freight train of additional mortgage defaults coming, perhaps confidence building would be a good thing. As matters stand, encouraging confidence is equivalent to encouraging investors to throw good money after bad.
http://tinyurl.com/pcqry5

Hussman is getting about as pissed off as I am over this whole little goverment operated scam.

Kevin