The View From Up Here

The electric contractor finished the new generator installation today. I am very impressed with the product and think it was a great addition. Of course now that I have it we will never lose power again! Goes to show ya!

Two Things Not to Worry About
Just to show you all I am not all gloom and doom, here are two things I see coming up often that are not worth much worry at all.

Israel (or whomever) to Attack Iran Over Nuclear Program
This will not happen. There may well be plenty of noise but nothing will come of it. Iran will have a workable nuclear device within the next year (if they do not already) and they will have to live with that fact. The US will posture as angry and Israel will be pissed to a degree not seen in some time. Nothing will come of it. Iran is too dangerous to mess with and any bomb they could possible build, if fired, has as good a chance of hitting Jordan, Syria, or South Africa due to their missile technology ability. No one will like it, but nothing will happen. Iran will figure out all that money they blew on the program raises their place in the world community not one nanometer. Just my 2 cents.

The Iceland Volcano is a Mess, but not a Calamity
Unless you need to fly this week the amazing volcanic eruption going on in Iceland should not cause long term damage. See the Wikipdia write up here. Seems only fitting that the UK wants their ponzi money back through the icesave program and Iceland sends them a plume of volcanic ash as payment. You cannot make this stuff up!

If interested, you may find the Year Without a Summer a great history lesson on what happens when a monster volcano (Mount Tambora) really goes up and causes a seasonal change. Pretty wild.

If it Matters
If anyone really cares about the story regarding debt defaulters going nuts with their new found money, Edward Harrison has a great write up on it:
Strategic Defaults Increase Consumer Spending
Some pooled examples from various sources (including Bill Fleckenstein):

My anecdotes on strategic defaults
Here’s what I have uncovered via two anecdotes a friend sent me.

This first one comes via Bill Fleckenstein from a retired hedge fund manager. Catch Fleck via his daily newsletter (subscription) or his MSN column, which is free. Bill says the reader told him the following five anecdotes:

1.My 25 year old niece had $10,000 of outstanding credit card debt. Recently, she told the bank she couldn’t pay. She is not unemployed so the ‘hardship’ is all relative. Nevertheless, the bank offered her a concession which she refused. They offered another concession, she refused again. Finally, they told her if she paid $150/month for 2 years (total of only $3600 with no interest), they would call it paid in full! She accepted in a heartbeat. It is less than a month later, and she celebrated her good fortune by going on a cruise to Hawaii.
2.A friend owns a small manufacturing co. He tells me of one of his female employees who was saddled with a $450,000 home she purchased almost five years ago with no down pmt. One year after her purchase she pulled $75,000 home equity and purchased ‘fun stuff’ including a boat. She recently walked away from the house (now saddled with $525K mortgage), purchased a new house for $200,000 (in her sister’s name) and kept all the goodies purchased from the home equity withdrawal. With the much lower mortgage payment she just bought a new car.
3.Almost everyone in my "survey" is aware of, or knows someone living rent free in their home for an extended period of time, having stopped paying their mortgage. Many of these free boarders are spending lavishly on non-essentials. My hard-working part-time assistant knows two different 35+ yr olds who have enjoyed over 9 months (one is up to month eleven) of rent-free living in very nice homes they purchased in 2004/2005! Both are employed and both enjoy a non-frugal lifestyle. My assistant wonders if he should do the same or have me pay him more so that he too can enjoy the ‘good life’.
4.My sister is a nurse with 25+ years on the job. She told me of a young couple that she is good friends with that both work at her hospital making a decent joint income. They didn’t like the fact that they grossly overpaid for their 3000 sq ft home in 2006. They stopped making hefty monthly payments six months ago and haven’t yet been contacted by the bank. They have decided to wait until contacted and then walk away. In the meantime, they just returned from NYC from a week vacation in the Big Apple.
5.My brother-in-law wanted to know if he should stop making payments on everything. He lives in Virginia and his carpentry skills are not as marketable as they were in the height of the boom. He and his wife’s best friend have lived close-by for many years. For the past 13 months since they strategically decided to stop paying their mortgage, they had yet to be contacted by their bank. Not even one letter! My brother-in-law doesn’t understand how they get to pocket the mortgage and spend carefree, including a 10-day Caribbean vacation.
I can list numerous other, verified examples. And these are just from my tiny, tiny universe. I can’t help but assume if I know of this many instances, there must be millions of similar stories across the country. And I am sure many of your readers have first or second hand knowledge of similar situations.

Bill, for me, the weight of evidence is pretty powerful. I am convinced that it is a specific government policy to increase consumer spending by allowing massive debt repudiation. And, I think they are pulling it off, at least for now.

Another hedgie in San Francisco, responded with this after seeing these anecdotes:

From the West Coast I have at least that many stories. They come in clusters. One brave party takes the first step and "wins" then relatives or co-workers follow the successful example. The persons are still employed – default on debt – they rarely get contacted by lenders and then negotiate hard (the debtors that is). After some settlement they keep spending lavishly. In every case a vacation is part of the program. Every case!

In one example 5 employees at a local business that caters to wealthy clients have defaulted. The first guy and his ex were a classic accident waiting to happen – big lifestyle and all on borrowed $$. He’s still in his place 19 months later. Then a guy who got his hours cut back – same story. The last two are STILL making over $100k. No one is making his mortgage payment. No one is in foreclosure yet – only the first guy has even been contacted and he’s the most underwater. The last two (one guy I know well) are still religious about the credit card debt, however.

I have a place of the beach in Mexico. One of the newer buyers on our beach got the money from a refi in Oregon in 2006 (about $300k). He stopped paying last year on his Oregon place – still has the house, no proceedings – just some letters. He even rents it out during the winter to another couple who walked away and mailed in the keys on their home last year (foolish them!!).

Small business here are getting killed, however. There is very little new money and the terms to renew a line, or refi a CRE mortgage, are crazy. Almost all small business lines are also tied to assets – real estate in most cases – and it’s very hard to renew with a smaller bank.

I know this sounds like lunacy but these are stories I know personally.

Clearly this is not scientific data in the least. But I hope you see the evidence is pretty substantial that strategic defaults are indeed goosing retail sales. The question is what comes next?

How this matters now that the economy is fixed and everything is going parabolic I have no idea, but I still find it amazing this crap happens and nobody has to answer for any of it. What a country. My Dad always said "You Get What You Deserve" and after 34 years I have found that to be a universal truth.

The View From Up Here
After being bombarded with bullish commentary for about 6 months now (yes, it has been that long!), say I am convinced all is not only well, but so awesome that this is a once in a lifetime opportunity to jump on a bright red flyer bandwagon and get rich in a timely fashion. I will note a few structural points as to why I may be unconvinced, but then we will look at a few numbers and discuss the "new economy" that we have built.

I could bla bla you with details and provide backing information, but why bother? Here are my reasons nothing has changed:
-Housing still is terrible
-New home construction and selling does more for the economy than existing ones; when the wave of foreclosures hits later this year new home sales are done
-Bad debts held by the banks (well, what is not parked at the FED anyway) still renders most banks close to insolvent
-Unemployment at +/- close to 9% for years to come (many reasons why, why bother telling it again?)
-Wage pressures to the downside
-Serious State debt issues
Well, I will stop there as I was getting a little bearish for a second and that does not reflect the reality on the ground.

The view from here using the S&P 500 as my proxy:
Today's close was 1210 (1211 something but I want the numbers round!)

The last all time high for the S&P was 1561, set on 10/08/2007.

After a small pull back around 5/12/2008, the S&P sat at 1425.

My math using 1210 as the start shows (from today on)
-A 10% move arrives at 1331
-A 20% move comes out at 1452
-A 30% move ends up at 1573

I will say that a 30% move this year will not happen. The 20% move is highly likely, and the 10% move I can all but guarantee (NOT trading advice).

Why? Everything right now numbers wise is still terrible, but not end of the earth bad. Wait until the census jobs hit, orders go up even more, and the numbers look just far from normal! You think you have seen a rally so far?

I bring this up because at some point this year (by October?) the S&P will be sitting at around 1450 and things will seem strange. Foreclosures will be accelerating, unemployment will still be very high (forgot all those who quit looking did you? Wait until they think they can get a job!) and home sales will still be poor outside of the auction block properties which are not really part of the "real" housing market anyway.

One may think with all that positive activity the FED may want to raise rates, but that's a pipe dream. Low rates are here forever, try to take that in, everyone else has and has bet accordingly.

So what is the face of the "New Economy"? Here are the key points contrasted with the old one:
OLD
At the old highs the engine of growth was a credit boom fueled by overextended money in all channels via loans by banks
NEW
Growth comes from super-extra-extended-double secret unemployment benefits payed until a ten year span has passed. Add to this all the "free" money from previous debt defaults (still not written down by the banks, but why worry they will grow their way out!)

OLD
Rising home prices allowed at the time owners to extract "equity" and spend like mad.
NEW
Housing was never a big part of the economy! See, everything is fine now!

OLD
Good paying jobs actually doing stuff were lost overseas and replaced by low paying jobs in the "service" industry. Hey, a job is a job!
NEW
Well some things never change but think of all the spending money to "service" coming online!

OLD
The Financial sector accounts for all the big money in the economy due to their amazing ability to be smarter than any one else.
NEW
The Financial sector is larger than ever (especially the big banks) and now they are armed with a 100% taxpayer funded backstop should anything go wrong! HUGE improvement.

OLD
Americans for the most part fail to understand that saving and staying out of debt are the keys to financial freedom.
NEW
With all the freebies and years payment free, there is now no way these jokers will ever figure that out! WHEEEWWW, dodged one there!

OLD
If the country is brought to a point where "tanks in the street" are a possibility, and not due to a "Red Dawn" type scenario, those who represent us will make sure it never happens again.
NEW
Wow, 3 guys retired and Massachusetts elected a Republican that votes democrat! That's all we have to fear? What a deal.

All in all, the "New" economy seems pretty good. All you have to do is believe and read the papers. Seems just like 2007 all over again. Nothing at the core has changed since then, just mood and perception.

Maybe I will revamp this blog as a Sci-Fi, Molecular Biology, NFL Football, BBQ smoking, 80's pop culture, and fishing site. Nothing really to see or point out until the next wake up call sounds. What do you think?

Added:
Of course Friday Night is upon us and I feel a ripper of a funfest on the way! Get your requests in!

Have a good night.