Thinking Out Loud

It has been almost hurricane like outside today! The winds are very strong. I replaced a light on a lamp post near the road but I could not do any yard work because the wind just blew everything around. Too bad, HA!

What I Said
As the details of the foreclosure/loan packaging mess keep coming to the surface, here is what John Carney is thinking right now:

So here’s what I expect will happen. The lame duck session of Congress will pass a bill that essentially papers over the misdeeds of the banks that originated mortgage securities. Every member of Congress and every Senator who has been voted out of office will cast a vote for the bill. And the President will sign it.

Of course readers will know I thought this on day one of the news. I cannot imagine a way the banks cab get what they have coming after all the money that was spent on them. The wild card? Get enough lawyers involved and a few sympathetic courts and this could move to a place where new legislation could be blocked. I would not hold your breathe though.

Thinking Out Loud
After re-reading the article over at The Automatic Earth I linked to last night I had a few thoughts I wanted to jot down.

I think the huge problem the FED is having here is that they really do not understand where we were just a few years ago in regards to demand from consumers for credit and "stuff". I use the term "stuff" because I mean everything from TV's to furniture, everything.

So how I see it is that from 2004-2007 people had the dial set at 11 for all out consumption and then some:

During this time not only did people (in general, not every single person obviously) spend every cent they made, they went out and spent all the cash they could suck out of their homes as well. The credit markets were a huge pool to draw on and people did. I will not rehash all those numbers but the spending frenzy was immense, the dial was turned to 11.

The bad thing is that the old "11" has now become the new "need to return to" level. Right now most people are still spending every single penny they have, but they cannot access extra credit because they do not have any home equity left. Even if they do, unemployment and stagnant wages are putting the breaks on credit appetite.

What Ben Bernanke and the FED, Paul Krugman, CONgress and everyone else seem to be missing is that spending and demand are still highly elevated and probably at the maximum level possible given the income side of things.

I have written that stocks going to the moon is not a pot of gold for normal people because they either do not own much stock or if they do it is held in plans like a 401k or other retirement vehicle where getting to that money is not an easy (or cheap) thing to do. We can be thankful for that at least. In this sense I do not see the S&P at 1600 as adding much if anything to consumer spending. Some may argue that higher stock prices will encourage business to expand or grow, but grow for what? Expand into what? All time low borrowing costs are here to stay and there is no hurry to get bigger in the face of flatlining demand. Business may borrow money, but they will most likely just do stock buybacks with it!

The issue with the monster tsunami of liquidity the FED keeps deluging the world with is this:

There is only a small place for all the cash to go in the end!

Right now where is money running?:
-Bonds
-Commodities
-Some equities (AAPL, NFLX, GOOG, and like others)

How will this re-ignite massive consumer over spending? How will higher input costs for business make them want to hire more people?

The FED is getting more and more scared and now we even have this kind of thinking going on out loud:
FED's Evans Suggests a Price Level Target
Discusses aiming for higher inflation in the short term (sure buddy!) to make up for lost time. This kind of discussing is abhorrent!

So the FED would like to make cash trash and get people to run out and spend due to fears their cash will not go as far tomorrow? This is a path forward? Again, here in the real world things are different on the ground.

If inflation heats up and even the average joe knows about it, what do you think is going to happen? Here again, the FED has no real ability to see things as they are.

The US is broadly a service based economy. This means we make "services" as our primary way to make money. So if cash is going to go away to inflation in a hurry, would you buy a vacation to Disneyland (which would add revenue to service based industry across the board) or are you going to buy food? If your savings are getting smaller all the time, is a plasma TV sure to be outdated by the time you get it to the car in the parking lot going to be your first purchase or will you look to make sure you have heating oil covered for the winter?

Backing away from the small scale one person model, what about big business? Will you look to hire more people that are going to make more money or will you streamline even further? Will you try and procure your materials and energy in bulk to dodge higher input prices going forward? I think so. This adds nothing to the service sector, but it will add revenue to producers and manufacturers in China and Japan. I think Australia is exporting more materials to China than ever as well.

In the end I think the policy right now would be great if we were a net manufacturer or a net materials provider. We are not! We will need to buy more expensive things due to higher costs and this will hit the service sector! It seems all backwards to me.

On another side of things I have an issue with the Central Bank discussing so openly the idea of scaring you into spending using fear. So far only us economic minded folks have any clue what is happening, if there is a Nightly News Special on how to get the most for your ever inflated away cash there is going to be an ugly panic!

Along these lines I have always said a serious currency issue will not happen slowly and with broad signs for all to see. You will just wake up one morning and it will "be on". I get a chuckle when I read folks say if things get bad they will have time to see it and get out of various positions. Yeah, you and a million other guys! Wait until all your stocks go no bid after a dollar scare and let me know how those stop losses worked out for you.

I am not saying this will happen. I think the FED will likely fail for the reasons I outlined above. Should they succeed I can then put the more ugly scenarios on the table at that time. It's a real mess out there right now!

A bit outdated (here the Saudis are the big dogs!) but this clip from "Rollover" was making the rounds and it is worth a look:


Have a good night.