Five Things You Need to Know: Countrywide Empties Out on Widowmaker; Housing Starts Point to Increasing Reliability of Collapse; Everybody Out of the Poole!; Is Our Money Safe?; Who Let the Lepers Out?

By Kevin Depew  AUG 16, 2007 11:59 AM

What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1.  Countrywide Empties Out on Widowmaker

The news trickling out on Countrywide Financial (CFC) is a big deal.  Remember, this is the biggest mortgage lender in the country.   

2.  Housing Starts Point to Increasing Reliability of Collapse

Speaking of housing... Housing starts decreased by 6.1% in July, and June starts were revised lower to 2.1% from the previously reported 2.3%, the Commerce Department said.

3.  Everybody Out of the Poole!

Meanwhile, back in the fake world, St. Louis Federal Reserve president Bill Poole said the subprime mortgage rout doesn't threaten U.S. economic growth, and only a "calamity'' would justify an interest-rate cut now, according to Bloomberg.

4.  Is Our Money Safe?

The questions about the "safety" of our money continue to pour in:

Dear Minyanville -

I wanted to ask a quick question.  My 401k only offers a stable money market fund that "cuts corners" to get added return.  I have no other "safe" options other than some bond funds to place my money for the downturn I suspect is on its way.  What do you think I should do?  It is not like they offer a plain cash account.  I feel like many folks will be in the same boat I am in and even though they think they are safe they can end up getting hurt. 

Thanks, Minyan C

Dear MC -

If you trust the company that houses your 401k, if its a legitimate investment firm that has a long history of successfully weathering market downturns and holding onto client assets as most 401k firms are and do, then you will probably be fine. 

Only people who NEED liquidity on a daily basis - and a 401k by definition does not NEED liquidity - should worry about whether their money market fund is "safe" from Asset-Backed Commercial Paper, which is where the major problems are beginning to show up.   

Most companies would rather take a loss than let their money markets fall below $1.  The reason why this money market fund issue is an issue at all is because many companies and institutions that require cash flow need to be able to access that cash at will, or they are suddenly finding that risk aversion in the commercial paper market is making it far more expensive than they anticipated to manage their short-term cash positions.  And most money market funds do have some exposure to commercial paper.

Two years ago I wrote a piece called Savings versus Investment that may be worth revisiting:

"Today this may seem like a petty game of semantics – “savings,” versus “investment.” But I assure you the difference between the two will not be a petty game of semantics when, and I believe it is a matter of when, not if, the day comes that investment risk finally shows itself, and those who have been fooled (some would even go so far as to say forced) into treating their savings as investments pay the price."

There are many reasons Americans are now conditioned to view common stock ownership and 401ks and IRAs as "savings," and none of them are good.  They range from Fed policy that systematically punishes savings, to the elimination of defined benefit plans to easy credit terms and predatory lending. 

The end result has been the Death of Savings in this country.  In its stead, a complacent view has developed where cash has been supplanted by credit and the ability access credit has somehow come to be equated with "savings." 

Money in a 401k is investment money.  Even money in a money market fund is, by definition, investment money.  If the goal in your 401k is to avoid all losses, and it sounds like from your question it may be, then that money should by definition not be in a 401k.  If the goal is to minimize losses, then you are in the safest investment vehicle available through your 401k.  Just remember, savings is money you cannot afford to do without.  Investments, even low-risk investments such as money market funds, are by definition money you are willing to risk losing - even if that risk of loss is very, very low.  Risk is a two-way street.

5.  Who Let the Lepers Out?

Speaking of credit as a substitute for savings, Minyan RatpackMike (not his real name!) forwarded us an interview in today's Washington Post with James Scurlock, director of the documentary Maxed Out, which takes an in-depth look at America's debt and credit obsession.  Although released months ago, the plot is all too familiar. 





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