Five Things You Need to Know: Too Much Debt, Too Many Insolvent Debtors
Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:
1. The Corkscrew Haircut
2. Improving Credit?
3. Symptoms Quiet Even as Disease Rages
4. Bread & Circus Maximus
5. The Return
The Corkscrew Haircut
"Every day I come home and look at the Dow, and I didn't used to be that kind of person."
- Petra Masson, Starbucks employee, quoted in New York Magazine
So, finally, this is what it's come to; normal, innocent people reduced to rampaging like herds of investment bankers, tearing at their hair and bursting into spontaneous tears or manic laughter with each tick of the Dow Jones Industrial Average.
Who can blame them? The feeling on Main Street, especially among those Baby Boomers staring down the barrel of a 65 caliber Golden Years retirement special, is that there must be something horribly, tragically wrong with the stock market. Which is true - why else would it lurch erratically, day in, day out, in wheezy 5% clips - but beside the point.
Things are now so far off the rails, things have gone so far past any decent person's sense of normalcy, what's one more bizarre datapoint in the mix? The professional traveler understands that when you discover a golden retriever is driving the train, the point where panic is an appropriate response has long since passed. When the conductor offers you a parachute, does that make the weirdness any more or less real?
There is a point to all this, and it's related to the latest acronym coming from the Federal Reserve, the MMIFF, or Money Market Investor Funding Facility. I would ordinarily spend the next 100 words or so going over exactly what this means, but I get the sense you won't be needing a parachute on this train:
"Under the MMIFF, authorized by the Board under Section 13(3) of the Federal Reserve Act, the Federal Reserve Bank of New York (FRBNY) will provide senior secured funding to a series of special purpose vehicles to facilitate an industry-supported private-sector initiative to finance the purchase of eligible assets from eligible investors."
Ye Gods, that doesn't even make it up to the level of pure gibberish. To even think of a sentence like that requires someone with a head so twisted their barber has no choice but to cut their hair with a corkscrew.
What that sentence basically says is this:
"Under the power vested in us by the authority vested in us, we have authorized ourselves to provide credit of unassailable credit quality to a series of unknown (by you) entities to help bank-supported bank initiatives to help banks finance their purchases of financial assets deemed worthy, at our discretion, from people deemed worthy, at our discretion, by virtue of the power vested in us by us."
Improving Credit?
"After weeks of extraordinary efforts by the world’s governments and central banks, the frozen flow of credit began to thaw on Monday."
- New York Times, Oct. 20, 2008, "Signs of Easing Credit and Stimulus Talk Lift Wall Street"
The Times article continued, "a benchmark borrowing rate among banks, known as Libor, dropped on Monday by the largest amount in nine months, an indication of growing confidence in the financial system."
And CNN even dug up a positive nugget on the "TED Spread," a phrase 99.9% of God-fearing Americans have long prayed, most without even fully realizing it, that they would never ever encounter from any respectable news source. "The TED spread, which is the difference between what banks pay to borrow from each other for three months and what the Treasury pays, narrowed to 2.63% from 2.97% late Monday."
Symptoms Quiet Even as Disease Rages
The problem with these arcane credit market readings is that they are just symptoms of the larger disease, which is too much debt and too many insolvent debtors. If you lose your arm in a meat grinder, successfully stopping the bleeding doesn't mean you're going to get your arm back.
For a nation nurtured by forever-happy endings and conditioned to force movie directors to recut the final three minutes of their films for the purpose of appeasing happy-ending focus group, this will doubtless come as a vicious shock. Yes, the symptoms have quieted, but the disease rages on.
Bread & Circus Maximus
"The time for honoring yourself will soon be at an end."
- George W. Bush, President of the United States of America
Frequently, on Sunday nights, I find myself sitting in the Paris Cafe Bar on South Street handicapping which demographic group is going to be pilloried and, ultimately, jailed by The People when the gig is finally up. I always choose Fans of the New England Patriots, while most of my competitors choose the Baby Boomers, and judging from newspaper op-eds like this one from the Wall Street Journal today, it's not hard to see why:
"Generalizations about the 79 million people born between 1946 and 1964 are overdone and easy to debunk. Boomers went to Woodstock, voted for George McGovern and, so the thinking goes, cared deeply about the Rolling Stones. Boomers also helped put Ronald Reagan and fellow Boomer George W. Bush in the White House and turned Nashville into a cultural capital. But what Baby Boomers of all persuasions have done, without dispute and to an unprecedented degree, is spend money instead of saving it."
- Wall Street Journal, Oct. 21, 2008, "Boomer Bust: How Will the Economy Rebound Without Post-War Babies Financing Their Harleys?"
The Return
"The expensive stores along Bond Street and Sloane Street have fallen eerily quiet, as have the cheaper ones scattered all over town. Britons are coming down from their huge spending spree, and alarm about the future is coursing through the nation like an electric current, as it is everywhere. But there is a parallel thought in the air: perhaps the downturn, however painful, will lead to a return to the values of the past. Perhaps the last 15 years or so will be considered a sort of madness, an anomaly, a strange dream."
- New York Times, Oct. 21, 2008, "Dear Prudence: Recession May Bring Return of Traditional Values"
In the end, economic downturns, sometimes euphemistically referred to as "Corrections," do, in fact, correct something that is askew. Because we live in the skew, and come to view and accept it as normal... no matter how weird it gets... it's therefore very hard to imagine what, if anything, there may be Out There to correct. That may be why the transition from a consumer culture to a savings cultures seems so unimaginable.. even now.
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Every time I think Kevin can't get any better, his next "5 Things" tops yesterday's screed.
I hope Minyanville is paying Kevin well enough to stay there, at least until the storm passes around the year 2015.
A dose of Soma and a visit to the Ministry of Love is in order.
We must borrow in order to spend since spending generates spending and tax revenue. Saving decreases consumption which decreases borrowing and taxation. Taxing savings decreases savings which thereby increases spending which increases borrowing to maintain spending. We must borrow to spend to increase spending so we can spend more on spending thereby increasing spending.
Where, my good man, does debt enter this simple equation of prosperity in Oceania?
Dr. Hussman and Andrew Jeffery and a few others spoke of slicing off "property appreciation" for the government in trade for reduced mortgages and better rates. My question here is what's to say the consumer won't re-leverage? They certainly learned the lesson the first time (mortgage refinance), or the second time (HELOC or second mortgage).
Third time's a charm?
Our economic system only works if most people don't try to access their supposed wealth.
The larger the supposed wealth and the more people who try to access it the higher the liklihood of an economic meltdown.
The magnitude of the numbers don't have to increase nearly as much as might be expected in order to cause this meltdown due to the network effect...i.e. everything is now connected (and dependent) on everything else.
Due to the last three decades of financial consolidation, optimization and leveraging we now not only have a large number of companies that are 'too big to fail' but due to an economy increasingly dependent on credit the ripple effect of the failure of these businesses (or perhaps just some as yet undefined 'turbulence') is so vast as to be unquantifiable.
Add to this the number of people dependent on retirement accounts which are in turn dependent on the stock market and the entire financial system and you have the makings of a financial version of a nuclear chain reaction...i.e. a relatively small initial explosion triggers a chain reaction that results in a massive release of energy.
This is all going on in the context of massive debt and just when the baby boomers are beginning to turn 65...the age at which people become net sellers of houses and increasingly drain resources from the economy.
Therefor, all previous frames of reference for economic downturns are inadequate. If indeed the chain reaction has begun then 700 billion dollars is a drop in the bucket. In fact, before the explosion is over the economic system that gives dollars significance may no longer exist.
Kind of makes questions like 'Is it over yet?' or 'Is this the bottom?' seem pretty foolish...
don't you think?
The problem is that an economy can only support a limited number of non-productive consumers. Usually those are children, who by definition, are limited consumers and future producers. Right now the population, for the first time in history, will have a large, significant mass of older adults who think/want/believe it's their absolute right to become full non-productive consumers.
Here's what would have happened if every boomer had diligently saved: we'd be facing massive (real) inflation as more and more money chased less and less goods (and especially) services. As it is, we should all be pretty thankful the boomers couldn't (collectively) seemed to have saved a dime. Ironically, them working as long as possible will help the economy lurch along.
It will be over just as soon as the adjustment to an perpetually older population is finished. *grin* It's pretty baffling to me that people don't get on a personal level that we can't *all* be rich, as defined by not working for money. Wealth is very relative.
I would take my chances with a boomer with cash versus an overleveraged boomer. We are seeing how the overleveraged boomer is playing out. I yearn for the opposite of that.
Both were saying they are worried that this is much worse than we think. As in...worse than the Great Depression as it unwinds.
Over optimized banks and commodities and agriculture; the ripple effect of hedge funds liquidating assets may cause turbulence we can't predict or comprehend.
Yikes!
It is amazing how frequently and fervently, so many have been pointing to symptoms of short sighted policies by governments and consumers as "proof" of various economies "decoupling" and "immunity" from these credit issues...
BRIC, UK, Euro were all riding this same doomed train in various ways at various points in the grand economic pipeline.
BRIC were the outsourcing destination and had to "built out" to support their new found preferred backoffice/factory status.
The UK was riding high on iBanking and consumers, the Euro was riding high on well.... lack of anything really bad and depressing happening spurring more socialistic government and consumer spending.
When the credit engine and the first data point in the consumer chain got hit (the US consumer), clearly it should be assumed that the effects were going to take some time to be seen throughout the pipe.
For a while, the "Greenspan Put" gave (false) hope to many that this blip at the head of the pipe would be just that. However, as soon as it was obvious it would be more than a blip - everyone in this pipe _should_ have been hitting the brakes to avoid rear-ending the guy in front of them...
Not surprisingly, until risk is realized, it is assumed that the "making less money" is the worst thing that can happen... So, they kept the pedal down...
More to come and it isn't good...
Not everyone spent with abandon.
Wells Fargo & Co. Chairman Richard Kovacevich may not have initially wanted the U.S. government's $25 billion investment in his bank, but he dropped his resistance after realizing the infusion will provide the ailing economy with a vital shot in the arm.
"I have always believed that the system is more important than any individual company," Kovacevich said Tuesday night during a question-and-answer session at the Commonwealth Club. "If that means a company has to sacrifice along the way, so be it."
Would somebody PLEASE give me 25 billion so I can 'sacrifice' too!!!!
Timed right local farm land, after taxes and inflation, purchased with long term loans that will be essentially forgiven by hyperinflation, look interesting.
I'll need to find out when the bulk of their baby boomers are set to retire. The issue is not wholly economic (save vs. not-save) - the idea is that an economy can only support a limited number of non-producers. If significant portion of their working population continued to work thanks in part to the real estate/economic bust, then their inflation rate is irrelevant. If not, I'll have to re-think my theory. :)
My husband and I have had some vague thoughts of going into farming. (really!!). I've avoided researching the idea simply because I knew real estate prices were too high across the board. We may try to time a purchase (of perhaps a homestead at least) as real estate prices (hopefully) continue to go down but before inflation kicks in again in earnest.
"Ye Gods, that sentence doesn't even make it up the the level of pure gibberish."
made me snort coffee out my nose. In a time when the general level of economic commentary and reporting has me tearing what's left of my hair out, the Minyanville staff is a ray of hope.
There's a certain type of sloppy thinking that occurs when speaking of demographic sectors as a group. I'd like to see the actual percentages of boomers that have lived above their means and have lived below their means. Further, many of the financial "wizards" that enabled this mess are not members of the boomer generation, many are younger.
Rather than pin this on a particular generation, I think it is more accurate to attribute it to the certain type of person that feels entitled to what they see as "the good life", whether or not they can afford it or are in fact actually entitled to it. This type of person belongs to *any* demographic.
Basically, what we are seeing is the collapse of a gigantic ponzi scheme. A house of cards where the first money in and out gets the payoff and the last money in gets hosed. That's the whole housing collapse and credit freeze. Greed, it's that simple.
Let's all buy a farm.
That is trading in a nutshell.
Most of the economy of the U.S. is for activities that we don't need to do: lots of plastic junk, lots of miles driven, lots of people advertising stuff that nobody really wanted in the first place.
We could give everyone an iPod, tools, seeds, and a pink slip and see what happens.
"Profit's just another word for
nuthin' else to do."
Just when I thought I knew everyone that was watching me from Washington....
Now I'm really paranoid.
Lee: how much farm do you want? There ought to be plenty available when the subsidy checks start bouncing and the Mexican workers head home.
Personally, I'm gettin' a little annoyed by all of the 'open pit sh)t mines' they call farms around here.
Like the current credit, it's about sheer numbers and common sense.
Pensions and SS only work when there are several young workers for each retiree. Within the my lifetime, that ratio will be steadily dwindling with time down to 2 workers to 1 retiree.
I'm saying that the boomers are the generation that's really kinda screwed. They are expecting and planning on a retirement, which directly they supplied to the their parents en masse. Regardless of whether any individual boomer deserves it, it's simply *not possible* for the mass of boomers to retire because their aren't enough young workers. Ironically, I suspect my generation has had the fortune of not have such expectations for retirement.
