Parade? Here Comes The Rain

Hate to rain on your parade, but the government providing over $300 billion in investment and backstop to Citi is not much reason to celebrate, though the market seems to have done just that today. Best two day climb in over 20 years. Impressive indeed. But not nearly as impressive as what I am about to tell you, assuming you have not already read about it.

Seems two Bozos and one Bozette (less her than the other two) have really racked up quite a lot of IOUs for you and me. Mind you, lawmakers - as in elected representatives - are in part responsible for $700 billion, but the rest is the Bozos and Bozette. Hope you are sitting down. We are potentially committed to the tune of $7.4 Trillion, which is $24,000 for every man, woman and child in the country, and we haven't saved the auto industry yet. That is half of the value of everything produced in this country last year. And nearly all of it has been racked up by unelected officials, who are doing so on our tab.

But hey, you say, they are doing a good job, just look at the market the past couple of days. Well, I would not throw caution to the wind just yet. Yes, some people who know more than me are getting back into the market - and I am mostly back in myself (and reconsidering that decision) - but there are troubled waters ahead and if you are going back in, do so with the knowledge that many risks are ahead. Knowledge is power and I do this blog because it forces me to read enough to get knowledge. I hate that it cuts into my evening TV time, but it has paid off a good bit better than watching Dancing with the Stars.

I am not talking here of the obvious economic risks that I usually discuss. I am (or Yves is) talking currency crisis, and she is not the only one. We have a temporary prop of the currency currently taking place as certain bets unwind, but soon that will come to an end and the U.S. currency is then toast. I do not pretend to know a lot about currency related issues, but I have been reading more lately and we are on the edge here from what I have read from various sources I trust. I have seen a few articles I have not posted and will try to find more to share, but this is becoming a key risk going forward. I noted it last week and it seems to be accelerating.

And currency crisis is not the only problem. We need to start worrying about debt default. I posted the other day about what happens when our foreign allies stop buying Treasuries. Well, that issue is increasingly coming front and center.

Once you consider these two issues, give yourself a headache thinking about deflation. Deflation is not a good thing. Why? Let us assume I bought a home for $100,000 and took out a loan of $80,000 to pay for it. For the past year or so that home price has been deflating and the home could very well now be worth less than the loan. An example of bad deflation. What's more, let's say I have a fixed rate loan and I am paying, say $750 a month for that loan, which does not change. The spending power of the $750 goes up during deflation, i.e. $750 buys more as things get cheaper, so on a relative basis, I am giving up more stuff to pay a mortgage on property not worth the amount of the loan. Not a pretty picture. Try adding to that the prospect that I did an ARM and the rate is about to adjust up significantly, and you get the picture on why deflation can be bad.

Another way to consider deflation is related to its cause in the current economy. People have no money, so they stop spending. Demand goes down so prices come down to try to lure demand. Companies have no demand or sales, so they reduce employment, further reducing available cash and demand, which continues the spiral.

Moreover, deflation is harder to fix than inflation. For inflation, raise rates. For deflation, lower rates. But what do you do when rates are already at 1%? Well drop money from helicopters and increase the money supply, but that too has consequences.

Sorry for the doom and gloom when people are popping corks, but you need to appreciate the "potential" risks. I say potential as nothing is written in stone. The positive response in the markets the past couple of days could be a self-fulfilling prophecy in some respects. Certainly, a large part of the market and economy is mental. Credit and lending are in part about companies feeling the economy is on the track to recovery. So I cannot discount how emotion might impact things, especially in the short term. But in the long run, I fear two plus two will always equal four. Somebody has to pay the piper, and unfortunately that is on our tab. Thank you Bozo!

http://www.nakedcapitalism.com/2008/11/government-lending-support-pledges-and.html

For more less than inspiring thoughts on the Citigroup bailout and the rag tag nature of the U.S. response, I highly recommend the following article. All is not as well as the last two trading days would seem to indicate. Some of my mentors seem to be wading back into the market yet I am thinking "hunker down." They know much more than me, so you decide. Nonetheless, Bloomberg is one news service I respect, and they have been decidedly negative on the Citi development.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aNaCt99p3AZg&refer=homepid=20601087&sid=aNaCt99p3AZg&refer=home

I believe I mentioned that the Citigroup/Wachovia deal was really about a back door way for the FDIC funding Citigroup so that it does not fail. I believe Bronte Capital did a piece on this, but here is another:

http://www.nakedcapitalism.com/2008/11/wsj-us-agrees-to-bail-out-citi.html


Housing Down

Hardly a surprise, except that it is down on a global basis. First time ever. Wow!

http://www.guardian.co.uk/business/2008/nov/24/international-property-house-prices-dubai

Deep 6 Big 3 Chapter 11?

Apparently the thought of the big three doing Chapter 11, bankruptcy talk for reorg., is not well liked in all corners. Some say the damage to public image will be the death knell, despite airilines successfully doing it. Certainly, taking a chance that an airline will go Chapter 7 in a few weeks on a ticket worth a few hundred is not the same risking a five year warranty on a $40,000 car or SUV, so this will never ever work, right? Well, folks, guess what, the government that has taken on $7.4 trillion may need to spend a few dozen billion and backstop warranties on vehicles. I really don't get it; we spend trillions backstopping the jerks that got us into this mess and are unwilling to spend what is realtively little to save hundreds of thousands, if not millions, of jobs and avert very real losses to the U.S. economy. Do an AIG type of deal but keep at least two of these companies up and running.


Stop!!!!!!!!!!!!!!!

Paulson wants the rest of the $700 billion now. Given his track record I have one comment, just say no. Let's start a grass roots effort, "Say No To Bozo, Say No To Bozo!!"

Bad?

Sounds bad.

http://www.nakedcapitalism.com/2008/11/us-trying-to-combat-treasury-repo-fails.html