First, I apologize for another OT post. I did put "OT: " in the subject for all who do not wish to read OT posts.
Some time back I stated that I expected the Dow to reach about $7500. Today it dropped $444.99 (5.56%) on top of its previous losses - to $7552.29, just $52.29 above that expected point. Of course, some nay sayer came right back and told everyone how stupid I was, etc. etc. etc.
I am not proud of this and sincerely wish I were wrong. I revise my estimate to about $7000.00, possibly even lower!
America is being taken over by degrees, but the burner has been turned up a bit, so we're going to see things accelerate.
The Amero is supposedly waiting in the wings ready to be introduced. The USD, Canadian Dollar and Mexican Peso will probably have to be traded in for Amero's at some preset ratio.
A globalist government is in the process of being set up right now. There's a process called creeping gradualism. It has been "creeping" up on Americans at least since 1913.
The globalist government will be established - and actually already exists as a "shadow government." This has to be. But it will be short lived and probably not last over one decade after it's official acknowledgment and installation.
Hang tough and keep looking up.
Some in the market will wish they'd sold all their stocks and invested in something a bit more tangible, even bolts and nuts. The way ammo has gone up over the last few years it would have been a far better investment than the market, except for the fact it would have to be warehoused and protected from the elements and thieves!
Let's still hope I'm wrong, but don't believe the nay sayers are all right!
-------------- If it was all a plot that would be the good news, because it would mean somebody was in charge.
The bad news is it appears that the no-loads, d**k weeds, f**kwits, and just plain crooks "screwed the pooch" and, like cockroaches, spoiled far more than they ate or carried off.
The news media puts the best possible spin on things, but the comparison of a 7,500 Dow in October 2008 to a 7,500 Dow in March
2003 is meaningless because the critical item is the actual value of the stocks, i.e. what you can buy with their cash equivalent.
Thus these index values should be adjusted for inflation. The most widely used and accepted inflation index is the CPI-U, and you can look-up and download in text or xls format at ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt {Be reminded the CPI-U understates the actual inflation rates/effects, so what follows is a best-case.}
October 2008 CPI-U index 216.5 [actually 2.165] March 2003 CPI-U index 184.2
a 7,500 Dow in Nov 2008 is
7,500 / 216.5 = 3,464 in 1982-84=100 dollars and 3,464 X 184.2 = 6,381 in March 2003 dollars of equivalent purchasing power.
While a 7,500 Dow in March 2003 would be 7,500 * 215.5/184.2 or 8,815 in Nov 2008 dollars of equivalent purchasing power.
==>The further back in time that you go for the comparison, the worse it gets, thus the inflation-adjusted "value" of GM and Ford stock is *BELOW* what it was in the depression.
Note 1: True. I mentioned before there was one way to avoid the 7500 bottom and we would not like it. Just go into hyper-inflation where you get a wheelbarrow full of money on Friday to get a bag of groceries at the store.
Note 2: Also true on the high point. Talk radio has made a big deal, and rightfully so, about the "big three" going to the meetings in their private jets and $5000 suits with cup in hand to beg poor, almost already strangled taxpayers for a handout then getting back into their private jets to attend their daughter's recital that night hundreds of miles away....
If it weren't so serious I'd say it was really funny the way these big wheels have tried to manipulate the system. I realize they were often hamstrung by greedy union bosses who basically said, "You give us what we want or we'll walk off the job and cost you millions of dollars for every day you wait to make up your mind to see things our way!" The unions are probably as guilty as the board of directors who voted multi-million dollar bonuses to their bosses each year - and should share in the debacle.
------ This sounds good and has been repeated so often that it is approaching big lie status. [Repeat it often enough and it becomes "true."]
The problem is that Enron, Global Crossing, Lehman, AIG, WaMu, Countrywide, etc. etc. not only did not have a UAW local, they had no union involvement at all. Where a union didn't exist an alternative scape goat has to be found. The "mark to market" provisions of SarBox requiring honest accounting is a favorite. "If you would just let me cook the books like I used to" is a favorite excuse.
Unions are just the capitalist system in action. I buy as cheap as possible, you sell for as much as possible. The Union negotiators out foxed the corporate ones, and the company had to share. None of the "its my bat and its my ball, and if you don't play nice like I want you to, I'll take 'em and go home" BS. Same thing as the IAM and Boeing.
Why would you want to do anyone any favors that had hired goons to beat the c**p out of your father when he worked there, is currently in the process of stiffing you every way they can on contractual and customary benefits, and has a long history of making promises they can't or won't keep? [FWIW, to the extent possible, it appears the Detroit auto makers also treat their vendors and dealers the same way, e.g. the thread about Ford's diesel engine supplier.
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Their employees reasonably enough see no reason their wages/benefits should or must be cut to "save the company" when the management compensation, benefits and "perks" stay the same, or even increase [such as a huge up front signing bonus] for another "suit" parachuting into the corner office.
In GMs case they have sold the union a "bill of goods" about turning over a new leaf at least three times in the last few years in return for "flexibility," specifically the Fiero program, the establishment of the GEO division to make compact cars and learn the Japanese methods, and the Saturn program to apply these lessons. In the case of their largely non-union white collar employees, they have replaced the defined benefit pension plan with a 401k, and have now welshed on the 401k contributions, and are unilaterally revising the retirement benefits, and in the process shifting much of their retiree health care costs to the taxpayers via Medicare, and cheating the retirees out of the rest through higher co-pays and reduced coverage.
It is a truism but never-the-less true that a company almost always gets the union they deserve. The reason the labor relations between the Detroit auto makers and their unions are so poisonous is the long history of management abuse, physical violence, exploitation, and lies.
If the transplant auto makers start to get "cute," they will face the same problems, however it appears they are more enlightened and do not have the long history/reputation in this country of worker exploitation/confrontation that the Detroit auto makers do. Indeed, the wage/hour laws and work place safety/OSHA regulations now in place will most likely save these companies from themselves in this regard.
One final thought, if the Detroit auto workers get paid twice as much as the transplant workers, it means they are paying twice the income taxes, making twice the social security payments, and spending twice as much in their local economies.
Unka' George [George McDuffee]
------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?
Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).
---------- Among many others Citi looks to be in big trouble. Another house of [credit?] cards begins to collapse [after receiving 25 billion in TARP funds].
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With the stock under 5.00 per share [currently 4.02, as low as
3.57] many trust funds, pension plans, etc. will be forced to sell driving the price even lower.
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Citi's common stock is now worth less than the government pumped into the company last month. (On the bright side, if the government hadn't pumped in the money, it would now be worth zero). The company's tangible book to equity ratio is now more than 50-to-1, and the firm's gigantic mountain of consumer debt "assets" will almost certainly face enough writedowns in the next several quarters to wipe out the equity that's left.
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Unka' George [George McDuffee]
------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?
Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).
------------ Fed Pledges Top $7.4 Trillion to Ease Frozen Credit (Update1) By Mark Pittman and Bob Ivry Nov. 24 (Bloomberg) -- The U.S. government is prepared to lend more than $7.4 trillion on behalf of American taxpayers, or half the value of everything produced in the nation last year, to rescue the financial system since the credit markets seized up 15 months ago.
The unprecedented pledge of funds includes $2.8 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the only plan approved by lawmakers, the Treasury Department?s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.
When Congress approved the TARP on Oct. 3, Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson acknowledged the need for transparency and oversight. Now, as regulators commit far more money while refusing to disclose loan recipients or reveal the collateral they are taking in return, some Congress members are calling for the Fed to be reined in.
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One of the major current recipiants of the taxpayer largess is Citi Bank.
----------- Citigroup Gets U.S. Rescue From Toxic Losses, Capital Infusion
By Bradley Keoun
Nov. 24 (Bloomberg) -- Citigroup Inc. received a U.S. government rescue package that shields the bank from losses on toxic assets and injects $20 billion of capital, bolstering the stock after its 60 percent plunge last week.
The second-biggest U.S. bank by assets surged as much as 64 percent in New York trading after the Treasury, Federal Reserve and Federal Deposit Insurance Corp. announced the aid plan in a joint statement. In return for the cash and guarantees, the government will get $27 billion of preferred shares paying an 8 percent dividend.
The regulators stepped in to protect Citigroup from losses on a $306 billion pile of troubled U.S. home loans, commercial mortgages, subprime bonds and corporate loans when the firm?s tumbling share price sparked concern that depositors might pull their money and destabilize the company, which has $2 trillion of assets and operations in more than 100 countries. The $20 billion of new cash comes on top of a $25 billion infusion the bank received last month under the Troubled Asset Relief Program, passed by Congress to shore up the financial industry.
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No one knows or even says they know how many more of these "pillars of capitalism" are tottering houses of [credit] cards.
----- Citigroup?s ?Capital? Was All Casing, No Meat: Jonathan Weil
Commentary by Jonathan Weil
Enlarge Image/Details
Nov. 24 (Bloomberg) -- Over and over, as its stock price plunged last week, Citigroup Inc. repeated the same tired line. Citigroup has ?very strong capital,? the bank kept saying.
Its capital was so strong that the New York-based lender yesterday was ironing out yet another federal bailout. One lesson here is: There?s something very wrong with the way Citigroup and the government measure capital.
To see why, let?s dig into just one portion of Citigroup?s capital that has been soaring in value this year. It?s called deferred-tax assets, or DTAs, which now make up a big part of Citigroup?s book value and Tier 1 regulatory capital.
Little Capital
-- The Tier 1 measure excluded $10.8 billion of paper losses on various securities and derivatives, even though these reduced GAAP equity. It also included $12.7 billion of intangibles.
==>So, in truth, Citigroup had little, if any, real capital, even if the values for all its toxic loans and mortgage-related investments had been accurate.
Before we get carried away with numbers, what do they mean "pledge of funds"? So far, the guarantees and loans have only resulted in a very small fraction of the big numbers winding up as "costs," according to several sources. This "pledge" sounds like some kind of insurance guarantee, which one would expect is intended to ease liquidity and credit because it reduces risk for the various players. Whether the insurance is likely ever to be invoked is an entirely different matter.
What is clear is this is the rationale that took down Lehman and AIG, and appears to be taking down many of the other banks, brokerages, private capital, and hedge funds.
Their mathmatical risk analyis models appear to be masterpieces of econometrics, with one fatal flaw, namily the assumption that financial/fiscal events are distributed according to a normal/Gaussian distribution, when in fact these appear to be much more closely modeled by the Cauchy/Lorenz distribution, which has much "fatter" tails, and much higher probability of extreme values/events.
What is puzling is why all these people thought they were smarter than the Noble laureates, Merton and Scholes [the Black, Merton, and Scholes option pricing model, later extended to derivatives]
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hedge fund "Long Term Capital Management" [which was anything but] was the first to "crash and burn" as a result of this "small" error.
The other institutions that followed their model are now in the process of following them over the cliff.
For additional information on the application of the Cauchy/Lorenz distribution to finance and other social behaviors see
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(Mis)behavior+of+Markets%22&pg=PP1&ots=UxXVTZ1yar&source=bn&sig=uhX4GYszTSi2sXn4Xw8Wa_THj3M&hl=en&sa=X&oi=book_result&resnum=4&ct=result I have already posted my view that while a lack of liquidity is indeed a major symptom of the current economic situation, it does not appear to be the cause, but rather the most obvious and immediate symptom of the underlying problem of insolvency of large numbers of organizations and individuals, who are discovering that their assortment of IOUs, hot checks, and "collectables" such as "Beanie Babies" are in fact worthless.
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Unka' George [George McDuffee]
------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?
Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).
--------------- Whatever the amount it just went up another 800 Billion.
------------ Fed Commits $800 Billion More to Unfreeze Lending (Update3)
By Scott Lanman and Dawn Kopecki
Nov. 25 (Bloomberg) -- The Federal Reserve took two new steps to unfreeze credit for homebuyers, consumers and small businesses, committing up to $800 billion.
The central bank will purchase as much as $600 billion in debt issued or backed by government-chartered housing-finance companies. ==>It will also set up a program of $200 billion to support consumer and small-business loans, the Fed said in statements today in Washington.
Because every lender will immediately stop lending. That will dry up consumer spending. Which will lead to a self-feeding series of layoffs. Which will plunge us deep into a deflationary spiral. From which we probably won't recover until you and I are dead and gone.
----------------------------- That's the old "its my bat and my ball, and if you don't play nice like I want you to, I'll take them and go home" threat.
Given that banks can't make any money if they don't lend it out, I seriously doubt that all lending would stop if the usuary laws were reintroduced and enforced. After all, the banks and other lending institutions made billions under these laws before they got greedy (and were enabled by the politicians).
If this is indeed the case, it is another reason to bypass these existing dinosaur institutions and channel the money/credit though new innovative institutions and processes, or existing channels such as reputable local banks and credit unions, with much lower overhead, lower or no bonuses/perks, and much less "baggage"/legacy costs.
Unka' George [George McDuffee]
------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?
Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).
----------------------- Indeed, but the problem is that almost all [I can't think of any that didn't] of the major credit card issuers did the same thing.
This is what the "race to the bottom" is all about. The state/nation that has the least or most "flexible" regulations will always be the one to "get the business" [in several senses]. In many cases, the "nominal" business presence is a mail drop, while then actual business domicile remains where it always was, e.g. Citi corp headquarters remained in NYC.
Unka' George [George McDuffee]
------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?
Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).
Merchant fees (interchange fees) are now down to 1 - 2%. Annual user fees are no longer applied to most types of cards. Unless you limit all kinds of credit issuers across the board, the interest spread will eat up the credit card companies, especially if their business becomes marginal and creditors have other attractive options.
Add in operating costs (which could be reduced somewhat) and charge-offs, and customers at the lower end of the credit-worthiness scale quickly become a loss unless you can charge them a premium rate. But those customers buy goods. So if you knock off, say, 20% of the cardholders at the low end, you're looking at reduced consumer spending probably close to the double-digit range. That's enough to start or maintain a serious economic recession.
It doesn't take a stop to "all" lending to send us down the tubes.
The credit-card business is highly competitive. Given today's operating conditions, competition and cost issues would force them to cut services (such as those telephone operators who answer when you call to complain about a mistake on your bill), but that would be manageable. Then they'd probably start cherry-picking customers. Scrape off those low-end customers, and you've just knocked the hell out of retail sales.
The market now determines how the business works. If you want to avoid the fees and interest, pay your bill before the end of the month. But if too many of us do that, we'll start paying annual fees again. And most people won't or can't do it. So, again, there goes your retail sales.
When my parents had their store, 30 years ago, the merchant fee for AmEx was 6%; for MasterCard, it was 3-1/2%. Those are much higher than they are today. Of course, those costs showed up as higher retail prices. If you squeeze the balloon by cutting interest rates to credit card users, the air will just move over to merchant fees or to other customer fees.
And the final knife in the beast is this: Given today's global movement of capital, if you squeeze the credit card companies, they'll just move their capital overseas to a better market. Anyway you cut it, the US market isn't going to be very attractive for a long time to come. Unless everyone else tanks along with us -- a possibility -- capital is going to be looking for happier hunting grounds.
The point is, we already have a mechanism to cut consumer costs. Several of them, in fact. One is, pay off your credit cards in the same month. Two is to use your credit cards less. Three is to not use credit cards at all. The one that won't work is to have credit card companies carry your debt at tightly regulated interest rates. They'll just raise other fees, or, if you try to cut those off, they'll put their capital somewhere else.
--------------------- Which is yet another financial mirage.
The credit card companies *DON'T HAVE ANY MONEY OF THEIR OWN* and are simply engaging in the "carry trade," where they borrow at a lesser rate than they lend for.
The problems seem to have started when the old "charge card" companies such as American Express, that expected the card balance to be paid in full every month, discovered that loansharking was more profitable, and adopted the "credit card" model.
Even then, as long as the balances were kept reasonable, and were used as intended to "even out" periodic expenses such as school supplies and vacations over the entire year, little trouble was encountered, although the interest rates were high, albeit slightly less than the storefront finance companies.
What changed was the precept ion by [too] many individuals that this was "free money," which was then used to attain/maintain a unsupportable lifestyle/level of consumption.
--------------
I.The Basics: Average/Median Debt, Length of Time in Debt According to our survey, the average credit card debt of a low- and middle-income indebted household in America was $8,650; the median was $5,000. One-third of households had credit card debt over $10,000, while another third reported credit card debt lower than $2,500. (See Chart 1.)
------------- Table 1: Mean and Median Credit Card Debt by Age, Income Level, and Race/Ethnicity Mean Median All $8,650 $5,000 By Age
18-34 $8,182 $4,700
35-49 $8,938 $5,500
50-64 $9,124 $5,000
65 and older $7,382 $4,000 By Income Level Less than $35,000 $6,504 $4,000 Between $35,000 ? $50,000 $8,319 $5,000 Greater than $50,000 $10,472 $5,100 By Race/Ethnicity Non-Hispanic Caucasian $8,972 $5,000 Hispanic $6,432 $4,100 African-American $7,926 $5,000
IV. Draining Wealth: Using Home Equity to Pay Down Credit Cards
Homeowners increasingly look to their home equity as a source of funds to help deal with rising household debt. While the mortgage lending industry promotes consolidation loans heavily in advertising messages, few cautionary notes are sounded. Like over 30 million U.S. households, 40 percent of the homeowners in our survey refinanced or got a second mortgage during the past Forty-seven percent of households had been called by a bill collector. Just under half had missed or were late with a payment in the last year, with nearly a quarter of households reporting paying a late fee at least one or two times in the past year. Over half of these households used proceeds from a mortgage refinance or home equity loan to pay down credit card debt. The average amount of credit card debt paid down was $12,000, which used up an average of 12 percent of their existing home equity.
The majority of these households were middle class, with an average income under $48,000. If refinancing and paying down credit card debt provides a means for low- and middle- income homeowners to escape revolving debt, this could perhaps be a beneficial use of home equity: trading a shortterm, higher-cost liability for lower cost, longer-term debt. At the same time, combining credit card debt with mortgage debt?thereby stretching out repayment of short-term debt over twenty or thirty years?runs a high risk of being a detrimental financial decision, even at a low interest rate. The scenario is even worse if the homeowner takes on a subprime mortgage at a higher interest rate.
Table 3: Monthly Payments and Total Interest Paid Under Different Debt Scenarios Amount Annual Monthly Number of Total Credit Interest Payment Years Interest Card Rate to Repay Paid Debt $12,000 16% 3% or $20, 18 $9,287 whichever is greater
Prime Mortgage Debt $12,000 6% $60 30 $13,898
Subprime Mortgage Debt $12,000 9% $90 30 $22,752
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40 percent of homeowners had refinanced during the last three years, with over half using the proceeds to pay off credit card debt.
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Thus it appears that servicing credit card debt drained much of the home equity, so that one of the major contributing factors to the subprime crisis, in addition to the real estate "bubble" was the proliferation of "E-Z" credit card money.
Unka' George [George McDuffee]
------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?
Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).
That's what I'm referring to above, George. That's why I introduced the issue of the credit spread. With commercial credit as tight as it is, they're going to be limited.
That's the revolving-charge card model, and my dad was one of the people who got it off the ground. That was at Sears, where they had it running at least six or seven years before MasterCard came along.
Again, with American Express's original model, there was no revolving credit. There was only the convenience of not having to carry cash. And for that convenience you paid an annual fee, and retailers were charged 6% -- which, of course, they passed on to the customer, on top of the annual fee.
I don't think many people considered it "free money." I think they just didn't care very much what they paid, as long as they could make the payments. It's like houses in that regard.
George, all that shows is that people have overextended themselves. They could use home equity to pay their debts directly, or pay it through credit cards. They would have been much better off to pay directly from home equity. They would have been better off still if they didn't get themselves so far behind that they had to.
All of which says that a large percentage of consumers/home owners/citizens are either irrationally exuberant, or hopelessly irresponsible, or some of each. If they had the home equity to pay for the credit card debt, they didn't need the credit card debt at all.
The point is that trimming the top interest rates is only going to solve some problems if people behave rationally. But we already know they behave irrationally. The net result, in other words, is likely to be more moral hazard with no recovery of people's financial positions.
I don't like the credit card companies any more than you do, but there is a limit to how many kinds of recalibration we can go through in an attempt to help people recover. If you're not careful, you just plunge them in deeper.
That's not quite it. The primary idea is to make more credit available to credit-worthy borrowers, and to "unfreeze" purchasing by some of those less worthy borrowers, so we don't wind up with an unemployment spiral. Going further into debt is better than having everyone out of a job and declaring bankruptcy, if you can get the economy moving by doing so.
It's a real moral-hazard situation on one hand, and a certain deflationary spiral on the other. The moral hazard is worth it. It's like the good news and bad news of collapsing oil prices.
It takes a lot of guts for the administration. I hope Obama's team will stay the course.
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