Gecopol update - Oct 15th, 2008

The Syndrum Files Gecopol update
Oct 15th, 2008


I haven't written in a while so today's rant is a bit long and a bit emotional...
It is also focused mainly on the US.

Question of the day: Are the financial bailouts the right way to go?

First the numbers: According to many economists, the recession will last 18 to 24 months, driving unemployment to 9 percent, and already depressed home prices will fall another 15 percent. Economist Nouriel Roubini believes the U.S. government will need to double its purchase of bank stakes and force lenders to eliminate dividends to save them from bankruptcy.Treasury Secretary Henry Paulson said yesterday he plans to use $250 billion of taxpayer funds to purchase equity in thousands of financial firms to halt a credit freeze that threatened to drive companies into bankruptcy and eliminate jobs.

The U.S. unemployment rate stood at a five-year high of 6.1 percent last month. Home prices in 20 U.S. metropolitan areas fell 16 percent in July from a year earlier, the most since records began in 2001, according to the S&P/Case-Shiller home- price index. Bank seizures may push home prices down further, scaring away buyers in coming months, after U.S. foreclosures rose at the fastest rate in almost three decades in the second quarter, according to the Mortgage Bankers Association.

For those of you who have read my earlier posts, know that I have been against a bailout of the banking sector. Banks that knowingly put their institution at risk through predatory lending, over-leveraging, repackaging of risky assets as Grade A safe investments, must not be rewarded for their actions. Their greed induced monetary philosophy is what propelled our financial system to this point of collapse.

When the Tech bubble burst in 2001, the stock market needed another boost to keep its record levels of valuation. Too many bigwigs would be losing too much monopoly money if something was not done. It could not be allowed to crash. The Fed, led by Alan Greenspan, lowered interest rates to the point where people nearly felt stupid if they didn't get into debt. Mortgages were force fed, propelling further loans and an ever increasing level of liabilities. The bubble formed again, a much larger bubble, but this time in the housing market. The forced infusion of cash so we can consume more and more without consequence has now found its day of reckoning.

And what do we do again?

We throw more money at the banks and its executives. As if we have not had enough of this irresponsible fiscal behavior. They will will certainly blow new bubbles, which means incredible volatility in prices (ie. the incredible stock market swings this week alone) and exploding monetary inflation around the world. And finally we can wind up with a situation where the common man cannot afford a loaf of bread, people are rioting in the streets, and martial law is imposed upon the land. Complete and utter stupidity.

The system is attempting to perpetuate itself.

The greed of the bankers is feeding off the greed of the people.
I'm talking about Big Macs, SUVs, McMansions.
The average person in India or China eats less, needs less energy. They don't consume as much and their consumption is more renewable, cotton, food, against oil, metals.
Homo suburbianus is heading toward extinction

Savers are gonna be robbed blindly in coming years through inflation or hyperinflation. Sooner or later governments will default on their debt (many are now guaranteeing everything) and the result would be even more money printing. The cost will be billed to the middle class and working people in the form of more inflation, higher taxes, and lower benefits.

Small banks in the US who are not even in danger of defaults, are actualy being forced to take on money from the Federal government! This is unbelievable! Banks who have been responsible money brokers are in essence being punished, while others who are near collapse due to their predatory actions, are being rewarded. Other large investment banks are being systematically taken over by the federal government. Is it any surprise that our Treasury Secretary Henry Paulson was the CEO of Goldman Sachs, one of the largest recipients of the bailout money?

"Fascism should more properly be called corporatism because it is the merger of state and corporate power." (attributed to Mussolini)

Why are we undergoing an enormous correction now? Because Greenspan wouldn't allow a more serious recession in 2001-2002. At least ... many people believe that, and I'm one of them.
And now that the Fed is trying to pump the credit system again ... it just puts off the final day of reckoning a little longer. But it doesn't eliminate it.The current ones put the stage for new imbalances and unattended consequences without solving the underlying issues. This will only lead to hyperinflation, creeping social unrest, and the rise of totalitarian regimes. To me, it seems just a bit suspicious that they want to put out the fire by pouring more gasoline on it... (but I'll leave the conspiracy side of this for another post)

To sum it up: It's necessary to inject some money in the system to minimize the damage as much as possible for your average citizen. But this needs to be done with a lot more regulation to avoid the path of moral hazard we are one. What we are experiencing is nothing less than a real painful reordering of the international monetary system and no amount of printed money can stop it. Lets let the system crash, pull out the weeds and start anew!

Upcoming posts:

- What will happen in good ol' Hungary?

- Where is the value of the dollar, euro and other currencies heading? This ones a bit difficult to get a clear picture on, but with everyone wanting to know where to keep their money, its worth doing a bit of research.

and a little something positive...

All we hear nowadays is doom and gloom, world-wide financial disaster, record breaking stock market crashes, bailouts, recession, depression, CRISIS! CRISIS! CRISIS!

And it will be bad. It will be bad for years to come. But we do have some cause for hope.

I went on a little hunt for some good news. Good news that doesn't fudge over the facts and distort reality. That's nearly mission impossible these days, but I found this below...

Charles Hugh Smith

http://www.oftwominds.com/blog.html

1. We can protect ourselves against declines in paper assets and currencies with hedges.

Frequent contributor Harun I. has repeatedly suggested in these pages that the prudent household/investor attempt to hedge the risks of huge swings of valuation via futures or options contracts. Harun has also provided many charts which depict the relative strength of gold as compared to the stock market. Unsurprisingly, stocks have lost considerable value compared to gold. Thus gold can be viewed as a hedge against paper currencies and other non-tangible assets. Oil (or other tangibles) can also be viewed as a hedge against devaluations in currencies and paper assets.

2. One-third of all U.S. houses are owned free and clear. While the media has now glommed onto the millions of insanely risky mortgages which are in default or otherwise distressed (risks skeptics had long pointed to as highly dangerous), let's not lose sight of the fact that many Americans are frugal and have either low mortgages or no mortgages.

Many of you avoided the housing bubble hype and remained renters or sold in 2005 or 2006 and escaped the carnage. Many like Alberto R. and others have lived frugally and are waiting patiently for housing to bottom, at which point they will be buyers as long-term investors.

In one sense, what is happening is not the bankruptcy of America but the transfer of assets from the spendthrift imprudent to the frugal prudent. Is this a bad thing? I don't think a "good/bad" statement has any meaning here; it is simply a market economy at work. Excesses get unwound, cash is always king, prudent investors tend to be rewarded and gamblers tend to lose all their money.

3. Not everyone speculated in housing or the stock market. Some $6 trillion has been squirreled away in money markets for years. Trillions more are in 401K and IRAs, and though much has been lost in those accounts in this crash, much is in bond funds and precious metals funds.

4. The U.S. has the ability to print trillions of dollars which are still accepted in exchange for goods and services. Now I have never said this is a good thing, as eventually this will drive the value of the dollar to near-zero, but nonetheless in the short-term possessing the global reserve currency which is still used for 2/3 of all global transactions is a powerful advantage. If the U.S. decides to print a few trillion dollars and do an FDIC-type workout of bankrupt/insolvent lenders, it can do so. Will it have negative consequences? Yes, but unwinding excesses leaves us few good choices. Being able to print a couple trillion dollars without sparking immediate hyper-inflation is still better than not having that option. (Note I was adamantly against Paulson's bogus TARP bailout, but would support financial triage along the lines of FDIC workouts.)

5. The vast majority of Americans have running hot water and electricity. These are very good things. As anyone will tell you, having money is more fun than being broke, but if you can cobble together shelter, running water and some grub (beans and rice are still cheap), then life's happinesses are not quite as dependent on constant consumption as marketers would have us believe.

As correspondent Riley T. recently noted:
"Remember getting rich has nothing to do with being happy. I worked all my career with the rich and for the most part they are not very happy and their children are very miserable and seem hopeless."

6. At least until the Federal government itself becomes insolvent, millions of people are getting Social Security and military pension checks. As my father recently noted (he's 82 years old), in the Great Depression nobody received Social Security; now it acts a a safety net not just for individuals but for the economy as a whole.

I would add that the standing U.S. Armed Forces were relatively small in the pre-WW2 eras (On 30 June 1939 the Regular Army numbered 187,893 men, including 22,387 in the Army Air Corps. On the same date the National Guard totaled 199,491 men. Source: military history online.)

Millions of veterans receive medical benefits via the VA and millions more (and their spouses) receive disability and pension checks. All of these provide a cushion of spending for the economy.

7. The U.S. still pumps 4.5 million barrels of oil per day. While we're still consuming about 20 MBD, nonetheless it is entirely possible to create an economy which consumes only 4.5 million barrels a day, should we wish to do so and should we collectively make this transition a priority. Will the energy consumption per individual remain as high as it is now? No. Nonetheless a very nice lifestyle with shelter and running water and transportation is possible in a largely solar-powered economy. Will grapes be flown in From Chile? No. Changes will have to be made. But having 4.5 MBD is a lot better than having zero.

8. There are 15 million vacant dwellings in the U.S.. There seems to be plenty of shelter available once the price drops down to market rates.

9. This is still the land of opportunity. Yes, we're all being ripped off by The Powers That Be, our politics and media are corrupt, venal and clueless, and blah blah blah, fill in the blanks with all the other ills we suffer. I do not say this cavalierly but merely in recognition that rights and citizenship are relative concepts with implicit tradeoffs. I like France and China and Japan and Italy and Thailand a lot, but there are tradeoffs to living in each nation. There is no Paradise on this planet, only various sets of tradeoffs.

Immigrants (you know, those people who fight their way through endless paperwork to get green cards and citizenship) still recognize this as a land where you can better yourself via working hard and prudent saving/investing. Unfortunately many native-borns seem to have forgotten this in their rush to a entitlement-based personal ideology.

10. We have the Internet. Want to learn how to lower your blood pressure? It's online (caveat emptor, of course--buyer beware). If you want to learn more about living better, cheaper, smarter, we have astonishing resources available online. That is a stupendous advantage our ancestors did not have.

NO MORE REALITY, DAMNIT!!!

Are you sick of the jolt of reality you get everyday by turning on the tube and hearing how you might not have a job waiting for you the next day... when all you wanna do is watch your favorite TV show?

Well, no need to listen to that garbage any longer!

Stick your head in the virtual sand of internet TV and avoid any chance you might have of your remote running out of batteries when flipping past your local news channel.

Internet TV Universal Remote -- The foolproof way to avoid reality!

http://gizmodo.com/5061851/internet-tv-universal-remote-quick-links-to-all-free-shows