Thursday, February 26, 2009

Where are we going and why are we in this basket?

Being a Christian unavoidably supplies one with a very efficient conscience. I feel it is my moral duty to say something to those of you who have any interest in being prepared for the uncertain economic times ahead of us. I suspect that most people who hear these predictions will not act on them, but I am OK with that. My duty as a Christian is not to save you, but to inform you and give you the tools to make wise decisions. God Himself will not impose his will on you, even though his will would be the best possible course for your life. He gives you the information, YOU have to do your part.

Any comparison between myself and God, and my advice and God’s advice is purely superfluous and incidental. I do not have delusions of godhood. I could be wrong. I’ve been wrong lots of times in the past. You’d be crazy to follow my advice. I am a crackpot. There, full disclosure.

On to the prophecies, Um, I mean predictions.
1. The 750 billion dollar bailout will turn out to be a huge economic non-event. The economy will continue to lumber along in heavy seas. There will be minor ups and downs, but the general trend will remain firmly down for at least five years, ten would not surprise me in the least. You, and your children and your grandchildren will be paying for this enormous lapse in judgment for decades. All for naught. You should be incensed. I would not be surprised if they end up spending 2-5 times that much in a vain attempt to stop the inevitable. Do a google search for “the mother of all bailouts” if you want a real education.

2. The 75 billion dollar housing package from President Obama, ditto. Various parties over the last ten years thought it would be a good idea to push cheap credit onto the housing market, allowing and encouraging people to buy houses who otherwise could not afford to do so. It also encouraged people to upsize to a house they couldn’t really afford. This was bad and dumb for any number of reasons, but that’s how we got here. There’s plenty of blame for both the Republicans and Democrats, AND the FED. Pretty much only the Libertarians thought this was a bad idea and said so out loud. Nobody listened to them and we created the largest housing “bubble” in history.

Any time supply artificially outstrips demand, or demand is artificially stimulated, creating a larger than normal supply, there will be a correction. In this case, our artificial stimulation of the housing market is the equivalent of shooting an anvil into the sky with a cannon. While you could keep the anvil afloat a little longer by attaching a bunch of helium balloons to it, you have not solved the fundamental problem of the anvil being up where it doesn’t belong. The ONLY thing that will solve the housing crisis is for the price to continue to drop, a lot, until supply and demand match again. Once they do, life will be good and housing construction will assume normal rates. The rescue package is the helium balloons if you didn’t get the analogy. It will only prolong the correction and agony.

So, here’s the take home message, your house value is going to be stagnant at best, and will probably drop over the next five years. If you put less than 10% down as your down payment in the last few years, you are probably “upside down” on your mortgage. This means the house is now worth less than what you owe on it. This is why small down payments are a pox on humanity. If you are upside down, you have limited choices. You could sell at a loss and pay the bank the difference. Chalk that up to the school of hard knocks and never do that again.

You could try for a short sale. That’s where you sell the house at a loss, and the bank agrees not to take the loss out of your hide and/or your paycheck. If the bank will go for this, that wouldn’t be a bad deal and not really dishonorable on your part.

You could gut it out and just keep paying your house off. If your job is stable and you can massage your budget to make extra payments on the principle of your mortgage, do it. The debtor is the slave to the lender. Slavery is highly over rated.

If you have a pile of cash, this is a good time to buy a house, using a whopper down payment. Get a small fixed interest rate mortgage to finance the difference. Interest rates on fixed mortgages are at historic lows. ARM’s (Adjustable Rate Mortgages) are going to see substantial and rapid increases over the next five years. Don’t get one. If you have an ARM, you need to get out of it to reduce your risk. If you’re upside down, the bank will be loathe to refinance your house unless you give them big piles of money to improve the debt to equity ratio, and I feel for you.

3. The Obama administration has promised to create 4 million new jobs. Actually, they changed the language a bit, and now they are going to save and/or create 4 million jobs. Some days they say 3 million, some days 3.5 million, some days 4 million. It is, admittedly , an inexact science. Of course, it turns out to be pretty much impossible to tell how many jobs are preserved by any given action. If the economy loses an additional million jobs next year, well jeez, it would have lost 5 million without the Super Duper Federal Rescue Plan.

It is politically clever to make it difficult or impossible to judge the outcome of your legislative efforts. I have very low expectations about how many real long term jobs will get created by this. Some will. It’s hard to spend that much money without employing somebody. They will undoubtedly show glowing anecdotal evidence of great outcomes here and there, but they will be anecdotes, not evidence. There is a big difference.

The problem is, where does the money come from? Washington does not have a magic money fountain that spews out free money without consequence. There are only three places Washington can get money. They can get it through tax revenue, they can borrow it or they can print it.

They can get it from taxing you. If you’re a successful (to Washington, that means evil) business person, you can count on this happening. Question….now that you the successful business person now have less money, because the government just took it from you by force, you now have less money to pay your employees, or hire new ones.
If you do the math, the current stimulus plan costs approximately $300,000 per job saved/created. So how many employees are you, the business person, going to have to cut to cough up that 300k? I’m thinking about 8-10 jobs. In this first order analysis, we’re going to take away 8 jobs to create one job. Let’s see, how’s that going to turn out? You’re right, rotten crummy bad.

Let’s do more sophisticated 2nd order analysis. Let’s suppose that you the successful business person runs a VERY profitable company. You’re swimming in profit. You get hit with new taxes, but you decide you’re not going to downsize your business, you’re just going to reduce your profit to almost nothing in a goodwill effort to not fire your employees. What a guy/gal! The Obama plan is now a roaring success.

Oh wait, we said second order brainy analysis. What did you, the evil successful business person do with your evil capitalistic excessive profit back in the old days? Either you put it in the bank, resulting in the bank having more cash reserves so they wouldn’t go belly up, or you invested it in the stock market, or you bought houses and cars and boats and airplanes that created a lot of jobs directly and efficiently.

Now, those folks that build boats and RV’s and houses are all getting laid off. You DIDN’T put that money in the stock market and due to reduced demand, the stock market dropped like a frozen turkey from an airplane. Or you didn’t put that money in the bank, and banks started going belly up due to lack of cash reserves. Is any of this sounding even a little bit familiar?

The bedrock problem with all this is the government has a centuries long track record at being inefficient at manipulating capitalism, every time, without any serious exceptions. By definition, they are going to take money away from successful people who know how to run a business and create jobs, and give it to people who, by definition, have a proven track record of NOT knowing how to run a bank, or a car company or pay for a house.

They could just continue to borrow money, and as long as China is willing to finance the Federal Government at stupid ridiculous levels of national debt forever, who needs a budget??? If you have any doubt about the viability of this option, do a google search for the ratio of national debt to GDP (Gross Domestic Product) to find out how terrifying this strategy has become for the U.S. economy. I do not use the word” terrifying” lightly.

If the Obama administration says thing like “reducing the deficit by 50%” you have to make them define their terms, or it’s just more smoke and mirrors. Did you know that much of the money spent by Washington isn’t even reflected in the official budget. The Feds don’t have to use the generally accepted rules of accounting like everybody else does.

For example, did you know that the entire Iraq war does not appear in the Federal Budget when calculating the deficit? If they had to play by the same rules you and I do, the official Federal deficit would look much bigger and much scarier, which is scary indeed. If I do bookkeeping like they do it, it’s called accounting fraud.
Don’t just trust me on this, do a google search for “how big is the federal deficit” to get a real eye opener on creative accounting.

They could also just print money like it was going out of style. In large measure, they are already doing this. Many governments have tried that over the decades and centuries. It works every time, in the short run, but works badly or horrifically in the long run. Since our fine government officials have an attention span of something under eight minutes, you can guess that they will try this, for a time. It will even work, for a little while longer. Again, if you want to know what’s really going on, do a google search for “inflating the money supply”.

The bottom line is that job losses will continue to mount, a lot. There will be much hand waving and vigorous finger pointing to explain why the government’s plan was a really good, but x,y, and z just somehow prevented it from having the desired effect. I’m sure they will blame Bush (and he deserves some of the blame for sure), and the Republicans, the chinese, the evil business people, etc. ad infinitum. Do not believe it, it is a BAD plan from the start and it is doomed to failure. You cannot dig your way out of a hole. You cannot borrow your way out of debt. The government cannot spend its way into prosperity. The Austrian school of economics is going to be proven right with a vengeance.

4. Everybody knows about the housing bubble now. The next two big things you’re going to hear about are the hedge funds, and the commercial property bubble. Both are in deep, serious, long term trouble. It’s hard to get good data on the hedge funds, but everyone that I trust who has named a figure puts that market at well over a hundred trillion dollars. My best guess, and I am a complete amateur at this, is that the hedge funds can rob Peter to pay Paul for another two years at the most. The Fed has already made promises to this sector of “around” a trillion dollars. When they start defaulting, a trillion dollars will barely constitute a band-aid. It will make the present crisis look downright manageable by comparison. Lots and lots of banks and a few governments will fail then. When that happens, you had better have a 6-12 month emergency fund in place. Spare groceries would not be a bad idea either. I pray every day that I am wrong about the hedge funds.

5. All of those nice governments overseas who have been loaning the Federal Government money by the barge-load are going to lose their motivation to keep doing that. For various reasons, the U.S. dollar will lose a big chunk of its value over the next decade. It looks strong right now (compared to other currencies), but only because the banks in Europe were even dumber than the banks in the U.S. In reality, it has already lost a substantial amount of buying power compared to even 3 years ago. All of those currencies will all go down, a lot. I hope I wasn’t unclear. This is a fancy way of saying big time inflation. If we’re lucky, it will only rise to 12-15% per annum. First we have to get through the initial deflationary period, then the inflation will take off like gangbusters.

You will suddenly hear terms on the news like Bretton-Woods, official dollar devaluation, reserve currency (it won’t be the dollar any more, most likely a “basket” of currencies). When that happens, it will have a lot of bad consequences for everybody in North America pretty much.

6. The stock market is not going to magically bounce back in 2009. It’s just not. Sure, there will be little teasers where things are starting to look up. Do not trust these brief moments. 2010 is not looking so good either. I could be wrong about that. I have no formal training in this arena. If you listen to my advice, you are listening to a complete amateur.

I would be remiss if I failed to point out that the stock market has lost almost half its value in the last five years, while my investments have, on average yielded between +6% and +15% every year, depending on which category we’re talking about. If you just pay extra principal payments on your house, that’s a guaranteed return of 6-8% right there.

To end this cheery post, I leave you with an informative and amusing source of information that exhibits a much higher truth to baloney ratio than anything you will see on the network news:

There’s a lot of stuff on there that’s useful, but I particularly enjoy the Mogambo Guru. He’s actually a fictional character, but the column is written by a guy with access to information that you almost never see on the nightly news. Beneath the obvious comedy is a surprising amount of sobering truth.

This one is also extremely informative. It’s a short book at less than a hundred pages. They are giving it away as a downloadable PDF at the moment. I’m not sure how long that will go on. Get yours soon. In less than 100 pages, you can learn more about what’s really going on in the economy than 95% of the goofy talking heads on financial TV. Learn what inflation really is, and what causes it and why it’s so insidious. This book is a little dated, and in some ways an oversimplification. It is still a terrific way to educate yourself so that you can recognize who is telling the financial truth, and who is spreading the baloney on thick. I do not entirely agree with his assessment about how to avoid the coming difficulties, but the other 95% is extremely worthwhile and educational.

You have now been duly informed. Do what you think is right to protect yourself and your family.

Finest regards,


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