Creditor.net

It seams consumer mortgage was just one piece of the cycle, and the news is getting worse every day. And the approach to fixing it (leaving consumers up to their eyes in debt while bailing out the banks) fails to account for the positive feedback loop from falling consumer demand.

We are already bailing out mortgage (Fannie Mae & Freddie Mac), insurance (AIG), the banks, autos, and now the cancer is spreading…where government funds are being asked for by hedge funds and commercial real estate developers.

From the Financial Times:

Hedge funds will be allowed to borrow from the Federal Reserve for the first time under a landmark $200bn programme intended to support consumer credit.

The Fed said on Friday it would offer low-cost three-year funding to any US company investing in securitised consumer loans under the Term Asset-backed Securities Loan Facility (TALF). This includes hedge funds, which have never been able to borrow from the US central bank before, although the Fed may not permit hedge funds to use offshore vehicles to conduct the transactions.

From the WSJ

With a record amount of commercial real-estate debt coming due, some of the country’s biggest property developers have become the latest to go hat-in-hand to the government for assistance.

They’re warning policymakers that thousands of office complexes, hotels, shopping centers and other commercial buildings are headed into defaults, foreclosures and bankruptcies. The reason: according to research firm Foresight Analytics LCC, $530 billion of commercial mortgages will be coming due for refinancing in the next three years — with about $160 billion maturing in the next year. Credit, meanwhile, is practically nonexistent and cash flows from commercial property are siphoning off.

Look for more violent swings in SRS. I wonder how far along talks are, and how this news will influence the market.

Nassim Taleb, author of The Black Swan, remains uncertain and hopes the situation is not getting worse:

But the extent of the bailout requests is absurd. Even the catfish industry is asking for $50 million, as reported by the (now bankrupt) LA Times:

“The catfish industry is on the verge of collapse,” said Marty Fuller of the Catfish Farmers of America, citing high feed prices and an increase of imports. About 6,000 jobs are at stake, mostly in economically depressed areas in states such as Arkansas, Mississippi, Alabama and Louisiana. Officials are talking about seeking $50 million in aid as a stimulus.

As Barry Ritholtz said, “Capitalism without failure is like religion without sin.” How many industries can the US government bailout before the dollar collapses? Looking at all the bailouts makes me want to go on vacation, rather than earning a lot of money so it can be confiscated by taxes and handed to crooks.

I can’t wait to read Bailout Nation! Great timing on the book, though I imagine there will be a need for an update in another year or two.

Massive Deflation?

I am new to investing (outside of investing in websites we own and operate) but some stuff that happens in the market simply does not make much sense to me. We have deflation rates that have not yet been seen since the Great Depression.

via the NYT

Real Estate Deflation

While the real estate market is already down about 25% from its peak, experts like Robert Shiller believe it still has a ways to go.

• On a historical basis, US residential real estate prices are still way above normal averages (if you compare rent price to sale price or sales price to median home income – lots of research in this PDF)
• the future of commercial real estate is looking grim, with consumers cutting back on spending
• and there is going to be a ton of Alt A and ARM mortgages resetting in the next couple years

Shouldn’t Real Estate Deflate?

So if we are seeing rising unemployment, a contraction of credit, and are in for massive deflation, then an asset class that is still well above its historical prices (like residential and commercial real estate) should be easy to trade against, but for some reason (maybe the US government backstopping incompetent companies – and fears of more of the same?) that trade has been a failure in the current market. ProShares UltraShort Real Estate (SRS) is a leveraged fund that “seeks daily investment results that correspond to twice the inverse daily performance of the Dow Jones U.S. Real Estate Index,” but it reached fresh 52 week lows only 2 days ago, traded up yesterday, and then gave back most of those gains today.

There can be a small decay rate associated with such leveraged funds that can cause them to lose out on some growth, but it should not be so much that real estate backed assets are seemingly increasing in value.

Commercial real estate firm Simon Property Group (SPG) has a price to earnings ratio over 30 (50% higher than Google’s!!!) while ShopperTrak reports foot traffic in malls is down 17.9% year on year.

Refinancing Rising, but Few New Home Purchases

People have not been buying many new homes, but mortgage refinance is up sharply on lower interest rates.

How Much Inflation Can the Fed Create Before US Bond Yields Rise?

Longterm treasury bond yields are exceptionally low, killing trades against it – like TBT. The US Dollar has been sliding hard against the Euro recently, and the is planning on using inflation to help stimulate the economy. How far can they push this string?

Chicken or the Egg?

With the US recycling money (and attempting to inflate the crap out of it) to prop up an overpriced asset and stimulate the economy, either real estate or treasuries will eventually get killed…though I am not smart enough to know which bubble has further downside in the short run, and was recently on the wrong side of a trade/bet against the fed.

Are those trade so obvious that there is no opportunity left? How long can the market deny fundamentals? How steep is the market decline when it does happen?

Classic video about the virtues of inflation, with the complete opposite approach as Whip Inflation Now. 😉

The NYT published an article about the credit card industry, highlighting steep cuts some lenders are makings. One of the more surprising aspects of the article was that shoppers were being profiled against other shoppers for credit cuts.

Lenders are shunning consumers already in debt and cutting credit limits for existing cardholders, especially those who live in areas ravaged by the housing crisis or who work in troubled industries. In some cases, lenders are even reining in credit lines after monitoring cardholders who shop at the same stores as other risky borrowers or who have mortgages from certain companies.

While such changes protect lenders, some can come back to haunt consumers. The result can be a lower credit score, which forces a borrower to pay higher interest rates and makes it harder to obtain loans. A reduced line of credit can also make it harder for consumers to manage their budgets, because lenders have 30 days to notify their customers, and they often wait to do so after taking action.

So the lenders offer you a credit line that gives you a false sense of security, and pull the rug out from underneath you when you need to rely on that offer. Then they don’t even let you know until you have reached your new lower limit or a month has passed.

Pricing risk behaviorally further increases the risks to the poorest of the poor. Lets say a person gets laid off or has a bad earning month and shop at Aldi (a discount grocery store). Based on risk assessments associated with shopping habits, acting responsible and living more frugally may increase the chances of a consumer getting their credit line pulled and going bankrupt.

Snce the consumer bankruptcy law was rewritten by MBNA in 2005, consumers can’t get bailed out the way the bankers just did. If the consumer dies then so does the economy. But nobody cares about the consumer, and the consumers won’t realize it until they are a day late and a dollar short.

Or was it it’s my money, and they want it now?

The Wall Street Journal reports that the taxpayer funded corporate candy banking bailout is getting requests from all corners of the markets, with handout requests coming from insurance agencies, car manufacturers, and other industries:

The U.S. Treasury Department is considering taking equity stakes in insurance companies, a sign of how the government’s $700 billion program has become a potential piggybank for a range of troubled industries. The availability of government cash is drawing requests from all corners, with insurance firms, auto makers, state governments and transit agencies lobbying for a piece of Treasury’s pie. While Treasury intended for the program to apply broadly, the growing requests could rapidly deplete the $700 billion, an amount that initially stunned many as being quite large.

Barry Ritholtz once said that “Capitalism without failure is like religion without sin.” And even before this government handout is done the toxic effects are already kicking in, with investors worrying that banks that did not get a handout are set up to fail:

The Treasury Department has decided to let banks individually announce that the government will invest in each firm, scrapping an earlier plan to release the names of multiple banks receiving federal money all at once. The decision came after concerns that banks left off any group list would appear too weak for government assistance, spooking investors and depositors and potentially making troubled banks’ situations more dire.

With enough handouts appearance becomes reality. Spread that across dozens of industries and people will make a lot of false assumptions, killing many good businesses in favor of larger and sloppier competitors.

Andrew J. Bacevich, author of The Limits of Power, was interviewed by Bill Moyers. In the interview Dr. Bacevich highlights how America’s Ponzi-scheme of ever-expanding credit, energy addiction, and imperialistic military powers used to support endless materialism is not working out too well, and how we are in for a crash if we do not change our ways.

He also mentions that the biggest thing that needs changed is an internal problem rather than an external one, which is good news, as it is much easier to change how we act than force change onto others…though how could you win wide coverage in this country by preaching the virtues of thrift and moderation?

Nice interview of Marc Faber on CNBC

“About 15 percent of U.S. households have negative equity. Who supplied the leverage into the system? It’s called the Federal Reserve Board,” Faber said.

“If I’m the drug dealer I’m not responsible that everybody takes drugs, but I facilitate it, especially if I give it out free of charge, I can enlarge the market share, and that’s what the Fed has done.”

President Bush went on national TV to try to sway the population that the proposed Wall Street bailout is a good plan, but is it? Chris Martenson describes it as act of financial terrorism, and The Greatest Looting Operation in History.

The bailout proposal, as originally presented (on Sat. 9/20/08), was shocking.

First, there was the sneaky language that the $700 billion figure was the most that could be spent at any one time, meaning that there was no limit on the spending at all. Second, the right of review by any court of law or other administrative body was to be stripped away, a distinctly unconstitutional and anti-American provision if ever there was one. Third, the Treasury Secretary was to be embodied with complete unitary power in selecting who was to be empowered with an open-ended taxpayer checkbook.

No review, no limits, no questions.

Marc Faber, expecting more shadiness from the US government, predicted that if this emergency measure/theft did not work well enough that…

“The next emergency measure will be that Americans are not allowed to buy foreign currency and transfer money overseas, and the next measure will be not permitting Americans to buy gold and so on and so forth…. It creates even more uncertainty in the market place when you continually change the rules,” Faber said.

It wouldn’t be the first time United States citizens had their gold confiscated. In 1933 Franklin D. Roosevelt issued executive order 6102, requiring all US citizens to hand all gold coins, gold bullion, and gold certificates over to the Federal Reserve. Shortly after confiscating all gold the price of gold from the treasury was raised from $20.67 to $35 an ounce, devaluing the US dollar by 41%.

Some entreprenuers fear that Barak Obama might increase tax rates if he gets elected. But is it any different than what we just lived through? One savvy commenter recently stated “One party will strangle us with taxes, the other will strangle us with inflation. Care to tell me the difference?”

Barrons recently published an article titled Spinning a Grand Old Fantasy, highlighting how the Republican party has become the party of big government and socialism (at least for the rich):

Democrats are depicted as the party of big, intrusive government, willing to “ignore fiscal problems while squandering billions on ineffective programs.”

The GOP, however, has no moral legs to stand on when it hurls such insults.

The Bush administration has bailed out Wall Street, and stands ready to bail out mortgage giants Fannie Mae and Freddie Mac — in the process abetting a slide into more intrusive government. If we are headed down the road to socialism, then the GOP can be credited with setting the pavers.

Because inflation happens, we just assume it is part of the economy. We typically do not lay blame on anyone for inflation – except in some cases claiming merchants are greedy, but that statement misses the cost of inflation and who controls it – inflation is largely controlled through the money supply. Grow the federal debt and money supply faster than the population and you have inflation. Inflation is an intentional economic strategy, one which had no lasting role in our economy from 1776 to 1913, but has been present ever since the Federal Reserve was created

Chris Martenson has a great video on inflation.

The United States already has a debt nearing $10 Trillion, much greater if you include unfunded liabilities like Medicare and Social Security. Richard W. Fisher, President of the Dallas Federal Reserve pegs the number closer to $100 trillion. Mr. Fisher ended his speech with this quote about weakness of the US Dollar.

Of late, we have heard many complaints about the weakness of the dollar against the euro and other currencies. It was recently argued in the op-ed pages of the Financial Times that one reason for the demise of the British pound was the need to liquidate England’s international reserves to pay off the costs of the Great Wars. In the end, the pound, it was essentially argued, was sunk by the kaiser’s army and Hitler’s bombs. Right now, we—you and I—are launching fiscal bombs against ourselves. You have it in your power as the electors of our fiscal authorities to prevent this destruction. Please do so.

That speech has fallen on deaf ears.

U.S. Treasury secretary Henry Paulson pushed through a banking industry bailout plan which grants the Treasury authority to issue up to $700 billion of Treasury securities to finance the purchase of troubled residential and commercial mortgage-related assets, which may include whole loans and mortgage-backed securities. The Seretary may work with the Fed to purchase any other assets they deem necessary to stabilize the financial markets. Worse yet, the Treasury’s actions may not be reviewed – by any administrative agency or court of law.

Unelected quasi-governmental officials have a limitless credit card to buy junk at whatever price they see fit, and nobody can review or overturn their purchases.

What does the future look like? Pretty ugly. This chart was made before the above bailout and limitless credit card came to be.

I was talking to a friend last night about the economy, and he stated the above quote…noting that the market has a short memory. Every bubble in history is built on the thought that this time is different, but opportunity leads to opportunism leads to corruption leads to collapse. Trade away the future until there is nothing left, and then start over again.

The Daily Show offers a humorous look at the economy and you

With the recent worries on Wall Street leading to government bailout after bailout deregulation failed badly.

We now see that the grand experiment of deregulation has ended, and ended badly. The deregulation movement is now an historical footnote, just another interest group, and once in power they turned into socialists. Indeed, judging by the actions of the conservatives in power, and not the empty rhetoric that comes out of think tanks, the conservative movement has effectively turned the United States into a massive Socialist state.

The problem is not regulation, but short term opportunism. People will always work within the limits of the loopholes that exist. Regulators can at best be one step behind.

Unless corporations have a real opportunity cost that prohibits them from fudging the numbers the standard will be fraud, or step away from it…every time there is a bubble we can expect the whole market to chase it, especially if the government undermines moral hazard and saves these companies that should no longer exist.