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bearfund is a Top 50 Commentor
- 547 Comments, 75
, 17 
- Total Comment Stream rating - = 58
Marc Faber on the Economy, Gold, WWIII
Admissions of Spin at the NAR
1. Someone with something to sell is going to tell you that you should buy it,
2. No one is forcing you to listen to him, or to do what he recommends.
If he is working for you as your financial adviser and deliberately gives advice he knows to be bad, you have a case. But unless you are the NAR, Mr. Lereah wasn't working for you. If you acted on his "forecasts", you deserve whatever you got out of it (which was probably a kick in the pants).
Lesson #1: Some people in the world don't have your best interests in mind. Some of them may lie to you. Be wary.
Lesson #2: Don't rely on advice from people being paid by your counterparties.
Didn't your mothers teach you *anything*?
Yellen's sentiment was echoed by Chicago Fed president Charles Evans, though he tempered his enthusiasm for wide-scale stimulus by calling current policy 'sobering.' "By historical standards, our current fiscal debt is not unusually large; but our expected future obligations are enormous." (full speech)
1. If you are rich, we will keep you rich.
2. If you are poor because you have no marketable skills and don't care to acquire any, spend too much, and/or can't be bothered to look after yourself, we will give you money to support your bad habits.
3. If you are not "you" in (1) or (2), you are "we" in (1) and (2), and if you don't like it you're welcome to join "you" in (2) by accepting an unlimited stay in federal prison.
Some days it sounds a lot better than working for a living.
On Jan 04 10:34 PM Jackson Cash wrote:
> Translation:
>
> 1. If you are rich, we will keep you rich.
>
> 2. If you are not, even if financially prudent, your money will
> go towards number one.
Michael Lewis and David Einhorn team up on an exceptional NY Times op-ed, The End of the Financial World as We Know It. One of many money quotes: "Our leaders have framed the problem as a 'crisis of confidence' but what they actually seem to mean is 'please pay no attention to the problems we are failing to address.'"
Oh, and one correction: Madoff Investments was at no time the "world's largest Ponzi scheme." That honour, as we all know, belongs to Social Security.
Together these errors and contradictions are exactly the kind of nonsense one expects when reading an article from intelligent people with real knowledge who also happen for no obvious reason to be hardcore dyed-in-the-wool socialists. They see and understand most of the problems, and they even get some of the solutions right. But when push comes to shove, it's all about finding more ways to take money by force from those who earn it and give it to those who have not. Someday I'll understand what makes people think this is a good idea.
Consumers Spending Less Than Justified by Actual Income
Write it down and take it to your gold-filled safe: unless incomes start rising rapidly, consumer spending has a long way left to fall.
Lenders, Loan Modifications and Coming 'Cram-Downs'
Oh, I hear you. And you're right, some of them probably are thinking that way and I can't blame them for it. In fact, I too am looking for my share of the handouts. There are 3 different approaches that can be taken here by angry taxpayers:
1. Joe's way: act outside the rules in ways that perpetuate both the transient problem and the deeper underlying problems with the government and the economic system.
2. Voting in a new government. The Obama team is not new; it's the same people you've had all along. Try Ron Paul next time; you'll learn what kind of change in government is really possible, and the handouts to crooks and fools will stop overnight.
3. Get your share by playing within the rules. The system may be corrupt, but it still offers ways to profit from its own insanity. Here you profit by making extremely cynical trades: long banks and gold, short Treasuries (and with the latter at bubble prices you really can't go wrong). Be sure to keep the gold in hand so that no one can take it from you; you're making this trade because you know they'll take anything they can find and want them to take it from someone dumber than you.
Note that (2) and (3) are honest ways to fight. (1) is not; it steals from people who may themselves be honest, provides relatively limited upside, and does nothing to punish those responsible for the current situation (which, I must add, includes YOU if you bought an absurdly overpriced house and took on a loan you knew or should have known you can't afford). Worst of all, in the absence of other meaningful action, it encourages the powers that be to do even more of the things making you so angry today. And I hope you have an escape route planned because the ultimate result of these policies isn't pretty, and they're not going to stop!
Lenders, Loan Modifications and Coming 'Cram-Downs'
John, I appreciate your comments on why modifications often fail, which are well thought-out, but quite frankly they've really stuck in my craw. When you say "only the monastic will avoid default" and "They do not have the basic financial skills to assess prudent action..." my immediate response is So What? Perhaps the lenders should give them a pamphlet to help them learn their chants. At minimum, any judicially-enforced cram-down should come with an automatic wage garnishment for the amount of the new payment (whether it's 50% or 40% or 36% of income), enforced until all loans against the underlying collateral are paid in full. It's remarkable how resourceful people can be when they have to be, and how profligate they can be when permitted.
Let's put some numbers to this. Joe makes $80k a year. He lives in a house for which he paid $500k; he owes $445k at 6.5% and the property could be sold today for $320k. He's paying $3450 a month (52% of his gross income), of which about $2300 is tax-deductible interest and another $450 is federally-deductible property tax (he lives in California and pays 1.1%). His monthly take-home pay is approximately $5750. After making his onerous mortgage payment, Joe has $2300 left. Note that we're assuming Joe is single and has no dependents; if this is not the case, he probably pays almost no taxes at all and his take-home pay will be higher still.
My question to my fellow readers is this: what is it that's so all-fired important to Joe's monastic lifestyle that he needs $2300 a month for it? Robes, rosaries, and bibles aren't very expensive. Let's keep going with this and make up an example budget for Joe.
Housing: $3450
Savings/retirement: $500
Groceries: $500 (Joe eats meat every day and has a thing for lobster)
Utilities: $350 (Joe lives in the desert and air conditioning is expensive)
Car note: $500 (Only poor, smelly people ride the bus)
Car expenses and fuel: $200
Laundry and miscellaneous household costs: $100
Clothing and other durables: $150
Total: $5750
Monastic? Try decadent. Joe is living like a king on a pretty ordinary paycheck despite being in debt up to his eyeballs. He's even putting away money! He'll be in trouble if he loses his job, to be sure. But the reality is that even if we cut his pay by 30% he could continue making his mortgage payments if he decided to forgo the lobster, ride the bus or trade in his Acura for a 9-year-old Toyota, turn his thermostat up a bit in the summer, and save a little less. He now takes home $4350 a month. His new budget looks like this:
Housing: $3450
Savings/retirement: $100
Groceries: $250 (Joe has meat four days a week, lots of rice and beans)
Utilities: $250 (Joe likes to set his thermostat at 82 in summer)
Car expenses and fuel: $225
Laundry and miscellaneous household costs: $75
Total: $4350
We're starting to approach monastic here. But notice that Joe's housing payments are now a whopping 74% of his gross pay!
So, sorry, I'm just not seeing it. The reason Joe doesn't make his mortgage payment isn't that he can't, it's that he doesn't want to (and probably doesn't even know what his income and expenses even are, so trying to set out a reasonable budget isn't even possible). Under circumstances like these, lenders should be able to obtain garnishment orders for delinquent loans if the collateral is under water and the borrower's remaining income would be sufficient to sustain life and health. In truth, even with a supposedly inconceivable 74% mortgage burden, Joe is living a lot better than 80% of the people alive today. He could cut another $400 or so from his new spartan budget without threatening his life or health (and he'd still be living better than nearly anyone in Africa or Asia). More to the point, he'd still be making his mortgage payment every month.
Too many people have insane ideas about what the essentials really are. If you've lost a lot of money on your house and money is tight, you don't get to just stop paying. You cancel the cable TV subscription, quit eating out, and rein in your spending. No doubt there are people who truly are at rock bottom already; as a lender I would be happy to work with such a borrower even if it means a principal reduction simply because I can see that he or she really is doing everything possible to pay, and is therefore likely to continue to do so if we can come up with some reasonable terms. But in our example above, Joe isn't even trying. He's not a very sympathetic figure; as little love as I have for banks (hint: none at all), they're in the right here almost every time. Suck it up and pay your debts, and learn a tough lesson your good-for-nothing parents should have taught you.
Who Can Lenders Trust?
Doing fine right up until the end there. In fact, having excess capital sitting around is definitely a bad thing. When I buy a business, I want the returns from that business and only from that business. I do not want exposure to arbitrary other assets. When a company builds up excess capital, it usually does so in its home currency or in one of the world's major reserve currencies (dollars, yen, euros). These assets typically earn very little yield, dragging down the company's return on equity.
Compare with dividends: the company retains enough of its earnings to pay off any debt and operate normally through a recession, and pays the remainder of its earnings to its shareholders. They can, in turn, put those earnings to use in whatever fashion they like. If you want to own, say, 3 units of exposure to AAPL's business and 1 unit of US Treasury bills, you're free to do so by taking the dividends AAPL should be paying you but isn't and buying your T-bills with them. If you would rather own 3 units of exposure to AAPL's business and 1 unit of gold, you could do that too. And, if the managers really have a great idea for growing the company, they can sell shares in the new company on the open market and use the proceeds to fund it. If the existing shareholders want to own the new venture, they can benefit from a European-style rights issue in the new shares, or they can agree to suspend the dividend to fund the new business line as an integrated unit.
AAPL is of course only one particularly egregious example, but the point is clear: give the shareholders the flexibility to decide how to save, invest, or reinvest the profits from their holdings. Don't try to turn business managers into asset managers; most of them are not very good at the latter and will consistently underperform.
In the time period of interest, you are correct that holding excess capital was profitable. But these are relatively unusual times: there has been a short squeeze in money of zero maturity; despite plentiful supply, the size of the short positions outstanding simply became too large and forced covering resulted. Under such circumstances, those T-bills did pretty well (though not, I should mention, as well as much more leveraged instruments like the Long Bond, or - curiously - the base unit of stored value, gold). If you as an investor chose to buy assets like Treasuries or gold with your earnings, good for you. If you chose to buy more shares, not so good for you. But your choice shouldn't have been made by management or the board of directors. You should have been handed a dividend check and told to fend for yourself.
Buybacks, funded by debt or not, deserve only a brief mention: most publicly traded companies provide their senior managers with most of their compensation in the form of restricted stock and/or stock options. Under such circumstances, buybacks should be strictly prohibited, especially if any senior manager also serves as a director. The main reason for buybacks is the incestuous nature of boards of directors, which usually consist of executives from other companies. Doing buybacks simply allows them to feather one anothers' nests at the expense of shareholders.
It is true that paying out substantially all earnings every year will expose marginal businesses to severe pressure during downturns, because they will mostly be forced to take on tremendous debt to provide an adequate return on equity. The solution to this is not to limit dividends but to limit debt, and encourage marginal businesses - especially mature ones in decline - to shut down. The result will be a smaller economy in notional terms, but one which is far less volatile and allows investors much greater freedom to start new enterprises (since their capital will not be tied up on the balance sheets of poor-performing companies). In short, the economy would be much more dynamic, with fewer zombie companies and more new ventures. If the money is sound as well (i.e., it is gold or silver and no central bank is on the scene) then interest rates will be low all the time (no need for an inflation premium since there's no inflation, and little demand since debt is used sparingly) and the speed of money will be high as paid-out earnings are forced to search for returns.
Who can lenders trust? A tough question to be sure. But maybe the answer, as I've outlined it here, is that it shouldn't matter so much. A more dynamic, less leveraged economy would offer all of us quite a lot - except, ironically, those who take, and introduce, only systemic risks: the large-scale leveraged borrowers operating underperforming businesses and the lenders who enable them with the help of a flood of money from the ever-devaluing central banks.
Will the New GCC Single Currency Include Gold?
The way to avoid this is to issue gold and silver coins as the only unit of money, and denominate them by weight, not some notional currency unit. If someone owes me 100 ounces of gold, I don't need to worry about the revaluation of my debtor's home currency. A troy ounce is a troy ounce and that's all there is to it.
Chances that the GCC is contemplating such a move: somewhere between zero and nil.
The Intrinsic Value of Gold
I could quite reasonably argue that the real value of gold looks like a flat line, but the units on the Y axis would have to be "goods and services" - and now I'm on my way toward computing the value of the units in which the sizes of various good and service markets are usually quoted by sources like Bloomberg and the BLS; i.e., a serious article. More trivially, I could simply decide to graph the market price of the US dollar, in ounces, adjusted such that the value of an ounce of gold never changes. But I'd still have to work out the value of the dollar at each point in time.
That's fantastically hard to do. I know you haven't done it, not only by reading your article but simply because you wrote it. If you had a reliable formula for determining the value of the dollar at a point in time, two things would occur:
1. You would be so wealthy that you'd hire someone else to write a much more detailed - but subtly wrong - article for you, and
2. Your enormous wealth combined with your constant arbitrage profits would make the market price of the dollar dramatically less volatile than it is.
Keep trying, please.
GMAC: Happy to Lend You Some of Your Own Money
In short, if you have a credit score in the 800s, you can probably borrow tens of thousands of dollars without providing anything at all. You probably cannot borrow hundreds of thousands without doing so, except maybe in a trading account.
Now, if you have a credit score of 620, you're going to have a tough time borrowing money on any kind of reasonable terms, regardless of your income or employment situation. Crazy? Maybe, but true. Personally, I think it's pretty reasonable; if a loan is small or well-secured, there are no red flags about a particular transaction or your recent credit history, and you have a long track record of paying reliably, proof of employment isn't really that important. Likewise, if you have a track record of not paying your bills, I don't really care that you're a hedge fund manager making $800k a year. You don't pay your other creditors and I don't really care why. All I can do is assume you won't pay me either, and not lend to you.
Welcome to the bizarre world of consumer credit. It's very different from corporate credit, which places far more emphasis on ability to pay. In general, the assumption is that a history of payment in the absence of sudden increases in borrowing connotes both ability and willingness to pay; people who are able to pay for a long period of time are assumed to be the same kind of people who manage their balance sheets well, so they'll probably be able to pay in the future as well. More importantly, they're also willing to pay; many people are able to pay but unwilling, which is rare in the corporate credit universe (probably because the amounts are large enough, and the debtor's assets easy enough to find, that it's worthwhile for creditors to seek legal remedies in case of default).
So coming back to the issue at hand, no, having a few more people working making cars doesn't really mean very much to the economy if there are also a few more people buying cars who can't really afford them. More wages being paid to a particular group of people doesn't necessarily equate to a bigger real economy. Strange but true.
GMAC: Happy to Lend You Some of Your Own Money
Hot new items flying off store shelves: piggy banks. Heftier safes are a big seller too, Amazon.com (AMZN) says, jumping to #260 from a their previous #2,755. John Maynard Keynes' paradox of thrift may soon be in play.
GMAC: Happy to Lend You Some of Your Own Money
Two questions should come to mind here even if you're part of the "pragmatic" or "utilitarian"... school of thought; i.e., a mainstream thinker. (Those of us who are principled don't care about these questions because the move is obviously damnable regardless.)
First, is this actually helpful to the economy? In other words, how much marginal demand for GM automobiles is out there between 621 and 700 that could not obtain financing anywhere else, or would not buy under the terms previously on offer but would now? That range of credit scores covers something like 25% of potential buyers. Given that around 5% of surveyed individuals intend buying a car in the next six months, if we assume that 1/3 of them will not consider GM at any price and the most hopeless credit risks have already excluded themselves from answering the survey, we might conclude that at most 0.8% of all households are in play at all, or about 800,000 of them. Not all who wouldn't have bought GM before will do so now, but let's be generous and suppose that half will. That would be enough to increase GM sales by about 800,000 vehicles per year, less than 10%. In fact this is probably generous. But notice that most if not all of these sales are simply being taken away from other vendors, meaning only a very slight net win for the US economy (after all, the "foreign" carmakers still have dealers, service shops, and usually manufacturing operations in the US anyway). Most of the benefit here accrues specifically to GM, not to the economy writ large.
Second, even if we suppose that encouraging people to "buy stuff" and giving them money to do so is a sound strategy, should we really be encouraging them to buy cars specifically? After all, there are already plenty of cars out there, and they pollute, place great strain on locally-funded infrastructure, and due to resource and space constraints provide much less marginal utility as their number increases. Worse still, a cheap car with interest-free financing is like a cheap puppy with interest-free financing. Most of the individuals who might take advantage of these offers really cannot afford the cost of owning and operating a vehicle, or a second vehicle. They have little or no savings and marginal jobs and should really be focused on saving and paying down existing debt (hint: you don't get a credit score of 650 without having some unpaid debts lying around). In many cases we have to believe that both these people individually and the economy as a whole would be better off if they moved closer to work and walked, took the bus or train, or bicycled. No doubt there are exceptional cases, but by and large there should be real questions about encouraging this particular purchase.
So on balance it looks like the taxpayer is handing GM at most an additional 800,000 sales per year, many of them taken from other vendors. In addition to the up-front costs, he is also on the hook for additional road work and construction (paid out of already barren city and state coffers), the cost of pollution cleanup and/or environmental degradation, and the likelihood that more bailouts will be required elsewhere as more new car owners on marginal credit decide to make their car payments instead of paying on existing debts.
A better strategy would be to simply give GM the marginal revenue from another 800,000 sales (call it $20b) and tell them that it has to be used in one of two ways: to downsize their brand and dealer fleets, or as severance payments for UAW workers. The net effect on GM's balance sheet would be better, the net effect on the Treasury's balance sheet would be no worse, and the net effect on individual Americans' collective balance sheets would be better. There would also be intangible quality of life improvements (cleaner air and water, less traffic congestion) due to having slightly fewer cars on the road.
Another option would be to use the money to support a prepackaged bankruptcy filing. It's going to be hard for GM/GMAC to obtain the financing they'll need to get through the filing. No doubt the taxpayers will be providing that, too, when the time comes. It would have been better to just make that move at the beginning rather than throwing some away now and then providing the loans later after the initial "investment" is written off.
There can't be too many people who profited from this move. With the possible exception of GM dealers and perhaps the UAW workers in their 40s and 50s who would (and will) be laid off when GM downsizes, it's likely that every single American lost money on it. That enrages those of us who value free markets, small and limited government, and low taxes, but as I've shown here it should enrage even mainstream observers as well. This is entirely consistent with a thoroughly corrupt and incompetent system of government that continues to fail its stakeholders.
An astonishing 60% of Americans who now think a depression is likely will almost surely be disappointed, Savant Capital says. "The truth is that the current situation is nowhere near that bad."
1. The price of something is rising to account for all that cash, and
2. Something bad is going to happen when that process reverses itself.
That something in this case is Treasury obligations, which are in a bubble that puts tech, housing, and oil to shame. Next stop for these securities is tulipville. After that, who can say?
As for the second part, a question: what happens to banks when the market price of their "core capital" falls by 20-30%? Seems like a problem to me given what happened when the market price of some of their other assets took a similar swan dive.