Heyer Capital, LLC

Estimates are that global government banks and agencies have shoveled against the bubble upwards of $30 Trillion (that’s a ” T “) in direct aid and indirect guarantees.  Does that mean we’re facing a hyperinflationary hell?

Not necessarily.  If the trillions upon trillions were in the form of currency, then we’d be on a direct path through Thermopylae. Instead, the vast vast majority of the aid is in the form of credit reserves and contingent taxpayer guarantees.  So long as the reserves remain just that — reserves — and are not put into general use, then their effects on the system are limited only to keep zombie banks (and their creditors & establishment owners) above ground.

Behind the curtain — think Wizard of Oz — the central banks are trying to figure out the best way to remove these reserves from the system.  And government/central banks have never been able to time that shift correctly.  Fortunately, the public’s unwillingness to borrow and the bank’s unwillingness to lend keep the reserves out of reach.

(BTW, I facilitate the local Dave Ramsey Financial Peace University course. Believe me, people are increasingly very unwilling to borrow.  I mean not a thin dime  ever, ever again.  And we’re teaching our children that too. There are inter-generational consequences to this extended crisis.)

Retail sales fell last month, despite the “cash for clunkers” taxpayer transfer to the auto companies.  As it turns out — don’t tell Washington this and burst their bubble — but when poor people (that drive old cars) sign up for a boatload of consumer debt on a rapidly depreciating new clunker and a new monthly payment, they don’t actually run to the mall right away to spend like mad.

Austerity is the new ‘in.’  But now that Congress has shifted the demand curve back to present, expect a vacuum-collapse in auto sales now that the layer of demand is instantly removed.

Before they get too far with the “cash for house clunkers” program, recall that something like 30% of Americans would sell their house if they could get a good price.  That’s a heck of a price overhang and pending supply.  Do the world a favor and laugh out loud whenever someone on the TV or in polite company says, “Housing prices are coming back.”

Now that the political classes and leeches are clamoring for another stimulus, now is as good a time as any to dissuade you from this nonsense.

The “Economy” is often discussed as a detached entity that can be controlled, poked, prodded, studied, enhanced, depressed, and manipulated at will.   In reality, the “Economy” is you and me.  That’s it.  What’s good for you and me is good for the Economy.  The converse is true.  What’s bad for you and me is bad for the Economy.

Now let me ask you this:  is your household and neighborhood suffering because you are not spending more than you have each month?  Or are things a bit tight now because you, your neighbors, or your company already spent more than was available, and now you’re tightening your belts because of that prior excess?  If the latter is the case — and it is– then how is spending more and more of the money that you don’t have going to ‘cure’ the problem. It won’t.

Spending more won’t. Saving will.

Savvy Mish relates another analytical post, and with the miracle of the internet, I’ll repost here for your edification.

Mish’s Global Economic Trend Analysis.

Unfortunately you, dear beleaguered taxpayer, are going to buy the car company itself.

And their competitor. 

And GMAC, the car loan provider to both companies.

And just in case your blood pressure is still low, here are a few more reading suggestions to learn how you’re being robbed blind. 

http://zerohedge.blogspot.com/

http://www.goldmansachs666.com/

http://globaleconomicanalysis.blogspot.com/

Fortunately, the bill to audit the Federal Reserve has 170 co-sponsors in the House.

h/t to Rush Limbaugh for the graphic

The best summary of my thoughts on the “toxic bank asset” plan comes from another writer, Tom Fant of Atlantic Advisors Asset Management appearing on Minyanville’s Buzz and Banter. (Minyanville is worth every penny.)

PPIP(Public Private Investment Program)-At first glance this makes very little sense to me. Geithner seems to avoid specifics like income tax. But from what I can tell, this is not going to help much. 

Enticing investors to buy loans that the bankruptcy courts can now modify (Home Affordability Act- see law of unintended consequences!) is a tough sell to begin with, but sweetening the pot with cheap financing is almost ridiculous. Aren’t they asking private investors to do what the banks never should’ve done which is buy bad assets and magnify returns with cheap financing? How can anyone be comfortable levering an asset where the underlying cash flows can be changed in a way that is nearly impossible to analyze? And even if I get lucky and make a huge return, I’m going to partner with a government that might take my bonus back? Not so much. 

Here’s the fundamental problem that the government doesn’t get:  The banks CAN’T sell. There is no lack of buyers for these “legacy assets.” After all, there’s no such thing as bad bonds, only bad prices. The problem is where the bonds are marked relative to where investors will buy. If a bank sells a bond at 50 that they have marked at 95, the losses would pile up pretty quick until they are bankrupt.  (emphasis is from Heyercapital)

Here’s the best summary I could steal and call my own: 

Brian Saint-Paul: The popular media is blaming the economic collapse on the free market and “laissez-faire capitalism.” And yet these same commentators seem largely ignorant of what a laissez-faire economy actually involves. So first things first: What is free market capitalism?

Thomas Woods Jr.: Well, it’s not nearly as scary as people think it is. Free market capitalism simply involves the free exchange of property between individuals. The idea is that you’re free to enter into contracts with other people. These contracts are reached on a voluntary basis; both parties must consent to the terms. The system proceeds along the lines of mutual respect. In other words, the free market is civilized behavior, institutionalized: You can’t initiate physical force against somebody else to make him do something — you have to get his consent. It’s a system based on private property and free exchange. And that’s really it.

Order the book Meltdown by Dr. Tom Woods through this link.

Last May, I cautioned blog-readers against investing in banks. Using the BKX as a general proxy, big banks had fallen about 30% from the peak;  Bear Stearns had been wiped out in March, big banks were reaffirming the dividends are safe, and the calls were being made: “January and March lows have held, so the bottom is in.”

But….

If you bought M&I Bank, or Lloyds, or Citigroup, or General Electric (a bank in drag) your investment is eviscerated. I mention those stocks specifically because I know from interviewing clients that area brokers were pushing those stocks.   Your broker gave you the sweet song of “juicy dividends” and “bank safety” and “buy and hold and cash the dividend checks”… and you just lost 50-80% of your capital and the dividends have evaporated.

In retrospect is seems it should have been obvious to anyone with just a cursory knowledge of economics:  banks were struggling for a mighty good reason: lack of un-impaired capital.

Sometimes the best investment is just staying out of the way.

Let us start this discussion with the admonition that you, dear Citizen, will be continuously lied to by your government.  I know those are harsh words, and perhaps a bit unexpected from an investment blog.  There are times to be delicate with the truth, and there are times to deliver it with a 2×4. 

The Department of Labor goes to great efforts to compile the statistics of employment and unemployment.  As you can imagine, it’s understood by everyone that there’s a quite a bit of guess work involved.   As long as the guess work and assumptions are documented, the users of that data can develop workarounds with those guesses and weight them accordingly. 

The “official total unemployed” figure the media reports is one for six numbers that is released to the public.  For whatever reason the media and government like to fixate on the U-3 figure. Here’s a chart showing all six “U-” figures.    

The most valid figures of unemployment, in my opinion, are the U-6 category, since it is the most inclusive at showing those that are willing to work, but can’t find that work.  This comprehensive figure shows 12.2% of Americans looking for work, a little less than double the unemployment rate the government touts. 

For perspective, in 1930,  the unemployment rate with a similar methodology with the U-6, was 8%.  If the Great Depression is an analog, and we’re now one year off the stock market highs, (1929 and 2007 were the stock peaks), we’re already well ahead of the joblessness rate of the Great Depression.

EDIT: 

Excellent videos such as this make me very reluctant to make analogies to the Great Depression, as they are such poignant reminders that modern society is so ill-equipped spiritually, mentally, and physically to make it through such a time again.