03/13/09 Paris, France Hate thy neighbor? Giveth his children money; that will fix them all.
Few things are as costly as free money.
When the Spanish Galleons came back from the New World with cargoes of gold and silver coins, the Spaniards thought they’d hit the jackpot. All of a sudden, Iberia had plenty of money. Historians report that the Spanish neglected their fields and their manufactures; now they had easy money to spend. Prices rose quickly. Then, when the treasure ships stopped coming, the Spanish were broke. Spain – and Portugal too – went into a decline that lasted four centuries.
In the late 1990s, America got in the habit of getting shiploads of stuff from Asia – and paying for it only with pieces of green paper. Pretty soon, Americans too neglected their own factories – though not their fields. Let the Asians sweat, they said. We’ll think!
Not much serious thinking has taken place in the United States of America for the last 20 years. Instead, people preferred comforting illusions and conceited claptrap. We have the ‘strongest, most dynamic economy the world had ever seen,’ they congratulated themselves.
Of course, you don’t need to think – not when you ship is coming in. But now that the ship is sinking you’d expect people would put on their life jackets and their thinking caps. Nope. Now they look to the government for the free money. Yesterday’s news told us that Congress is now spending away $1 billion per hour.
We’ll come back to that in a minute…
First, some treacherously good news: the Dow rose again yesterday…up 239 points. We’re still withholding judgment, but it looks as though this might finally be the long-awaited rally. Stocks worldwide lost more than half their value without a single major rebound. We’re overdue for one. Maybe this is it.
Oil rose too – to $47. It seems to be getting ready to slide back over the $50 mark.
And the dollar may have topped out. The euro rose yesterday to $1.28…while gold recovered $13 to close at $924.
As near as we can tell there is no good reason for stocks to rally. Unemployment is still rising and sales are still falling. Until those trends flatten out, there is no reason to think business will improve.
Au contraire, business conditions are worsening and companies are cutting dividends faster than any time since the Great Depression. How can stocks go up in price…when sales and earnings are falling? The only possibility would be an increase in P/E ratios. But who wants to pay more for corporate earnings now?
No one we know. Instead, investors are becoming more and more wary. Why? Because even the biggest, strongest companies in the world are reporting problems. The agencies knocked down GE’s rating the other day. “What’s it worth now?” asks a headline. But the same question could be posed to almost any company on the planet – conditions have changed; what’s it worth now?
Last autumn, Warren Buffett commented on the solidity of his own company: “If Berkshire [Hathaway] isn’t Triple A, I’m not sure which company would be.”
But yesterday, Fitch took Berkshire down a notch…noting that the company had financial exposure in its insurance division that could be troublesome. Berkshire is no longer Triple A. And investors have to ask themselves: if you can’t trust the best companies, run by the best CEOs, who can you trust?
We won’t wait around for an answer, because there is none. The fact is the crisis has put a question mark behind all asset values.
Again, you’d expect these question marks to inspire a little serious thinking. If assets aren’t worth what we thought they were worth…well, what are they worth? And what is happening in the economy that makes things so uncertain?
House prices show no sign of reaching a bottom; foreclosures are running 30% ahead of last year. And the press reports that there are 14 million empty houses in the United States. What happened to all the people who lived in them? Below…a partial answer…
Meanwhile, the free money is flowing. Taxpayers got rebate checks from the government last year – even if they hadn’t paid any taxes. According to recent tallies, the feds have committed $12 trillion to freebies, bailouts, and boondoggles.
GM got a few billion. But the banks and Wall Street have been the biggest freeloaders so far. AIG has gotten four bailouts. Freddie Mac took a big bailout from the government too. But boo hoo…Freddie lost $50 billion last year, says the Washington Post, so it will need a little more help.
Freddie Mac “to tap $30.8 billion in aid as losses deepen,” says the Bloomberg report.
When will the losses stop? Who knows? But chances are…not any time soon.
*** Where have all the homeowners gone…Long time passing
Where have all the homeowners gone…Long time before
Where have all the homeowners gone…Gone to motels everyone…
When will they ever learn? Oh when will they ev-ev-er learn?
There are said to be 14 million empty houses in America. Where did the former tenants go, we wondered?
The New York Times has part of the answer: they’ve moved into motel rooms:
“Greg Hayworth, 44, graduated from Syracuse University and made a good living in his home state, California, from real estate and mortgage finance. Then that business crashed, and early last year the bank foreclosed on the house his family was renting, forcing their eviction.
“Local officials estimate that 1,000 families who live in motels in Orange County, Calif., go uncounted in federal homeless data.
“Paris Andre Navarro, 47, and her daughter, Crystal, 11, have been living at the El Dorado Inn in Anaheim, Calif., for three years. Ms. Navarro said the $241 weekly rent makes it hard to save.
“Now the Hayworths and their three children represent a new face of homelessness in Orange County: formerly middle income, living week to week in a cramped motel room.”
*** Finally, a Dear Reader with a comment:
“I have been reading your comments regularly for a past few years, during which I was a Managing Director at a major US and, thereafter, major European financial institution. I am now semi-retired, living in the English countryside and watching the meltdown from afar. In my youth I was drawn to Austrian and Libertarian thinking and, as I progressed in the financial industry, never forgot these roots. Now I feel fortunate to have that grounding as it helps me to better understand what is really going on.
“During 2004-07 I saw the financial industry stacking up the powder kegs that would eventually blow up. I tried on occasion to warn people. But my warnings fell on deaf ears at Lehman and elsewhere, but not for the reasons you might think.
“I recall numerous conversations with senior people at various global financial firms on topics ranging from Fed policy, to the US/UK housing markets, securitisation and its potential pitfalls, the CDS tangle, and so on. One thing that is clear to me is that key people at these firms were aware for the most part what risks they were taking. They knew that it was all going to blow up someday, if not so spectacularly as it now has done. But they all believed that somehow they would be quicker and cleverer than rival firms, that they would effectively hedge themselves and they would get out first, before things got really ugly. As you well know, that sort of collective “greater fool theory” mindset is characteristic of bubbles and, if widely held, almost ensures that liquidity will dry up suddenly as markets turn for the worse.
“Believe me, they knew they were playing with fire to a much greater extent than is currently acknowledged. They blame ‘animal spirits’ and ‘market forces’ when they were, in fact, the most important market participants. No wonder a hedge didn’t work if most major global financial institutions held the exact same hedge! If you are curious I can fill you in on some of the details although I suspect you know much of this already.
“In any event, I admire you and those few who are tirelessly pointing out that it was most emphatically not the free-market, but rather central banking and misguided regulation, that got us into this mess. You are doing the next generation a great service. Sadly, the current generation is probably beyond help at this point. I hope and pray that, like a phoenix, a form of proper, free-market capitalism rises from the ashes of the current conflagration.”
This one is for Bill from a not so prime reader who has never worked for Goldman, Morgan, Lehman or anything remotely close.
This question is related to the Paradox of Savings. As I understand it, savings are good for the individual; but if everyone saves, and saves a lot, it’s bad for the economy.
Now, my question is called The Paradox of Writing. I firmly believe writing is good for the individual; good writing or bad writing, it doesn’t matter so much. But if we all become writers, who will do the house cleaning? Isn’t that bad for the economy as well?
It sounds like that reader should be a DR Guest Contributor. I’m sure he has a lot of funny/sobering anecdotes.
regarding:
“Again, you’d expect these question marks to inspire a little serious thinking. If assets aren’t worth what we thought they were worth…well, what are they worth? And what is happening in the economy that makes things so uncertain?”
The deeper question is, “What is the value of THE MEASURING-UNIT by which we are measuring the ASSETS worth in?” I used to think I knew the answer to that question. It has a rather matrix-like ring about it:
Agent Smith: Have you ever stood and stared at it, marveled at it’s beauty, it’s genius? Billions of people just living out their lives, oblivious. Did you know that the first Matrix was designed to be a perfect human world. Where none suffered. Where everyone would be happy. It was a disaster. No one would accept the program. Entire crops were lost. Some believed that we lacked the programming language to describe your perfect world. But I believe that as a species, human beings define their reality through misery and suffering. The perfect world would dream that your primitive cerebrum kept trying to wake up from. Which is why the Matrix was redesigned to this, the peak of your civilization. I say your civilization because as soon as we started thinking for you it really became our civilization which is of course what this is all about. Evolution, Morpheus, evolution, like the dinosaur. Look out that window. You had your time. The future is our world, Morpheus. The future is our time.
Agent Brown: There could be a problem.
I DO really like the articles sir!
In light of this closing line, “Sadly, the current generation is probably beyond help at this point.” I have the where with all to possibly make a video that the younger folk may grok this debacle. What might be an outline for this?
Where we started and how we got here?
What is money the Fed and how does it work?
Where does money come from?
How do we build wealth?
It would be a wonderful thing to see them assemble with torches and pichforks in Grant Park. Yes indeed.
Any thoughts appreciated.
I have observed and experienced on occasion that when warnings and potential dangers are pointed out, free and without any financial cost, most CEOs, senior managers and middle managers treat it like a joke and laugh it off. Is this what that saying about the higher up you go the less productive you become refers to?
Tragically, some unknown number of the 14 million foreclosed upon and lost homeowners have moved in with their aging parents, and have begun sucking away at the now vanishing wealth of baby boomer’s retirement. Without credit and a job, their only hope is to someday inherit their parent’s homes, one way or another. The story gets more depressing once you start thinking through the tax consequences of their actions when the parents move on to a far, far happier place. Happy, multi-generational families might appear wholesome and attractive on television, but the reality is far more likely to be different.
Would you PLEASE, Mr Bonner, refrain from disseminating the MYTH that it was “was most emphatically not the free-market, but rather central banking and misguided regulation, that got us into this mess.”!#@!!!???
It’s QUITE misleading and QUITE disingenuous to peddle that TRIPE that Wall St and industry seem so VERY fond of.
Why? If the private sector and free marketing had not gone CRAZY we WOULDN’T be here. They had a FIDUCIARY obligation to exercise SELF RESTRAINT. They, most EMPHATICALLY, did NOT.
The baloney you put forth in this column essentially is like a child, caught out in some egregious misdeed saying, I can’t help it, I’m hard wired this way! It’s YOUR fault you didn’t rein me in!
Like HELL it’s the regulator’s fault. A regulator only needs to regulate if there is a miscreant. Lax oversight does NOT absolve the perps from their egregious behavior. Capitalism is being brought to its KNEES BY that misbehavior, convulsive change is in the offing, God only knows what forms of retribution it has yet to assume, and that is, now, a certainty – something which should worry the myriad perps, who, as yet, don’t seem the repentant in the slightest (witness AIG and its bonus imbroglio of the hour). The malfeasors want to blame weak law enforcement for their misbehavior! The absurdity of this idiotic notion would be wryly amusing were the consequences not so profoundly tragic.
What’s happening regarding all those empty houses (actually, IIRC, I read it’s 19 million, not 14 million, empty houses)? Well, here’s the story of some of them.
How to turn 4 housefuls into one: My landlords’ youngest daughter announced at Christmas that as soon as she graduated from grad school, she had to move back home until she got a job and paid off her student loans. She has yet to find a job, graduation is less than 2 months away, and she’s given her landlord notice that she’s moving out. One empty apartment coming up soon.
Next, their son reported that his job of several years went down the tubes and he has decided he has to go back to grad school. To pay for it, he has to sell his condo and move back in with mom & dad. One condo on the market.
This week their oldest daughter landed on their doorstep with her toddler — busted marriage. She & toddler need to live with mom/grandma & dad/grandpa until she finds a job and sells/settles their house.
So that leaves tenant in the in-law apartment having to move and find a place to share with whomever. Rents have yet to come down (in fact, they’re still rising as at least some homeowners turn into renters).
Are we having fun yet?