Beginner Financial Investing.

[SMASH]

General Motors, Freddie Mac, and Fannie Mae all going under, as I've been predicting consistently since long before it was fashionable to do so as evidenced in this thread.

I am no longer short those, expecting a bounce perhaps on government intervention of some sort. As I've stated and argued stridently many times in this thread, government has no business in the mortgage buisiness and no one has a "right" to own a home (I mean owe massive debt on an overvalued mortgage).

That only causes market distortions and grief for the taxpayer. The market distortions are finally correcting, but the grief to the taxpayer and citizen (in form of higher prices of food, gas, etc. since the dollar will likely be sacrificed further to intervene) is just getting started.


From my last post, dated May 20 :

"My current outlook? It's going to get much, much worse economically in the US and in the markets [...] I had predicted earlier in this thread that cities/municipalities in the US would start going bankrupt. That's finally begun in Vallejo California. Many, many more to come. I also see GM going bust or needing to be bailed out at much lower share prices withing the next year or two. I've predicted that here for years and it's going that way as is plainly evident by their balance sheet and stock chart.

So too FNM and FRE (Fannie Mae and Freddie Mac). I'm currently short all those, [...] "


Recent relevant charts.

Invalid Link Removed

Invalid Link Removed

Invalid Link Removed


Don't see losses here. Learn to see massive profits. That's the example I'm trying to make. Same thing in the housing markets, price of gas, etc.

 

[Bassic83]

Great post, Smash!

Know of any good Lithium suppliers? Looking at the vehicle market, it seems that the main thrust is going to be plug-in hybrids, and they need Li-Po batteries to run...

 

[SMASH]

Great post, Smash!

Know of any good Lithium suppliers? Looking at the vehicle market, it seems that the main thrust is going to be plug-in hybrids, and they need Li-Po batteries to run...

Thanks. Lithium suppliers, no, but this might interest you. I scored very well on it but don't own any at this time. http://www.talkbass.com/forum/showpost.php?p=4846396&postcount=156

Did you ever act on those water stocks we discussed last October in this thread? http://www.talkbass.com/forum/showpost.php?p=4846396&postcount=156 One is flat, the other is up quite a bit, despite the markets. A great example that you can even make money going long despite crashing markets.

Actually I recommend everyone interested in the markets re-read at least the posts from mid-end October, if not the whole thread. Pretty chilling. Point being how obvious it all was to anyone who cared to notice.


-------------------

I now congratulate all US taxpayers on their pending new home ownership ! http://www.reuters.com/article/companyNews/idUSBNG18193220080711?pageNumber=1&virtualBrandChannel=0

"Land of the fleeced ?" Don't flame the messenger.


When the Lobby still had a "free for all" type section, long since deleted, I started a thread about the disaster that was coming due to these scammy mortgages - at the time around 50% (fifty, not a typo) of mortgages in San Diego were of the screwy no-money-down, interest-only, do not pay until 2007, etc. variety. This was about 5 years ago.

A particularly argumentative person went on at length about there being no problem and his house would never go down in value and no one would be affected unless they we irresponsible. I tried to reason with the guy, over many pages & wasting many hours, to no avail. How I wish that thread were still around, now that it is so obvious every time you fill your tank, and in every headline, and in that link I posted above, that *everyone* is suffering because of it, which was my argument all along.

Not only did gov't do nothing about it, they actually facilitated and exacerbated it. Thus fulfilling my past predictions that one day the fomerly-adored Greenspan would be villified.

I re-read some of my old PM's, a few of which had to do with investing. One particularly sharp person, in 2005 wrote "I can't help but feeling this is how it was in Rome before the empire collapsed." Again, 2005.

Be it housing, Fannie Mae, General Motors, or the general markets, the truth was out there and plain for anyone to see. That's point #1. It's been very profitable for those who cared to make money, just as rising oil/gas prices have been. That's point #2. I guess point #3 is that we ain't seen nothing yet and it's never too late to make killing$ no matter which way the markets go. Heck, I even closed out my oil shorts (mentioned in my post in late May) at a very nice profit despite oil still being at its all-time high. Quite lucky, I'll admit, but it happens.

In other words, let no one be bummed by the current state of affairs. The truth shall set you free, and it can make you big money too. Just remove the blinders and be open to what's really going on, not what you think or wish is going on.


Note to those who are proponents of just "investing" in an index. S&P 500 performance since 1995 is +7.85% NASDAQ performance since 1996 is +6.51% That's not including July's crashing markets. Think ahead a few months and these might even be negative figures, despite both enjoing two of the biggerst bull markets in history during those years. Then factor what the rate of inflation is, which is more than that in the past single year alone, and that should explain pretty well why I say people are foolish and even irresponsible to put money in such funds.

 

[Bassic83]

I think a salient point here, in light of what's happening, is that it's not a profit until you have sold it.

I was unable to get back into the market for a while, and still am on the shy side of broke, but there are so many nuggets of wisdom in this thread that some of it is even making sense to me! One of the best threads on TB, for sure, and it's sadly ignored by so many, yet it's hiding in plain sight!

Thanks for all the info, Smash- you rock!

 

[dangnewt]

..............Be it housing, Fannie Mae, General Motors, or the general markets, the truth was out there and plain for anyone to see. That's point #1. It's been very profitable for those who cared to make money, just as rising oil/gas prices have been. That's point #2. I guess point #3 is that we ain't seen nothing yet and it's never too late to make killing$ no matter which way the markets go. Heck, I even closed out my oil shorts (mentioned in my post in late May) at a very nice profit despite oil still being at its all-time high. Quite lucky, I'll admit, but it happens.

In other words, let no one be bummed by the current state of affairs. The truth shall set you free, and it can make you big money too. Just remove the blinders and be open to what's really going on, not what you think or wish is going on......

Excellent post. I'll try to keep my eyes open. I don't think I have the skills/temperment to short with as much conviction as you - but someday who knows. I did buy some of the Pico recently on your advice - only thing that has gone up in the last few weeks. Thanks.

I'm still pissed at Fannie and Freddie - not so much because of the price decline but because when I was in the mortgage business 18 years ago, they knew what they were doing. Another moral is that even good companies can lose their way.

 

[SMASH]

Excellent post. I'll try to keep my eyes open. I don't think I have the skills/temperment to short with as much conviction as you - but someday who knows. I did buy some of the Pico recently on your advice - only thing that has gone up in the last few weeks. Thanks.

Thanks, and congrats on the PICO.

To short, you have to develop the mindset that it's not a lot different than going long. You need an idea why you're entering the trade, what your expecatations are, and most importantly at what point you'll cut your losses. If you fear you lack that discipline, Put Options will completely limit your maximum loss exposure by their nature.

I'm still pissed at Fannie and Freddie - not so much because of the price decline but because when I was in the mortgage business 18 years ago, they knew what they were doing. Another moral is that even good companies can lose their way.

Company leaderships and cultures change, and not long ago they had massive accounting fraud scandals, and their balance sheets have revealed effective insolvency for quite some time now. For too long they've been buying their own issues instead of selling them like they're supposed to be doing. The adage "don't get high on your own supply" comes to mind.

For one reason or another, the vast majority of high-flyers come crashing down eventually. Might take months, years, or decades, but that's the cycle.

IMO these never should have existed as "gov't sponsored enterprises" to being with, and they've done much more to wreck the housing market than to help anyone, plus the fact that these two companies are spend the more than any other company on Washington lobbying - added to the above points - reveals a lot about whether they're actually viable enterprises or just another couple of stock scams, IMO.

Not that I'm complaining. I made huge amounts shorting these, then recently made almost 30% in just two days on Freddie by going long, as my email alert readers that post here can attest. Another great short winner for me in the past year was CROX, as per earlier in this thread, and I've been doing very well on that one after going long over the past couple weeks.

You gotta be quick or be dead, if you're into trading, and if you're into a slower pace of "investing" then shorting should not be uncomfortable. When a balance sheet says something is hyper-levereged garbage such as Fannie and Freddie have been for some time now, it should be as easy to short them as it would be to buy MSFT for 10c per share - basically a "sure thing" ... a pure "value play" either way. Perhaps think on that rather than allowing yourself to miss out on half of all market moves (by which I mean moves in a "down" direction), especially when a massive bear market is in effect such as has been the case the past year.

 

[Bassic83]

Not that I'm complaining. I made huge amounts shorting these, then recently made almost 30% in just two days on Freddie by going long, as my email alert readers that post here can attest. Another great short winner for me in the past year was CROX, as per earlier in this thread, and I've been doing very well on that one after going long over the past couple weeks.

Yup!

 

[SMASH]

Some interesting tidbits :

- Vietnam, which is a modern and vibrant economy these days FYI in case people are unaware, have had inflation of about 17% recently and some homes are now being priced in gold and must be paid for in gold. Reasons? Collapsing stock market and currency value. Much like in the US, where the *real* inflation rate is closer to 14% than the 3% officially claimed (since the official figures dropped the inclusion of food and gas, two name two key components in real inflation, about 30 years ago).


- Housing sales in the US remain in free-fall. Invalid Link Removed Key consideration : "About a third of sales are distressed sales, either foreclosures or short-sales. Many foreclosures aren't included in the data at all because they are not sold through the realtors' multiple-listing service." This means, once again, the reality is much worse than officially claimed. Notice a trend?


- and speaking of things getting worse, I'll let this good rant by Mr. Stansberry ( a lot of investment letters here, quite affordable too http://www.stansberryresearch.com/ ) explain it :

"It's worse than criminal. It's despicable, tragic, cruel, and evil. A bill scheduled to pass this week commits our government to bailing out both the bondholders and the shareholders of Fannie Mae and Freddie Mac. If you had any remaining doubts about the ethics of Washington, I hope these events will clear your mind: The people running our country are crooks.

"What's the problem with bailing out the two largest mortgage companies in the world? Let's start with this fact: There is no money for such a bailout.

"Peter Orszag, the top budget analyst for Congress, says the bailout will likely cost $25 billion. Ha, ha, ha... I hope you remember that number. The fools in Congress have no idea how big the problem is – they're not even close. Together, Fannie Mae and Freddie Mac already own $6.9 billion of foreclosed homes. That's almost as much property as the entire rest of the financial system – all the other 8,500 commercial banks – combined. (Remember when you were told that Fannie and Freddie's lending was conservative, that their portfolios were "safer"? Ha, ha, ha.)

"The recovery rates on these properties are unlikely to be above 50%. The bankers among you are probably smirking... Yes, recovery rates have been much higher historically. But there is a correlation in the bond market between the magnitude of the default rate and recoveries. The same will be true in mortgage bonds. Recovery rates will plummet as defaults increase substantially because the number of houses on the market will continue to increase, pushing prices farther and farther down.

"As an example, consider Fannie couldn't sell a $110,000 Michigan home for $6,900. Assuming the default rate stops rising immediately, it's likely that around 10% of Fannie and Freddie's owned and guaranteed mortgages will end up in foreclosure. Assuming a 50% recovery rate, that's a $250 billion loss – more than 10 times the amount Congress is expecting. And don't forget, more and more homeowners – even folks with prime mortgages – will decide to simply mail in their keys as home prices fall. Why keep paying your mortgage when the bigger house across the street is selling for half what you paid?

"Says Bond King Bill Gross of the deal: "It's impossible for Freddie and Fannie to raise capital without help from the government... Let's be blunt: to the extent the Treasury suggests they'll never have to use their authority, that's a sham. It's fallacious to suggest that the agencies could issue capital, preferred stock, without the co-participation of the Treasury. I don't think that's possible."

"The current housing bill gives U.S. Treasury Secretary Henry Paulson the authority to spend as much money as needed to support Fannie and Freddie. Paulson says he will provide "unlimited" government financing. But there's no government surplus. Thus, these debts will either be paid for by our children and grandchildren... or, more likely, by inflation.

"And so, the government will bail out a bunch of crony capitalists – Fannie and Freddie spend more money on lobbying than any other two companies in the United States – by either robbing its citizens of their savings (via inflation) or by taxing several future generations of Americans. This is the greatest financial crime in the history of our country. How much would you like to bet that not one single mainstream member of the press even questions the wisdom of this plan?

"A subscriber raised a fair question: What should be done about Fannie Mae and Freddie Mac? Simple. There is a well-established bankruptcy process in this country that treats creditors fairly. Yes, allowing Fannie Mae and Freddie Mac to go out of business would make it, temporarily, difficult to get a mortgage. Rates would probably increase substantially. But private lenders would enter the market. And because housing prices would fall due to less-available financing, the overall affordability of the market would probably increase.

"The people who tell you the mortgage market wouldn't exist without Fannie and Freddie are the same people who will tell you that without Washington, Americans wouldn't know how to farm, educate, manufacture, or conduct trade. Taxpayers have absolutely no reason to bail out the shareholders and the bondholders of Fannie Mae and Freddie Mac. America is, once again, being sold a bunch of lies. And this time they're going to cost a fortune."



My current take :

Today's drop in the markets (as of this writing) is likely not (yet) the resumption of the bear market trend, but that is forthcoming I believe. Probably early-mid August, and until then I am net long and have been raking it in on the long side lately.

Once markets turn again, in my opinion crap like General Motors and Bank of America will make excellent short targets, as will Simon Property Group (enormous owner/manager of American and global shopping malls) which releases its quarterly figures tomorrow pre-market.

 

[Bassic83]

I understand your short on GM, but what about Ford? Their current plan is to move European (you're a peon? ) models into the US, since they've been making fuel-efficient cars over there for a while now, retooling their factories to handle the new production. Seems a whole lot more nimble a move than GM, which only recently has announced the closing of truck/SUV plants. Their problem is that they have nothing to move to, plus their ongoing UAW problems. I see Ford's quick, decisive solution, stopgap though it may be, as being much more attuned to the demands of the US populace than GM...

"Cadillac- anything else is just...foreign"

What kind of marketing slogan is THAT? Don't they realize that the US auto buyer is going for smaller, more fuel-efficient, usually foreign, vehicles? Why can their management not comprehend that big luxury cars is not what people are looking for these days? Yet I constantly see them pushing big luxury cars- and it's not just to clear inventory for upcoming fuel-efficient models, as they have nothing of the sort in the pipeline that I can tell. Their biggest seller right now is the miserable Daewoo sedan, the "Aveo". Can't hardly keep them in stock! As soon as the boat from Korea pulls in, they're spoken for. Before the super-glue holding the blue bowtie on the grille is even dry!

And Chrysler is still the low-mpg king. They can't make an engine that gets over 21 mpg...

Of all the three US carmakers, I think Ford will prove to be the best of the worst, long-term. Their management realizes the sea-change in customer wants and needs, and unlike the other two, is reacting to it as quickly as they can.

 

[Bassic83]

The whole reason that Ben was pushing so hard for the bailout is because he and his cronies were too far into Fannie and Freddie to cover their bets. Rather than let them "take it in the shorts", as it were, why not make the US taxpayer pay to bail them out? That way, they can continue to profit until they find their "exit point", at which point they can sell and be done.

That's what I'm taking away from all of that mess. It's oversimplified, I know, but it covers the nuts and bolts of the deal. IMO, government has no place in the mortgage business. Same thing happened a few years back with Chrysler, and it is only delaying the inevitable. Of course, they're privately owned by Cerberus now, but still...I don't think bean counters make very good automotive engineers, and I don't think bureaucrats make good loan officers, either.

 

[dangnewt]

The article that SMASH posted was right on when it came to the indictment of the crony capitalism that allowed these two to get into the trouble they did.

But the thing you have to remember when it comes to the taxpayer bailout is that we the taxpayers are partially responsible for the mess. Under the "you broke it, you fix it" rule, we have to suck it up and pay what it costs.

The connection is that our elected representatives - our Congress and our President - could have reigned these two in well before it got this bad. As SMASH correctly pointed out earlier, the warning signs were there with the accounting scandals plus the federal agency that did have oversight responsibility sounded a very clear alarm three years ago. My cursory reading of articles on the effort to pass legislation that would have lessened the train wreck suggests that it was a bipartisan breakdown (believe me, as a partisan, it was difficult for me to write that last sentence).

The shareholders have taken a beating, just like Bear, the bailout is not much comfort to them. That the bondholders are being protected is a function of an implicit promise made explicit.

Whatever happens, Fannie and Freddie will not be quite as free as before. While it is certainly a case of closing the barn door after the horses are long gone. I guess I am more inclined to reform the system than start up with a new one.

 

[SMASH]

But the thing you have to remember when it comes to the taxpayer bailout is that we the taxpayers are partially responsible for the mess. Under the "you broke it, you fix it" rule, we have to suck it up and pay what it costs.

Only the irresponsbile ones caused it. And they get bailed out. Thus capitalism becomes communism.

My cursory reading of articles on the effort to pass legislation that would have lessened the train wreck suggests that it was a bipartisan breakdown (believe me, as a partisan, it was difficult for me to write that last sentence).

The shareholders have taken a beating, just like Bear, the bailout is not much comfort to them. That the bondholders are being protected is a function of an implicit promise made explicit.

Investors that can think and read balance sheets - putting more effort into researching their "investments" than they do into pondering how Geddy gets his tone or plasma vs. LCD big-screens, made a lot of money shorting that crap. The others got what they deserved. If they asked for a beating, then so be it. Be it Stearns, Enron, or Fannie/Freddy, anyone that holds garbage long in a bear market, or a stock that shows them a big profit then goes red, or stock in companies dependent on an obvious massive asset bubble, or any stock diving from all-time highs at ridiculous price/earnings multiples to 1-year lows, deserves to lose what they put in and usually will lose what they put in and more.

Whatever happens, Fannie and Freddie will not be quite as free as before. While it is certainly a case of closing the barn door after the horses are long gone. I guess I am more inclined to reform the system than start up with a new one.

Maybe if "they" left the system alone, the garbage would get flushed and the system would be working properly, thus not requiring *any* reform at all.

Could've started right from "just saying no" to government sponsorship of these companies in the first place, or even the idea that everyone has a right to own a cheap mortgage vs. the idea that those who work hard and save money have a right to own a home, or simply even not propogating the simple myth that owning/oweing is defacto better/cheaper than renting.

 

[SMASH]

No real surprise, is it? A friend was watching this show a few years ago and eplained the premise to me and I predicted exactly this. Same thing happens to lottery winners.

From today's "5 Minute Forecast" :

That’s one of the phenomenal Extreme Makeover: Home Edition homes. The TV show goes around the country, finds the most tragic, strife-stricken families in the U.S. and builds them an ultra-cush new house. 1,800 volunteers built this fully furnished house for a struggling Georgia family… the show even raised enough money to pay all the taxes and utilities on the house for decades and create a fund to send the kids to college.

That was in 2005; now the place is up for foreclosure. The happy owners took out a $450,000 loan against the property and blew it.

“Every day,” reads The Washington Post, “we are greeted with fresh evidence of the great American fire sale. If it was wrong to think the economy could go on forever subsisting on money that no one actually had, then it was wrong to think there was something wonderful about watching shows where people got houses for nothing, and then expect them to live happily ever after.”


Readers of this thread will want to see this :

 

[SMASH]

From today's 5 Min. Forecast :

Invalid Link Removed (<- click for chart)

Struggling banks borrowed a record amount of funds from the Fed over the past week&#8230; more than any other week during the whole &#8220;credit crisis.&#8221;

U.S. banks borrowed an average $17.45 billion from the Fed&#8217;s discount window every day. That&#8217;s easily the most action the discount window&#8217;s ever seen, and the second consecutive week of record transactions.

&#8220;It is an understatement to say that the U.S. banking system is in uncharted territory,&#8221; suggests James Turk. &#8220;The Federal Reserve is providing more than just a 'helping hand.'

&#8220;This chart should alert everyone to the perils of putting your wealth on deposit in a bank. The magnitude of the borrowing by banks shown on this chart is signaling that the banking system is suffering from more than a lack of liquidity. The real question we need to be asking ourselves is whether the banking system is solvent, i.e., whether the assets of banks in the aggregate have greater value than the banking system's liabilities.

&#8220;The above chart indicates to me that we are on the cusp of a crackup boom. Owning gold and silver and avoiding the dollar are now more important than ever."

-----------

My comments in this section :

Imagine if things did get to their logical, and arguably likely, end and a lot of banks failed?

The FDIC only has 1% of what it'd have to pay out in case of widespread bank failures. Where would the other 99% come from?

Yet people just say "well, up to $100000 per account is insured so I'm OK". How long 'til you get that money, if you have to make a claim? Worse yet, if it came to that, how much stuff would $100k buy you? A modest car? A tank of gas? Dinner at McDonal's?

The Zimbabwe dollar was about on par with the US dollar 30 years ago. The they got stuck with bad leadership, to say the least, and recently the country issued a $100 Billion Dollar banknote. Yes, 100 Billion. You can buy a can of Coke with that in Zimbabwe. Not joking.

As Bill Bonner put it in a recent speech, "Inflation [there] is running at one hundred million percent. A policeman in Zimbabwe now makes $15 billion per month. With that he can buy 20 eggs...or a quart of beer...if he can find them. So the place is falling apart. The banks can't print the money fast enough. So naturally they have chaos in the economy and people line up to get money. And, because they can't print it fast enough, they have to ration it. So everybody has the right to get $100 billion per day, no more, and $100 billion is worth about 80 cents.

So these people line up to get their money, and when they get it they realize they can't buy anything with it anyway, because there isn't anything to buy."


Can't happen here? Well maybe it already did. The dollar is now worth 95% less than it was about 80 years ago. A can of Coke used to cost a nickel.

Regardless, I certainly don't expect the worst-case scenarios to happen here. Heck, these ones I've described aren't even close to many quite plausible even worse cases I can think of. I'm just wondering how many people even consider this stuff? Is it often talked about, or are the Orioles' chances of a pennant this year and whether Britney is dating her bodyguard more pressing topics?

--------------

"Not only did the Fed dole out record funds from the discount window this week, but Bernanke and his crew also conducted another wave of TAFs and TSLFs. Earlier this week, the Fed &#8220;successfully&#8221; conducted its 17th TAF. Banks were able to secure another $75 billion in emergency loans.

And yesterday, another TSLF came and went. In less than 30 minutes, the Fed took on another $28 billion in illiquid asset-backed securities in exchange for U.S. Treasuries.

Between the TAFs and TSLFs, the Fed has now dedicated over $1.5 trillion to keeping financials afloat."

---------------

The U.S. housing crisis is &#8220;nowhere near a bottom,&#8221; opined Alan Greenspan yesterday. In an interview with CNBC, Greenspan provided a litany of lackluster predictions: Chances of recession are still &#8220;50/50.&#8221; It will &#8220;take a while&#8221; for markets to stabilize. The U.S. will soon face &#8220;a very substantial change in the balance between growth and inflation.&#8221;

&#8220;Greenspan has no shame,&#8221; declares Agora&#8217;s Australian adviser Dan Denning. &#8220;He is monetary history's greatest villain since John Law. This is the same man who essentially called Americans morons for preferring fixed-rate over adjustable-rate mortgages. http://www.federalreserve.gov/boarddocs/speeches/2004/20040223/ If Americans understood more how inflation destroys their money, and connected the dots between Greenspan's rate cutting and the current mess, he'd be forced to do his interviews from undisclosed locations for fear of being set upon by mobs.&#8221;

 

[Bassic83]

From today's 5 Min. Forecast :

Invalid Link Removed (<- click for chart)

Struggling banks borrowed a record amount of funds from the Fed over the past week… more than any other week during the whole “credit crisis.”

U.S. banks borrowed an average $17.45 billion from the Fed’s discount window every day. That’s easily the most action the discount window’s ever seen, and the second consecutive week of record transactions.

“It is an understatement to say that the U.S. banking system is in uncharted territory,” suggests James Turk. “The Federal Reserve is providing more than just a 'helping hand.'

“This chart should alert everyone to the perils of putting your wealth on deposit in a bank. The magnitude of the borrowing by banks shown on this chart is signaling that the banking system is suffering from more than a lack of liquidity. The real question we need to be asking ourselves is whether the banking system is solvent, i.e., whether the assets of banks in the aggregate have greater value than the banking system's liabilities.

“The above chart indicates to me that we are on the cusp of a crackup boom. Owning gold and silver and avoiding the dollar are now more important than ever."

-----------

My comments in this section :

Imagine if things did get to their logical, and arguably likely, end and a lot of banks failed?

The FDIC only has 1% of what it'd have to pay out in case of widespread bank failures. Where would the other 99% come from?

Yet people just say "well, up to $100000 per account is insured so I'm OK". How long 'til you get that money, if you have to make a claim? Worse yet, if it came to that, how much stuff would $100k buy you? A modest car? A tank of gas? Dinner at McDonal's?

The Zimbabwe dollar was about on par with the US dollar 30 years ago. The they got stuck with bad leadership, to say the least, and recently the country issued a $100 Billion Dollar banknote. Yes, 100 Billion. You can buy a can of Coke with that in Zimbabwe. Not joking.

As Bill Bonner put it in a recent speech, "Inflation [there] is running at one hundred million percent. A policeman in Zimbabwe now makes $15 billion per month. With that he can buy 20 eggs...or a quart of beer...if he can find them. So the place is falling apart. The banks can't print the money fast enough. So naturally they have chaos in the economy and people line up to get money. And, because they can't print it fast enough, they have to ration it. So everybody has the right to get $100 billion per day, no more, and $100 billion is worth about 80 cents.

So these people line up to get their money, and when they get it they realize they can't buy anything with it anyway, because there isn't anything to buy."


Can't happen here? Well maybe it already did. The dollar is now worth 95% less than it was about 80 years ago. A can of Coke used to cost a nickel.

Regardless, I certainly don't expect the worst-case scenarios to happen here. Heck, these ones I've described aren't even close to many quite plausible even worse cases I can think of. I'm just wondering how many people even consider this stuff? Is it often talked about, or are the Orioles' chances of a pennant this year and whether Britney is dating her bodyguard more pressing topics?

--------------

"Not only did the Fed dole out record funds from the discount window this week, but Bernanke and his crew also conducted another wave of TAFs and TSLFs. Earlier this week, the Fed “successfully” conducted its 17th TAF. Banks were able to secure another $75 billion in emergency loans.

And yesterday, another TSLF came and went. In less than 30 minutes, the Fed took on another $28 billion in illiquid asset-backed securities in exchange for U.S. Treasuries.

Between the TAFs and TSLFs, the Fed has now dedicated over $1.5 trillion to keeping financials afloat."

---------------

The U.S. housing crisis is “nowhere near a bottom,” opined Alan Greenspan yesterday. In an interview with CNBC, Greenspan provided a litany of lackluster predictions: Chances of recession are still “50/50.” It will “take a while” for markets to stabilize. The U.S. will soon face “a very substantial change in the balance between growth and inflation.”

“Greenspan has no shame,” declares Agora’s Australian adviser Dan Denning. “He is monetary history's greatest villain since John Law. This is the same man who essentially called Americans morons for preferring fixed-rate over adjustable-rate mortgages. http://www.federalreserve.gov/boarddocs/speeches/2004/20040223/ If Americans understood more how inflation destroys their money, and connected the dots between Greenspan's rate cutting and the current mess, he'd be forced to do his interviews from undisclosed locations for fear of being set upon by mobs.”

I understand how inflation destroys our currency, and I'd LOVE to meet Greenspan or Bernanke in a dark alleyway some fine evening, for a little "discussion" on the "intricacies of modern finance that the average American cannot understand" ...

And the threat of the US going Zimbabwean is very real, though somewhat overblown- they'll run out of ink before they get enough $$$ printed to get to a hundred million percent inflation. At the rate they're going, I need to invest in printing press manufacturers, linen paper manufacturers, and ink suppliers!

As far as Zimbabwe's "dollar", I recall pictures of people looting stores there for toilet paper that was on sale for 100,000 Z$...might be easier to use the $1, $5, $10 bills AS butt-wipe, it'd be cheaper, and likely stronger as well! Quite simply, Robert Mugabe's reign is nearing a violent end, unless he manages to starve the rest of his people to death before they organize. Then inflation won't matter much at all.

I do hold some bullion in reserve at the house, as I don't trust safe deposit boxes- what if the bank gets seized? Then the vaults get looted, or become the property of your friendly FDIC goon squad, and THEN what? I don't keep a lot around, but enough to probably buy food and gas to get somewhere else, if need be. I might sound paranoid, but I assure you I am not- just like to be as prepared as possible so I don't get caught with my proverbial pants down...

 

[SMASH]

I understand your short on GM, but what about Ford? Their current plan is to move European (you're a peon? ) models into the US, since they've been making fuel-efficient cars over there for a while now, retooling their factories to handle the new production. Seems a whole lot more nimble a move than GM, which only recently has announced the closing of truck/SUV plants. Their problem is that they have nothing to move to, plus their ongoing UAW problems. I see Ford's quick, decisive solution, stopgap though it may be, as being much more attuned to the demands of the US populace than GM...

"Cadillac- anything else is just...foreign"

What kind of marketing slogan is THAT? Don't they realize that the US auto buyer is going for smaller, more fuel-efficient, usually foreign, vehicles? Why can their management not comprehend that big luxury cars is not what people are looking for these days? Yet I constantly see them pushing big luxury cars- and it's not just to clear inventory for upcoming fuel-efficient models, as they have nothing of the sort in the pipeline that I can tell. Their biggest seller right now is the miserable Daewoo sedan, the "Aveo". Can't hardly keep them in stock! As soon as the boat from Korea pulls in, they're spoken for. Before the super-glue holding the blue bowtie on the grille is even dry!

And Chrysler is still the low-mpg king. They can't make an engine that gets over 21 mpg...

Of all the three US carmakers, I think Ford will prove to be the best of the worst, long-term. Their management realizes the sea-change in customer wants and needs, and unlike the other two, is reacting to it as quickly as they can.

I forgot to answer this one, sorry. In short, I agree.

I was short both Ford and GM for years, but GM is simply in a worse position overall so since they're both essentially the same idea as an investment I stick with GM for the most part. I have seen some great little Ford cars elsewhere, in Mexico for instance, and couldn't understand why they weren't sold in the States.

Part of it is the US consumer though, not just the automakers. Even Toyota couldn't sell the Echo (now Yaris) in the US whereas in Canada and many other countries it was wildly popular.

GM always just seemed more desperate to me overall out of all automakers, which is why I started shorting it in the first place over $60. GM had 0% financing while Honda was increasing their rates, for example. A few years later, GM offered "employee discounts" for any person who has a friend that works for GM (all of the US?), etc.

A TB'er is a GM exec and he started a thread a few years ago about TB'ers being able to get a GM discount through him. I told him the company was going bankrupt in a few years, and of course people didn't want to hear that although to his credit he took it quite well (I suspect because he already knew, deep down if not factually although the facts were in their financial statements). Of coruse now the company is indeed effectively bankrupt.

If it survives, it'll be in name only. I doubt Ford will survive either.


---

General Motors lost a towering $15.5bn in the second quarter as it was hammered by falling sales in its core North American market and a dramatic shift from big pick-up trucks and sport-utility vehicles to more fuel-efficient but less profitable cars.

Together with mounting evidence that the Detroit carmaker will lose its crown to Toyota this year as the world's biggest vehicle manufacturer, the loss casts a long shadow over celebrations in coming weeks to mark GM&#8217;s 100th anniversary.

&#8211; Financial Times

 

[Bassic83]

Coming next spring, the Hyundai Suburban! The Kia Expedition! The Toyota RamCharger!

Yeah, it does look bleak. However, I'm betting that Ford will survive over the other two, based on it's European design and engineering bureau, along with it's overseas manufacturing capabilities. I think it could go out of business here in the US, along with GM and Chrysler.

China and India are looking to be strong upstarts in the world automaker sector, with India having Tata motors, and China having Geely and Chery. Tata owns Jaguar and Land Rover already, which may give them a jumpstart on engineering. Geely is specializing in making Western-looking copycat cars, Chery making the wildly successful QQ. All three are in developing countries, where the "car culture" is not as well established as the US, and where people don't expect much more than basic transportation. Things we take for granted, like engineered crumple zones, airbags, and even A/C, are either optional, or not available on these cars. The safety aspect is suspect, especially in the Chinese-made rides. They LOOK like American-made cars, but are death traps.

On a side note, I think that the US safety standards may actually be a little TOO stiff. I drive a Metro (Chevy's re-badged Suzuki Swift), and I know that I'm dead if I crash at speed. But the idea is to GO, not to CRASH! And the Metro excels at that. It may not be the safest, but I drive very defensively, and I save a TON of gas money doing so. Might not be as glamorous as a Lamborghini Gallardo, but it fulfills the same mission- getting me from point A to point B. Hell, it even has A/C!

Point being, I'm seeing a lot of folks in Houston starting to think a little differently about wants vs. needs. You WANT to drive a Hummer to work, but you NEED to pay your house note, so you take your Nissan Versa. Compromises abound.

 

[SMASH]

Bassic83, Ford might survive but will the nation?

Today's bundle of awesome from Stansberry Research. Note that the "Letter from the Chairman of GM" is a parody - it isn't written by the actual Chairman of GM, but that doesn't mean every word isn't true (it is).


""If I had better foresight, maybe I could have improved things a little bit," Freddie Mac CEO Richard Syron said in response to accusations that he ignored warnings about the company's credit risks. "But frankly, if I had perfect foresight, I would never have taken this job in the first place."

I doubt that's true. Whether Freddie survives or not (we'd bet heavily on the latter outcome), Syron is sure to walk away a very, very rich man. Meanwhile, his company announced an enormous $821 million quarterly loss. This follows a $528 million loss last quarter. Freddie now admits, for the first time, there's a "significant possibility" it will fail to pass its regulator's capital standards.

What will happen then? Our guess is shareholders will be wiped out and the government will take over Freddie. We say "guess" only because, despite Freddie's negative $5.8 billion net worth and soaring losses, the U.S. Treasury is now authorized to spend an unlimited amount of money on both the company's bonds and its stock. Who knows what the fools in Washington will do? Not us.

One more interesting tidbit from the Freddie results. The company's CFO, Buddy Piszel, says the firm's modeling of the housing market &#8211; which is probably the most sophisticated anywhere &#8211; predicts home prices will fall 20% from their peak. Piszel says prices have fallen 11% so far. "We are about halfway through." If Freddie is already insolvent and the housing market decline is only halfway through, don't you wonder how both our Federal Reserve chairman and Treasury secretary could have testified before Congress last month that Fannie and Freddie were "well-capitalized"?

If a private-sector CEO had told the same fat lie about his company, he'd be heading to jail. Why doesn't the SEC charge Bernanke and Paulson with telling lies about publicly traded stocks? Some investors surely took these men at their word and bought shares. Seems to me, our punishment for government officials lying to Congress and the American public ought to be at least as severe as what we dole out to CEOs and CFOs who merely lie to their shareholders. Don't our elected officials have any obligation to tell the truth?


My Last Letter
By the "Chairman" of General Motors

Apparently $50 billion was the magic number...

As the CEO and chairman of General Motors, I'm now responsible for more than $50 billion in losses &#8211; in only the last three years. I thought they'd fire me after the first $10 billion &#8211; when Kerkorian was trying to force me out. But I survived. Considering what has happened since, it's hardly a victory I can celebrate. Off the top of my head, I can't think of any American executive in history who has lost as much money as I have &#8211; ever.

My legacy will be the bankruptcy of one of America's greatest corporations &#8211; at one time the wealthiest and most powerful in the world. Until the 1970s, GM sold roughly half of the cars built in the world. How could GM have been destroyed so quickly, while its sales volumes are still so large? I'll explain one more time. But this will be my last letter to the subscribers of Stansberry Research.

Privately, the board told me the gig is up. The announcement of my "retirement" won't be made for a few more weeks. Publicly, of course, I keep spouting off the same nonsense I always have &#8211; useless comments about how pleased I am with the way our 'turnaround' is going.

"Our actions over the past several years, and today, position us not only to survive this tough period, but to come out of it as a lean, strong and successful company..."

It's pretty amazing what you can get away with saying as the chairman of a public company. The press actually takes that crap seriously. Not a single newspaper reporter in America can read a financial statement... luckily for me.

Here's what I should have said:

"We don't have a prayer of saving this company and, really, we never did. It is impossible to repair the fatal damage done to our great company by the enormous pension and health care liabilities promised to our workers decades ago. The best we can do now &#8211; by suspending our dividend, cutting health care benefits for all white-collar retirees, and 'postponing' our required union health care funding &#8211; is keep the lights on another two or three quarters."

Of course, these sad facts aren't news to Stansberry readers. About a year and a half ago, (when our stock traded for more than $40), I began writing these letters to you. I wanted you to know the truth &#8211; we had no way to avoid bankruptcy, as I explained in the opening paragraph of my first letter.

We own one of America's proudest companies, whose heritage and reputation far exceeds its operational capabilities today. We have infrastructure and employee obligations that outpace what we can afford given our greatly reduced profit margins and debt load. Our ongoing results reflect these important structure problems, which may be beyond our best efforts to fix...
&#8211;"A Letter from GM's Chairman," March 14, 2007

GM suffers from two insurmountable and interconnected problems: rising debts and declining market share.

Even now, in the last innings of this horrible game, GM's overall debt load increased by $1.5 billion last quarter. And our global market share declined by another percentage point, to 12.3%. This is the terrible trap I've been describing to you, quarter after quarter. There is no escape. Our debts make it impossible to invest enough capital to upgrade our manufacturing capabilities. And our inability to upgrade the styling and performance of our cars causes us to lose market share, little by little. Since 1992, our share of global car sales has fallen from 30% to about 12%. Meanwhile, our debt load quadrupled.

Why did this happen? How could GM's executives ignore the noose being laid around our necks? Are we really as stupid, lazy, or greedy as certain newsletter writers have claimed? Why didn't we think to pay down our debts as our market share fell and our pricing power evaporated?

We had no choice.

In the last 15 years, GM has spent $55 billion on pension plans &#8211; compared to only $13 billion in dividends. Cutting our dividend to zero 15 years ago wouldn't have made much of a difference in terms of our solvency today. It would have bought us another year of operations, at most. What bankrupted America's leading manufacturing company wasn't inept or greedy management. What bankrupted GM (and what will soon bankrupt the United States government) are unlimited pension and health care promises whose costs cannot be contained and could not have been estimated at the time they were granted.

As I told you in my last letter, GM is now in a death spiral. In the most recent quarter, we lost more than $15 billion. Our sales volume fell 20% from last year. We even lost $2.4 billion on leases &#8211; which indicates bigger problems to come. We're no longer offering leases on most of our cars, a move that will decrease revenues further. About 10% of our sales volume comes from leases.

We are now down to $21 billion in cash. As I've told you, we must have between $10 billion and $14 billion to keep operating. Given the rapid decline of our operations and revenue, I think we'll be very lucky to survive 2008. There's no way we can last through the end of 2009 without filing for bankruptcy. We're doing everything we can to conserve cash, but it won't make much difference.

We've been steadily losing around $3 billion in cash reserves per quarter since the third quarter of 2007. All of our efforts to staunch the bleeding have ended up being overwhelmed by our deteriorating credit quality, rapidly declining market share, and the losses from our 49% owned financial subsidiary GMAC (which was a major originator of subprime mortgages).

If you remember from my first letter, I warned that as our debt matured it could only be refinanced at much higher rates. This has always been the supreme risk to our shareholders &#8211; our Sword of Damocles. It was only a matter of time before it fell on our head.

In mid-2007, our company was downgraded from an investment-grade credit all the way to "junk" status. Currently, our near-maturity bonds (the 7.2% 2011s) are trading at $0.60 on the dollar, yielding 32%. This implies the credit market expects us to default on these bonds &#8211; to file for bankruptcy. This makes it impossible for us to roll over our existing debts &#8211; we cannot afford to pay 32% a year on our obligations. In 2008 and 2009, we have around $5 billion in debt coming due. We have no way to refinance these obligations and no way to repay them. We will file for bankruptcy. And quite honestly, the sooner we file, the better.

How can we fix GM?

As I told you in my last letter, "A company cannot suffer 40 years of bad decisions, bad ideas, and bad debts and expect to compete with the rest of the world's automakers." In our noble efforts to make the lives of our employees better, we have bankrupted our company and made it impossible for GM to compete in the North American market. Before GM can do good for its workers and pensioners, it must first do well in the car business.

All of GM's stakeholders will pay a price in GM's eventual restructuring. Its shareholders will be wiped out. Its bondholders will suffer defaults and losses. Its employees will face declining wages, and its pensioners will lose benefits.

Yet the greatest risk to America is this restructuring won't be allowed to take place. GM will face enormous political pressure to maintain its pensions and its labor agreements. But if GM's bloated cost basis is simply passed from shareholders to bondholders through bankruptcy, GM will emerge no stronger than it is today. It will simply have a clean balance sheet on which to stack more losses and more bad debt.

Please believe my warning: What has happened to GM will soon happen to America as a whole. How we face these challenges during GM's bankruptcy will be an indication of how we will face them in the future as a nation. Will we go on making promises we cannot afford? The retirement years of many public and private sector workers vastly exceed the number of years spent working. Retirement incomes, when health benefits are added, are now frequently a multiple of current working wages. Far from being a small amount of money to help support workers in their old age, retirement has become a lifestyle choice for millions of Americans. Like it or not, as a nation we simply cannot afford the size of these obligations. Will we squander America's wealth and impoverish our children by giving away unlimited benefits to our retired workers?

Or... will we see that in order to grow the wealth of our nation we must be competitive with the rest of the world? To maintain our standard of living we must find more efficient ways of taking care of our elderly workers and delivering health care. We need to adopt sensible pension guarantees that promote saving and investing, rather than adding an unlimited expense to our largest corporations and public coffers.

There are no easy solutions. But one thing is certain: If we do not take steps to reform our health care and pension guarantees, GM will not be the last great American company to go bankrupt. And in only 15 to 20 years, our entire federal government will be bankrupt as well.

Best regards,

Your chairman

Regards,

Porter Stansberry
Baltimore, Maryland
August 6, 2008

"

 

[dangnewt]

Good stuff, strikes me as right on.

 

[Bassic83]

Heard someone saying on the radio on the way home that the US may declare bankruptcy as soon as next year. I doubt that, as the nation owns the printing presses that spit out the lifeblood we know as cash...of course, with this being an election year, I have to wonder what their motivations are...

But the fact that people are starting to talk openly about the very real possibility that the ship is indeed sinking leaves me to ponder...where will I go? What country will have a reasonable way of life that I can adopt, where I don't have to pledge my allegiance to either a warlord or a corporation? I already knew, growing up, that there would be no retirement for me. That's not the part of the equation I'm worried about. My "catastrophic health plan" remains in the same place it has been since I last cleaned and lubricated it, locked away in it's form-fitting case on the top shelf in my closet...my retirement savings I have been slowly converting to Euros and precious metals that I can hold, not some silly ETF that is bound to the dollar. Our leadership has just abdicated their job, rushing out to go on vacation to spend a little time with their families before they actually had to DO something. My 401k is in about the same place as it was a year ago, despite my reallocations. At least I'm not moving backwards there like so many of my coworkers. But what good is it, if the dollar is worth nothing? Someone at the top is getting very, very rich at the expense of the average Jose, while the rest of us are drowning in debts our great grandkids won't ever be able to pay. The US is imploding, and it's happening faster than I had ever imagined. No longer do we stand for fiscal prudence, they spend money faster than they can print it, make stupid decisions, refuse to address issues even if their feet are held to the fire, and attack the middle class, gutting it. We have been on an empire-building trip of late, and the next step after empire is invariable collapse, yet nobody sees it? I find that hard to believe. I see it coming, and I am not at all sure I want to be here when it all comes crashing down.

Sure, there are profits to be made, but some of them are not worth the hit my conscience would take making them. I am not greedy, so I guess I don't have what it takes to be in the top percentile.

That article, which I had read before you posted it, is spot on. It's about being held to agreements made 40+ years ago, when the world was a vastly different, (and some would even argue, a better) place.

Very good post, Smash.