some of mannfm11's old articles

Posted on Saturday, August 25, 2001 - 2:56 am: -------------------------------------------------------------------------------- AUTHOR: mannfm11 DATE: 8/24/01 5:52:16 PM STATS: 182 reads 0 replies Funnyhow people find someone to blame for their bad investments. Greenspandid a pretty good balancing act for the late 1990's. If anything, likeDoug Noland writes, he failed to blow this thing up about 3 yearsearlier than he did. But everything started lining up so well, like theCPI and what they called productivity. Then there was the debt collapsein SE Asia, where everyone saves every cent they don't spend on riceand new cars and thus someone else has to borrow it. I cannot blameGreenspan for the mess that the world, through its greed got itselfinto. The Democrats liked to call the 1980's the decade ofgreed because of guys like Michael Milken. Compared to the 1990's, the1980's was mild in this matter. The 80's were a decade of difficultfinance, because the Fed did the opposite of what they did in the1990's. They hammered down on the interest rates every chance they had.One little inflation sneeze would be met with a panic in the bondmarkets and a major hike in rates. If I recall correctly, the long bondhit 7% around April 1, 1987 and immediately turned upward, hitting 10%the day before the crash of 87. I don't believe the Fed did anything atthat time but barely touch interest rates. The dollar fell in the sinkover actions that barely move it today. The good old USA was sustaininggrowth, despite the handicaps it had from its central bankers and aninsane world exchange market. Literally the opposite happenedin the 1990's. Instead of the greed being confined to a few WallStreeters like Milken and the others that ended up in prison, togetherwith some guys that were given the key to the S&L vault to hide thefact that system had already gone broke in 1980, hoping they couldwheel and deal congress out of a bailout and move the problem down theline, the 1990's was a time when the greed bled over to the public. Thesearch for higher returns bled over to everyone from the child prodigy16 year old high school kid to the blue haired old ladies. Throughoutmodern American history, there has been only one period of time thatwas handicapped by massively high interest rates, at least on a nominalbasis. That was the period from roughly 1970 to 1991. I think a lot ofthat had to do with the influence of the Great Society, where everysocialist program possible was passed and the Viet Nam and cold wars.Johnson saw this coming and he removed the silver from the backing ofthe dollar, thus allowing for the expansion of the money supply with nolimit and having no substance suddenly behind the money but the copper,that was worth a mere fraction of the silver behind the money. Theprogressive nature of the tax schedule gave the government a continualwindfall in taxes that was not even approved from year to year bycongress and the massive deficits that were building were hidden fromview. This tax increase was passed along as higher wages which fed moreinflation and higher taxes and eventually created a squeeze on capitalformation in the United States. People love pork, but they hate taxincreases and Congress had the best of both worlds, with a tax codethat automatically passed tax increases on the working man withouthaving the debate in the news that taxes were being raised, providingthem with an endless flow of higher tax receipts. So, we had asystem that automatically fed inflation, with higher production costscreated out of the tax system and cheaper money created by there beinga sudden windfall to the government of coining money, previously madeout of silver, from copper. The deficits created by this mess didn'tlook too bad because they were hidden from view and were being takenout of savings of the people that saved money by conventional means.Plus, the system started doing a number on the stock market. In1981, Ronald Reagan was elected president and he had a plan to stopthis nonsense. For one, he decided to win the cold war instead of haveit as a stalemate that drained billions annually out of the treasury,but provided no solution. Second, he decided to cut the legs out of thespending side of the government by freezing bracket creep and theincentive of government to create inflation. Government raised taxes bycreating inflation, not by voting taxes in those days. So, we suddenlyhad a system that protected the taxpayer from bracket creep, butexposed the government to higher spending if inflation continued, dueto indexing of government benefits. What this really did was forceCongress and the President to debate tax increases publicly and killedoff the idea of every socialist program that could be imagined beingpassed. It did something else. It exposed the massive deficitsthat had been masked by the continual inflation and bracket creep.Reagan was blamed for the deficits of the 1980's, but they were thereall the time, draining the very life out of the United States economy.Had he not been faced with continual high interest rates during the1980's, I doubt we would have seen these deficits go on for more than acouple of years. The amount of government financing really couldn't beblamed for these deficits, as the amount of financed red ink peakedduring the S&L and bank bailout around 1991 and the result wasrevealed to be a 3% discount rate by the end of 1992 or early 1993. Iknow this sounds pro Reagan and it is. For one thing, the cold war wasbeing waged as nothing but gradual surrender, instead of being a war.Second, the spending of the government was out of control. I took thebudget figures published by the government between 1961 and 1975 andused trend projections. Those trends in receipts and expendituresrevealed a projected budget deficit for the year 1991 of $900 billion.So what ever Reagan did, shaved $600 billion off that trend, despitethe fact the long over due bill for bank and S&L bailouts had to bepaid during that period. He also won the cold war, which freed upbillions more to be spent in other directions. This influencedtwo major trends in the 1990's. First of all, the Fed was forced to cutinterest rates back to more conventional levels. Second, it freed thegovernment from the binds of raising taxes and not being able toaddress spending issues. They not only had billions from the end of thecold war available, but they had hundreds of billions eventually fromthe lower interest rates that appeared. With the need to raise taxesfor the politically palatable reason of balancing the budget gone,business and the private sector was suddenly given a stable playingfield. This was really all the result of the Fed finally letting itsfoot off the neck of the economy, due to the fact that by 1990, theyhad killed the economy. They had a nice culprit in Ronald Reagan, whoprobably did more to save the American economy than any President inthe 20th century. Capital spending and formation could then take placeon a more conventional basis. It had another effect though.During the 1980's, despite a nice return in stocks, maybe as good orbetter than the 1990's as a decade, the investment of choice wasinterest bearing accounts and government securities. Since the shortterm rates had gone from as high as 16% to as low as 3%, there weresuddenly a lot of people searching for a better yield. Those people,quite often the retirees and people in their 50's, started barrelinginto the stock market. I mentioned that the market was too high and wassubject to a long correction to a well known local man who was playingthe market and his response was, where are people going to get thereturn on their money, revealing the fallacy that a lack of savingscould be remedied by a higher return. So, the clever idea of the freelunch provided by stocks was made up and embraced by those thatcouldn't face the fact they didn't have enough money to maintain theirlifestyles. Returns of 20% became advertised as being the norm, ratherthan the exception and the long term inflationary trend of the past 70years, that had clearly been reversed, was accepted as normal and along term 11% return out of stocks was accepted by academia. Withso many people barreling into stocks, a new paradigm was again acceptedas being normal. This time its different was the call. I believe GeorgeSoros came up with a great theory in his theory of Reflexivity, in thatthe sound scientific basis of economy is often thrown out because therecomes a period where it suddenly doesn't look to apply. Financialprincipals always apply, as risk and return parameters over time arealways constant. That doesn't mean that there aren't riskier times thanothers, but that a risky investment is a risky investment and thereturns offered are generally a reflection of the risk involved. Stockswere suddenly looked at as risk free investments, if you held them overtime. The shifting sands of the modern economy, where a dollar istreated as a dollar, but isn't a dollar over time, hides the riskinvolved in these securities, as one may eventually sustain a gain, butfind out in purchasing power, they sustained a loss. Inflationcan only bail out investments on a nominal basis, but it is the majoringredient in the changes of price of most instruments today. Sincechanges in prices are taxed, how much gain must be involved to reallyearn a profit? Maybe quite a bit. On the alternative, how many of theseinvestments are going to zero or close to zero before these highlyuneducated investors realize what they have done and get out? (There isa vague idea passed around that the investors today are more educated,but being educated in the art of Finance, I feel the opposite is truebecause most of these valuations given to stocks have no basis in atrue financial valuation.) My guess is quite a few. Now letsaddress the idea of inflation. I believe what has occurred is ourproperty has replaced the metal in our coinage as the collateral forthe money. Contrary to most of the opinions on this page, that thedollar is going to see a sudden fall, I believe we are faced with athreat of massive deflation. As time has passed, people have mortgagedtheir primary asset, the equity in their homes to do about anythingfrom pay off their excessive credit card balances and finance thehigher education of their children, to taking the money and putting itinto their 401K's and high yielding investments that may not yieldanything when the ink is dry. Doug Noland keeps harping on the amountof FNMA paper on the market and I believe he is 100% correct in hisassessment of its influence in the market and economy. The problem is,this cannot go on forever. We are now faced with a weakening economyand the driving influence behind home prices, more spendable income issubsiding. Once home prices quit going up, the net effect is they startgoing down. A home, once purchased and financed, is worth 90% of itssales price to its owner, due to sales costs involved. When onerefinances their home, they often give up part of their equity inrefinancing costs. We are headed for an equity trap in this area. Ibelieve the home has become the asset that backs the money in thiscountry, as people will fail to pay just about anything before theygive up their homes. Going forward, if this one majorhousehold investment or necessity begins to fail, we are faced with amajor deflation. There isn't anything to collateralize more credit on amajor basis. The growth industries of the world have outfinanced theirability to generate revenues and their credit is crumbling as we watch.There is going to be a limit. Greenspan is in a pickle. Thiswhole mess is going to have political implications as well as financialimplications. Clinton spent 8 years reaping the benefits of the pain wesuffered in the 1980's of correcting an out of control government.Instead of doing something to correct what was called the greed of the1980's, the Clinton white house, together with a marginally Republicancongress, gave the key to the henhouse to the Wall Street wolves.Someone in the SEC should have realized we had a mania going on thatwas being fueled by a lack of full financial disclosure, even if fullfinancial disclosure was being made. I believe the pundits of the maniaknew the earnings being posted and the investments being made by thesecompanies was of highly doubtful quality, but there was littledistinction being made as to what was what when the situation wasdiscussed. Companies were given credit for earning 1% against thecapitalization value of the company, despite the fact that in the sameyear, 5% of the equitible equity in the company was given away in stockoptions to employees, thus really showing a 4% loss. Corporate officerswere given an extravagant life style at investor expense. A goodquestion that is continually being tossed around is, are guys likeSandy Weil really worth compensation in the area or $250 million andmore per year, year after year? When you think about it, that makes thesalaries paid the best sports athletes look like chicken feed. Has BillGates and Paul Allen really created $150 billion in wealth or are wejust in a temporary illusion? Has $1 billion become such a small sumthat bonuses and overnight sensations been able to merit it or have welost our minds? It takes 1000 million dollar homes to collateralizethis amount of money. Look at Mark Cuban, who got money out of Yahoo soeasily, he doesn't flinch at throwing it around to any NBA player thatwill come to the Mavericks. This guy has multimillion dollar toyscalled basketball players. So the real question is, did AlanGreenspan create this mess or did the pundits on Wall Street whostarted believing their own hype? For one to blame Greenspan for CSCObeing given a $600 billion cap value, while GM and Ford combined for$100 billion is nonsense. I think if Greenspan keeps this economy fromimploding out of this mess that was created by the Wall Street wolvesand dream weavers like Cavuto, he deserves a Nobel Prize in Economics.But, I am a firm believer there is not mathematical solution to bankcredit but bankruptcy and as long as large institutions are given thekey to the creation of money out of basically nothing but thecollateral they can get, we are going to be faced with this problem. Ibelieve in charts because the whole phenomenon we have witnessed is anatural event. People were created in a certain manner on apsychological basis and the masses will always do the same thing,provided the same stage is created. This can be charted in pricemovements. If the genetics and emotional nature of people changed overthe matter of a few years on a major basis, there would be no basis incharting, but this doesn't occur. Most of us are neurotic, despite howstable we may appear and this means we adopt emotional opinions ofourselves that exceed our true powers. What this means is it willalways happen to the other guy, but I can beat the market or I can getfantastically rich on my own resources, out smarting the markets. Thelaws of finance and nature don't apply to me, only the other guy. Thistime its different. I will get out in time if it starts to implode! Thatlast statement says it all. We had quite a few bear markets appear tostart and like the boy that cried wolf, people reacted, only to missthe next maniac wave upward. Well, the wolf is at the door and thechickens are trained to not believe he can get in the coop. He isalready there and a few of the chickens are being eaten daily, but therest think they are too smart to be eaten so ignore the wolf. Weare in for a long bear market. The valuations and the economic cycledon't support a breakout in stocks any time soon. The money machine ischoking on its own medicine and Greenspan knows it. He is concernedabout the banking system, which is the true backbone of the economy,not the stock market. He is getting close to being out of rope and aJapanese scenario is around the corner if the lower rates don't createearnings for the banking system and ease the financing pressures of themajor corporations in debt. I don't know that we won't have a crash,except crashes don't generally occur this far into a correction. Thechickens are stuck on the nest and in denial. Corporations are facedwith a long line of one time charges against earnings as they attemptto keep their book value intact. Cavuto has believed his own bull forso long, he has bought into the nonsense that financial principalsdon't apply to stocks. These are risky assets and must be capitalizedas such, not as treasury bills. As the mess deepens, the risk premiumon stocks, especially the growth stocks with little history, has to goup. Absent a fall in earnings, this means the price has to go down,unless the interest rates on long term capital continues to fall withshort term rates. This influence hasn't been felt yet, as the 30 yearbond is still where it was the afternoon Greenspan first cut rates inJanuary. We have created a capital crisis in the United States, and thepeople that have failed to realize it are the very ones that aresupposed to report it. Great posts worth putting in special places (See Bottom Entry)
RE: And another	mannfm11	NEW 8/14/2007 7:50:19 PM
AUTHOR: mannfm11 DATE: 2/24/01 5:54:40 AM STATS: 214 reads 1 reply My friend, you like most Americans seem to be ignorant of how credit works. Inflation is something that cannot be measured by prices because it happens outside of prices, upon the extention of credit. What price will clear the shelves is always the important price and it generally collapses over time because people run out of credit. Hyper inflation is generally created in a system where there in noncollateralized debt being extended. Eventually the amount of debt against collateral becomes sufficient to begin to consume money rather than produce it. At that time, there either has to be more assets to mortgage and get more money or the ability to service the debt begins to decline, thus impairing the loan against the property. If a lender begins to sustain losses, they lose the ability make more loans and become financially impaired. If you read closely what Doug Noland prints, you will see that fine line between inflation and deflation. The inflation we suffered in the 1970's was as much or more a result of debasing the American dollar than merely printing too much money. A shift in demographics also contributed to a lot of shortages as did spiraling regulation. Plus, the very reason for the debasement of our money was the Great Society, where a tax spiral was created and a lot of the debt was monetized. There are two things at work right now and not many people understand them. One is what Noland talks about and that is the creation of deposits outside of banks. The problem with this system is there is little control on how far they can spiral these deposits, as long as someone can find the collateral to borrow against and there is paper to support the deposits on the other side of the equation. This system would work fine, but there are now increasing chances the quality of the paper behind these money market assets will go bad and if they do, there will be a run started on these funds. All the money in this country is in the banks and these money market funds have to draw on this money in some way or another. So they are supporting a tremendous amount of close to cash deposits with really no money. Have a run on these funds and the value of the paper implodes on itself. Its kind of like the Mississippi bubble where the Mississippi stock collapsed when John Law offered warrants to buy the same stock. The system becomes a vacuum, short term rates go to the moon and the capital base of FNMA implodes on itself. You take FNMA out of the mortgage market and there is not a mortgage market. Try to borrow funds or sell your house without a FNMA or any system where there is a low down payment necessary. This knocks over every domino and the life savings of the entire country goes up in smoke. You may think this isn't possible, but it is becoming more probable every day. The problems in Japan revolved around real estate and excessive lending on it. I was in the mortgage business in the 1980's and we would kick what they call a good borrower today out in the streets. The quality of loans today are crap. Despite the higher quality of lending in the 1980's, the market still imploded here. Virtually all equity in homes sold at full financing after 1979 was gone and there were close to 100,000 foreclosures here. It won't take much of an economic slowdown to wipe out almost all the equity in homes in the United States due to this excessive lending. That is why Noland calls it a moral hazard and a problem in the future. The collateral value will collapse when the financing dries up and the equity, what enables people to move in the first place, is gone. Then there are the banks. This outside the bank financing has diminished the quality of bank loans. If the banks have their capital impaired in a slowdown, which is likely, they don't make new loans. When money is paid back to a bank, it ceases to exist in anyones account, not even the banks. M-1, which is hardly sufficient to support what is going on now without repeated crisis around the world could potential and probably will implode as this asset deflation continues. Robert Prechter said it best when he stated we were a credit based society and that the extention of credit was based entirely on the good faith of the parties. The faith of the lender the loan was good and the faith of the borrower that they could pay it back. If you have so little knowledge to think the money market assets in these accounts and the payments made against loans behind this commercial paper will be made in event of a collapse in M-l then you need to do some studying. People start pulling in their horns when times start getting tight. They sell off assets and pay off debt, thus constricting the money supply. Then a lot of the other debt becomes unservicable and the system implodes. It's part of a bubble deflation. I heard in Thailand a plane was bought with a Krugerand as was an almost new BMW. Now is that inflation or deflation? You want to sell something of value in a declining market and you will wonder what happened to inflation. The point is, all this paper piled up on top of the banking system is going to implode. People can move their money to the safety of banks, but banks have got to purchase this paper to give them the money so they can get it out of these accounts and put it in the bank. Banks won't be up to buying these assets in a liquidity squeeze unless they can get favorable terms and borrow from the fed at rates that make the paper worth the risk. The rates the Fed charges are useless if the banks don't make loans and borrow the funds, collateralized of course, from the Fed. People seem to be under the assumption the Fed just throws out money on the street. If lending and borrowing dry up, the discount rate used by the Fed doesn't matter. Real estate price in Japan are now 10 cents on the dollar and I have heard estimates they still have another 90% drop in front of them. Their central bank has had rates almost free, yet it hasn't picked up the economy much. Remember, this country thought times were bad when their unemployment rate went up to 4%. Their problem is their asset bubble burst and they cannot get collateral to create more money. They just flat ran out of collateral in the 1980's. It takes money to provide liquidity to the markets. We are going to find this out quick as this declining stock market starts to suck hard cash out of circulation. The asset bubble bursts all the way down when it bursts. Most people in the US don't have enough money to live 2 months without a job and they will surely use what credit resources they have left. There will be people with maxed out credit cards and others paying them off monthly and all that will be left in these money market funds are debts with no mathamatical solution. Try to draw your money out of a nonperforming money market fund and see how far you get. There is sure to be a run on these uninsured accounts and there will be no market to liquidate several trillion dollars in short term assets in these funds. So, when the credit system in a credit based society collapses, there are no spendable funds in widespread circulation, thus no money to buy goods and services and a massive deflation. The whole system is built on a flimsy house of cards and a small breeze can now topple it. The inflation you are speaking of is in the past and we may have more in the future, but Greenspan can only fight one tiger at a time and he knows the deflation tiger will win this battle, even if the inflation tiger appears to be winning right now. He takes an eye off the deflationary threat for one minute and we are dead ducks. But, I don't believe anything less than the government creating money off treasury debt is going to stop this beast. No credit, no money, no sale. Suite 101.com Posting of 2/24/01 comment by mannfm11 on prudentbear Anyone ever take time to post your stuff? Why don't you read some of this stuff written a few years early?