Geldpress

There is no shortage of great books that explain the financial crisis in simple details that even a boob CEO from Countrywide, Citibank, Fannie Mae, Moody’s and Goldman Sachs (not a typo, even the Goldman guys turned a blind eye to the mess as it was created!) can understand.  Here is another one called Financial Shock from economist Mark Zandi, and it is definitely worth reading.  You can read chapter 1 here for free and decide for yourself if you want to purchase it.

Financial Shock: A 360º Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis by Mark Zandi

I just found this interesting piece to share.  Take a look at the Financial Times snapshot below that lists the top foreign banks in order of the ratio of their assets as a percentage of their countries GDP.  If the United States government deemed its own Bear Sterns, AIG, Lehman, Freddie Mac and Fannie Mae to big to fail, then failures in the in the list below could cause quite a bit of economic disruption in their own countries.

To date, the blame of the current financial crisis is all pointing to the United States.  And most of the freefall in financial shares is occuring here as well.  The European Union has stood strong against interest rate cuts, and according to a recent report by Bloomberg,  they are expected to continue holding the line on interest rates.  But in this tightly linked global economy, it’s hard to believe that the irresponsible lending that caused the current crisis occured solely in the United States.  Perhaps Europe is just doing a better job of hiding the mess they are in.  And if that’s the case, then the banks listed above could cause serious turmoil in their respective countries when the truth starts to leak out.

The bailout bill failed to gain enough votes yesterday, but all indications predict that a substantial package will pass both houses in the coming days or weeks.  But even if the bailout bill does pass, what’s next?  The Commerce Department recently reported on September 24th, that sales of new homes dropped by a seasonally adjusted 11.5% from July to August.  Year over year sales were down 34.5% from August 2007 to August 2008, and inventory of unsold homes still sits at 10.9 months.

Even if the entire financial industry is wiped clean of all their existing bad debt, they still face the grim prospects of how to garner new business going forward.  The old game is over.  Consumers are wise to the crooked real estate agents, rating agencies, banks, builders, appraisers and mortgage agents.  They are also terrified of continued weakness and falling prices.  The ones not scared are just not qualified to borrow substantial sums of money to buy a house.   Housing prices, especially in past runaway appreciation markets like California, Florida, Seattle, New York, Chicago, Las Vegas and other large cities are destined to see continued weakness.  With weakness comes more foreclosures, more walk aways, more short sales, and more bank losses.

It took a decade or more to get into this mess, and it sure is not going to be over with a single $700 billion check!

I was not at all surprised by today’s 777 point drop in the Dow today.  What I am surprised about, however, is that Jim Cramer still manages to brainwash his viewers into thinking he has a clue.  There are countless examples of Cramer’s ignorance, but the two videos below pretty much sum up his lunacy.  In the first clip, he is kissing up to Ron Paul for his brilliance as the only one in congress that understands the financial issues.  In the second clip he is justifying the bailout, the same bailout that Ron Paul is vehemently opposed to.

The bear market and correction we are facing was a long time in coming.  We have been living on borrowed time in this phantom credit and over leveraged economy for far to long.  The market drops we are witnessing are a direct result of the credit crunch and the de-leveraging it is forcing on the economy, and there will be more blood on the streets to come.  Regardless of whether an amended substantial bailout  is passed, the path of least resistance is DOWN.

Jim Cramer praising Ron Paul for his views on letting the market self correct:

Jim Cramer justifying the $700 billion bailout of the financial markets:

The Geldpress bookstore has a new category titled “BAILOUT NATION”:

Books related to reckless economic policy, failed policies of the past, housing bubbles, financial crisis, bank failures, long term capital management, other insane bailouts, the great depression, the national debt, savings and loan crisis, and more.  The latest round of financial bailouts are nothing new.  These reckless ideas have been going on for decades, and will continue indefinitely as long as we let it.

Just click on the BOOKSTORE tab to get started.  There are 5 pages of bailout books to choose from.  Among those I recommend most are:

Everyone knows you can’t squeeze blood from a turnip, but it hasn’t stopped Paulson and Bernanke from trying.  The American economy today is built entirely on speculation and irresponsible consumer spending.  Housing prices, especially on both coasts, and in large cities (Chicago, New York, Baltimore, California, Florida, and more) will continue to go down no matter what the intervention is.  The consumer is tapped out, and the easy credit days are over.  Perhaps one day in the future everyone will realize again that it is just a market sum game, but until that time we will continue looking for blood in the turnips.

The latest measure from the government is to ban short selling in 799 financial securities, and to expand the purchase of toxic securities from all of the incompetent financial firms that got us into this mess.  The full details and the exact wording of the far reaching bailout plan is yet to be released, but it does seem to have bipartisan support, and the support of the biggest moron on Wall Street, Jim Cramer.  Jim Cramer’s philosophy, if you remember, is to celebrate the counterfeit boom in the housing bubble based economy, and then scream and cry for interest rate reductions and bailouts when the house of cards comes falling down.  Jim Cramer apparently never saw the mess coming 5 years ago when he pumped up the stock prices of every bank, brokerage and homebuilder during his nightly shows.  Despite the obvious warnings, in the form of minimum wage workers everywhere receiving $500,000 home loans, the ignorance of the “experts” and “leaders” is purely astonishing.    The list of those “experts” and “leaders”, in random order includes:

• Alan Greenspan - After 911, he aggressively jacked down short term interest rates to 1%, and encouraged everyone to take loans they could not afford.
• George Bush - Utterly clueless.  Up until yesterday, he was still in denial of the financial crisis, and wondering how much more of those phantom surpluses he should give back to taxpayers.
• Phil Gramm - Completely gutted the Glass-Steagal act in 1999, and replaced it with the Gramm-Leach-Bliley act, allowing commercial banks, investment banks, and insurers to merge, and setting the stage for the largest bubble in world history to occur without oversight.
• Suze Orman - She claimed on national TV that “nobody could have seen this crisis coming”, and urged homeowners nationwide to move to Seattle to buy even bigger houses they could not afford.
• Henry Paulson - Worked for Goldman Sachs as they helped create the mess, and now the biggest sponsor of the largest bailout of Goldman Sachs and other financial institutions.
• Moody’s corp - They are called a rating agency, but in reality they only have one rubber stamp, with three letters on it - “A A A”.
• Jim Cramer - He is famous for his arrogant “They Know Nothing” rant, when in reality he has been completely ignorant of the housing bubble since its beginnings.  He preached for years on how the idiotic investment banks and homebuilders were the best investments.  And when they got in trouble for insanely stupid loans and ridiculous leverage, he cried how the “Feds know nothing”.  And now he supports the largest bailout in history to save his buddies at Goldman Sachs, at your taxpayer expense!

The additional details of the current bailout will likely be apparent in the coming days.  But don’t expect it to be the last bailout, or the last set of rule changes to the market.  Housing prices are still extremely unaffordable, and need to come down, and come down A LOT!  But these very necessary collapsing housing prices will wreak additional havoc on the economy.  More jobs will be lost.  Consumers, who surprised everyone by spending what they didn’t have over the last decade, will suddenly be cut off from easy credit.  Federal, State and local tax revenues will plummet.  Everyone will feel the pain of the idiotic economic policies of yesterday.  And the ranting over the bailouts will continue for years:

From the Daily Reckoning,

They’re missing the point completely. It is not “flaws” that are being exposed - it’s the whole consumer economic model and the whole generation of jackass economists who created it. They rejected the insights of classical economics. Instead of encouraging saving and capital formation, they thought they could nurture growth by luring consumers to spend more money.

From the UK Telegraph:

What is causing widespread anger is that those who should have exercised greater caution have already banked the gains from the good times and have a nest egg to sustain them even if they do lose their jobs….Perhaps most of us, at some point or other, have dipped our hands in the pool. Where did we think all that cheap money was coming from? With people borrowing 10 times their salaries, there was always going to be a settling of accounts.

Professor Bennet Sedacca

The Federal Government just declared war on short sellers.
Will it help the real economy? No sir.
Will it help the value of my house? Nope.
Will it blow up hedge funds? Yep.
Is it a selling opportunity? You betcha.
Will the rally last ? No.
Will earnings increase? Actually I think they will fall.

From Lea Pickard, former SEC official:

The securities and exchange commission can blame itself for the current crisis.  The SEC allowed five firms — the three that have collapsed plus Goldman Sachs and Morgan Stanley — to more than double the leverage they were allowed to keep on their balance sheets and remove discounts that had been applied to the assets they had been required to keep to protect them from defaults.

English Al Jazeera:

The roots of the panic in financial markets around the world are deep and complex but they lie in the convergence of three factors. Millions of people pursuing the “American dream” of home ownership, politicians and regulators who dismantled a system of financial safeguards and then ignored warnings of impending disaster and financial markets and institutions disregarding risk in their headlong pursuit of profit.

Speculation Economy book, by author Lawrence Mitchell:

American businesses today are obsessed with the price of their stock, and no wonder. The consequences of even a modest decrease can be so dire that some executives would rather damage their corporation’s long-term health than allow quarterly returns to fall below projections. But how did this situation come about? When did the stock market become the driver of the American economy? Lawrence E. Mitchell identifies the moment in American history when finance triumphed over industry. He shows how the birth of the giant modern corporation spurred the rise of the stock market and how, by the dawn of the 1920s, the stock market left behind its business origins to become the very reason for the creation of business itself.

The Speculation Economy: How Finance Triumphed Over Industry (BK Currents (Hardcover)) by Lawrence E Mitchell

The financial markets are in turmoil.  Nobody disputes that.  The mystery is how we are going to get out of the mess, and how we will prevent a similar mess in the future.  But in an election year, both presidential candidates are scrambling to present their solutions to the mess.  The most interesting solution comes from John Mccain.  McCain has always stated openly and honestly that he knows nothing about economics or finance.  It’s no surprise then, that his solution is to authorize a high level commission to study the turmoil and find out what went wrong.  Such a high level commission would surely cost American taxpayers millions of dollars.  What McCain does not realize is that the exact cause of this crisis has already been conclusively determined. (Hint:  Housing Bubble)  The cause is clear, the damage has been done, and the American public is simply looking for a path out of the mess.  And they are looking for a path that does not put the taxpayers on the hook for bailing out incompetent banking and brokerage CEO’s.  If McCain is serious about leading the country out of the mess, he should stop reading Age of Turbulence, and instead concentrate on the following books that explain the mess:

Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve by William Fleckenstein

Bailout: What the Rescue of Bear Stearns and the Credit Crisis Mean for Your Investments by John Waggoner

Bear-Trap: The Fall of Bear Stearns and the Panic of 2008 by Bill Bamber

The United States press is not the only place we are seeing calls for a dollar rally.  The United Kingdom Times Online has a story very well worth reading, Profit from a plunging pound.

They are predicting continued weakness in the pound, and advising British citizens to “Invest in America”.

The pound has fallen 16% against the euro over the past year and hit an all-time low of €1.23 last week — compared with €1.47 this time last year. It also hit a two-and-a-half-year low against the dollar, falling to $1.77 — down 12.4% on the year and 16% from its peak of $2.11 in November.

Related Reading on dollar rally call:

• Preparing for and playing the dollar recovery - bye bye euro
• United States ranks 51 in Nationmaster debt to GDP

Take a look at the 7 year chart of the U.S. dollar vs the Euro below.  The dollar saw a triple top in the 1.15 range between late 2000 and early 2002, and has gone steadily down ever since.  But that decline may be on the verge of a significant and long lasting recovery.   Are you prepared for the dollar recovery?

There are many reasons why a currency can become weak over time, and the United States has had significant factors justifying a decline in the dolalr, including:

• Prolonged and costly wars in Afghanistan and Iraq
• Fiscal recklessness and runaway deficit spending
• Large debt to GDP ratios
• Huge trade imbalance - trade deficit
• Low federal funds interest rates (currently just 2%)

While all of these factors have indeed impacted the dollar over the last 7 years, it is important to realize that currency analysis works in pairs.  It’s not enough to justify a weakened dollar on its own merit.  The dollar weakens or strengthens only in relation to other currencies.  And often times the extent of a weakening currency (dollar) can be overdone due to perceived values. The United States currency decline may have been overextended due to several factors including:

• United States budget and debt statistics are freely available to anyone around the world, making it convenient to target United States fiscal recklessness and ignore other currency problems.
• By many accounts the housing weakness and bank failures started in the United States
• Multiple dollar doomsday books available such as the Demise of the Dollar, and The Collapse of the Dollar.

But eventually the currency traders will realize that for every problem pointing to a dollar decline, there are just as many or more pointing to an even greater chance of a euro and pound collapse.  Consider these facts:

• From Nationmaster, the United Kingdom debt per GDP ratio is a staggering 387%.  France has a ratio of 173%, Germany 144%, Greece 148%, Ireland 758%, Italy 117%, and Finland 135%.  Those staggering figures make the United States ratio of “only” 86% seem less atrocious.
• The United Kingdom chancellor of the Exchequer, Alistair Darling, recently stated that the U.K. economic environment is the most difficult in 60 years.
• Forbes magazine recently predicted the Demise of the Euro.
• On a lighter note, the Big Mac purchasing power parity indicator points to a strengthening U.S. dollar as compared the euro and pound.

If you believe that despite the U.S. fiscal problems, the dollar will still lead a prolonged recovery against the euro, pound and other currencies, then here are a few ways to play it:

• The Rising U.S. dollar ProFund mutual fund.  (symbol RDPIX)
• The Rydex Strengthening Dollar 2x fund.  (symbol RYSBX)
• Powershares DB US Dollar Index Bullish Fund.  (symbol UUP)

From the Los Angeles Times in June 2008, “Music sales decline 8% on piracy, industry group says”:

Music sales fell to the lowest level in at least 10 years as a surge in digital content failed to make up for declines in compact discs and the effects of piracy, an industry group said today. Global music sales dropped 8% to $19.4 billion in 2007, according to a report from the International Federation of the Phonographic Industry…

But the “industry group” has failed to recognize the real answer to slowing sales, and that is the result of media hyperinflation. Hyperinflation occurs when there is so much of something available that the value of that something goes down. It is most often used to describe the money supply, such as with Zimbabwe’s currency. But the explosive growth in the information age of the last decade has also caused hyperinflation in digital content. Just count the number of albums or DVD’s for sale at Amazon or iTunes and you will see; the numbers are staggering, and increasing rapidly every year. There are also dozens of new ways to obtain free or nearly free and legal music, that will not hit the sales books of the recording industry:

• Direct consumer to consumer sales on Amazon.com, half price books or similar
• 25 cent older generation music CD’s at garage sales
• Legal downloads of free albums from up and coming bands that the labels never picked up
• Internet streaming and legal radio
• Satellite radio

Instead of recognizing the obvious, and adapting to the current operating environment, the music industry continues to blame piracy and charge the same 1990 prices ($15 for 10 cent piece of plastic) for a rapidly declining commodity with infinite supply. Perhaps the music industry would be interested in purchasing my 1990 era computer for $1500. I’ll even make a fair trade - my 1990 computer for 100 music CD’s of my choice.