Monday, September 29, 2008

Panic Monday (Musical Tribute)

Let's go acoustic. Electric guitars would be overkill.

Six o'clock already
I was just in the middle of a dream
I was sellin' J.P. Morgan
With a crystal bluetooth headset scream
But I sold too late
And it seems that I just won't get paid
These are the days
When I knew my bed was already made

It's just another panic Monday
I wish it was Sunday
'Cause that's my pun day
My lack of bank run day
It's just another panic Monday

Have to catch an early train
Got to be laid off by nine
And I just bought an air-o-plane
Still can't make the payments on time
I've been leveraged so long
Hard to figure out what I'm gonna swear
Blame it on the game
But the loss is already there

It's just another panic Monday
I wish it was Sunday
'Cause that's my pun day
My lack of bank run day
It's just another panic Monday

Reality bites
Why did my broker have to buy last night?
It tanked down
Doesn't it matter?
That he is fooling the both of us
Employment's down
He sells me with his banking voice
"C'mon sonny, you should buy the dips"
Cash it goes so fast
It's quite worrisome

It's just another panic Monday
I wish it was Sunday
'Cause that's my pun day
My lack of bank run day
It's just another panic Monday

Wall Street panic hits New Yorkers hard

A flood of somber, dejected-looking bankers and investors poured out of the Stock Exchange Monday after a Congressional bailout plan failed, sinking the Dow Jones industrials to historic lows.

Hope Revisited

Last Thursday I said the following as it relates to the bailout plan.

If, and this is a big if, the pricing in the market has hit an illiquid wall and the government's intent is to merely unclog the system, I do think there is some hope.

Hope was clearly not warranted at that point. It seems Congress wants the clog to fester.

US Congress rejects billion dollar rescue deal

In the US, House Republicans blamed a partisan speech by Speaker Nancy Pelosi, a Democrat, for the bill’s failure.

So let me get this straight. The contents of the bill were apparently acceptable, but the Democrat's speech wasn't? I didn't realize the speech was being voted on. I was under the assumption that speeches from the opposing party could generally be safely ignored. Shame on the Democrats for verbally poking the beast. Shame on the Republicans for being the beast.

Sticks and stones may break bones but words will hurt arrogant self-serving congressional elitist egos and quite possibly send our country into another Great Depression? Fantastic. How bad could it get?

US Treasury Secretary Hank Paulson went down on one knee at one point to plead with Democrats not to say anything to the media which would harm the chances of a deal.

That should be some indication.

Invest an Hour

Invest an hour and boost trading confidence

That was in my inbox. It was from ETrade. Their stock was down 25% today and now trades at $2.60.

This is great news. Financial institutions are now willing to accept "time" deposits in leu of actual cash it seems. You invest an hour of your time and you'll be ready to take on Nobel Prize winning economists, professional day traders, umpteen hundred hedge fund managers, and a variety of high level management types with reams of insider information. With this boost in trading confidence, you simply can't lose!

That being said, I can boost your confidence right now. Why wait an hour? Behold the power of the Internet! If you are at a dinner party, someone asks you the meaning of a phrase such as in leu of, and you aren't quite sure of the exact definition, just say, "I think it has something to do with foreclosures." If you do this a few times you'll really start to feel more confident. You'll be making a great impression on those around you. You might even get a promotion.

Search the web for "in leu of"

First Hit: "Deed in leu of foreclosure??"

See how it works? Let's try again. If asked what the US Department of Housing and Urban Development was doing these days then I'd simply respond, "Foreclosures?"

Search the news for "US Department of Housing and Urban Development"

First Hit: United Way and HUD start foreclosure hotline

Don't believe me? Come on. It works every time. Ask me about Michigan election officials. Not knowing anything about that I'd simply say, "I'm fairly sure it has something to do with foreclosures."

Search News for "Michigan Election Officials

First Hit: Michigan officials: Foreclosure can't stop votes

That's how I generally run this blog, only the rules are changing. In the past I'd say it has something to do with illusions and prosperity. One must keep up with the times though if one intends to appear smart. Now I'd say it has something to do with foreclosures. Genius I tell you!

Beware the curve ball though. Once someone realizes what you are doing and that maybe, just maybe, you aren't quite as smart as you appear, then you'll want to switch from foreclosure to bankruptcy. For example, if someone was to ask you about "creative loafing" that's a clear indicator they are catching on. That's the time to switch! You'd respond, "That's not foreclosure! That's bankrupty thanks to our economy tanking!" Then do a hearty chuckle and wink to the ladies. You simply cannot lose at that point!

Search News for "creative loafing"

First Hit: Creative Loafing files for bankruptcy protection

“This is not a management issue. It’s strictly the economy tanking.”

Stock Market Down 12 Years

Oops. I really should try harder on my headlines. It was not my intent to imply that the stock market has been a lousy investment over the last 12 years. I'm just talking about today.

The S&P 500 is currently down about 6%.
The 3-month treasury bill currently yields a mere 1/2%.

Therefore, at today's 3-month treasury bill rate, it will take roughly 12 years of interest to "safely" recoup the losses for those who are selling stocks right now.

Of course, I'm not factoring in inflation over the next 12 years for those concerned about future purchasing power. Hence my quotes around the "safely" word.

Let's be an optimist though and assume that there won't be any inflation going forward. It makes the math so much easier (to stomach).

Friday, September 26, 2008

Record Failure (Musical Tribute)

WaMu Seized by U.S., Assets Sold to JPMorgan in Record Failure

Sept. 26 (Bloomberg) -- Washington Mutual Inc. was seized by government regulators and its branches and assets sold to JPMorgan Chase & Co. in the biggest U.S. bank failure in history.

Record failure? I guess this means Washington Mutual won't be putting out a Greatest Hits album.

Thursday, September 25, 2008

Hold-to-Maturity = Mark-to-Myth?

The big bailout is unlikely to work

LONDON: The U.S. "hold-to-maturity" bailout plan is really just the new "mark-to-myth," and even its heroic proportions are not likely to paper over solvency problems in the banking system.

I've been thinking about this idea for a few days and how it applies to my own personal finances. I believe I have a new appreciation for what the banking system is going through.

As you may recall, I participated in the 20-Year TIPS (treasury inflation protected securities) auction in January. For the record, I put roughly 10% of my overall net worth in it. The yield ended up being
1.81% (above reported CPI inflation).

The yield today on the 20-Year TIPS is

If I was forced to sell my 20-Year TIPS today I'd experience a loss of roughly 12% (0.61% times 19 1/2 years). Needless to say, I'm glad nobody is forcing me to sell. It gives me some small feeling of what the investment banks must be going through though as they are forced to sell. I'm in reasonably safe government backed TIPS. Just imagine what it would be like if it was subprime mortgage debt instead.

What does it really mean to me though? How much worse off will I be over the next 19 1/2 years? I know this might seem hard to believe, but I'll actually be somewhat better off. Here is my reasoning.

First, I'll still be earning 1.81% over reported inflation (technically 1.75% since I bought at a discount as part of the auction process). That doesn't change. In 19 1/2 years I'll be getting my inflation adjusted principal back. That doesn't change either. Therefore it is very hard to say that I could be any worse off in the long-term.

Second, the market is saying that inflation isn't going to be as big of a problem as I feared. That means that it is less likely I'll be earning 10% or more per year (say 8% inflation with 2% real yield) and being fully taxed on that 10%. That actually helps me. I may have overpaid for the inflation protection, but under no circumstances was I ever rooting for extra inflation. All it could do is hurt me (it would just hurt me less than people without inflation protection). I was also never rooting for a complete stock market and financial institution collapse. How could that possibly help me long-term? No, I'd be better off in the long run if the prosperity machine continued to fire on all cylinders (or at least appears to be firing on all cylinders). I might not do as well as my risk-taking neighbors by taking the safer path, but I'd still be doing okay.

Third, in 19 1/2 years I'll need to reinvest. Should these real yields hold up I'll be one happy camper at that point. That's a very good thing. My worst fear is that real yields turn negative, inflation skyrockets higher, and I'm left with no safe way to protect my nest egg without resorting to hoarding even more hard assets. Currently, the markets are saying my worst fear will not come to pass.

Fourth, I have more TIPS maturing soon (the next several years). It is in my best "interests" to root for higher real yields as I reinvest that money back into more TIPS.

Yet, here I am with a 12% loss on paper. It is a real loss and I'm certainly not trying to argue that it isn't, but it is simply an opportunity cost loss. The odds of depleting my nest egg have not gone up. Sure, had I waited I would have done better. That being said, in 19 1/2 years, based on what the markets are currently telling me (lower inflation going forward), I will still be doing better than I originally expected though. Ideally, at least as it applies to me, I'd be rooting for zero percent inflation and be getting paid a mere 1.81%. My taxes would be next to nothing. So how could I complain? The market is telling me that I'm somewhat getting my wish (just wish I could believe the market, it can tend to get very confused from time to time).

In summary, I have a 12% real loss, but it is the kind of real loss that lets me sleep better. I continue to "hold-to-maturity" and somewhat sigh in relief. It honestly doesn't concern me much what the market is willing to pay for what I own. I never intend to sell it, nor is it likely that I'll be forced to sell it. I guess that's what separates my risk from that of an investment bank.

This is the exact same mindset I have towards my toilet paper hoard. I have no doubts that the market would not pay me full price for it either (on eBay for instance). That also doesn't bother me though. I never intend to sell it either. Go figure. Further, if the market determines that I overpaid for my toilet paper hoard at some point in the future that's just fine too. It will simply be another opporunity cost loss. In fact, I'd root for it too. First, someday in the distant future I'll no doubt NEED to buy more. I will certainly not complain if it ends up being even cheaper. Second, even cheaper toilet paper means that hyperinflation did not wipe out my entire nest egg.

So is "hold-to-maturity" a "mark-to-myth"? As it relates to my personal finances, I don't see the myth in my reasoning. Perhaps there's some glimmer of hope that the same could be said of the government's plan. Oh my, I said something optimistic again. I better not make a habit of this. I think that's the second time I've done it since starting this blog, lol.

If, and this is a big if, the pricing in the market has hit an illiquid wall and the government's intent is to merely unclog the system, I do think there is some hope. Unfortunately, that's a reasonably big if. There are SO many problems and this is but one of them. For example, should the entire global economy begin to bounce back and billions of workers world wide think driving cars is in their future while simultaneously helping us to exponentially grow our trade deficit, well, I'll no doubt be back to my old pessimistic (realistic and stagflationistic?) self in no time. Of that I assure you.

Monday, September 22, 2008

The Importance of Proper Economic Darkness Wording

With markets on edge, journalists watch their words

So in most of the news, stocks have "slid" and markets "gyrated" but not "crashed." Companies have "tottered" and "struggled" rather than moved toward failure and bankruptcy.

One must not speak of crashes, failures, and bankruptcy.

"We're very careful not to throw words around like 'meltdown' and 'free fall,' " said Ali Velshi, senior business correspondent at CNN. "If someone wants to say the markets are in free fall, we'll discuss it first," he said, and the outcome is most likely to be a change in wording.

One must not speak of meltdowns and free falls.

" 'Crash,' 'panic,' 'pandemonium,' 'apocalypse,' those are the words we're staying away from," said Robert Christie, a spokesman for The Wall Street Journal, now part of the News Corporation.

One must not speak of crash, panic, pandemonium, and apocalypse.

At the same time, no one wants to be seen as minimizing the danger. The Journal's front page has called this the worst financial crisis since the Depression, and each day last week it carried banner headlines the entire width of the page — the first such headlines since September 2001.

Oh oh. I've been saying those words. Why do I suddenly feel like I've summoned an Army of Darkness?

Wiseman: When you removed the book from the cradle, did you speak the words?
Ash: Yeah, basically.
Wiseman: Did you speak the exact words?
Ash: Look, maybe I didn't say every single little tiny syllable, no. But basically I said them, yeah.

Oh yeah, that's why.

Questioning Risk?

Unrest has investors questioning risk fundamentals

Market turmoil leaves investors wondering whether lessons about risk still apply

For the record, lessons about risk still apply. I'm fairly confident that hasn't changed. In fact, I'd bet large amounts of other people's money on it using 30-1 leverage just like a typical financial institution would. It's such a sure thing!

No matter how close they are to retirement, many are considering getting out of the stock market entirely by shifting to cash or even gold, believing the market is so shaky they're willing to take the potential tax and inflation erosion they'll suffer from a quick pullout.

Yeah, I had those exact thoughts back in the summer of 2004. I even acted on those very thoughts. Go figure..

Welcome to the party, pal! - Bruce Willis, Die Hard

Some habits "die hard" though.

"Right now, it is just a loss on paper. If I pull out now, it becomes an actual loss," says Deborah Allen, a 51-year-old administrative assistant at a Royal Oak, Mich., school district who's trying to protect a nest egg she's relying on to take early retirement next year.

Picture my head banging down repeatedly on my desk. Seriously. Picture it. My forehead hurts.

She has a
persistent attitude about her nest egg though (i.e., that it's only a loss on paper so far). I'll give her that. In fact, it reminds me a bit of how banks are treating their own mark-to-market waste. It's only a loss on paper.

Stagflation (Musical Tribute)

Oil Rises for a Fourth Day on U.S. Bailout Plan, Weaker Dollar

Oil has climbed 17 percent since Sept. 16, the biggest four- day gain since October 2000, as lawmakers pledged fast consideration of the Treasury's plan to buy devalued mortgage- related securities. The dollar fell to a three-week low against the euro, increasing the appeal of commodities as a hedge.

"Line of Death" to the tune "Taking Over Me"

Taking over me
You're taking over me
Taking over me
Taking over me

Saturday, September 20, 2008

Woo Hoo! (Musical Tribute)

Congratulations are in order! We taxpayers are cleaning house, literally. What a week!

Despite crisis, the U.S. stock market is holding up relatively well

If you put all your money into American stocks this year, congratulations. You may have lost money, but you have also done better than investors in almost any other stock market.

Woo hoo!

Congratulations, you’re now in the banking, investment and mortgage business.

You and I are now in the mortgage business with a rather limited contract of employment. We pay the bills but do not reap any potential profits. Heck of a deal!

But that’s exactly what has happened with the government’s (i.e. the taxpayers, you and I) taking over Fannie and Freddie. We are also going into the banking business as we take over, outright, or guarantee the bad debts and decisions of leading banks and investment houses. Out of the goodness of our hearts, as each private business fails, workers’ pensions go down the tubes, loyal rank-and-file employees lose jobs and homes, we reward the most senior executives who made the bad decisions by allowing them to take tens of millions of dollars and live very well indeed.

Woo hoo!

US Riding to the financial markets' rescue

"What we are witnessing may be the greatest destruction of financial wealth that the world has ever seen," Pearlstein said.

On NBC News, Brian Williams had a different take. "Good evening and even congratulations," he said to viewers, "You are now the proud owner of a massive insurance company."

Woo hoo!

Thursday, September 18, 2008

The Government Bans Panicking

SEC Issues Temporary Ban Against Short Selling

The Securities and Exchange Commission on Friday launched an aggressive assault against short-sellers, saying it would temporarily prevent investors from making bets on stock declines in an attempt to stem some of the worst stock-market slides in years.

I just have one question about the sanity of this move. What are the unintended consequences? Surely there must be some. If this is truly such a great idea, then why is the ban only temporary? Better still, why was short-selling ever allowed in the first place?

The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. - Alan Greenspan, 1966

Shorting stocks is one way that owners of wealth were protecting themselves. That's no longer an option, pun intended.

There is no safe store of value. - Alan Greenspan, 1966

Panic seemed like a decent safe store of value, but that all changed in the last 48 hours. The safety was illusionary.

I'm taking a bit of damage. Money is flowing out of "safe" investments and back into the government sponsored "sure things" (Wall Street). However, I'm not complaining. As some might recall, that was actually what I was rooting for. Higher real yields hurt me in the short-term but help me much more in the long-term. As far as I'm concerned, the sidelines have never looked so good. There's not much crowding as there just aren't that many of us left here. Real returns on "safety" (through treasury inflation protected securities, TIPS) are actually looking fairly decent these days. Perhaps a miracle will occur and I-Bonds will actually be offered with a rate above 0% again soon. Sign me up.

I'm glad that I didn't panic into changing my name to Deflationary Mark. Who knew panicking would be banned? I was certainly tempted. I'm not tempted now though. The stock markets aren't all the government is managing to prop up.
Look at oil. I remain Stagflationary Mark for yet another day it seems.

I do have more blog naming remorse though. Based on the never ending government reactions to our problems, "American Roulette" would have been a better choice I think. I suspect that it is similar to Russian Roulette, but the government sponsored smoking gun comes fully loaded instead.

Wednesday, September 17, 2008

Stocks Cramered, Yet Again (Musical Tribute)

You should be buying things and accept that they're overvalued, but accept that they will keep going higher. I know that sounds irresponsible. - Jim Cramer, October 31, 2007

When have I heard that before? Oh, I know. The year was 2000.

The Winners of the New World

How did this bizarro world where nine-tenths of the companies I have followed as a stock picker for the last 20 years are losers and one-tenth are winners? To answer that question, you have to throw out all of the matrices and formulas and texts that existed before the Web. You have to throw them away because they can't make money for you anymore, and that is all that matters. We don't use price-to-earnings multiples anymore at Cramer Berkowitz. If we talk about price-to-book, we have already gone astray. If we use any of what Graham and Dodd teach us, we wouldn't have a dime under management. - Jim Cramer, February 29, 2000

They say that nobody ever rings a bell at the top. Really? Cramer's my cowbell hero. A legend is born.

More Lies

IMF head: worst of financial crisis may lie ahead

JEDDAH (Reuters) - The worst of the financial crisis may still lie ahead and more major financial institutions may face trouble in coming months, IMF director general Dominique Strauss-Kahn said on Wednesday.

I just wish I knew what definition of "lie" he was using.

Still, the world economy was very resilient and should rebound in 2009, Strauss-Kahn said to reporters after a meeting with Gulf Arab finance ministers and central bank governors.

Oh oh. I think I know which definition it is.

Monday, September 15, 2008

The Four Low Riders of the Financial Apocalypse (Musical Tribute)

  1. Lehman Brothers
  2. Larry Kudlow
  3. Lawrence Yun
  4. Lereah, David
April 11, 2006
Lehman Brothers: A super-hot machine

Fuld's modus operandi has been to bind his employees' fates together—to turn the culture from one of sibling rivalry to cooperation and teamwork. His tool: money.

Halloween, 2007
Despite the Gloom, More Bush Boom

The print and broadcast media do not give President Bush much credit for his economic policies. But somehow I have to wonder whether low unemployment, strong growth, negligible inflation, and record stock markets do not deserve just a bit of praise.

It is still the greatest story never told.
- Larry Kudlow

Top economist says state housing market is "whacked"

You have a situation in New York where you have more people with jobs and more people living in the state than 10 years ago. Affordability conditions are very similar, yet home sales activity is much lower. So something is out of whack, and what is out of whack is the buyers’ lack of confidence. - NAR's Chief Economist Lawrence Yun

March 3, 2005
Why NAR's David Lereah Believes The Housing Boom Is Far From Over

I believe that in years to come historians will see the beginning of the 21st century as the 'golden age' of real estate. - NAR's Former Chief Economist David Lereah

All my friends know the low rider
The low rider is a little higher
Low rider drives a little slower
Low rider is a real goer
Low rider knows every street yeah
Low rider is the one to meet yeah
Low rider don't use no gas now
Low rider don't drive to fast

Panic Revisited (Musical Tribute)

`Tectonic' Market Shift as Lehman Fails, Merrill Sold (Update1)

  • Balked
  • Ballooned
  • Bankruptcy
  • Breaking
  • Breathtaking
  • Carnage
  • Chain Reaction
  • Collapse
  • Convulsions
  • Criticism
  • Cut-Price
  • Detiorating
  • Dimmed
  • Dropped Out
  • Eliminated
  • Emergency
  • Erasing
  • Extinction
  • Failing
  • Fail
  • Fails
  • Flawed
  • Great Depression
  • Liquidation
  • Lose
  • Loss
  • Losses
  • Painful
  • Pressure
  • Push Down
  • Refused
  • Repercussions
  • Shaken
  • Silliness
  • Sold
  • Swirled
  • Tectonic
  • Thrust Into Reverse
  • Trouble
  • Tumbles
  • Ugly
  • Unable
  • Under Seige
  • Undermined
  • Unwinding
  • Vaporized
  • Wipes Out

See Also:
Don't Panic
Don't Panic Revisited

Sunday, September 14, 2008

Once in a Century

Greenspan Says Crisis May Be `Once in Century' Event (Update1)

``This is a once in a half century, probably once in a century type of event,'' Greenspan said. ``We shouldn't try to protect every single institution. The ordinary cost of financial change has winners and losers.''


Long Depression

In the United States, the meltdown of the European economies led directly to the Panic of 1873 and ushered in the Long Depression.

Panic of 1873

Years of government-promoted speculative credit created vast overexpansion of the nation’s railroad network. The failure of the Jay Cooke bank set off a chain reaction of bank failures and temporarily closed the stock market.


Great Depression

Another explanation comes from the Austrian School of economics. Austrian theorists who wrote about the Depression include Hayek and Murray Rothbard, who wrote America's Great Depression in 1963. In their view, the key cause of the Depression was the expansion of the money supply in the 1920s that led to an unsustainable credit-driven boom. In their view, the Federal Reserve, which was created in 1913, shoulders much of the blame.


October 27, 2005

Bernanke: There's No Housing Bubble to Go Bust

U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president's Council of Economic Advisers, in testimony to Congress's Joint Economic Committee. But these increases, he said, "largely reflect strong economic fundamentals," such as strong growth in jobs, incomes and the number of new households.

Let's not forget the "unsustainable credit-driven boom" that we also saw in the previous two "once in a century" events. I'm surprised that wasn't mentioned. After all, the Fed did lower interest rates to 1% in 2004.

"Without these policy blunders by the Federal Reserve, there is little reason to believe that the 1929 crash would have been followed by more than a moderate dip in U.S. economic activity," Bernanke wrote.

It seems Bernanke's finding some difficulty these days sustaining an unsustainable credit-driven boom. Go figure.

Tuesday, September 9, 2008

Snatching Defeat Out of the Jaws of Defeat

I flipped on the TV early this morning and was told that yesterday's 290 point stock market rally was "proof" that the bailout of Fannie Mae and Freddie Mac was exactly what the economy needed. How could I dispute it? It was proof.

Using a logical extension of this existing proof, then it stands to reason that today's 280 point plunge is "proof" that the bailout is exactly what the economy doesn't need.

The bailout was therefore exactly what the economy needs and exactly what the economy doesn't need. Dizzying, huh?

Unfortunately, that's not the only paradox. The Government clearly attempted to reduce uncertainty by bailing out Fannie Mae and Freddie Mac. Less uncertainty would translate into less market volatility. Less market volatility would imply less risk. All things being equal, less risk will eventually lead to greater rewards. For example, less risk and companies might be more willing to add jobs. It was a very noble effort. I'll give them that.

Hell isn't merely paved with good intentions, it is walled and roofed with them. - Aldous Huxley

What we actually got was two consecutive days of heavy volatility (280+ point moves in the DJIA). More volatility implies more uncertainty. More uncertainty implies more risk. All things being equal, more risk will eventually lead to fewer rewards. For example, too much risk and people will invest in highly predictable toilet paper and canned goods instead. Wall Street will not find that to be very rewarding. Not that I speak from personal experience or anything. *cough*

So let's summarize what the bailout has done.

  • Gives the economy exactly what it needs.
  • Gives the economy exactly what it doesn't need.
  • Creates less uncertainty, volatility, and risk.
  • Creates more uncertainty, volatility, and risk.
  • Offers greater rewards.
  • Offers fewer rewards.
That's probably exactly what we should expect out of our government. After all, they are using OUR taxpayer money to bailout US taxpayers out. In my opinion, it is like robbing Peter to pay Peter. How can Peter possibly be any better off once he's been robbed and then compensated for the loss?

Thursday, September 4, 2008

Economic Magic (Musical Tribute)

Greenspan: Don't use Fed as a 'magical piggy bank'

Greenspan, 82, who ran the Fed for 18 1/2 years and was the second-longest serving chief, says he is concerned that Capitol Hill will look to the Fed's actions "as a wondrous new font of seemingly costless federal funding -- a magical piggy bank."

The "magical piggy bank" reminds me of a little parable that Ben Bernanke offered in 2002, well before Greenspan retired.

Deflation: Making Sure "It" Doesn't Happen Here

The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.

Today an ounce of gold sells for $800, more or less. That's a 167% increase in price. I think it is safe to say that alchemists have not been able to produce unlimited amounts of gold at essentially no cost yet.

What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Meanwhile, our government's monetary alchemists do have a proven "magical" technology which allows them to produce as many U.S. dollars as they wish at essentially no cost. Unfortunately, they've been dabbling in the black arts for nearly 30 years (as seen here). I'm not sure they know how to stop. In fact, they must summon more dollars into existence just to pay the interest on the dollars they have previously summoned. Further, investors are a fickle lot. They don't just want interest. They want a real return above inflation. That requires even more summoned dollars. Without the extra reward, investors are no doubt tempted to hoard hard goods instead.

You have to believe we are magic
Nothin' can stand in our way
You have to believe we are magic
Don't let your aim ever stray
And if all your hopes survive...

Late-Year Recovery Hopes Devastated

Stocks plummet after retail, unemployment data

NEW YORK (AP) -- Dejected investors sent stocks plunging Thursday, hurtling the Dow Jones industrials down more than 340 points after retailers and the government added to a mountain of bad economic news and devastated hopes for a late-year recovery.

Captain Obvious says, "Goodbye bull market's wall of worry, hello bear market's slope of hope?"

Furthermore, if the job market keeps deteriorating, it is tough for Wall Street to see a rebound in sight for the economy's biggest culprit: the tumbling housing market.

Captain Obvious says, "Deteriorating job markets aren't generally known for their ability to generate prosperity, even in an illusionary sense. The same could be said of deteriorating housing markets."

"You have to have a paycheck to pay that mortgage," said Craig Peckham, market strategist at Jefferies & Co.

Captain Obvious says, "While currently true, there was a time when paychecks were not needed to pay that mortgage. All that was needed was a pulse and a banker willing to offer a stated income loan (see below)."

"We're seeing nothing but sellers," said Ted Oberhaus, director of equity trading at Lord, Abbett & Co. "In a bear market, you sort of really don't need an excuse to sell."

Captain Obvious says, "You 'sort of really' do need a good excuse when telling your bank why you aren't paying the mortgage though. Without a really good excuse, you 'sort of really' need to sell something in order to pay it. Stocks can be sold. Houses can be sold. Based on recent late night TV commercials, so can unwanted gold jewelry (and dental gold). Go figure."

Stated income loan

However, a real estate investor may have multiple properties and for each may receive only a small amount more than their loan payments on each house, but end up with 200,000.00 in disposable income. Nevertheless, a non-stated income loan would decline this person since their debt to income ratio would not be in line. The same issue can arise with self-employed borrowers, where the bank with a fully documented loan would include the borrower's business debt in their debt to income calculation. Stated income loans also help borrowers where fully documented loans normally would not consider the source of income as being reliable and stable, such as investors who consistently earn capital gains.

Captain Obvious says, "Since 2006, the consistency of the stock markets and housing markets to earn capital gains for investors seems more than a bit suspect."

U.S. House Price Decline Could Be Worse than Great Depression, Economist Shiller Says

The current hopeful consensus -- that house prices will bottom soon and then begin to recover -- is most likely a dream. Housing markets don't usually have "V-shaped" recoveries. And even if house prices stabilize in nominal terms, after adjusting for inflation, most homeowners will continue to lose money.

Captain Obvious says, "It may be best to remain on the sidelines during periods of hopeful consensuses. Using the power of hindsight, Captain Obvious should have sold his house a few years ago to become a renter. He's also seriously questioning his stagflationary outlook, not that he's going to alter his inflation protected investments and begin to bury fiat paper dollars in his backyard. That is not what concerns him most. It is that he's talking about himself in third person. He's clearly fallen off the deep end, much like our overall economy."