Saturday, February 28, 2009

Disturbing GDP Commentary

The Most Important Messages From the 4Q GDP Report

Some very quick headline background. Although it may have been a bit lost in the shuffle, a rise in inventories contributed to the headline GDP number. Academically, rising inventories are a positive for GDP in that they are additive to the number. Of course actual businesses may see it a bit differently, no? Here’s what we believe to be one important observation. In almost classical terms, US recessions in the post war period have been led by inventory corrections. The key character trait is “led” by inventory corrections. Absolutely classic stuff. But in our current circumstances we’re now supposedly 14+ months into the current recessionary interlude and it’s only in the last quarter that an inventory problem is now occurring.

Oh oh!

You can see that we’ve shaded in the anomaly that is the current cycle. Point blank, we have not seen this type of a dichotomy anywhere in the US postwar period. For now, this is something completely different. THIS is probably the key message of the GDP report that we believe has been virtually completely neglected in mainstream financial reporting. Key point being, not even lower prices could spark consumption strength. This is quite the oddity in the post war period shown as households have always used price weakness to increase real consumption. Always...until now.

Oh oh!

The Stratospheric Apex of AmEx

AmEx Encourages Cardholders to Leave

It used to be that credit-card companies lured customers with cash rewards. Now American Express Co. is paying to get rid of them. The card issuer is offering selected customers a $300 AmEx prepaid gift card if they pay off their balances and close their accounts.

The unusual move underscores how quickly conditions have deteriorated in the credit-card market. The current economic morass was provoked by spiking mortgage defaults. But as the economic crisis widens and unemployment climbs, there is growing concern that credit-card defaults will soar into the stratosphere as well.

Here's a glimpse of the ride.

Las Vegas Stratosphere X Scream Ride

Here's a chart of the ride.

From Bad to Worse

Three market developments keeping me up at night

I’m a worrier by nature. I can’t help it. My job is to peer around the corner, figure out what’s next, and most importantly, discern what can really go WRONG in the economy and the markets.

And right now, I see three troubling developments that are keeping me up at night. These problems aren’t front-page news … yet. But they are circling in the background and threatening to explode into the headlines — derailing the market in the process. I suggest you sit up and take notice. I sure am.

For me, the biggest one is the cost to insure United States debt against default. Right now, I'd have to pay roughly 1% to do it. As seen in the chart within the link, that is way up in the last year as things went from bad to worse. 1% is what the market says I should pay though, per year, if I want to sleep better at night.

Here's what really makes me not sleep so well. Let's say I did buy the insurance that costs 1% per year. Let's say the US did default on its debt. Am I sure that I would actually be paid? Doesn't it seem likely that I should also have insurance against that bet defaulting? I mean, surely there would be vast ripples throughout the world if the reserve currency of the world went belly up.

So here's my nightmare.

1. I buy CDS in case the US defaults.
2. I buy CDS in case the CDS defaults.
3. I buy CDS in case the CDS's CDS defaults.
4. I buy CDS in case the CDS's CDS's CDS defaults.
5. And so on, until I've spent all my money on CDS insurance and there's nothing left to actually insure.

Yeah, I tend to dream of cascading defaults. Go figure. Therefore, I don't have any insurance at all. What's the point?

Last year I was basically playing Russian Roulette with a 1,000 chamber revolver and one bullet. This year I'm playing Russian Roulette with a 100 chamber revolver and one bullet. I really don't like this trend. In 2010, am I going to be playing this game with 10 chambers and one bullet? How about in 2011? Playing with one chamber and one bullet might be just about the stupidest game I will ever play.

Yet here I sit. In comparison, the stock market played with a fully loaded machine gun. Fortunately, the shooting accuracy was somewhat reduced. It did end up being a bloodbath though.

Say hello to my little friend! - Tony Montana, Scarface, 1983

That's just one of the three things that should keep me up at night. Fortunately, the other two can't keep me up at night more than I already am. It's like painting a wall white. Once the wall is fully white, two more additional coats of white paint won't make it any whiter.

Friday, February 27, 2009

Art Hogan's Bottom Seriously Violated

Sorry! I didn't know how else to word the headline. ;)

November 21, 2008

Art Hogan's Bottom Call

“This market is indiscriminately selling and ignoring good news out of IBM, GE, and ignoring good news on the monetary policy front.. all of that’s being ignored while we’re in liquidation mode.”

“I think if you look at all the carnage we’ve done to the major indices, the bottom gets put in today.“

That was said on October 10, 2008. The S&P closed that day at 899.22. It closed today at 735.09. That's an 18% loss for those keeping track at home.

What's 18% in this environment?

A pessimist would say that at today's
0.25% interest rate on three month treasury bills, it's going to take 66 years to safely make it back. Why not 72 years? Fortunately, the interest will compound and you'll soon be earning interest on that interest.

On the other hand, a pessimist would say that at today's
14.03% interest on a typical credit card, that's just 15 months of interest.

What on earth? How did the pessimist get in there twice? I was planning to have an optimist offer the rebuttal. Sorry!

Let's look at that good news out of GE we've apparently been ignoring. It closed at 21.50 on October 10, 2008. It closed down 6.5% today to 8.51. That's a 60% loss.

GE cuts quarterly dividend to 10 cents a share

In a statement Friday, CEO Jeff Immelt said that GE's board of directors cut the payout to strengthen its balance sheet and provide "additional flexibility." GE is trying to protect its top 'AAA' credit rating despite growing doubts over the stability of its GE Capital lending unit.

Those are growing doubts over stability from an indiscriminate selling, the ignoring of good news, and a liquidation mode mindset though. I want to make that clear.

The Game of Risk

Some of my investment thinking comes from the game of Risk. I thought I'd share one strategy that I stumbled upon in college.

My strategy was simple. There was no grand scheme for total world domination. I simply did not wish to lose first and I meant it. That's all I was striving to do and those I played with believed me, mainly because it was absolutely true.

I'd therefore concentrate all my armies in one country in Asia, sacrifice all others, and make it clear that I could neither take nor hold Asia. In the early stages of the game, I was clearly not a threat. I was also someone not worthy of attacking. It would be very painful to extract me with nothing to be gained.

The game would start with me being completely ignored and left alone. The only combat I would do would be early in the game with a willing participant. I'd take a nearby country to gain a card, then retreat leaving one army to defend. Another person would generally be willing to attack that army so that they too could get a card easily. They would then leave one army for me to attack and the process could repeat. Once I reached four cards in my hand I would stop all hostilities and hibernate (having more than four cards forces you to spend them).

The game would continue and I would do nothing. Meanwhile, others would fight bloody wars in an attempt to acquire more land and power. Some would lose. Some would gain. The winners tended to be somewhat weakened in the wars, at least temporarily. Each turn my forces grew steadily through reinforcements and none were ever lost though.

As the end game approached, someone would notice that I had accumulated a vast number of armies on my one country. They would want to know just exactly how many were there. That's when things started to get very interesting. I had already achieved my stated goal. I was not the first to lose. The first time I played I really wasn't sure what I wanted to do next. I didn't have a secondary goal.

One of my smarter opponents thought up a strategy to deal with me and the rest really seemed to like the idea. They would take turns whittling me down to size and therefore level the playing field. It was in their collective best interests to gang up on me. As you can imagine, I was not fond of their plan to say the least, lol.

That really helped motivate me to come up with a secondary goal. My primary goal was not to be the first person to lose. My secondary goal would simply be an extension of that. I would not be the NEXT person to lose. Winning the game was still really not a part of my thought process. I was concentrating on not losing (which some might argue is the actually the same).

My new strategy was in the form of an ultimatum. There would be no whittling. The first person to attack me will be wiped out on my next turn using ALL of my remaining armies. I would not win the game, but I would not be the next to lose. I wasn't quite sure how that threat would be received, but believe it or not it did have the desired effect. Nobody wanted to be the next person to lose. They actually went back to ignoring me!

This brings me back to the idea of the
prisoner's dilemma. It was in their collective best interests to remove me from the game, or at least reduce me as a threat (especially since I was now making threats). It was not in their individual best interests to do it though, so it never happened.

Ignoring me even though they knew I was a threat was a big mistake, although I'm not sure what they could have done to stop it without someone making the ultimate sacrifice. Sound familiar? At some point I was able to sweep the entire board of all opponents in just one turn.

The next time we played I used the same strategy and it worked again. This really surprised me. I did not expect to win twice, nor was I even attempting to do so. I simply did not wish to lose first again and they believed me again. They tried to deal with me earlier on though. That just meant that I had to offer the ultimatum earlier. It did not actually solve their problem. The problem was

The third time we played things went to hell in a hand basket. A friend of mine decided to use my strategy too. Now there were two of us being ignored. Towards the end of the game, he had boxes of armies on his country. I also had boxes of armies on my country. Here's the problem. Neither of us could sweep the board first. We were equally powerful. Neither of us had an advantage over the other. That means that if he swept the board first then he would be weakened in the process and then I could sweep him. We could not attack each other directly either, since that would weaken the victor to the point the remaining players could finish us off. We were protected by the concept of
mutually assured destruction.

The remaining players were beyond frustrated, as you can imagine. They were somewhat safe from us, but only because of our gridlock, and not because they could ever actually win. There's just something wrong about seeing boxes of armies in Asia while you are trying to send a handful of armies to take back Australia from some other opponent for the umpteenth time. It can be very depressing, or so we were told, repeatedly.

I actually felt pretty bad. We never did finish that game and it was the last time we ever played. The game was ruined for all of us, and it was all due to me playing a game of risk but striving to avoid risk. That's kind of how I feel now. The more of us that avoid risk the worse this economy is going to be. Unfortunately, avoiding risk has been a winning strategy since at least
1997 and more and more people are finally stumbling upon it.

Further, we're doing everything in our power to amass boxes of working class armies in Asia. They aren't our armies though and I doubt very seriously that we can safely ignore them long-term. We're probably well past the point of being able to do anything about it. I certainly don't think we're the ones who are going to be in a position to hand out ultimatums in the end game. Let's just put it that way. Sigh.

The Average Recession

How long does the average recession last?

I've been giving this some thought lately and I think I've come up with an analogy.

How much damage does the average hurricane do?

That's a good start but there are even better questions to ask.

  1. How much financial damage does the average hurricane do?
  2. How much financial damage does the average hurricane that hits land do?
  3. How much financial damage does the average hurricane that hits populated land do?
  4. How much financial damage does the average hurricane that hits overpopulated land do?
  5. How much financial damage does the average Category 5 hurricane that hits overpopulated land do?
  6. How much financial damage does the average Category 5 hurricane that hits overpopulated land do when that hurricane was created from an asteroid hitting one of our planet's oceans?
  7. How much financial damage does the average Category 5 hurricane that hits New York City do when that hurricane was created from a 500 mile wide asteroid hitting the Atlantic Ocean?
  8. How much financial damage does the average Category 5 hurricane that hits New York City do when that hurricane was created from a 500 mile wide asteroid hitting the Atlantic Ocean during a real estate boom?
I'm thinking that it generally pays to be as specific as possible when looking for answers. So, using that theory, let's see if we can ask a more specific question about our current recession.

How long does the average recession last when it is created by popping tens of trillions of dollars worth of ponzi debt bubbles (credit, housing, stock market) in an environment where we have a huge unsustainable trade deficit built on the idea that vast numbers of oil consuming foreigners can do our jobs and send us cheap goods as long as other foreigners supply us with vast amounts of cheap oil and both sets of foreigners are willing to be paid with vast amounts of our paper IOUs even though they see that our solution to end the recession relies on generating even more vast amounts of additional IOUs?

Whew! I need to take a breath. That question nearly wore me out.

Here's the simple answer. Who knows! We've never been here before, not even during the Great Depression.

You know how much I like sarcasm in this blog. I feel like I'm really letting you down with this post though. I only managed to work a little bit in this time (by creating the mother of all run-on sentences, which is a cheap theatrical trick and not the kind of honest hard working sarcasm I generally strive to offer).

Further, as pessimistic as my recession question seems, I have to remind myself that I have constantly been too optimistic on this blog. Things continue to be worse than I expected. I merely thought it would turn VERY bad. For example, although I moved to inflation neutral quite a few months ago, the deflationary forces have overwhelmed any stagflationary outcome so far. Wealth is being destroyed far faster than it is being printed and/or borrowed.

Thursday, February 26, 2009

The Turtle and the Hair(cut)

I had a haircut in Seattle yesterday. Business was noticeably down. The guy who cuts my hair said that he's finally seeing it now. Some customers are actually increasing the number of weeks between visits. I told him not to plant dangerous thoughts in my head. I still get it cut every six weeks.

I had my car worked on today. When I called to back out this morning (had serious second thoughts about spending the money on such an old car), they knocked nearly another 28% off the price of the work (that's on top of the 14% I haggled off of the price yesterday). I opted to do it. I asked how business was doing. They said it was down 30%. People don't seem to be buying new cars OR fixing their old ones. I don't think that can work long-term.

Watched "The International" while waiting for my car. I was alone in the theater. I laughed every time I saw "FATHOMEVENTS.COM" ads in the previews. The crashing housing market and economy must be getting to me. I was supposed to see Fathom_Events but I kept seeing Fat_Home_Vents, lol.

The movie was about evil banks controlling the world and one man's attempt to bring one down. Yeah, I was watching some fiction as an escape from reality. So sue me! My favorite line from the movie was (and I paraphrase from memory), "If you can't dig yourself out of a hole, then dig further in."

Drove home from the auto shop. I saw one of those lit up construction signs that normally tells us to expect delays and what not. This time it said $2,500 reward for the arrest and conviction of those who stole equipment from the job site.

Flipped on my computer. Noticed that my TIP fund got a haircut compared to the non-inflation protected counterpart even as oil jumped in price. Meanwhile, gold couldn't hold $1,000 an ounce, again.

I have a theory to explain this. The stagflationists are exiting TIPS, gold, and silver and piling back into oil while it is still relatively cheap. They certainly weren't exiting TIPS to buy stocks.

Meanwhile, the deflationists stand pat in nominal treasuries and refuse to buy stocks. Go with what works I guess. How can I even heckle? It really has worked, and quite well.

Just a theory of course.

Treasuries: Inflation Protection (TIP) vs. No Inflation Protection(IEF)

I was on the wrong side of that trade. I really can't complain though. I could be doing a LOT worse.

Treasuries: Inflation Protection (TIP) vs. The Stock Market

Just doing my part to play the role of the turtle. I figure it's only a matter of time before the bottom falls out of The Old Shell Game again. Regardless of what happens, I'm sticking with the turtle defense.

Here's yet another prediction. At some point (maybe years from now), financial advisors will tell us that rising oil prices are deflationary again. The long-term stagflationists will do well as inflation actually does pick up in the face of rising oil prices again. Shocking! Then the global economy will tank again. That's when the long-term deflationists will do well again. The cycle can repeat again, and again, and again. Just a hunch.

Bernanke confident can keep U.S. inflation at bay

WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke said on Wednesday that he had an exit strategy from the U.S. central bank's recent massive monetary expansion that will keep inflation under control...

I think my prediction is consistent with Bernanke's exit strategy.

I'm not quite sure at what point the long-term stock market investors do well again though. I'm not going to be holding my breath, let's just put it that way.

Tuesday, February 24, 2009

Deficit, Energy, and Employment Predictions

These predictions come straight from the government.

The Budget and Economic Outlook: Fiscal Years 2009 to 2019 (pdf)

High deficits in the near term may be inevitable in the face of the financial crisis and severe economic weakness, However, once the nation gets past this downturn, it will still face significant fiscal challenges posed by rising health care costs and the aging of the population. Continued large deficits and the resulting increases in federal debt over time would probably constrain long-term economic growth by reducing national savings and investment, which in turn would cause productivity and wage growth to gradually slow.

EIA: Short-Term Energy Outlook

The worsening global economy and a weak oil consumption outlook are keeping the world oil market well supplied, despite two downward revisions in production targets by the Organization of the Petroleum Exporting Countries (OPEC) within the past few months.

BLS: Retail Salespersons

Employment is expected to grow by 12 percent over the 2006-16 decade, which is about as fast as the average for all occupations. In fact, due to the size of this occupation, retail salespersons will have one of the largest numbers of new jobs arise, about 557,000 over the projections decade. This growth reflects rising retail sales stemming from a growing population. Many retail establishments will continue to expand in size and number, leading to new retail sales positions.

BLS: Chefs, Cooks, and Food Preparation Workers

Employment of chefs, cooks, and food preparation workers is expected to increase by 11 percent over the 2006-16 decade, which is about as fast as the average for all occupations. This occupation will have among the largest numbers of new jobs arise, about 351,000 over the period. Growth will be spurred by increases in population, household income, and demand for convenience that will lead to more people dining out and taking vacations that include hotel stays and restaurant visits.

BLS: Loan Officers

Employment of loan officers is projected to increase 11 percent between 2006 and 2016, which is about as fast as the the average for all occupations. Employment growth stemming from economic expansion and population increases—factors that generate demand for loans—will be partially offset by increased automation that speeds the lending process and by the growing use of the Internet to apply for and obtain loans.

Here's a summary.

Many retail establishments will continue to expand in size and number despite the financial crisis and severe economic weakness. As household incomes rise, despite slowing wage growth brought on by increases in the federal debt over time, more cooks will be needed as we continue to visit restaurants and take vacations. The economic expansion will require an ever increasing number of loan officers as we continue to reduce national savings and investment. And lastly, the world oil market will be well supplied as long as the global economy continues to worsen.

I don't know about you, but I feel much better already.

More Gold Safe Haven Ideas

Gold Falls as Demand Ebbs After Rally to $1,000; Silver Drops

Feb. 24 (Bloomberg) -- Gold fell the most in six weeks as demand ebbed following a rally last week that sent the precious metal above $1,000 an ounce. Silver also declined.

Now that gold is an expensive safe haven (at least compared to toilet paper and canned goods), here are some more practical gold investment ideas to help you rationalize the cost.

Gold Pills

These $425 capsules are dipped in and filled with 24-karat gold and you're supposed to eat them to "increase your self-worth".

Solid Gold Remote

It costs -- sit down -- are you seated? $55,000! It doesn't even come with a damn display!

Gold Porsche

Some moron with more money than taste has added almost 40 lbs of gold to his 911 convertible.

Gold plated Mercedes-Benz C63 AMG for the uber rich

Spending a huge amount of money on a luxury car like a Mercedes and then adding thousands more on its beautification with a precious metal or gemstones is indeed a matter of concern that needs your attention.

Golden Newspaper

The paper, a one-off, is called 'China's Flourishing Period'.

A Fifth Third Half of Year Recovery?

Q: Who is looking for a fifth third half of year recovery?

A: Fifth Third Bancorp shareholders, that's who! Badum-ching!

Fifth Third Bancorp (FITB)

Fifth Third Bancorp. operates as a diversified financial services holding company.

Here's a long-term chart of what financial services diversification can get you.

I know this sounds crazy, but ever since yesterday on the road, I've been seeing this shape. Shaving cream, pillows. Dammit! I know this. I know what this is! This means something. This is important. - Roy Neary, Close Encounters of the Third Kind, 1977

It never gets old. Sorry!

You think I investigate every Walter Cronkite story there is? Huh? If this is just nerve gas, how come I know everything in such detail? I've never been here before. How come I know so much? What the hell is going on around here? Who the hell are you people? - Roy Neary, Close Encounters of the Third Kind, 1977

Why did I have to sign the loan documents in blood? Why did I have to promise a first born? Why am I in this hand basket? Where am I headed? Why is it getting so hot?

Science illusion and ignoring the lessons of history

The first is that even at this late stage, we should never underestimate the ability of the banks to come up with novel ways of losing money.

The real beauty of too big to fail is that failure simply isn't an option. Oh the risks I would take if that worked for my own personal finances. Heck, I might even try buying stocks again at some point. Who knows!

This is not intended as another of those doom-laden comparisons with the Great Depression. The point is rather that as this crisis unfolds, some of our previous optimism seems the product of complacency or lack of understanding. We already knew what went wrong before. What we are now learning – the hard way – is why.

Doom-laden comparisons with the Great Depression must be thought of as a bonus. That's how I think of them anyway.

Alternatively, in China – whose leading banks are now much the world’s largest by market value – government has used its majority control to keep the banks lending. That is one reason why, according to the latest Merrill Lynch fund manager survey, investors now base their hopes for global recovery once more on the Chinese locomotive.

Given the recent collapse in China’s trade figures, that may be a long shot. It rather sounds as if the old decoupling theory is making a comeback out of sheer desperation.

Welcome to the Great Desperation.

Monday, February 23, 2009

The Washington State Economy

Economic and Health Insecurity: A Survey of Washington Voters 18+ on Current Legislative Issues

Moreover, among those currently retired, 18% say they will re-enter the workforce if the economy does not improve.

If you will recall, this was actually one of my fears from an earlier post today.

One-third report difficulty paying for daily necessities like food, gas, or medicine (33%) or helping a family member pay their bills (34%).


Washington state’s projected budget shortfall balloons to $8B

“We were not pessimistic enough,” in the earlier forecast in November, Raha said.

Yeah, that's been my problem too.

Why voters are suspicious of a state income tax

So far Gov. Chris Gregoire has held the line against more taxes, but she and legislative leaders still have a few escape routes. One is to say, "The budget gap is so big we have no choice." Another is to let various suits result in a court decision that prevents spending cuts, giving them the cover of, "We didn't want to raise taxes, but the courts are making us, so we have no choice." The third is the politically expedient path of throwing the mess in the hands of voters and trying to convince them, "You have no choice."

I live in a future California it seems, minus the sun.

Wash dairy farmers struggle with milk surplus

ADNA, Wash. -- The free-falling price of milk and high feed cost have forced many dairy farmers to begin to "lay off" some of their cows in an effort to make ends meet.

In this rough economy, even dairy cows are feeling the effects of downsizing.

Gallows humor is about all we have left.

"I know a farmer in Clark County, and he told me 'Chuck, this is the first time I've ever been scared,' and he's been doing it all his life," Hayes said.

Join the club.

Seattle man accused of sinking his own yacht

Jack Bateman, a broker with Mahina, remembers the Jubilee as a "beautiful" 1967 Chris Craft Cavalier. He said the Mahina has only seen this type of case one other time in its 30 years of operation.

"This is a very rare, not common occurrence" he says. Bateman added that Mahina has yet to see any real distress sales due to the bad economy.

This doesn't technically count as a distress sale of course. It's more of a distressed sinking.

I wish I could say that my commentary included sarcasm this time. It doesn't. It has been one heck of a news day though. Most of the news has been hitting me in bits and pieces, mostly to the side of the head, repeatedly, when my forehead isn't doing the same to my desk that is. Once again, no sarcasm.

Bottom Feeding Could Set a Record

Soros sees no bottom for world financial "collapse"

"We witnessed the collapse of the financial system," Soros said at a Columbia University dinner. "It was placed on life support, and it's still on life support. There's no sign that we are anywhere near a bottom."

The Record Catch - "Sport Fishing"

We're all bottom fishermen now. Who knows what we'll be bringing up from the bottom.

Housing Bubble Memory Lane

May 26, 2005
Real Money: Don't Buy Housing Bubble Propaganda

There are bubbles in debt, credit and interest rates. There is the oil bubble, the import bubble, the China bubble and the current account deficit bubble. In short, we have a veritable bubble in bubbles.

He managed to name every single bubble that popped and even one that hasn't (interest rates, at least so far). Too bad it was sarcasm, lol.

Indeed, it is astonishing how many people who failed to either acknowledge the tech bubble in the 90s -- or at least failed to act on it -- now have no hesitation to declare real estate to be a bubble. This despite their lack of expertise or past track record in spotting bubbles on a timely fashion.

It is even more astonishing how many people heckled the people heckling the housing bubble, the debt bubble, the credit bubble, the oil bubble, the import bubble, the China bubble, AND the current account deficit bubble after already seeing one bubble pop.

I put the count at about one person actually, which you have to admit is pretty darned astonishing!

Sarcasm is dangerous work. I want to assure you that there are many layers of safety in place to protect the sarcastic nature of this blog.

First, the sarcasm is performed by a semi-trained professional in a controlled laboratory environment.

Second, zero or more adults supervise the sarcasm in its preplanning stages, planning stages, and its actual implementation. It is then stress tested using the power of prehindsight.

Third, if it passes said stress tests, it is moved on to an historical sarcasm simulator to see how the sarcasm will hold up in a simulated real world environment.

Fourth, under no circumstances is the sarcasm allowed to predict the current state of the universe or predict the future without adequate disclaimers. This usually involves either a self-heckle, a question mark, and/or references to trained monkeys. Even then, there is some risk that inaccurate sarcasm might be perceived to be released onto the Internet.

Fifth, if you have to ask how much sarcasm insurance costs, then you simply can't afford it. You'll need it though. There is nothing worse than having your sarcastic hard work heckled in a sarcastic manner. Nothing.

Please, for your own safety, do not try this at home. Once you put the sarcasm onto the Internet, it becomes fair game for every sarcastic loving fool out there, of which I am one. As a side note, don't even get me started on puns!

Timing the Next Bull Market (Musical Tribute)

Long-term fix on finances still eluding California

And perhaps most deplorable is that after months of marathon debates in Sacramento, we still don't have a clue how the state government will keep running once the bandages fall off.

We are no closer to reaching a long-term fix for our perennial financial problems than we were when Schwarzenegger rode into office, after forcing the recall of Gov. Gray Davis, whose budget gaps paled in comparison to the chasms we now face.

It would be nice to think that the critics of the budget in Sacramento would have some ideas about how to rectify these long-term problems. Instead, they stood by the sidelines, chanting “No new taxes” and “Cut the fat” as the state headed toward the brink.

Oops, I did it again. I forgot what my point was. Sorry!

Hot Opportunity

Boiling frog

The boiling frog story states that a frog can be boiled alive if the water is heated slowly enough — it is said that if a frog is placed in boiling water, it will jump out, but if it is placed in cold water that is slowly heated, it will never jump out.

The story is generally told in a figurative context, with the upshot being that people should make themselves aware of gradual change lest they suffer a catastrophic loss. Often it is used to illustrate a slippery-slope argument.

I forgot what my point was. Sorry.

The Investment Minefield

I'm having investment minefield flashbacks today, ten of them to be precise.

I remember heading into 2000 thinking that I'd be relatively okay. I felt strongly that the dotcom bubble was a bubble, but I was also mesmerized by the long-term performance of the stock market. One of my beliefs was that it was better to own banks than to have money in banks over the long-term. That brings me to financial landmine #1. I mostly avoided dotcom type stocks when most others seemed to love them. I wanted solid earnings. When dotcom stocks blew up, they did take part of my foot though.

As some may recall, I sold all my stocks in 2004.

It was August. I had done fairly well compared to the major market averages. I rode out the dotcom bubble's collapse and although it was painful I did manage to fully recover (and then some, but no better than CDs would have done overall). I looked through my stocks individually and I really didn't like what I saw. At the top of my not-liking list was Citigroup. Call this landmine #2. I had to replace a deep-rooted belief that it was better to own banks than have money in banks and replace it with a wacky theory that maybe neither option was a good idea. Not easy to do!

I had this very uneasy feeling that we were simply trying to borrow prosperity and I was therefore no longer interested in companies that specialized in debt. I still had some brainwashing left in me though. Buy and hold stocks for the long run, blah, blah, blah. I therefore sold all my individual stocks and bought broad market ETFs.

Shortly thereafter, I had an epiphany. If I didn't like my individual stocks any longer then why would I assume that a collection of all stocks would be any better? I wish I would have realized that on the first day, but fortunately I did eventually realize it. It cost me a few percent. The broad market was not doing well. However, in the grand scheme of things this was landmine #3. I managed not to step on it.

It was my plan then to wait for the next recession and then jump back in. One would come someday. I was mentally prepared to underperform the market into the distant future. It didn't matter to me. Greenspan and his crazy interest rate scheme had made me whole. That was good enough. I just didn't feel like taking the risk any longer.

Okay, so there I am sitting in cash. Sigh of relief. Right? Yeah, that lasted less than 24 hours, lol.

The very next day, I had another epiphany. Holy @#$%! I'm sitting entirely in cash earning next to zero interest, possibly even negative if inflation keeps up. That brings me to landmine #4. I put one third of my nest egg in gold and silver as the dollar fell and inflation picked up. Whew!

Fast forward to 2006. Gold and silver went parabolic. I sold. They promptly crashed. That was landmine #5.

Or was it? I was now sitting entirely in US Government debt. How did that happen? Further, avoiding landmine #5 was only good in the short-term. Nobody told me that gold and silver would form yet another parabola. Therefore, landmine #5 was actually a misplaced step to some degree. Boom! Literally!

Here comes a series of landmines. When I exited the stock market in 2004 it was my plan to jump back in when the next recession hit. However, the market gave me a lot of time to think and start a blog. I had way too much time in fact, to make charts that is. Whew!

When the DJIA fell to 11,000 in July of 2008 I was tempted to jump back in. Adjusted for inflation, it had been a rough four years. The market seemed fairly beaten up. That's landmine #6.

When the DJIA fell to 10,000 in October of 2008 I was tempted to jump back in. That's landmine #7.

When the DJIA fell to 9,000 in October 0f 2008 I was tempted to jump back in. That's landmine #8.

When the DJIA fell to 8,000 in November of 2008 I was tempted to jump back in. That's landmine #9.

Now the DJIA has fallen to nearly 7,000. I am tempted to jump back in. As you can see, I'm almost always tempted these days. That may or may not be landmine #10.

I'm not going to jump back in though. I'm reminded that more money was lost during the Great Depression attempting to bottom feed than was lost in the original crash. I'm never going to jump back in. That brings me to the latest epiphany. I'm done. I can stay in TIPS and I-Bonds for the rest of my life. If for some reason they do extremely poorly, then I strongly suspect that the stock market will be doing much, much worse. On the other hand, if the stock market does okay over the long-term then so will TIPS and I-Bonds. I therefore have very little reason to risk stepping on any more landmines. Further, I feel incredibly lucky as it is. That's a LOT of landmines. It really does feel like I'm standing in the middle of a financial minefield. I do not wish to tempt fate. I'm done moving!

I'm calling my condition Post Traumatic Landmine Disorder (PTLD). Let's hope you don't suffer from it. Let's really hope everyone doesn't end up suffering from it, or this economy will be in even more serious trouble.

You can lead a horse to water, but you better not do it through a minefield! It's a simple problem with the math. There's just too many darned feet.

Illusion of Mall Prosperity

Is the American mall dying?

The doomsday scenario has crushed the share prices of some developers. Shares of the country's second-biggest mall operator, General Growth Properties (GGP, news, msgs), have plummeted below $1 as investors have become increasingly concerned about debt load.

I'm a believer in doomsday scenarios. Keep in mind that I have been consistently too optimistic though. Sigh.

The pain of a dying mall is far-reaching. For many of the suburban municipalities involved, problems at the mall portend problems with the municipal budget.

I have no great desire to own municipal bonds.

"Malls generate so much tax revenue for the township, homeowners hardly have to pay any property tax. A dead mall means there's no choice for the town except to raise property taxes," retail expert Jim Quinn said.

Something tells me raising property taxes isn't going to work in this environment.

"America is in survival mode. The American consumer is trading down; they're going to Dunkin' Donuts and McDonald's (MCD, news, msgs). They're not going to pay for designer coffees at Starbucks," Davidowitz said.

I strongly believe that this is a permanent change and if so there is absolutely nothing the government can do to reverse it.

"Ultimately, the American consumer loves to shop. I don't think that's going to change that much," Moore said. "As employment returns, which it always does, then the shoppers will return again as well."

The American consumer loving to shop is one reason why we are in big trouble. Another reason is that some things that "always" happen, didn't. Stocks "always" went up over the long-term. Real estate "always" went up over the long-term. Our country "always" grew more prosperous. We were "always" able to borrow against that prosperity.

Our last recovery was called a
jobless recovery for a reason. I'm really not looking forward to what history will call our next one. I suspect that we'll be breaking another "always" rule of thumb. Way too much of our economy was built on debt, automated, and/or outsourced away.

Here's another quirk about employment that makes me wonder. How many people thought they had enough money to retire early? How many of these people spent money assuming 10% annual returns or more on their nest egg? How many of these people are praying for a second half of year recovery? How many of these people will be in serious trouble if it doesn't come?

Lotto Lessons for Homeowner Bailouts

The authors focused on two groups of winners: those who won a big jackpot (between $50,000 and $150,000) and those who won a small jackpot (less than $10,000). In all cases, the winners received their entire prizes in one upfront, lump sum (rather than in yearly payments, as in some other state lotteries). In theory, the people who won the big jackpots should be less likely to file for bankruptcy than the winners of more piddling amounts. Right?

Wrong. The study found that in the first two years after winning a lottery, people who won a big jackpot were, as expected, 50 percent less likely to file for bankruptcy than their counterparts who won smaller jackpots. But during the three to five years after winning, big-jackpot recipients showed a statistically significant increase in bankruptcy rates of similar magnitude.
In other words, winning a large amount in the lottery seemed to postpone, rather than reduce, bankruptcy — even if the jackpot amount was more than enough to fully pay off the winner’s unsecured debts.

Keep the Faith!

The Morning of February 23, 2009
Stocks Set to Rally After Waterfall Decline: John Dorfman

A recession usually ends three to nine months after the stock market hits its low. Many economists are now talking about a recession stretching through 2010 and perhaps into 2011. Although that scenario is possible, the stock market suggests that the country’s economic contraction is more likely to bottom out in late 2009.

I'm reminded of the year 2000. The stock market suggested that the economy was ushering in a new permanent level of prosperity never before seen in the history of mankind. The stock market sure knows its stuff. Only fools would bet against its omnipotence and all-knowing ways.

Later that Day

U.S. Stocks Fall, Sending Market to Its Lowest Close Since 1997

The S&P 500 lost 3.5 percent to 743.33, its lowest close since April 1997. The six-day losing streak in the U.S. stock benchmark ranks as its longest since October. The Dow Jones Industrial Average tumbled 250.89 points, or 3.4 percent, to 7,114.78, its lowest since May 1997. The Russell 2000 Index lost 4 percent.

Behold the stock market victory salute. Ours is not to question the supreme financial being. Sacrifices must be made. Remain blissful in its almighty splendor. Better times are coming. Stay invested. Keep the faith. Faith is the spirit.

It's just a one-fingered victory salute.

May 3, 2001
Keep the faith. (Larry Kudlow)

BETTER times are coming for the stock market and the economy according to a number of market-based financial and commodity indicators.


Though full economic recovery probably won't appear until next year, it is likely that a sizable stock market rally has already begun. As is always the case, stocks lead the economy by six to nine months.


Better times are coming. Stay invested. Keep the faith. Faith is the spirit.

The bull market in sarcasm and heckling continues.

Saturday, February 21, 2009

The Danger of Gold, Silver, Death Futures, Annuities, and Cons

Calculated Risk: Silver, Gold, and the Hunt Brothers

I don't follow gold, but back in the late '70s I was long the silver market. I closed my positions when housewives started selling the family silver - and eventually shorted the market. Of course that market was being manipulated by the Hunt brothers, but this story reminded of early 1980.

I was given three silver dollars as a graduation gift in 1982. There was an ad in the local paper offering me $18 each. I sold them at a hotel room in Spokane, Washington. They spent a moment looking at the coins, then they tossed them into one of the very large white buckets along with everyone else's coins. At the time I felt that maybe I was being fleeced. In hindsight, I actually made out like a bandit. I'm reminded of this each and every time I see a television commercial asking to buy gold from me. It's kind of creepy.

You've got to have nerves of steel to bet against
this and this over the long-term. I could only muster a short-term bet. I owned gold and silver from 2004 to 2006. Using hindsight, I made out like a bandit again. Those I sold the metals to would also make out like bandits if they sold today. At some point, we'll need serious hyperinflation for the bandit machine to continue though. What if it doesn't come? What if we slide into a long-term deflationary mess instead? Don't think it is possible? Yeah, well that's exactly the same thought process that was used to justify buying overpriced real estate. It only goes up. That being said, I'm a believer in the long-term stagflation story, but only to a point. I do not think it is a sure thing. Worse, from an investment standpoint, gold and silver may have already fully priced it in.

All I wanted was some inflation protection and I managed to earn more than 50% (even after transaction costs to buy and sell it). A friend reminded me that I told him that I would take gold and silver to my grave if necessary. He wanted to know why I changed my mind. I didn't change my mind. It simply paid off sooner than that. That brings me to the bulls make money, bears make money, but pigs get slaughtered rule of thumb. Don't be greedy, especially in an environment that has been punishing greed in a major way, such as this one.

Gold and silver have been in a bull market for nearly a decade. I certainly can't tell you where the price of gold and silver are headed next. However, I can say that if I had to choose between converting my life savings into gold and silver or converting it into toilet paper, I'd choose toilet paper hands down. It has not risen in price parabolically AND if the you know what really does hit the fan I am quite confident that I will be glad to have it. The things that Mad Max would look for (toilet paper and canned goods) are still relatively cheap. I'd much rather hoard the cheap stuff. In fact, I actually do. That's not being greedy. That's just buying insurance.

Steer clear: 4 'hot opportunities' to avoid

And his recommendation would be brilliant if it were 2001. Over the past eight years, gold has soared from about $271 an ounce to its recent closing price above $900, an all-time high. If you had bought then and sold today, you would have earned a 230% return -- better than virtually any other investment.

That's kind of how I see it. We're well beyond the Suze Orman's of the world investing in precious metals. Gold and silver are pricing in hyperinflation but if that's the case why isn't oil pricing it in too? Risky!

So-called life settlements are the latest twist in a 30-year-old market in "death futures." They involve buying a person's life insurance policy for a fraction of the policy's face value. The investor gets paid when the policyholder dies.

I had NO idea you could even do this. Good grief.

Like all annuities, equity-indexed ones are complex contracts that come with pounds of legal documents. That's where you find the "gotchas," which vary from contract to contract.

I really don't like annuities and for so many reasons. First and foremost, I am not going to pay someone else whopping fees to manage my risk for me, especially when I realize that they'd prefer to simply be spending my money on some beach in the Caribbean. Who wouldn't!

Second, a few decades ago I had two salesmen show up at my apartment. They told me that I could earn a fixed 9.5% in an annuity and asked me if I wanted to know more. Of course I did! I kept asking two questions over and over again. What's the catch? It is really 9.5%? No catch and yes were the answers. I spent time looking through the paperwork. I couldn't spot the problem. I bought in. Later that night, I reverse engineered the payout data. It didn't come up anywhere near 9.5%. I called them up and cancelled. Fortunately, I had three days to back out and I knew it. They were really, really mad. They invested several hours time with me. They weren't the only ones who were upset though. Where did that 9.5% go? Fees! That's what they told me once I'd actually done the math. Most people wouldn't do the math of course. That really ticked me off. How many people had they fleeced?

And lastly, I cringe every time I hear that annuities are guaranteed. Guaranteed by what? I'm having a really hard time trusting the U.S. government to stay solvent long-term. What are the odds I'm going to trust an
insurance company to actually do the same? Insurance companies don't have monetary printing presses last I checked, nor do they have a captive audience that they can tax.

Con artists know you're desperate. They know you think the people on Wall Street are all crooks who lie to you and keep the best deals for themselves.

Don't even get me started. They sure do seem to know me. Hahaha! You know what they say about something looking to good to be true though. There are no sure things. I feel that I'm already in a hand basket asking where we are going. The last thing I need is a brochure of "hot opportunities". That's just cruel!

Wednesday, February 18, 2009

Exponential Growth, Deficits, and the Made in China Kitchen Sink

The following link is a must see. Trust me.

Watching the Growth of Walmart Across America

That's the problem with exponential growth. It can go on for years and years without anyone really noticing or caring. In the later stages, everyone notices and cares though.

That's exactly how I see China. When we first started sending our jobs overseas it didn't seem like it was a big deal. Of course, we didn't have a massive unsustainable trade deficit back then though. We also still had plenty of jobs.

Calculated Risk: U.S. Trade Deficit Graphs

The trade deficit with China was $23 billion in November alone, and even with declining imports from China, the deficit with China will probably account for well over half of the U.S. trade deficit in January.

Welcome to my petri dish. I no longer feel immortal. We can't afford to put the disease back in the bottle and we can't afford to cure it.

Got antibiotics? You do? Are they still made in America?

Does the United States make anything anymore?

WASHINGTON — It may seem like the country that used to make everything is on the brink of making nothing.

In January, 207,000 U.S. manufacturing jobs vanished in the largest one-month drop since October 1982. Factory activity is hovering at a 28-year low. Even before the recession, plants were hemorrhaging work to foreign competitors with cheap labour. And some companies were moving production overseas.

But manufacturing in the United States isn't dead or even dying. It's moving upscale, following the biggest profits, and becoming more efficient, just like Henry Ford did when he created the assembly line to make the Model T.

The article tries to put a positive spin on it. I guess I've just been spun enough.

Judy Horkman, 47, was devastated when she was laid off after 13 years of attaching handles to saute pans on the Mirro Cookware plant assembly line. But two years ago, Horkman took a job making industrial light fixtures for office buildings and warehouses at Orion Energy Systems Inc. She makes $12.50 per hour - not quite the $13.80 she earned at Mirro, but Horkman says she is fine with that.

No good can come from middle income wages not keeping up with inflation and no good can come from an unsustainable trade deficit.

November 22, 2004

The Trade Gap: How Long Can It Go On?

Still, doesn't everyone agree that the trade deficit should shrink?

No -- some argue that U.S. deficits serve vital interests. American factory workers suffer, but consumers and the government get to spend more than they earn.

It made me want to pull my hair out. It still does. Common sense as an economic policy must have died at some point.

What's the bottom line for the deficit?

It's hard to say because this experiment has never been conducted before. What happens when the world's sole superpower becomes history's biggest debtor? No one's really sure.

The experiment isn't doing all that well lately, in case anyone didn't notice.

Responsibility Math?

Fla. smoker's widow gets $8M in damages

The jury did find that Hess was 58 percent responsible for the cigarette addiction that led to his death. If Philip Morris prevails on appeal, that could cut the compensatory damage award from $3 million to about $1.3 million.

I just want to make sure I understand the math properly.

Stuart Hess is 58% responsible. That implies that Philip Morris is 42% responsible.

42% responsible costs $8 million.
58% responsible would therefore cost $11 million.

As I see it, the widow Elaine Hess should be getting $19 million in total. That would seem fair.

What if Stuart Hess didn't have the $11 million to pay Elaine Hess though? In the name of responsibility, perhaps the U.S. taxpayer can cough up the difference. Surely we can work the money into a future stimulus package.

Let's talk about what $8 million dollars is really worth. Maybe that's enough money though.

Tech coalition launches sweatshop probe

The report by the National Labor Committee, a human-rights group based in Pittsburgh, covers the work environment in the Meitai Plastic and Electronics factory in Dongguan City, Guangdong, China. According to the report, released this month, workers sit on hard wooden stools for 12-hour shifts, seven days a week. Overtime is mandatory, with workers being given on average two days off per month.

The report also said that while workers are on the production line, they are not allowed to raise their hands or their heads, and they are given 1.1 seconds to snap each key into place. Workers are prohibited from talking or listening to music and are encouraged "actively monitor each other" to see if any of the multiple company rules are being transgressed. They are also monitored by guards, according to the report.

It also found that workers are fined if they break the rules, that they are locked in the factory for four days per week, and that they sleep in crowded dormitories. The workers' gross wage is 64 cents per hour, which the report claims "does not even come close to meeting subsistence level needs," while their take-home pay is 41 cents per hour.

At 41 cents per hour, $8 million represents 9,380 man-years of cheap Chinese labor (40 hours of work per week, not that they work that little). And we wonder what is wrong in America? We have clearly lost all ability to understand a big number when we see it.

Don't even get me started on what $1 trillion represents.

Tuesday, February 17, 2009

The Falling Knife of Capital One Financial

Sector Snap: Credit card stocks slide

Elsewhere in the sector, Capital One Financial Corp. dropped $1.93, or 15.9 percent, to $10.18. Earlier in the session, shares hit a 13-year low of $9.69.

It just sliced through its 52-week low like it was boiling butter.

"Until lenders like Capital One show stabilization followed by trend-bucking improvement over a several-month period, we will continue to remain bearish on credit card lenders, and the U.S. consumer."

Somewhere along the way I must have turned into a permabear.

The Wisdom of William Pesek

Death of Corporate Bonds Is Worth Investigating: William Pesek

This crisis has a drip-drip-drip dynamic that tends to make what seems implausible one day real the next.

Well said!

Friday, February 13, 2009

Peak Sarcasm Report

Work Expectations, Realizations, and Depression in Older Workers

We found significant effects on depression at age 62 both for full-time workers who expected not to be working full-time, and for participants not working full-time who expected to be doing so.


These results hold even after adjustment for earlier depressive symptoms, sociodemographic and other relevant controls.


The findings suggest that working longer and retiring earlier than expected each may compromise psychological well-being.


The current financial crisis may result in both scenarios as some workers may have to work longer than expected due to the decline in pension and other wealth while others may retire earlier due to job loss.


This is going to change the way we think about depression not only for our generation but for all generations to come.

Based on what I'm reading in the abstract, if employment continues to deteriorate, then perhaps we could someday call this era the Great Depression? That could be a catchy way to link unemployment with how people are actually feeling.

What? You say THAT name was already been taken by a previous generation? I suddenly feel like I've been living in a cave and have been completely unaware of my surroundings. Point me to another study. I want to know more!

Study reveals shocking truth: Most Facebook apps are silly, pointless

A new study from number-crunching firm Flowing Data did some eye-opening work recently, dividing 23,160 Facebook applications into 22 categories. A whopping 9,601 of them fall into Facebook's "just for fun" category, followed by "gaming" and "sports" with over 2,000 each. In other words, the majority of Facebook applications are goofy time-wasters.

This is an unsettling piece of news that I don't think any of us saw coming.


Blondes Make Men Act More Silly, Study Says

Don't be surprised if you see a man acting dumb, he may be distracted by a blonde beauty. The recent study revealed that men's mental performance became worse after they looked at blonde women.

My entire world is being flipped upside down. I hope you realize that.

Thursday, February 12, 2009

My Layoff Fallout Clock

Layoffs take a toll, even on survivors

Those consequences are, unfortunately, long-term. The psychological fallout of surviving a layoff lasts six years, according to the study published by the Institute of Behavioral Science. And the effects of surviving multiple layoffs are cumulative.

The effects are cumulative? Wow! That sure explains a lot. This is a relatively long post but it may be worth some amusement should you wish to continue reading.

I moved to Seattle in 1988. I worked as a software programmer at a small consulting company for 18 months. It went under and I was laid off. I'm going to assume that being laid off is at least as bad as surviving it. Therefore, add six years to my fallout clock.

In 1990, I worked as a software programmer for a Japanese landscape company. 18 months later our US branch was shut down and I was laid off. Add six more years to my fallout clock. That brings me to 12 years of fallout.

In 1991, I started work at Sierra Entertainment. It is there that I hit the layoff fallout clock jackpot lottery.

Sierra Entertainment

On April 3, 1997, Sierra announced that the staff of the old company headquarters in Oakhurst would be reduced by almost 50%, relocating about 90 people to CUC Software’s facilities in Torrance.

Add six years. That's 18 total.

The irregularities were in the area of several hundred million dollars and when the news was announced and the real numbers revealed in the end of September, the Cendant stock instantly plummeted to about one fourth of its former value. As a result, the company was sued by its shareholders and the former CUC management team was terminated.

The CUC management team was terminated. Considering that I instantly lost several years pay in the form of worthless stock options, I'd like to add six more years of fallout. We're up to 24.

In March 2001, Forbes and Shelton were indicted by a federal grand jury and sued by the Securities and Exchange Commission, accused of directing the massive accounting fraud that ultimately cost the company and investors billions of dollars. Sierra and Davidson were among the many Cendant subsidiaries that had been used in the irregular bookings and Cendant had already announced its intention to sell off its entire computer entertainment division when the news of the accounting fraud came. Sierra was one of many companies that suffered great losses because of this affair even though it had been totally out of the management’s hands. Many of its employees lost their pensions, their net worth and even their jobs. The following years would be filled with aggressive endeavors to restore the profitability of the company.

I certainly felt my net worth drop. I'd sure like to add another six years, but not because of that. Instead, I'd like six years simply because we hit the front page of the Wall Street Journal for a solid month due to fraud. However, since it isn't technically a layoff, I'll keep the total years of fallout at 24. Fair is fair.

On February 22, 1999, they publicly announced a major reorganization of the company, resulting in the shutdown of several of their development studios, cutbacks on others and the relocation of key projects and employees from these studios to Bellevue. This decision was made by Sierra's own management, not by Havas. Studios that were shut down included PyroTechnix, Books That Work Inc. and Synergistic Software. Headgate was sold back to its original owner and the publishing of Sierra's InterAction Magazine was discontinued. About 250 people in total lost their jobs.

Six more! We're up to 30 years of layoff fallout now.

But the shutdown that received the most attention was that of Yosemite Entertainment.[citation needed] With the exception of the warehouse and distribution department, the entire studio was shut down.

Same layoff. We're still at 30.

40 people, critical to the development of Babylon 5 and Middle Earth (the other projects were dropped) were offered to relocate to the company headquarters in Bellevue and continue with the development, and eventually about 30 people moved from Oakhurst to Seattle.

They aren't laid off yet. I'm just warning you in advance. Some of these people will soon be walking by my office door and joking about "Dead Men Walking." Keep in mind that they survived one round of layoffs, relocated, but will get laid off anyway. We're still just at 30 years of fallout as it relates to me though.

But the bad news did not even end there.

Of course it didn't!

At the same time, legendary game designers Al Lowe and Scott Murphy were fired.

We're still 30. It's part of the same layoff. Things appear to be stabilizing. Or are they?

Layoffs continued on March 1, when Sierra fired 30 employees at the previously unaffected Dynamix, 15% of their entire workforce.

That's 36 years of fallout.

In June 1999, Ken Williams shut down TalkSpot and laid off its employees.

That one doesn't count since it didn't really enter my thoughts. Ken Williams already left Sierra.

This reorganization resulted in even more layoffs, eliminating 105 additional jobs and a number of games in production, including Desert Fighter and Pro Pilot Paradise from Dynamix, Babylon 5, the much awaited game started at Yosemite Entertainment and Orcs: Revenge, a Berkeley Systems title. This was announced on September 21, 1999.

Sweet. We made it to 42 years of fallout. What's 42? For those who have seen the Hitchhiker's Guide to the Galaxy, it is the answer for everything of course. It explains why I am writing an Illusion of Prosperity blog. It also explains why I actually quit my job. I was 35 years old and had accumulated 42 years of layoff fallout. I figured that was probably enough.

These final cuts eliminated most of Sierra’s prominent development teams and projects, and so 1999 proved to be the last year that Sierra developed any of its major titles in-house.

Ask me if I have any regrets?

On January 23, 2001, Vivendi announced the closure of its division’s Bellevue offices, costing 39 people their jobs.

I'm already gone. No more fallout.

In early August the same year, WorldStream Communications was one of the many victims of the dotcom crash, and the company was forced to shut down and laid off its 87 employees.

I'm gone.

On August 14, 2001 Sierra On-Line let the axe fall on Dynamix for the final time and closed the development studio for good. 97 people lost their jobs.

Seriously. I left.

148 more people, at the main offices in Bellevue, lost their jobs on August 15, 2001.

Is it just me or is this getting a bit silly? Why didn't these layoffs happen as part of the previous day's layoffs? That's 12 years of layoff fallout for the survivors, when it only needed to be 6 years.

Layoffs continued on November 9, 2001. Sierra laid off more than 39 employees at the headquarters in Bellevue, which included Bellevue’s entertainment teams.

Did you sense the trend? Did you see that layoff coming?

Even with quite a few recent successes, Sierra’s long history came to a close with a few short strokes in 2004, Sierra’s 25th year of business. Cost-cutting measures were taken, due to parent company Vivendi’s financial troubles, and due to Sierra’s lack of profitability as a working developer: Impressions Games and the Papyrus Design Group were shut down in the spring, and about 50 people lost their jobs in those cuts;...

How about that one?

...180 Sierra-related positions were eliminated at Vivendi’s Los Angeles offices; and finally in June 2004, VU Games laid off most of Sierra’s final employees at Bellevue, which cost over 100 people their jobs, and dispersed Sierra’s work to other VU Games divisions. Other titles, such as Print Artist, were discontinued totally; The Hoyle franchise was sold to an independent developer. In total, 350 people lost their jobs....

Or that one?

...The lights went out at the offices in Bellevue, creator of hundreds of memorable Sierra titles and home of so many memories for all of Sierra’s fans, for the last in time in August 2004. Vivendi announced that the Sierra brand name and logotype would still be used on VU Games products, run out of VU Games headquarters in Los Angeles.

Or finally that one?

I worked in those offices in Bellevue. Had I survived until the very end just imagine what my layoff fallout clock would have been? Better still, imagine what I would have named this blog, lol.

What Crisis?

July 17, 2008
Housing Market Perspective - Dennis Kneale

I want to talk to you about the nationwide housing crisis and whether it is really a crisis at all. Every day we hear gloomy news on falling home prices, how foreclosures are soaring and the stunning loss of wealth will send us tumbling into a deep recession.

I have three points to make.

First, we were already in a deep recession. The recession officially started back in
December of 2007. He just didn't know it yet.

Second, he speaks of 40 million homes that were bought before 2000 as being safe. He completely dismissed them. None of those homes were refinanced and no cash was extracted? Why do I find that so hard to believe? I find it especially hard to believe after reading

Third, his simple chart and theory did not fully grasp what a fundamental oversupply of homes combined with a glut of subprime mortgages would do to our complex and interdependent economy as seen

But you just watch, but by the time Congress's $300 billion bailout kicks in the free market will already have made the necessary adjustments, and most of us won't feel it at all.

Here's a glimpse of one of those free market adjustments that most of us won't feel at all.

S&P 500 1-Year Chart

Here's another one.

Civilian Unemployment Rate

Here's yet another glimpse. $300 billion was apparently just a drop in the bucket.

February 11, 2009

President Obama Set to Exceed President Bush’s Deficits

Presidents need to craft policies that address current challenges. Over two years, Washington is set to borrow a staggering $3.5 trillion from a shrinking global savings pool. This could raise interest rates, worsen the recession, and dump $30,000 per household of new debt into the laps of our children and grandchildren. Any justifications for such borrowing should be on the merits of the current economic situation and not on the mistakes made by the previous administration.

By my estimates, that's a brand new car for each household in America, and a nice one at that. Too bad we had to spend it on this non-crisis instead. Oh well.


February 12, 2009

Fed: Americans' net worth hammered by recession

The report also includes some data that illustrate the inflating credit and housing bubbles that popped with such disastrous results.

That's hammered and disastrous in a non-crisis sort of way of course.

Wednesday, February 11, 2009

Theory: Irrational Investors Actually Believe They Are Rational?

I came up with this theory back in 2006 after reading one bull's take on Sirius. Today seems like a good day to revisit it.


Rational Investor Strategy

The Rational Investor strives to capitalize on pricing inefficiencies in the domestic stock market often caused by irrational behavior and 'herd' mentality among investors.


We believe it is difficult to impossible to make money chasing the hottest trend, and we often do the opposite of the fashionable trade. Ultimately, our goal is to generate positive returns regardless of the prevailing direction in the market and to do so rationally.

August 9, 2006
Get Sirius

Profits in the market are made by acquiring shares of quality companies with superior growth prospects at discounted prices. If that doesn't define Sirius Satellite Radio (SIRI, news, msgs), I don't know what does. Poor market sentiment is artificially deflating the price of Sirius and that creates opportunity for you.

Don't miss out on owning what I view to be one of the better long-term growth stories of this millennium.
Regardless of what happens in the economy, I feel quite confident in stating that the next generation will view terrestrial radio as being similar to manual transmissions.

It would seem that the next generation is now viewing fee based satellite radio as being eerily similar to manual transmissions.

Sirius vs. General Motors (The Chart)

The similarities don't end there though.

February 11, 2009

Maybe satellite radio is a bad business model

NEW YORK (MarketWatch) -- Sirius XM Radio, which reportedly is on the verge of declaring bankruptcy, has problems that go far beyond the dismal state of the economy.

The idea of charging consumers a modest fee in return for superior programming and sterling reception quality may not be viable. Perhaps the industry's entire business model was flawed from the start and the nation had to experience this devastating recession before people reached that conclusion.

February 9, 2009
GM in Talks to Take Back Part of Delphi

"It's fair to ask the question of why the taxpayer could be stuck with the problem of bailing out GM's business model," said a banker who has done extensive work with GM and Delphi but isn't involved in the current negotiations.

Hey, there's no sarcasm this time. It is just 100% pure unadulterated heckle!

Too bad I can't charge a fee for the premium nature of this content. In fact, I've yet to figure out how to make money posting any of my thoughts and/or charts. I think there must be a serious deflationary flaw in my business model. ;)

Tuesday, February 10, 2009

The Inflation/Deflation Optical Illusion

Here's a chart.

Which way is the price of this silver company going to go next? Inflationists might see the price returning to the 2000-2008 trend line. Deflationists might see a continuation of the downtrend that started in 2008, possibly with yet another crash.

So which is it? I certainly can't tell you. I look at the chart and see both, but not at the same time. I tend to toggle back and forth between the two as my brain attempts to make sense of the puzzle.

Don't answer yet. Watch the following video first. Trust me. It will help you make a more informed decision. It sure helped me, well sort of!

Optical Illusion Girlfriend

A Flaw in My Thinking?

I've been basing my worst-case scenario on a combination of the Great Depression, the 1970s, and Japan. I'm starting to think I was too optimistic, yet again.

TechTicker:'s Martin Wolf "We'll Be Lucky if Downturn Only as Bad as Japan's"

Wolf, who is also a professor of economics at University of Nottingham, believes "it will be lucky" if the current downturn is only as bad as Japan's so-called lost decade. Unlike the U.S. today, Japan was able to count on a strong global economy to mitigate the affects of its burst bubble and struggling financial system. "There is no world economy to rescue the U.S.," he says. "Chances are [it will prove] much worse than Japan." (editor's note: wait, I thought China was going to save the U.S.?)

He makes a very good point.

Arguing today's toxic assets are "fundamentally worthless" - and there's lots more losses coming - Wolf says the lack of political will (or outright cowardice) to admit to reality means "we're really in trouble." Why? Because confidence in policymakers will continue to deteriorate as their ill-conceived solutions continue to fail.

We are so, well, you know. I've been thinking it since 2004. What I wasn't thinking was just how, well, you know, we really are.

There's nothing stagflationary about what happened today. Everything was in the red, from stocks to bond yields, to the CRB. My TIP fund had a good day (up 0.46%) but its non-inflation protected counterpart IEF had a much, much better day (up 1.34%).

As a side note, my girlfriend just bought a pair of Dockers for $2 at Ross. They were 75% off of $7.98, which was already a heavily discounted price. Is Starbucks pricing two pairs of pants equals one cup of coffee into their business plan?

There's currently deflation out there. No doubt about it.

Calculated Risk: Obama on Nationalization

Sweden, on the other hand, had a problem like this. They took over the banks, nationalized them, got rid of the bad assets, resold the banks and, a couple years later, they were going again. So you'd think looking at it, Sweden looks like a good model. Here's the problem; Sweden had like five banks. [LAUGHS] We've got thousands of banks. You know, the scale of the U.S. economy and the capital markets are so vast and the problems in terms of managing and overseeing anything of that scale, I think, would -- our assessment was that it wouldn't make sense. And we also have different traditions in this country.

Scale, vast, problems, and scale are what I see when I read between the lines. A normal cyclical downturn is something I don't see. I certainly wouldn't have started this blog up in 2007 if that's all I thought was coming.

TIPS: The Swiss Army Knife of the Bond Market

I argued that the government-guaranteed real yield on TIPS was compelling regardless of one's view on inflation.

That is and was my thinking. Further, my view of inflation is decidedly undecided, now more than ever. If deflation really sets in with a Great Depression style vengeance then I could easily lose 8% this year. It isn't as bad as it sounds though, once 10% cheaper prices are factored in. As a saver, it beats the heck out of hyperinflation.

But with oil and energy prices stabilizing and even rising over the past month or so, negative CPI months are much less likely to occur going forward.

I am sympathetic to that argument but we don't know that for sure. The stock market has also been stabilizing, right up until today that is. The experts continue to tell us that last November marked the bottom. Their reasoning? We haven't had a new bottom since. Wow. I sure hope they are paid the big bucks.

Never mind that staring at the obvious trends within historic charts is what helped to get us into this problem in the first place. Housing and stock market prices only went up, oil was always cheap, deficits didn't matter, and the banking system was riding an unprecedented wave of American prosperity, remember? Good times, good times.

Monday, February 9, 2009

Why the Government Can't Fix It

Geithner Seeks Private Investment for Toxic Assets (Update1)

“We have to reach a point where investors and consumers have greater confidence in our financial system,” Philadelphia Federal Reserve Bank President Charles Plosser said in an interview. “Without that, these institutions will not be able to attract new capital or be able to fully resume their important role in providing credit.”


The FDIC is expected to play a role either running or financing some bad bank type of unit that takes on illiquid securities, which may sell its own government-backed debt, the people said.

I know what I am about to suggest might seem a bit crazy and outlandish, but bear with me. I'm about to go way out on the limb here and I would appreciate some support.

Has the government given any thought to dropping two terms that tend to not inspire confidence? "Bad bank" and "toxic assets" just doesn't seem like things I'd ever want to invest in.

Couldn't the government at least attempt to slap some lipstick on the pigs? I mean really, you have to admire the honesty but enough is enough. We're in a crisis right now.

Why not "not so good bank" and "really not all that good for you assets"? That would at least be a start. We could then move to structured investment loss vehicles (SILVs) and undercapitalized debt obligations (UDOs). I still wouldn't invest, but at least somebody might.

If we don't get this ponzi scheme restored soon, we may never get it restored. Then where will we be? Abandoning retirement? Don't answer that. It's a rhetorical question.

Madoff victim, aged 90, abandons retirement

(Reuters) -- Ian Thiermann, age 90, has abandoned retirement and now works the aisles of a grocery store to make ends meet after losing his life savings of $750,000 to Madoff. He now hands out fliers hawking avocados and pork ribs at a supermarket in Ben Lomond, California. Thiermann, owner of a pest-control company in Los Angeles before retiring 25 years ago, enjoyed returns of 10 to 12 percent each year on his savings for about 15 years...

Isn't 10 to 12 percent each year roughly what the financial experts told us that we would make in the stock market over the long-term? You guessed it. That's another rhetorical question.

September 30, 2008

Your Money and the Stock Market

Investors planning to keep their money in the stock market for the long term have come to expect returns in the region of 10 percent, the historical average for the 20th century. But since 2000, returns have been significantly lower. From the start of 2000 through the end of this past May, annual returns for the S&P 500 Index were 1.1 percent. Since then, things have only gotten worse.

The S&P 500 closed at 1,398.26 on May 29, 2008.
The S&P 500 closed at 1,164.74 on September 30, 2008 (16% loss).
The S&P 500 closed at 869.89 on February 9, 2009 (38% loss).