A Firehose to A Flood

I'm here with my fire hose....Point me to the flood.


I know, yesterday I told you that the World would cut interest rates. Well, only the Aussies came through today with a full point cut. And the market tanked another 500 plus points. Should you be upset with the Bullet? Well, any cut would be a short lived pop, that's it.

Should we really be surprised that the world did not come through with the cut? Probably not. Considering with the Fed moves Monday paying interest to banks on required reserves it was a stealth cut. And the Fed also is pouring money into the system through Lending Facilities of all types and kinds.

So if the world is awash in cash, which it is, why is it not working? Would you bring a fire hose to a flood? The issue is not the money, it is trust between banks is non existant and debt destruction.

Put it this way...I come to your house and give you $500 dollars and ask you to please lend this money to Dave, charge his interest. Then you can give me back the money later.

You don't trust Dave. He has a gambling problem. But even if you trust Dave, His brother Freddie and his sister Fannie, well they suck and who knows who Fannie and Freddie do their business with.

See the problem? If you can't trust your lending partner, or who else your lending partner is working with too...then you can't trust you're going to get paid. Blame Lehman and AIG. Since their failures, the wheels have really come off.

It will not matter what the Fed does with rates, until banks can trust each other we are stuck in this mess. I'll talk about what really has to happen either tomorrow or whenever I feel like it.

Markets Down, Not Out

The biggest thing to remember is that Wall Street is not the economy. The bad news is that the economy might be worse than Wall Street. It is coming painfully clear that the wheels are coming off, all over the world. The US is actually doing okay. We are further along in this cycle of debt destruction than the EU. That is why you are seeing our dollar strengthen against the the Euro. If terms of suckiness, we are just a little less sucky. Now that is saying something.

Tomorrow, you will wake up have your morning coffee and see that the major economies of the world have all collectively decided to lower rates in a major move. I would expect .50 to .75% before the markets open up here at home. If not by open, no later than ten o'clock.

Tuesday is for bounces. We have seen this over the last few weeks. It started to happen because of all the Sunday investing news, Fannie & Freddie, and Lehman Brothers Bankruptcy all happened on Sunday. Monday has been freakishly bad over the last few weeks.

I know that I have been lack posting. Even you followed you knew that I was high on EWZ, the Brazilian EFT. If you hadn't gotten out before now...I'm sorry. I sold out at $64 taking my medicine back on 9/9/08. I was hoping for a bounce, saw it and took advantage. The bottom has really fallen out now...it closed just north of $42 today. It dipped all the way down under $38 earlier. The EFT is made up of financials and commodities...two big no nos in this market.

Want to know what I am looking for right now? Nat City to fail in the coming days. Fifth Third and Key to follow. It doesn't take a rocket scientist to figure that one out. I would go highly defensive at this time. Gold, I'm not sold on right now. I see too many gold hawks screaming for our fiat currency to fail. If I were looking at equities it would be highly defensive...Pepsi, McDonalds, Wal-Mart, Colgate, and PG. None of these names have fallen too much, pay dividends, are not financials, and will be around when all of this finally calms down.

This may be bad, but this is not a depression. Nor do I think it will get to that level. God, I hope it doesn't get to that level. Good luck.

The Bailout

I have been quiet for the last few months. Writing here has become more of a chore than a joy and that is pretty much why this blog is dead. I'm ok with that. No one read it anyway.

But I worked for a credit union in the mortgage department and get asked every hour on the hour what do I think about all of this. I not going to get into derivatives, credit default swaps, or mortgage backed securities.

1) Remember when you had one of those tests back in school where the teacher told you, "There are no wrong answers." Well, this is exactly the opposite. No matter what we do big, small, or stay the course, it will be the WRONG answer. Bottom line: There is no rose pedal path back to prosperity. Sorry, $700 billion won't do it. Letting banks fail all around us won't do it either.

2) I'm not a doom and gloomer. I don't think this is the end of the world. But I do feel strongly that we as a country are going to stagnate over the next decade. We saw it with the Japanese with their "lost decade" that came from a housing bubble. I doubt that it will look the same but it will be similar in effectiveness.

3) What happened to moral hazard?

4) Funny thought about this government, we are PROACTIVELY trying to spread DEMOCRACY through war and sanctions but we are REACTIVELY becoming SOCIALISTS through our own stupidity. The Chinese,Russians and Hugo Chavez must be having a nice laugh about right now.

5) And I will leave you with one final thought. WARNING: THIS IS POLITICAL. Remember when Bush wanted to privatize social security? Can you imagine that right now? Look at how people freak out about their 401K...can you imagine if the other part of their retirement "nest egg" had been in this mess? Want to know which candidate for president supported that measure? I will give you a hint, he cheated on his wife to marry a beer heiress. He has seven houses, thirteen cars, thinks anyone making less than $5 million a year is middle class, said ten days ago that the economy was "fundamentally strong", one of his chief economic advisers called us a "nation of whiners", and suspended his campaign stating that he was going to work until this bailout was done and not debate if it did not get worked out, acted like a bull in a China shop, left the whole thing worse off than when it started, declared the mission was accomplished, debated when a deal wasn't done, has a creepy smile, calls people "my friends", and has a swollen gland on the side of his face that I can't help but stare at.

6) I bet you'll never guess who I am voting for.

The Big Problem

You mean that inflation is not under control?

I found it laughable last month when April's inflation numbers came in "lower than expectations" and all the talk of the bottom being behind us was abound. It was laughable because in May we had seen energy prices sky rocket to all time highs on a daily basis.

How could so many people not see it? They were looking back at a report when the current picture was dramatically different. It is the problem with all reports, as I have said before, are backwards looking. It is like driving a car when all you can see is only where you have been and not what lies in front of you.

I have a hint for you. June's inflation number will be fairly muted and either hit or be below the consenus estimate. The only reason it won't is that food prices will continue to rise in the next couple of weeks in response to the flooding in Iowa and Indiana.

The whole, "Oil will hit $150 by July 4th," has some way to run. I don't know. I don't follow it that closely, but it sure doesn't seem like oil has the gusto at this moment to hit $150 in the next couple of weeks, but it still may hit it sometime this year.

As for my friend, the Fed. Well, frankly, you're screwed. You have no plays. You can't lower the rates anymore because the dollar will continue to fall and inflation will continue to rise. That's no good and they have FINALLY admitted as much. You can't raise the rates right now because of the housing slump and banks still really need the liquidity to stay afloat and that little thing called the Presidential Election.

So, the answer is that the best plan of action is no action at all and bluff and blow hard that you are going to raise the rates aggressively as needed. Which you will have to do to curb inflation. Look even the low-ball government estimate is putting inflation at just a touch over 4%. The current Fed rate stands at 2%. The rates will have to be HIGHER than inflation to curb stem it's tide.. Little .25% increases will not cut it.