Credit Market -> Currency Market

Er... I was waiting for someone else to write about this... but it seems either it hasn't occured to anyone else... or everyone is dismissing this... or... who knows.

Anyhow.

Governments are wondering when credit is going to unthaw. Well, on the consumer level, I guess it'll unthaw once everyone has cleared all their existing debts, or at least reduced them to manageable levels. If the average citizen was a company, no one would buy this coy. I mean, average short term debt would be around 6 months cashflow, long term debt is around 20 years cashflow, net current assets is a MASSIVE negative number, total assets - total liability is also bad...
For your information, I was asking my grandparents... during their time, debt levels were much MUCH MUCH lower compared to income/ cashflow/ expenditures.

On the corporate level... er... hello. Due to US Dollar being fiat money, and due to the RIDICULOUS uncertainty that America's bailout policies, deficit spending, world trade, etc etc have caused... no one dares to borrow or lend in USD anymore! I mean seriously, you might borrow/lend AUS 1 million today denominated in USD and find that it's turned into AUS 1.2 million/ 800k in 6 months time!


The American government does not understand something very very simple:

Volatility and uncertainty is bad for business.

Yes yes, this "shock and awe" technique seems to be propping up the market well and is stopping bankruptcies.


But in reality, America is causing a LARGE amount of global uncertainty, as everyone is wondering how all this national debt, printing money, interest rate cuts, bailouts, 0.1% yields on US Treasury notes... everyone is waiting for the next big movement to happen.

This is why, for decades upon decades, people LET inefficient companies go under, and did not prop up everything artificially. There always was a lot of damage done, but in truth, it allowed the TRUTH to come to light, and the rebuilding could begin.

In this case, we have near zero transparency. It's reached the point where no one knows what is going on anymore.

To use Buffet's analogy of the athlete who's collapsed... the current solution seems to be the star's manager putting a splint on his leg and letting him take part in a marathon.
Whereas normal logic would be to bring him to a hospital, get it x-rayed, set in a cast, and give him 3 months of rest and 3 months of physio.
Right now, the entire audience is waiting to see whether the bone is going to snap under the strain of being thrown back into competition.
Oh, and of course, the athlete's manager is screaming that his star athlete is perfectly fine, why won't anyone agree to sign up for this year's sponsorship deals, yada yada.

... gee. I wonder why.

Dumbasses.

Bankruptcies rising in America

Excerpts from: http://www.nytimes.com/2008/11/16/business/16consumer.html?pagewanted=1&_r=1&hp

"The number of personal bankruptcy filings jumped nearly 8 percent in October from September
Filings totaled 108,595. That translated to an average of 4,936 bankruptcies filed each business day last monthFilings totaled 108,595
A recent study found that the typical family who filed for bankruptcy in 2007 was carrying about 21 percent more in secured debts, like mortgages and car loans, and about 44 percent more in unsecured debts, like credit cards and medical and utility bills, than filers in 2001. Their incomes, meanwhile, remained static over those six years.
Some people are trying to rescue their homes through bankruptcy proceedings, but many are just as relieved to walk away, shedding layers of debt that otherwise would have taken decades to pay off."




Why does the US think that lending will stave off bankruptcy proceedings. In the first place, is it in fact a healthy business practice to lend money to people who are already drowning in debt and on the verge of bankruptcy? Well, obviously not.
Would it be charitable to do so? Well, yes, of course. So, maybe America should start up some non-profit banks, which make losses every year, and are supported by donations.

In the 2nd place, these guys still don't get it.

Look, sooner or later reality always sets in. Sooner or later, people realise that they have been living outside their means, due to overoptimism. Sooner or later, the DEBTS GROW TOO LARGE compared to their incomes.

Decades to pay off? Actually, a lot of people who are going bankrupt have realised something: those debts they have are NEVER going to be paid off. It's a case of 2 steps forward, 3 steps back. Their debts have been growing larger and larger every year, and their incomes have remained stagnant, or are growing far too slow to ever catch up.

...

It's sad to say this, but some people were just asking for trouble. Let's take the example of the couple quoted in the New York Times:

"Tony and Carrie Forsyth, both 30, chose not to walk away from their house in Florida. The couple said they thought their financial situation would improve in 2006, when Mr. Forsyth accepted a promotion from his employer, a Michigan food distributor, that required them to move to Florida. But they could not sell their home in Ypsilanti, Mich., so they decided to rent it out.
In June 2006, the couple headed south and bought a house for $220,000 in Tamarac, Fla., with no money down. Five months later, their tenants in Michigan stopped paying, and the family had to carry two mortgage payments, just as the adjustable-rate mortgage on their Michigan home reset to a higher interest rate. They lost the Michigan home to foreclosure in February 2007. "

...

Hello. Does anyone else see the problem here? This couple were in financial difficulty in 2006. They didn't sell their home when they moved. They claimed they "couldn't". Actually it just means they were OVEROPTIMISTIC and hoped for a better price.
"no money down". A sign of the very loose credit controls in the market. $220,000? That's a little on the pricey side for people who were in financial trouble just one promotion ago. Overoptimism at work again.
2 houses. 2 mortages? No no no no no. This is just being silly. It's clear at this point that this couple has no sense of caution at all, and in case you didn't notice, the article made no mention of how much Mr Forsyth's salary was before and after his promotion, or whether his wife had any forms of income or not.

The point is that whoever wrote the article didn't think that such information was important enough to include.
But the fact of the matter is, that when looking at debt, bankruptcy, and paying loans, the level of income is the most important fact of all. NOT how much credit is available. 2nd most important would be interest rates. In fact, total amount of debt sort of comes 3rd place. ... okok, actually, all 3 are important. But basically, ignoring any of the 3 is just stupid, and this is what is happening here, they are ignoring #1: income.

I've always sniffed at financial planners, but I'm starting to realise that there are many people in the world who aren't so intuitively good at balancing their finances. These group of people should go to a financial planner early on in their careers and ask them to plan their finances in great detail, including how much is healthy to spend on their house, how much to borrow, how much to spend on their car, entertainment... in fact, asking your financial planner to advise you on these facts will help much much more than asking them how much to put in Fixed Deposits, how much in unit trust, how much in EPF, etc etc. Ask them how much to spend, as well as how much to save. Cause, let's face it, most people spend more than they save, right?

Summary: It's always best not to be overoptimistic. Don't borrow more than you can repay COMFORTABLY. (don't borrow the maximum, borrow what is comfortable, there's a huge difference).
Increasing lending liquidity is ridiculous, these people are declaring bankruptcy because they have too much debt, you want to give them even more debt?
Ask your financial planner to plan your SPENDING for you. It's even more important than your SAVINGS plan.

Fed Got Scammed

The FED thought wanted to increase liquidity by increasing lending.

Instead of just doing this themselves, they decided to lend a lot of money to the banks, which they thought would then turn around and lend to consumers and corporations. The whole "borrow at 3%, lend at 5%" thing.

Unfortunatly, Warren Buffet and top analysts have been going on and on about how this is a WONDERFUL opportunity to buy into the stock market if you have spare cash.

So, the banks make a quick calculation:

"Let's see... I've got USD 30 billion in my pocket now... I could lend it to people at 6% per annum... but then again, Warren Buffet is saying that I could make over 10% per annum annualized if I buy stocks, or even better buy over an entire bank...
Lending to consumers is looking risky... Buffet just said that buying stocks right now is really safe...

hmm... which shall I choose..."


Which option do you think they chose?

Keep in mind that unlike the the Fed, or Jesus, or a church or charitable organization, these are Public Traded Companies and their directors get sizeable bonuses based on profit...

Yeah. It seems fairly OBVIOUS in hindsight, doesn't it?

And that's why Treasury is now switching to a different plan of what to do with the remaining 350b from the 700b.


IDIOTS.

Warren Buffet... you have to stop giving naive advice. My personal opinion is that Buffet is a very kind and philanthropic man. Which is precisely why he should stop trying to analyse this economic situation.
He does not understand that PEOPLE ARE NOT THE SAME AS HIM.
Normal humans are... only human.
Warren Buffet is practically a demi-god, in some ways.
This actually has some negative effects. For instance, he has forgotten that in a crisis, people will look after their own interests first, that people are greedy and fearful, that people generally earn money in order to EAT not to grow their portfolios then give it away to charity.

Warren Buffet is the sort of man, if you gave him 700b to save America, I am sure he would do his greatest effort to save America.
These bank CEOS... are the sort of people... if you give them 700b to save America, they will happily start looking for the ways to make sure as much of that 700b goes into their own pockets as possible.

Basic human nature.
Frankly, if you gave ME 700b, I do not think I could... no. I admit it. I could not resist temptation completely. Whether it be giving myself a high salary, or a contract saying that I take some of the profit if it succeeds, or a huge expense account organizing "business trips"... I don't think I could resist it. Do any of you think you could?

Warren Buffet probably could. Heck he manages billions upon billions and yet the bulk of his income comes from his own investments, not yearly bonuses or salaries. He drives his own car, lives in a small house...
The trouble is... Warren Buffet has risen above human materialism. But he's unfortunatly forgotten that normal humans HAVE NOT.

The FED forgot this too. And got scammed big time. 350b to the banks, and not much of it going to help American citizens or corporations. Why doesn't the Fed hold a gun to citi's head and force them to buy General Motors, or force citi to extend credit to them?

Taking huge amounts of cash, and giving it to Profit Orientated Corporations, in the hope that they will "do the right thing"...

FED is DUMB.... and rather naive.

Freeing up the capital markets

Let's go onto a very very basic fundamental here... that I am trying to argue against!!!

Basically, world banks all over have been fighting a MASSIVE battle to free up liquidity. Unfreeze credit markets. Which they seem to think (as I said, they are basing from theories cooked up after the Great Depression) will solve the financial crisis and let the healing begin.

Er.

Um.

Will I sound stupid if I ask WHY everyone is so caught up about lending?

...

Cause, you know. I don't REALLY see that much people trying to BORROW money.

So... if no one is desperate to borrow, why is everyone fighting so hard to make sure that the banks are going to lend?

...
...
...

No, seriously, consumers who are not in deep financial straights are not eager to increase their debt. Nor should they... in fact, that is what everyone has been educating everyone, for the past few decades, that having too much debt is a bad thing! duh!
Corporations are now cutting costs, not borrowing money to expand their businesses. With a few exceptions. Said exceptions who are making tidy profits are having no problems getting loans whatsoever, actually.
In fact the only people who I think should be getting increased credit facilities are those individuals who have been retrenched, and need a line of credit to support themselves until the economy picks up and they can get a job again. Which, frankly, the Fed could do with a much much smaller bailout package. There's no need to give billions and TRILLIONS to the big financial companies!

...

These idiots are going to wake up one day and realise that by the time credit markets are unfrozen, the economic climate will be so bad that NO ONE wants to borrow... except for those people who want to borrow but would be unable to service the loan whatsoever ie they need zero % loans for say 5 years. And NO bank will offer this to them. It has to be the government, pure and simple.
Whatever rate the government lends at to the banks... THE BANKS WILL LEND AT A HIGHER INTEREST RATE TO THE BORROWERS. DUH. Banks are PROFIT MAKING ENTERPRISES. If Fed lends to the bank at 3%, the banks will lend to consumers at 7% or 8% or in fact as high as they can possibly go.

Very good, America. Give out "altruistic non-profit loans" to the big corporations. So they can give out "greedy bloodsucking loans" to your American people.

You dumbasses.

You big big bunch of big big dumbasses.


The worst part? The worst part is, by the time they're done chasing ghosts solving the credit markets, they will realize that UNEMPLOYMENT has gone up to 10% or higher, consumer spending has reached new lows, as everyone is afraid of losing their job AND has also lost faith in the pension funds and hedge funds and investment funds BUT BUT BUT... due to the efforts of the Fed, have regained faith in the safety of the banks...
Can you guess it?
Your people then take their money and put it in their bank accounts saving money in case they lose their jobs! They don't put it into other asset classes which might generate higher returns, they put it in the bank.
Which is giving them probably 0% interest at this point. Thanks, once again to IDIOTS IN THE FED.
But it is no longer about the interest at this point!!! It is about security! All other forms of savings are failing, and income security is at a low, what else would they do???

So starts the vicious cycle where consumer spending drops, savings increase, companies cut more jobs, spending drops, savings increase etc etc etc and you've basically got a 2nd Great Depression.

Except it's even worse this time.

And internationalised too. Thanks to OTHER dumbasses outside of America.

Dumbasses.

OK, the INAUGURAL POST!!! Let’s discuss… the world markets and LENDING.

For those of you with short attention spans, just skip to the SUMMARY at the end. I think I will try to maintain this format in future posts too.

OK. Let's start my blog then.

First, off, let's look at the Great Depression.
http://en.wikipedia.org/wiki/Great_Depression
We can see from here that everyone blames CREDIT FREEZES and lack of EMERGENCY LENDING by the FED for the disasterous recession. It is extremely obvious that the international banks have all agreed that they are going to focus on increasing lending, in order to avoid a second Great Depression. They probably have some textbook gameplan just for such and such an event, actually.
WRONG, GUYS.
Yeah, it might seem really arrogant of me to just contradict all these so called financial experts. But let me point out that these current steps are not something they've really thought out clearly. They are just trying out what they didn't get a chance to do back in 1929.
Now. WHY won't it work?
It's all really simple, if you sit down and think about it.
What is the FIRST step to surviving a recession, for an individual? Basically, what should an individual do to maximise his chances of seeing it through and eventually being on strong grounds when the economy eventually does clear up?
First, you need a stable job. (so Kennedy's nonsense about paying people to dig holes and others to fill them in doesn't work. You need to provide JOB SECURITY too.)
2nd, you need to reduce your debts! This is elementary school people. Those who are debt free will be in a MUCH stronger position than those who are heavily in debt. BUT... the governments are trying to encourage increased borrowing! ... Actually, anyone with eyes can see that the current corporate bailout plan is going balls up. Seriously people, it is a simple simple basic financial management principle: you should borrow at 3% in order to generate 4% returns. You don't borrow at 3% when you are expecting to generate -2% returns!
Do these stupid governments think that being able to put themselves deeply into debt will increase/ preserve consumer spending? ... obviously, these financial whizs and government folk have not spent enough time BEING POOR. For those who are familiar with the feeling, you will realise that being jobless, your home and in fact your total networth just dropped in half, your government is going BADLY into debt and is spending taxpayer money bailing out corporations... enthusiasm to spend money? ... are you MAD???
HOWEVER... I am very much in favor of repacking current debt. It makes a LOT of sense for those who have credit card debts to be able to pay those off and shift them into mortage debts. Basically, you would want to reduce monthly debt payments by shifting from higher interest to lower interest charges.
UNFORTUNATLY for the banks... this means that bailout of the banking industry is a failed enterprise from the get go. The will be banks runs. There SHOULD be bank runs. ... Why? Well... it's a simple next step extrapolation:
The FED has reduced their interest rates to a mere 1%. Even a really stupid person will look at his bank savings account gaining a lousy 2%, and look at his mortage at 3 times that, 6%, and realise that they should really break those fixed deposits... This is even more so for credit cards. And those who do not come to this conclusion themselves, if they go to a financial planner, the financial planner would definitely tell them this. It would be STUPID to have $10,000 earning you $20 a month interest in savings account, and at the same time you have a $10,000 credit card debt costing you $200 a month.
SO. Conclusion. America is bailing out banks with it's left hand. The world is creating bank runs with the right hand. Reaaaaaaal smart. You morons.
So, how long will this recession last? It took a world war and wartime industry to end the last Great Depression. Will it get that bad? Who knows. Ok. More realistically? This recession will end when consumer spending increases. Consumer spending will increase when consumer INCOME increases. UNFORTUNATLY, the stupid world governments (except for China, who is being applauded by everyone, despite being the odd man out... which should say a lot! China=smart, the rest of you=stupid. And I'm glad all of you nations recognise this and say so too), are totally ignoring RAISING GDP. They are not looking at helping out the people by creating jobs and job security and by making sure that the bottom 30% of the population will be ok. NO. They stupid Americans are bailing out the top 0.01% of their citizens!!! Who are throwing parties, BTW. Look at AIG. In AIG's case, they got caught, so they tried making it SECRET parties. Nonetheless, they got caught again. People are... *angry*...
You know what the big difference here is? ... I am ashamed to admit it, since I am an avowed capitalist. But... seriously there is something to be said about communism... they really make it a priority to protect the poor, not the super ultra rich and powerful! (though the controlled economies tend to fail spectacularly at the slightest hint of corruption since the system is non-self regulartory... communism means there is no policeman to catch the corrupt policeman)

SUMMARY:
Look, when the citizens and corporations are losing income/ have NO income/ have LOSSES... and they also have outstanding debts, which are causing them to suffer... you do NOT throw even MORE debt on them! Repacking debt is a good idea though. Not like AIG's case, however, since that is essentially not repacking debt but is a DONATION from TAXPAYERS to AIG. You should be concentrating on REDUCING expenses, and INCREASING revenue. Very basic. Very simple. So, do it, world governments.
To investors and shareholders: The governments are making an even bigger mess of things. STAY OUT of the market. In fact, I would recommend that you take your investments, your 401k plan, your savings accounts in banks which are rated C or lower, withdraw them all. and put them in banks with guarantees, which are rated as A to A+. Trust me even the A rated banks are not as safe as they might seem. Also, get out of banks that just bought over a failing bank. TRUST ME, there is a very good reason why those banks failed, they have some pretty toxic assets there, you do NOT want to one day read headlines that consumers had lost faith in the bank you are using and the bank has policemen outside refusing to allow customers to withdraw their deposits. Preventation is better than cure. Seriously, why not just put your money in the most secure bank possible? Do you REALLY love your current bank so much?