Archive for March, 2009

Mutual Funds are dinosaurs and many are becoming extinct like their dino counterparts and much of the mutual fund money is pouring into ETFs but will that ultimately lead into more volatility?

I think of Mutual Funds as dinosaurs because they often move in the same manner, for example if you decided to liquidate your holdings and they’re in a mutual fund, you can call your broker or log on to your account and click sell but it doesn’t happen instantly.  In some cases it could take days for the sell order to go through and liquidate your holdings.  Buying mutual funds is very similar but with ETF’s a sell order is a sell order and gets executed almost immediately.

Some ETFs also have options available on them allowing a buyer/seller to get in/out via options plays as well.   Both of these features in ETFs may ultimately make the stock market much more volatile in the long run as investors are able to liquidate or move nearly instantly instead of waiting a few days for transactions to take place.

This is comparable to the now gone “check float” where writing a check could take days before it cleared a bank but now it is cleared nearly instantly and a once loved “benefit” has disappeared.   Will ETFs lead to greater volatility and we’ll long for the days of mutual fund dinosaurs?   Only time will tell…..

I’ve been conversing with a few people and talk of the “credit card nuclear option” seems to be coming up more and more these days.   What is the credit card nuclear option?   Well, if you’ll recall from this post, it is essentially taking cash advance(s) from your credit cards to the max or near max with no intention of ever paying back the money.    The goal after taking the cash advance money is to pay off outstanding debt on tangible but protected (non seizable) assets.

For example, let’s say you have 100k in credit lines and have 100k left on your mortgage, the goal would be to take the 100k cash advance then use the proceeds to pay off your mortgage and finally file for bankruptcy at some point in the future.    This plan only works in certain states however depending on the laws in your state.   In some states, I think your home can be seized or lien placed on it to recover the funds but in other states, a home can’t be touched.

This also works really well to get rid of student loans.   If you file for bankruptcy, student loans ARE NOT forgiven and you will still owe the amounts on this debt BUT if you take out a credit card cash advance, pay off your student loans, THEN file for bankruptcy there is no recourse.    The student loans are gone forever and the bankruptcy will be gone in 7 to 10 years or so.

I’ve spoken to a good friend who runs a small business and he’s heard from some of his small business customers that they are exactly planning on doing the credit card nuclear option if things get much worse.   Interestingly, he’s told me elaborate stories of how these “nuclear options” are meticulously constructed to ensure that the trails all go to dead ends (i.e. no possibility of recovery).    Obviously, I won’t post details on how to do that but it’s very interesting at the ingenuity of the “free market” system to come up with these scenarios.   Clearly, small business owners are taking their cue from their big business counterparts and gaming the system just like big corp.

I can’t blame anyone for taking this approach if their situation is dire.  Would you want to live in a tent city or homeless shelter or use the nuclear option to keep your home and simply file for bankruptcy?   If I were saddled with 30k or more of student debt, I would probably take this approach to get rid of my student loans if I were on my way to bankruptcy.

Wow, it’s been ten days since I’ve last posted and time flies when you’re at home working on various projects.  So what have I been up to?

For starters, I’ve been clearing “land” in my backyard and planting crops.  I’ve planted corn, carrots, onions, bell peppers, water melon, tomatoes and various flowers all throughout my backyard.   I really hope the yield will be much better than in years past and I’ve never planted so much seed so I’m not entirely sure what will happen.   This is not easy work, if anything it is back breaking work as it took several hours just to weed the land and much longer to sow seeds.   I was so exhausted after a few days that I stopped going to the gym since I had more muscles sore from “farming” than I did when I completed several circuits at the gym.

I’ve also been working on some indoor projects and odd jobs that have been sitting in the queue for quite some time.  I finally got around to fixing my daughters bicycle which suffered from a perpetual flat tire.   I also made a homemade swing for the kids out of broken old fencing boards I had lying around. I’ve cut down on the TV somewhat since the economic data (the real data that matters) has been too depressing to watch.

Not much has changed on my world view of what’s coming, job losses continue to mount and many people’s anxiety continues to climb.   Many of my former co-workers are worried about losing their job or the company going bankrupt.   Other friends and family continue to view things pessimistically and while there are glimmers of hope in some data it’s not significant enough, in my opinion, to make much of a difference.

We are clearly in a deflationary period as wages and prices continue to drop almost across the board.   I went grocery shopping and was shocked to see a 17oz box of HoneyComb cereal selling for $1.45.   This same box sold for about $4 a year and a half ago.  I can also tell that the grocery store owners are trying to artificially hold on to higher prices and margins but I think it’s a futile effort.   The grocery stores all have a pattern of being full at three time periods: the beginning of the month, the 15th of the month and the end of the month.   I can only surmise that people are shopping when they either get their paycheck, unemployment benefits or welfare checks.

Rather than continue to write about “gloom and doom” however I have simply opted to observe the data and make some notes and continue to plan the way I best see fit.   The government has monetized so much debt (i.e. created “money” out of thin air) that inflation is going to whack everyone really hard at some point in the future and while many believe it is a long time away, the fact that the herd is tipping toward the “deflationary” side of the boat means that it’s time to start preparing by moving toward the other “inflationary” side.   I’ll hopefully have some interesting observation posts soon!

Have you been paying attention to the mass movement to fight a war on contract law?   By now, you’ve heard of those dreaded AIG bonuses and while I agree it’s total crap that bonuses were handed out from government funds,  there is something to be said about contractual obligations and contract law.

Imagine if anyone could simply void a contract because they changed their minds or suddenly didn’t like a company.   Over the past week I’ve read three key articles that speak to the movement to invalidate centuries of contract law.

First, a bankruptcy judge in California has ruled that a city can void union contracts.

In the first ruling of its kind, a bankruptcy judge held the city of Vallejo, Calif. has the authority to void its existing union contracts in its effort to reorganize, holding public workers do not enjoy the same protections Congress gave union workers at private companies.

Secondly, there is pending legislation in Congress to give bankruptcy judges the ability to modify contracts with regards to foreclosures.

— Legislation that could provide a last-ditch option for Nevada homeowners facing foreclosure has passed the House but is facing a tougher time in the Senate.

The bill, an element of President Barack Obama’s housing recovery plan, would give bankruptcy courts the authority to reduce mortgages as part of an intense court-monitored plan to restructure homeowner debt. Even families who don’t declare bankruptcy could benefit because the law would add pressure on lenders to rewrite loans before homeowners turn to bankruptcy court.

Third, there is great talk of invalidating AIG employees contracts with regards to their bonuses.  Don’t get me wrong, I am AGAINST these payouts BUT if the company had a contractual obligation to pay then it had a contractual obligation to pay.

One of the cornerstones of capitalism is contract law.   Person A and Person B wanting to conduct business or agree to something do so under a contract and if there is an issue with performance under the contract then a judge & jury can be called upon to settle the differences.   Unfortunately, now we’re headed into a situation where a single judge somewhere may arbitrarily change the terms of a contract and essentially force one of the parties to perform unreasonably under the contract.  Worse yet is the power of the state to simply void contracts for the “benefit” of the people.

In my view, the four legs of capitalism are: capital (money), people, contract law, industry.   It seems the four legs are under assault and weakening day by day.  Capital is disappearing, people are being laid off, contract law is under attack and industry is on the verge of bankruptcy.  Only time will tell where the assault will lead everyone to at the end of the day.   Where is John Galt?

If millions of homes are being foreclosed then it must follow that millions of previous home owners now have trashed FICO scores. There are supposedly at least 25 million bad subprime loans in or near default so it follows that at least 25 million or so people have had their scores trashed. If “bad credit” stays on credit report files for at least seven years and if the majority if these loans are going into default from 2005 thru 2009 then any real credit recovery won’t be feasible for at least 2012 (2005 + 7 = 2012) thru perhaps 2016.

Of course there are way more than just subprime loans in default and that adds a few other million so from the sheer number of trashed credit, it’s not realistically feasible to see a recovery of epic proportions anytime soon.   Making the situation much worse is the fact that banks are cutting credit line exacerbating the problem for credit card holders.   Many people are seeing credit lines cut in half or worse and the resulting effect is a significant drop in FICO scores across the board.   The result here is even more FICO scores trashed.

The question that is begged of course is what happens when nearly everyone has a trashed FICO score?   Does 600 become the new 700 on the FICO ladder?  Does everyone become subprime at some point?   Will we all have to pay 30% for loans of any kind?

Now that I’ve been paying close attention to the price of items at the grocery store, I’m becoming aware of the games many grocery stores play with their customers.   For example, there was a large display of cereal on sale with a $1.00 off coupon with the purchase of two boxes.   The boxes were “family sized” and contained 17 oz of cereal priced at $2.99.

The “regular size” box of cereal (13 oz) was priced at $2.14 so which is the better deal?

Doing the math, (2 x $2.99) – $1.00 = $4.98;    $4.98 / (17 oz x 2) = $0.14/oz.   $2.14 / 13 oz = $0.16/oz

So from a purely mathematical standpoint, the “family size” deal is a slightly better deal if you plan on carrying inventory of over two pounds of cereal in your home BUT the prices of cereal continue to drop almost on a biweekly basis so the actual better deal is to buy the smaller size, wait for the price to drop and then  reassess a week or two later.

I think buying in bulk is a bad play during deflationary spirals but that’s just me.

I’ve found myself muting CNBC more and more as I work at home on various projects, I get more out of CNBC by simply reading the tickers and news flashes than listening to the pointless banter of the CEO of the week or the orgasmic cheer Erin Burnett gets when the Dow breaks a few hundred points.   Speaking of Erin Burnett, one day  she looks like a hag that just got out of bed and showed up at the studio and on other days, she fixes her hair and puts some make up on.  What gives?   It doesn’t help that HD reveals every little detail of misplaced hair either.

I can’t help but wonder why CNBC didn’t expose the Madoff scandal.  What about the Standford scandal?   What about the housing financial crisis?   With all the supposed “experts” of finance, not a single person reported on the possibility that the entire financial system would melt down.

What have I watched this week so far?   A parade of “experts” that say the Dow will continue to drop and a parade of “experts” that claim the bottom is in and  we’re off to the moon.   What is the point?   If there were any “expert” that was consistently right, he or she would become the one true expert that everyone would look to for the market direction but there’s no such person so countless hours of electricity, money, and time are wasted daily on CNBC over nothing.

My father was born during the Great Depression and he often told me tales of having to sell loaves of bread at age 9 to help make money for the family.  I saw the NBC news last night and I saw a story about an organization that helps feed hungry kids around the world; the only catch was that the delivery it was making was in the United States, not some forgotten 3rd or 4th world country:

ELKHART, Ind. – In this job-starved city where President Barack Obama last month made a public appeal for his economic stimulus plan, hundreds of volunteers — and an agency that specializes in handing out food — worked together Tuesday to feed 5,200 hungry families.

Roughly 300 local volunteers worked with Feed the Children to distribute more than $2.1 million worth of food at Concord Mall as part of the nonprofit relief organization’s “Feeding Americans Emergency Caravan.”

The caravan of semi-trailers is visiting small cities and towns across America hit hard by the economic crisis. No area in Indiana has been hit harder than Elkhart County, where the jobless rate skyrocketed to 18.3 percent in January.

There are also tent cities springing up everywhere:

A tent city is burgeoning in Sacramento, Calif., prompting local officials to consider whether such an encampment should be made permanent, with plumbing and all.

The primitive settlement sits in the shadow of the state capitol and is home to about 300 people who have no toilets or running water, creating unsanitary conditions that advocacy groups worry could promote diseases like cholera. With the downturn in the economy and more working-class people losing their jobs and their homes, the tent city is expanding.

So I started thinking what I would tell my  grand kids   (should I ever have any) about the Crash of ’09.  I can imagine some teacher already asking the kids to “interview” their parents or grandparents and ask them to explain or describe the hardships from the Great Crash of ’09.

We’re not anywhere near the bottom yet as job losses continue to mount but the early observations were this:

  • No one believed that a crash was coming, they all thought real estate and the good times would last forever.
  • People who spoke out about excesses were ridiculed, called “doom and gloomers” or “pessimistic sky-is-falling chicken littles” or other names.
  • Everyone thought buying the Dow at 12,000 from 14,000 was a great buy.  They said it was a great buy at 11,000 then 10,000 then 9,000 then it wasn’t a great buy anymore not even when it went down to 6,000.

And I suspect I may add this to the commentary:

  • No one believed there would be a run on the banks but that came later.
  • No one believed there would be food riots but there were many later and many got killed.
  • No one believed there would be military internment camps inside the United States holding US citizens but the prisons had become too full.
  • No one believed we would ever get out of the mess but we eventually did and it made us all better and stronger people.

But I’ll tell them to get the full story, start reading here.

One of the things I miss the most from my pre-unemployment days are the $200 massages from four star resorts I used to visit. Almost every few weeks, we’d go to a resort for the weekend and get a couple of massages at the spa which typically ranged from $190 to $275 plus tip ($75) and service fee but because we continue to spiral into a depression, we’re hoarding cash now and wouldn’t dare think of spending that kind of money now.

Unfortunately, my muscles feel very tight and knotted and I’ve been aching to go to a masseuse to get the problem fixed. Since I’ve been unemployed, I’ve been going to the gym for 2 to 4 hours at a time working out by lifting weights and hitting the treadmill for an hour or two at a time. I recently discovered though that there is a masseuse school next door to the gym! The massages are $25 and conducted by students and from what I understand no tipping is allowed!

Update:  I had the massage this morning and it was actually interesting.  Because the masseuses are students, they are required to follow the curriculum which includes stretches and other massage exercises that most resort masseuses seem to skip over.   In any event, the massage was good and only cost $25 and NO tipping is allowed.

According to the Federal Reserve System there is approximately $600 billion in cash circulating around the world. usprintedmoney

According to the US Treasury, approximately $750 million dollars of US currency are printed annually primarily to replace aging/damaged/worn currency

During fiscal year 2007, the Bureau of Engraving and Printing (BEP) produced approximately 38 million notes a day with a face value of approximately $750 million.

What can be derived from these two pieces of information?

We can posit that Americans generally “consume” approximately $750 million in cash yearly.   By “consume” I mean “wear out” the currency to the point where it needs to be replaced.  If there are 300 million people in the US trading dollar bills in the amount of $750 million then on average $2.50 is traded yearly between people.   That’s sound a bit odd doesn’t it?

If we look at the population demographics:

  • 0−19 years: 27.4% (male 42,667,761; female 40,328,895)
  • 20−64 years: 60.1% (male 89,881,041; female 90,813,578)
  • 65 years and over: 12.6% (male 15,858,477; female 21,991,195)

We can make some assumptions, the 0-19 will likely not have too much cash on hand so the remainder of the populous will be dealing with mostly cash transactions which gives us aboute 113 million people.   Doing the math again we get roughly $6.60 per transaction.

How can this puny amount be correct when you know you spend at least $10 on lunch, $20 on gas, and $5 on Starbucks every other day?   The answer is that the remainder of the transactions are done with CREDIT and not cash.   If these transactions were being conducted in cash, the amount of currency in circulation would need to grow exponentially.

So let’s take a leap of faith, what happens when the CREDIT disappears?   How will these transactions be conducted if they are still necessary?   The only solution is to utilize cash.   Where do most people keep their cash?   At the bank!   What happens when banks run out of credit to give and have a sudden and huge demand for cash?

As for the other cash circulating around the world, it’s doing just that, circulating around the world in respective countries to conduct business transactions or to use as a store of value.

It’s not too difficult to figure out, all you have to do is follow the money and do the math.

Note that I’ve used various assumptions, get out your spreadsheet and run the numbers any way you like and you’ll be able to figure out more or less when the bank runs will begin, it’s not rocket science it’s basic math.