The GM Affect

Interest rates have gone haywire the last couple of days. You won’t hear it reported in the media though. Why? Because it would look bad for certain economic positions and actions taken by the current Administration …at least that’s my take on it…

The problem is that the bond markets are upset about the way the Obama Administration has handled the bond holders for Chrysler and fear the same will happen with GM. At the administrations urging, the judge in the Chrysler bankruptcy case forced the bond holder to take on more risk.

Usually bond holders are the first to be protected in a bankruptcy but this time it was other interests that were protected first. (think Unions) The bond holders took a back seat to almost every other concern.

Before you go saying those ‘evil’ bond holders (lenders) deserve it, think about this. Bond holders invest in companies by making loans to them because they are risk adverse. Investing in normal stocks is to risky for these investors. There reason? They are investing money from pension funds and insurance companies. This money needs to be invested in areas with very little volatility and steady returns with low risk to the money. (think about your pension, you want safety right?)

The way these bond holders are being treated is a huge change from how large restructuring like this normally takes place. And this sets a dangerous precedent going forward. So with a bankruptcy from GM looming on the horizon, the bond market got very, very nervous and everyone backed out of the market in one day!

I’m calling this The GM Affect because it was so awful. We saw rates jump 1% in less than 24 hours ….by the way… That is completely unheard of!

Rates have come back down today, but I don’t know how long that will last. Rates jumped up to 5.5% from a low the previous day of 4.5%. Rates today are back down to 5% but no one knows for how long.

With a very scary economic report just out about a 5.7% decline in GDP the first quarter of this year and about companies slashing inventories and jobs (approximately 2,000,000 more jobs lost) I’m not sure how much longer rates can stay this low.

So while the Administration rolls our their latest campaign touting the ‘good’ that the stimulus package has done and while they roll out the parties for the supposed 150,000 jobs that were created, our economy has had the second largest contraction since 1981. (By-the-way, only about $11 million of the $45 Billion that has hit the economy was for worthwhile make- work projects. The rest was for one-time payments for welfare and Medicare and for the extension of unemployment benefits.)

I know that this sounds like political commentary and I apologize because it is truly not meant to be a political view point. I'm commenting on my concern about the numbers The numbers don’t lie, and since they don't lie, then someone or something else is lying. Could that something be the government, maybe both parties? Some will point back to the Bush administration as an excuse to support Obama’s actions. Guess what? Bush was wrong as well!

All the economic tricks and gimmicks being tried today have been attempted before. We did here in the late 70's to early 80's. and it didn't work. Heck countries all around the world have tried what we are doing and they will tell you it doesn’t work.

Call it Keynesian Theory, call it Social Democratization, call it whatever you want but understand this. If it is illegal for you to 'kite' checks to cover your debt, then why do we allow the government to do it? (Kiting a check is when you deposit a check from one of your own checking accounts into another and then from that account back into the original account in a never ending circle just to cover checks that you right elsewhere, at some point it will catch up to you.

So why are we allowing our government to do a thing that we would be put in jail for doing? Because of some ‘theory’? Does this make sense to anyone?

At some point we will not be able to print enough money to buy our own bonds to fund our bloated and bureaucratic government. I’m hoping for the best and preparing for the worst. Here’s a link to a great article with the bad news/good news that can help you make up you own mind. http://www.marketwatch.com/story/us-gdp-revised-to-57-decline-in-first-quarter

Lending Lies

There is a great new show on Fox called Lie To Me. In the show the main characters are experts at facial expressions. They can literally tell when someone is lying by the look on their faces. Pretty amazing and fun to watch.

I wish I could get the bank execs in the room with these experts. Here's why, the banks say they are lending, but are they really? The truth is that many banks have increased lending but at a paltry rate.

Bank of Americas recent revelation that they earned a profit of almost $4 billion dollars in the last quarter was quickly quashed and the ‘real’ number was reduced to $2.5 billion. But even that number may not be accurate.

B of A, Citi and other large banks would have us believe that these profits stem from an increase in lending to home owners, when the truth is that lending increased less than 2% over the same period last year. So where did the profits come from?

The profits came from thin air. As reported in a very eye opening article on MarketWatch.com, much of the banks profits were driven by the TARP money they received. With TARP plugging gaps in the banks balance sheets, huge write downs allowed by larger banks swallowing up smaller failing banks and additional relaxed accounting rules allowed by regulators, the banks all of the sudden look very strong.

But that’s not the real story. The real story is this, banks aren’t lending for good reason. After years of excess and easy money the banks have learned their lesson and their hording their cash to protect them from further market turmoil.
In a recent quote in The Wall Street Journal, Fed Chairman Ben Bernanke talked about the need for more education about credit by addressing the inequities in wealth between whites and minorities.
He stated: "Part of it has to do I think with financial education," Mr. Bernanke told students at the historically black college. "There needs to be broader understanding in minority communities … about the importance of saving and building a credit record."
In my opinion Mr. Bernanke missed the point. This is more than a white vs. minority issue. He could have just said; There needs to be a broader understanding …and a core curriculum starting in grade school that teaches… the importance of saving …money… and building a …good... credit record. (the bold comments are mine.)

Additionally, I still hold to my belief that America needs to change our economy from a spending based econ to a savings based economy. Some have argued that this will limit growth and achievement.

Those that argue against a savings based economy miss the point completely. All a savings based economy refers to is an economy where the pace of credit spending does not outpace the rate of earned income and savings.

http://www.marketwatch.com/news/story/Banks-say-theyre-lending-theyre/story.aspx?guid=%7b4280B32E-53CB-49A7-8DC8-D0E95F855358%7d&print=true&dist=printMidSection

Transparency Right?

Suffragette America: wham, bam, thank you mam’! Congratulations the recovery and reinvestment act is law!

Our government is borrowing and this bill is so freaking huge, both colossuses’ of Memnon couldn’t prop the thing between them if they tried. It’s ridiculous! Throughout the history of mankind this type of unchecked spending has collapsed societies.

While I am on the topic of ancient civilizations that no longer exist can I just scream out Rome! Thank you but I am dumbfounded by all of this and not in a good way. I can’t believe the people that are think certain aspects of this bill are good.

“Like, yo dude, I found an extra twenty-five dollars a week in my paycheck! It just appeared magically! Cool!” These knot heads don’t get it! Somebody will pay …all of us will pay… and we’ll pay and pay and pay!

Maybe it has all gotten to me but I see all of this borrowing as being a little like we have this giant drill and we’re boring through the earth. In the end we will pop out the other side and be siphoned into some impoverished third world nation but nobody will notice because it’s been such a slow downward spiral.

For many we are just nibbling on the sweet illusion of socialism but not quite ready for the commitment. Some are excited, some are exasperated and I just may be resigned to what is happening. Trust me I don’t want that and I am almost confident in saying that you don’t want to see it happen either, what a nightmare!

Now I know I am being a little rough on the new bill and some say we need to give it time. All I can say in my defense is that we’ve seen this before and it hasn’t worked. But this time we have ‘transparency’ so everyone can see what’s going on. Right? That makes it all different…

The seductress is Lady Transparency. She’s all dressed up for us and promises the fulfillment of our wildest fantasy, a government that is for the people, by the people and keeps the people free. A government with no corruption and where we can spend all this money and do ‘good’ for ALL people.

But underneath the seductive trappings is a two-timing tramp that is telling lies and stealing from us. You need proof, then just look at the new government web site, recovery.gov. It’s one huge piece of Socialist propaganda. The so called transparency is fiction, read the fine print and the asterisk on the site. Transparency my a**!

Hold on America! I started this blog entry with a song so I’ll end with one. Back in the USSR, you don’t know how lucky you are boy, back in the, back in the, back in the USSR!