Sacking the Treasury
It’s a form of Tuna, too. After the fall of Saddam Hussein’s government in Iraq, people went wild. They broke into every government building and the numerous Presidential Palaces and ransacked each one of them. The 24-hour News Stations aired footage of men carrying away filing cabinets and swivel office chairs and desks. Framed pictures, computers and copy machines were prized loot while the Capitol burned and the frenzy of liberation from one despotic regime to another took hold and the light of reason failed to illuminate the minds and hearts of men. No one was around to stop them or protect the assets of the once powerful totalitarian government. Somewhere around $600 billion in US currency likewise disappeared in the mêlée that went on for days until the elation ran out of steam and an uneasy quietness enveloped the country.
Years later the American financial architecture suffered a catastrophic failure that resembled the aftermath of carpet bombing from high overhead with munitions that targeted only the infrastructure while leaving the shocked and disoriented population largely intact and wondering exactly what had happened and when it would all be over. The zombie-like inhabitants of the nation wondered around in the metaphorical wasteland landscape looking for loved ones or serviceable objects to dust off and try to put to some further use. They ambled aimlessly around in the rubble of their once great nation with all cogent thoughts suitable shaken out of their heads. Others sat around their television and computer screens straining to hear some news that was good or to glean from millions of webpages some insights as to what was going to happen next.
While the shell-shocked people remained static, the predators moved in to clean out the accounts of the now ruined financial houses and banks that still had a mission to fulfill and a semblance of momentum to keep going. Government promised help in the form of taxpayer provided bailout funds and the predators kept draining the accounts. Men and women who specialized in economics and accounting principles and practices looked at the sinking financial companies and knew that there was money that was going to waste and it should be theirs. They placed Sell Orders in the still functioning stock markets for stocks that they did not own. Then as the prices continued to fall they repurchased those stocks and kept the difference in the two prices as their reward for being observant and capable of making such a deal work.
Each time the short-selling and the buying-to-cover transaction took place, the stock was worth less that it was before. Big corporate investors sold out early as the news of bailouts bolstered the prices for a few more days. The small investors who had their money in mutual funds that had bought into the failing institutions when they were doing quite well, sat in shocked inactivity not know whether it was good to sell their mutual fund shares or ride out the roller coaster trip and wait for a brighter day. Meanwhile the Short-sellers were looting the funds that held the life savings of millions of Americans who heeded the admonition to save for their retirements.
Short-sellers rationalize their plundering as a part of economic natural selection of survival of the fittest. They proclaim that they make the system more efficient by knocking down corporate stocks that are overvalued. They are only “right-sizing” the companies that they target. But for every dollar that the short-seller extracts as the stock prices falls from high prices of $60 to $100 per share down to sub-dollar and “penny-stock” status, some small investor who planned to retire on that money loses it. It would not be so bad if it was one mutual fund manager was shorting a stock to make income for his small investors, but in general, it is extremely wealthy investors who can chance investing in such schemes. The small conservative, risk-adverse, near-to-retirement investor simply cannot take the chance on such investments.
Somewhere in the vicinity of $2.7 Trillion worth of stock value evaporated between the November 4 National election and November 23, 2008. Mutual fund balances lost that value, as did the day traders and other serious investors who wanted to build an account balance. Not all of it, but it is fair to expect that a sizable share of that “lost value” was “found” by short-sellers who knew that the prices were going to continue to fall and did not want to “waste” that loss.
The Dow index bounces as the cycles continue to move through time. Each time the level reaches a new crest it is a lower number than the crest that preceded it. New lows are registered at the time the bounce begins and recovery could be imminent. Then just when the floor seems found, the bottom fall out once more. At or near the crest of these cycles the price is ripe for yet another round of short-selling that sucks a few more billion dollars from the accounts of hopeful investors.
This whole scenario is an example of it all being Tuna! The predatory investors are providing nothing of value to the economy, to the investors they prey upon, to the companies they target. All they are doing is deriving a profit from the misfortune of prior investors who cannot move swiftly to protect their funds.
In a well functioning economy with thousands of well performing companies, a few short sales here and there may indeed do what the short-sellers say their activities do, but while the entire global economy is in free-fall, all they are doing is looting the treasury and making the results exceedingly worse.
Sunday, November 23, 2008
Saturday, November 15, 2008
So It's All Tuna! Now What?
Now What?
The global economy has been sinking into a quagmire allegedly created by the magnitude of crappy mortgages that turned into foreclosures in the seminal year of 2008. Everything seemed to be going along reasonably well until something happened. People went to work and earned their paychecks. Mothers shopped for groceries and toted the children from one after school activity to another. Consumers bought new cars, flatscreen TVs, cell-phones and iPods. Cable and satellite content delivery utilities put every conceivable sports event on screens in millions of American homes. Beer and a multitude of fried potato and corn products ran aplenty. Tens of millions of Americans earned a paycheck, received a pension payment, got a public assistance check of one kind or another, and dutifully spent all of it on the consumables, commodities and utilities and medical bills. All seemed right with the world.
But lurking just beneath the surface was a condition so insidious that it would bring down the global economy in a way that the most diabolical arch-villain criminal mind could not even imagine. On top of that, it was not especially dastardly in its character. One could not point to the evil doers and single them out for punishment.
The decline of the global economy was not a single event nor was it caused by a single cause. We need a single day to represent the transition from The Before and The After. This date will be September 13, 2008, the day that Lehman Brothers filed for bankruptcy. On the morning after the protracted crash there was exactly the same number of people willing and able to work like they did the day before. They all had the same amount of income to spend for all their necessities and discretionary purchases. So what happened?
A couple of things happened that culminated in what professional Economists call a Meltdown. The biggest trigger was the resetting of variable interest rates on millions of mortgages that people had taken out on their homes, to buy homes and vacation spots, and refinance existing debts. Suddenly there was the equivalent of a huge tax that upset millions of household budgets. House prices started to fall making it difficult or impossible for people who needed to sell for one reason or another to realize the anticipated equity for their future goals. Some of them wanted to move to a smaller place, a retirement village, an assisted living location, etc. For them the selling price of the house was their retirement investment.
Other people who were fully entrenched in mortgage debt found themselves in the upside-down position where the payoff balance of the mortgage was higher than the new lower market price. For them to liquidate their home investment, it would cost them additional money just to get out. As other dire economic circumstances, such as the loss of a job or the resetting of an ARM, their ability to maintain timely payments diminished.
If everyone is ready to work and make things, provide services, and such, why is the economy still collapsing? The banking system of the world has two essential functions: move people's money around as payment for goods and services and to make loans for operating capital and to allow present growth through equipment and facilities acquisition. The present failing of the system is that the banks are not making those loans. Even more importantly, consumers are finding it difficult to borrow the money to buy all the stuff that the economy needs them to buy.
Right now, millions of consumers are waiting to see if they have a job next month or next week before committing themselves to spending more money that they have not yet earned. At the same time the lenders are wary of putting out the funds for consumers to use because they do not want to increase their loss exposure when the credit card payments fall behind and many customers will choose bankruptcy to settle their accounts. There is a bottom line fact at play in all of this. That fact is that all the income (earned or otherwise received) of all the employees in America does not add up to enough money to buy all the stuff that the manufacturers and service providers need to buy in order to keep the economy vibrant.
Consumers are not making discretionary purchases because they are using their remaining incomes to pay for necessities and they are a bit wiser about using credit to finance their lifestyles. Real buying power of the aggregate population of the US declined over the years as the total outstanding credit levels increased. While the US population grew by a few more millions, hundreds of thousands of well paying jobs evaporated as the manufacturing sector relocated to more conducive lands with hungry workers who could live on a lower pay level. Some of those jobs were replaced with the low wage variety where immigrant labor, unskilled citizens and those who are new to the labor market could earn enough to be considered employed but not so much as to be able to pay for everything that is necessary for quality life in the United States. Hence some in some families two wage earners holding three distinct jobs were necessary to supplement their TANF, Food Stamps and WIC payments to make ends meet.
These families were not typically the ones who were mortgaging their dwellings for a few more dollars now in anticipation of future earnings.
Part of the dynamics of the free market economy is that some people do not have to provide their labor for their incomes. Instead they derive a few cents on other people’s money transactions. They receive interest on the mortgages, interest on the balances carried by credit cards. They buy and sell paper that represents natural gas, coal and electricity that the families buy to heat their homes. They buy and sell paper that represents crude oil that is refined into gasoline so people can drive to work, the grocery stores, the doctor’s office and everywhere else. Every dollar that is derived from those activities was paid by someone who earned far less. While this process is a natural and necessary one, when too many people get into the same game the benign character of the game becomes malignant. At some point the consumers of the commodities suffer to keep up with and pay the costs while the providers recline in comfort.
ExxonMobil earned record profits of tens of billions in the year ending Oct 2008, those profits computed to a 15% return on the stock price of $75.00 per share. Everyone who owns any mutual fund would like to have such an annual return on his or her investments. The reality though is that many of the stockholders in ExxonMobil paid $10.00 or less for their original investments many years ago. At $10.00 per share the $2.83 quarterly dividend makes a 113% return on investment. The billions of dollars in annual profits directly relate to cold families in the winter months.
With our markets measuring its performance in shareholder profits, its efficiency in keeping production costs as low as possible, there is too much room for suffering out of sight of the board room where financial decisions are made.
The global economy has been sinking into a quagmire allegedly created by the magnitude of crappy mortgages that turned into foreclosures in the seminal year of 2008. Everything seemed to be going along reasonably well until something happened. People went to work and earned their paychecks. Mothers shopped for groceries and toted the children from one after school activity to another. Consumers bought new cars, flatscreen TVs, cell-phones and iPods. Cable and satellite content delivery utilities put every conceivable sports event on screens in millions of American homes. Beer and a multitude of fried potato and corn products ran aplenty. Tens of millions of Americans earned a paycheck, received a pension payment, got a public assistance check of one kind or another, and dutifully spent all of it on the consumables, commodities and utilities and medical bills. All seemed right with the world.
But lurking just beneath the surface was a condition so insidious that it would bring down the global economy in a way that the most diabolical arch-villain criminal mind could not even imagine. On top of that, it was not especially dastardly in its character. One could not point to the evil doers and single them out for punishment.
The decline of the global economy was not a single event nor was it caused by a single cause. We need a single day to represent the transition from The Before and The After. This date will be September 13, 2008, the day that Lehman Brothers filed for bankruptcy. On the morning after the protracted crash there was exactly the same number of people willing and able to work like they did the day before. They all had the same amount of income to spend for all their necessities and discretionary purchases. So what happened?
A couple of things happened that culminated in what professional Economists call a Meltdown. The biggest trigger was the resetting of variable interest rates on millions of mortgages that people had taken out on their homes, to buy homes and vacation spots, and refinance existing debts. Suddenly there was the equivalent of a huge tax that upset millions of household budgets. House prices started to fall making it difficult or impossible for people who needed to sell for one reason or another to realize the anticipated equity for their future goals. Some of them wanted to move to a smaller place, a retirement village, an assisted living location, etc. For them the selling price of the house was their retirement investment.
Other people who were fully entrenched in mortgage debt found themselves in the upside-down position where the payoff balance of the mortgage was higher than the new lower market price. For them to liquidate their home investment, it would cost them additional money just to get out. As other dire economic circumstances, such as the loss of a job or the resetting of an ARM, their ability to maintain timely payments diminished.
If everyone is ready to work and make things, provide services, and such, why is the economy still collapsing? The banking system of the world has two essential functions: move people's money around as payment for goods and services and to make loans for operating capital and to allow present growth through equipment and facilities acquisition. The present failing of the system is that the banks are not making those loans. Even more importantly, consumers are finding it difficult to borrow the money to buy all the stuff that the economy needs them to buy.
Right now, millions of consumers are waiting to see if they have a job next month or next week before committing themselves to spending more money that they have not yet earned. At the same time the lenders are wary of putting out the funds for consumers to use because they do not want to increase their loss exposure when the credit card payments fall behind and many customers will choose bankruptcy to settle their accounts. There is a bottom line fact at play in all of this. That fact is that all the income (earned or otherwise received) of all the employees in America does not add up to enough money to buy all the stuff that the manufacturers and service providers need to buy in order to keep the economy vibrant.
Consumers are not making discretionary purchases because they are using their remaining incomes to pay for necessities and they are a bit wiser about using credit to finance their lifestyles. Real buying power of the aggregate population of the US declined over the years as the total outstanding credit levels increased. While the US population grew by a few more millions, hundreds of thousands of well paying jobs evaporated as the manufacturing sector relocated to more conducive lands with hungry workers who could live on a lower pay level. Some of those jobs were replaced with the low wage variety where immigrant labor, unskilled citizens and those who are new to the labor market could earn enough to be considered employed but not so much as to be able to pay for everything that is necessary for quality life in the United States. Hence some in some families two wage earners holding three distinct jobs were necessary to supplement their TANF, Food Stamps and WIC payments to make ends meet.
These families were not typically the ones who were mortgaging their dwellings for a few more dollars now in anticipation of future earnings.
Part of the dynamics of the free market economy is that some people do not have to provide their labor for their incomes. Instead they derive a few cents on other people’s money transactions. They receive interest on the mortgages, interest on the balances carried by credit cards. They buy and sell paper that represents natural gas, coal and electricity that the families buy to heat their homes. They buy and sell paper that represents crude oil that is refined into gasoline so people can drive to work, the grocery stores, the doctor’s office and everywhere else. Every dollar that is derived from those activities was paid by someone who earned far less. While this process is a natural and necessary one, when too many people get into the same game the benign character of the game becomes malignant. At some point the consumers of the commodities suffer to keep up with and pay the costs while the providers recline in comfort.
ExxonMobil earned record profits of tens of billions in the year ending Oct 2008, those profits computed to a 15% return on the stock price of $75.00 per share. Everyone who owns any mutual fund would like to have such an annual return on his or her investments. The reality though is that many of the stockholders in ExxonMobil paid $10.00 or less for their original investments many years ago. At $10.00 per share the $2.83 quarterly dividend makes a 113% return on investment. The billions of dollars in annual profits directly relate to cold families in the winter months.
With our markets measuring its performance in shareholder profits, its efficiency in keeping production costs as low as possible, there is too much room for suffering out of sight of the board room where financial decisions are made.
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