Deflation was here, no matter what Henry Paulson has done.  When you lose half the value of the equity market in 12 months, people were not going to have the resources to spend on things.  The lost value, the downward spiral, was here.  It was why GM and Ford were looking for money, “bridge loans.”  It was why the prices of gasoline has dropped by sixty percent.  Gasoline had to be the best every day barometer of deflation.  Home values had to drop.  Gross domestic product growth actually went negative in the third quarter.  People were not going to spend like they had over the last 20 years.  If 70% of the economy was based on consumers spending, well those sectors were in trouble.  I see the deflationary trend to occur slowly and continue for more than the next 12 months.  And those money managers on Wall Street who had cash seemed to want to buy stocks.  Some people on Wall Street see this as only a market correction.  

Bill Gross defined equity valuation in a column released this week as “that mysterious fragile flower where price is part perception, part valuation, and part hope or lack thereof.”

In September 2008, a news story was released that 30% of the economist did not think we were in a recession.  This week we learned that the recession officially had started in December 2007.  It did give pause to those paying economists why they were not the first people cut in employee lay-offs.  I compare these economists to those market managers who seemed to breathe the financial air of other money managers with huge egos and, as we learned with smoking, second hand breathing was hazardous to everyone’s health. 

A Reader’s Digest for the weekend:

Bond yields up:  Treasury prices declined, with benchmark 10-year note yields rising 16 basis points to 2.72%, near lows not seen since the 1950s.

December 5, 2008…..NEW YORK (Reuters) – Mohamed El-Erian, the chief executive of bond giant Pacific Investment Management Co., or Pimco, said the 533,000 drop in U.S. non-farm payrolls in November points to a contraction of gross domestic product of 4 or 5 percent in the fourth quarter.  “A very sharp drop in the GDP growth rate to negative 4 or 5 percent for this quarter is now definitely in the cards,” El-Erian told Reuters on Friday. El-Erian helps oversee $830 billion in assets at Pimco.

Bill Gross, noted bond guru at Pacific Investment Management Co., said because of Federal Reserve steps to inject massive liquidity into the banking system and bolster parts of the fixed income markets, Treasury yields will be much lower than previously expected for the next several years. Gross said on Tuesday when viewed in relation to the direction the market is heading, with more regulation, lower leverage and higher taxes on the way, stocks aren’t cheap yet.  “Recognize that roughly 20% of bank capital is now owned by the U.S. government and that a near proportionate share of profits will flow in that direction as well. Better to own corporate bonds than corporate stocks, but that’s a story for another Investment Outlook.”  His stock market outlook is this: “Stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing, and even lower corporate tax rates. That world, however, is in our past not our future.”

From Larry Elliot, economics editor, in The Guardian

“Forget all talk of soft landings. Banish from your mind the comforting thought that the credit crunch may be just a bad dream. Today’s shocking jobs data from the United States should remove the last shred of complacency from those still in denial about the potential of the current crisis to turn into the most serious economic shock to the global economy since the 1930s.  Make no mistake, the fact that the world’s biggest economy shed 533,000 jobs last month smacks of a slump.”

Dec 05, 2008

PRNewswire-USNewswire via COMTEX/

The Mortgage Bankers Association (MBA) said today that at least one out of every 10 homeowners is behind on their mortgage or already facing foreclosure, a fact that underscores what we already know is the gloomiest housing picture in the United States in decades, possibly ever. The MBA’s newest numbers for the three months ending September 30 also underscore what we and others, including many economists with expertise in housing issues, have been saying for over a year: Avoiding foreclosures that don’t need to happen is our country’s best hope for economic recovery.  The reason Treasury Secretary Paulson has had to announce a new plan to prop up the economy every few weeks for over a year is that none of the plans launched so far — however well-intentioned and necessary — has addressed the runaway foreclosures that are at the root cause of today’s crisis, driving losses at financial institutions and driving down property values nationwide.

MarketWatch  Last update: Dec. 5, 2008

“Through its 16,000 retail brokers known in the industry as the “thundering herd,” Merrill was a retail brokerage first, peddling stocks and bonds to everyday Americans seeking to put something away for retirement or for the kids’ college education.  Friday, Merrill essentially took a final step toward disappearing as an independent firm as shareholders of both Bank of America Corp. and Mother Merrill voted in favor of what was once a $30.3 billion bid when it was announced in September, but had ebbed to just $19.7 as the stock of both companies had sunk.”

It seems appropriate as their ID is absorbed, the bull market is over.  Government seems to be positioning itself to print money, like in the Weimar Republic, to address debt forgiveness.

I spent 30 minutes tonight listening to the request for $34 billion in “bridge loans” to the 3 American auto makers.  And I wondered even if they got their bailout, who possibly is gonna buy your cars?  Having heard some testimony for these CEOs in the second appearance in front of Congress, these 3 dorks led their companies to their disastrous point.  Do these people follow markets?  Did they not see a bubble?  Did they not have economists who saw the day the bubble would burst with an affect on their business?  Every CEO asking for a bailout has been paid way beyond common sense, unrestrained by boards of directors, and now they expected taxpayers to rescue them. 

The way markets work is that companies go bankrupt.  Old ways no longer always work.  The market would be as cruel to the manufacturers of BMWs and Hondas.   Bailouts were a form of illusion, to continue what will not work.   Bailouts and bridge loans were for putting good money into bad.  Why did the government not just buy GM stock and take over the business?  That would be true nationalization.  And we would not have anyone making incomes and stock options worth $5 million to $15 million a year.  Means could be found to put an end to United Auto Workers’ wage of $60 an hour or more so American cars could compete in ten years in foreign lands.  And government could stand behind guarentees to retired United Auto Workers who had earned their health care benefits over a lifetime.  Government as the owner could actually maintain pension benefits. 

The CEO from GM was discussing about how “we use our global capabilities.”  I half expect any bridge loans to finance the building of new plants overseas where labor rates can be cut in half.  The revolution in the world of auto sales has arrived.  The compensation paid to the United Auto Workers is as much part of the problem.  Here 2 sides of the aisle have come together, equity holders and blue collar workers, to keep what they always have had.  It was like watching a loved one with cancer.   And too many people were living in denial as to what all this meant.  I was left wondering about the motives of CEOs who always paid themselves well, whose concerns were shareholders and not the government that they had come to asking for help. 

Instead of a “bridge loan,” I would insist these CEOs be required to read On Death and Dying by Katherine Kubler Ross, on their ride home.  But they were probably getting prepared  to announce job cuts next week, like the  CEO at Citibank last month, instead of shared paycuts. 

Illiquid.  Over swerved.  Henry Paulson.  Who to save?  How many?  How many before that circular device that people jumped into as firemen held onto wore out?  Before the firemen wore out?  I was beginning to feel ill liquid. 

“I believe we have taken the necessary steps to prevent a broad systemic event. Both at home and around the world, we have already seen signs of improvement,” Paulson said in a speech at the Treasury Department.  Huh?

Nasdaq composite index closed below 1,500 for the first time in five years.  Oil closed at $56.16 a barrel.  If you have not noticed it, the price of gold fell to $712.30.  And since the economy is more perilous than it was in 1996, the Dow would be below 6500 before January 15, 2009.  These closing numbers will look unbelievably great at this time in April.  All the earmarks of deflation are setting in.  The New York Times quoted Mark Zandi, chief economist at Moody’s Economy.com. “Wall Street is increasingly taking its cues from D.C.  Policy makers are deciding who survives and who doesn’t.” 

And the system was never supposed to operate this way.  I have heard of inverted yield curves.  This seemed more like inverted sliders and knuckleballs.

From Floyd Norris:  “Five of every 10 risky borrowers have their debt trading as if default were likely. That could indicate panic, dysfunctional markets or impending disaster. Or it could reflect a combination of all three.   The S&P financial index has lost nearly a quarter of its value since Election Day, with every share in the index falling.”

 Goldman Sachs Group Inc. is down to $66.70 per share from its $240 high over the previous 12 months.  The firm may have suffered even more damage, based on an article in the LA Times. “Goldman, Sachs & Co. urged some of its big clients to place investment bets against California bonds this year despite having collected millions of dollars in fees to help the state sell some of those same bonds.”   

 According to Elizabether Moyer in Forbes, “Fighting the financial crisis has put the U.S. on the hook for some $5 trillion a report says. So far.  For all the fury over Treasury Secretary Henry Paulson’s $700 billion emergency economic relief fund, it seems downright puny when compared to the running total of the government’s response to the credit crisis.  According to CreditSights, a research firm in New York and London, the U.S. government has put itself on the hook for some $5 trillion, so far, in an attempt to arrest a collapse of the financial system.” 

As goes GM, so goes the nation.  Or does not go.  In virtually every U.S. industry, companies are openly asking the government to lend them money. 

Torii Hunter was a distraction in Minnesota in 2007.  He had gotten bigger than the game.  It can happen with media focus.  The same thing was going to happen in Denver this year.  That was why Matt Holiday was traded today to Oakland.  “He was going to be a distraction,” Dan O’Dowd said. ”And that’s nothing against Mattie. He’s earned the right to be a free agent after next season.  He’s earned the right to pick where he plays after next season.”  And a team also has a right to say enough of this nonsense.   Holiday turned down a contract offer in excess of $100 million.  He must not buy the newspaper. 

 And a lot of guys on Wall Street got bigger than the game.  Enough of this nonsense.  The Wall Street bailout put into perspective the past spending on new football stadiums whether for major league baseball teams, NFL teams, or Big Ten teams.  They were all playing for the money.  These big times players on Wall Street, in YAnkee Stadium.  Bailouts for Wall Street or bailouts in good times for athletes who thought they deserved these salaries.  Was it a wonder that present day politicians were paying for all of this, after politics had paid to build these stadiums? 

Jeff Jacoby cited some fiscal facts today in the Boston Globe, in the wake of news this week where General Motors announced a $15 billion quarterly loss, in an environment where any corporation dependent on oil seemingly was headed for a fatal crash.   

Jeff Jacoby cited the increase in the Bush administration estimated budget deficit without the inclusion of the full cost of military operations in Iraq and Afghanistan or of the expected drop in tax collections, if the economy continues to worsen. The facts presented included a projected $389 billion deficit in the current fiscal year.  This was an increase of $226 billion more than last year’s deficit.  As critics in Congress have begun to criticize, Jacoby noted that a president cannot spend money unless Congress has made the appropriation.  The Democrats have had control of the two chambers over the past 19 months. 

Jacoby pointed out that a budget deficit was not the same thing as the national debt that was currently $9.6 trillion and climbing.  And ask some forclosed home owner about the cost of debt service.  To the US government, this debt service was projected to be nearly $250 billion this year, the fourth-largest item in the federal budget.  Forget about the coming Social Security crisis traveling with its partner Medicare.  Jeff Jacoby quotes McCain as one who promises to balance this budget, yet with a plan to have troops remain in Iraq and Afghanistan.  Obama rules out balancing the budget.  “The National Taxpayers Union Foundation, tallying the promises made by the presidential candidates, calculates that Obama’s ‘investments’ would cost taxpayers another $344 billion a year. McCain’s add up to an extra $68.5 billion.” 

In an unrelated matter, I listened at lunch as Tim Pawlenty, the governor of Minnesota, talked about candidates who work to “earn” a vote.   Somehow their was a disconnect in the language of politics with the real world of work and money.   

I was still looking for a candidate who lived by the first rule of holes.  (ED NOTE:  See July 26,2008.)  Maybe they are both so old they had forgotten.  But a twelve-year old knew that when you were in over your head, you stop digging.

POST SCRIPTS:    

If you like a good horror movie, don’t miss ‘I.O.U.S.A.’ a new documentary on the nation’s looming fiscal problems.

From the Milwaukee Journal Sentinel

Posted: Aug. 19, 2008

We don’t normally write about films, but today we’re making an exception. The real national debt is now a hefty $53 trillion – $175,000 for every person in the country.

“I.O.U.S.A.” is meant to scare you. As the Reuters news agency put it, this film “may be to the U.S. economy what ‘An Inconvenient Truth’ was to the environment.”

Go see “I.O.U.S.A.,” the new documentary on America’s coming fiscal reckoning.