by John Galt
February 25, 2010
Ah yes. Who can forget the go-go 1990’s. When buying a .com stock on margin was hip and if you sold out of the markets in 1998-2000 you were considered un-hip and ignorant and old fashioned. That shearing session taught some of the sheep but by and large the lesson was not learned and with the expansive advent of informercials and the insanity of the post 9/11 “we can’t have a recession now, it would cost us votes” mentality thus causing the next liquidity wave in 2003, well, we know what happened next…..
Needless to say clowns from the various realty front organizations and slicksters on local television stations, cable networks, Bubblevision and of course, with their own “Make Money with Real Estate” type infomercials blasting every susceptible soul night and day, day and night, via email and snail mail, pop-up ad and billboard, the sheep had no problem with the “I’ll make up my losses from Pets.com by flipping houses” logic which permeated America from 2004-2007. Unfortunately many people doubled down, including the banksters and just because the family full of illegals qualified for a mortgage it didn’t mean they would actually stay in the home and PAY for the home when hard times hit. Of course the banksters also assumed that the grocery bag boy with two homes already could afford two more since he was showing positive cash flow with the imaginary drive by appraisals and winks and nods of everyone who got 1% of the pie along the way. Keep in mind we pay our twenty year old bag boys down here in Florida well, at least $7.75 per hour in some places. Then of course the sad part of the housing investment debacle. Where phone farms were constructed, some in garages of homes where “mortgage brokers” would purchase master lists of homeowners with FICOs above the Mendoza line and cold call the elderly convincing them to turn a lifetime of equity in a paid off or almost paid off home into a 125% LTV party palace and go “see the world” and “get that Cadillac” you’ve always deserved. The bill of goods were easy to sell because the key phrase at every sales pitch, showing by a realtor, or phone huckster/mortgage officer (Same difference) was:
“Real Estate never goes down over the long term.”
Unless of course you don’t consider 1926-1961 a long term.
This disaster was still unwinding when people were sold the marvels of modern technology just one more time. To believe that this time it was different. To assure everyone that it can’t happen again…..
Yes, the sheeple were herded into Bubblevision mania as their real estate prices dropped and while they still had money on credit cards, home equity they could borrow on or even better, a bonus check from work, it was time to fulfill that gambler’s great mantra:
“Time to get even.”
Yup. The old adage, “I just know I have a winner this time” filled the pasture and the sheep stampeded over to hear a bald guy who is a used car salesman in an alternate universe throwing plastic bulls and telling fools not to sell their Bear Stearns just weeks before it reached an all time record price of $0.00. Woo-hoo, happy times are here again! Of course if anyone listened to yours truly starting in February 2007 I was warning that something very, very wrong was happening in our financial system but the Bubbleboys and girls all laughed off the miscreants on the internet like myself and said Dow 20,000 here we come and the sheep jumped right on board, forgetting that just seven years earlier they lost a boatload of money on a stock popularized by a sock puppet.
Ugh. They never learn. So after the last two years, money has been fleeing equity funds and running, not walking from the aft of the Titanic to the bow thinking it could never slip into the water. Inflows into bond funds continues to increase as people have finally been terrified and beaten over the head long enough to understand that the people who manage equity funds may just not have your best interests in mind when they look at your $53,291.36 account and then the guy next to them is managing a whale and playing golf at two every day. In Augusta.
Thus the final step before the slaughter is put into place:
Yes, that is a an actual bond vigilante.
You see, when one side of any trade gets absurdly crowded and you begin to review what has happened in history, it usually ends poorly, like the .com’s, the real estate boom, the second stock boom, and now the bond bubble. Everyone got tired of watching Cramer sit like an Indian on a rug in his studio with bottles of bourbon surrounding him and said “Screw this, I’m fleeing to safety” which meant corporate, municipal, and unfortunately United States Treasury bonds. Now that this side of the trade is nicely crowded nobody really ever wanted to ask the one question that hangs over everyone’s head like the scythe from the reaper:
“What if there is a whole bunch more insolvency to deal with? What happens to us bondholders?”
Wellllllllllllllllll……glad you asked.
But don’t ask me.
Ask a Chrysler bond holder.
Ask a General Motors bond holder.
Ask a Vallejo, CA Muni bond holder.
Need I continue? There is a boat load of hurt heading our way and without a sustained effort to hyperinflate the economy from both the fiscal and central banking side of the equation, all bets are off. I figure that Ben and the Boys have ninety days to re-affirm a commitment to Quantitative Easing or the lack of foreign participation at GSE auctions, municipal auctions and Treasury auctions will send the desired message and obliterate what is left of this economy. Deflation is now a real risk and with John Williams’ Shadow Stat series on M3 showing actual contraction in the money supply, once we hit the magic -5% level, all bets are off. I do not think Ben can reign in the deflation which will cascade out of control and the painful, necessary reset which was postponed seven years ago then Super-bubblesized to outrageous extremes will be popped. When I say popped I mean -15 to -17% GDP popped, 30% unemployment(U-6), 7 million foreclosures and Los Angeles looking like modern day Greece. The results of such a deflationary event might have some convinced that “oh the dollar will rally in such a scenario” but that is like saying the 120 grit sandpaper will feel much better than the 200 grit when wiping one’s tuckus. It’s going to hurt and just because the Euro is crap, it does not make our currency any better, in fact perhaps possibly worse.
In the end, people will be looking for safety. Some will proclaim “cash is king” but when the government could be forced to devalue the currency to keep the nation from shattering, that’s a dangerous bet if GDP drops to negative double digit levels. My suggestion is the three B’s, Bullets, Broads, Buicks, er, Bullets, Beans, Bullion (or you can make it 5 B’s if it helps you survive) may be the best investment during this time period. Time will be short, you will have to be nimble. If somehow, someway they pull this rabbit out of their hat and the inflationary cycle restarts by summer, you will see a commodity bull market, stock market recovery with a S&P well above 1500, and Happy Days are Here Again on every Bubblevisionista’s lips. Just understand however that everything you use, drink, consume, etc. will cost a pretty penny either way. There is no great ending, it is either pay the debts off with deflationary defaults and devaluations or hyperinflate and buy a few more years. The other day I said this was a key moment.
Today’s report on New Housing Sales with numbers from the Eisenhower administration levels only confirms that that moment has arrived. The bond auctions were just icing on the cake. Get ready for the markets, worldwide, to move and our economy to take that next big step, either off a cliff or into a fantasy land with the flying purple unicorn. If you watch the herd, one thing is abundantly clear: America is being led to a slaughterhouse and the obliteration of the Baby Boomers retirement funds in this final last desperate act of political self-preservation by the powers in charge of our economy, banking system and political offices will result in a fundamental change to the nation as a whole. Stand clear as the meat and bone bits fly off of that band saw blade.
