Financial topics

[malleni]

...
Its not much different in the US. Gasoline peaked around $4/gallon and has been SLOWLY creeping down. Currently its around $2.85/gallon (about 30% drop). I have not noticed any real decline in food prices at all, in fact produce is at all time record levels. I continue to be amazed at produce prices like a SINGLE apple or SINGLE tomato selling for almost $1. Overall, there has been no deflation yet, however it is very typical for markets to be slow to react, and food/fuel are NOT discretionary items like jewelry and electronics.

Thank you Gordo.

It is exactly what I believed and what I also understand in talks with some friends from US.

Now it would be nice to see - when exactly overall prices started to fall in time of Great Depression?

Here John accented each day that we are in the - "deflationary spiral and that prices are falling".
And that is from the beginning of this forum.

Logical questions are:
1. If we are in "deflationary spiral and that prices are falling" - why overall prices do not fall? (I mean - in reality - not just at the Forum)
2. If that is not the case - as man from Gordos link basically saying - it looks that we are going to the opposite.

[Gordo]

Gordo,
OK, so if you apply for hundreds of credit cards I am trying to understand (1) what impact that would have on your credit rating,

There are a lot of misconceptions about credit scores. The more credit cards you have, in general, the higher your credit score is going to be. The reason is that as you accumulate more and more available (but unused) credit, your % total utilization gets lower and lower - this is a major factor in your credit score. For the most part companies do not care how many cards you have and that alone is not a factor in determining if they will approve your account. However, many companies limit the number of cards you can have from them (for example, Citi usually limits you to 4 personal, 2 business. So between you and your spouse you can only have 12 Citi cards).

There are lots of credit score related things to know of course. For example, opening any new account TEMPORARILY lowers your credit score by a few points. Too many RECENTLY OPENED accounts IS a factor in approving new applications for cards. This is why everything should be done in waves, and all at once. For example, apply for 20 cards IN THE SAME DAY, and at the beginning of a week). Your credit score won't get dinged until about a week later. You won't be able to get any more cards from that point for about 3 months, but sooner than that your score will actually be higher than when you started.

Finally, there is the impact of actually borrowing money (i.e. using the cards). Maxing out all of your credit lines like I do, can drop your score considerably, and your score will remain lower for the entire duration of the loan. This is something you have to consider - i.e. if you NEED a high score for some reason (like you know you will be applying for a mortgage) then you obviously do not want to max out your lines like me. My Credit score will go from around 800 to the low 700's or high 600's with lines maxed out. This does not bother me at all. However there are other people that only pull out 50% of their credit lines (instead of 95% like I do) and this keeps their total % utilization low enough that their credit score is NOT seriously damaged. So that is always an option. Personally I want to take the score hit for much higher profits. As soon as the loans are paid back, your score skyrockets, and you can do it all over again about a month later. Lets say you had some emergency and had to get your score back up, just brake the CDs and pay off the loans early - not a big deal, you may lose some or all of the interest, but your score will go back up within a couple weeks.

(2) at what point will credit card companies STOP giving you cards (i.e. when they see you have 80 cards already).
I haven't applied for a credit card in a long time, and I know they have been lax, but I am finding it difficult to believe there are that many banks willing to lend after looking at a credit report that lists more cards than "Carter has pills". In fairness, I will disclose I haven't done any research on this (mainly because I don't use credit cards).
God bless you for the cast iron stomach you must have to do something like this. I cant' imagine taking that kind of risk in an environment like this (especially since I have a wife, kids and a house).

Like I said, they don't deny based on number of existing accounts. A very common mistake people often make is closing accounts for no good reason (they think because they don't use a card anymore, they should close it - this is wrong). I DO close accounts at times, but only when the company insists on it. And if you have to close an account, always close the youngest account, as "age of accounts" is a factor in your credit score. The older an account is, the better it is for your score.

I know people's eyes BUG out when I tell them I do this stuff, and I understand how some might think this is "risky" but really the only risk is that you are not organized enough to make your monthly min payment and pay the thing back when it needs to be paid back. To me, that is extremely LOW risk. What investment do you know of with LESS risk? I don't see how having a wife/kids/house makes any difference at all. And your comment about not using credit cards at all also makes me squirm... OK - I understand there are some people who can't handle having a credit card, i.e. they spend more because of the convenience I guess - so if you are in that boat, I understand, and you definitely don't want to play the credit card game. For everyone else - it makes sense to put absolutely EVERYTHING YOU POSSIBLY CAN on a credit card. Citi has/had a "cash returns" card that gives 5% cash back on every purchase - I put my taxes even on this card (people are doing this for hundreds of thousands of dollars) using officialpayments.com for a 2.5% total reduction in my taxes, I put every bill and expense I can on this card. You can even buy CASH with this card via the US Mint direct ship program - you get 5% of your total (up to $7000) in free money. Sure the bank teller is not going to be happy when you hand her 50 lbs of dollar coins, but hey its the easiest $350 you will ever earn. You can get a 15 cent a gallon discount on your gas by using a card that gives 5% cash back on gas (there are several of them out there), there are also cards that give 5% cash back on grocery purchases which my family has been using for years. Plus you get to delay the outflow of funds by a month even when you pay your balance in full, so you make money on interest.

Credit cards have made me tens of thousands of dollars. But obviously someone that has had a history of not being able to pay their balance in full is probably not going to have a net benefit from using credit cards. To me this comes down to basic economics - I never understood why people buy things they cannot afford. I'm a frugal living "nut" with extremely low recurring monthly expenses. I can very easily live quite happily on 15k a year. If I lost every dime I had in savings, and my job, I'd still be OK. I heat my house for free (high efficiency woodstove), do not have cable/satellite TV (free digital & high definition broadcast TV is wonderful by the way, only 4 months before they shut down analog), my cellphone costs $8/month, home phone is internet service ($10/month for unlimited calling), I use the internet to make a steady stream of residual income so it pays for itself and my electric bill, and I grow lots of food and sell some of it for additional income and a property tax break (many states have a program like this, but few people know about it).

[JimZ]

Gordo wrote:

it makes sense to put absolutely EVERYTHING YOU POSSIBLY CAN on a credit card. Citi has/had a "cash returns" card that gives 5% cash back on every purchase

Gordo, I DO agree with this point. I have always been against running up a credit card and, for this reason, avoided using them. About three weeks ago I had a conversation with a friend who is one of the best money managers I know. He also made your point that, as long as you pay off the card, there is money to be made because of their cashback, points towards travel, etc. For this reason I am interested in researching the benefits different cards offer and pick one or two to start using for cashflow (in place of my debit card) -paying them off at end of month.

Best regards

[John]

I haven't been feeling well the last few days, which is just as well,
since the world news is mainly about the credit crisis, and the
credit crisis has been relatively placid for a couple of days.

On Monday the market rallied when Ben Bernanke told Congress that he
favored a new stimulus package. But pundits and investors, all of
whom seem to believe that "history always begins this morning," lost
interest in the new stimulus package by Tuesday, and there was a
selloff.

Today, investors seem to be spooked by these things:

• The historic collapse in the Baltic Dry Index is scaring people.
  A shipment of iron ore might have cost $240,000 in shipping costs two
  years ago, but costs $9,000 today. The collapse of this index has
  been so deep and so rapid, that it's frightening pundits who, until a
  month or two ago, couldn't even spell "Baltic Dry Index."
• Related to the BDI collapse is the collapse of emerging markets
  around the world. I summarized some of these in my last web log
  entry.
  
  ** Pakistan near bankruptcy, as China refuses aid
  ** http://www.generationaldynamics.com/cgi ... 20#e081020
• Corporate earnings are really tanking. The old fantasy that
  corporate earnings would grow 25-50% in the last two quarters of this
  year has been demolisted as third quarter actual earnings come
  in. Lowered earnings estimates means high price/earnings valuations,
  which computerized sell programs take to be a sell signal.
• The forced selling by hedge funds, mutual funds and money market
  funds is continuing. This could turn into a full-scale worldwide
  panic at any time.

One thing that always continue to puzzle me is this talk of
"capitulation," and "finding a bottom." I heard it again this
morning, and it's really weird.

The argument by pundits is as follows: There'll be a sharp selloff,
and that will cause investors to become discourage and "capitulate."
Once that happens, the market will go up again.

The problem is: Who are these people talking about? All the
investors listen to these arguments on CNBC, so none of them is going
to simply give up and capitulate at any time. So who are the pundits
talking about with the capitulation message?

I'm trying to imagine what kind of person would see the market fall,
and would say, "I'm not going to take a chance on losing any more
money, so I'm going to get out of the market."

Generally speaking, the only person who might say that is someone
from the Silent generation. They were running things in 1987, and
this is exactly what happened. These Silent top-level managers
simply decided to get out of the market, all at one time, at a time
when the market was underpriced, and they ended up losing out in the
rally.

But you can see where I'm going next -- the Silents are gone. I
can't imagine a Boomer or Gen-Xer saying, "I'm not going to take a
chance on losing any more money, so I'm going to get out of the
market." (The exception, of course, is Boomers and Gen-Xers who read
this web site.)

So this explains why there's a capitulation concept at all, why it
applied in 1987, and why it doesn't apply at all today.

Sincerely,

John

[Gordo]

Just to recap what Bernanke said in 2002, because I think its important, and John has basically dismissed it:

"Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.17 The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation. "

If the "new depression" scenario really does in fact play out as most here expect, the above is exactly the policy response you should expect. Exactly how it will look, I don't know, but it will have its intended affect of forced inflation.

Bernanke knows he has to create inflation at ALL COSTS even if he doesn’t know what will happen as a result (it could actually make things worse). This is perfectly obvious from his speeches, he has vowed not to allow deflation to take hold. He has already started trying to inflate by forcing money into the banking system and supporting FDIC, money markets, and even short term corporate bonds – but there is little evidence to suggest this will work. Yesterday he was talking about a second fiscal stimulus (presumably more checks to every taxpayer) but the last round did little to the big picture, and I don’t see why another round would do much either. After that is the last resort – blatant depreciation of the currency which in a sense is what Roosevelt did after confiscating gold then raising the dollar exchange rate with gold from $20.67 to $35.00 (a massive devaluation of the dollar). I think this was easier to do when we were on a gold standard though, the equivalent action today would be met with total outrage around the world because we owe so much to Japan and China. Many developing countries have done it in recent times (Zimbabwe, Argentina) and of course Weimar Germany did it once with pretty devastating consequences. The result would be soaring interest rates and skyrocketing inflation hedging investments. But I don't see any chance that this could happen anytime soon, perhaps 4-5 years from now at the earliest. If this action resulted in substantially higher interest rates it would make housing even less affordable.

[John]

> Thanks for this article. I have a question and it would be
> interesting to get information from USA about it. It looks that
> similar diagrams can be made for EU (Austria), but still something
> looks not exactly clear as you described regarding "falling
> prices". At least here. (perhaps in US is situation different and
> it would be good to compare)

> Namely, 6 months ago the gas prices was double so high as today
> (140 against 70 $ roughly today) But, on the gas stations this
> nice reduction of prices - is NOT to see. The reduction is about
> 20-25% (at highest!)

> In the food stores - the food prices are in the BEST case - the
> same. In many cases - food is more expensive as 6 months ago! It
> looks that this good effect for customers (at least A-EU) - is
> almost NOT visible (besides this insufficient reduction of gas
> price - now about 1.15€/liter for 95 Euro)

The deflationary spiral is caused by the deflating of the massive
credit bubble, and that was created by securitization of various
kinds of flaky investments. Depending on how you count it, the
credit bubble created tens or hundreds of trillions of dollars, or
even $1 quadrillion.

However, all of these securitizations -- CDOs, CDSs, etc. -- all of
them were denominated in dollars. Thus, the deflationary spiral now
applies only to the dollar. As the credit bubble collapses, there
are fewer and fewer dollars in the world, and dollars become more
valuable relative to other currencies.

Thus, as expected, we've seen the dollar strengthen sharply against
other currencies (except for the yen). In the case of the euro, the
exchange rate was close to $1.60 a few months ago, and is now close to
$1.30.

So there are two different things going on. The commodities prices,
as denominated in dollars, have been falling sharply. But with other
currencies weakening against the dollar, commodities prices
denominated in those currencies have been falling far less.

So if we just take some round numbers, the fall in the price of oil
in terms of the dollar is (1 - 70/140) = 50%.

In terms of the euro, it's 1 - (70/140 * (1.60/1.30)) = 38%.

That 38% is still a fairly large fall, and so you should have seen
reductions at the gas pump, but not as great as at dollar-denominated
gas pumps.

Beyond that, most countries charge fairly hefty tax rates for gas,
you might want to check whether tax rates have changed in your
country in the last few months.

Sincerely,

John

[JWest]

In the article you're referencing, I specifically said that Elliott
Wave analysis is valid.

** There's never before been a day like this on Wall Street.
** http://www.generationaldynamics.com/cgi ... 11#e081011

However, it's not designed to identify generational panics and
crashes. As far as I know (correct me if I'm wrong), EW analysis
predicts a recession, perhaps a bad recession, but not a generational
panic and crash.

** System Dynamics and the Failure of Macroeconomics Theory
** http://www.generationaldynamics.com/cgi ... acro061025

All I'm saying is that they're two completely different
methodologies, measuring different things, both predicting "trouble,"
but different kinds of trouble. We'll see which methodology's
predictions come closer to what actually happens.

Sincerely,

John

Actually, in this case you might be wrong (just slightly). EWI has predicted a deflationary depression for as long as I've been a subscriber (about four years). As for as predicting a general "panic and crash", the EW analysis certainly leads to that conclusion, but not necessarily in those words. That's what I love about Generational Dynamics, the terms in which you paint the picture tends to be much clearer and more easily understood. I'm certainly not saying one methodology is superior to the other; especially, as, in this case, both EWI and Generational Dynamics appears to be in 100% agreement as to what is happening and where it's all going. I do beleive that Generational Dynamics explains the "why it's happening" much more completely. After all, no matter what the numbers and patterns say now or historically, at some point the mob (people) has to actually move things along.

Cheers,
J.West

[John]

Quote of the Day

They were discussing the fact that actual earnings were coming in
lower than estimates, and that was keeping the market down.

An analyst responded to this as follows: "The problem is that
investors' earnings expectations are too high. We have to get
investors to expect lower earnings, and then the market can go up
again."

This guy probably makes a 6 or 7 digit income, but he's as dumb as a
mushroom.

John

[Witchiepoo]

Quote of the Day

They were discussing the fact that actual earnings were coming in
lower than estimates, and that was keeping the market down.

An analyst responded to this as follows: "The problem is that
investors' earnings expectations are too high. We have to get
investors to expect lower earnings, and then the market can go up
again."

This guy probably makes a 6 or 7 digit income, but he's as dumb as a
mushroom.

John

I'm not so sure that he's all that dumb. The stock market IS a game of psychology and herd mentality, after all.

Only problem is, nobody is willing to accept low earnings ... yet. Things will have to get a lot worse before reality sets in to The American Mind.

BTW, if anyone cares who has read my other posts, I'm leaning towards staying out of the stock market, no matter how low it goes. I just don't like the idea of making money off other people's labor. Go figure. So any spare cash that I have after buying my new condo (sometime next year, I think) will go towards more charitable causes. Like buying land for conservation purposes, which supposedly comes with some serious tax breaks. Actually, if anyone has any info on that kind of thing, I'd be glad to hear about it!

[John]

I really wanted to post a web log article tonight, but with this cold, my
mind is total mush. (Some would say my mind is ALWAYS total mush, but
this time it's worse than usual.)

Good night, everyone.

John