Generational Dynamics Forum - New Site

I'm no economist, but I think what will happen is that the feds will bail out Wall Street, the next administration will tax the hell out of us all to pay for it, and the economy will then die a slow and painful death. So I guess I'm not in a panic or anything right now, but that's no surprise because my usual rule of thumb is whatever everyone else is doing, do the opposite.

My cousin, who IS in a panic, asked me what she thought she and her husband should do about refinancing their mortgage, re-investing their assets, etc. The reason she asked me this is that I basically predicted the collapse of the SF bay area real estate market, back when it was at its peak. I kept telling people around here not to take out those insane mortgages, but nobody listened. Now she's worried about the value of her own home, which is in Sunnyvale where prices are still on the rise. My answer was simple ... don't take your money out of anywhere and stuff it in your mattress, just make sure that you have a job that it is in demand so you can always make a living regardless of what happens. I did tell her that refinancing was a good idea, though, cuz eventually her own home will drop in price along with the surrounding neighborhoods. I don't think she wanted to hear that, but oh well.

"...My answer was simple ... don't take your money out of anywhere and stuff it in your mattress, just make sure that you have a job that it is in demand so you can always make a living regardless of what happens."

I do really like your answer and advice.

To all:

This message is for those of you who have the common sense to prepare
yourselves for what's coming. The rest of you should skip this, and
just go on living in your dream world.

Incidentally, this is top-notch expert advice for people who have
money, and well worth reading.

A web site reader sent me the following today:

> Now I'm getting frantic e-mails and IMs from people. They are
> panicking.

> One just asked about how on Fox they are talking about "Credit
> Swaps" and asked me if I knew anything about that! It's hit the
> mainstream!

> These are people around my age who are reasonably intelligent
> professionals. They have IQs of maybe around 120 and have a few
> hundred thousand in net worth.

> They have all left themselves wide open to losses. They have
> absolutely no idea what is going on. So they have come to me
> because they don't trust anything they hear from the financial
> industry and figure I can answer their questions (they admit
> that). Once I answer them, they just go do whatever I tell them
> to do. There's no hesitation.

> They are telling me how much is in their accounts, exactly what it
> is, and then asking me what to do with it. I have been warning
> every one of these people for years and am finding out that they
> never listened to or absorbed one thing I said! I guess only when
> two lunkheads like Bernanke and Paulson go on TV and say that the
> financial system is within days of collapse does it register that
> oh my God, that's what Clark has been saying all along. Let's
> call him and ask what we should do!

> UNBELIEVABLE!!!

> PS I read your blog last night and am not going to try to
> enlighten catfishncod as to why 1,000 trillion notional value in
> derivatives CANNOT be neutralized like an acid/base chemical
> reaction. Maybe I'll join in a few days when he finds out it
> can't.

I wrote back to ask him what advice he gave, so I could repost it,
and he sent me the following:

> Question number one was from a guy who had a $500,000 CD with JP
> Morgan and owned 5 Comex gold contracts outright. He asked me if
> there was any possibility he could lose the funds in his CD if JP
> Morgan went under and if there was any way he could lose his gold
> contracts. Of course, you know the answer to the first question.
> On the gold contracts, I told him that he would not lose them in
> the event of a default, but that it might take a long time to
> sort everything out. I told him to do one of two things.
> Preferably, to get the warehouse receipts endorsed to his name and
> then go pick them up from his broker or have them Fed Ex the
> receipts out to him. Or at a minimum to make sure that there is a
> statement from the broker specifying the receipt numbers and
> serial numbers of all bars owned, not simply a line item stating
> "5 Comex Gold" as Refco used to do.

> Question number two was from a guy who had $250,000 in a Deferred
> Compensation account. You might know that many people have these
> types of accounts and that there are only certain options
> available to them. I told him that "what you would want to do is
> look at the money market funds offered and then pick a "treasury
> only" money market fund if they have that option. Otherwise, look
> at the prospectus for each fund offered and pick the one with the
> least amount of junk paper in it. That would probably be the one
> that pays the least interest. The other thing you might be able
> to do is get into a short term US government bond fund with
> maturities in the 2-5 year range or something like that."

> Question number three was from someone who asked if they should go
> to the bank and take out their cash and how to do it. I advised
> them to call the bank and speak to someone who they are familiar
> with about what they would like to do. I mentioned that any
> withdrawal over $10,000 will likely trigger a SAR (Suspicious
> Activity Report) and that will be on file in Federal government
> database in Detroit for something like 7 years. I advised them to
> speak with the rep at the bank to confirm that. I warned them not
> to go to various branches and try to withdraw amounts less than
> $10,000 in order to avoid an SAR as that is called "Structuring"
> and is a federal crime. I told them that the bank would not
> likely have the amount of cash on hand that they were looking to
> withdraw or may not be wanting to give it up due to liquidity
> concerns, but that perhaps the bank could order the cash and have
> it available for pickup the next day. They aborted the
> conversation before I was able to explain that Federal Reserve
> notes are partially backed by junk now that the Fed has exchanged
> their good collateral out through the TSLF, and that t-bills are
> probably the better option. Although, at this late date I am not
> really sure whether there would be enough time to establish a
> treasury direct account and I do not really know whether having a
> bank hold treasury bills is 100% safe. I think so but am just not
> sure as I never considered that option.

Sincerely,

John

John J. Xenakis
E-mail: john@GenerationalDynamics.com
Web site: http://www.GenerationalDynamics.com
Forum: http://www.GenerationalDynamics.com/forum

John wrote:

> PS I read your blog last night and am not going to try to
> enlighten catfishncod as to why 1,000 trillion notional value in
> derivatives CANNOT be neutralized like an acid/base chemical
> reaction. Maybe I'll join in a few days when he finds out it
> can't.

If I'm wrong, tell me why. I'm not an economist and I don't pretend to be. If I missed something, don't laugh at me for being ignorant, enlighten me.

catfishncod wrote: > Why? Because there were intermediate panics and stimuli which
> reminded people why the FDIC was important. There were bank
> failures in the 30's, again in the '70s, and again in the S&L
> crisis. The FDIC never looked antiquated, so the rules stayed
> right in place... and are even now safeguarding the retail banking
> sector. There have been no general bank panics, and the FDIC is
> why.

> This immediately suggests a mechanism for crafting enduring
> institutions: ensure that they become necessary more often than
> once per saeculum. If the SEC rules had somehow prominently
> rescued America in the '70s, for instance -- perhaps by Whipping
> Inflation Now? -- it would not have been half as easy to
> manipulate (still within living memory), therefore harder to
> monkey with, therefore not the cause of the crash.

When you're analyzing historical events from the point of view of
generational theory, these arguments are all irrelevant.

If you want to do compare historical analyses, then comparative
history is valid ONLY during comparable generational eras. Today
we're still in what one person calls the "post-unraveling era," where
the crisis era has technically begun, but the regeneracy hasn't
occurred. Eras before and after the regeneracy are not comparable.

The FDIC did not exist in the last pre-regeneracy period, and so
there's no historical example that we can use to judge whether the
FDIC will survive today. The FDIC was formed in 1933, after tens of
thousands of banks had already failed. The other examples you gave
were in American Awakening and Unraveling eras, so they're also
completely irrelevant.

What we DO know is that pretty much EVERY financial institution
failed during the crash. That's the historical comparison to use, and
it indicates that the FDIC will fail.

catfishncod wrote: > The question is not whether we have a crash, but whether it is
> more painful than it need be. The Great Depression was Great
> because the actors at that time made things even worse than they
> had to be. Can we avoid the same? Perhaps. We are about to see if
> you really can learn from history.

What you see going on in Washington is "actors" making things worse
than they have to be. As for your last statement, the answer is
"no."

catfishncod wrote: > History Lesson One: I tell you three times I tell you three timesI
> TELL YOU THREE TIMES never ever EVER hand ANYONE dictatorial
> powers, no matter how constrained or how sunsetted or how
> reserved! Secretary Paulson has asked for dictatorial powers over
> a large portion of the American economy, and dictatorial control
> of the power of the purse to execute his mission to save the
> economy. It's a classic "man on a white horse" request.
> Fortunately, I don't think even Congress is that stupid.

Congress is pretty stupid, though not for that reason.

catfishncod wrote: > Except that nearly all of these derivatives are between the firms
> that are blowed up or about to be blowed up, and exist only in
> terms of other derivatives. They are like virtual particles in
> nuclear physics: they are notions that make math come out, but
> aren't REAL. They can't be detected (or, in this case, bought and
> sold). Their values are purely theoretical. There ARE no
> "quadrillion dollars" to be poured into such items; it's all a
> pipe dream. The only question is how many REAL (non-derivative)
> dollars were used as starter yeast to create this malarkey --
> because that's how many dollars we're really out. I suspect that's
> more in the range of a trillion dollars, which is bad enough but
> is manageable -- and realistic.

First off, yes they are real. Second, one quadrillion is such a
large number that you can't even grasp it. One quadrillion dollars
in credit derivatives makes my brain explode.

What you're doing is looking out of the vast ocean, seeing how calm
it is, with soft billowy waves, and saying that everything is ok.

You can't see the whole ocean. All you can see is the top of the
water, and only a mile or two out to the horizon. Not only can you
not see the rest of they ocean, you're saying that its very existence
is "purely theoretical," a "pipe dream."

You see a calm ocean, but you have no idea what's going on beyond
your sight. Perhaps there's a typhoon or hurricane being spawned,
and it's going to land on your home with 200 mph winds, destroying
everything you own. Perhaps there's an underwater earthquake that
will spawn a mile-high tsunami that will drown you and millions of
people around you. You have no idea, because you don't see such
things, and so you don't believe they exist.

I can assure you that those one quadrillion dollars of credit
derivatives do indeed exist. They are very real, and they're like
tens of trillions of time bombs that will be going off whenever
there's a sufficiently big "credit event." Maybe those credit
derivatives are sufficiently interlocked so that the explosion of one
time bomb will cause a vast chain reaction. Maybe those credit
derivatives are so correlated that there's one particular kind of
credit event that will cause 10% of them to explode at the same time.

You have no idea. How do I know that? Because nobody knows.

Returning to the ocean analogy, we have satellites and radar and
various oceanic sensors that can tell us pretty quickly when a
hurricane is forming, or when an earthquake occurs.

But we have NO such tools to detect a credit derivative earthquake.

And all we need is some event that triggers explosions in only 1/2 of
1% of those credit derivatives -- that's $5 trillion, already far
more than anyone is talking about in a bailout bill. Now imagine
that instead of 1/2 of 1% it's 5% or 10%.

You say that's "malarkey." I say you don't have a clue, because
nobody has a clue.

catfishncod wrote: > If I'm wrong, tell me why. I'm not an economist and I don't
> pretend to be. If I missed something, don't laugh at me for being
> ignorant, enlighten me.

I wasn't laughing. It's just that you and I have known each other
for a long time, and I've written about this stuff so many hundreds of
time that I thought you were posting what you did just to be
perverse. I didn't laugh when I saw what you wrote. I just
shrugged. I hope the above explanation helps.

Sincerely,

John

John J. Xenakis
E-mail: john@GenerationalDynamics.com
Web site: http://www.GenerationalDynamics.com
Forum: http://www.GenerationalDynamics.com/forum

Dear Pat,

The Grey Badger wrote: > This bear just took some of my stock money market fund and bought
> Family Dollar Stores. If anyone can ride out a financial meltdown,
> they will. The middle classes are starting to buy there now.

> The Grey Badger, who remembers Woolworth surviving until
> prosperity was a done deal.

The problem is that when the crash happens, even the "good" stocks
will fail. That's because investors having to meet margin calls and
cover shorts will need to sell even their "good" stocks to get cash.

The company Woolworth may have survived the Great Depressions, but
I'd bet that its stock price fell 90% from 1929 to 1933. The same
thing would happen to Family Dollar Stores, even if the company
survives.

And don't assume that they'll survive. They may be in debt, and
their creditors might go bankrupt, in which case they'll go bankrupt.

Sincerely,

John

John J. Xenakis
E-mail: john@GenerationalDynamics.com
Web site: http://www.GenerationalDynamics.com
Forum: http://www.GenerationalDynamics.com/forum

John wrote: If you want to do compare historical analyses, then comparative
history is valid ONLY during comparable generational eras. Today
we're still in what one person calls the "post-unraveling era," where
the crisis era has technically begun, but the regeneracy hasn't
occurred. Eras before and after the regeneracy are not comparable.

Just to qualify this, the difference between the 'cascade' phase and the 'post-unraveling era' (as I envisioned it) is the catalyst in the historical context. If there is catalyst that triggers a series of events that directly leads to the regeneracy years later, the early part of the fourth turning is a cascade. However, if the catalyst fails to develop into something bigger yet changes the societal temperament toward the Crisis marker, then the early part of the fourth turning is a post-unraveling.

So, for example the 2001-2008 period (or 2005-2008) would likely be a post-unraveling. Note however, that a catalyst can develop during this time-period, thus moving society into the cascade phase. My expectation is that such a phase would be truncated. My current projection is that a 2008/2009 financial crisis would act as the nominal catalyst, with a regeneracy developing within two years.

A web site reader called my attention to the spike in the TED spread
today, 24-Sep-2008:



http://www.bloomberg.com/apps/cbuilder? ... EDSP%3AIND

The TED spread is one of several measures of "credit aversion." The
TED spread was spiking to astronomic levels last week, and came down
after the announcement of the Bailout of the World (BOTW) plan.

Now that the bickering in Congress appears to be delaying the BOTW
plan, the Ted spread is rising again.

Sincerely,

John

John J. Xenakis
E-mail: john@GenerationalDynamics.com
Web site: http://www.GenerationalDynamics.com
Forum: http://www.GenerationalDynamics.com/forum

From a web site reader:

Feel free to post this thought/idea....

I really don't understand why we bailing out the big banks sub prime problem after leveraging? That would seem to cost way way more money than just bailing out homeowners directly. It always amazes me how our government can find money out of thin air for Wall Street but can't seem to solve our own health care system at a fraction of the price.

Why shouldn't we just use the roughly 700billion dollars to pay for Americans mortgage directly (before all the ridiculous leveraging) as an effective method of backstopping the losses. The 2007 census tells me that there are roughly 100million homes out there. If you make the (arguably generous) guestimation that 2% of american homes are at risk of default or have already defaulted then that's 2 million homeowners in the US with mortgage debt, say you use 200 billion for a direct bailout to homeowners and divide that by the 2 million homes, that would allow for $100,000 for each defaulted homeowner to pay there mortgage and "save" a better part of the sub prime mess. Many homeowners would be able to pay off there loans while others would be in a functional position to maintain their mortgage and some may be able to reduce there monthly payments due to a positively shifted loan to value ratio (getting rid of private mortgage insurance payments, etc). Now it's likely that 100k is more than what is needed for many homes, and there should be more to this plan, such as taxpayer equity in the home itself and a payback once the loan is re payed. Something would need to be offered to renters as well in this plan, to be fair. And hell, for an extra few billion or so, we could give each US citizen some kind of "stimulus". As for 5 million dollar second homes in La Jolla, I say this plan should probably not qualify. This strikes me as a more patriotic, fair and effective solution that may, in fact stimulate the economy and satisfy out creditors (which are largely foreign entities these days). Is there something I am missing here? Likely. But I think this kind of idea should at least be a more prominent part of the conversation. Why do we assume that only the big guys deserve this bailout? Why do we settle for crappy proposals and patronizing vague explanations for what is really happening with OUR money?

From a web site reader:

I think you've mentioned other indicators of risk aversion besides the
TED spread. One would be LIBOR and the other I look at quite a bit is
the 3 months T-bill rate. I don't know if you're aware of it, but the
3 month bill rate hit 0.02% last Thursday. Yesterday morning it had
recovered to about 1.2% and ended the day at about 0.7%. I can't
remember the exact numbers but that is quite a drop. And it is
dropping further today at 0.49%. So indications are that the credit
markets could possibly lock up again very shortly. My guess is that
if the stock market takes a quick plunge to last weeks low, the credit
markets will lock up at the same time, and the stock market will then
begin to crash. Hopefully, this will happen before they can get any
"bailout" plan together, and then there will be serious discussions
about what to really do to fix the economy.

http://www.bloomberg.com/markets/rates/index.html

---


has dropped to 0.36% last quote.

The nice thing about watching this indicator is that is has an
absolute limit that when reached indicates that a crash can start at
any time and the system is in deflation mode. The absolute limit
being zero of course. I think bill rates can go negative but there
may be some natural limits to that because investors can park their
money in what are called zero percent certificates of indebtedness.
These are just cash balances that pay no interest. The physical
alternative to that would be to hold Federal Reserve notes in your
mattress or whatever.