Barack "100 cents on the Dollar" Obama Will Save Us All

Sometimes it's good to remember how something Bad Got Started, so you can figure out how to stop it.

At some point, back in the 70's (80's?, 60's?), we started getting little applications in the mail. It was actually the norm to have only one credit card way back when, like it was the norm to have 1 TV or 1 car or 1 house.

Then people started applying for another. And things still seemed OK. You could get more stuff, and paying 3% on 2 cards with $1,000/ea was not the end of the World. It was actually nice, you didn't have such a rigid connection between earning & spending. People could bridge the gap on the odd occasion when they actually lost their job.

But saving became a little less important. And there was this strange creeping feeling that we weren't spending real money. I got my first credit card when I was fairly young, and I certainly remember that feeling.

Pretty soon though, the urge to save pretty much went away. The urge to spend increased with each new application filled out, and new plastic arriving in the mail became something of an expected ritual. In fact, those applications started to feel like income.

And things NEVER got worse because of this. People seemed happier. In fact a whole generation of people base their happiness on consumption. They don't even know it. I'll show an illustration in a bit.

So things seemed to get eternally better. More jobs. More income. More stuff. Every indulgence indulged, every craving sated.

Then, round about 5-10 years ago this credit-fueled industrial complex began engaging in some practices that seemed great, but they ultimately sowed the seeds of economic destruction:

• We started putting unqualified borrowers in homes.
• We started accepting nothing down on a home.
• We started lying to put them in a home.

See, we did this with those credit card app's, right? Sure! Who hasn't hit hard times, got a CC app, and lied to get one, and bridge the gap? Or, maybe you just wanted another card, because you could get money at near 0%, and if you inflated your income, you'll be eligible for a buttload of extra cards, right? And the credit card companies NEVER CHECKED!

It was become standard issue to LIE on credit applications. So when they began Securitizing Mortgage Loans, it became OK TO LIE. Why not? They were going to sell the loan to someone, who was going to sell it again, ad nauseum. And this scheme was working out great! Everyone got a little slice of the action, and foreclosures, price declines, joblessness, and other such nasties had Never Been A Problem Before.

So we had historical evidence on our side. We had a booming economy on our side. We had rock-bottom defaults validating these practices. Everything was peachy.

So what did we have, circa 2005-2006? We had an incredible over-abundance of homes. An overabundance of cars. Overabundance of clothing, computers, food, carpet, factories, businesses. An over-abundance of JOBS. Yes. Most of the jobs created in the 5-10 years prior to The Boom, are artificial. They really are not meant to be.

The credit was not meant to be. The consuming was not meant to be. So the jobs & businesses behind them are not meant to be. We've had quite artificially low unemployment for a good decade. Go to Wal-Mart: Look at the troglodytes working & shopping there; those people should be kept in trailer parks, away from the rest of humanity.

And Yes,I went there yesterday. And on a Sat afternoon, I have never seen the parking lot so empty. EVER.

So lots of the stuff lying around you right now, is probably from a place whose existence is predicated on demand about 30% higher than it is right now.

So the upshot is that demand & spending need to crash for equilibrium to be reached. Unemployment goes way up. Lots of factories shut down. Demand just goes away, and simple economics of supply & demand reassert themselves, and prices fall.

As I said Long Long Ago: The only way to pay off debts is to sell stuff or make more money.

The "make more money" option is being lost at a clip of about 50,000 jobs/day. That leaves Selling Stuff.

Selling houses. Selling toys. Selling cars. Selling computers. Selling everything. And not just re-selling house, or re-selling computers: Builders have crushing debts & need to build & sell more homes. Dell has factory capacity that costs them when idle. Airlines. Flea markets. Garage sales. GM. Banks. Home sellers. All have product that must go.

We have a FLOOD of stuff from ALL CORNERS... and no one can buy it.

So along comes The Stimulus Package. That'll set it right... right?

Well, the first slug of the bank bailout billions is out there, and guess what? The Banks Are Not Loaning. Gee, I wonder Why?

Oh....right, right, right, right, right. Cuz they have TRILLIONS in bad loans on their books. Now they can do one of a few things.

They can go into the Free Market and SELL THESE LOANS, and realize essentially that they are insolvent. The banking system in the USA is technically INSOLVENT RIGHT NOW. If they realized the losses, the CEO-pay gravy train is over & Disgraced Idiot Era begins. Is it any wonder they are not doing this?

And really, why do this, when Obama, Our Lord & Savior, Has Promised that he'll Make It Right.

Father Barack "100 Cents on the Dollar" Obama

This brings up Option 2: Wait to be bailed out. Wait for TARP money that you can stick in the vault. Don't even have to worry about bad loans, or realizing the losses, cuz Barack gonna make it all all right.

"We gonna get that TARP money!"

So the bailout, and it's promise of making us all whole again, has actually exacerbated & prolonged the problem. Every bank in the country is waiting to accept & BANK their piece of the trillions. Ain't gonna lend it, that's for damn sure. Fool me once...

So we are caught in a deflationary spiral. Lots of people are looking out the Side Window, and telling us, "NO! We're Not In A Depression! Now Deflation seems to precede, cause & exacerbate a Depression, but we ain't in a Depression. Look. Out the side window. We're just in a rapidly deteriorating Deflation. There's really No Way To Know what lies ahead. Sure, about 99.9999999% of the time, deflation leads to Implosion, but we can't be sure! So all we can really do is Hope For The Best. And plan for the best. And start that new handbag store, despite the complete failure of the last one".

Stock slaughter

For equities, a sustained period of deflation is widely seen as a disaster By Alistair Barr, MarketWatch

SAN FRANCISCO (MarketWatch) -- As 2009 began, U.S. dairy farmers slaughtered more than 70,000 cows in one week to fight slumping prices.

Herds are being culled at the fastest rate in almost two decades as the recession withers away consumers' demand for everything from frothy cappuccinos at Starbucks.

In January alone, milk and cheese prices plunged by at least one-third. Similarly painful adjustments are playing out around the world as companies try to slash production and cut jobs in the face of falling demand and waning pricing power.

The problem is that, as more companies hunker down, demand may weaken further, spurring another wave of downward pressure on prices that would usher in a prolonged period of deflation.

"The combination of credit-crunch deflation and recession is forcing companies to conserve cash by firing workers and slashing capital spending," said investment strategist Ed Yardeni. "That should work for one company, but when they all do it, it just exacerbates the situation by cutting demand all over again."

Many investors believe that a lengthy bout of deflation is unlikely.

But if consumer prices do indeed fall for a long time, the result is likely to be a disaster for much of the stock market, investment professionals say.

Investors could minimize their losses in stocks -- and maybe even capitalize a little on the situation -- by paring their portfolios of the most vulnerable assets while steering toward sectors that are more resilient to a deflation wave.

Companies that may suffer less include those with costs that fall more than the price of their products, such as Dean Foods, and firms that help consumers save money, like Wal-Mart Stores and McDonald's Corp. But many sectors including banks, metals companies, retailers and manufacturers would likely be crushed by sustained deflation. "Sometimes an entire asset class is not a good idea," said Kevin Harrington, chief economist at San Francisco-based Clarium Capital.

Clarium, which runs a $2.24 billion global macro hedge fund, is avoiding stocks, while betting on gains in the U.S. dollar, which Harrington describes as "implicitly a deflationary trade."

No global macro hedge funds were bullish on U.S. equities, according to a survey in early February by consulting firm Greenwich Associates.

That was down from 46% in January and 62% in December. The lowest level of interest in U.S. stocks before that was 8% in October 2007, just before the Standard & Poor's 500 index began a 45% slump.

"It's not a question of if. Deflation is upon us," said John Brynjolfsson, chief investment officer at Armored Wolf LLC, a global macro hedge fund in Aliso Viejo, Calif. "It's a question of how bad it will get."

Steven Bell, a former Deutsche Bank economist who runs a global macro hedge fund at London-based GLC Ltd., has been betting against, European and Japanese stocks, while buying two-year German government bonds.

"Deflation is a serious threat," he said. "You have to say that all companies would lose in such an environment, but some would lose less than others."

In contrast to equities, deflation typically boosts long-term government bonds because their fixed payments become more valuable as the price of goods and services fall. See feature on deflation and the bond market.

Japan

When Japan suffered its most severe bout of deflation, from October 2000 through January 2003, only one sector of the nation's stock market -- electric power and gas shares -- posted gains, according to Morgan Stanley.

Shares of non-ferrous metals producers, communications, banks and services companies dropped more than 60% during the period. And there's a worrying difference between Japan's experience and the current predicament of the U.S.: The Japanese had lots of savings when the country descended into its deflationary recession, but U.S. consumers are now mired in debt.

"The societal effects were not nearly as dramatic as we're experiencing now in the U.S.," said Brian McAuley, chief investment officer at Sitka Pacific Capital Management LLC. "People had much more to fall back on in Japan, while our consumption is falling dramatically."

McAuley is investing in gold and gold mining companies, while keeping his clients' equity exposure at zero.

He's expecting more stock market losses, with the Standard & Poor's 500 index possibly falling to 650 points, more than 20% below current levels.

Deflation scare trades

Morgan Stanley strategist Ronan Carr recently advised investors to keep most of their money in cash and gold. Gold is usually considered a good hedge against inflation, rather than deflation.

However, Carr said the precious metal would likely provide protection in either scenario. Banks should be avoided, partly because deflation increases borrowers' debt in real terms, making it harder for them to repay loans, Carr explained.

Bank stocks in Japan slumped 91% during its long fight with deflation and slumping real estate, according to Goldman Sachs. The KBW Bank Index, which tracks the largest U.S. banks, has dropped roughly 77% since the housing bust began two years ago.

That suggests, in a worst-case scenario, U.S bank shares have another 60% to fall, Goldman analysts warned this week.

Mining companies carrying lots of debt, such as Xstrata , may also be losers because the real value of their interest payments would rise while the prices they can charge for the metals they produce falls, Carr said.

Other so-called cyclical stocks, such as carmakers, should also be avoided, he added. Relative winners include companies that generate strong cash flow and have little debt.

Industries that have pricing power and are protected from new competition could also survive better. Tobacco companies, drug makers and property and casualty insurers fit those criteria, Carr says.

Already declining

While debate swirls over whether deflation or inflation will emerge over the long term, prices are already falling in the U.S.

The consumer price index fell 1% in October, the most since the Bureau of Labor Statistics began publishing seasonally adjusted prices in 1947. The CPI slumped 1.7% in November, another record, and 0.7% in December.

Morgan Stanley estimates that by July, U.S. consumer prices will have fallen 3% from a year earlier.

Merrill Lynch sees the CPI down by the same amount by the third quarter. Once falling prices form a trend, it's difficult to reverse, partly because consumers are encouraged to save rather than buy.

That dents demand and sales, potentially inflating companies' inventories and triggering more discounts. "

Potential buyers realize that they can negotiate even lower prices simply by waiting," Brynjolfsson said.

Fixed debt payments get larger in real terms, which means any credit problems impacting the financial system only get worse, he added.

The auto industry has already been buffeted by deflationary winds. Most new car purchases are at least partly paid for with loans.

The transaction results in two costs for consumers -- the extra money for the loan and the impact of an asset that begins to lose value the moment it's driven off the lot.

But in a period of deflation, the cost of the loan increases because the debt payments rise in real terms.

The result has been a plunge in new car sales which has pushed U.S. automakers General Motors, Chrysler and maybe even Ford to the brink of bankruptcy.

One carmaker, South Korea's Hyundai, is trying to tackle the problem by letting buyers return vehicles, at no cost in most cases and with no dent on their credit rating, if they lose their job or income within a year.

"That's a direct response to the deflationary psyche of buyers," Brynjolfsson said. Cutting capacity Airlines performed relatively well last year when their costs fell as oil prices slumped. However, demand for flights started dropping too, pushing ticket prices down 11% from their August high, according to Yardeni Research. "

Airlines benefit when oil prices decline, but they lose if conditions are such that no investment bankers are flying to see their clients," GLC's Bell said. "Space in first class and business class has been dramatically reduced."

Bell was speaking from Kuwait, an oil-rich country which only a year ago was dogged by inflation concerns. "January is usually very busy, but the Middle East is much quieter this year," he said.

"The hotels are empty and flights are not full." The parent companies of American Airlines and United Airlines said in January that they would cut capacity further this year to try to halt the decline in airfares.

The retail sector has been particularly hard hit as slumping demand forced many companies to slash prices to whittle down ballooning inventories.

Costco Wholesale Corp., one of the world's largest retailers, sent a shudder through the industry in early February when it issued a big profit warning.

The company said it cut prices aggressively to drive sales, but that took a chunk out of margins. Eggs and butter prices were chopped 10% to 20% and milk prices were slashed more than 20%, Chief Financial Officer Richard Galanti said. "

Arguably, a good chunk of that is short-term, as long as we don't live in a recession forever and as long as we don't see huge deflation," he added, during a conference call with analysts. Even luxury retailers have slashed prices.

Saks Inc. cut designer-clothes prices by 70% before the holiday shopping season. Still, the department store operator reported a 24% slump in January sales, partly because shoppers continued to buy sale items, rather than regular-priced merchandise.

"What the sector will have a tough time doing is returning to full-priced business," said Brian Sozzi, an analyst at Wall Street Strategies.

"Consumers are now trained to expect discounts." Nuts and chips Other companies traditionally considered resilient in recessions have also been hit by deflationary troubles recently.

Kraft Foods, the world's No. 2 food maker, reported a 72% drop in fourth-quarter profit as it struggled to deal with declining food prices.

In January, Kraft was forced to cut prices on its Planters nut snacks after it lost market share. When Kraft raised prices last fall, its rivals didn't.

Technology companies are used to falling prices, but the recent drop in chip prices has been so severe that several companies have suffered.

The price of DRAM, a memory chip commonly used in personal computers, slumped 77% from May to December last year. NAND flash chips, used in cell phones and digital cameras, have fallen 62% in price during the same period, according to iSuppli.

Shares of Micron Technologies, a leading DRAM supplier, dropped 64% last year, while SanDisk, one of the largest NAND flash makers, slumped 71%. Qimonda AG, a big German DRAM maker, went bust in January.

Possible winners

Some companies may benefit from deflation if their costs fall faster than the price of the products they sell. Take Dean Foods.

The company buys milk from dairy farmers then processes it, distributes it in refrigerated diesel trucks and sells it to grocery stores and other food retailers. The recent drop in milk prices and a slump in diesel in the past year have cut Dean's costs dramatically.

That's made up for declines in the price of the dairy products it sells, improving profit. As recently as Wednesday, Dean Foods said that fourth-quarter profit more than doubled and issued a bright forecast for 2009.

Other companies that offer consumers ways to save money may also avoid some of the damaging effects of deflation. Sitka's McAuley said Wal-Mart may benefit as shoppers become thriftier.

Meanwhile, fast-food giant McDonald's has remained resilient in recent months. "Companies that provide consumers with the opportunity to save some money and still get fairly good service and products may do OK," Yardeni said.

Even so, Yardeni and McAuley warn, if deflation lingers for a long time, there would be few such examples for investors to consider.

So deflation, and it's attendant terrible side-effects, is here. Prices, demand, and jobs simply go into a self-reinforcing cycle of decline. Easily illustrated by Japan's economic conditions for almost the last 2 decades. Generation Lost.

Japan's reaction was to hope against hope. Still is. Banks STILL hold trillions in NPA over there. They are entering their 3rd decade of Asset Denial. They won't sell or re-price, or otherwise realize these loan losses, as the corporation would cease to exist. The Overhang Continues.

So what are we doing? Surely we aren't following Japan's Bad Example, right?

Ohhhhh, we surely are. Everything possible is being done to avoid realizing losses. Everything possible is being done make it to Barack's Promised Land, where TARP, and other bailout funds flow like water. Everything possible being done to Ride It Out, wait for the bailout some we can bank the money, wait for The Bad Bank to take All Our Bad Loans. Every bank in America made whole again.

Maybe. It's possible. We can certainly print the money.

But The Losses Will Be Recognized. At some Point. By Someone. And that someone is taxpayers. Which seems OK, since it's just us chickens. We made the mess, we'll fix it, we'll be fine.

Actually, this is true in some respects. But what is Really Happening, is that the wealth of this country is being reallocated.

All the banks with bad loans are having their negative net worth made whole.

All the people with foreclosures, are being made whole.

Trillions are being expended to do so. And we are all going to pay. Even those who had NOTHING WHATEVER TO DO WITH CREATING THE PROBLEM.

The Responsible are bailing out the irresponsible. The Good bail out the Bad. The winners are being made to lose.

Did you buy 6 houses by LYING on your mortgage applications at the top of the Bubble mega-froth? Lucky me, I am going to bail you out, because I chose to rent, and not lie, and live within my means.

Citigroup and J.P. Morgan suspend foreclosures

Obama to provide more details about foreclosure prevention plan in Arizona

WASHINGTON (MarketWatch) -- Citigroup Inc. and J.P. Morgan Chase & Co. on Friday announced that they would temporarily suspend foreclosures, as Washington's debate continued about how to save the U.S. economy and moribund housing market.

In a letter to House Financial Services Committee Chairman Barney Frank, D-Mass, J.P. Morgan Chief Executive Jamie Dimon said that he would set up a three-week moratorium on foreclosures.

Citigroup, in its own statement, said that it would suspend foreclosures until the Treasury plan is finalized. The announcements by Citigroup and J.P. Morgan come as President Obama prepares to announce more details about his plan to stem home foreclosures in an address on Wednesday in Phoenix, Arizona, according to White House press secretary Robert Gibbs.

The Arizona housing industry has been pounded by the slow economy and the state is now seeing some of the highest foreclosures rates in the country.

The Treasury plans to use $50 billion of the remaining $350 billion in bank-bailout funds for some form of foreclosure-mitigation program, but it has yet to produce details on the subject.

The goal of the program, which is part of a $1.5 trillion financial rescue program, is to help troubled homeowners avoid defaulting on their loans.

The Obama administration is working on a program that would subsidize mortgage payments for troubled homeowners subject to an affordability test, according to reports.

This approach would be different from other assistance programs, because borrowers would go through a standard eligibility test and could be approved before their mortgage becomes delinquent.

Citigroup and J.P. Morgan are responding to a request from Frank, who pressed bankers on Wednesday to voluntarily set up a moratorium on foreclosures until the Treasury Department has put in place a plan to alter mortgages.

In addition to Frank, the Office of Thrift Supervision asked the federal and many state-chartered thrift institutions it regulates to stop foreclosures on owner-occupied homes until the new plan is finalized in the next few weeks.

Frank, in a meeting with reporters on Wednesday, said he expects that more than 90% of banks will halt foreclosures until the program is up and running.

He declined to provide details of what kind of plan he would like to see take place, but he said some principal write-down for troubled borrowers would be a key part of it.

A Treasury staffer said Tuesday that the program could resemble a proposal introduced by Federal Deposit Insurance Chairwoman Sheila Bair that would use funds from the bailout package in a program to help avoid foreclosures.

It is a loss-sharing program between mortgage servicers or investors and the FDIC and deals with loans that fail six months or longer after being modified.

See? Everyone waiting. Everyone going to get bailed out.

In the end, it's so tragic, you just have to laugh. I am, at some point, going to pay higher taxes for the STD's built on the Eastside. I will pay so that mortgage app liars will be bailed out of the lies. I will pay to artificially somehow keep housing prices high, so that I cannot afford one. I will pay for being honest and living within my means.

I made a bad choice.

I'll learn next time. I want my bailout money. I want money re-allocated TO ME, not AWAY FROM ME. I will be irresponsible. I'll lie. I will fuck you over to get mine.

This is a great country.

OK, I said earlier I would end with an illustration of almost ridiculous self-indulgence. It comes from the owners of Pomegranate, the failed downtown crap-O-torium. This woman is still blogging, and still just oblivious as shit to the World around her. Check this out:

End of a dream (or two or three)

I miss Merenda. We would have gone there a few weeks ago after closing the doors on our own downtown shop for the last time. Instead, we went home and made a nice little dinner, sat in our pjs, and drank some champagne... to soothe our souls.

Truth is, we hardly ever (never) go out to dinner anymore, which makes us part of the problem for restaurants. It's endemic, this economic situation. Call it trickle down (too lite), ripple effect (better) or smashing tidal wave (apt), but it has affected everyone in one way or another.

When I lived in San Francisco some time ago (and please, no one needs to send an anonymous comment about Califungos [sic: Cali-Bangers]) I used to frequent the wonderful Farmer's Market at Ferry Plaza, just like I frequent our wonderful Farmer's Market at Mirror Pond here in Bend.

Back then, the Ferry building wasn't yet refurbished into the foodie heaven it is now, but once a month or so, local restaurants would set up tented booths and cook up a storm for shoppers. At that time, Jody Denton owned Lulu's (south of Market area), one of the restaurants represented at the market. I didn't know him then, but clearly remember standing in line for a soft shell crab sandwich, and going crazy over the amazing taste and texture of it. A bunch of people around me announced (to no one in particular) that it was so good they were getting back in line to get another one.

Sometimes a meal is memorable like that, even if it's eaten standing up in a converted parking lot with seagulls and pigeons swooping around, hoping for a bite. We were happy when Merenda opened. It was hugely ambitious, and all the buzz about how it could sustain itself seemed to dissipate when year after year, it just kept succeeding.

Until the financial crash. I really liked going there, and maybe this post is more about post-mortem support than anything else, but some of the blog posts I've read bothered me in their analysis of why they went down.

Truth is, everyone has a different experience at different restaurants, and some of it depends on the day, time of day, mood of the servers, who's cooking, and who's sitting next to you. There are lots of good restaurants here, and you'll get a different critique of them from everyone you talk to. And no observer will really know the details of why a restaurant – or any business – falls apart.

All I know is the restaurant business has to be a crazy scary venture: more intense and problematic and potentially disastrous than anything you can do in retail. I'm glad another group is giving it a go: the space is fabulous and, I think, the anchor of downtown. It's good that some of the Merenda employees are going to get their jobs back.

And I'm glad that Jody has another job lined up in Sydney. But I'm very sad that they had to go bankrupt in the process. No one wants to see that for a young family. Or anybody. We were there on their last night, and I shed a few tears as we left (oh yeah, lots of raw emotion these last few months).

Jody and Michelle are sure to land on their feet again, and the restaurant will reincarnate itself (empty spaces downtown will get filled: it will just be different).

It just hit me as the end of a dream, a vision. Not just theirs, but ours as well (knowing we'd be soon closing our downtown location), and soon, others. This is what I crave right now: that lemon rotisserie chicken. Maybe with an indulgent side of tempura green beans, followed up with an order of insanely delicious beignets. Call the medics.

I mean, this gal sounds like she's very nice. But, if you read this post closely, and in the context of someone who has just Closed Down A Failed Luxury Handbag Shop, you just have to wonder What The Fuck Is She Thinking?

She even has the barest self-awareness to know that Cali-Bangers are the most LOATHED species on Earth. But even so, she almost defines Happiness by the Quality of Her Consumption. I almost feel bad for this person. How many authentic moments has she had in her life? I mean she describes herself as a "Shopping Monkey" on her blog.

It's actually just sad. And still, she is probably almost broke, and all she can do is reminisce about consuming. And you see this as a common thread in almost everything listed on BendBlogs.com. 95% of all posts are of an almost completely selfish nature: "Why I like/eat/do/dislike/buy/avoid/think about 'X'".

Well, I better wrap this up, so hbm can take a nappy pie.

I love deflation! My back is killing me!