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alstry (< 20)

Pay Bondholders or Pay Employees?



August 17, 2008 – Comments (6)

There is little doubt our economy is facing some unprecedented negative headwinds. 

The PE on the Dow 30 and Russell 2000 is nil. 

Unemployment jumped in July and some areas in CA are reporting 12-18% unemployment rates.  In recent weeks a large number of retail chains and restaurant chains declared bankruptcy. 

Housing foreclosures are at record highs and with more and more losing  their jobs that trend doesn't seem to be stopping anytime soon.

GM sees no signs of improvement even after falling gas prices.

Target is forecasting negative same store sales comps even though food prices are up significantly from last year.

From the above, clearly things are slowing and the outlook doesn't seem bright.  This slowing is exacerbated on a historically high level of debt that is suffocating our economy.....especially as revenues decline debt payments consume a greater and greater percentage of revenues.

If you really want to have some heart wrenching conversations, sit down with anyone of the millions of construction workers, real estate agents, or mortgage brokers who have seen their incomes disappear and have been forced to liquidate their 401Ks and savings just to make ends meet as they have been unable to find replacement jobs.  Few of these people are counted as unemployed but their suffing is real nonetheless.  This same issue is happening to many others as businesses go bankrupt or layoff large numbers of workers with few being able to find comperable replacement work.

As the savings are being drawn down....the slowing is speeding up.


a tsunami is developing very fast....due to the rapid slowing, state and local governments have seen tax revenues evaporate.  Going forward, states are going to have to make a difficult choices. 

Revenues have really started to decline signifcantly over the last two months and governments must now deal with a problem that growing with each passing week.  The mainstream media have been remarkably silent about this....

A major concern is some of the states biggest taxpayers in the past are no longer earning money and you can't extract tax from those that are losing money.  Some include banks, auto dealers, airlines, mortgage companies, real estate agents, mortgage brokers, retailers, restaurants, and vendors to the above.  As more and more can't pay.....that leaves fewer and fewer that will have to shoulder an increasing burden.

In CA, it reduced workers wages to minimum wage and it still didn't cover the deficit.  We saw unemployment in CA skyrocket in July only compounding the problem going forward. 

NY saw 20% of its tax revenues evaporate when Wall Street Banks started losing money....and it is likely this money won't come back for years with NOL carry forwards.

As the gap between revenues and expenses continues to widen....pretty soon states and local governments will demand more and more out of fewer and fewer and likely be forced to make a the bondholders or pay its employees.

Some people call it communism/socialism when every dime you make goes to the state and the state chooses how to allocate among the people.  Remember, the money must come from not from your neighbors and business.....then it must come from you.

In upcoming weeks, watch the spreads in municipal could get interesting.


6 Comments – Post Your Own

#1) On August 17, 2008 at 10:42 AM, alstry (< 20) wrote:


The value of America is based on debt.  If you don't believe me, just ask you banker.

If you look at the assets of America's banks, insurance companies, pension plans, and money market is mostly debt.  The debt market is much larger than the stock market.

If the banking system is insolvent, so is the rest of the economy.  Where do you think individuals, companies, and governments put their money???  When banks leverage 10X, 20X and doesn't take much for defaults to wipe out everyone's savings. 

As long as most are paying, everything is fine. For the last few hundred years....most were able to pay.  However, following the unprecedented lending of the past few years, that long historical streak seems to be coming to an end.

The majority of debt is concentrated into residential mortgages, loans to commercial real estate, corporate debt(including LBOs), consumer revolver debt like credit cards, and municipal debt.

Without discussing Federal debt, the outstanding amount of the above debt has exploded in past few years without offsetting rising incomes.  It became a ponzi scheme where money was being borrowed to fund spending and pay back old debt.

As long as people, businesses, and governments could borrow, the game went along fine and no one knew the better.  But now, fewer and fewer are able to borrow and the house of cards is starting to collapse.

For those of you mathematically inclinced, we are talking about tens of trillions of dollars of total debt.  How do you unwind such a large ponzi scheme that has infected the entire economy without a total collapse????

If you read Barron's this weekend, Fannie and Freddie are well on their way.

The funny part is that the media is trying to focus you on whether gas prices are up or down a few pennies and somehow that is going to make a difference?

Until the economy is deleveraged to a sutainable level...gas could drop to $1.00 a gallon and it wouldn't make much difference.  You can't offset trillions of dollars of borrowing money with a few hundred billion savings in fuel.  

There is no doubt that a major crash rests ahead.....and there are those that argue that the Fed will print money......but don't hold your breath....becauce if the Fed prints simply to meet debt payments....pretty soon bread costs $30 per loaf while incomes are stagnant....sound like the past seven years?????

We now know that printing and rebating $100 billion dollars(which was really more borrowing by the federal government) simply allowed consumers to make debt payments in June and July and did little to increase retail sales. 

At this point, as money becomes harder and harder to obtain, fewer and fewer individuals, businesses and municipalities will be able to meet their obligations.  The trend is already visible and becoming clearer every week.

What is amazing is none of our politicans are attacking this issue.  The problem is too much debt versus too little revenues.....and the problem is getting more that too hard to understand?????





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#2) On August 17, 2008 at 11:37 AM, alstry (< 20) wrote:


South Carolina’s state pension managers see a chance for that $29 billion fund to profit from the real estate collapse that has affected much of the country.

A volatile market — hurt by bad loans, tight credit, high energy prices and inflation — has decreased the price of most securities. As a result, the value of the state’s pension system, which holds primarily stocks and bonds, now is worth less than it was last quarter.

So after coming off a losing quarter with a detiorating outlook, what do the managers project???

The pension fund also has raised its projected profits to 8 percent a year, expectations Gov. Mark Sanford has said are too optimistic. According to the pension fund’s most recent quarterly report available, the value of its investments is down 4.16 percent this year.

As earnings outlook and credit metrix continue to deteriorate......our pension plans our taking greater and greater risks to make up the losses as demands for pension payments continue to increase.

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#3) On August 17, 2008 at 2:18 PM, alstry (< 20) wrote:


You can only blow up a baloon so far before it pops.  In the end the value must be justified by the income stream.  And right now, because credit is becoming harder and harder to come by, income streams are evaporating and so is asset values.

Let's look at the South Carolina Pension fund above for a second.  Its value decreased 4.19%.  That is 4% on a $30 Billion dollar base or about $1.2 Billion dollars.

We know since the end of last quarter, the value of debt securites have fallen significantly.  If the fund were to sustain another 4% loss, it would have to recoup $2.5 Billion to get back to its previous high.

$2.5 Billion is a lot of ground to make up when you only have 400K members.  Just a guess, but contributions are probably coming in at less than $1 Billion per year.  Imagine what would happen if equity prices continued to fall along with credit values. 

Remember, everything was great as long as we could borrow more and more money and pay higher and higher that we can't borrow.....prices are crashing......except for the cost of things we need to consume on a day to day basis like food and fuel.  Funny how the CPI likes to exclude the two things we buy all the time.


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#4) On August 17, 2008 at 2:54 PM, alstry (< 20) wrote:


NEW YORK ( -- Americans saw their net worth decline by $1.7 trillion in the first quarter - the biggest drop since 2002 - as declines in home values and the stock market ravaged their holdings.

The first quarter's decline follows a $530 billion drop in wealth in the fourth quarter of 2007.

[The first quarter's drop more than tripled the fourth quarter's drop]

The net worth of U.S. households fell 3% to $56 trillion at the end of March, according to the Federal Reserve's flow of funds report

The value of real estate assets owned by households and non-profits declined by $305 billion

[This number seems grossly understated as we know that housing alone(excluding commerical and investment property) was valued at over $20 Trillion at the peak....thus a $300 million dollar decline would be less than a 1.5% decline which is much less than the real fall in housing values....add in non residential RE and the number is not even reasonable]

Whether household wealth will be up or down at the close of 2008 depends more heavily on the stock market's performance than on housing values, since financial assets account for about two-thirds of net worth.

[This is one of the most idiotic statements I have ever read.  Yes, on a net basis financial assets out weigh real estate...however on a gross basis they are more equally weighted because real estate is leveraged.  (ie a family with a $1 million dollar house and a $700K mortgage and a $1 million dollar investment portfolio) Thus if a house falls in value 50%, it is just as much a real loss to the individual as if his/her finanical assets fell 50%.(using our previous family, if either the house or investment portfolio dropped 50%, the loss would be the same $500K)]

"The jury is really still out," said Englund, adding that wealth could end up flat for 2008.

The jury is still out?????  Housing is down about 20%.  That is over a $4 Trillion dollar loss without counting investment property.  Factor in the decline in debt securities and stock values and we could be looking at another $4-6 Trillion.  That would be the equivalent of a 50% crash in the stock market.

Wealth evaporation tripled from the fourth quarter to the first quarter.  I expect it to double or triple again from the first quarter to the second quarter as housing, debt, and equity continues to fall due to lower revenues and earnings.

If it were to triple for four quarters in a row, the net worth of Americans would just about be cut in half.  Just one more triple would more than wipe out Americans net worth completely.

Compounding is amazing on the way up, but very devasting on the way down....and much easier to occur with leverage.  Never before has America been so leveraged.

From the above article:

Meanwhile, the amount of equity people have in their homes fell to 46.2%, the lowest level on record.

Thus, if home values just fell another 46%, bringing us back to 2000 levels....on a net basis, Americans would have no equity in their homes.

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#5) On August 17, 2008 at 4:46 PM, alstry (< 20) wrote:

Our Suffering RetireesThey worked, paid off mortgages and saved for their senior years. But even they are increasingly feeling pinched, as the prices of basic necessities rise faster than they ever imagined or planned for.

Power companies are warning of 30 to 50 percent higher heating bills come winter. Although gasoline is on its way down from more than $4 a gallon, it has still doubled since 2006.

More drastically, when her basic prescription coverage maxes out each year, and she has to pay in full, Embertson makes hard choices. Usually around October, she uses her asthma inhaler once instead of the prescribed twice daily, and she takes a cholesterol pill only every other day. "The high-blood-pressure medicine, that's the one I make sure I take," she said.

Embertson is one of Minnesota's middle-class retirees. There are plenty of them among the state's approximate 600,000 senior citizens. Half of Minnesotans 65 and older have incomes of more than $30,000, nearly 12 percent higher than the national figure, according to the U.S. Census Bureau.

"People are not living extravagantly," said Michelle Kimball, director of the Minnesota AARP. "Their lifestyle hasn't changed. What's changed is how expensive it's all becoming and how static their income has been. And what you see is a growing sense of struggle."

What do you think life will be like when heating costs hit this winter?????  What about recent food price increases????

People with their homes fully paid for are struggling....imagine those with mortgages????

If they have to sell their homes, it will simply mean more inventory to a growing inventory already out there......and some people are calling a housing bottom????

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#6) On August 17, 2008 at 8:24 PM, lquadland10 (< 20) wrote:

Libor is expanding again so higher arms resets comming they lie to us about everything so it is time to do the contrainary plays. Everytime gs says something follow it up and use the money you make to cost average down silver and gold. When the country's money is worthless then you will have the gold and silver to pay your taxes and keep a roof over your head.

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