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Wall Street Breakfast: Must-Know News

The growth of the financial engineering, since its first vehicle in 1972, is covered by Kevin Phillips, in: “Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism.” He wrote:

“Between 1987 and 2007, debt—in all flavors, from credit card and mortgage to staid U.S. treasury and exotic Wall Street—became one of the nation’s largest, fastest-growing businesses. Over those two decades, so-called credit market debt roughly quadrupled from nearly $11 trillion to $48 trillion. This was abetted by a revolution in marketing, packaging, and propaganda—in reality, public debt wasn’t the big ballooner, private debt was. Without much publicity, the financial services sector—banks, broker-dealers, consumer finance, insurance, and mortgage finance— muscled past manufacturing in the 1990s to become the largest sector of the U.S. private economy. By 2004–6, financial services represented 20 to 21 percent of gross domestic product, manufacturing just 12 to 13 percent. And finance enjoyed an even bigger share of corporate profits.

“Risky” doesn’t begin to describe this new focus in the American economy. Bingeing on debt is reckless, and financialization has a long record of being an unhealthy late stage in the trajectory of previous leading world economic powers. Moving money around instead of making things is always dicey, and the U.S. transformation has been the most grandiose to date."

I wish I'd read this when it was first given to me as a publisher review copy in 2007. As it was, I learned about the contents from his In Depth BookTV interview on December 7, 2008
www.booktv.org/watch.a... and didn't read the work until last month. There is a one hour show from May 9, 2008 on BookTV at www.booktv.org/watch.a...
The paperback with an update will be released on Mar 31, 2009.

Can Americans Really Cut Back on Consumption?

It seems we are hard-wired to be deceived and then defend the deception as truth. We also don't much care for the following generations. Advertising encouraged us and the generators of easy credit led those that would, into pits of debt. Not being our brother's keeper, the crash has brought us all down as well. What we've done with money we are likely to do with energy. As living crash-test-dummies for our built environment, it is time to look within at the wiring and do some cultural updating given the physical limits of earth. That would include actually caring in the present for the generations to follow, not to mention the completion of our own life journeys. Want is unlimited, but what we need now and in the future, is a greater community approach to humanity. We are all in this together. Local, regional, state, national and international networks could work more harmoniously without the frenetic need for success and wealth now! A longer time horizon for achievement of goals, individual and corporate, public and private, is needed. We are engaged in a relay race where the legs themselves are marathons, not sprints. If we don' self manage, we'll get smacked.

Wealth Watch: Redefining Rich and Poor In a Shrinking Global Economy

Alan -

Good job of laying out a glide path scenario. The image I had the other day was: "selling the family jewels at the flea market, not Christie's." We are truly going to learn the meaning of illiquid assets. In the stagflation period, collectibles were one strategy. Now, no one collects. Museums make get a lot of donations, but what income will credits be off-setting?

On inflation, your thought: "The reality is that we are replacing the equity and debt of individuals, companies and soon local governments with federal debt. While ultimately this can end up as inflationary, it is not a foregone conclusion." offers some hope that re-inflation will not lead to hyper-inflation.

Needing to sell good stocks/assets/bets to cover bad investments/bets when there are few buyers is what Jim Cramer said was going on early in the drop of stocks. This increased "gambling for redemption" as Nouriel Rubini characterized it. We little folks were clueless to what was going on behind the scenes, as the leadership said things were fine, its a good time to buy. I wasn't aware of Seeking Alpha at the time, perhaps its readers had earlier information.

Cash is King and those that have it, will keep it. The haves - in your analysis - will have to rescue the have-nots, which I think is a good way to look at it. While this is a difficult situation, its not one of the life-ending earth disaster as featured on the, just finished, History Channel's Armageddon week.

How will we get through it? My faith is in the built-in, human community instinct for cooperation. It will do the job. There will have to be change, even repentance for false doctrines, such as the credit-debt ratio. That 50% of the average household's assets are debt is frightening rate and I hope it is incorrect.

What will our world be? Maybe the 1950's with the Internet and more TV stations. Kids night actually have to wait until Christmas to get the gift they wanted all year. There will be a lot more of working across boundaries, enabled by the communications networks now in place. That will need to become the intent of our communities: local, regional, state and multi-state, national and multi-national, and global. While we might want to retreat to a walled community, it is hard to meet all your needs within a finite geographic space.

Tom

The Losses of a Money Magazine Portfolio

The scale looks like for every $100 invested at the start, you'd be at $104 at the end of eight years. To be up $4,000 you'd have to had invested $100,000. To make $4,000 on $10,000 would be decent in these times, though not the near doubling in seven years that is the vision of compounding advocates. The financial engineering of companies appears to have weakened the corporate landscape. When Sears, GM, Ford, etc began to make more money financing purchases than in cash sale of the items, probably back in the 1970's - and after the tight credit of the early 1980's, the magic of interest and fee income from creditors of all types, preferably those who carried large balances ended up putting money creation in the hands of the private sector, that is - money as debt. We are headed for inflation to avoid deflation. What assets can keep up with that?

Are U.S. Home Prices Reasonable?

People have come to buy more house than they need or can afford. Suburban development policies have encouraged the up-sizing of homes as they sought values which would result in taxes to cover services, primarily the expansion of school systems.

Pre-1960's, most development was in cities. They extended infrastructure - roads, water & sewer, with low interest municipal bonds. The housing was then built within the grid. Suburban development - post WW-II, often in unincorporated areas of Counties, had infrastructure demands, but the Counties did not have much infrastructure. The developers then put in what was needed and dedicated it to the public utility. That ended the grid road system and led to the cul-de-sac as developers sought the shortest possible runs. It was aesthetic, but did not "connect" to adjoining projects. Thus you got the suburban problem of: "you can't get there from here" and eventual suburban congestion as every resident over 16 needed their own vehicle.

This "solution" meant that public infrastructure was being financed at market interest rates because those costs were put in the house, rather than municipal bond rates. Housing values increased to reflect this cost. Today, a lot cost before the unit is built, can range up to $300,000. Close in jurisdictions use this to keep values high and school children out. The farther out communities provide housing more cheaply, but there's a 45-85 mile, or more commute. Whatever is cheap to a suburbanite - $300,000 compared to $500,000 - is always unaffordable to the local market. Here in Virginia's Northern Shenandoah Valley, affordable housing in 1999 was a $90,000 townhouse for a $25,000 income family.

Post 9/11 - the Washington, D.C. metro area contractor employment ramped up and local values nearly doubled in three years. Bigger units were built for the commuters and retirees cashing out from D.C. area home values. Now they are sitting empty and prices are dropping.

Housing, it turns out, is also a commodity. The recession of 1990 proved that on a small scale, and this collapse is reinforcing that lesson. Just looking at a spreadsheet does not tell the whole story. Bigger houses require more maintenance. Who is going to be able to afford that? The Victorian homes were high maintenance too. Their owners of the time could afford to hire the help. When that was no longer the case, those neighborhoods declined and the units became rooming houses. That could be the fate of McMansions. Zoning ordinances won't like it, but economics is likely to win out. Modern housing construction materials are not as sturdy as those used in our cities up through the 1950's. Demolition is as likely as rehabilitation for many units.

No doubt the aspirational readers of Seeking Alpha have goals of big estates and multiple homes. Many do live large, and by doing so, create employment for others, but feeding the wants has exceeded the need. Easy credit enabled the ramp up by giving people a Midas touch. Financial leverage does have risks, so a conservative approach is warranted. It generally takes time to fully "experience" inflation. We now get a chance to experience "deflation." Meanwhile the people will be doing their best to create long-term value for their families and human society.

Why We Need Higher Gas Prices

Funds are needed for transportation infrastructure. The U.S. and most States were reluctant to raise gas taxes a few cents or index them to provide the funds. Virginia, where I live, is a good example.

Then oil prices and gas prices went crazy. The demand for gas was inelastic, given the great distances we drive from home to work or any common event. (Walking is done on a treadmill watching TV. Some drive to the gym to walk. Suburban development since the 1950's has made walking impossible. That's where real cities do have an advantage.)

The money that could have been raised by a nickel or dime fuel tax ended up in the Middle East as an up to $2.50 supply shortage price premium was paid. Had there been a tax that leveled cost over time, more of that money would have stayed here. It represented an opportunity lost. Our potential road improvements ended up in the Arabian sands.

Commodity markets are small. They do boom and bust, particularly when they attract spec money. A flexible rate fuel surcharge that would keep the per gallon rate about $2.99 - (still cheaper than bottled water or bistro coffee) would build resilience by requiring a focus on fuel efficiency.

Distribution and marketing cost for fuel have ranged from 8% to 12% in the past according to data at the PTS Blog: peltiertech.com/WordPr.../

The current accounts adjustment in the infrastructure revenue share would adjust to total costs. A mark-up range would allow competition at the pump.

For low income or other hardship situations a tax credit or partial rebate could be offered. A high percentage of transactions are by credit card, so it would be an option to track gallons of use by date for comutation of a credit.

Cheap commodity prices lead to over-indulgence. High commodity prices to cold turkey withdrawal. We've recently been turkeys. For the good of the flock, I think we should organize to limit recurrence of that.

The Free-Markets Myth

The natural world is a free market where the strong dominate the weak, when they can. All that survive do so by making use of whatever advantage they have evolved. Although humanity has perpetuated itself, its societies and cultures have not all survived. How societies have organized is what counts for those that endure. Our global economic organization, thanks to modern technology, is being gamed.

Seeking Alpha is a source of information for the gamers. We all work with incomplete information. Those with

the power to dominate will, just as in the natural world. Humans, over time, have learned to come together so set up governments - "We the people, in order to form a more perfect Union ... ." This institution of humanity, like others - religion & commerce, were created by humans to serve us.

Jeremy Rifkin set this out in a Government Technology interview in Visions, May, 2000:

"What I say to business leaders is "understand that your sector and the government sector are derivatives, not primary institutions." There is no example in history where you first create a government or establish a market, then you create a community. It's always the other way around, although we have lost sight of that lesson. First people establish communities, then they create social exchange, shared metaphors, shared meetings in life. Only when the social capital is well developed do communities create markets for trade and establish governments.

"Markets deplete trust -- caveat emptor -- and governments are simply an institution that represents the interests of the culture. We need to move, therefore, to the politics of a three-legged stool and away from the
politics of the polar spectrum between market and government. We need to begin a dialogue on how to create a new role for government."

www.govtech.com/gt/art...

To be an investor requires trust and long term stability. Trust is in short supply for good reason. Lots of hands were working invisibly to manipulate the market to their advantage. This has happened before. It is called: "boom and bust." Those with a truely long perspective - "Money can wait" probably had good positions. Those that "gambled for redemption" (Nouriel Roubini) on the way down, as opposed to their
"playing it smart" on the way up, have compounded the problem that more debt was created by the shadow banking system than could be covered. That, it turns out, put everyone at risk - investor or not.

Some anticipated this. Kevin Phillips, in: “Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism,” wrote:

Between 1987 and 2007, debt—in all flavors, from credit card and mortgage to staid U.S. treasury and exotic Wall Street—became one of the nation’s largest, fastest-growing businesses. Over those two decades, so-called credit market debt roughly quadrupled from nearly $11 trillion to $48 trillion. This was abetted by a revolution in marketing, packaging, and propaganda—in reality, public debt wasn’t the big ballooner, private debt was. Without much publicity, the financial services sector—banks, broker-dealers, consumer finance, insurance, and mortgage finance— muscled past manufacturing in the 1990s to become the largest sector of the U.S. private economy. By 2004–6, financial services represented 20 to 21 percent of gross domestic product, manufacturing just 12 to 13 percent. And finance enjoyed an even bigger share of corporate profits.

“Risky” doesn’t begin to describe this new focus in the American economy. Bingeing on debt is reckless, and financialization has a long record of being an unhealthy late stage in the trajectory of previous leading world economic powers. Moving money around instead of making things is always dicey, and the U.S. transformation has been the most grandiose to date."

This is part of the excerpt at www.bad-money.com/exce...

It does not seem that the institutions of humanity are serving us well on our local planet, so changes will occur. This is an experimental planet - one where the learning of past generations is lost, ignored, misinterpreted in illusions of the "new." Good luck with your "game strategies." As President Reagan recommended, "Trust, but verify."