Signs

Every now and then I pick up on a sign that there is a problem in our economy. A few years ago when the new bankruptcy laws were passed I could see a near future in which these laws would become more important. After all I predicted a down turn to the housing markets years before it actually happened.

Today was one of those sign post days. The FDIC wants to up the limit for personal protection to $250,000 for a savings account. This might seem like a good thing overall for the average citizen. After all if a bank collapses today and you have more than $100,000 in it then you are pretty much hosed.

To me this new (yet to be) law is a serious red flag. The president is not there to warrant bailing out people for more than $100,000. If you have more than that in any one bank account you are not managing your money properly. The same goes if you have more than $250,000.

The proposal is a sign post that there is inflation on the way. I would add Gold as a short term investment against inflation. Do not even think about this paper gold nonsense. Gold is only worth something if it is in your hands. 

Leave the credit. Cash is king.

There is a bailout proposal in the works in Washington. This plan has been in the works for an entire week now. Essentially what this plan does is bail out banks and other financial institutions.

The bailout is needed because portions of the credit market are completely frozen. Meaning home loans, auto loans, student loans, and personal loans are not able to be processed in the normal way. This bail out is designed to unfreeze those markets. So far this freeze has not affected current credit limits.

You need to pay attention to this!

Ok so that is the overview of the drama happening this month in regards to the global financial crisis. There is something a little more subtle that is staying out of the news that everybody should be extremely concerned with. For those of you that do not have or use credit cards but use a debit card you should be paying attention to this crisis in an acute way. If you use a debit card you are taking part in the credit market. This crisis affects you!

Personally I almost never carry cash. When I do carry it I do not like to have large amounts on me. There is never more than $50 in my wallet at any given time. Like many other people in western civilization my transactions are either done with a credit card or with a debit card.

No more credit cards!

There is the potential for this crisis to spill into the credit card market. When you use a credit card you are borrowing from a bank. If the credit card market freezes it would mean that your bank would no longer be lending you money. Commerce on a personal level would all but stop.

It gets worse!

Whenever you use a debit card your bank is actually borrowing money for a day to cover the transaction. This money is taken out of a fractional reserve system. This means that the bank only has a fraction of the overall deposits on hand at any one time. The danger is that banks are now heavily leveraged and they no longer have the ability to deal with people en mass withdrawing money.

What all of this means is that all forms of electronic transfers could be shutdown within days or weeks. There is a real potential that ATMs and credit cards could stop working all together. 24 to 48 hours after that happens things are going to get ugly. We are talking Mad Max ugly.

Lets hope the leadership in Washington can pull a rabbit out of their hat. 

The only thing I can suggest is that people have some real cash on hand for this scenario.  In the long run it may not matter if this bail out passes or not. The planet may have a long and hard depression ahead of it no matter what happens. This bail out does do something important. It prevents the depression from hitting today or tomorrow or next week. The United States is a consumer society. This bail out has bought us another 2-9 months to either turn things around or prepare for the absolute worst. 

I hate being right

Lehman Brothers filed for Chapter 11 last night. This is one of those times where I actually hate being right. I did not see the whole AIG thing coming. Their pending collapse is something out of left field. Honestly I did not even know what AIG did until this week. 

It seems that no investment is safe these days. It appears that cash is king at the moment. Even the king cannot hold up to inflation. Cash will tend to lose money over the long run. It is actually the riskiest investment you can make. It is 100% guaranteed to not make any interest or lose value given enough time. In all honesty I am not totally convinced there is a long run as far as an economy goes.

I was walking down the sunny streets of San Francisco near Golden Gate Park on Sunday. By nature I am a people watcher. I notice people. I watch people. I feel like an observer out of time and place. People watching coupled with behavioral studies is one of my favorite games.

Normally I would say that the hordes of people that I encountered in and around the park are a good thing for the economy. Restaurants were packed with tourists. Parking was a premium. Sunlight was in abundance. It seemed that a good time was had by all. Excluding the financial nuclear meltdown thousands of miles away I would say it was a picture perfect day.

What bothered me about this Sunday was the fact that I had a pretty good idea that the collapse of Lehman Brothers was just a matter of a few hours away.  Most people on the streets seemed untroubled by the news if they heard it at all. The entire day felt like it was September 1929.

Civilization is on the edge of a financial abyss caused by a few people that decided to tie their greed into the foundation of our culture. The everyday person is a slave to the balance sheets of others. I am still betting on food, guns, and ammo for the long term. Cash may be king but the ace up my sleeve is a boom stick. 

David

Lehman Brothers is going to go off like a nuclear bomb

I have been following the Lehman Brothers problem for a few weeks now. What I seeing is that there are few options for this orginization. This isn't going to be a replay of Bear Sterns. Nobody has the capital or the want to put Lehman Brothers on their books. We seem to have reached a peak on just how much tax payer money can and will go into a bail out. 

I expect Lehman Brothers to collapse. On Monday I see a wider run on financial stocks happening. We did not see much of anything happen last week when Fannie and Freddie were taken over. I predict a huge amount of toxic fall out on Monday. 

Fannie Mae and Freddie Mac. The twin towers of 2008.

On September 11th 2001 I was sitting in an office at Wells Fargo in San Francisco. It was 5:20am PDT and I was trying to figure out why every news site I was trying to connect to was simply not coming up. Every other site was working just fine. Since I was one of the IT staff I figured we have some kind of weird proxy problem. I had exactly 2 hours to fix this problem before I started getting actual trouble tickets on it. For the next few hours I was sequestered in the third floor server room.

After many fruitless attempts to connect to various news sites, I finally pulled up a single image from msnbc.com. What showed on my screen was a large jetliner flying into a skyscraper. It dawned on me that there wasn’t a problem with the Wells Fargo connection to the internet. Something crazy was going down.

I headed back to my desk on the fifth floor. I did not notice at the time but thinking back the building was all but vacant. The usual assortment of coworkers that should be at there desks were nowhere to be found. In fact my boss was even AWOL.

In the distance I could hear the sounds of a television set. Everybody in the department was crowed around a tiny 12 inch screen. The United States was under attack.

Watching the World Trade Center come down in fiery rubble was one of the most disturbing things that I have ever witnessed. Before that it was the Space Shuttle Challenger exploding on live TV while I was sitting in a classroom still half asleep.

I have known that Fannie Mae and Freddie Mac were in trouble for some time. Everybody that has been watching the financial markets knew it. To some extent it overshadowed some of the other things happening on the world stage. The troubles with Russia seem like so much saber rattling rather than anything like a serious challenge at the moment.
Today when I saw that Fannie Mae and Freddie Mac had been seized I realized that in some sense the events of today echoed those of 2001. The planes have just flown into the towers. The world is holding its breath.

I honestly do not know what the next few days and weeks are going to bring. The Feds are trying to ease fears but commodities like gold have shot up over $15 in the last 12 hours. (Gold is seen as a hedge against inflation). We might see a short term rally in the markets on Monday. We might also see a complete collapse of our financial system. Think October 1929. Good luck trying to buy anything with gold if there is a complete financial collapse.

For a long term investment my money is on ammunition and vegetable seed. The best hedge against anything for the next few months is going to come in a can will still edible in a few years.

David