Friday, November 28, 2008

Everything Else is Negotiable... The Negotiable...

Everything Else is Negotiable...
Abraham Lincoln had it right. He was the President who made Thanksgiving a Federal Holiday. Maybe it was Honest Abe's ability to think positive during a time of national crisis (the Civil War). Thanksgiving was a simple call to remember the sacrifice and misery of our Puritan-Separatist forefathers. In 1620, the Pilgrims left England for good. They left to escape religious persecution from the Church of England. The Puritans were different, and had such a deep commitment to God that they left their mother country England, and set up for Virginia Colony. (Jamestown, VA was the first successful English Colony started in 1607.) As fate would have it, the Mayflower was blown off course and they landed in Cape Cod. In the first year of settlement, the Pilgrims saw one-half of the original settlers die. In spring, there was considerable discussion as to whether they should abandon Plymouth and return to England. Then one day, an English-speaking Indian walked into Plymouth. Samoset, Squanto, and the Wampanaog Tribe taught the Pilgrims new world survival skills. In spite of the many hardships, the Pilgrims recognized that they were truly blessed with health, prosperity, friendship, and an opportunity to worship. In the fall, the Pilgrims celebrated a great feast with their Indian brethren, and the first Thanksgiving was born. Like the Pilgrims, let us remember the important things on Thanksgiving... health, happiness, and friendship. Everything else is negotiable.

The Negotiable...

As of late, the stock market has seen a pop due largely to President-elect Obama's brain trust of cabinet members. Obama brings an upbeat-pragmatic attitude that has given the American people in general, and Wall Street in particular, a belief that help is on the way. To call Wall Street's recent upturn to be anything else than a "feel good" rally is a mistake. As I was sitting in the barber shop the other day, I over-heard one client say that now has to be the time to buy... I simply smiled and asked him "Why do you think we should buy?" He said "Because it has to go up from here." Simple enough...

$800 Billion or the 800 Pound Gorilla?

The Fed is using some of the same implied powers delegated to it during FDR's New Deal. The latest move showed that the Fed was going to purchase up to $600 Billion dollars worth of mortgage backed securities, you know the ones that are guaranteed by Freddie Mac and Fannie Mae. As we know, the Fed is not in the business of purchasing its powers to purchase these loans. With several key strokes to a computer, the Fed "created" additional fiat currency...(at this point I will no longer call it money... money always has value.) Prior to the credit crisis in August of 2007, the Fed's balance sheet stood at $850 Billion. As of last week, it is now at $2.2 Trillion dollars. The sincere hope of the Fed is to create liquidity... an atmosphere where banks are not afraid to loan to businesses or consumers. Aside from inflation which is an issue the Fed is willing to kick down the road for now, their real concern is to oil the credit market.
If credit was the drug, then it is obvious that we have an addiction. It is more than obvious that those who have maintained their credit, lived below their means, and serviced current debts will always have credit. A good portion of the credit crisis originated from those who could not service their debt. As the saying goes:

"There are those who buy things they don't need, with money they don't have, to impress people they don't even like."

To continually offer credit to this portion of the credit market is a monumental mistake. If anything, there should be a nationwide program to teach people about the dangers over over-consumption, not encourage it. While credit markets could use a thaw, I would hope that lenders would be older and wiser as to whom they extend credit. It is always a bad idea to give a drug addict more drugs... Hopefully we are not creating another 800 pound gorilla.

2 comments:

AX said...

TC, as to the reason for the rally, that is negotiable. Maybe Obama's team, maybe short covering and electronic trading too. We'll see. Either way, these actions will be hyperinlationary and agreed, providing the American consumer with credit is akin to methadone clinics for heroin rehab.

Tiger Coach said...

Ax...
“Panics do not destroy capital; they merely reveal the extent to which it has been destroyed by its betrayal into hopelessly unproductive works.” If the government creates another bubble, on the ashes of the old one, then everyone will suffer. The truth of the matter is the credit may well be available, but this time, a portion of the population will not have teh credit scores to qualify... Why should lending institutions put their heads into the lion's mouth?