Too Much Loose Money

There's nothing I hate more about gambling on stocks in my SEP than being clever enough to short the market at the right time and then losing my shirt because all the other stock punters don't agree:-) Yesterday my UltraShort QQQ ProShares was up nearly 4% in the morning and flat by closing. It's staring to remind me of the NASDAQ bubble when the boys and girls on CNBC were cheering the stocks on like sports every day.

Can it make 3,000?
Can it make 4,000?
Can it make 5,000?

It's a new world. Blah, blah, blah.

There's just too much loose money floating around the world, and as bad as stocks look to the pessimist, everything else looks worse. Leaves us with a 4% return on Fed money that isn't even keeping up with real inflation, or maybe buying land in Canada. Being right in your bones isn't an investing technique when the prices of stocks may as well be the prices of artwork.

Remember when stock valuations were supposed to be about earnings? When the earnings come in light, and it's supposed to be about future earnings, and by golly, what a great time to buy stocks. When the earnings come in heavy, obviously, by golly, what a great reason to buy stocks. When is it not a great time to buy stocks? Never, if you buy that logic. And don't even talk to me about the original reason to buy stocks, dividends.

I suppose in the end, it depends whether you're more comfortable losing money with a crowd or alone. Going against the crowd always means you'll lose when other people are winning, and you won't necessarily recoup those losses when the other people lose. Going with the crowd turns you into part of the problem, an inflater of bubbles. Like our friend, Mr. Bernanke, who is expected to cut rates again today, even as the EU considers a raise.

Wage Inflation IS Inflationary

I saw a Wall Street journalist speaking yesterday, in which he said everybody with inflation fears had it all wrong. He explained it something like this:

It doesn't matter if prices are going up as long as wages are going up. If you have more in your pocket, you can afford the higher prices. That's not real inflation and it won't hurt the economy.

Which is about the dumbest thing I've heard from a Wall Street analyst since they were all claiming there wasn't a housing bubble. Prices and wages going up are the definition of inflation. When you get hyper-inflation, with prices going up 100% or more a year (often in regulated economies), the wages of workers rise more or less in lock step. People who don't have any assets are immune to inflationary pressures as long as they keep their jobs, hardly a certainty.

The people who get screwed by inflation are the people who have savings or have invested in debt denominated in the currency of the country. Eventually, inflation is the most likely way our government will pay back foreign investors who have been buying our debt and enabling our bubbles. That works fine to get out of the current cycle, but nobody will be in a hurry to lend America money ten years from now, unless they can get a heck of a good discount on the debt. I guess the moral of the story is I never should have started saving for a house, better to just spend the money on toys and wait for the inevitable Socialism to set in.

Japan Is The Economic Model

I remember back in the late 70's and early 80's, as the American economy struggled with high inflation a non-competitive auto industry, everybody looked to Japan as the new economic model. They had just-in-time manufacturing, cooperation between corporations, banks and government, a highly motivated workforce, it looked like they were going to eat our lunch. Well, for a long while they did eat our lunch, but then came their real estate bubble and stock market crash. The Nikkei still hasn't recovered half the "value" it had 20 years ago.

And all of a sudden, the pundits in the US decided that everything about the Japanese economic model was wrong. After all, they lacked diversity, creativity, and that Greenspan grail, creative destruction. The American economic experts railed at the Japanese for propping up failed companies that had speculated in real estate, with chest thumping exclamations that "the market" knows best, "the market" will work it out. The Japanese couldn't stand the pain of failing companies and people thrown out of work, so they settled for slow growth, a fairly valued stock market, and occasional bouts of deflation. Unlike American households, Japanese households save their money at the expense of consuming, so slow growth is a given when corporations aren't spending.

Jumping forward to 2007, Bernanke has replaced Greenburg, the US is in the beginning stages of the worst real estate bubble ever, and the Treasury is encouraging the banks to get together and prop up their bad real estate portfolios. What? Whatever happened to the wisdom of the market, capitalism and all that. "No" say the Fed and the Treasury, it's more important to limit the "damage" from a credit crunch. After all, didn't the Nobel prize for economics just go to three Americans who explained that markets don't always work correctly?

So it's getting near time for a Japanese style recession in the US, and the only thing that can delay it is very un-American tampering with the system. You can count on the Dept of Commerce to keep under-reporting inflation, and both sides of the House to come together for a mortgage bail-out to try to sustain housing prices at their unrealistic levels, nationwide. Yes, you heard it here, real estate isn't a series of local markets, it's a national market, and cheap mortgages inflated it all.

I just wish I spoke Japanese so I could watch their financial TV for the next 20 years and hear their pundits telling Americans that they have to let the market decide, stop hiding those bad loans off the banks balance sheets, and of course, a special plea to the American consumer to spend, spend, spend.

Faking The Savings Rate

Earlier this year, I'd planned to write something about the American savings rate. The source for this information is the Department of Commerce, so I went to their site in April of 2007 and downloaded the following graph:



The personal savings rate is clearly shown as negative starting in the 2nd quarter of 2005, and never recovering since. Today, I thought I'd get an update, see how the savings rate is doing so far this year:



Such a miracle! All of a sudden, the personal savings rate is positive for all but one quarter. Instead of losing money at a record pace, American households are suddenly saving money, perhaps even keeping up with inflation! The only problem is I remember in 2005 when the rate went into negative territory for the first time since the Great Depression. I have no doubt that it's still there, change of heart of the part of the Department of Commerce not withstanding. It's fitting with the times, seeing that 2007 will be the first year since the great depression that house prices fall, but I suppose come 2008, somebody might get around to faking those numbers as well.

I'm sure the statisticians who worked up the data don't see their job as faking the savings rate, they probably revised the data based on a new model, or uncovered a flaw in their recent methodology. Maybe somebody decided to include medical expenses as savings, in the theory that a stitch in time saves nine. My own theory is that Americans have been taught not to save by the Fed keeping interest rates artificially low in the face of very real inflation. Idiots like me who actually keep money in the bank rather than buying toys on credit are losing a few percent of that capital every year to the bite of inflation. It also helps keep the stock market inflated, since "investors" feel they have no reasonable alternative. Boy, is it ever going to hurt when faking the numbers just doesn't pay the piper anymore.

Treasury Bills Ain't What They Used To Be

For the last year or so I've bought Treasury Bills with my house savings while waiting for the housing bubble to pop. If you've never bought T-Bills, they sell them at a discount off the face value and you have to calculate the interest on the T-Bill after the auction. For a while they were paying around 5%, which is State tax free. At the last auction for 4 week bills, I barely got over 3.5%. That's no better than those rip-off i-bonds are paying. Inflation protected my foot.

I changed the name of this blog today from "Saving Money" to "Losing Money To Inflation". My main goal in saving money has been to buy a house, and the housing market is finally coming down. The problem is, the value of the dollar is dropping faster than the cost of housing. The Fed is doing their best to pump up the bubble which may just last until the Baby Boomer retirees start collecting Social Security in earnest around four or five years from now. At that moment, Social Security is broke, because the Trust Fund consists of Treasury Bonds which have to be paid by, you guessed it, the U.S. taxpayer.

So, there's a race to the bottom going on between the down payment for a house I have saved in T-Bills and the cost of housing, which of course the State and Federal governments are tying to keep inflated so people will borrow and spend more. I figure real inflation has been around 6% a year for the last six years, or my savings from 2001, after interest accrued and taxes paid, are worth about 75% of what they were then. I'm just thankful I didn't have any money to speak of six years ago:-)