Wednesday, May 19, 2010

What to do, What to do?

anonymous asks; what to do, what to do?

An excerpt from a recent post of Les Leopold:
The ultimate insanity of our current moment is that the richest investors and the largest bankers in the world just crashed our system, got bailed out by taxpayers, grew even larger, and now are back to earning record profits and bonuses. They caused the biggest jobs crisis since the Great Depression and drove the entire global economy into a ditch–and they could do it again any minute. And now they’re telling us to tighten our belts and act more responsibly? from:

Les Leopold is the author of The Looting of America: How Wall Street’s Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It Chelsea Green Publishing, June 2009.

This from the NYT:
“This bailout wasn’t done to help the Greeks; it was done to help the French and German banks,” said Niall Ferguson, an economic historian at Harvard. “They’ve poured some water on the fire, but the fire has not gone out.”

"How to learn nothing from crisis"
is a must read article by Doug Henwood

Hero watch: Al Gore just added a forth estate to his collection, a 9 million dollar ocean view estate in Montecito Ca.

The above are just some of the latest in the continuing saga that is the documentation of our current crisis that spurs cries of; "what to do, what to do?".

What I am going to suggest we all do is get smarter. We have to understand how some of the fundamentals work so that we can either exploit them to our personal advantage or demand that they be reformed.

We have to learn to follow the money. When you read that the IMF is putting up a trillion euros to support the EU you have to understand that 25% of those monies are your dollars. Once again the beneficiary of your generosity is not the people, but the banks who hold the notes on the paper that blew up.

We have to know what really drives the markets and how to play them. The Fed is handing the banks profits, leveraged on our money. The "carry trade" is the trade that banks can employ that has them borrow our money at 3/4% (today's rate) and then, in a no risk trade, buy a 30 year treasury that yields 4.23 on 95% leverage.
Why would they lend to you and me and tie their money up when they can reverse this trade on a second's notice. Hedge funds don't get quite the same deal, but close.

Why does this matter to you and me? The most obvious answer is that in order to generate bank profits and make them whole again, we are expanding our debt. Second, and trickier, is those same hedge funds that brought us the last disaster, are leveraging into all manner of asset classes with cheap money. Thus the stock market, gold, oil, wheat markets, rise. Ride the pony if you dare. Here is the key proviso. When the Fed announces its first rate change, of policy, or worse an actual rate change, (the beginning of unwinding the carry trade) those of us holding any security must sell, that second. It is going to be a race to the door and it will precipitate the next crash. For a nation of people whose response to the last crash was not to open their quarterly financial reports this is asking a lot. You might want to get in front of the curve and be in cash, I-Bonds, TIPS, or a laddered portfolio of short term bonds.

For those who don't think they invest, and live within the confines of their cash flow, they must learn to recognize the impacts of a public policy that may harm them. Arizonians just voted for an increase in their sales tax. People in Maine are being asked to do the same. Here in Maine it is couched within a bill that reduces income taxes and is thus argued as neutral. Wrong! A sales tax, and God help us a VAT tax is regressive. Even the average citizen can shelter or delay some tax consequences on their income. 401's are not as sophisticated as the tax avoidance schemes of the rich but they help. But there is no escaping a sales tax. It is regressive. We are being asked to shoulder the burden of debt relief, not those who profited from the debt creation. This issue is high on the agenda of Europeans who have surfaced the fact that the rich are not paying taxes, and they are demanding justice. It is what they are demonstrating about.

All of the markets are indicating there is no risk of inflation. Why would you invest money in a 30 year treasury at 4+% if interest rates were going to rise? The principle on that investment will disappear. Trust the markets? Skip three paragraphs.

If we do enter an era of inflation, then you are going to have to learn an entire new skill set. An early trial balloon was sent up in California with the printing of scrip as a cash substitute and it didn't work. It did work in Argentina. Of course they were smarter about how they designed the system and paid a premium to holders of their funny money. Argentina is but one example of how a citizenry acted to protect itself. Those with money moved it off shore and into other nations currency. The same is happening in Europe today. The flow of euros to dollars is one of the factors keeping our interest rates low. (Fear that the Chinese will devalue the Renminbi keeps it from becoming an international reserve currency).

Another survival skill is the ability to index. Persons holding or dealing in any commodity are creating indexes to hedge the value of their commodity against devaluations. Iron ore futures are just the latest. When Argentines demanded to get paid daily for their labor and then exchanged their wages into another currency or bought a commodity they needed with that money, they were effectively hedging the costs of those commodities. No one wants to hold anything being devalued.

The lesson to learn is not to enter into long term contracts that fix your remuneration without effective, unconditional COLA adjustments built in. And you must demand independent third party regulators to determine the actual rate of inflation, be you a Social Security beneficiary, teacher, cop, WalMart employee, or seemingly secure IT worker.

It may be time to consider tax boycotts. Counties are considering boycotting state revenues, while real estate tax boycotts are spreading. The key to any such activity is to appreciate the need for solidarity. When it finally becomes clear that the persons getting shafted by this kleptocracy are us, then we may find we have more in common with the disenfranchised than we could imagine. When gets their act together to identify the bankers, and protest their actions, it is not enough for us to sit in front of the TV and murmur or write a check. If we are really concerned about what to do we have to begin to join those coalitions we can tolerate and actually get in line.

Learn a new language set. Come to terms with "walkaway, bankrupt, boycott, self interest, tax avoidance, yuan".

"Yes Magazine" has been promoting a set of alternative behaviors. Peruse their splash page and determine where and how you might find ways to act to resolve this morass.


  1. I'm turning into a pink salmon!!!

    Was in the streets of NYC on May 1st..... with thousands of others who must (but how?) be mobilized....

    Did you hear of the African country whose ATM's dispense gold ingots?

  2. Great topics recently.

    My understanding of the IMF bailout is that our 25% is even more costly than it seems, b/c it's not really our money to begin with...we're actually giving them money that we've borrowed and owe to Japan and China.

    With regards to "riding the pony," don't you think that gold, oil and commodities are a little different than owning shares of Citibank or Netflix?

  3. yes, the trading conditions are worse, there is no long term buy in any commodity so no one sits on the sidelines with a long term hold. thus you trade in the day market and will get killed by the pros.

  4. Even Gold? In this economy? Not so much gold futures themselves, but mining companies or maybe even precious metals ETFs. I gotta think that the price of gold is only going to go up until the debt situation gets settled (which, one way or the other, seems a long way off).

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  6. There is pressure from central banks and always Asian interest but when it corrects it is a train wreak. if you want a commodity that is inflation proof, that they are giving away this week, buy oil companies. Petrobras is my current choice. symbol PBR

  7. I own PBR. Bumpy ride, but definitely undervalued compared to other big petro compaines.

    What do you think of water stocks? Not so much technology (like filtration systems, etc), but just public water works like WTR? Definitely inflation proof?

    Also tobacco...Phillip Morris International?

    Just curious about all of this b/c I hear a lot of smart non-mainstream thinkers give very compelling opinions in both directions.