Tuesday, May 5, 2009
Mo' Money, Mo' Problems
as stated so succinctly by the late Notorious B.I.G. Though few strive to have a lack of capital, those who have capital are finding that they are quite anxious about it right now. Many around the world have switched, appropriately so, to simply trying to protect what little they've got. Systemic risk is at a multigenerational high.
This link gives concrete examples of people's 401(k) money being inaccessible. Now, those in the finance business that sell such toxic products can claim that it was all in the prospectus and investors need to be cognizant of the risks entailed in such investments. I call bullshit because it is. Trying to read a prospectus these days without both a law degree and an MBA is an exercise in futility. When someone looks for a "stable value" fund or "money market" fund, they are seeking safety, not risk. Yet these products may be as risky or riskier than a penny stock it turns out.
The house of cards is tumbling down on cue, as fast as any slow motion train wreck can do, and it will really start to fall apart when people finally realize how truly insolvent the entire U.S. banking system is. We have a situation identical to the 1930s where banks are now ailing and failing left and right. The worst stressors in the system, namely high end Alt-A and Option ARM residential mortgages and commercial real estate loans, are now starting to implode and these make subprime look like the warm up act that it is.
Think about that for a minute before you go rushing back into the new "bull market." Subprime lending is not the biggest problem and yet it tipped almost all of Wall Street into bankruptcy, imploded AIG, caused Fannie to be nationalized, and has rendered nearly the entire U.S. banking system insolvent. What happens when the next LARGER wave of loan defaults hits the shores of our financial system (which it absolutely, unequivocally will)?
I am uber-bearish right now because it is appropriate to be so when one understands the fundamentals. Large banks like Citibank are completely insolvent/bankrupt. This is the equivalent of 500 banks failing back in the 1930s, as it a mega-bank with its tentacles in every region of the country. Such massive retail banking corporations didn't exist in the 1930s. This is why saying that we've "only" had tens of bank failures versus over a thousand in 1930s is a nonsensical argument. Citibank should not be a corporation any more, but our government is hiding the truth from its citizens to prevent panic. The panic will come anyway as the truth leaks out, but for some reason buying time is felt an appropriate use of taxpayer money.
When you vaporize the banking system of a country that is overleveraged to the hilt, the leverage wipeout implodes the economy. This is already happening as we speak on a global level and is intensifying, not abating. The Euro zone is now as I type this experiencing its highest unemployment rate in the last 60 years, so which recession are you comparing the current bear market with since unemployment is still accelerating to the upside in Europe?
The other thing that happens when you vaporize a banking system is that some people aren't going to get their money back from their bank. I don't believe the FDIC and federal reserve could promptly handle a public demand for paper dollars/actual pieces of physical money once the big bank run(s) materialize(s). Their best hope is that everyone remains comfortable with digital computer entries that say someone actually has money. The FDIC does not have unlimited resources and there aren't enough printing presses in operation to meet a big surge in retail demand. Do your own due diligence on your bank, avoid the "too big too fail and yet failing right in front of your eyes" multinational banks, and hold a supply of physical cash to meet a minimum of 2 months worth of expenses.
The spring silliness in the markets is in full force. A bear market requires hope to return periodically so that it can extract maximum pain from the largest number of participants. The bear market will resume shortly and your best protection against it is Gold and cash - just make sure your cash and Gold are safe and shun all the counterparty risk that you can.