Sunday, December 27, 2009

Sunday Thinking

* A year ago when I started this blog, I commented on the insanely low long-term bond yields. The 30-year was at 2.6% or something, and now it is at 4.7%. Whether this is the bond vigilantes or the market simply frontrunning the expected maturity extension in the government's borrowing remains to be seen. I think this time is "for real" barring a major equity crash or an event with a similar impact. In 1981, the 30-year yield was (had been?) over 15%. We are in a worse shape now as 29 years of kicking the can down the road, growing spending and debt at unsustainable levels, and handing out unfunded promises make the matters much worse.

* Here's something else that makes no sense: California housing prices rose on a YoY basis by 6%, and there is anecdotal info that the flippers are back. California is like Greece, but the Greeks smelled the coffee while the Governator is asking for a bailout from the taxpayer. Who's the "girlie man," Arnold? California has outmigration of taxpayers and businesses, powerful public employee unions, a large underclass, highly business-unfriendly climate and dysfunctional politics. Official unemployment in the state is over 12%, and yet, housing prices- which never went down to proper income-based levels, are going up.

*2008-2009 were the years of the corporate bailouts (when the government decided that failure is not an integral part of capitalism), 2010 will be the year of the state bailout. CA is already asking the other states to fund its deficits, can NY, IL and MI be far behind? Newsflash for the states: if you can't cover your spending with taxes, then increase taxes or reduce spending. Surprisingly for me, NY's Gov. Patterson here has been a breath of fresh air coming from the Albany cesspool. He sounds like he gets it unlike most pols who still think it is politics as usual. The simple truth is that the government costs too much to run.

* I already wrote that one should be aware not only of the news as it comes out, but also the context of the news, such as the date and time the news was released. I pointed out that the House voted on the healthcare legislation on a Saturday at 11 pm, and interpreted it as a bad sign. The Senate voted on their version in the early morning on Christmas Eve. This, along with the partisan nature of the vote and the incremental cost of the last vote (the NE senator), is bad news. The other news that came out in the afternoon is that the Fannie and Freddie bailouts are now unlimited. This is correct: unlimited. And instead of having the past board and management of the companies in jail, and keeping the current management on an $1 salary while they wind down the portfolio, Little Tim is giving them $6 mm of your money.

* One can only speculate as to why the FNM and FRE news was released on a holiday afternoon. My thoughts are that they will be forced to grow again (which means credit losses) as the FHA is about to blow up. Because the bank bailout via housing market inflation sure ain't gonna get done by itself. But this is just me, a cynical guy sipping his coffee at home with the keyboard on my lap.

* In June, I declared that POTUS is a failure. By now BHO completely "owns" Iraq, Afghanistan, the economy, the twin deficits, Bernanke, Geithner and healthcare "reform". He has failed on the first six, and is about to fail on the last one.

* Keeping up with the political streak, if I were running against an incumbent in 2010, I would run on repealing most legislative initiatives (passed or proposed) by Pelosi, Reid and the like. Few incumbents are safe, and I am looking forward to possibly having more reasonable, thinking people in both chambers.

* Is the US going to "emerge stronger" the way "we've always done it"? In a word, no. To qualify, very likely "no." I recommend reviewing Taleb's story of the turkey (figure 1 in the essay). The "growth" has been funded by debt just like the turkey's weight gain has been funded by the farmer. The turkey is happy because, see, every day things move up. The farmer has other things in mind, of course.

So how likely is that the debt gets called one day? I don't know. If I knew, I would not be writing about it. Some of the signs will be rapid currency debasement (vs. hard assets) and rapidly rising interest rates on government bonds.

Speaking of turkeys, here is a nice clip of Idiocracy's poster girl, Sarah Palin, trying to use multisyllable words while some guy is beheading turkeys in the background.

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