Facing the Inevitable Market Adjustment

Oh what a tangled web we weave when first we practice to deceive

(Sir Walter Scott ( Marmion),

The times were dismal. We stood at the edge and looked into the hole and we declared that any action that would save us would be acceptable.

A long time ago, the market tanked. Do you remember? It is said that it takes sixteen years for us to forget the lessons learned by the gyrations of our economy and our markets. I think we have become fast learners.

Allow me to refresh your recollection:

(from the Dept. of the Treasury April 2012)

The problems that we faced were a myriad of poor decisions by legislators and regulators. Banks had become “too big to fail” Barney Frank and other do-gooders had pushed for a home for every family. Laws were drafted to assure that loans would be made to make that dream a reality.

Soon, banks were making loans that any prudent banker would never make. To cover their butts, they “packaged” them, that is, they put them into a package of loans, buried the bad ones with some good ones, and sold them off. These loans were the “hot potato” and every bank who made them wanted to offload them before they, inevitably,  went sour. It was a game of musical chairs and there were few chairs remaining in the circle.

What made this much worse was that many banks were making these toxic loans, so the “good” ones in the “package” were often just some other guy’s bad ones. The packages were than packaged into bigger bundles of loans in an attempt to dilute the “bad” loans. The problem was that there were too many “bad” loans and not nearly enough “good” loans to float the package. Default was imminent.

Not to worry, there were “mortgage guarantees”, companies like AIG insured these loans against default. They were driven by falsified loan valuations, fabricated bank financials, fabricated real estate valuations, etc. You get the idea. It was a money fest and everyone was getting rich and, of course, it was never going to end. But, end, it did. The insurers hadn’t the asset base needed to insure the losses realized.

The response was one that had been anticipated. Ben Bernanke had held this plan just in case, and here was his chance to use it!

T.A.R.P. was set into motion  ( ‘Troubled Asset Relief Program  A group of programs created and run by the U.S. Treasury to stabilize the country’s financial system, restore economic growth and prevent foreclosures in the wake of the 2008 financial crisis through purchasing troubled companies’ assets and equity.  www.investopedia.com

Anything needed was acceptable and much was needed. The response was the buttressing of the financial system. Much was said about the “greedy” banks and the “greedy” investors. Little was ever said about the regulation that drove the crisis, the poor administration of our economy, nor the complete loss of oversight.

Barney Frank even lined up the bankers and berated them for making the loans that he required them to make.

(from the Dept. of the Treasury April 2012)

Filling the hole in our economy proved very expensive. To rough it out – around twelve trillion dollars. Much of this was money that we simply printed. The net result of all of this, of course, is the devaluation of the dollar. Inflation was a great concern in the minds of economists. The reason that money can be “printed” willy nilly in such an instance is that we have no “basis” for our currency. It is no longer tied to precious metals or any other thing. It floats.

The only value of our currency, then, is the value that we collectively assign it. Now, I am betting that you have savings. This money in your savings “floats”, too. “But I have a portfolio of stocks” let me explain what stocks are.

No doubt you have been told that stock is “ownership in a company” and that you are buying a part of that company whenever you buy a stock certificate. That is a lie. The stock was sold and the money was paid long ago. What you have is a worthless piece of paper that is exchanged on a market after the I.P.O. Unless you can en mass enough of these certificates, you can’t even have a say in the decisions of the underlying company. Stocks, like currency, “float”, taking on the value that the community assigns to them. You can see this when a company has a bad quarter and the “value” of their stock plummets. There is no change in the underlying assets or the value of the company, only the “perception of value”.

Here we are in 2015. The economy has recovered. Our problems are behind us. NO. They are not. Each of the faults that allowed the failure still exist today. Some, like bank size, are worse than they were. Collateralization is improved, but availability of the kinds of loans that drive our economy is poor. We have falsely buoyed a treacherous economy, and the piper shall be paid.

The economy is in the dumps . 2% growth is disgusting and it is NOT the new normal. It is a failure. The economy is a very complex problem to understand. The variables are numerous and changing. We have spent our ammunition and there is no magic bullet.

As is always the case, we must weather the storm. This false market will take the hit that we so aptly put off. The economy will crash again. It must.

The stock market never recovered. It was manipulated by a devalued currency and a Fed. that wants to insulate our economy from the pain that is coming. The stock market will find, again, its real value in time. It will be a painful transition.

Scott Cahill

Repairing the American Dream

The United States of America is shouldered with debt. This is a significant challenge. We are at a time in the evolution of our democracy where change must be made, and the past must be retired to allow the future.

Many wonder if we can find a way. We can. We face deep challenge, yet America has faced hurdles higher, and challenges more severe.

Always, when a course of action results in degradation of the positives, such course must be changed. All of the experiment of democracy is, indeed, such a metamorphosis. Today’s challenges, too, can be overcome.

The debt that we have assumed must be addressed by an increase in the tax base and by a careful level of inflationary change. I feel that a GDP of 7% to 9% with the relative inflation rate of 4% would retire the debt and allow for the continued evolution of our great Republic, and, indeed all mankind. I believe that tax base escalation must be a result of increased income and not additional burden.

The challenge is how to so significantly grow the GDP. Things that hold the GDP down (1.9% recently, honestly more like .9%) include over-regulation, a lack of escalation of real estate valuations, and the horrible shape of our national infrastructure. Together, this is an insurmountable headwind.

We must develop a plan and make a committment to bring our infrastructure up to the highest standards. Our nation cannot grow at the needed rates to address the debt that we accrued without a completely developed and updated infrastructure of electrical transmission, roadways, pipelines, bridges, and dams.

We must develop a reasonable and realistic energy platform for the nation to develop energy in excess of need. Energy breeds business and industry. A lack of available energy strangles business. Some components of such a plan should include public/private partnership gen. and co-gen. plants, renewables, storage, including pumped storage, and more hydroelectric facilities with modern dams and fish passages. Many opportunities exist for the privatization of elements of infrastructure to minimize the management of this by government bureaucracy and return all possible elements of the infrastructure to private hands with balanced and proper oversight and regulation.

Nuclear energy must be a part of the whole, with new engineering to maximize safety of generation, containment, and disposal. We have much science and engineering to find a way to assure public and environmental safety. These will include metal cooling of reactor cores, isolation and armoring of reactors, and fail-safe lockouts and provisions for autonomously “killing” the reaction by interrupting critical mass. We must develop further methods of refining spent fuel to maximize its usefulness to react and to minimize the remaining net waste.

Real estate must be allowed to appreciate with a balance of regulation, control, and a free market. Failures of the market are, clearly, failures of regulation and legislation. We must regulate from the “middle of the road,” and not be pulled from market-driven equitable methods.

Finally, we, as a nation of men, must remind ourselves of who we are. We stand for something on the world stage. We have drifted from this important understanding. America is representative of the free expression of free men, of industry, and government driven by freedom of speech, enterprise, and trade. We need not be the police of the world. We must never abandon the promise of our culture, the realization of freedom to manifest in equity for all. We must stand, again, as brothers, Americans, men and women who lead not by party affiliation, nor leaning, but always seeking the best course for all of us to travel together into a better future for those who follow, that they may one day read about our generation that we set aside differences for the betterment of our nation and of the world.

Scott Cahill