Tuesday, November 25, 2008

You Can Lead a Horse To Water.....

But you can't make him drink!

Good Afternoon Folks!

Someone needs to mail this famous saying to the Fed. They need to read it and realize that you can lead a consumer to the bank but you can't make them borrow!

We got another round of bailouts today as the Fed attempts to encourage you to go out there and spend spend spend like housing speculator on steroids. Just what we need! More liquidity from the Fed to borrow! These knuckleheads need to realize something: We can't borrow anymore because we are up to our necks in debt.

The Fed is absolutely terrified of deflation so they continue to flood the money system with money in attempt to fight off deflation and stabilize prices. Sadly, its not going to work folks. The consumer is tapped.

How are consumers supposed to go out and lend when 50% of their take home pay is going towards the mortgage? The answer is they can't!

Treasuries continue to collapse as investors continue to pile into treasuries. Rick Santelli warned today that the government could also be buying the 10-year as a way of "quantitative easing" in an attempt to get mortgage rates down.

As you can below see its working. Take a look at the yields on the 10 year:

Quick Take:

We are now down near 3% on yields which are 50 year lows!

Some Advice:

This may be the best time in history to refinance your mortgage. I am hearing reports that mortgage rates have dropped to as low as 5-1/4%. Take advantage of this desperation and go out and refinance your mortgage if you plan on staying in your home. This is the opportunity of a lifetime and its not going to last very long. Get you butt in gear if you plan on going for it!

The sad reality here folks is the fact that yields are this low is a very bad sign. Its a giant warning signal that deflation is here and a Japan Part 2 scenario is on the way.

Take a look below at this excellent video on the bond market from an analyst in Europe:

Here is the link to the bond monster!

There isn't much else the Fed can do after buying down the 10-year. I am afraid they are just about out of bullets. The analyst in the video above explains that the same type of action was seen in the Japanese bond market as there market began to collapse. Our interest rates are rapidly approaching zero just like theirs did.

One other pressure on treasuries that's dropping yields should also be noted:

The banks are also buying treasuries as they look for safety and attempt to fix their balance sheets. So basically the banks are taking your bailout money and going and buying treasuries instead of lending it to you like they promised. How do you like that folks? Pretty crappy isn't it?

The bottom line here is there is no way the Fed can prevent deflation no matter how much liquidity(money) they throw at the system. They cannot force consumers to borrow. Most of the consumers couldn't even qualify to borrow even if they wanted to because their credit scores would be too bad after years of overspending!

The Fear of Deflation

So why is the Fed so deathly afraid of deflation? Because it feeds on itself and deflation can stop an economy in its tracks. The fear of deflation is the consumer may just stop buying and wait if they see prices continuing to drop month after month.

I mean think about it. If you want to buy a house and the one you want to buy keeps dropping $10,000 in price every couple months what are you going to do? Stay on the sidelines and wait right? I mean why buy now if you know its going to drop another 10k in a few months.

This same line of thinking can be used for any consumable item. The less people buy, the more prices drop. So what eventually ends up hapening is everyone just waits and waits and waits because they know they can get a better deal if they just stay on the sidelines.

If everyone moves to the sidelines and waits guess what happens? Presto! An economic collapse!

We are already seeing signs of massive deflation. Have you been to a mall lately? Did you see any for sale signs when you were in there? Is your mailbox starting to get filled with mailers announcing sales? Gone to a car lot lately? Hell, they are practically giving cars away right now.

Don't forget the biggest sign of all that tells you deflation is here ...HOUSING! Did you see the Case/Shiller housing index today?:

"Nov. 25 (Bloomberg) -- House prices in 20 U.S. cities declined in the year ended in September at the fastest pace on record as rising foreclosures pushed down property values.

The S&P/Case-Shiller home-price index dropped 17.4 percent in September from a year earlier, more than forecast, after a 16.6 percent decline in August. The gauge has fallen every month since January 2007, and year-over-year records began in 2001."

I don't see any deflation in these numbers do you?Yeah right. After seeing the biggest price drops in the history, I guess you could say that deflation is here in a big way.

Bottom Line:

We traded pretty sideways today as the market begins to quiet down as turkey day approaches. This is a good thing because I think everyone is pretty worn out after the last couple of months.

I didn't add any new positions today and I probably won't until after the holiday. If anything I may sell a few longs that I have been waiting to dump if the bounce continues.

The Fed's actions the last few days should be taken very seriously folks. Ignore the positive spin from the equity markets on these developments. The bailouts and huge moves in treasuries should not be cheered.

They are major warning signs that some very tough times lie ahead.

Stay Tuned!


Jeff said...

Thanks to whoever caught my typo!

I am pressed for time today and my proofreading went to hell. Not that its anygood anyways!

Jeff said...

Great article here from Martin Weiss. He warns of a potential banking system failure.

This is a must read and why you need to have some cash on hand at home:


johndaniels said...

am ex has already reduced credit lines to current balances; they are closing down the OPEN small biz network. Discover is probably on the ropes. Chase has reduced lines as well.. So most "consumers" are indeed maxed out..where thye might not have been last month. Are the CC companies going to give those LOC's back? I kinda doubt it..credit #'s are going DOWN, not up... figure a correllation in unemployment. As unemployment increases, credit lines decrease, and the banks hoard the available capital masked as a "main street bailout". same old bulls**t.

Jeff said...


I know its frustrating isn't it? I have been reading about people cancelling their Citi card in protest to the bailout.

Some have gone so far as to stop consuming anything beyond what they need in reaction to how the government has handled the economy.

I read somewhere today that some politicians in New York City want to change the name of "Citi field" to "Citi/Taxpayer field" after Citi agreed to move forward on their $400 million dollar naming rights deal with the Mets post bailout.

Uncle Joe said...

Where the heck does this all end? We're up over $8 trillion in bailout costs. I just have no clue what this is going to do. Does anyone have any idea? Is there any precedent for this?? WTF?!

Jeff said...

Uncle Joe

I ask myself the same question everyday. USA bankruptcy? The only thing that this can be compared to is The Great Depression.

I am increasinly beginning to think that this might be worse! How do you ever payback $8 trillion? It won't happen in my lifetime.

Perhaps we can ask Santa Clause for $8 trillion?

Its going to end badly. Its only a matter of time until we run out of money. These bailouts are all about using smoke and mirrors to try and restore confidence.

Its not going to work. All you can do is save as much money as you can and pay attention to whats going on out there!

Anonymous said...

ha. thats the spirit: consumer revolt!

next we need a taxpayer revolt!

then the jig is up!

we're going to see the ugly face under the makeup then!

teddy bear said...

US Government's Rescue Efforts
(+7,4 trillion)


+300 bln Citibank
+800 bln FED's "new" programs

Bearded & Bald are going crazy unless their real plan is to destroy US economy

Of course at the end they will say: sorry! we made a mistake. :D

Jeff said...


"Bearded and Bald"
I love it..lol

This is the equivelant of making an $7.4 trillion gamble at a roulette table in Vegas.

We all know who usually win those bets!

More terrible economic numbers released today. Durable goods were twice as bad as estimates.

Market seems to be handling the news in relative stride. Many are home for the holidays so I don't put to much stock into todays trading.

Lets see what happens today!

Avl Guy said...

Let's see...the US via Treasury and the Fed has increased its debt, guarantees, liabilities, and obligations to the tune of $8 trillion since Bear Stearns and the 1st batch alphabet soup of new facilities in March 2008. That's $1 trillion per every 30-days.

Jeff said...



Watch out on the short side. We could be seeing a Bear Stearns rally on steroids through Christmas. This is another "hope Rally.

The 4th quarter data that will be released in the 1st quarter should quickly bring us all back to reality.