Investors and Their Lost Money

Give the sans-culottes a chance…and they’ll turn violent. So far, two bosses have been held hostage in France. Employees wanted something the bosses either couldn’t or wouldn’t give.

In England, the yahoos attacked poor Sir Fred Goodwin’s house. Fred ran the Royal Bank of Scotland into the ground; you’d think the rabble would be delighted.

In America, meanwhile, they organize bus tours to gawk at AIG executives’ houses…and howl for blood. Apologize, resign…or commit suicide, suggested Senator Grassley.

“The corporate security business is booming,” says the International Herald Tribune.

Until now, the whole bonus/executive pay/bailout spectacle was just an amusing diversion – diverting the public’s attention with a trifling few million dollars, while the feds picked their pickets for trillions. But now, it’s turning ugly.

Our guess is that the blood will flow…but later. It’s still fairly early in the correction. Investors have lost money – lots of it. Homeowners have lost their homes. Working stiffs and Wall Street sharpies have both lost their jobs. But the violence-prone yahoos still expect something for nothing. The bailout plans will work, they believe. The government will step in and save them. They haven’t figured out that the government’s bailouts are just making their situation worse.

Today’s International Herald Tribune tells that “shanty-towns” are beginning to appear throughout the United States. People are setting up tent communities…shacks…and Rio-style favelas – in America. The paper shows a photo of a group of tents under a California freeway. It’s not hard to understand why. Many families live paycheck to paycheck…just one week ahead of the rent payments. If the paychecks stop – even for a short time – they’re in trouble.

When credit is expanding, jobs are plentiful and credit is willing. Lose a job and you can always get another. And you can fill in the gap in your budget with credit cards. But that was then…this is now. Advertise a job opening now and you’re likely to get hundreds of applicants. And not only is it harder to get a job…it’s harder to get a line of credit too. And even people who still have credit are more reluctant to use it. They know where that leads; many would prefer to live under a highway than to run up more debt.

A big change in attitude has taken place. People used to think that whatever they needed, they could get it ‘just in time.’ That’s why we have 24-7 liquor stores, all-night convenience shops and cash machines on every street corner. But something has gone wrong with the ‘just in time’ system. The cash machines aren’t as yielding as they used to be. Neither is the housing market. Or the job market. Sometimes, they just say no.

Now, people want a little cash in their pocket…just in case.

But what do we know? We missed the whole credit cycle. When we were young and in need of credit, the banks were still smart enough not to lend to us. When we got older, we were smart enough not to borrow.

But pity people about 20 years younger than we are. They were just starting out…having children…buying houses…at a time when the banks had lost their minds. Credit was as easy to get as a social disease. Now, the debt is even harder to get rid of. Old people…and young people…tend to have little debt. It’s the people in between who are hurting.

But enough rambling…

Everyone’s looking for the recovery. The commentators think they see signs of it everywhere. Commodities are rising. Stocks are going up. Even houses are said to be selling better than they were a few weeks ago.

“Risk appetite grows on hope US is near bottom,” says the FT today.

The Dow rose 174 points yesterday. Oil, the dollar, and gold moved little.

Maybe you should stop reading here…before we get to the ‘rest of the story’…

But first, we turn to Ian in Baltimore for more news:

“On the housing front, we see a ray of hope,” writes Ian in today’s issue of The 5 Min. Forecast.

“According to this chart, the precipitous fall in home prices might start to ease up soon:

“The current crisis has finally wiped out the bubble in home prices,” continues Ian. “Adjusted for inflation, the price of median single family home has plunged 33% from its 2005 high. Now at pre-mania levels, an average of $165,000, home prices have a reason to at least slow down their rapid decay.

“Ouch…sorry if you bought your home during the height of the housing boom in the 1979. The median, inflation adjusted return over the last 30 years is negative 1.6%.”

Each weekday, Ian and Addison bring readers the The 5 Min Forecast, an executive series e-letter that provides a quick and dirty analysis of daily economic and financial developments – in five minutes or less.

And now, as Paul Harvey used to say, the rest of the story:

GM says 7,500 hourly workers have left the company. Jobless claims sent another record – the 9th one in a row. There are now more people getting benefits than any time since 1967.

And what’s going on in the bond market?

“Weak demand at Treasury auction gives Wall Street pause,” says an article at the New York Times.

And in England, an auction of government bonds “failed” – buyers didn’t show up.

If the government can’t finance its debt, how will it pay for its bailouts? Oh, never mind…we forgot; the Fed will lend the government the money. Where will the Fed get the money? Oh, never mind…

Meanwhile, the corporate bond market is still expecting a Great Depression…

“Investment grade corporate bond indices are [still] priced for default rates of 38% in Europe; 40% in the US; and 51% in the UK – all worse than the Depression,” writes John Authers in today’s Financial Times. Bank lending is the target of all these recent operations, he points out.

Stocks are going up. But corporate debt is still priced “on the assumption of absolute disaster,” says Authers. Someone’s got to be wrong: either stock market investors…or the bond market. “Either the credit market is so illiquid that these numbers bear no relation to the outcomes that investors expect; or we are in for a re-run of the Depression.”

Naturally, we don’t know which it is. We are incurable optimists here at Markets and Money. Let the markets work…they’ll straighten things out. In the meantime, we keep our Crash Alert flags unfurled…just in case.

And finally, Alan Greenspan is in the news today. He has a major work of obfuscation in today’s Financial Times, the gist of which is the same as his previous pieces. “It’s not my fault,” is the message.

In a sense, he is right. The free markets are full of boom and bust, sturm and drang, yin and yang. Free markets also create prosperity, he points out. And if bubbles are the price we pay, well…it’s worth it.

“I do not recall bubbles emerging in the former Soviet Union,” he says.

Yes, bubbles will always be with us, dear reader. But that is no excuse for a Federal Reserve chairman who pumped extra air into the already bubbling economy.

Poor Dr. Greenspan. The more he tries to defend himself…the more guilty he appears. And now he must shuffle out the end of his days…an empty coat upon a stick…with the curse of the biggest financial crisis in history upon his wrinkly, old head.

Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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4 Comments on "Investors and Their Lost Money"

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Paul Phillips

Woomera, Australia’s best kept secret? A reason for blocking the bid for Oz Minerals; I do’nt think so. So far as the public are aware nothing much has happened at Woomera for 20 years, Australia has no missile development either current or planned and does not manufacture or test large-scale weapons. Wayne Swann please explain


Whats to explain?. it is called politics. If you get an opportunistic opposition painting the government as associating with a chinese spy, bending over for china,selling out the country and plastering it over the popular press at every opportunity in order to take down a minister, to put a notch on your belt as the country slides downwards as you hope it will, you get a small token speed bump in return.


Due to Decline in every field of Market not only in US but every Part of the Country and the People Thought would be the Same Save the Money For Future.

Greg Atkinson
Gerry I think the Minister is doing a good enough job of taking himself down. I wonder if one of the troops in the defence forces would get away with breaching regulations twice and just get out of trouble by saying “ooops”. Fitzgibbon likes to call people incompetent for failing to sort out the SAS pay debacle but he cannot even fill out simple paperwork correctly! It is funny how Rudd07 was all about government accountability but once in power himself and his team seem all about dodging it? Anyway, if the government’s relationship with China is all on the… Read more »
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