The Mess We Are In

[crappiefarmer]

This is one that I don't know as much about as far as what controls them outside of the federal reserve. I know the reserve can loose control of rates if they are not careful as was seen in the Jimmy carter years. The set rates and LIBOR rates which is the interest rates the banks borrow money from the federal reserve and then add their own interest rates hike to make a profit lending money to the public. If the libor rate goes up, they just pass the increase on to the consumer. The banks can also raise rates as high as they want to over the libor rate but competition keeps them in check on that. Like I said before, there are other entities at control of interest rates besides the federal reserve that can make the fed loose control. The feds job is to keep rates low but also battle inflation. If commodity prices start rising faster than income levels, it can be dangerous. They don't like see commodity go up year over year by over 2% on average. To keep up under investment gains. If inflation starts going up to say 5% on all commodities in general, They can raise the interest rates by a couple percent, drive the dollar up and sink the commodity prices back down to a level more acceptable. They can't just kill the inflation though as that is how commodity producers stay ahead of their own input inflation. Its a balancing act and one I would not want to do.CF

[LBM]

Wow what a outstanding thread here. I'm almost afraid to comment here because I don't want this thread highjacked even though I'm dieing to chime in on some points or issues discussed here. I'm eagerly awaiting your segment on government. As for me when Ed speaks I listen. I

What the hey I just have no control. The answer for this thread "The Mess We Are In" can be wholly and completely be attributed to the last segment 'government' action and not with the inherent nature of man. JMHO here.

[crappiefarmer]

The Bond Market is known primarily for Treasury Bills(Bonds). They can range from short term Bonds to long term. I know of 5 year bonds but I'm sure they come shorter and they go out to 30 year Bonds. Bonds are backed by the Government through the federal reserve and because they are backed by the government, they are thought of as a safe haven for investment money. safe haven as in the government will remain solvent to back the Bills. The investment return on the bonds is called yield and the yield is based from a percentage of the value of the bonds but the yields return work backward from a stock or commodity. A stock or commodities value goes up with more buying, the yield on bonds goes down as more bonds are bought. The government is basically saying that when bond prices are low, "We need Your investment money and will pay a higher yield to get Your money". When the Bond prices are high because of a high amount of bond purchases, the government says "We have plenty of people wanting to buy bonds so we will not pay as high of a yield". Even the higher yields will not match strong returns of the stock market so the stock market is the market of choice for most investors to make money. After all, making money is what they are doing for a living. They are going to go to the place that makes the most for them. Remember how the bond market works because it is part of what is going on with this mess we are in.CF

Also, think of the bond market as a place to lend the Government money and the yield would be the interest on that money You lend the government and again think about what happens when more and more lend the money to the government with bonds. The Yield Goes down and so You get less interest from the government You are lending to.

Other countries also buy our bonds too. For whatever reason they see fit.

Think of China. They have a trade advantage with cheap labor and they have a currency advantage as they keep their currency pegged under the dollar to keep an export advantage over us. Even though they have a trade advantage, They need us to buy their junk. What they do is, they take the profits from the junk they send over here, Buy treasury bonds to help fund our government so that our government will not go after them for their trade distorting practices because they are funding our governments bad spending habits. Our government is bought and paid for But! we also have the Chinese on the hook for Trillions of dollars of our debt and if they ever want to get their money back from our bonds, they are going to have to help us get to where we can pay them back.

The Chinese are finding out first hand about the snakes we have in Washington because We keep printing money to buy Bonds and that is hurting their investment and We Don't Care! That leaves me with tying all this together and I will do this tomorrow. Please go back and review every other part for tomorrow and I think you will get where I am coming from when You see it. It could be a lengthy post. This will go back to the 90s.CF

[crappiefarmer]

Wow what a outstanding thread here. I'm almost afraid to comment here because I don't want this thread highjacked even though I'm dieing to chime in on some points or issues discussed here. I'm eagerly awaiting your segment on government. As for me when Ed speaks I listen. I

What the hey I just have no control. The answer for this thread "The Mess We Are In" can be wholly and completely be attributed to the last segment 'government' action and not with the inherent nature of man. JMHO here.

LBM, I think You will like the last post here as it will tell it like it is.CF

[RetiredRR]

Well, I always enjoyed listening to Paul Harvey, so............I'm waiting for the rest of the story.

[Don G]

Great thread, Ed. Keep'um coming.

[fishingpox]

I'm like Scoutout, my head hurts and not in a good way.

[crappiefarmer]

Thanks for Your patience. Been a long day but I will jump right into it. Back in the late 90s, Fannie Mae was already in existence but Freddie Mac and Sally Mae were created and Fanny was given more ability to loan. Now as we know, they were created to help people get loans that were refused by the Private banks.

lending Rules got Lax and people did not even have to show proof of income to get a loan to buy a house through Fannie or Freddie. I remember hearing folks say they could buy a house and make house payments cheaper than they could rent a place. I knew something was wrong then but I didn't understand as I was in My mid 20's and knew nothing about markets. I remember Dad saying, "It can't keep going like this. Something is wrong and something bad is about to happen." That was in the early 2000's. Dad was early by a few years but He was right. Around that time, the private banks had relaxed their rules on lending because people were going to Fannie and Freddie in droves and the big banks were losing market share to the government. More finance regulations were removed along then as well that allowed Banks to invest in the Stock market. These Banks were using customer money as a pool to bet in the markets to create a huge stream of income. They became super banks but not too super as they were also making millions of bad loans and betting in the markets and doing unregulated swaps with insurance companies( Think AIG). A Swap is where the banks would transfer the risk to an insurer with the insurer banking on the strong economy keeping most people in their loan payments. the problem with the swaps was that the insurance companies were not big enough to handle a crash in the housing market and when the Insurance company could not keep the banks afloat when the housing bubble busted, They both went insolvent. And because the swaps were unregulated, they were not backed by the Federal reserve. keep in mind that all of this was done because this is the way banks had to compete against Fannie and Freddie.

Things were going bad at the banks when things were still good but insiders in the banks were polishing numbers in the books to make them look good to the share holders of the banks. This was referred to as "Cooking the Books". Goldman Sachs was very evil at this point as they were setting up their own investors. If you were in the inside crowd at Goldman, You were taken care of as they saw this mess coming. They told all of their Preferred investors to short the stock market or sell against the buyers and told their normal run of the mill investors to buy the stock market. When the market tanked, those who sold the market got the money of the ones who bought the market. How Goldman Sachs is still in business I'll never understand, Well maybe the fact that the Obama and Bush administrations were loaded with former Goldman employees. None of these banks have a clue as to how to cook the books like the Federal Government though. People go to prison for doing it in the private economy but it is common occurrence in the federal government.

The Tipping point started in 2007 but was not fully realized until 2008 when the market crashed. At the time, the US economy and the World economy in general were getting super overheated and investment money looked at how commodities that had been plentiful for decades were being drawn down by the physical demand of these super heated economies so investors started buying commodities. The three kings of commodities were the ones they bought up the most being Crude, Corn, and Gold because we were starting to run short of those commodities they had to rise in price to ration off demand. In other words, get to a price where it hurts to buy them to make you cut back. They found out 4 dollar gas was the magic number for us but that number also did something else....

It Uncovered the mess going on with the Housing market because when crude went to 147 dollars a barrel and gas went over 4 bucks, people started having to make a choice, Eat or pay their mortgage. Millions chose to eat and the defaults started pouring in at the Banks. The insurance swaps deals were faltering because the insurance companies bit off way more than they could chew. The first domino was Lehman Brothers. A Bank that had been in business for over 100 years. Gone forever. then several others started following suit. These banks also had ties to Europe and countries all over the world. If they were to go under, It would cause a loan freeze around the globe essentially crashing the world into recession, stopping most if not all business around the world to halt. this over an extended period could lead to societal breakdown. Riots, starvation, War and so on. The US Government decided to give the banks an infusion of cash to stop the bleeding. Then they did the bailouts to buy out the houses that were being foreclosed on. In other words, We Had to buy back the houses that the federal government made loans for that were backed by tax payers to people who did not have a snowballs chance in hell of ever paying the loans back! It came full circle as it flooded the market with homes and destroyed the home construction industry in this country. The people that were broke before were now bankrupt and we were left with a glut of houses that would take years to for demand to come back to buy them up for construction to really take off again. All of this because the government was trying to show they care and go into the home loan business to show those nasty bankers a thing or two. They sure did.

The government accuses speculators for running the commodities up and they are right they did. But if you have read what I have written about the markets, You will understand that these people only go into something when it is the best place to make money. The only time You buy commodities is when there is a supply shortage or there is a demand driven market like crude oil. Demand driven means that there is only so much supply and the demand has to be rationed off. That is why gas prices are so much higher now than it was just a few short years ago. THE GOVERNMENT WON'T CREATE AN ENERGY POLICY TO PRODUCE MORE ENERGY TO GET AHEAD OF DEMAND!!!! As long as You have this in place, Gas prices will periodically go high enough to stop You from driving because supply gets tight. As everyone cuts back, the supply loosens and the prices start coming back down. It is a vicious cycle that could be stopped but there are too many people in the Government and the oil companies making too much money to do anything about this. Wouldn't You like to get paid more for producing less of something? Enter the oil companies on that deal and they have a powerful lobby.

The government keeps blaming speculation and My favorite that is used by the current administration. "We can't go back to the policies that got us into this mess in the first place" Meaning tax breaks and free markets. They have the nerve and apparently the people of this country believed the current administration when the real "policies that got us into this mess in the first place was Fannie and Freddie!!!" Government programs!!!! So Government ruins the worlds largest economy and then blames the Economy!!!! And the people believe them!!!! But don't worry, Government is going to fix everything with More Government programs!!! We are sunk with Obamacare because we do not have the revenue to pay for it because our econimic revenue engine threw a rod out the side of its block!!! It is easy for government to blame the private sector for failing while it is the government producing competing programs designed to make the private sector fail!!! Government programs are never been good over the long haul. they will fail eventually. I am 37 years old and will not see social security because they spent peoples money that are in their 60s now a long time ago. Obamacare will fail too.

WHAT WE HAVE TO LOOK FORWARD TO. What is the government doing now, and what is coming in our future? I know You have heard the term stimulus. This is where all the market talk in the last posts gets tied in.

THE STOCK MARKET IS ON A SUGAR HIGH! Why would the stock market be making new highs when the economy stinks so bad? It should be in the tank right now and we should be 3 to 4 thousand points lower at least in my opinion than where we are. It is high right now because of the stimulus money. The federal reserve is printing money and buying treasury bonds. remember what happens when there is a huge amount of bonds purchased, the price goes up but the Yield (return) goes down. when they dump money into the bond market, it forces normal investment money from the private sector back into the stock market. Which because they don't want to be there in the first place because the economy stinks and does not reflect higher stock prices for companies not doing well because of the bad economy. They don't have much of a choice and the stock market high we are seeing right now is artificial and does not represent the true condition of the economy. politicians love the numbers as they think it looks good but tells You how evil they are to use the false numbers to fool the general public into thinking there is a strong recovery. CONTINUED...

[crappiefarmer]

So the stock market is being inflated by investment money being forced out of the security of the Bond market and could possibly be being led like lambs to the slaughter. Now we can also look at other aspects as to what they are doing to "Fix This Mess". The other areas of the markets are being affected as well. China has quit lending us money and is not buying our bonds anymore because of our crisis and because we started printing money, hurting their investment in our bonds. So now that we don't have them to help fund the government, the government prints dollars to fund itself but every time they do that it causes our dollars to cheapen so our purchasing power goes down. when that happens. commodities rise in price because the dollar is worth less. This is called INFLATION. But remember, the dollar also gets value in comparison to performance of other currency. Right now the Euro is in such poor position that it is worse than the dollar so the investors in the euros sell euros and buy dollars. While this is happening our Fed is printing money causing selling of the dollars . So the Fed is playing it smart and keeping a floor on the dollar as long as the EURO tanks and the buyers of the dollar coming out of the Euro can keep up with the sellers that are selling short the dollar. It looks like a flat market for the dollar while this is going on but that will change. The Euro at some point will stabilize and with all the dollars the fed has printed, the dollar will tank and commodities will skyrocket and we will go into INFLATION to even HYPER INFLATION. If this happens, we will need a wheel barrow full of cash to but a loaf of bread. With a weak economy and inflation, it is called Stagflation. Stagnant economy with high inflation rates that makes us all poor fast. This is where we are headed next.

Then down the road, something will need to be done about the inflation and you guessed it, the fed will raise interest rates and keep raising them until inflation stops. this will raise borrowing rates up so high that it keep producers from getting operating loans(Jimmy Carter)and producers of commodities will go bankrupt in droves. This is called DEFLATION. Prices will get cheaper for a while until the poorer economy can buy them cheaper and start building demand again. There will be more consolidating in the commodities sector. more super sized companies because they will eat the weak through this whole process and the government these days is perfectly fine with regional monopolies (too big to fail) so the vicious cycle will be starting all over again in another 10 years or so. we got a lot of down hill left to go before we even get there. And Think, all of this started with a government programs called Fannie and Freddie.

Sorry it took so long. Hope You understand it and I will try my best to help You with any of this and I would love to hear Your opinions.CF

[Boscoe]

Ed, thanks for putting all this in terms the common man can understand. Kinda sad those at the top don't seem to grasp the situation as well as you do.