What’s New Pussycat?

The world is firmly on track to crack along the lines drawn in my posts for more than a year now.  Here we briefly examine some important new developments for your reading pleasure.

60 Minutes and Very Old News

Months ago readers on this site were advised of the impending calamity revolving around municipal debt and deficits.  People who know me can attest that I have been talking about this issue for at least the last three years.  Yet there is not a ripple in the financial markets.  But put a hot blonde on 60 Minutes who says essentially the same thing and all hell breaks loose.

While it is true that Meredith Whitney is gorgeous and I have a great face for radio, she does have an excellent track record and 60 Minutes has a much wider following than I do.  More frustrating is that the financial blogosphere had dissected the municipal debt issue so thoroughly over the last few years that it is now almost a yawner in that arena today.  The key takeaway is that when 60 Minutes takes on a subject (especially finance and economics) it is very, very old news.

The latest update is the city of Vallejo, California, in bankruptcy since 2008, has just offered creditors 5-20 cents on the dollar.  Also, there is serious discussion of federal legislation allowing states to declare bankruptcy.  This is groundbreaking stuff that all of you should follow closely if you want to maintain your financial health.

Of equal import is the approaching tidal wave of underfunded public pension liabilities.  Lame stream estimates by financial service industry lackeys puts the number at $500 billion.  Unfortunately, that number is arrived at by using wildly unrealistic assumptions of future investment returns (8% compounded annually).  More realistic assumptions and calculations put the nut at more than $2 trillion.  When health care benefits are rolled in the total exceeds $2.5 trillion.  Even the estimates by people I consider reliable understate the problem by $trillions.  None of the calculations factor in the super crappy economy we will experience over the coming years.  By comparison, total state and local debt now stands at a bit under $3 trillion.

These depressing facts have implications far beyond your portfolios.  Basic services will be severely reduced and irrevocably compromised in many localities.  Meredith Whitney’s estimate of up to 100 municipal bankruptcies (getting lots of heat by mainstreamers) is conservatively low. Many towns and cities will literally shut down as millions of people will be on the move in search of municipalities with financial stability.  This is the 21^st century twist on the fictionalized Okie migrations in the Grapes of Wrath.  The most important financial undertaking you must begin immediately is to become informed about and active in influencing the finances in the town or city where you live.  You also must learn which states and cities are in the best financial condition now and which are most likely to withstand the calamity to come.  You may find it necessary to join those 21^st century Okies.

Inflation/Deflation Debate

More than any other issue, the debate over inflation is polluted by undefined and ill defined terms.  Inflation, as commonly used, refers to rising consumer prices, especially as calculated by the Consumer Price Index (CPI).  Actually, rising consumer prices are the results caused by inflating the money supply!

The public has been conditioned by the experience of the 1970’s and early 80’s to think of inflation in terms of the CPI.  Given that experience of consumer prices rising more than 10% annually during the peak of that era, we foolishly and incorrectly look upon 2% or so as benign.  Therefore, today’s inflation reports give calm to the masses.  If the CPI reported each month is growing at 2% or less, then we must be in good shape on that front.  The Fed must be doing the right things.

However, there have been two significant changes in the way the CPI is calculated – one during the Reagan administration and the second during the Clinton administration.  The net effect has been a significant reduction in the reported CPI increase.  We can save the debate over the advisability of those changes for another time.  Shadow Government Statistics provides us with the data and charts showing the effect of the changes.

Using the same methodology before the two changes shows the CPI rising at the same alarming rates as during the stagflationary days of the Nixon/Carter years.

Even if we ignore this inconvenient truth, the inflation story is still ominous indeed.  The reason is that inflating the money supply results in prices rising unevenly and unpredictably.  In the 70’s we saw consumer prices and raw commodities rise sharply while real estate and the stock market stagnated.  In the 90’s we experienced a stock market boom and bubble.  In the nasty naughts of the current century the results of monetary inflation were soaring real estate prices and a credit bubble.

Today we are back to the more classic consequences of monetary profligacy as we again see raw commodity prices rising to records.  The worldwide food riots of 2008 are back with a vengeance.  Here in the U.S. the consequences are less grave at the moment, though the bottom 60% of today’s “two Americas” is getting crushed by increased food, gasoline and heating costs.  Virtually all of the increased holiday spending came from the top 20% that is doing very well, thanks to Bazooka Ben Bernanke.  He and most of the economics profession still do not understand that boosting cyber cash does not result in a proportionate increase in prices across the board.  Residential real estate prices, for example, are still declining (the one asset the fools at the fed wanted most to increase in market value).

This unstable condition cannot last much longer.  Unfortunately, I have no clue when this nonsense ends either.

Housing and Fraudclosuregate

Despite $trillions of monetary inflation and federal deficit financed Keynesian stimulus, housing prices remain at their lows and are almost certainly headed much lower still.  What is new is the endemic criminal fraud perpetuated by the mortgage servicing industry in their foreclosure procedures.  The general public is only in the early stages of absorbing the magnitude and consequences of this phenomenon.

Worse is the fact that there will be no justice coming from the government.  To date, the only actions at the federal level have been a few failed attempts at legislation whitewashing the whole affair.  At the state level, the “rocket docket” in Florida is emblematic of outright complicity in the criminality perpetuated on the public.  Only the sleaze ball lawyers stand in the way of shoving this under the financial rug right now because they stand to make mucho moolah suing everyone.

This is a big deal folks!   The very reliability of our system of legal title is at issue for all real property, not just those in foreclosure.  Take extra care if you are in the market for a house.   Fraudclosure will be a major factor, along with falling home values, in triggering millions of strategic defaults in the next few years.  There are already many cases of servicers not bothering to follow through with a foreclosure sale because the likely price is less than the cost of the sale.  Next step is to bulldoze the house. Note the feedback into the problem of municipal debt discussed above as property tax collections collapse.

There is an ironic opportunity here.  The mess will eventually be cleaned up, but will require legions of new businesses created for and of people hired by the foreclosure industry.  If I weren’t such an old dog I would look into the possibilities myself.

China

China is out of control.  It turns out that there is not just one empty city, but more than ten in China today.  Still, the breakneck pace of building new, soon to be empty, facilities continues.  The reason for this, despite repeated tapping on the breaks by the central government, is that incentives at the local level have overpowered all attempts to curb the mania.

Local government bosses make their income by selling land.  This requires financing which the processes of corruption readily provide notwithstanding directives from the capitol.  Credit growth continues at levels unknown in the western experience.  Unfortunately, again I cannot provide a reasonable estimate when this too will blow.

For those who would like to get more insight into the biggest gorilla on the world’s economic stage, I highly recommend all three books by Peter Hessler, especially Country Driving.

Europe

Greece, Ireland, Portugal and Spain are busted.  Italy is not much better off.  The key question is whether they will default or will the European Central Bank (ECB) print euros to buy up the bad debt like the fed did here.  If the ECB prints, look for commodities to rocket a notch or two higher almost immediately.  This is better than anything even Shakespeare could make up.    Some day great movies will be made about all of this.

That’s the latest.  Good luck!!  We will all need some.

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