Friday, October 24, 2008

Staring at the Abyss

Russia has suspended trading until next Tuesday after seeing another 10% loss in value. Russian default risk tops Iceland as crisis deepens. Hungary, Ukraine and Belarus have sought emergency loans from the IMF. Chrysler is laying off 25% of its salaried workforce and a day earlier, Chrysler announced 825 job cuts at its Toledo plant and another 1,000 relating to the closure of the Newark plant. GM Suspends Matching Contributions to 401(k) Plans. AIG taps $90 billion government credit line, after having exhausted nearly $120 billion in bailout money in under one month! Japan Stocks Drop to Brink of 26-Year Low while a recession panic hits the Nikkei.Meanwhile the Hang Seng (Chinese stock market) crashes 8.3 percent to a four year low. Mike Shedlock notes that Job Losses Mount as Recession Deepens. There aren't any remaining consumers out there who can take on more debt or purchase more junk. As Mish also is fond of saying, the Shopping Center Economic Model Is History.

Is the picture above getting clear enough for you yet? For the last few weeks, after the last big decline, we've been in another trading range from about 8300 to 9500. We're still in that range although near the bottom. And the global financial problems may cause the market to panic out of that range towards a new low. That new low, for the next round, will likely be around 7000 but that's not the bottom yet either. The bottom is yet to come and will be somewhere south of 5000, with a reasonable chance of being south of 4000. The next downleg on the S&P will be in the 650 range, when it finally comes. There's no sunshine in this market yet. None at all.

This weekend my adult children will be meeting with myself and my wife to discuss what the possible scenarios are and how we can all prepare for those scenarios. I've been busy the last few years learning to garden, compost, learning a bit about vermiculture and building rich soils. We've set aside food and other consumables to see us through an extended emergency and now we're going to try to ensure that our children and grandchildren are cared for as well. We may or may not succeed but we don't have lots of time to spend worrying about strangers who have not prepared at all.

MSNBC recently ran Hard times have some flirting with survivalism--Economic angst has Americans stockpiling 'beans, bullets and Band-Aids’., run by James Rawles, is a treasure trove of practical information about surviving catastrophes, ranging from Cat-5 hurricanes to Cat-5 financial storms. I advise bookmarking it and reading it regularly.

Most readers of this blog (the few that bother to read it) won't have the resources to really prepare. For people in that category, I suggest that you learn to pray. You're going to need it. Some small number though still have a chance to purchase rural land, even land without a house on it is better than no land at all. And I mean purchase it, not via a mortgage. Take that cash and get your hands on some productive land. In a pinch you can build a cabin, or even get fancy and go underground, as outlined in The $50 and Up Underground House Book. If things get as bad as I fear, we're all going to have plenty of time to work on things at home, so it's best to really own a home for that purpose. Additionally, being rural will get you out of the most immediately dangerous problem if society does go pear shaped - civil unrest, aka rioting and looting. Most won't be able to do this but if you can, your chances to actually take this step are drawing to a close.

The chickens are coming home to roost on decades of fiscal irresponsibility and we're all going to pay. The only question is how much?

Sunday, October 12, 2008

That Flushing Sound is the Global Economy

The press is reporting that the Royal Bank of Scotland and the Holding Bank of Scotland PLC (HBOS PLC) are both being seized and nationalized by the British government tonight. As Mish notes in his Royal Bank of Scotland, HBOS Nationalized, these actions do nothing to correct the underlying problems - insolvent financial institutions. As I write this, Asian markets for Monday October 14th, are showing some gains. But US institutions are closed tomorrow and Europe may involuntarily close their markets in an effort to calm the situation. I'm not sure what they expect that to do because that also doesn't address the underlying problem. However, reviewing the October 1929 crash, there was a multi-phase collapse. The biggest part occurred on October 29, 1929 but there were serious precursor drops and rallies along the way as well.

Because of this and because of various other observations, many people are expecting a short term rally in the market at this point. People really do want to believe that governments globally can solve this, whether they really can solve it or not. That belief will help fuel some form of rally, perhaps into the 10,000 range. Trying to outguess the crowds when we don't have any sort of reasonably accurate model is a difficult thing to do but my best guess is that this rally will last somewhere between a few days to a few months, ending not later than sometime in January of 2009.

A key point to take home from all these "rescue" attempts is to ask whether the action in question actually helps resolve the underlying problem of insolvency for a particular financial institution. If the answer is no, then it cannot succeed longer term. Given that zero actions thus far have addressed underlying insolvency issues, that means that somewhere ahead of us is a further fall downwards, perhaps below 5000 and perhaps even much lower. If we get very far below 5000 though, I fully expect the wheels to come off industrial society in Europe and the United States. Whether you do anything about preparing for that eventuality is your choice. But if you choose to not prepare, please don't knock on my door because I did choose to prepare.

Thursday, October 02, 2008

It just keeps getting worse, doesn't it?

It's hard to believe that our government could have done as many boneheaded things as it has done since I wrote my last entry. Yet the infamy of September 7, 2008 may now be lost amid the early days of what could become the Greater Depression.

Yes, you read that right. I want anyone reading this to realize that right now credit lines are being closed for major corporations. Given that most major corporations and most small ones operate from their credit, the closure of credit lines is starting to suffocate the economy. GMAC shut down the credit line of Bill Heard Chevrolet dealerships, the largest Chevrolet dealer in the United States with annual sales over $2 billion and dealership locations across the US south. This credit line was shut down in August. In September, the Heard family shut their doors on every dealership they have. That's about 3000 people out of work right there. That's $2 billion in annual sales lost to GM via one of their oldest dealers. Bill Heard was founded in 1919, lasted through the Great Depression but was done in by this oncoming Greater Depression.

Other corporations either have been confirmed to have lost their credit lines, such as McDonald's, or rumored to have lost their credit lines, such as HEB grocers.

Those of you who think that the 451 page boondoggle that the Senate passed last night will change anything significant are believing in unicorns. I won't argue with someone who is that economically illiterate but the Senate bill does nothing other than allow Paulson to make his friends whole again at US taxpayer expense, right before the entire global economy goes to hell.

There are lots of issues at stake here and other people, ranging from Mike Shedlock's Global Economic Analysis blog to The Automatic Earth cover these issues better than I do. But I want to ask you something very direct, personal, and not abstract at all. What are you going to do if HEB, Kroger, and other major grocery chains shut down due to lack of credit? Oh yeah, the government will send in the National Guard and distribute emergency foods. Do you like that stuff that FEMA hands out? Have you ever tried most of it? It's... not that good and I am being generous here.

If you do not have at least 60-90 days of canned and dried goods on hand, then you are probably in trouble. And all that 60-90 days will get you is through the initial turmoil to where you become a ward of the government, possibly for years to come. But hey, that's the choice that you made. Of course not having 60-90 days of food supplies may mean you lose some pounds in the 1-4 weeks before government relief shows up in your area. Maybe you lose lots of pounds. Maybe you starve?

Likewise, are you going to have a job if credit shuts down? Will you even get paid? Will your bank allow you access to your funds or not? You are still going to owe money to people and have bills to pay. Wouldn't it suck to have money in the bank that you cannot reach while you are foreclosed and thrown out of your home? Think it can't happen? It already did in the 1980s in Texas and the US south during the S&L crisis and this is thousands of times bigger than the S&L crisis.

In short, your preparation options right now, today, are very narrow but you still do have the choice of doing something as opposed to nothing. So, are you going to do something or are you going to see how long you can fast? Better make your mind up soon. Credit lines continue to lockup worse and worse for the fourth straight day. At this rate, in another week it will be shut down altogether.