Juggling Dynamite

MSN Money reports today on the escalating default rates plaguing the car industry:  The Repo Man is getting busy: 

“The shorthand is that for years we've lived beyond our means, reflected in record debt levels, and now comes the paying phase,” said Christian Weller, a senior fellow at the Center for American Progress, a progressive think tank in Washington, D.C. “Car loans have expanded as fast as mortgages, and in terms of the categories of what people borrow for, it is the second-largest.

“It fits the overall picture that all the economic-distress measures are trending upward.”

Repossession agents in areas hit by foreclosures say they've been picking up vehicles both from people struggling to keep their homes and from those now left without work: construction workers, pavers, landscapers and real-estate agents.

For the past year I have noted a billboard outside a local Ford dealership that we drive by each morning.  The sign says:  “Bad Credit, no Credit. Bankrupt?  Bank yes no? We say yes!.”  Call me insane, but who the hell can afford to sell cars to people that can't afford to pay for them?  What kind of a business model is this?  Either we have launched into a world where gravity no longer applies, or we are in for a very nasty reality check as bad loans are eventually taken into the numbers over the coming months.

After some time off with the kids last week, I am today back in the seat so to speak.

One is really never off in this line of work though.  Thanks to the Blackberry and Internet we are always hooked in.  I admit that I did do some work from unlikely spots like a horse drawn buggy around Niagara-on-the-Lake and our boat in the middle of Kempenfelt Bay.  But all in the weather was great and we all had good fun.

This morning we are back reviewing developing trends like sagging corporate earnings, rising defaults, rising interest rates and over-levered participants.  Sure looking forward to happier themes ahead.  Getting a little weary of the looming storm clouds ominously building day after day.  Unfortunately the air is not likely to get clearer until the storm comes to its inevitable crisis.

Bloomberg today reports “US Rebound May Be Bumpier Than Fed Expects as Credit Tightens”.  No surprise there.  An interesting piece was the lead CBS 60 Minutes story last night:  U.S. Heading for Financial Trouble?”  Evidently David Walker, the US Comptroller General, is tired of helplessly watching storm clouds build in US federal deficits.  He has now taken the issue past the politicians to the people and is touring the country alerting Americans to the truth.  In his words the politicians are spending the nation to bankruptcy unless some immediate and dramatic steps are taken to cut entitlements and spending and increase taxes:

“Well, because we promise way more than we can afford to keep. Eight trillion dollars added to what was already a 15 to $20 trillion under-funding. We're not being realistic. We can't afford the promises we've already made, much less to be able, piling on top of 'em.”

With one stroke of the pen, Walker says, the federal government increased existing Medicare obligations nearly 40 percent over the next 75 years.

“We’d have to have eight trillion dollars today, invested in treasury rates, to deliver on that promise,” Walker explains.

Walker points out that the government has so far managed to allocate zero dollars of the many trillions needed to fund upcoming liabilities.

The politicians are all going on hope for a miracle that can allow them to avoid making unpopular cuts and increased taxes.  The citizens have so far largely stuck their head in the sand rather than owning up to responsibility for the failures and burdens of the current structure.

Someday the masses will have to admit that debt is nowhere near the same thing as real money in the bank.

The Financial Post ran an article on Juggling Dynamite on Saturday under the inappropriate and misleading title:  “Doomsday ahead, author claims.”  It article's author Jonathon Chevreau this morning posted an explanation on his blog site saying that he did not pick the headline.

I was glad to see this correction and my response to his blog was as follows below:

Dear Jon, thank you for this correction today.  The headline was not accurate or fair.  I certianly never would say I see “doomsday ahead.”  My friends have now been jokingly calling me “Dr. Death” since your column Saturday.

There is an unfortunate tendency of some to discount a person as a perma-bear or a dark horse if one feels the need to express some caution or highlight risks which the market may not yet be accurately pricing.  In general our world is starved for critical thought and especially in the financial world.

This has always been the case through history in fact.  As you know, I discuss this issue in my book.  I guess the person who picked the headline was unwittingly helping me to make my point about the sensational tendency of some business media.

I was interested to see the opening story on “60 minutes” last night where the US Secretary of the Treasury-the country's head accountant, has taken it upon himself to tour the US warning citizens that their government leaders are spending the country into bankruptcy unless immediate major cuts are made to expenses and increases are made to taxes.  He pointed out that to fund current entitlement committments, the US government would need to have 6 trillion dollars currently invested in Treasury Bills to have the money needed to fund their health and social committments alone.  They presently have zero set aside for this looming liability.  I was heartened to see that 60 minutes reported his sober news without labelling him as doomsday or dark.  These are serious and real issues that cannot be discounted that easily.

Lastly, I would like to correct for the record, that the closing quote in your article was actually edited to the point of misstating what I had said.   My quote was that few people in the financial sales world can afford to have clients leave equities markets since the industry fees tend to drop off dramatically if clients move to cash.

Best wishes, D (aka “Dr. Death”)