Monday, February 16, 2009

Dead Presidents and a Moribund Economy

As with so much in America lately, this is an artificial holiday. George Washington was born on February 22 (1732). Abraham Lincoln was born Feb. 12 (1809). I used to get two school days off, one to celebrate each man's birth. At some point, business prevailed upon government to consolidate the holidays, so most states now and the Federal Government name neither man and instead give a somewhat meaningless holiday called President's Day on the third Monday in February.

Both men lived through more perilous times than now, but we are in perilous times that require courage and imagination. Every day, I hear of imploding property values. One example is a luxury home on Fisher Island, an exclusive island near Miami. This 4 BR 2800 SF condo, ocean view, was not long ago valued at least at $3 M. Fair value now is said to be $1.4 M, and the current occupant, who rents it and who is highly experienced in real estate matters, believes it is likely to sell at the bottom of this cycle for under $1 M. Four months ago, yours truly sold his primary residence in Florida at a loss, such home having been purchased in 2001, long before real estate bubble talk surfaced. Values in that community are said to have plunged in only 4 months. One owner, for example, is on the Madoff victim list and is listing his house for sale. Between listed homes and known shadow inventory, the overhang of homes is huge. This situation is writ so large in luxury, middle-class and less than middle class communities to need no further repeating.

Another Madoff-type multi-billion dollar scam courtesy of "Sir" Allen Stanford, involving the isle of Antigua, cricket, and Texas is under active Federal investigation. Google him or Stanford Investment Bank to find different articles.

A family member who actually remembers the Great Depression and has successfully been in the retail business for decades states that we are in another Depression. He lived through the horrible economies of the mid-seventies and the LA mini-depression of the 1990 era, and states that the current economy is not just worse than that in either of those times, but now is far worse.

Globally, the headlines continue to be bad without precedent. Bloomberg reports that Russia and Japan are both showing record quarter-on-quarter drops in industrial production. RGE Monitor (Nouriel Roubini's organization) reports that Ireland is on the brink of default, and Germany is being asked by the EU to rescue it. Goldman Sachs reports that the International Monetary Fund is running out of money. Other countries on the brink include Ukraine, which is not a small country, and other Eastern European countries. Western European financial institutions are said to be levered 50 or more to 1 and to have major exposure to cross-border loans in troubled foreign countries.

Back in the U.S., Dr. Roubini has a somewhat triumphant post today in RGE Monitor titled: Republicans start to support the idea of nationalizing insolvent banks (no link; subscription required). Our opinion is that the Citis of the world are Establishment creations, recalling that the major opposition to TARP came from rural, populist small-business Republicans and the rest of the opposition came from the other side of the spectrum (think Socialist Bernard Sanders of Vermont).

In the meantime, markets continue to function, but where is the buying power for a new bull market in anything except distressed debt and the like?

Until the cost of fixing the financial system is known and this task is accomplished, and so long as the economy is either deteriorating or stable but weak, the supply-demand situation in all but the safest assets appears to be poor.

This is what both causes and happens in Depressions.

Copyright (C) Long Lake LLC 2009

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