Chris Tomaras / Straight Talk / March 7, 2009

When it comes to the financial markets this has been another gut wrenching week, not so much because of the decline of the markets but because reality has set in and the true consequences of our  past mistakes is really hitting home. We’ve experienced a lot of tough weeks and shocking events over the last several months but this week was very sobering in that it reflected the true lack of consumer confidence, the confusion, the uncertainty and the continued corporate improprieties that are plaguing the nation. Wouldn’t you think that companies like Merrill Lynch would be sensitive to corporate bonuses when they are on the brink of collapse only to be bailed out by the government and the B of A. We have talked at length as to the greed and overindulgence that brought the country to its knees and then these same people turn around and do something stupid again. We hear reports everyday of another company or hedge fund manager or investment manager, or politician, using bad judgment to say the least. AIG took a massive thriving business and turned it into a failed casino because of the greed of its executives, and now we’ve bailed them out to the tune of $150B and we’re still not done. Do they not understand, or are they so arrogant that they think they have some special dispensation for doing things that are wrong while at the same time collecting multi-million dollar bonuses?  I mean the list just doesn’t end.

It is incomprehensible that Merrill Lynch paid executive bonuses of 3.6B to 121 people. That’s almost an average of 30mm per employee.

Have these corrupt morons completely lost their minds. How do we expect consumers to have any confidence in the financial system when the government throws away hundreds of billions and executives rob the corporate coffers while taxpayers are paying the bills? 

For the past several months we’ve been discussing at nauseum the economic crisis and the reasons for the meltdown. The governments and the central banks of the world’s major nations are presently experiencing the greatest shock and awe reaction to the worst financial psunomi that we can ever remember, including what many of us have read or been told, about the great depression.

When our children and grandchildren look back, I am fairly certain they will allude to the time that we are in, as the “truly great world depression”.  If you remember, it took us quite some time to admit that we were in a recession, but very soon, I am sorry to say, we will refer to it as to what it really is, a depression. A depression by definition is actually an extended recession, where somewhere in the middle, stimulus programs cause a momentary uptick or false start followed by continued deterioration. I don’t mean to be the bearer of bad news but the name of the show is Straight Talk.

President Obama is attempting to put out a runaway forest fire with the injection of largest amount of money ever spent in our history, in a matter of a few months. It’s a trillion here and a trillion there and he’s basically pulling the plug and saying it’s all or none.  Just keep spending as much as it takes.

Well no offense but it’s not working now, it has not worked in the past and the markets are telling us this. Remember that markets anticipate, they are not lagging indicators. I heard something interesting this week. If you were to take a trillion dollars in one dollar bills and count them, it would take you 95,000 years. It’s too bad it doesn’t take that long to spend them.

All this stimulus is about big business and big government getting bigger and the sacrificial lambs are small business and middle class taxpayers.

On the surface the President is trying to stop further deterioration of the financial, housing and credit markets  followed by the stabilization and stimulation of the economy to where people will once again begin to borrow, spend and invest.

Are you kidding? Stabilization and stimulation? How on earth is that supposed to happen when every day we see the horrible judgment and corruption of our elected officials , corporate executives and trusted financial advisors? The government is more concerned about shutting down Guantanamo to show the world that we are defenders of the constitution when dealing with prisoners, many who would kill us just as soon as look at us. Yet America is being Eaten away from within through our lack of morality and greed while hypocrisy rules the day.

At the same time and at a level below the surface the President is imposing his liberal agenda upon the country by making sure that he directs billions of dollars to his special interests before things become so bad that he is voted out of office in the next election.

Well, at least that is the assumption. Maybe and hopefully, he will come to his senses and surprise us by vetoing the upcoming stimulus bill. If he does, I will be the first in line to applaud him depending on whether or not he cuts out all of the pork.

Pumping all of this money into the economy is like putting a critically ill patient into an induced coma hoping that at a point in the future the patient will wake up and the pain will disappear. I don’t think so.

So the problems at hand, away from a few thousand character issues, have to do with housing and jobs. This must be our focus. If we can stabilize the housing and job markets, the rest will begin to fall in place. Forget global warming and giving money to Hamas, if you can believe it. They’re spending money faster than we can count it.
Like the stock market, the housing market was made up of paper profits, meaning that even though stocks and houses went up in value it is meaningless unless you sold and took your profit. If you spend during the rising price euphoria with the belief that you have accumulated this vast amount of wealth, you better make sure you took your profit, otherwise you could end up with the worst of both worlds, the bills for what you bought, and the disappearance of your paper profits which you anticipated using to eventually pay the bills.

And, Voila, here we are. Welcome to America!

The next problem is this. Experience has shown that when you go through major market reversals such as the stock market in the 70S and the bond market in the 80s, these markets do not simply turn around on a dime and then life suddenly goes back to normal. The problems we are going through in the housing and stock markets are going to take many years to correct.

And, the primary reason is this. When people go through a serious crisis in their life, as we are currently experiencing, it has a profound effect on their psyche and they do not forget the paralyzing pain. Just ask someone who went through the great depression. In many cases post stress disorder sets in. In this case, people could care less about spending money buying homes, stocks, TVs, cars or any other consumer luxury. They just want the pain to go away and get back to the basics. Jobs have now taken over the top spot on peoples wish list. Yet in my opinion the government doesn’t get it. That’s because they are not experiencing the pain of average Americans. They view normal as getting things back to where they used to be but that’s not going to happen especially when people don’t want to go back there. People no longer care about spending money on toys, they care about having a job in order to put food on their tables and provide for their families.

More than 8.3 million U.S. mortgage holders owed more on their loans in the fourth quarter than their property was worth as the recession cut home values by $2.4 trillion last year.

The stock market has dropped from 14000 to 6500 in just a few months. When you combine 3 trillion of losses in housing value and at least another 7 or so trillion in the stock market and then spend another 4 or 5 trillion in stimulus packages and bailouts, add it up. And now long term interest rates are beginning to rise making the debt even larger.

If housing prices drop another 5%, an additional 2.2 million borrowers will be underwater. Households with negative equity account for a quarter of all mortgage holders.

The problem is simple. We have way too much supply and not nearly enough demand and people aren’t going to purchase a home as long as prices keep falling, and someone who is worried about their job certainly isn’t going to purchase a home either. 

Prices fell 18.5 percent in December from a year earlier, the fastest drop on record.. Sales of previously owned homes, which account for about 90 percent of the market, fell in January to the lowest level since 1997, and new-home purchases plunged to the lowest level since records began in 1963.

Of the $2.4 trillion drop in home values last year,  more than $1.2 trillion occurred in CA accounting for roughly half of the national decline. Maybe that’s why it is said that, as goes CA goes the nation.

U.S. foreclosure filings exceeded 250,000 for the 10th straight month in January, and payrolls plunged by 598,000, pushing the unemployment rate to the highest since 1992, according to the Labor Department.

So with things looking so bleak what is the President to do, keeping in mind the reality of what we’re dealing with and what the markets are telling him.

President Barack Obama has proposed a $275 billion plan intended to help as many as 9 million troubled borrowers refinance or restructure their loans. About $75 billion would be used to rescue homeowners by agreeing to pay lenders for altering troubled mortgages while reducing borrowers’ interest rates as low as 2 percent.

I can go on and on about all of these spending stimulus packages but the bottom line is this. President Obama needs to stop the spending and change direction if he wants the markets to change their direction. The President has a very important vote coming up. I really hope and pray that he uses good judgment and stands behind his promise to veto a bill filled with pork. If he shows the nation that he is a man of his word, the markets could begin to stabilize and reverse themselves but if he signs the bill look out.

Let me ask you an important question. Do our current economic problems first stem from bad judgment or weak character? Think about that honestly and then ask yourself where the country is headed.

And that’s this week’s straight talk.