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The government announced the details of the $1 billion “cash for clunkers” program today.  Here’s a relatively good Q&A on it.

One thing the Q&A says that I disagree with – ok, I think they are 100% wrong – is this:

Q: My old car or truck is worth more than $4,500. Should I use this program?

A: Probably not. The program essentially guarantees a minimum trade-in for a vehicle. So someone with an old beater valued at $1,000 that meets the mileage requirements stands to gain the most. Any prospective buyer with an old car worth more than $4,500 should probably trade it in for a new one. But many automakers and dealerships are offering additional incentives, so it’s worth talking to your dealer.

This is wrong because a sensible buyer will NEVER buy a new car – unless you’ve got piles of cash laying around that you don’t know what to spend it on.  Buying a new car is one of the most stupid financial decisions you can make.  Especially if you need to borrow money to buy it.  Spending money on something that will lose  at least 1/4 of it’s value within a year is stupid.

Buy a used car instead.  Personally, I think a 3 year old car is the sweet spot – some other sucker gets hit with the depreciation, while you get a fairly new, low mileage car for about 1/2 the cost of the car when it was new.

Here’s a link to the NHTSA page with all the details if you’re curious.

gk

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I just read a great article on FEE.org entitled Less than Nothing that explains why the federal government should have nothing to do with managing the economy.  But the article goes further and explains that it’s now too late to simply do nothing – we need to undo the existing policies which brought us to this point.

In other words, we need to get the government out of the way and let the people run the economy again.  Please read the article – it’s short and won’t take long.

Be sure to check out the rest of FEE.org.  FEE stands for Foundation for Economic Education, and there are a lot of excellent articles on the site.  There’s even a special FEE edition of the Henry Hazlitts’ classic “Economics in One Lesson” available online – so you don’t even need to buy it.

But I encourage you to buy a copy anyway.  maybe you can give it to your Senator or Representative after you’ve read it.  Here’s a link to it on Amazon: Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics

gk

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This is quite possibly the dumbest thing I’ve read today.  A story on CNN talking about a mileage tax, where the government tracks your car via GPS and bills you based on the number of miles you drive.

Speaking to The Associated Press, Transportation Secretary LaHood, an Illinois Republican, said, “We should look at the vehicular miles program where people are actually clocked on the number of miles that they traveled.”

It’s also another example of how there’s no basic difference between Republicans and Democrats.

The idea is dumb on so many levels that I don’t know where to start.  Privacy, intrusive government, cost, etc.  So I won’t.

Read the story.  Think about why the federal government should be involved in building and maintaining state roads and bridges anyway.

Think about if it makes sense to have a federal tax where the states collect it (skimming off some overhead for administration) send it to DC (where they skim off a lot more for administration, and attach a bunch of conditions to how it can be spent) then send it back to the states where they skim off even more administrative overhead – all before a single dime is approved to be spent on a project.

Is there some kind of law that says ALL politicians have to have lobotomy’s before taking office?  Just curious, because it’s extremely hard to find one with ANY common sense.

Yet people will bitch and moan and raise holy hell if they don’t get money from DC.  They don’t even realize that DC can’t send you a dime that it didn’t take from you in the first place.  How is that a good thing?

Dumbasses.

gk

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I didn’t vote for Obama (I voted Libertarian this year) but I was hoping Obama would be an inspirational President who wouldn’t actually do much – because I don’t think the government should do much.  I was really hoping that there would be Republican control of the House and Senate so hardly anything would get passed.  Gridlock is good!

In my (admittedly minority) view, the government should basically do what the Constitution says it should do – and no more.

That pretty much boils down to protecting us against foreign invasion via the military, protecting us from domestic violence via laws and police, and providing impartial courts to mediate when there’s a disagreement about (or someone violates) the laws.  That’s it.

Viewed in that light, Obama isn’t starting off very well because he’s pushing increased spending and increased regulation.

According to a story I just read on Yahoo News, President Barack Obama issued a withering critique Thursday of Wall Street corporate behavior, calling it “the height of irresponsibility” for employees to be paid more than $18 billion in bonuses last year while their crumbling financial sector received a bailout from taxpayers. “It is shameful,” Obama said from the Oval Office. “And part of what we’re going to need is for the folks on Wall Street who are asking for help to show some restraint, and show some discipline, and show some sense of responsibility.”

I agree that it’s shameful to pay out bonuses (or buy a new corporate jet) when your company needs billions of dollars of taxpayer bailouts just to stay in business.  So far, I’ve got no problem with what Obama says in the story.

My problem is that Obama is pushing for another bailout package in excess of $800 billion.  These are private companies, and they shouldn’t be receiving taxpayer money unless they’ve won a contract to provide a product or service in exchange for that money.   And the government should have no say in how much profit, or how big of bonus, the companies make.

He also successfully lobbied for Congress to spend $350 billion for bank bailouts just last week.  If he really wants companies to “show some sense of responsibility” why is he giving our tax money to the most irresponsible banks and companies?

I’m getting the feeling that Obama wants to have his cake and eat it too.  He wants to decry the irresponsible spending, lending, and investments these companies have made – while simultaneously giving those same companies more money – and cajoling them into spending, lending, and investing more.

You can’t have it both ways Mr. President.  Borrowing more money (and encouraging consumers to borrow more money) is what caused this mess.  Encouraging them to borrow and spend more will not solve it.

What will clean up this mess?  Time.  Let the bad companies and individuals who borrowed more than they could afford go broke.  Let them disappear.  The capital that was invested in them will disappear also.  Those companies and individuals who conserved their capital will get some great bargains and will start rebuilding the economy on a solid foundation.  This will happen eventually anyway – but the longer we delay the painful process of debt destruction, the harder the inevitable crash will be on everyone.

gk

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Last January I was beginning to get tired of reading stuff like “kitchen sink quarter” and “this is a great time to buy real estate” and “this is the time to buy stocks”.  One evening I happened to read a post by Doug Kass entitled “Buy the Financials. Yes, Buy” in which he made a case that it was a good time to buy the financials using XLF as a proxy.

You can read my original post here, and Doug Kass’ article here.

Anyhoo, I happened to be looking at XLF today, because I’m interested in FAZ – a 3x financial bear ETF that I sometimes use – and I decided to revisit my original post and update the numbers.

Mr. Kass mentioned the S&P 500 estimated earnings as one of the basis for his buy call.  At the time of his post, the estimated earnings for 2008 were $80.  2009 earnings estimates were at $85, and 2010 earnings estimates were at %90.

2008 earnings aren’t totally in yet, but S&P is now estimating them (clicking on the link will open an Excel file from S&P with these numbers) at $65.73 – which I think will turn out to be too high.  As to 2009 earnings, S&P has the current estimate at $81.52.

I’ll bet anyone as much money I can scrounge up that the 2009 earnings estimate of $81.52 is too high.  Does any rational thinker actually have reason to believe that 2009 earnings will come in 24% HIGHER than 2008?

My guess (and it’s only a guess) is that 2009 will come in closer to $40 or $50 than $81.  In other words, I think the current price for the S&P 500 is almost double what it should be if investors are looking at the earnings.  So no, this isn’t the bottom.

I didn’t think it was anywhere near the bottom last January when I said “I think it’s waaay to soon to be looking at this sector.  Personally, I think we’ll see a couple of big bank failures before the financial house of cards has collapsed fully.  No, I don’t know who it will be, but I do know that you don’t make money in the long run by borrowing money (especially at today’s higher rates) to pay down debt”

Side note – A few years ago my brother had an email signature line that said “Tis a vain man who quotes himself”.

Since I wrote the prediction of “a couple of big bank failures” last January, we’ve all seen the collapse of Bear Stearns, Lehman Brothers, IndyMac, and Washington Mutual.  We’ve all seen the trillions wasted on bailouts of Citi, Bank of America, AIG, and even GM and Chrysler.

I’ve previously posted who has been bailed out by the taxpayers.  The list includes Citi (multiple times), Goldman Sachs, Bank of America, Capital One (What’s in YOUR wallet?), Wells Fargo, Morgan Stanley/Dean Witter (We make money the old fashioned way), US Bancorp, and Regions Bank.

I think my prediction of “a couple of big bank failures” has been vindicated….

A year ago I said “we’re heading into a very rough period for almost all asset classes, but “soft” things like made up financial assets and corporate profits (measured in the dollar) will fare much worse than “hard” assets, such as commodities.  Another 20% to 30% decline from here is not out of the question, so sell some stocks and put the proceeds into simple money market funds or commodities. ”

So how did that prediction turn out?  Here are some numbers:

So you can see that basically every asset class has lost money during 2008 – but absolutely nothing has lost more value than the financials as measured by XLF.

Don’t misunderstand my intent in posting this – I’m not claiming to understand how everything works.  I thought that commodities would take off during 2008 as the dollar weakened because of all the debt we were taking on.  In fact I still think that the dollar is way over-valued and the slide towards zero will soon resume.  But it didn’t happen like I expected it to happen last year.

We did have a very nice commodities boom in mid 2008 – but that turned out to be a bubble.  I still think that commodities are going to go up long term, but I “misunderestimated” (to borrow a term from our idiot President) the world-wide slowdown that happened in 2008. Oil was especially hard hit when worldwide demand fell off a cliff.

Long term, the US dollar is toast and commodity prices (as measured in dollars) must eventually go up to reflect the worthlessness of the dollar.  This is being exacerbated by the Fed’s insistence on printing up boatloads of worthless currency to use to bail out banks.  My advice is still to buy gold and silver.   Physical gold and silver – not the ETF’s.  Because when I say the US dollar is toast, I mean it.  You’ll want physical metal in your hand when our currency starts to look like Zimbabwe.

That’s a bit of an exaggeration to make the point, but inflation is going to take off at some point – it’s simple supply and demand.

I’m very happy that I moved money from stocks to a money market fund early last year.  I left 20% in US stocks, bonds, and overseas funds, and I kept putting my new 401K money into an S&P 500 index fund, so I still lost about 10% in my 401K last year.

So what’s going to happen this year?  In my opinion, the financials will drop more.  Their share values are being diluted every time the Fed does another round of bailouts – and that won’t end anytime soon.  Earnings will follow the same trend they did in 2008 – and stock prices will reflect the lower earnings.

Another side comment.  Have you noticed that stock prices tend to rise during earnings season?  No matter how bad the earnings actually are?  That’s because investors still want to believe that this is finally the “kitchen sink quarter”, they want to believe that all the writedowns and bad news are finally out there for everyone to see.  But they’ve been wrong for 5 straight quarters, and they’ll be wrong for at least a few more quarters.

After all the earnings have been reported, stocks tend to drop because everyone starts thinking that maybe it is that bad.  That the next quarter earnings are going to be even lower.  And prices drop until the next quarter reports when the cycle starts again.

If you’ve been to a mall, car dealership, or hardware store lately, you know that traffic in those stores are way down.  So are sales.  Which means profits will also be down.  So I don’t think this will turn around anytime soon.  4th quarter 2009 is the earliest that I think could bring an improvement in earnings – but that may change depending on how deep this recession turns out to be.

IF my earnings estimate ($40 to $50 for the S&P 500) turn out to be close to correct, you can expect to see the DJIA around 5000 and the S&P 500 around 500 sometime this year.  That’s another 40% drop from current levels.  So I think you’ll come out ahead by selling stocks (even after the big loss you might have taken in 2008) and putting your money into a money market account for now.  And I think putting it into gold and silver now will pay big benefits when (not if) inflation takes off.

gk

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I don’t know where to start….  Let me get this out of the way – I think the $700 billion bailout of Wall Street banks is a bad idea.  A very bad idea.  A very bad idea for many reasons.   I’ll try to explain some of them.

For starters, here’s what the Telegraph in the UK thinks of the bailout.  The headline reads: Bail-out enslaves US taxpayers Here is how the story starts:

“To preserve their [the people's] independence, we must not let our rulers load us with perpetual debt. We must make our selection between economy and liberty, or profusion and servitude” – Thomas Jefferson

There was a time, early in America’s history, when its leaders believed in financial discipline. No more. Perpetual debt, which Jefferson feared would enslave future generations, is clamped on Uncle Sam’s undercarriage like a ball and chain. US public borrowing is $9.8 trillion – and rising.

Jefferson, America’s third president (1801-09), is widely regarded as the White House’s most intellectually gifted occupant. He believed that “banking institutions are more dangerous to our liberties than standing armies“, and that “the principle of spending money to be paid by posterity … is but swindling futurity on a large scale.”

I couldn’t agree more.  But my opposition to the bailout goes deeper than simply agreeing with a long dead President about the dangers of debt.  It’s a philosophical disagreement that goes to the roots of the principals that our country was founded on.

I don’t think the Federal government should be involved in bailing out private companies – or homeowners.  We have not granted the Federal government the right to regulate executive pay, decide which companies get preferential treatment regarding loan rates and terms, or decide which group of citizens (or companies) receive direct government buyouts – or indirect preferential write offs of bad debt.

In other words, it’s unconstitutional.  I hope someone has the guts to file a suit and get the case heard in court.

So if this is such a bad idea, why do stocks rise whenever it looks like a deal is close?  That’s easy.  Stocks (especially financial stocks) stand to gain if the US taxpayer takes away their bad debt.  But we (the US taxpayer) are stuck bailing out companies (and people) who made stupid decisions.

Here’s my plan – let them go broke.  Let the companies that made (and sold) these stupid investments go broke and disappear.  Let the people (and companies) who bought these toxic investments go broke.  Kick their stupid, bought-more-house-than-they-could-afford-asses out of those houses.  Let the banks go broke and disappear.

Others – who have managed their money responsibly – will be here to buy up the houses and the toxic debt.  Yes, they will buy the houses and the debt at pennies on the dollar – so what?  Broke companies and people can’t buy stuff anymore – that’s a good thing!

We’ve been collectively living beyond our means for way too long. It’s time to get our budgets balanced – personal and government so we can pay off old debt and get moving forward again.

One other thing – the government doesn’t have $700 billion to use to bail out these stupid assholes.  We will have to borrow it.  That will increase the debt buy trillions by the time it’s paid off – and we already owe over $10 trillion at the federal level alone!

I’ve emailed my congressman and senators to let them know how I feel.  I encourage you to do the same.  Speak up – maybe we can stop this crap before it gets passed.  If you don’t email, call, or fax your representative – shut the fuck up and don’t bitch about the economy, congress, or Wall Street.  You’ve forfeited your right to complain.

gk

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Ok, any opinions on who’s going to be the GOP candidate?  Since I think the federal government does way too much anyway – things that it doesn’t have the Consitutional authority to do – I’m thinking Ron Paul is getting my vote on February 5th.  I especially like his thoughts on monetary policy, and I agree that we should get rid of a bunch of agencies in Washington.  

 I’m curious to see what opinions I get here.  It’s a brand new blog, so there’s no history to plow through to see how others feel – tell me what you think.  I’ll post something later which tells a bit about me, my background, and why you should give a damn about what I think.  

gk

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