A Financial House of Cards

In the world of high and low finance there is a wonderful concept known as The Greater Fool Theory.  In a nut shell the concept is this: there will always be a bigger sucker out there to buy from you the investment you just bought – and at an even higher price. Surely based on the famous P.T. Barnum dictum “there’s a sucker born every minute”, this theory has sadly been the underlying premise for far too much of the US economy.

For years many have said that the highly leveraged US economy would eventually crumble under the weight of its own debt. Being from up there, we did not take any joy in hearing this – but we knew they were correct. That the great free market was anything but that was blatantly obvious as the Federal Reserve endlessly tinkered with interest rates to stave off disasters and bail out robber barons. And it was equally chilling that fundamentals — real earnings, real growth, real investment — had been long abandoned and replaced with a passion for hocus-pocus derivatives and phantom quarterly profits. The house of cards would inevitably have to give. And so it has.

Witness the collapse of the sub-prime mortgage market, the Dow Jones’ and NASDAQ’s series of plunges, SIVs (structured investment vehicles) living up to the irony of their acronym as money gushes through their holes, oil nearing $100 a barrel, gold at a 30 year high (up more than $150 per ounce in just the last 6 months to over $ 800 and still climbing), General Motors posting a $39 billion net loss for the third quarter, stalwart investment houses Bear Stearns and Merrill Lynch on the brink of insolvency, the dollar at a 15 year low. . . .

I could go on but the train-wreck is just too long. What started as a credit and housing crisis has been found to infect every artery of finance. The markets have never seen a financial typhoon of this magnitude before. Mortgage lenders, homeowners, banks, hedge funds, bond insurers, butchers, bakers and candlestick makers will all either go under or feel the bashing of this freefall. Trillions of dollars, that’s with a “t”, of asset value is about to vanish from the face of the globe.

And there is going to be a quick shift of who is the big dog on the street. The world might put up with a barking mad fool when it’s got cash spilling from its pockets, but when it comes with its hand out for a dime, that’s a different story.

If you read the news daily perhaps you have been numbed to the collective weight of what is actually happening. But this is bad, worse than the stock market crash of 1987, worse than the dot.com rupture of 2000 – worse because the US economy is getting hit with the double whammy of simultaneous deflation and inflation: the price of certain key commodities are skyrocketing while the most important asset to the average US citizen, their home, is plummeting in value – to date it’s the biggest  percentage drop in home prices nationwide in 16 years, and by all reckoning the bottom is a long way off. When things fall apart the Reagan “Trickle Down Theory” really works, and with geometric velocity. All that free cash floating around to buy SUVs and i-pods and trips to Vail – not to mention paying that first, second, or third mortgage – just isn’t going to be there. As usual, those with the thinnest safety net are going to get hit the hardest.

Moreover we can expect the trickle of economic woe to head our way. As new housing construction comes to almost a complete halt, remittance dollars sent home by Guatemalans to their families will diminish rapidly. According to the World Bank 10% of Guatemala’s GDP comes from remittances; and for many poor families remittances account for up to 50% of their income.

And hey kiddies, guess what, there does not appear to be a knight in shining armor on the horizon. The fairytale that the economy has been won’t have a happy ending. Though the Fed is sure to try it, the past Greenspan gasoline on fire approach of easing credit will be virtually impossible this time round. Bad debts are virtually everywhere, no one wants the dollar, and we’re in the middle of money sucking war in Iraq. Bernanke’s balls are in a sling and god help the next president who will inherit this disaster. She better start thinking this one through now.

Man, ain’t I the Grinch who stole Christmas? Sorry.

So what is one to do?

I say drink and laugh in the face of disaster. So I will end this on a lighter note as I pour myself a Kamikaze.

Recently it was reported that confidence in the dollar has reached such a low point that, though still officially the world’s reserve currency, it apparently cannot purchase the services of Brazilian super model, Gisele Bündchen.  Gisele, who has shown she has brains as well as beauty, demanded the $30 million she earned during the first half of this year to be paid in euros. You go girl.

Of a like mind, and no investment slouch – but not nearly as easy on the eyes – Jim Rogers, a former partner of billionaire George Soros and professional short seller, is reportedly selling his home and all possessions in order to convert all his wealth into Chinese yuan.  If you have not had the misfortune of seeing Jim Rogers in an appearance on a television financial program, he wears seersucker suits and bow ties. Why anyone with all that money, or anyone at all for that matter, would want to dress like Orville Reddenbocker is beyond me.

Survival Tips for those from the USA:

-Marry a European.

-Learn Chinese

-Go long on KLEENEX

-Move to Cash.  (We can’t find it on a map, but we hear that it has nice beaches.)

-File for bankruptcy before they make it illegal.

-Liquidate now.

-Buy back….?

-Drink Heavily

-Look at all that crap you thought would make you happy.

-Drink More.

-Divorce your European wife.

-Remarry with a Brazilian Supermodel.

-When traveling, say you are from Canada.  To be convincing, say “Ay” every few words and brag about how good your weed is.

-Renounce all your possessions, sell everything and send a check to Café No Sé, we’ll open a bar tab for you.

John Rexer is a Bar Owner familiar with financial woes. He knows not of which he speaks and is prone to mixing his metaphors. He can be reached at Café No Sé. He’s the one throwing glasses.  Duck.