Basic Math

[StinkerBell]

I am trying to understand some of the Presidents recent reasoning I have heard of late. Lets see if I got this. We have outrageous debt. for the sake of character space here lets say it is 1000. He is going to get us in more debt, bringing our debt up to 9000. But he promises to have the new debt cut in half by the end of his term, which will be 4500. Hmmmmm seems like we will be worse off if my math is correct.

[ScottA]

I see I wasn't the only one who picked up on that.

[peternap]

Sure is nice to see other people NOT understand.
Doesn't look like the Stock Market understood either.

[StinkerBell]

It is good to know I did not imagine what I heard. Because the response by others was indicating to me that I need to retake math.

[bayview]

And yet, the sheep still follow . . .

[StinkerBell]

I do find it funny how they keep going on an on about how expensive the Iraq war has been and how much debt it has built up. Yet that has been over 7-8 years. And in one month the Democratic controlled Washington has spent just as much.  The debt is for differnt things, but it is still debt.

[muldoon]

well the math does work, but he just wasn't entirely truthful about what the variables are. 

CDS or credit default swaps tell alot about credit risks. They tell the amount of premium an entity must pay to buy insurance against failure.  One can use a CDS rate as a good tell to find who the market thinks is risky.  The market is usually right about these things.  Our swap rate is at an all time high, and has been rapidly moving up in the last few days. 

Here are some of the others .. go to http://www.debtorsprisonblog.org/ and see some for yourself.  Actually very good blog and worth a looksee on it's own. 

Italy 194.7
UK 166.5
Sweden 160.8
Belgium 157.8
Netherlands 131
US 100
France 96.9
Japan 95
Germany 91.8 was 70 on 2/13

---
The US pays 100 basis points today, it was 80 on Friday.  It rose 25% in 2 days.  Here is what that means, the COST of government borrowing has increased because the perceived risk of an all out US GOVERNMENT default has increased 25% in the last two days.  For historical context it was at 6 in April 2008. 

---
Today was the 5year bond auction day.  5 year came at 1.98 / now at 2.01,
look at out ten year.  up big today. 
http://ichart.finance.yahoo.com/b?s=%5ETNX  (when the market was down?)  humm.. that would be odd. 

..
the bottom line is very clear. 
we are selling a larger and larger amount of debt to a market that has a decreasing appetite for risk.  as we continue to acquire debt that we cannot manage our risk of default increases.  as risk rises so does the premium for others who borrow.  Trimming the deficit has everything to do with math because the cost of that deficit is going to increase.  The math does not lie. 

There is no printing press, the printing press was the banks (fractional lending) and it has been demolished.  Now we are watching the reverse of a printing press. 

[Squirl]

The actual current debt of the U.S is around 9 trillion.  The stimulus costs around a trillion and then if he reduced it in half it would be around 5 trillion.  We have already spent over $1 trillion in Iraq without getting squat in return.  Once you plug in the numbers it doesn't seam that bad.  We have been deficit spending by half a trillion a year, mostly on wars, if we could cut that out, we would have a lot to spend on our own country.

[muldoon]

Just an oddity on CDS and basic math. 

The us government bonds trade at 100 basis points while campbells soup trades at 46.  The collective risk pricing mechanism of the bond world believes it is far more likely for the us government to fail and completely stop paying their bills than campbells soup right now. 

Basic math expressly demands that spending be cut.  Obamas claim to cut deficit spending is not hollow, it is self preservation.   

[lonelytree]

Self preservation followed by massive tax hikes? Double digit inflation?

Me so scared..... I am staying with a job that I am really starting to despize with few "unwritten" benefits and way too much drama.

[apaknad]

muldoon,

i just inherited some money from my mothers estate. it is in a conservitive investment plan that lost $20,000($75 to $55). the plan manager was out to my house yesterday and is making 2-3 new plans and directions for me to see. i asked him if i could close the account, take the money and put it in my credit union and sit on the sidelines until things looked a little better. he said yes and it is not counted as taxable income. i asked him to look into gold also. he mentioned that G.E. was paying 14% returns right now which is really good. i would like to know what you think about my situation and any suggestions. this is the only money i have but i also get a pension, disability and got my first S.S. check today so i have a decent income but that is my only savings.
dan

[apaknad]

muldoon, i forgot to mention that i also inherited a 1200 s.f. house w/full basement that is paid for so i have no rent/mortgage payments(i am in the process of remodeling and sprucing up before i move in on april fool's day). i want to hear your take on my situation to add to my decision making process.

thanx, dan

[peternap]

muldoon,

i just inherited some money from my mothers estate. it is in a conservitive investment plan that lost $20,000($75 to $55). the plan manager was out to my house yesterday and is making 2-3 new plans and directions for me to see. i asked him if i could close the account, take the money and put it in my credit union and sit on the sidelines until things looked a little better. he said yes and it is not counted as taxable income. i asked him to look into gold also. he mentioned that G.E. was paying 14% returns right now which is really good. i would like to know what you think about my situation and any suggestions. this is the only money i have but i also get a pension, disability and got my first S.S. check today so i have a decent income but that is my only savings.
dan

While your waiting for Muldoon, what they are paying is $1.24 per. That works out to 13,70% right now. I haven't done my DD on GE because I'm not really interested now...and even if I was, I wouldn't be arrogant enough to give stock advice.

Look at GE's 52 week spread. $38.52 to $8.53. What if it drops to $3.00 for some reason?

I didn't look at the X date but that $1.24 is subject to change and companies offer High dividends as incentives to customers that would not buy otherwise. GE is a fairly good Company as Good Companies go these days....but these are not stable times. I have always disliked gambling with money I didn't expect to lose.

Gold....again you need to look at the price $944.60 I think. I was at the farm all day and didn't watch any news) That's pretty high. I think it will go up, but how long it will stay depends on a host of variables.

Lots to think about

[muldoon]

muldoon,

i just inherited some money from my mothers estate. it is in a conservitive investment plan that lost $20,000($75 to $55). the plan manager was out to my house yesterday and is making 2-3 new plans and directions for me to see. i asked him if i could close the account, take the money and put it in my credit union and sit on the sidelines until things looked a little better. he said yes and it is not counted as taxable income. i asked him to look into gold also. he mentioned that G.E. was paying 14% returns right now which is really good. i would like to know what you think about my situation and any suggestions. this is the only money i have but i also get a pension, disability and got my first S.S. check today so i have a decent income but that is my only savings.

I forgot to mention that i also inherited a 1200 s.f. house w/full basement that is paid for so i have no rent/mortgage payments(i am in the process of remodeling and sprucing up before i move in on april fool's day). i want to hear your take on my situation to add to my decision making process.

thanx, dan

Dan, first off, I am truly sorry to hear about the loss of your mother. 

Second, I want to be completely open and up front that I am not qualified to tell anyone what to do with their money.  I personally do not wish the guilt associated with losing someone elses money, especially their savings, even moreso that it is a store of wealth of a loved ones lifes work passed on to them.  I do not exactly feel very comfortable telling anyone what to do.  But you have asked my to offer my opinion, so thats what I'll provide. 

With that in mind, I can not tell who how to invest it to make a profit.  While there may be some good buys out there, there also are some large risks associated with them.  The only thing I can offer you is an honest opinion about how to keep that money safe, and how to preserve the spending power of those dollars going forward.  It is my opinion on what to do for safety. 

GE bonds are scary as hell to me.  There is a very good reason they are paying 14% and that reason is that their risk of default is high.  If GE defaults or bankrupts, you lose 100%, everything.  In the same token, GM was offering 21% last year and I thought the same thing - their dead.  Thats death spiral financing.  How can they borrow money at a high rate, lose money every quarter, and pay it back?  Maybe the government will step in on GE's behalf -- but I would not touch it. 

A news tidbit from reuters on the 24th shows that GE is paying 695 basis points above spread to sell debt.  http://news.google.com/news?hl=en&q=GE CDS swaps&um=1&ie=UTF-8&sa=N&tab=wn

A similar report from last September shoed they had 250billion in debt, http://www.reuters.com/article/businessNews/idUSBNG24299520080918?feedType=RSS&feedName=businessNews

.. yeouch.  no thanks in this environment.

Second, you also mentioned gold.  Gold is at a high right now.  Gold has completely stopped trading as a commodity and began trading as a currency.  That being said, buying gold scares me.  I am sure others will disagree with me BUT I can certainly see a chain of events that drives gold back to 300 as easily as I can see a chain of events that drives it to 3000.  I truly believe that the most important force at play right now is the deflationary spiral.  Within that, it holds that all assets fall in price because the amount of dollars (credit) decreases which drives prices down.  (Consider stocks, houses, cars, dvd players, whatever to see this in effect).  At some point, I believe there is large potential for that price mechanism to also impact gold.  While I wouldn't necessarily sell what I was holding today (if you are already holding it), I would not try to put any serious amount of wealth into gold.  I COULD BE WRONG, and if I am I will eat it on this because I simply wont enter into something that doesnt "work" in my head.  gold doesnt.  sorry. 

If you do wish to chase gold, dont use the GLD or any other "paper" holdings.  The only gold play that makes sense is to buy it and physically hold it.  The only way gold really pays off in the end is if there is a huge collapse and if such an event were to occur - paper would be worthless.  If you feel that gold is the answer, get metal and a safe, or a shovel and a GPS. 

--
So what do I think is a good store of value in a deflationary environment?

1) reduce debt.  removing obligations helps provide you with a better footing and more self reliance.  It removes risk from your life.  If you have any revolving debt (credit cards, etc) especially, then cars/housing/student loans, mortgage, - pay them off.  A true "financial advisor" will never tell you this, they will say it is better to make the 14% and pay the 7% interest.  I would say that removing liabilities and increasing assets is always a good idea.  reduce overhead (bills, fixed costs, interests), increase assets.

2) cash is king.  pick up a newspaper, go to craigslist.  I saw a John Deere 4210 tractor today with fel, 5' brushhog and post hole digger for 6500.  Someone is hurting.  That tractor with those implements was 19k 2 years ago.  While I do not particularly enjoy taking advantage of others in their time of need, the fact is that the sale is mutually beneficial.  As prices fall, you can certainly be positioned to buy some things for literally pennies on the dollar. 

To see this in "economic terms" watch the INO USDX chart, which tracks the value of USD currency.  It's been going up for quite some time, but you dont have to watch that index to know that your dollar today will go further today than a year ago if you shop around.  I do not believe that this will be turning in the immediate future, but will watch the situation closely and comment (LOUDLY) on this very forum if it changes. 

To take advantage of such a diversion, split your money across 4-5 banks in the area equally.  Leave it in a liquid (spendable) form.  When something is up for sale that you want, buy it.  I wouldn't buy with intent to resale just yet as we are not close to a bottom in my opinion.  But, a good deal is a good deal. 

3) Lastly, invest in yourself.  I learned a long time ago not to invest in companies but to invest in people.  That means that it is 100% ok to put money into yourself if you think it will pay off later.  Going to college or school is an example.  For me, putting a few grand into insulation in the attic, replacing lights with fluorescents, gardening, water efficiency, security improvements, etc.  Put some of that money into tangible assets that will return a lower cost of ownership on your house.  For example, (just example) spending 5k on a new air conditioner will repay 10k over 4 years.  Good investment, better than any bond for sure.  Take a look around, you may find lots of things you "could" spend money on to better your situation. 

Dan, again - these are just my opinion.  I would try to play it safe, to position yourself to take advantage of opportunity as they present themselves, to keep your dollars safe (not a single bank, well under FDIC limits at any single bank),  to spend the money locally with yourself as the beneficiary of the dollars spent.   I wouldnt put a dime in the stock market or bond market right now. 

[StinkerBell]

You guys have just ruin the simplicity of my basic math....

[apaknad]

good advice from you and peter,
i would never hold either of you or anyone else on this forum accountable for my decisions. just looking for a sounding board and some brain pickin'. being by nature a contrarian, i think gold will probably have a tendency to go down for awhile. but you never know. that being said i have bought more long term storage food and ammo,(can't eat gold if know one can or will trade w/you. i would not chase gold at this point and agree w/taking physical possession). the house was upgraded by mom with new roof, kitchen, windows, insulation(i think she did it for me as well as her). she was very good w/money and a poor farm girl that went through the depression as well as a "rosie the riveter" in WWII(put together the aft section of B-29's in detroit to be shipped to one of the plains states for final assembly) and thank you for your kind words.
i have one major loan(truck@$24,000) and i just negotiated the interest rate from 12%(bruised credit) to 4%($540/mo. to $408/mo.). a good rate but i was thinking, if i paid this off in cash, i could easily save $24,000 in two years as opposed to paying on the truck for six years.
right now i am leaning towards closing the account and putting the money in the credit union esp. since it was set up by mom and her atty. to be not counted as income against me. she was a smart gal and very strong/brave in the face of the inevitable(uterine cancer, no chemo for this 93 y.o.).
thank you to all for advice and condolences. dan

[Squirl]

Paying off debt is almost always better in this environment than any return you can get on an investment.  The only debt that might be different are mortgage payments or student loans because of the tax deductions.  4% is a good rate for debt.  If that is your only debt, I wouldn't worry as much.  Again, that is only my two pennies worth.

P.S. My condolences for you loss.

[peternap]

I've been gone all day again but I think GE cut It's dividend.

YEP! Sure did!
http://finance.yahoo.com/news/GE-cuts-quarterly-dividend-to-apf-14501124.html

[apaknad]

thanx squirl, your 2 cents are worth alot to me.

[muldoon]

and today, GE went to the dogs.  those investors will never a penny of that 14%. 

NEW YORK, March 2 (Reuters) - Sellers of credit insurance on General Electric Co's finance arm were asking to be paid on an upfront basis on Monday, a sign of greater perceived risk after a rating agency threatened to cut its "triple-A" rating. Five-year credit default swaps on General Electric Capital Corp were quoted around 8.5 percent upfront, meaning it would cost $850,000 in an upfront payment, plus $500,000 in annual payments to insure $10 million of GE Capital debt, according to data from Phoenix Partners Group. On Friday, it cost $710,000 a year to insure $10 million of debt. Moody's Investors Service on Friday said it may still cut GE's "triple-A" rating after the conglomerate said it plans to reduce its dividend by 68 percent, saving about $9 billion a year.

http://www.cnbc.com/id/29467394/site/14081545/for/cnbc/

[glenn kangiser]

Thanks for the opinions, guys.

[bayview]

 
   I'm getting paranoid !!!   

   Gold has lost about $100.00 in the last week.  From a high of about $1000.00, to $901.50 today. 

   Muldoon - may be right as it spirals to $300.00

   Precious metals are down, stock market is falling apart, real estate is on the decline.

   Now they are talking about a total collapse.  Martial law . . . We will living in the stone age . . .

   Someone, give me some hope . . .   (Don't you dare say O---a)

   Now, possibly the FDIC insurance will fail . . .
http://www.bloomberg.com/apps/news?pid=washingtonstory&sid=alsJZqIFuN3k

[muldoon]

bayviewps -

Dont panic, it's going to be ok. 

Yes, in a deflationary spiral -- all asset classes devalue.  It is the proverbial "no place to hide" situation.  The game goes from return on capital to return of capital.  BUT, money still flows. 

FDIC failed last year.  Which is why the bailout in October tied the FDIC to the treasury.  The fdic will be valid as long as the government is functioning.  If such an event were to occur, the possibility exists that dollars would not be worth much anyway, as a dollar merely represents a promise of the us government to repay the debt.  This is not a certainty, even if it is in the cards, it wont be imminent. 

Here's something to give you hope.  Everyone who loved you a week ago still loves you today.   Here's another one, it helps me sometimes.  I like to read, I read all kinds of books.  Science, philosophy, arts, music, religion, everything.  Anyway, I was reading an article written by a psychyatrist who was discussing the meme that what people need are three things to be happy.

1) something to do
2) someone to love
3) something to look forward to

And I got to thinking about that, and how many unhappy people I see these days and pondering if it was a crock of .#$ article or not.  As unemployment ramps, number 1 breaks down, or at least the fear and uncertainty does not build confidence.  As stress increases everywhere, our relations take a hit and number 2 decreases.  Finally as the doom and gloom mount in every media we encounter all day long number 3 can certainly take a beating. 

And that got me thinking about something else.  Now, I realize this forum has all kinds of members from all walks of life with different beliefs.  So feel free to take this or leave it. 

John 14, http://www.christiananswers.net/bible/john14.html go read it if you dont already know it. 

Dont let your heart be troubled.  Believe in me, love me, love your neighbor, and look forward to the goodness it brings.

That addresses all of those 3 things above, something to do - believe.  someone to love - god, jesus, family, friends.  something to look forward to - kingdom of heaven. 


It may not be for you, but if your looking for some hope you cant do much better than prayer and faith (with a little honest soul searching mixed in as well). 

[Sassy]

Hey, thanks for posting that, Muldoon - great chapter 

[Squirl]

I'm not worried about gold.  It has gone from 700 to 1000 to 800 to 1000 to 900.  I consider $100 swing volitility.