No, the title is not about another stock market crash - it's about crashes in the past. This one is a one-pager about the Nikkei Index collapse that began in the early 1990s. I remember being in college at that time, and the Japanese stock market was going absolutely nuts (on the bullish side). I think it got to nearly 40,000!!!

Only to fall to less than 10,000 and stay there for over 15 years!

By the way, the site below has articles on a handful of financial crises that have occurred over time. They're worth studying because there's one sure thing:

Humans aren't very good at learning from our mistakes. In fact, it's highly likely that we'll repeat them again and again. Often times, we make the same mistakes over, but bigger and more catastrophic.

The Nikkei Bubble

Money isn't everything. It's the only thing. Wait. That's only for football.
Enjoy life. Spend time with your family.

The stock market has rebounded quite well since it hit the 6,000 range (Dow). The question is, will the rise continue, or will it stall. OR worse yet, is this the classic "dead cat bounce?"

It all remains to be seen, of course. Too soon to tell. But I'm going on record to say that this, even with today's announcement by the Fed that it's officially fueling inflation by printing money, is not a dead cat bounce.

Oh, the market may tumble for a few days. But I think we've bottom. Just note that the bottom of the ocean has peaks and valleys, too, and that we might see 6,000 again. We may be here a while. But we're not gonna go any lower than 6k.

In fact, it is my gut feeling that we're on the upswing. I believe the end of this decade and the first few years of the next decade will be banner years for stock markets all across the land.

After all, we're at levels here in the US that we haven't seen since the mid-90s. The housing, credit, and mortgage messes weren't even in place then.

So we've fallen further than logic would dictate. John Hussman, in his newsletter, says,

As for the stock market as a whole, I continue to view the market as undervalued, but not deeply undervalued. So over the course of a 7-10 year holding period, I do expect passive buy-and-hold investors in the S&P 500 to achieve total returns somewhat above 10% annually.

But he also says,

Shorter-term, however, investors may demand much higher prospective long-term returns in order to accept risk, and that's a problem, because the only way to price stocks to deliver higher long-term returns is to drive prices lower.

After all, even a dead cat will bounce.

Money isn't everything. It's the only thing. Wait. That's only for football.
Enjoy life. Spend time with your family.

I've seen a lot of stories about what caused the Mortgage Meltdown, the Credit Crunch, and the recession (some are even calling it a depression). On the drive in today, the REAL answer finally came to me.

As in all complex things in life, there wasn't one specific cause. Here's my general thought process on this topic.

People who want to get to the root of any cause always use a root cause analysis to determine the true cause of any issue. One of the practices that process improvement folks use is the fishbone diagram, where if you keep asking "why?" to a question you'll get to the root of it.

But this simple approach often neglects the contributing factors to an issue or a failure. For example, a barn might have caught fire and burned to the ground. The root cause might have been determined to have been a spark from a passing-by freight train.

But the contributing factors were that there was damp hay in the barn, along with kerosene, dry timber, a poorly-maintained exterior, and weeds that had grown rampant over the course of several years.

All of these things led to the fire. Of course, the fire could not have started if not for the spark. But the weeds, hay, timber, etc. allowed the fire to spread at such a rate that the fire crew could not stop it before the entire barn burned down.

Such is the case with the economy. There were many contributing factors: Declining home values, rising bad debt, companies trying to stay afloat cutting staff, phoney financial instruments dreamed up by mathematicians rather than business folks, etc. The list is literally endless.

But what was the root of it all?

As in any mania, it was the madness of crowds. Adam Smith's "invisible hand" and "pursuit of self interest" was the downfall.

Home buyers thought, "If I don't buy this house now, somebody else will."

"Or, if I don't buy this house today, it will cost me $60,000 more to buy this house in 6 months." (By the way, this was the rate of price appreciation for a below-median home price in the Bay Area in California in 2003-2006.)

Lenders said, "If I don't fund this mortgage, somebody else will."

Insurers surmised, "If I don't insure this asset, somebody else will."

Bottom line:

If I don't _____ this, somebody else will!

It was all about getting "it" before somebody else got "it." Or, in other words, what I call "relative greed."

It wasn't that everybody was greedy, in and of itself. It was more along these lines:

Scenario 1

You get a 10 percent pay raise. Your neighbor gets a 15 percent pay raise.

Scenario 2

You get a 5 percent pay raise. Your neighbor gets nada.

Do you know which one most people would take? Yeah, #2. It's getting "more" than your neighbor, co-worker, competitor.

That's what happened here, in my humble opinion.

It's also "the market" filling in voids. If Bank of America doesn't do this mortgage, Wachovia will. And Wachovia did. And did, and did and did and did.

BofA saw this and said, "We're losing market cap. And we're the biggest and baddest bank around." So, they got into the game, and then some!

People did it, too. If I don't buy a house now, I may never be able to afford one.

"Investors" did it, too. If I don't buy this duplex now and flip it, I may never get another golden opportunity like this.

Do yourself a favor: Read Extraordinary Popular Delusions and the Madness of Crowds You only really need to read any one of the stories. They're all the same, really.

Market goes up and up, creating self-fulfilling prophecy. Something happens. Market goes down and down, creating self-fulfilling prophecy. What stops it? Who knows?

Money isn't everything. It's the only thing. Wait. That's only for football.
Enjoy life. Spend time with your family.

That's my "bold" prediction. The basis for this? The increased FDIC insurance on bank deposits of $250,000 laspes on that date, as if everything will be fine by then.

Don't count on it! There's a lot more downside to this economy, I'm afraid. But now might be a great time to get your ducks in a row and be ready for the upturn. It will happen just as things look their worst.

Money isn't everything. It's the only thing. Wait. That's only for football.
Enjoy life. Spend time with your family.

With all the talk about the souring economy, job losses, bank failures, and the like, the recession of 2009 is on the minds of everyone.

But I'd like to posit that we never fully recovered from the recession that officially spanned 2001-2002. And that, my friends, puts us into a possible discussion of Great Depression proportions!

Now, before you run off and withdraw all your money from the bank and bury it in your back yard, hear me out!

Typically, after a recession, jobs, sales, and revenues (as well as profits) rise, most often quite rapidly.

Didn't happen last time.

Here's a picture to illustrate what I'm trying to describe. The red arrows represent the year of the respective recession. See how unemployment rises after a recession, then drops until the next one, from 1991 to 2001? And see how the unemployment rate dropped below the rate during the year of the previous recession? That is the typical behavior of the labor market. But look at what happened from 2001 on.

Now, I'm not saying we're in another depression. But we're approaching Great Depression longevity, if not to the same depths. The Great Depression started in 1929, the economy made a few attempts at reviving itself, and then WWII came along. America wasn't fully involved in war preparations until 1941. So we're talking 12 years, at the most.

For this last round of economic downturns, the duration has been 9 years. We're getting there.

Of course, we've yet to see 25 percent unemployment. But also remember that we fudge the numbers nowadays, and there's a different sort of mindset for what constitutes "employment." In the 30s, if you didn't have a full-time job, you were unemployed.

Now, if you're no longer looking for work, you're not even counted. Perhaps you've been out of a job for 3 years, got fed up, and started selling all your worldly possessions on eBay. You're no longer "unemployed." This set of circumstances didn't exist in the '30s.

So, I'd say that whatever level of unemployment you see today, raise it by 30 to 50 percent. Yeah, I think it's that bad. But even at an official 8 percent, we're no higher than 12 percent. Not that that's a good thing. But it's not 25 percent, either.

However, for some pockets of America, where there's 12 or 13 percent unemployment (take San Joaquin County, California, for example, where home foreclosures are at all-time highs), that figure could easily be over 18 percent. I submit to you that those folks feel like they're living in a depression! If you don't believe me, ask them!!!

One last thing: If we hadn't spent $1 trillion on a war (or something else, for that matter), the economic picture during the 2000s would be even bleaker.

I said all that to say this: We got out of the last depression and we'll get out of this one (whether you believe it's a recession or depression).

But our way of life may have to change and that in itself may be the most uncomfortable part of it all.

Jobs you would have never considered before...you may now consider. Wages you hadn't thought about since high school...you may now reconsider. Hours you thought were only for hookers and security guards...they may be under consideration!

Things "I cannot live without" - you may have to live without them (like computers, cell phones, video games, cable, the list is endless).

All of this will break up some families and ruin lives of countless people. But the silver lining is that dire situations may bring us closer, may give us thought for conserving what he have, and give us a greater appreciation for all those things "I cannot live without" once we get some of them back.

It's a bitter pill to swallow. But swallow it we must.

One last thought: There may never be a better time to go out on your own. Consider starting your own business. The Internet being what it is, with low overhead costs, fast deployment capabilities, and only your own mental limitations ("I can't do it," "I don't have time," "I am not that smart" among thousand of other excuses), the sky literally is the limit to your income potential.

It may not come fast, but it will come. And in the end, you'll have more time, more money, and less stress. Get some ideas here. No pressure, no strings.

Money isn't everything. It's the only thing. Wait. That's only for football.
Enjoy life. Spend time with your family.

This is classic! Microsoft apparently "gave too much" in severance to some (all?) of the employees it recently laid off. Of course, this was the first mass layoff MS ever did, so they didn't have any practice!

Not sure how I feel about this from the employees' perspective...it would seem the ethical thing to do to give it back. But sheesh, MS, can't you make your internal software work right?

Microsoft seeks money from laid-off workers - U.S. business- msnbc.com

Microsoft, lay offs, severance, overpaid

Is this anything like Mutual of Omaha? As a kid, I looked forward to every Sunday afternoon and the wildlife show...

No?

Oh well, pretty cool anyway!

Bank of Obama: Send a Bailout Check to Your Friends

As the Mortgage Meltdown spills over into the Credit Crunch and recession, most of us who own homes (or at least live in homes where we pay a mortgage) have seen the value of our home decline precipitously. Where prices rose the highest and the fastest, they've come down the farthest and the fastest. In some areas, real estate values have dropped by over 50 percent.

Side note: If you can get a loan, start thinking now about buying a home if you don't already own one. Prices may drop further, but not by much -- if, that is, the economy doesn't go into free fall. If it does, all bets are off.

In trying to cope with falling values, I suggest you look at your house purchase as a two-part purchase, the first being the intrinsic value of the utility a home provides (shelter), the second being the investment value.

I submit to you that in years past (prior to the run-up in house prices), the investment value of your real estate purchase was trivial, whereas the past few years it held the majority component of your purchase.

Let's use an example. The discussion below assumes you paid cash, for simplicity. Nobody does this anymore, so the leverage is much higher, and your return on investment is considerably higher than this cash method suggests. Keep that in mind.

Say you bought your house in 1990 for $100,000. Back then, in a "normal market" you could expect the value of your house to rise by 2-5 percent (depending on where you lived). I'd estimate, then, that 95% or so of your mortgage was the intrinsic value of the shelter you purchased, and 5% was the investment component. So, if your $5,000 "investment" rose in value to $105,000, you made 100% on your investment.

Not bad. In fact, excellent!

But how much did your "shelter" component rise? Let's say rents rose by 2% in a year. In a market where rents and mortgages were in line (we'll call it equilibrium), the value of your shelter, by definition, rose 2%. That is to say, if you could rent out your house, you could rent it out for 2% more this year than last.

So, in fact, the gain on your $105,000 house was $3,000 investment and $2,000 intrinsic value.

Still, a 60% gain on your "investment." Not bad at all.

Fast forward to 2005.

Your $100,000 house is now $500,000. If you bought it in 2005, I'd estimate that your investment component was around $390,000! In other words, at 2% per year growth in rents, your shelter component is only worth about $110,000!

That leaves a lot of room for investment losses!!!

In fact, if house prices fall by 50%, it is my contention that your shelter component barely moves. If anything, it has risen, simply because rents should be increasing as everyone moves out of "too expensive" homes to apartments -- the demand for rentals has risen dramatically through this mortgage debacle.

So, if your house declined in value by 50%, down to $250,000, I am suggesting that all of it was comprised of the investment component.

But, the intrinsic value of your house has risen.

I know, money is money. And you've lost a lot. But if you felt that your house was worth $500,000 in 2005, what makes you value it any less today?

Your loss is only on paper. If you truly believed that your home was worth the half a million dollars you paid for it, then it truly has gone up in value since then.

Of course, you cannot realize that gain right now. Or for quite some time for that matter.

Think of your house for a moment as you would the purchase of a stock. There's the future cash flow (dividends) and the capital appreciation. If the stock does not rise in price, but keeps paying out the same dividends, it's still worth what it was when you bought it.

It may be worth more to somebody else right now, or it may be worth less (this is all based on price). But to you, it is worth just the same.

If the price falls on the stock, yet the dividend remains the same, then isn't the stock intrinsically worth more?

That's what I'm saying about your home.

On paper, you may be suffering a "wealth effect."

But in real life, your home is providing the same utility today as it did when you bought it. In fact, it may be providing more. Rents have not fallen, they've only gone up in the real estate "collapse." Therefore, the shelter component of your purchase is worth more today than yesterday.

It is only the investment portion of your purchase that has taken a beating. Try to set that aside for a while. In time, you will recoup your investment, and then some.

Especially with the rapid inflation the Fed is building into the system. Don't be surprised, if in 5-10 years, your investment will be reaping positive returns!

Money isn't everything. It's the only thing. Wait. That's only for football.
Enjoy life. Spend time with your family.

President Obama and his team are in the midst of designing a plan to reduce mortgage foreclosures. A big part of the plan is to give some relief to existing homeowners (or, more appropriately, people who live in houses that were purchased through borrowed money called mortgages. Not many people really own their homes) by making loan modifications for "responsible homeowners."

Before you get your panties in a bunch (they borrowed too much money in the first place), let's just think about this:

As your neighbor loses his house, and the value of that house declines because the bank that now owns the house doesn't want it and sells it low just to get out from under it, what do you think is happening to the value of YOUR house?

As almost everything goes in economics, Adam Smith's "Invisible Hand" is at work! People do the things they do for self interest.

So give this one a try: If your neighbor can somehow keep his house, it won't decline in real value (it may decline in perceived value), but until it hits the market, "comparable sales" will not show a decline in your neighborhood, and that's GOOD FOR YOU!!!

Stop foreclosures --> stop bad loans --> start credit flow --> people buy stuff


Got that? 

Money isn't everything. It's the only thing. Wait. That's only for football.
Enjoy life. Spend time with your family.

The story below takes the reader on seriously scary ride.

It's about the economy and how it nearly collapsed. I am not so sure that we'd be living in Escape from New York or Terminator land, but estimates of $5.5 TRILLION being pulled out of a $11 Trillion economy scare the snot out of me.

Zero Hedge: How The World Almost Came To An End At 2PM On September 18

In perhaps the biggest stimulus program EVER considered, Congress is mulling over a plan to spend over $800 Billion, none of which it has. Kinda what got us here in the first place...

"Congressional Democrats are planning a stimulus package with a price tag that could approach $800 billion over two years. It will include a tax cut, aid to state governments and funding in five main areas: traditional infrastructure, school construction, energy efficiency, broadband access and health-information technology. Meanwhile, top Republican lawmakers are positioning themselves as guardians against excessive spending rather than outright opponents of the Democrats’ plan." (from Scottrade's "Tomorrow's News Today")

I like their style (I say this facetiously)! Seriously, I think the right things are getting the focus. Our decrepit infrastructure is in serious need of overhaul, and in this classical Keynesian economy, it's high-time the federal government talked seriously about a stimulus program.

I know, we don't have the money. But it's in this time where the government has to step in and take the place of private investment (who's doing NOTHING to help resolve the issue).

Once it's apparent we're heading out of the woods, the government then needs to step out of the picture and let private enterprise reap the benefits. That growth will undoubtedly trickle down to the individual level.

Might as well spend some dough on education, alternative energy, and the like. It's all on the table.

What do you think? Tell me in the comments.


Money isn't everything. It's the only thing. Wait. That's only for football.
Enjoy life. Spend time with your family.

Here's a good primer on how our financial system is supposed to work. Could be very helpful in figuring out what's currently going on as well as finding out what went wrong.

Fed101

Lehman Brothers cost of failure to foreign entities said to be $300 billion. Astounding.

The financial fallout outside the United States from Lehman Brothers‘ bankruptcy has been about $300 billion, the head of Germany’s financial regulator said on Monday (October 13 -- I'm a little behind in my reading).

Lehmans Failure Said to Cost Billion Abroad - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times

If you are weary of the financial news, stay away from here for a few weeks because I'm going to offer different viewpoints from prominent money professionals. We know this debacle will last for many more months...

Here's Robert Reich's take on the crisis, taken from his blog: Why Wall Street is Melting Down, and What to Do About It

The sub-prime mortgage mess triggered it, but the problem lies much deeper. Financial markets trade in promises -- that assets have a certain value, that numbers on a balance sheet are accurate, that a loan carries a limited risk. If investors stop trusting the promises, Wall Street can't function.

But it's turned out that many promises like these weren't worth the paper they were written on.

That's because, when the market was roaring a few years back, many financial players had no idea what they were buying or selling. Worse, they didn't care. Derivatives on derivatives, SIVs, credit default swaps (watch this one!), and of course securities backed by home loans. There seemed no limit to the leverage, the off-balance sheet liabilities, and what credit rating agencies would approve by issuers who paid them to.

Two years ago I asked a hedge fund manager to describe the assets in his fund. He laughed and said he had no idea.

Is this crazy or what?

That is the question.

So, which is true? There's some uncertainty about China and its banks. Will they lend to US banks or not? I, for one, would not lend any money to US banks until the Treasury bailout is agreed on. But I would not tell the US that I had made that decision...

China banks told to halt lending to US banks-SCMP | Markets | Markets News | Reuters

Chinese regulators have told domestic banks to stop interbank lending to U.S. financial institutions to prevent possible losses during the financial crisis, the South China Morning Post reported on Thursday.

China bank regulator denies report of lending ban to U.S. banks - MarketWatch

China's government moved to calm financial markets Thursday and denied a report that it had ordered mainland banks to curb lending to U.S. banks, a day after rumors of financial stability led to a run on a Hong Kong institution.

Anybody know? In international politics, I think the US could win this one. It might also start another war...

Hopefully by the time this is published, the "bailout" plan will have been approved by Congress and signed by the President. We can hope that Washington works, though we have our doubts.

Nevertheless, a step to take after the financial system stabilizes is to take a look back and see where things went wrong. I cannot even begin to start. It's too complex, lots of things went haywire, and greed surely factored into the equation. We can simplify, reduce mistakes and risk, but greed will never expire. So, we'll have to put up new, better rules that protect people from their own greed (all parties involved exhibited some greed).

The article below doesn't really address the genesis of all this. Rather, it paints the picture of why and how several large financial institutions failed in a matter of days (Fannie Mae and Freddie Mac, AIG, and Lehman. You can now add Washington Mutual to the list -- same problems).

It's interesting to see how things transpired. Suffice it to say that cash flow and loss of financing caused these big and established companies major issues. Issues that they couldn't solve on their own.

In the grander scheme, it might very well have been that the real estate euphoria finally wore off. The leverage that we all (homeowners, banks, mortgage houses, investment banks, hedge funds, and others) enjoyed led to our ultimate demise.

Diamond and Kashyap on the Recent Financial Upheavals - Freakonomics - Opinion - New York Times Blog

This is more a rant than a logical argument against honoring financial derivatives. Let me explain.

According to everything I've read about this, derivatives, based on underlying assets, significantly added to the financial woes we're currently experiencing. In fact, in Everything You Wanted to Know About the Credit Crisis But Were Afraid to Ask, Ben Stein claims that the losses are unlimited. Furthermore, none of these instruments were on anyone's books (sellers or buyers).

Here's an idea: Since the government is so adept and eager to take over financial institutions nowadays (presumably to avoid a financial calamity second in severity only to the Great Depression), why don't they just declare these instruments null and void?

Seriously.

If they're not on the balance sheet, and they're not "hard" assets like dollars or gold, to me, at least, they don't exist. They're like me saying you owe me money and you saying you don't. If they're a "contract," can't the government rule that they are illegal?

Nobody loses here, do they? After all, if they don't exist, then nothing was lost, right?

I mean, obviously, the institutions and individuals who are owed money lose, but hey, haven't we all lost a bit in the last few months? Shouldn't we all share in this, especially since a lot of us just wanted to buy a house? I certainly didn't want to profit off my neighbor's loss.

In the derivatives business, it seems like it's truly a zero-sum game.

Here's another one: If these instruments aren't on the books, then how are profits taxed?

Our government has been asleep at the wheel on this stuff. Seems to me like they condoned, if not encouraged, a black market on financial instruments; instruments, by the way, that are purely imaginary right about now.

Great (short) video from Jim Cramer on who is to blame for the collapse of the financial system.

Money isn't everything. Enjoy life. Spend time with your family.

Funny picture from Greg Mankiw's Blog. (MBS: Mortgage Backed Securities, a trigger of the current Mortgage Meltdown and subsequent Credit Crunch, and then the Financial Seizure.)

Next up: Burning trash cans OR My House Is On FIRE

Now that the cat is out of the bag, I'll tell you I work for WaMu. At least I did. I guess now my employer is JPM. At least for tomorrow. Time will tell how it all plays out.

Now, on to the important stuff. Your deposits are fine. In fact, they're safer now than they were yesterday. I implore you, though, to call your federal representatives about the so-called bailout and urge them to just get it done. Iron out the details later.

Read more about WaMu's demise here -- JPMorgan buys WaMu

Money isn't everything. Enjoy life. Spend time with your family.