Today’s blog entry has a distinct lack of fun. Sorry ’bout that. But this has to be said.
On Friday, the stock market reacted to news that Freddie Mac and Fannie Mae, the nation’s top mortgage lenders, were on the verge of bankruptcy. Fannie Mae dropped 22% in one day, capping off a loss of 84% over the last year, as a real panic ensued.
Sunday brought a ray of sunshine into this dark place as the Fed and the Treasury made it clear that they these institutions are, indeed, “too big to fail”. Cash was made available at discount rates to keep them propped up and afloat. Has the storm passed?
The short answer is “Not on your life”. If these two are “too big to fail”, it means that we are committed to pumping into them whatever resources it takes to keep them afloat. The problem is that in a weak economy that includes a massive Federal budget deficit and an equally massive trade deficit, we don’t have the resources to put into them. $500 billion has already been spent just on the war in Iraq, and that’s money we don’t have in the first place. At some point, there’s no choice but to turn on the presses and print one Hell of a lot more Dollars.
The sad thing is that we’ve already done that, too. Gold is running close to $1,000 per ounce and the Euro is north of $1.50 and holding. Even the Canadian Dollar is worth more than the US greenback. The weak state of the US Dollar means that we don’t have extra room to do anything dramatic such as bailing out major institutions.
This brings us to October. Why October? Because that’s the month when market crashes traditionally happen for reasons that aren’t all that well known. Traditionally it had to do with weak harvests, but we aren’t as tied to the agricultural calendar as we used to be. This year, however, the high price of gasoline over the summer has to be simply killing retail sales, and the retrenchment of Wal*Mart, Starbucks, and some other retailers shows this is indeed happening. When those result come in, around October, we can expect the market will finally die – whether Fannie Mae is saved or not.
But there’s one more force on the market that is going to over-ride everything else. The median Baby Boomer is now 54 years old and thinking about retirement in the next decade. The money they made in their 401(k) would be burning a hole in their pockets, if only they could get it in there. These people are going to be looking for a safe haven to ride out the storm, a place where they can park their money and preserve the capital they’ve accumulated through the go-go 90s.
The problem is a simple one: as the whole economy melts down, there is no safe haven. There is nothing denominated in US Dollars that represents a safe place to put your money and expect it to be there a decade from now.
What will the Boomers do? How will they retire? I have absolutely no idea. What I can tell you is that once elaborate dreams puffed up by visions of the good life through the golden years sold on teevee commercials become a puff of smoke, people are gonna be pissed. Not just write-your-congressman upset at things, I mean pitchforks-and-torches ready to make someone pay.
How will this all play out? Don’t pay any attention to Fannie Mae, they’ll defend that. Watch what it takes them to make that last stand. Watch what else starts to melt as the dollar is printed on rolls suitable for use as toilet paper. See who is getting nailed in that process. Like most of the disasters on Wall Street, it won’t be the guys with ties and briefcases who stream off the PATH train in the Battery. It’ll be your neighbors and colleagues, your friends and your family. The final result of this is something you’re gonna see in their eyes. There is no safe harbor. The storm is only going to get worse.
UPDATE: Monday 3PM CDT
If you don’t believe me, read this from George Soros: