Ode to the Auto Feo, Part II – Optimism and Desperation are Poor Bedfellows

8/24/2011 Portland, Oregon - Pop in your mints…

Today we will continue the saga of the auto feo.  If you missed part I, please click here to get up to speed.  It shouldn’t be difficult as the auto feo is currently at a dead stop.

But first, a quick look at the markets.  At this point in the day, everything appears to be literally on hold until the FED chairman Ben Bernanke speaks at Jackson Hole.  What will he say?  Our guess is not much.  Perhaps some dribble about standing prepared with all necessary tools to fight deflation.  If He were truly to use his post for something useful, He would encourage Congress to recapitalize US households, not banks.

Speaking of banks, Bank of America seems intent on claiming that they are in no need of capital even as they sit on $2 Triilion in assets of an imploding economy.  B of A made perhaps the worst choices of all time when they paid a premium for Countrywide and Merrill Lynch.  They may not have had much choice in the matter given the carte blanche that regulators had during the panic of 2007-2008.  Whatever the case, they are now choking on the sewage of the above mentioned entities.

Citigroup, on the other hand, may need another reverse split sooner than they think.  With that said, we return to our personal story of a bad acquisition.

We left our story yesterday arriving at our rendezvous with the then owner of what would soon become our next “Auto Feo.”  As we pulled into the parking lot of a large supermarket, nature called.  Not seeing the vehicle which we were to inspect, we entered the supermarket to tend to our personal needs.  As we were exiting the supermarket, we received a call from the owner, announcing his arrival.

Our pulse quickened.

We exited and there it was!  A black beauty of an SUV.  At that moment, as the sun began to set over the horizon, the 1993 Isuzu looked like a late model BMW X5.  We were about to make the bargain of the century.

Astute readers will note that what we saw that evening was a mirage, born out of the dangerous mix of optimism and desperation that was moving in our body to inhibit our ability to make an informed decision.  We can only assume the same was true when B of A was looking over Countrywide Financial in late 2007.

We met the man, an Iranian, who promptly handed us the keys as we hopped in for a test drive.  As the engine roared to life, we were able to overlook the cracks in the windshield and somewhat soiled interior.  After all, it is a ’93, we thought.

As we proceeded around the block, never exceeding 40mph, we were impressed.  “This is a solid vehicle,” we complimented the owner.

A Solid Vehicle Indeed!

“Yes,” he replied, “we purchased it from a family friend and it has been our family car for five years.  We have maintained it and most recently replaced the clutch.  It was very expensive.  In Iran, a clutch costs you $200, here, $800.  We have a better car now.”

A new clutch!  We thought.  What a steal.  We bonded with the man as we spoke of our children and family life.  This was no longer a negotiation, it became a matter of honor.  As we parked the vehicle, there was only one hope for us.

The spousal veto.

For those of you who have never been married, this is commonly known as “running the idea by our wife,” which in most cases can save one from making a bad decision or fending off persistent salesmen.

Excusing ourselves, for it seemed an unnecessary step when we were obviously getting a BMW X5 for a mere $1,350, we made the call. 

Our wife was predictably skeptical. 

“Don’t you want to see other options?” 

We assured her that this was the best deal out there. 

“It’s not that urgent, come home and sleep on it and see how you feel about it in the morning.” 

Out of the question, I did not want to waste another trip to Vancouver or Gladstone just to pass on a car.

Again, astute readers will recognize this last objection as the sunk cost fallacy.  We, of course, did not.

“Well, if you are sure…”

And with that, our loving, ever supportive wife relenting gave her approval of the purchase and the deal was done.

We went back to the Iranian and, with an unintentional pause before speaking, extracted a $50 reduction in the vehicle’s price.

At $1,300, the deal was done.  And almost immediately, our problems began...

Stay tuned and Trust Jesus.

Stay Fresh!

David Mint

Email: davidminteconomics@gmail.com

P.S.  For more ideas and commentary please check out The Mint at http://www.davidmint.com/

Key Indicators for August 24, 2011

Copper Price per Lb: $4.01
Oil Price per Barrel:  $85.72

Corn Price per Bushel:  $7.31  
10 Yr US Treasury Bond:  2.25%
FED Target Rate:  0.09%  ON AUTOPILOT, THE FED IS DEAD!

Gold Price Per Ounce:  $1,753 PERMANENT UNCERTAINTY

MINT Perceived Target Rate*:  2.00%  EASIEST MONEY EVER COMING IN JAN 2012!!!
Unemployment Rate:  9.1%
Inflation Rate (CPI):  0.5%!!!   UP 0.7% IN ONE MONTH, 8.4% ANNUALLY AT THIS PACE!!!
Dow Jones Industrial Average:  11,232  TO THE MOON!!!

M1 Monetary Base:  $2,033,000,000,000 RED ALERT!!!
M2 Monetary Base:  $9,478,200,000,000 YIKES!!!!!!!

The Inflation Train is Back on Track, Citi Shares Rise the Hard way, and the Carcass of Housing and Sovereign Debt issues

5/10/2011 Portland, Oregon – Pop in your mints…

A head fake.  That is the only way we can describe the action in the commodity markets last week.  Commodity markets differ from equity, bond, and money markets in that commodity markets are where real stuff changes hands, even if the owners never actually take delivery. 

When one buys a bond or equity, they own the vague or explicit promise of an income stream at some future date.  These streams generally come in the form of currency, which must pass through the money markets to get to their wallet.  From the time the bond or equity is purchased until the income hits their wallet, this income undergoes a hazing ritual in the form of taxes and regulatory fees which would cause any fraternity house to be banned from the college campus.  This hazing ritual reduces the income stream to a mere trickle.

It should come as no surprise, then, that speculation in stocks and bonds is much more profitable than any buy and hold strategy, especially when the FED is supplying free money at the casino!  Equities are easy to manipulate which makes them the preference of modern day money changers.

Take Citibank (C) for example, their share price was languishing around $4.50 per share (which is still way too much for their carcass of a balance sheet).  Most institutional investors (read those who invest workers' 401Ks), wouldn't touch it with a 10 foot pole, simply because the stock trades below $10 (which says something about the brain dead fund managers and their models but that is fodder for another Mint).  What to do?

Voila!  On Monday, Citibank opened with a share price around $44.  This was accomplished with a little mathematical operation called a "reverse split."  You see, Citibank, on a whim, made 10 of their shares suddenly equal to one share.  Problem solved!  Citi promptly fell more than 2%.

AIG, another carcass, pulled the same type of head fake in July of 2009.  After rising 87%, according to the Wall Street Journal, they are down 39% year to date in 2011.  Mathematical operations do not change fundamentals.

In contrast, when you buy a contract for wheat or any other commodity you have the right to take delivery of said commodity.  In the case of wheat, all you need is some yeast and an oven and you are on your way to a good meal.

Speculation in Commodity markets is their very essence and function.  The stakes are high.  These markets can literally affect the price of producer and consumer goods all over the planet.

If the income stream doesn't pan out for an equity or bond, the seller simply points the angry buyer to the prospectus where it tells them that the equity or bond may lose value for any number of reasons. 

In commodities, if the seller can't deliver the wheat they promised, people may starve.

Last week, the commodity markets went into a nosedive.  It appeared for a moment that they anticipated demand to plummet and called for worldwide production to slow.

This was merely a head fake.  Astute readers have picked up on the fact that we are comparing the commodity markets to a basketball player.  The prices of various contracts are the "head" of the basketball player and the fundamentals of the market (supply and demand) are the player's hips.

A head fake is where a player leads one way with his or her head and then darts the other way with the ball towards the goal.  As a defender (or investor in commodities) one MUST keep their eye on the opposing player's hips.

The fundamentals in the commodities markets take many years to change.  This week the fundamentals are driving commodity prices higher and signaling a looming hyperinflation after throwing a deflationary head fake at investors last week.

Nothing has changed to stop the "inflation megatrend", as Nadeem Wayalat of the Market Oracle calls it.  See for yourself in our Key Statistics below.  Even if the FED were to change course now and raise its short term interest rate target, it would take around three years for this to trickle down to consumer prices.

But how can this be?  Isn't there slack in employment, ever increasing sovereign debt issues, and an overhang of housing inventory in the US as far as the eye can see?

Again, this deflationary propaganda is a mere head fake.  They are describing the carcass of the old economic model that governments worldwide are fighting to prop up.  This carcass will continue to decay.

Behold, a new economy is arising far from the reaches of the carcass and its handlers.  Most of the FED's money will end up not propping up the carcass but rushing into the new model. 

Skyrocketing commodity prices, which still have a long way to rise, are announcing this fact loud and clear to those who will listen.

He who has ears, let him hear!

Stay Fresh!

David Mint

Email:  davidminteconomics@gmail.com

P.S.  Please check out our latest 72 Hour Call at www.davidmint.com

Key Indicators for Tuesday, May 10th, 2011

Copper Price per Lb: $4.02 Oil Price per Barrel:  $103.72

10 Yr US Treasury Bond:  3.19%
FED Target Rate:  0.09% FED IN DESPERATION MODE!!!!

Gold Price Per Ounce:  $1,519

MINT Perceived Target Rate*:  3.25%Unemployment Rate:  9.0%
Inflation Rate (CPI):  0.5%
Dow Jones Industrial Average:  12,767
M1 Monetary Base:  $1,960,200,000,000 DESPERATION!!!!M2 Monetary Base:  $8,995,300,000,000 DESPERATION!!!!

*See FED Perceived Economic Effect Rate Chart at bottom of blog.  This rate is the FED Target rate with a 39 month lag, representing the time it takes for the FED Target rate changes to affect the real economy.  This is a 39 months head start that the FED member banks have on the rest of us on using the new money that is created.