first majestic silver

Delusions - Stocks, Real Estate, etc

April 24, 2003

We live in dangerous times. But we also live in times where delusional behavior is raising the risks and intensifying the danger. An unchecked cancer is growing on our nation's consciousness, fed by denial of degenerative hardship, grown from a layer of ignorance, inhibiting its ability to perceive reality and to properly make decisions for the future. The American public clings to a scintilla of hope that all will be well, jobs secured, threats eliminated, wealth restored, pensions returned to health. If anything, the delusions are becoming deeper, wider, more desperate, and departing farther from reality in just the first three months of this new year. A sense of profound denial lingers after the bust of the economic miracle, irresponsibly founded upon the greatest debt-generated speculative mania in human history. What in God's name went wrong? What are we missing? In short, the answer lies in "Economics 101" at a fundamental level. Our entire economics community supports a heretical system that produces apologists for perpetual debt abuse. In this piece I hope to disabuse readers of many persistent delusions in support of fallacious views. My list of delusions outlines the neurotic condition of the American mindset.


54. Factor upcoming energy cost cut benefit into stock prices, before recent cost hike

Recent increases in energy costs spell trouble for both production costs in corporations and utility & gasoline bills in households. The effect should be felt soon with reduced profits squeezing the business sector, putting more pressure to cut costs with job layoffs. On the household side, budgets have been strained with doubled heating costs for many homes, higher gasoline expenses, which undoubtedly will crimp consumer spending. I see no factoring of these effects into stock prices or economic stall forecasts. Instead, we see attempts to justify factoring in the benefits of reduced energy costs, on the expectation that prices for crude oil, heating oil, gasoline, natural gas will all come down after a quick resolution of tensions. No, investors cannot ignore the present ill effects, and accept only the anticipated beneficial effects.

55. Dividend tax will have beneficial effect on stock prices

If dividends are miniscule, then the benefit will be small. Microsoft announced less than a 1% dividend, met with a yawn. Companies are strapped for cash, and will not be able to issue hefty dividends anyway. Besides, if they were able to pay dividends, the money must be diverted from profitable operations. With stock share prices languishing, companies will not be turning to the equity markets for new financing, such as secondary issuances, nor supporting those prices with sizeable dividends. This was a point made by Frank Modigliani, mentor to Stephen Roach. No, the end result is that dividends will be tiny since funds are scarce, and companies have little incentive to bolster share prices during this horrible downtrend.

56. Enron/ WorldCom were the end of accounting fraud and scandals

Neither Enron nor WorldCom have been resolved. Offshore banks and special purpose entities continue to contaminate the corporate accounting world. Some suspect that many billions of former Enron capital are still hidden. Legislation toward their disclosure continues to be blocked by special interest groups. Enron was only the beginning, aptly labeled "the canary in the financial coal mine." Frauds continue to be exposed, but with much less attention given by the public. The Dutch firm Ahold is a recent example. Bristol Myers restatement of past years is another milder example. Earnings statements continue to be chockfull of "one-time" charges. My favorite is Ryder claiming that paint for their truck fleet is a one-time charge. No, accounting fraud marches on with less public attention or interest, having become part of the engrained and accepted landscape.

57. Stock investing Long Term Buy & Hold strategy succeeds

From 1969 to 1982, stock returns were nil. From 1994 to 2000, stock returns were significant, encouraging individuals to remain invested through brief troubled times during those 6-7 years. Once again, a lesson learned from a longterm bull market is being transported into a bear market, with disastrous results. Greenspan's Fed rescued the financial markets each time trouble surfaced. Now, we may be watching the bad brew results from numerous overrides in a bull market cycle, possibly creating a giant bear market. The longterm cycle over the ages often contains segments of time lasting years whereby the "paper" side of the finance world experiences adjustment. We are now knee-deep in such an adjustment period. Worse, a supercycle adjustment might be underway, dealing mercilessly with excess debts. The last one worked its natural magic from 1929 to 1932. No, LTBH is the mantra that Wall Street sells to the inexperienced public.

58. Stocks are cheap, with attractively low valuations now

Cheap? Certainly stock prices are much lower than in 2000. The word "cheap" implies low relative to established norms. Standard & Poor published responsible accounting reports on S&P500 earnings for 2002 which exposed that real earnings were 20-30% lower than stated earnings. The result was a Price-Earnings ratio in the neighborhood of 40 times, using core earnings. This range is two to three times the norm. Proper accounting should factor in both pension funding and stock option dilution. Besides, if they are cheap, why are analyst earnings downgrades so routine? No, stocks are more overpriced now than before the Great Depression 1929 stock crash!

59. Share buyback programs are a good signal for a stock

Investors have been seduced into accepting this as true. The immediate effect of corporations using treasury funds to purchase their own stock is for a share price increase. Closer scrutiny often exposes chicanery in the financing, with dastardly techniques such as extending longterm debt. Someday in the future, I expect to read about new stock issuance used to finance share buybacks. Diversion of corporate funds away from operations, away from investment in capital equipment, away from investment in labor training and benefits, and away from investment in Research & Development indicate neglect of the corporation, its core business, and its charter. This neglect usually takes a little time to bear poor fruit competitively. No, share buybacks are usually a device for management to use money unwisely in order to prop up the share price for future insider stock sales after large stock option grants.

60. Management stock options provide an incentive to build the business

If handled with moderation, this might be true. Management does indeed respond to positive incentive and reinforcement. However, when debt is extended for share buybacks, when deceptive accounting is used to bolster earnings reports, when the size of management option packages are so huge, when heavy dilution to outstanding share capitalization takes place, when insider stock sales are executed quietly, one must question in whose interest the option packages exist. Recall that management controls the distribution of option packages, usually with rubber stamp approval by the Board of Directors. The experience from the last several years has been that poor competitive trends and negative earnings trends left businesses leaders with a big temptation to fleece shareholders via accounting fraud, in a criminal exit strategy. No, the majority of cases demonstrate that stock option packages invite corruption and abuse, from their sheer magnitude and potential for lucrative gains.


61. Real Estate is a tangible asset that will never lose you money

Since the stock bust of 2000, real estate has seen a massive influx of investment. Following the Fed's numerous interest rate cuts, a mortgage finance bubble has developed. Fanny Mae and Freddy Mac, Government Sponsored Entities which support the mortgage finance industry, might be in trouble. However, a valid argument can be made that real estate property is not a hard asset, but rather a "hard asset impostor" whose value is primarily based upon available mortgage finance funding. The commercial niche has seen substantial value reductions amidst historically high vacancy. For now, housing has served well as a safe haven for capital. But cracks are showing, as coastal cities (plus Denver) have seen large losses in the high end. More importantly, across almost every single major city, supply of residential property is sitting on the market unsold. What is the value of an unsold home? We will find out. Mortgage debt has been abused with dictated appraisals, lax income verification, low down payment (high leverage), and widely reported abuse of cashback at contract closing. And a final blow might come from local govts, where fiscal distress has led to increases in property tax. I know of a few people who have already or plan to sell their homes in order to end their tax burden. The gap between rising housing prices and gradual increases in rental costs indicates a correction is near. At some point, job losses trigger such a correction. No, real estate is ripe for giving off gas for several years, since financing will soon become more difficult, job losses will escalate further, and the tax burden will only worsen.

62. FannyMae and FreddyMac represent stable fund sources

These Government Sponsored Entities are a house of cards built atop minimal capital foundations, supported by false expectations of government guarantees and willing naïve bond investors. I have never heard of Fanny Mae rejecting a portfolio of mortgages. They accept them all, good and bad, like a true burokracy, allowing only aggregate audits. A fortuitous cycle has benefited GSE's. They purchase mortgage portfolios after issuing debt, then they hedge against these portfolios by purchasing 10-year Treasury securities. This hedging is so massive that it has an effect on increasing the TENS value and reducing the TENS yield. This in turn lowers mortgage rates and has, up to recently, increased the FNM share price. Now GSE's capital structures have been called into question, with an underfunded base supporting a mountain of debt. A reversal of this pattern might lead to the absence of TENS purchases from Fanny hedges. Little if any regulation is in force to scrutinize the finance operations of these cancerous giants holding over $4 trillion in mortgage debt. An astounding figure was recently reported -- GSE's accounted for fully 25% of the expansion in the US MZM money supply in 2002. No, Fanny and Freddy are a marriage destined for a stormy controversial divorce and bust from under-capitalization, in a matter of time.

63. Real Estate and car sectors are examples of the strength of our economy

In the majority of economic recoveries, the housing and automobile sectors realize their pent-up demand and lead the renewed spending cycle. Since 2000 however, extremely low mortgage rates have led to a considerable bull market in real estate. The refinance waves have contributed to the economy by delivering spendable equity. Greenspan reported recently that in three years, housing prices have surged over 30% in major cities. This occurred against a backdrop of falling asset prices and economic hardship! Housing prices have begun their long descent, starting at the luxury end, mainly in major coastal markets. The car sector has seen 0% financing with 0% down, essentially giving the vehicles away for payment to principal, relieving dealers of inventory, and keeping labor unions working. Now car sales are seeing 25-35% sales declines. We have no latent pent-up demand. Those who expect economic recovery are poor students of past recoveries. No, the housing and car sectors show signs of utter exhaustion, and will lead the economy into recession, not recovery.


64. Press & news media are objective and unbiased

Surely, journalism is motivated to report the news accurately and fairly. In recent years, anchors find themselves celebrities, often basking in the limelight. Certain reports can set off mass herd movements among the listening, viewing, and investing audiences. Any normal human being would see his/her ego boosted, considering such mass sway. However, a strong controlling presence hangs over their business, influencing the news reporting. Financial conglomerates now own many media businesses, having long operated with banking and brokerage arms. The motives here are less than noble. When any arm advertises on a journal or channel, they can become angry if reported news discourages investors from investing in the stocks that the brokerage arm does investment banking business with. The same applies to negative news on its banking arm. When enough advertisers come from the same incestuous camp, pressure builds to bias the news and unduly emphasize the optimistic viewpoints. No, the advertisers have almost become partners, and now undercut objectivity, leading to growing bias.

65. CNBC provides a valuable news service, with both information and advice

I like to occasionally watch CNBC, but much less so than in 1999 and 2000. I confess an unabashed crush on Martha McCallum and especially Christy Musumeci. The channel does report much news. They do allow a rich diversity of guests to explain their views. But they have been very late in warning of any and all busted sectors and reversing asset groups. They almost never offer information about the torrent of earnings downgrades, which permit companies to exceed expectations, i.e. quietly lowered hurdles. Their enthusiasm is fast becoming a contrary indicator for a top in localized sectors. Their series on real estate last autumn indicated to me that a top was in place. Their bias against gold is often boldly blatant. They make no effort to conceal a positive slant, exposing clear intentions of bias in not pursuing the unfavorable side to stories. When JohnJ Murphy appeared in late February, his story of a gradual dollar collapse met with zero follow through. No, CNBC has an agenda, and has become as much a contrary indicator as an entertainment source.

66. Pension system will deliver retirement income when called upon

The majority of American pension systems now show clear evidence of decimation, with TIAA-CREF a notable exception. Defined benefit plans within major corporations are woefully underfunded, if not fraudulently accounted for, showing annual losses but contributing toward quarterly earnings under absurd ongoing assumptions. They have been raided for ten years! Defined contribution plans are showing feeble expected payouts in future years. New legislation might soon allow for corporations to legally swap out of defined benefit formats, letting them off the hook after years of pension fund theft. Personal 401k and IRA accounts are worse than decimated, managed by amateurs who never heard of bonds, and still do not know what they are. No, our pensions will be nowhere near adequate, and together with paltry Social Security income, Americans will simply have to delay retirement or abandon the notion altogether.

67. Shakeout of US airlines is largely completed, following WTC attacks

United Airlines and USAir are the most recent air carriers to enter bankruptcy protection proceedings. Most national airlines are operating in the red. Much of the blame can be placed upon the after-shocks of the World Trade Center attack, and the resulting fear of flying. People are staying closer to home, traveling less, with businesses resorting to conference calls more. Recent fuel cost increases only stress their finances further. The trend is for less travel, looking forward. Regional airlines are faring better, possibly because they choose to avoid unprofitable routes. No, we could very well see every national airline except Southwest Airlines eventually go bankrupt, inviting a national outcry for airline nationalization.

68. America (its capitalism, leaders, culture, way of life) is admired throughout the world

The image of America has undergone considerable change since the Clinton years, when we stole prosperity and were the beneficiary of an approving world impression. I believe the 1990 decade saw steady sales of our national gold treasure, for the unspoken purpose of subsidizing longterm interest rates to falsely generate economic prosperity and investment mania. The last decade also saw credit abuse to support multiple billions in malinvestment. Since 2000, our economy and financial markets have shown the ravages of debt implosion. Our leaders have been called into question for corruption. Our culture seems focused on video games, wrestling aberrations, drugs, eating disorders, sex, gambling, continued debt abuse, ghetto attire, and endless good life. Our high school students test poorly versus other industrialized nations, ranking last out of 17 nations in recent national results. Many Americans prefer to party and spend, rather than work and save. Our lifestyle is largely hedonistic, demanding immediate gratification. Foreigners certainly flock to our shores from Mexico, Ireland, South America, Eastern Europe, India, Taiwan, and China. In contrast, the Islamic World, pockets of Europe, and other corners of the globe are growing in enmity toward us. Many nations criticize us even as a small exodus of their citizens eagerly immigrate to the USA. The great bust has exposed America to criticism, and justifiably. A clear disconnect is developing, whereby we think the world admires us, when in fact they feel increasing disgust and disrespect. No, the world is more and more turning against the American ways, even as we are slow in realizing this fact.

69. Americans are entitled to perpetual wealth and good times

The "Ugly American" syndrome is making a comeback. We have produced many spoiled brats, accustomed to the good life, strong purchasing power, ample access to credit, good paying jobs. We seem incapable of calling into question the method and means for this wealth and party atmosphere. The wellspring toward our illusory wealth has been the abusive extension of debt and the simultaneous coercion of foreign economies to bestow upon us their savings, as we accumulate endless debts. We encourage Asian nations to serve as our manufacturing base, benefit from outsized trade surpluses, but recycle the capital back into our debt system. The chief export from the United States is now clearly debt. Yet we expect no ill consequences from this great societal abuse of debt. The game is not without limit and cannot last forever. We do have considerable innovation, but our financial violations of economic laws vetoes many benefits of innovation. What we boast of "financial engineering" has been laid bare as dishonest accounting, financial corruption, executive largesse, crazed leveraging, monetary inflation, and extortion of foreign economies. We might be nearing the end of the Keynesian Monetarist bankruptcy game. No, Kondratiev Winter has arrived, and its deep destructive force has only begun to work on the greatest debt experiment in the history of mankind, the United States economy, its citizens, corporations, states, and federal govt.

Jim Willie

Jim Willie

Jim Willie CB, also known as the “Golden Jackass”, is an insightful and forward-thinking writer and analyst of today's events, the economy and markets. In 2004 he launched the popular website that offers his articles of original “out of the box” thinking as well as content from top analysts and authors. He also has a popular and affordable subscription-based newsletter service, The Hat Trick Letter, which you can learn more about here.  

Jim Willie Background

Jim Willie has experience in three fields of statistical practice during 23 industry years after earning a Statistics PhD at Carnegie Mellon University. The career began at Digital Equipment Corp in Metro Boston, where two positions involved quality control procedures used worldwide and marketing research for the computer industry. An engineering spec was authored, and my group worked through a transition with UNIX. The next post was at Staples HQ in Metro Boston, where work focused on forecasting and sales analysis for their retail business amidst tremendous growth.

Jim's career continues to make waves in the financial editorial world, free from the limitations of economic credentials.

Jim is gifted with an extremely oversized brain as is evidenced by his bio picture. The output of that brain can be found in his articles below, and on the Silver-Phoenix500 website, on his own website, and other well-known financial websites worldwide.

For personal questions about subscriptions, contact Jim Willie at [email protected]


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