We’ve had our first taste of autumn here in the Pacific Northwest. We found ourselves strangely welcoming the overcast sky and constant humidity. It is the type of weather that is pleasant for a month or two. Unfortunately, we get about 8 months of it here which requires some sort of escape to the sun, either Hawaii or California, for it to remain tolerable.
But still, the first taste was sweet and provided a warm feeling that all was well with the world, despite constant reports to the contrary. Fortunately for us, the sun looks as though it will return this week.
On the whitewashed shores of Greece, where the sun seems to perpetually shine, there is now intense pressure from which there seems to be no escape. The Prime Minister was called back from a trip to the US after receiving an emergency call from the Finance Minister as he stopped over in London. The poor chap had to be on a conference call with creditors and the troika and didn’t want to take the lashing alone.
As if to give the world a taste of things to come, the Greek Government passed an emergency property tax which is to be collected via the citizens’ electricity bill to help ensure compliance. Apparently the folks at the electric company are not happy about adding tax collection to their duties and are pushing back on the order.
The Greeks never have been good at collecting taxes, either that or their citizens are especially adept at avoiding paying them. Either way, the combination makes for low tax revenues which makes servicing public debt, well, difficult.
We offer a suggestion to the Greeks, privatize the electric company and then enact an enormous tax on consumption. At least then the riots would be staged at the electric company and not at parliament.
Meanwhile, before departing for New York in perhaps the least understood yet most important peace-keeping mission the US will ever embark upon, President Obama gave yet another clinic on teleprompter reading during his speech on, what else, government finances. His proposal was to save $1.5 Trillion over the next 10 years by in large part by ending the wars in Iraq and Afghanistan.
Will Palestine Become a UN Member?
We do not have any statistics, but we are willing to bet that this is not the first time that ending these wars has been proposed as a deficit reduction measure. What is truly astonishing to almost every thinking person is that these two military adventures have continued for so long and have become such a drain on the public treasury that ending them now would save $1 Trillion.
Less war, more money, what a novel idea! It is as straightforward as it is unlikely to happen.
We sense that both this speech and bath time for Greek creditors will be interrupted by the Palestinian bid for statehood at the UN this week. The Middle East has not seen a moment like this since Israel vied for statehood in 1949. Let us pray that this moment passes in a peaceful manner.
What a week it has been, and we are only halfway through it! Societe Generale, BNP Paribas, and many other European banks are bracing for the impact of a pending Greek default which would likely be followed in short order by an Irish, Spanish, Portuguese, and possibly Italian default as club med prepares to give the collective finger to their German, ECB, and IMF taskmasters.
There were rumors that BNP could not borrow dollars yesterday and today we saw why. The large French banks, of which BNP at $2 Trillion in assets is the largest, collectively hold assets of $8 Billion, which is four times France’s annual GDP. This, in theory, makes nationalization of these banks impossible and the meager, strings attached handouts offered by China are of little comfort.
Zerohedge.com posted an excerpt of a report by Jeffries which spelled out a probable endgame scenario in Europe which involves sloppy nationalizations of the financial sector and a repudiation of the Euro by the defaulting countries in order to print the drachmas, pesetas, liras, etc. necessary to make good on the newly nationalized banks’ liabilities.
The PIGS have nothing to lose at this point and it will be EUROUGLY for those who cling to the Euro.
We are all preparing to learn a great lesson about faith in paper currencies and it looks like for the Europeans, class is in session.
Yesterday, we were attempting to explain the concept of inflation coming in disguise. We speculated that the disguise would come in the form of a “10:1 reverse split” being declared for the current USD. In other words, a new US Dollar would be introduced which would be worth 10 old US dollars. We left off with a question, “What’s the big deal? Why does this matter?”
At this point, our rational readers are thinking to themselves, ”Big deal, so we get rid of the penny and nickel production cost problem, learn to move the decimal place in our thinking, and happily move along with life, right?”
This, of course, is what most monetary and governmental representatives think as well. It makes the move almost a no-brainer.
We must beware of the money changers! They seem innocent, yet are wolves in sheep’s clothing.
Yes, fellow taxpayer, under the reverse split scenario, dollar holders will be robbed. Quietly, and, if not for the following humble explanation, completely unaware. It is as Keynes famously said:
“The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens”
(Editor’s note: today inflation is accepted as “sound” economic policy thanks to meddlers such as Mr. Keynes.)
How, then, will dollar holders have their wealth confiscated? A change like this initially robs those who can least afford to be robbed, the poor. And the thievery is made all the more sinister because the thieves employ unwitting merchants and tax collectors with which to fleece them.
The following is a practical example of how the theft will take place:
One would be hard pressed to find a more suitable and pleasant example if instant price inflation than that of the Spanish cup of coffee, pleasantly sipped at mid-morning with friends and colleagues.
Inflation explained in the new Euro price of Cafe con Leche
This cup of coffee, a constitutional right of Spaniards for generations, could be enjoyed for a mere 100 pesetas circa 1995, in the era before the peseta was to be pegged and converted into the then conceptual Euro currency.
This 100 peseta price held more or less firm until the Euro coins began to circulate in 2002. The Euro/Peseta conversion rate had been pegged at 166.386:1 in 1995. In 2002, the same cup of coffee was now 1 Euro, an overnight 66% increase.
The numbers may not be exact but you get the point. Currency changes offer a grand opportunity for price adjustments at the lower end. While on the surface, it appears that a cup of coffee that costs 1 monetary unit compared to one that costs 100 monetary units is an improvement. In fact, considering that many wages remained stagnant, it represented a considerable deterioration of overall purchasing power.
To this day, many Spaniards think of prices for larger items such as cars and houses in terms of pesetas. It is one thing to be duped on the value of a cup of coffee, quite another to be duped on the value of a car or house.
For a time, asset prices there did indeed rise as an indirect result of people fleeing the inflation caused by the change to the Euro. However, the devil of inflation is in the details. An overnight 66% increase in a cup of coffee can eat into a laborer’s stagnant wages quickly.
Once the transitory asset price increases have been burned through at the café, one is left with a nation that is collectively poorer and unable to make economic decisions because of these types of stealth price shifts.
Returning to the probable US Dollar reverse split, we can see that a 10:1 change from old to new dollars would likely result in a cup of coffee going for a nice round quarter (or 25 new cents). Which sounds like a trip back to the 70’s until you consider that we are talking about $2.50 of the old dollars for a plain cup of coffee which could be had for $1.50 before the switch.
One can rest assured, employers will be mindful to move the decimal point and nothing more on wage calculations. Voila! Overnight poverty, all with the stroke of a pen.
While one may hold out hope that any change in the monetary unit will be price neutral, the Spanish example shows us that lipstick on a pig does not make it any prettier, and coffee at 1 Euro is no tastier than it was at 100 pesetas, just more expensive.
We pray that you will prepare yourself by saving in gold and silver coins, which will retain and perhaps increase their relative value under such a scenario. Under current conditions (and probably more so after the G-7 begin to their coordinated action) anything that cannot be created by government decree, to paraphrase Michael Pento, will be preferable as a savings vehicle to the US Dollar.
The moment of truth is approaching for Greece. Today the headlines flashed that the markets were pricing in a 98% chance of the Greeks defaulting on their sovereign debt. A great lesson is about to be learned. Is anyone paying attention?
The great lesson is the following: Reliance on governmental and/or central bank action to stave off a default is not a sound strategy. You may get lucky once, twice, even three times. If one is particularly unfortunate, the strategy may even work many times in succession.
The government reliance strategy is like idly watching spins a roulette wheel with all your chips on red. With enough spins, the ball will eventually drop on a black. Think of it as the governmental version of a black swan.
Gambling on Government intervention
In the case of Greece, who abandoned its 2,000 year old currency to join the Euro club, there seems to be a lack of political will to ink the rubber stamp which approves the Greek’s next ration of Euros. The taskmasters of the Eurozone are starting to realize that each time the stamp is inked, the sewage of Greek finances leaks a little further into their well.
The populace is starting to get sick to their stomach, as are large banks on both sides of the Atlantic. The French banking giants are queasy because much of the Greek debt is on their books. In the New World, where about half of Greek debt is insured, the banking giants are getting nauseas. It is the nausea of a drunk man realizing he will be stuck with the bar tab after his buddies sneak out of the tavern.
Meanwhile, as the politicians and central banks continue to bungle their way through this information, the market has already priced it in.
“Priced in?” Astute, shocked, and astounded readers are surely thinking, “Then where is the crash in stocks and bonds?”
Astute readers, of course, are right. There is a crash occurring right now in stocks and bonds. However, bond yields are down and the stock market is up because the crash is occurring against the backdrop of rapidly depreciating currencies and as such, the debauched currencies are disguising the crash.
The Disguise
Astute readers now have a collective light bulb in their head illuminating as they clearly see that inflation in consumer prices is set to accelerate in the near future. Naturally, this obvious inflation would not be tolerable and as such must be masked in order for the general public to peacefully accept it.
A new dollar will be introduced with a convertibility ratio from old dollars of 10:1. In other words, each current dollar will be the equivalent of a new dime.
Voila! No inflation here. The new and improved dollar now buys more than ever!
The Debauched Dollar in disguise
Why choose a 10:1 ratio? There are two compelling reasons for the US Currency to go through a reverse 10:1 split. First and foremost, it is simple. Since a majority of the world’s commerce is conducted in dollars, the disguise must be mathematically simple. What could be simpler than moving a decimal place?
The second reason is less obvious but perhaps more compelling from the point of view of the monetary authorities. The disguise would immediately eliminate the need for pennies and nickels and increase the demand for dollar coins.
At this stage in the game, it costs the US Mint more to create pennies and nickels than they are worth. While we are not certain of the exact numbers as of today, some estimates have the value of the metals needed to create a nickel valued at $0.07 while the metals needed to create a penny are valued at $0.012. This is before considering the energy and equipment necessary to strike the coins and distribute them.
At current metal prices, which are unlikely to drop in the near future, the US Mint is producing nickels and pennies at a loss.
This embarrassing detail makes the purchase of nickels and pennies a better risk free investment than US Treasury Bonds, the world’s current safe haven of choice. The metal premium for Platinum, Gold, and Silver coins is widely known. At some point, nickels and pennies will disappear from circulation and their metal premium will take precedence over their face value.
Still, one may ask, “What difference does it make? This 10:1 switch sounds like a great idea. I’m sick of pennies!”
Oh, if only the switch were price neutral, it would make no difference at all. How, then, do the stock, bond, and almost every other market continue to rally in the face of questionable macroeconomic fundamentals?
Much ink is being spilled today in anticipation of what may or may not happen as the 10th anniversary of the events that occurred on September 11, 2001. Here at The Mint, we take the somewhat radical view of the Amish in response to tragic loss. We must forgive. An important part of forgiveness is to avoid making or observing a memorial to the offense. Memorializing an event is to keep it present before us.
As the US Empire is now conducting at least three extremely expensive military adventures which have their origins in the events that occurred that fateful day, forgiveness is probably not on many people’s minds this weekend. Meanwhile, millions of dollars are being spent to memorialize it.
We must forgive. It is our opportunity to choose the tree of life over the tree of the knowledge of good and evil. To repair the fateful error made in Eden.
Under the cover of this memorial, we sense that an extraordinary event will occur which will impact the fortunes of many in the US, England, Japan, and Europe and others outside their borders with exposure to their respective currencies.
Debauchery
The Event which we refer to is the coordinated debauchery of their currencies.
For the past four years, the FED, BoE, BoJ, and ECB have been engaged in a desperate attempt to debauch (devalue) their currencies. They have had the predictably mediocre to poor results that one would expect from efforts made by this rare hybrid of an agency which combines the laziness of the banking class with the incompetence of the governing class.
The goal seems simple enough. Print money to pay existing debts and encourage people to spend and to take on new debt. So simple, that each of these Central Banks is currently running at their own pace down this calamitous path with little regard to how the outside world is reacting.
Guess what? The outside world is not reacting as expected.
What they did not take into account, at least until now, was that there is quite a bit of money to be made from the fact that they are all running at different paces down the same path. The nature of international finance is such that one Central Bank’s unbridled effort to debauch its currency leads to an opportunity to profit by borrowing in that nation’s currency and purchasing one of the other three currencies, which undermines the debauchery of the currency that is being purchased.
Stark, as most thinking persons, cannot stomach the debauchery in his midst
This is commonly known as the carry trade, and these large Central Banks have taken all of the guess work out of it for the past four years.
We suspect that these four Central Banks see the immediate need to eliminate interest rate spreads amongst their currencies which will force those who ply the carry trade to purchase currencies outside of this group.
In effect, this ultimate coordination of interest rate policies will cause these four currencies to “peg” to each other, which should assure that the debauchery of their respective currencies will continue unchecked and likely accelerate.
Will another stealth disaster befall the US this weekend? If these Central Banks somehow coordinate their collective debauchery of the currency, the economic devastation of millions will march on.
We spent the weekend attacking sections of our yard that had, until now, remained a wilderness reserve due to our inner laziness. Trees, shrubs, ivy that had been allowed to grow unchecked all fell victim to our saw and lopper (which must be the best tool ever invented). The yard now appears more barren, if not civilized, than before.
Like everything, it came at a price. Our back may never be the same and working in such close company with the pines seems to have triggered a latent allergy which nearly floored us for the balance of the weekend.
Fighting nature is not a long term strategy, but it has provided a strange sort of satisfaction in the near term.
This is the same sort of satisfaction that the Swiss National Bank must be feeling after they arbitrarily decided to cap the Franc:Euro exchange rate at 1.2:1, effectively throwing their lot in with the doomed Euro. From the Wall Street Journal:
“The SNB said Tuesday that it would “no longer tolerate” the euro falling below the minimum rate. In a statement, it said it will enforce the limit with “the utmost determination and is prepared to buy foreign currency in unlimited quantities.”
While this type of action should come as no surprise to our readers, it is significant because the Swiss have traditionally been a sort of neutral safe haven on a number of fronts, not the least of which being money and banking.
Their abstention from joining the Euro in the first place was a testament to this. Their capitulation today simply gives more credence to the extraordinary pressures that the competitive devaluation of all fiat currencies is placing on those Central Banks which for one reason or another have chosen not to compete.
The Swiss currency has been under siege ever since its neighbors embarked on the Euro currency experiment. Being the ingenious people that they are, the Swiss, with their mountain bunker airbases and underground buildings, were able to hold out for a long time.
What finally sent them over the edge? We are not certain but we can only imagine that, as the Franc soared unwittingly towards parity with the Euro, the intelligent Swiss flocked across the border to purchase whatever they could from their unwitting neighbors who are all unequally yoked to the Euro’s fate.
In other words, why shop in Geneva when your Francs go further in France?
Having seen enough, the SNB is has now crossed the ropes and is entering the Battle Royal of fiat currency devaluation. Who will be standing at the end?
Fiat Currencies Battle for Devaluation
This is a trick question, as our equally intelligent fellow tax-payers will quickly point out. There are no winners when something with no value is widely recognized as such. Only mayhem, yelling, pile drivers, body slams, blood, and drama.
Most investors are now waking up and realizing that it is time to hold currency reserves (household savings) in Gold, Silver, Pork loins, anything but fiat currencies.
Get out of the arena and avoid the ensuing traffic jam. This sort of mayhem is better enjoyed from the comfort of one’s home and the quicker one gets there the better!
Just when you thought it couldn’t get any worse, Friday delivered a doozy of a one-two punch to the financial markets. The jobs report everyone watches showed that no new jobs were added in August. While this should come as no surprise to the sober and observant, most traders and economists took it square on the jaw with their gloves down at their sides.
The Chart of the Day, courtesy of the Money Game, shows what intelligent people like yourself, fellow taxpayer, already know. This recession is not like anything the current authorities have ever dealt with before. It is a balance sheet problem that has only one solution, widespread default.
The second punch came in the form of a lawsuit filed by the US Government against some of the heavyweights in the banking industry. A list of the defendants can be seen here and lo and behold, Bank of America is one of them.
There is much to think about over the coming weekend, but we think Michael Pento of EuroPacific Capital summed it up best in and interview yesterday:
“…do not keep money in the bank. You have to buy something that the government cannot duplicate by fiat.”
By fiat, he means currency or, by extension, bonds that are denominated in them. Starting in January, the FED’s cheapest money ever begins to hit main street. Then inflation will be on everybody’s mind.
With the markets relatively calm until the sparks fly later next week, we conclude our tale. Our tale is, among other things, a recount of the recent history of Bank of America wrapped up in a vehicle metaphor: “Ode to the Auto Feo,” originally inspired by the recent passing of a vehicle that taught us many valuable lessons.
You can catch up with the “Ode to the Auto Feo”, Parts I,II, III, and IV by clicking on the following links.
After careful reflection, we could see that our reasons for adopting the fateful “gasoline only” policy in the Auto Feo were two-fold and that they reflected two of our character traits which, taken individually are admirable, yet when combined, can lead to terrible decision making.
The first and most obvious of these traits is frugality. While we do not think of ourselves as especially frugal, we do tend to choose certain items or activities upon which to focus our frugality. This focused frugality in and of itself can prove extremely useful where investments in proven strategies are concerned.
The second, perhaps less obvious, trait which was expressing itself in this decision was our sense of adventure. This trait can prove extremely useful when there is something to be gained from the undertaking and adequate margin for error for the undertaking’s failure.
The terrible decision, then, comes when we combine this sense of adventure, which, we repeat, requires ample margin for error, with our frugality which, by definition, does not provide for any margin of error.
Hence, in retrospect it was obvious that adopting the gasoline only policy in the case of the Auto Feo was a terrible decision. The only thing to be gained was sheer entertainment value reaped by those unaffected by the decision, a group that you, fellow taxpayer, are happily a part of.
Now that we understand the motivation for such a decision, we offer you the inspiration.
We were inspired by the desire to avoid buying a quart of oil each week (frugality) and, by extension, to avoid further staining our driveway with oil spilled out of the engine block. To accomplish this, we discovered (or perhaps imagined) an experiment that the military had conducted in which they had never put oil in new vehicles and had been able to rely on the resulting engine shavings caused by the friction to serve as a sort of permanent lubricant for the pistons as they slammed up and down in the engine block.
Now most sane persons and certainly those who are mechanically inclined will quickly realize that there is a big difference between our situation with a 17 year old vehicle which held two quarts of oil and the military who had new vehicles which had never been filled. There was also a big difference in our respective circumstances. The military could afford to lose a few vehicles to this sort of experiment. We, on the other hand, would be walking if it did not pan out.
The experiment began with promising results. The vehicle’s performance, which was not that great to begin with, deteriorated only slightly. This did not concern us as. After all, we only had 1.5 miles to drive each day. We continued through rain and shine, confident that we were actually on the verge of improving the Auto Feo’s performance and significantly extending its useful life.
Like so many of today’s fiscal and monetary policies, the delusion of sustainability was to be, uh, sustained until the day it came to a catastrophic end.
Six more months passed and two things happened in quick succession. One turned out to be an omen, while the other an illusory victory.
The omen appeared one late Spring evening when we came upon the Auto Feo in the parking garage on our return commute to find that the driver side window had been shattered and the vehicle’s contents, which consisted of a Bible and a pair of jumper cables, had been clumsily rifled through. The thief took the jumper cables.
With the bi-annual emissions test that is required in Oregon just one week away, our frugality again kicked in and we resolved to use clear plastic and duct tape to temporarily replace our driver-side window until we could be sure that the vehicle would be cleared by the authorities to operate another two years.
Note to self: If you need to cover a broken out window in a vehicle, make every attempt not to use opaque or transparent plastic.
We hobbled along for a week of near misses at intersections with limited visibility out of our driver’s side. On a Saturday, we made the trek to Hillsboro to submit the Auto Feo to the automotive equivalent of a colonoscopy.
Arriving at the emissions testing center, we found ourselves apologizing unnecessarily for the condition of the vehicle and explaining that we wanted assurance that Oregon’s green gods would allow the vehicle to continue to operate on the roads of their realm.
“We wanted to see if it would pass before fixing the window,” we offered.
“Looks like its seen better days, let’s take a look,” said the attendant.
She was apparently unfazed by the appearance of the vehicle and we later thought that apart from these people, only body shops and junkyards see more pathetic looking vehicles on a regular basis.
We winced as we watched the attendant place the probe into the Auto Feo’s tailpipe and had to remind ourselves that it was not human.
“Looks like it failed,” said the attendant. “But it did improve at 2,000 RPMs,”
“Can we give it another try?” we offered in a desperate last ditch effort to forestall the diagnosis.
“Why not?” said the attendant.
And then a miracle occurred. The Auto Feo passed the emissions test.
We joyfully drove home and quickly arranged to have the driver’s side window replaced. Our experiment was going swimmingly and the emissions test somehow validated our hypothesis. The military was right, we are better off not adding oil to your vehicle!
The Bitter End - Rest in Peace Auto Feo
Our delusion, which was now government sanctioned, was allowed to carry on.
Astute readers will quickly draw a parallel between our Auto Feo tale and Bank of America and the current banking system in general: Our emissions test is a metaphor for the so-called stress tests that have been run on the banks in America and Europe in an attempt to shore up confidence.
When will these delusions end?
In the case of the Auto Feo, two short months after the government sanctioned emissions test gave it the green light, we were forced to make a journey farther than our normal 1.5 mile daily jaunt.
Through knocks, heaves, and roars, the Auto Feo dutifully carried us on our route until, a mere .5 miles from home, the Auto Feo froze up.
We feared the worst but in our optimism we had the vehicle towed to our house. We waited for the morning.
The next morning, it started! This truly was a miracle.
Alas, the miracle was that the Auto Feo was simply saying goodbye. For in the evening, when we jumped in to drive it home, the Auto Feo did not immediately respond. A brief heave was all it could muster as we cranked the starter. And then, all was silent.
Our experiment was a failure, the Auto Feo had passed on.
Bank of America has been in the news a lot lately, and for all the wrong reasons. The behemoth is too big to succeed and for every client that is making money, there seem to be two or three who are going bankrupt, leaving B of A to foot the bill.
Although management will never admit it, the Bank is now throwing Hail Marys late in the fourth quarter in a desperate attempt to raise capital. While this is exciting to watch, you probably don’t want to put your money on the team who has resorted to such a desperation tactic.
Returning for one last, painful look at our automobile metaphor, It appears that the FED has decided not to change the oil (i.e. replace member banks’ worthless assets for fresh cash) and the banks will be left to lubricate their engines with the metal shavings as its worthless assets disintegrate on the balance sheet.
It was another beautiful weekend here in the Northwest, safely away from Irene and all of the mayhem that it has left in its wake. Summer arrived a bit late this year and, like recent stock market rallies, has had trouble gaining traction.
One must be content with the days of sunshine that come our way, for our instinct tells us that they will not last. For us here in the Northwest, that means days of sunshine must be enjoyed to the fullest. In the stock market, it means that any near term rally should be seen as an opportunity to sell.
In the long run, as the wheels come off the US Dollar mobile, stocks should outperform most other paper assets. In the short run, with Bank of America imploding, the resulting black hole threatens to suck a few trillion dollars out of the stock market.
Bank of America is too big to succeed and is in a hurry to raise capital that they do not need. Given the incredible incentive that most Bank Executives have to misrepresent their circumstances, it is a wonder that investor would take them seriously. Anyone who is not obligated to hold B of A stock and is still holding it is performing an act of charity, for that money will go quickly down the drain.
That story is the sordid tale of the Auto Feo. You can catch up with the “Ode to the Auto Feo”, Parts I,II, and III by clicking on the following links.
We arrived at home much later than we imagined. What should have been a brief run across town to kick the tires on a vehicle that we should have passed on had now become a frustrating and humiliating odyssey. We were stuck with a car that seemed doomed to be scrapped within the week. Our only consolation was that we had “only” dropped $1,300 on this bitter lesson.
We drove the overheating, smoking beast into our driveway. We were dripping with sweat as we were forced to turn the heat on in a desperate attempt to moderate the vehicle’s temperature as the thermostat was not performing its designated function.
Still, our ever supportive wife was optimistic:
“It only needs to make it the 1.5 miles each day,” she reassured us.
“And it has air-conditioning!”
She appeared as sold on the vehicle as we were until the smoke, which we were later to identify as oil leaking from the engine block onto the exhaust system, began to fill the thick summer evening air.
The smoking of the Auto Feo produced a dry ice effect coming out of the hood on the passenger side which we were never able to repair (the only attempt the mechanic made served to make it worse.)
Then, she saw the keyhole, or lack thereof. She shook her head.
“You say you didn’t notice this?”
All we could do was shrug. It was an oversight of classic proportions, like forgetting to make gravy for Thanksgiving dinner. There was no reasonable excuse that could be offered.
Her look confirmed what we had now known for about 90 minutes, we had been taken.
What could we do? Given the discovery of the oil leaking and the lack of the keyhole, we deemed the vehicle unacceptable. We had to attempt the unthinkable.
“We will humble ourselves and ask the Iranian to undo the deal,” we proclaimed, as if the matter were firmly under control. Swallowing one’s pride seemed preferable to seeing a testament to our own ignorance and impatience in our driveway.
We will spare you the details of our three telephone calls to the Iranian that ranged in tone from bold appeals to the man’s honor to tearful groveling. True to form, He out-groveled us and admitted that the cash had gone to his brother that fateful night.
We were stuck.
A Unique Vehicle - The Discovery of a James Bond Smokescreen
The next two weeks served to confirm that we had just made the worst purchase in recent memory. In addition to the inconvenience of entering the vehicle from the passenger side and the permanent smoke screen that the vehicle threw off as it drove:
-We experienced random starter issues (i.e. the vehicle started or failed to start completely at random)
-The cherished air conditioner broke in a plume of smoke on 3rd day,
-After 7 days, the odometer stopped turning, which explained how a 1993 could have a mere 143,000 miles.
Still, the vehicle ran and served its purpose of carting us to and from the train station, a mere 1.5 miles down the road, and even though the starter worked only when it chose to, it rarely failed to start the motor after teasing us for a time.
With the initial bad taste out of our mouth, a strange sort of respect began to grow between ourselves and the mistreated vehicle.
“Just give us 12 months,” we told the trusty steed, which was obviously on its last legs.
Somehow, it seemed to understand, and six months passed without incident.
At that point, we decided to embark upon a dangerous experiment, an experiment that in hindsight was so ridiculous that it made even B of A’s robo-signing of foreclosure documents seem reasonable by comparison.
We decided to put an end to the annoying smokescreen the vehicle threw off the cheapest way we could think of. From that point forward, the only fluid we would put into the Auto Feo was gasoline.
Like B of A’s robo-signing adventure, it was bound to backfire.
We will continue our Ode to the Auto Feo next week. The week appears to be ending anti-climactically. Ben Bernanke said nothing of consequence at the economic conference in Jackson Hole, Wyoming today. As we have stated here at The Mint previously, the FED has essentially shot its last round of lethal ammunition, announcing that rates will stay near 0% until at least 2013.
Anything further would make the FED look like more of a laughing stock than it already is. At this point, they are giving away money because no one will take it. Unwittingly, the FED’s taking this most recent stance will spur a spending spree that will certainly be labeled “economic recovery” by the politicians who have become accustomed to identifying capital consumption as “growth” and capital accumulation as something to be severely punished.
Fortunately, the currency regime will end long before it can further scorch the earth. Our only advice is to not hold dollars or bonds when it does end, for those assets are the ones that will burn.
It appears that the debt crisis in Europe is spreading to the football clubs of Spain and Italy. Allegedly some of the clubs can’t pay salaries and the players are striking in the off the field sense. This is probably why the great Samuel Eto’o went to Moscow to become the highest paid player, of any sport, mind you, in the world.
Samuel, opting for liquidity over fame, must figure that Russian billionaires are more likely than Europeans to pay their bills over the next three years. Not a bad bet.
We will leave you with some footage of Eto’o’s goals which should tide you over in case La Liga and La Nazionale don’t play for a time:
What a brilliant move, and one that should give equity holders just enough time to get out while they still have some pocket change left. Brilliant for Buffett, we mean. For B of A shareholders, it is simply the latest bungle by management who are naturally overwhelmed by the sheer magnitude of the bank’s compost pile that it calls a balance sheet.
Like a compost pile, B of A’s assets should be allowed to disintegrate and be spread around organically to provide fertilizer for enterprises that actually contribute wealth to society.
In its current state, B of A as an entity is not only cannibalizing itself and its shareholders, but also nearly anyone that it comes into contact with. As such, the term’s of Buffett’s deal have allowed him to go into the toxic mix with a biohazard suit on. Berkshire should be shielded from the eventual collapse, albeit as a secured creditor.
But enough of B of A’s present woes, we have been relating a personal anecdote which may help readers understand the origins of what will be a spectacular slow motion collapse of B of A.
At a minimum, we hope you get a laugh at our expense.
You can catch up with the Ode to the Auto Feo, Parts I and II by clicking on the following links.
We climbed into what our delusional mind had now identified as a BMW X5 smiling from ear to ear. No, it was not perfect but the vehicle was powerful. It felt like it was reliable and had been well cared for. Heck, the A/C even worked and had recently been charged! We were feeling extremely good about our purchase.
That feeling was soon to pass.
No matter that the Iranian had us call his brother to let him know we were purchasing the car. Presumably it was to arrange a ride home but in retrospect it appears that there was a “family” debt that needed to be settled and the proceeds from the sale were of great interest to the brother.
For our part, we had to call our brother in law to arrange a ride home. We drove our find back to Portland from Gladstone to pick him up, still in awe of our good fortune.
Then, it began to fall apart.
The Illusion is Shattered
Not literally, of course, but the mental construction of the BMW X5 and more importantly the vehicle’s reliability were quickly demolished as we watched the oil pressure drop, the check engine light go on, and the temperature gauge quickly approaching the red line.
“What is going on? This car was working flawlessly until now…” We thought to ourselves.
“Are we seeing things?”
Our mind attempted to pass it off as an optical illusion. After rubbing our eyes and focusing our mind, we turned off the A/C and reluctantly turned on the heater on that warm summer evening in a vain effort to regulate the temperature.
Then the car stalled. In vain, our mind made another attempt, an appeal to the supernatural.
“Perhaps the car is possessed,”
We dutifully exercised our authority in Christ to cast out demons from the lifeless mass of the Isuzu.
The Isuzu, for we would never again see the vehicle through our rose colored glasses, started up and again we were off, albeit at a slower pace and with the heater running.
When we arrived at his house, we were concerned. Maybe this car wasn’t worth $1,300. Maybe it is just scrap. Even so, we held to the hope that, if we could just get the vehicle home, it would serve its purpose to take us the 1.5 miles necessary for our daily commute. We let the car cool off.
Upon exiting the vehicle, we noticed a small but very important defect that had escaped our eagle eye during the inspection: The driver side door’s keyhole was a hole, as in, there was space where one would normally expect to insert the key.
Now we were flabbergasted. All of the other defects were somehow excusable because for the most part they had been invisible and had for whatever reason not manifested themselves during our inspection. This one, under the circumstances, was humiliating.
Oh, how we wish we had heeded the spousal veto!
We went to the front door of our brother in law’s house a mere shadow of the conquering hero we had been just 30 minutes before.
We felt we had just thrown $1,300 down the drain. It was not so much the sum that bothered us as the fact that we had allowed ourselves to become enamored with the vehicle and in the process had allowed ourselves to be blinded to its obvious faults.
After twenty minutes chatting with our sister, enough to let the vehicle cool down, we were off to Gladstone. The sun had long since set and the blackness matched our darkening mood.
Our brother in law attempted to cheer us up.
“This is a great car! You don’t really need the lock on the door and once you get it home, it should serve its purpose.”
His words of encouragement sustained us for the next painful part of our all night journey, bringing home our error in judgment to show to our loving, supportive, and rightfully skeptical wife.
We doubt such fear struck the board of Bank of America as they reported Countrywide Financials mortally wounded loan portfolio to their shareholders for the first time.
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…
Apart from earthquakes on the US East coast and Colorado all appears calm relative to the past two weeks. Ben Bernanke is scheduled to speak in Jackson Hole today which may or may not change that. As we have stated recently, with the FED’s most recent announcement of its intention to hold its funds rate below 0.25% until at least 2013, they essentially told the world that they were stepping back to let the chips fall where they may.
With the fate of the US dollar apparently sealed, we have a personal anecdote to share. Like central banking, this is for entertainment purposes only.
A little over a year ago, our second car, which we affectionately call the “Auto Feo” (Spanish for “ugly car”) died. It was a vehicle which had been struck by another vehicle on the passenger side, denting the wheel well. The damage was cosmetic and only noticeable when one opened the passenger door, causing a horrendous sound of metal crushing metal. While driving, the car would “bark” (as in, it sounded like a dog was after us) if the front wheel on the passenger side hit a sizeable bump, causing the tire to rub against the crimped wheel well.
The car served its purpose until the automatic transmission went out. Even then, we were able to salvage a year of commuter service out of it before the transmission had a catastrophic failure, after which we finally took it to the junk yard.
Without much time to mourn, we set our sights on finding a replacement for the Auto Feo.
Based on a previous good experience, we wanted an Isuzu Trooper or Rodeo, any model year that could be had for $1,300 or less. After passing on what in retrospect was the best option at the time (a 1995 Trooper) we were eager, perhaps too eager, to not let the next opportunity pass us by.
The Auto Feo - One vehicle, many lessons
We were ready to be taken for a ride, literally, figuratively, and with a pun intended in the worst possible way.
After doing our due diligence by surfing Craigslist, we found a 1993 Isuzu Rodeo with 143,000 miles on it which the owner was selling for the incredibly low price of $1,350. We were intrigued. In retrospect, we were sold before even driving the vehicle. A dangerous frame of mind when one considers Craigslist’s non-existent vetting of sellers. (Editor’s note: We are not criticizing Craigslist, which offers a tremendous service, but rather our own lack of diligence.)
We were foolish, impatient, and determined. It is a dangerous frame of mind to be in when making any purchase and a deadly combination of states of being when trolling the internet for a used vehicle.
As the warning lights in our mind began to go off, we pressed on. We called the number and arranged to “see” (read “purchase” as it should have obvious that our mind was made up) the vehicle that very evening.
It was a warm early summer evening, pleasant in every way. The wind was at our back, traffic was smooth as we wound our way across Portland to Gladstone. What could possibly go wrong?
As we approached the rendezvous with our mystery seller, we were relaxed, optimistic, and the epitome of P.T. Barnum’s sucker…
Fear is overwhelming optimism. Gold is crushing equities which only look good relative to a collapsing dollar. Check out the chart courtesy of The Money Game…
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