Contagion of Chaos

I wish millions of Americans had read John R. Talbott’s The Coming Crash in the Housing Market: 10 Things You Can Do Now to Protect Your Most Valuable Investment when it was published in April of 2003. And for those who didn’t read that, it would have been nice if a few million Americans would have read his book, Sell Now!: The End of the Housing Bubble in the beginning of 2006. Millions of dollars and thousands of foreclosures might have been stopped if the media had made us aware of these books.

            Talbott published Obamanomics in July of 2008 before he was elected, warning what Obama might bring to economic markets here and abroad. Maybe because it is still not acceptable to criticize Obama in much of the media, we hear little about Talbott’s newest book, Contagion: The Financial Epidemic that is Sweeping the Global Economy…And How to Protect Yourself from It.

            Here is the description of Contagion in Amazon.com: “Tough times are ahead and Talbott argues that the coming recession will be on a global scale, affecting economies across the world. We have had no real growth in GDP for the last ten years if purchases with government and personal debt are excluded. In effect, government borrowing and spending on the war and healthcare and Social Security and corporate give-aways combined with dramatic increases in personal spending funded by credit card and mortgage debt have funded unsustainable levels of personal and government consumption. The world’s banks are threatened with insolvency due to bad mortgage loans and will not be making new loans for any purposes for a very long time. Consumption, by definition, has to decline. Our financial markets worldwide are in chaos with the inability of any financial house or big hedge fund going bankrupt without pulling down the whole $400 trillion derivatives market and the global financial markets at the same time.”

Talbott wrote and finished this book right after the fall of Lehman and the TARP bailout engineered by Paulson, Bush, and Congress. Yet, as I read this book, I was astounded that what were predictions then have already been nearly 100% accurate and it’s only been a few months since publication. As I’ve been reading this book on my Amazon Kindle, I kept wondering if Talbott will get something wrong.

If he doesn’t get something wrong, we are all in deep trouble.

I don’t need to read a book to figure out the economic black hole we’re in. The government borrows and spends trillions within the first six weeks of Obama’s administration. The GDP falls (revised down 6.2% last quarter), job losses widen, Detroit automakers and auto suppliers teeter close to bankruptcy (even with the last government handout) while the government owned banks (Citibank and others,) Fannie and Freddie, and AIG keep asking for more government money before they land in total insolvency. GE, the model of industrial strength and reliability, has its stock near $8 a share and even Warren Buffet’s Berkshire Hathaway, the highest valued stock in the world, has fallen 44% in a year. In his yearly address to shareholders, Buffett admitted that the U.S. economy will certainly be in “shambles” in 2009 and “probably well beyond.” Yet, Buffett, with his characteristic optimism, wrote, “America’s best days lie ahead.”

Don’t bet Talbott on that one. He believes that as the baby boomers begin their retirement years, there is no way that Medicare and Social Security will be solvent. The older citizens will battle the younger ones for limited dollars and jobs will remain scarce. He also believes that the companies that caused havoc to our economy and wouldn’t survive without government help shouldn’t survive. This list includes AIG, GM, and Citigroup. If what they did over many years leads them to bankruptcy, so be it. The strong will come in and buy them out or they will get stronger after bankruptcy.

Bush and Paulsen begrudgingly set the tone of “bailout nation” and Obama’s gang is continuing the bailouts at an accelerated pace, giving more money to AIG, Fannie Mae, Citibank, and Bank of America. They are also proposing helping home owners who can’t pay their mortgages to avoid foreclosures with “cramdown” provisions that banks and mortgage companies must provide.

Who knows if or when the bailouts will ever end? Nothing seems to be giving anyone any confidence and helping the economy heal.

Jim Cramer, certainly no fiscal conservative, has been vehemently opposed to the “radical agenda” of “President Polosi, I mean Obama,” as he jokingly refers. This “White House of Pain” has presided over what Jim called “the greatest wealth destruction I have seen by a US president.” When Obama’s press secretary laughed and commented that Jim Cramer’s television audience was “small,” Jim shot back that “the only thing small about my audience is their 401Ks, pension plans, and annuities.”

Yet, Jim doesn’t yell to get people stuck in despair to do nothing. He wants people to “stay in the game.” It is important to look at your retirement statements regularly, not just stay away. Investor Todd Harrison (“Investors Assume the ‘Ostrich Position,” Minyanville.com, March 4, 2009) wrote about a member of his family who told him last September when buying GE and Apple that “Things will eventually go back up. It always does.” Now, he just stops looking at his account.

Instead of burying your head and hoping for the best, Harrison writes, “be proactive” He compares financial awareness to going on a scale.  “Just because you ate donuts—whether they look like Citigroup or smell like General Electric—doesn’t mean you must continue to operate in the same manner. Read the ingredients, look at the expiration date, balance your budget and be psyched—genuinely psyched—that you’re gonna look and feel better than you did yesterday.”

Talbott recommends gold and cash and TIP funds (funds that pay based on the inflation rate.) Others recommend looking at the long term but making sure that we don’t lose interest and stop watching the markets. No matter how pessimistic we are in this contagion of financial chaos, we should not bury our heads. We need to take action every week and weigh ourselves financially so we don’t crumble under the psychological weight. We need to stay strong and be positive that we will survive whatever Obama, Geithner, Bernanke, and the markets throw at us.

What else can we do?