Agora Financial’s Rude Awakening

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Laguna Beach, California

• When the bailout dies and the music stops,
• Dude, where’s my $1.1 trillion dollars?
• The true value of a Corvette-less son and plenty more…

Eric Fry, reporting from Laguna Beach, California…

The ballyhooed bailout is dead…And so is the hope that Treasury Secretary Paulson would ride to the rescue of the U.S. financial markets.

Without any outward sign of anxiety or remorse, the U.S. Congress simply walked up to Paulson’s $700 billion steed and put a bullet through its skull. As the bailout legislation buckled to its knees and collapsed, the Dow Jones Industrial Average plummeted 777 points, or almost 7%…and that was the good news. The S&P 500 Index tumbled 8.8%, while the Nasdaq plummeted 9.1%.

These are not good results.

In fact, yesterday’s declines rank among the largest one-day stock market selloffs in U.S. history. As a result, Congress probably established new records for national wealth destruction…and that’s not easy to do. By defeating the bailout plan, Congress triggered a stock market selloff that erased about $1.1 trillion of shareholder wealth – a sum greater than the GDPs of Australia or South Korea or India!

Maybe the bailout package deserved to go down in defeat. And maybe a better bailout package will now emerge. And maybe therefore, the stock market will begin a dazzling recovery later this week or early next…Maybe.

But for now, all that is known is that share prices are falling. And all that is certain is that the crisis continues.

If we had to place a bet about near-term outcomes – with someone else’s money, of course – we’d bet that global equity markets will gyrate toward the downside for most of the next two days, until Congress passes a revised bailout bill on Thursday or Friday. Then stocks will rally for a little while.

Maybe stocks will rally for a long while. But the best bet, it seems, is to bet on the government to enact packages and policies that are, at core, inflationary. The best bet, it seems, is that the U.S. money supply will ramp upward and, therefore, that commodity prices will “catch a bid” and begin to move higher once again. Obviously, betting on commodities has been almost as painful as betting on financial stocks. But investors do well to remember that winning thoroughbreds do not always lead wire to wire. Investors also do well to remember that betting is optional. Holding cash is a worthy fallback plan.

The current market environment is miserable for almost everyone. This may not be as bad as it gets, but it sure feels like it. But adversity is a very odd creature. It is vile and odious. Even so, it is the creature that often escorts us into lands of financial opportunity and/or personal discovery that we never could have located on our own.

The true story below serves as a case in point…

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Bad Bailouts, Good Americans
By Robert P. Fry, Jr.

“I used to have my own construction company,” a taxi driver named Bruce explained. “We built houses here locally in Birmingham.”

“How big was the company,” I asked, “How many houses did you typically build?”

“Anywhere from 10 to 15 or so per year.”

“What happened?”

“We had a project going last year with 15 lots. We’d put in all the roads and sewers and had about 9 houses built when everything just stopped dead in its tracks…No buyers. And more than that. No phone calls, no inquiries, no agents calling, nothing. The market for new houses simply died.”

“So what did you do?” I asked.

“I’m still not sure that I handled it all correctly,” he began. “Our problem was the debt on the property. The interest cost was roughly $1,000 per day. So even though we stopped all of our other expenses, there was nothing we could do about that. But we had some other assets. So we started selling things to make the payments. Finally, we got so desperate, we sold my son’s Corvette and, after that, the condo in which he was living while attending the University of Alabama.

“I never thought I would have to do something like that,” he continued, “but the corvette was worth $25,000, which meant we could pay the bank for another month. But even after that, we ran out of money. So we went to the bank and started giving them the unsold houses in lieu of cash every time we got behind on the payments. When we finally ran out of houses to give them, we had no choice but to give them the remaining land and then file for bankruptcy.”

“That didn’t solve all the problems,” Bruce explained, “since we still needed to put food on the table and had other bills to pay. So late last year I leased a cab and started driving. That has worked out pretty well; the cab has really been a blessing. So I decided to buy this cab just a couple of months ago.”

Bruce, who looks to be about 50-something – with a daughter out of college and a Corvette-less son who’s a sophomore in college – works all night Friday and Saturday, gets up in the afternoon Saturday to watch a little football and gets up Sunday morning to go to church, then starts making runs to the Birmingham airport around 4:30 Monday morning. I heard not one word of complaint about his new life, just the simple statement, “The cab has been a real blessing.”

There were, of course, some good chuckles about that. With the move from business owner to cab driver, he admits that some of his friends and family haven’t known what to say to him.

“What are you doing these days, Bruce?” my friends ask.

“I’m driving a cab.”

“Oh. (Long pause.)…What kind of team do you think the Tide will have this year?”

But Bruce doesn’t seem to care much about “what the neighbors say.” He cares about what his family says. When it came to selling the Corvette, Bruce told me, “Taking my son for a drive and telling him that I needed to sell his car was probably the lowest and most difficult moment of my life.”

“We had done everything that we could for our kids and I was worried that I might have raised some sort of runny nosed-kid who needed a Corvette and would never be able to support himself. In addition to selling his car, we sold the condo where he was living and couldn’t even help him pay the rent on his apartment so he had to get a job while going to school.”

Bruce then told me how his son had gotten a job and was still doing great in school and now calls him regularly just to ask, “How are things going, Dad?”

At which point I said to Bruce, “So was it worth going into bankruptcy, just to learn that you have a son who is actually a stand-up man?”

After a moment’s reflection, Bruce smiled, “Yes it was.”

Bruce and his family and friends – people who get up every day and do what they need to do to provide for their families and to be good members of their communities – represent all that is still good in America. They are honorable people who spend all that they have to pay their debts, even if, like Bruce, it ultimately leads to bankruptcy. And when their businesses fail and life must go on, they take whatever job they can find to put food on the table.

How unlike the whiny, self-indulgent, profiteers who guided Wall Street’s leading investment banks onto the shoals of insolvency. These people, who have nearly destroyed America’s banking system, should be acknowledging their failures. Instead, they are demanding ever more of our resources, and of our children’s resources, as the price for not making things even worse.

America would be better served if Hank Paulson were driving a cab in Manhattan, instead of trying to give billions of dollars of other peoples’ money to his friends and colleagues on Wall Street. As a cab driver, there is some possibility that he would learn the value of a dollar, the importance of community and the inherent dignity of all good work. At the very least, we would all be $700 billion better off, less tips.

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[Rude Endnote: If you would like to comment on today’s column, or any other of our musings, please send your thoughts to the address below. Your editor is nursing a bit of a sore head this morning, both on account of yesterday’s “lost trillion” and the celebrations commemorating the end of fasting in his current locale here in Dubai. Still, we promise we’ll get around to reading them later today…after the aspirin and 2-minute noodles take effect.

Until tomorrow…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com