The air will soon be thick with bailout plans, "fixes," rhetoric, more dumbass commentary from Jim Cramer and anger. There will be much anger. I hope your preparations are in place.
Monday, September 29, 2008
Will it be an IMF big shot? A Chinese Communist Party Leader? A European Central Banker?I don't know. But when someone steps up and says that the U.S. is insolvent and that the big creditors are arranging a meeting to discuss the debt obligations, it is game over.
The elites will flee to Europe or Australia or various safe havens and live off what they looted from the dying Republic.
The rest of us will remain here. Property rights thrown into confusion due to securitization of mortgages. Tax base shredded. Government programs reduced to a trickle. Law enforcement challenged by active resistance.
Read. Ponder. Act.Credit Bubble Bulletin, 25 September 2008
by Doug Noland
...The Financial Structure that fueled myriad Credit Bubbles, asset Bubbles, economic Bubbles and overliquefied the entire world is today no longer viable. Wall Street finance is at this point an unmitigated bust, with a few of the “holdout” sectors (i.e. the Credit default market and the hedge fund community) now succumbing. The great Financial Alchemy of transforming endless risky loans into perceived safe and liquid “money”-like instruments has run its historic course. And with risky loans – household, financial sector, business, municipal and speculator – having come to play such a prominent role in the nature of spending and “output”, the near elimination of risky lending will prove a momentous financial and economic development. The U.S. Bubble economy is today in dire straits.Can Taxpayers Actually Expect a Profit on the Bailout?, 29 September 2008
by Charles Hugh Smith
...What is never mentioned in all this giddy talk of taxpayers "profiting" from buying the most distressed mortgages (and the MBS which bundled them) is that the future value of many of these properties is a negative number: that is, even if a buyer paid only $1, the house requires tens of thousands of dollars in repairs just to become habitable again. And an uninhabitable house has literally no value except scrap value for the materials.
In many cases, the scrap value will be less than the cost of the diesel fuel consumed by the bulldozer and truck taking the scrap to the dump...
The Looting Files
by John Robb
...the frantic week of negotiations in Congress over the bail-out bill hasn't produced any meaningful changes (everything added has massive loopholes -from compensation limits to insurance to equity warrants - that effectively make them completely useless). So, the bill as it stands, is still the same looting bill that Paulson originally requested. The Treasury will pay the banks full price (par before the crisis hit) and not much else. Net effect? Not much. It will be Christmas and New Years on Wall Street until the money runs out (which will be soon, particularly given the level of theft that will occur), and the crunch will begin again in earnest (which will prompt calls for more money from the Treasury). In short, the system is WAY too big to save. Better to do combat triage and save what you can...
Beware October, friends. Be Prepared.
Sunday, September 28, 2008
It looks like the Congressfolk will pass a "rescue" bill this week to address the solvency and credit crises that are sweeping through the banking system like smallpox over North America.Lawmakers Say They Have Breakthrough on Rescue Plan
by James Rowley and Alison Vekshin, Bloomberg
Sept. 28 (Bloomberg) -- U.S. lawmakers said they made a breakthrough in talks on a $700 billion plan to revive the credit markets and expect to announce an agreement on legislation later today.
Negotiators resolved "our differences so we can go forward with a package to stabilize the market,'' House Speaker Nancy Pelosi told reporters when talks at the Capitol ended after midnight Washington time. Lawmakers will review a written version of the plan later today, she said. The House may vote tomorrow...
I've mentioned this before, but want to reemphasize what I think will be critical blowback from this "rescue" or "stabilizaton" or whatever we are supposed to call it, as long as we don't use the word bailout.
The Powers That Be have shot their last great wad here. They are banking (hah hah) their entire credibility on this Great Plan to Save The World (GPTSTW).
- What happens when the stock markets (and all those 401(k) plans) still corrects by 35% or 50%? The GPTSTW does not address the fundamentals that are at the root of the problem. Lot's of Baby Boomers will watch their retirement money go up in flames, even after this bill was supposed to save them...
- Cultural Mood is rapidly shifting from an expansive and optmistic "crack and hookers for everyone!" mood to a much more somber, angry, sobering mood. This is the time bills are paid and scores are settled. No, I can't give you a specific index to track this, but pay attention to the moods, to the actions to even the word choices of your fellow citizens in the coming weeks. The world is now different and becoming radically more so with every passing day.
- Not one dime of this $700 billion will pay down a cent on the massive credit card liabilities that the U.S. consumer groans under.
- Not one dime of this $700 billion will help the transportation budget of a young family that bought a big house out in the exurbs and is struggling with the gasoline bill for the commute.
- Not one dime of this $700 billion will help local and state governments that are watching sales and property tax receipts dry up.
- This plan won't directly help tha unknown number of regional banks that will be crushed as price discovery on these mortgage backed securities forces them to write down their assets.
- This plan doesn't help a single person of Generation X or Generation Y struggling with student debt forced on them by their elders, who got to go to college for damn near free. What will that do to the supply of minions to slave away for the elites if you choke off the conveyer belt of young minds from the education system into B School, stock brokerage firms and law schools?
- Just how angry will the electorate be if their elected representatives support this thing and we still fall into a nasty recession? What kinds of political policies will such an angry electorate follow in the future if they were sold out by their current reps and senators?
There May Be No "Next Plan"
The financial elites have had the man of their dreams, Hank Paulson, running point on this project.
They've taken Larry Kudlow into a back room and reprogrammed him as a socialist.
They've called up everyone's favorite grandfatherly, friendly-looking, bottom-feeding shark of the investment world Warren Buffett to pimp out the GPTSTW.
No one is talking about what happens if this plan fails. Just like Super-SIV failed to stop the initial meltdowns in the CDS markets. Just like the bailout of Fannie and Freddie and Bear Stearns and AIG failed to stem the worries about counterparty risk in the derivatives world. Just like the forced sale of WaMu to JP Morgan Chase failed to stem the worries in the banking system.
What happens when Paulson, et al, come back asking for another $700 billion?
Who will take the lead on the next GPTSTW?
Credibility, like virtue, matters in the long run. Sure, this plan seems pragmatic and necessary to some people, but it can't fix a fundamentally flawed system.
These people are willing to risk destroying the credibility of the U.S. Treasury, of the Federal Reserve, of the entire U.S. government, of the entire U.S. equity market system - all on what is, in my opinion, a badly flawed "solution."
Pray it works, because it probably means that if it passes and still fails to stem the tide of devastation - it won't matter...
I expect a huge rally on Monday. Call it a spike to DJIA 12,000 or so through Wednesday. I expect to see Cramer nearly wetting himself with glee over the passage of the act and to see him, along with the other equity-pimps, begging people to buy into this market.
Have fun with that.
Beware October, friends. Be Prepared.
Life continues to imitate the art and science of Socionomics as we pull more headlines from the pages of Socionomics: The Science and History of Social Prediction:
Hong Kong man arrested over bank run rumors - Hong Kong police have arrested a man for allegedly spreading rumors on the Internet about a bank run amid anxiety in the Chinese territory about the U.S. financial crisis, police said Sunday...
Fired Indian Workers Kill Boss - ...in India a mob of angry workers attacked and killed the CEO who had just fired them from their jobs...
Britain to Nationalize Bradford & Bingley: Report - Britain will nationalize troubled mortgage lender Bradford & Bingley, the BBC reported on Saturday...
Bailout foes hold day of protests - The public backlash against the Bush administration's proposal to use tax dollars to bailout Wall Street spilled into the streets Thursday...
Friday, September 26, 2008
The US has been so hurt by the financial turmoil that markets now view its credit worthiness as akin to - or even worse than - that of McDonald’s, a shocking fact even if you believe that both are fronted by clowns.
One broker quoted McDonald’s CDS at about 26.5 basis points, compared with 30bp for the US, on Friday morning and another desk quoted both about 25bp. The picture has worsened since the news that politicians and public servants in Washington failed to seal a financial bail-out deal on Thursday night. McDonald’s closed at 28bp versus 25bp for the US on Thursday, according to Markit...
Just got back from lunch and now have to go puke.
Hat tip John Robb
I had assumed that the Wall Street Bailout (pardon me, stabilization) Plan was going to pass. I figured that the socionomically-predicted anger wouldn't have reached the political elites just yet, but it appears the Congressfolk are feeling some serious heat from the pepples. Hell, Mish is running a one-man political campaign on his own time to stop this bill dead in its tracks.
Now, whether this "opposition" is just posturing or not, we'll see. I still think that this current crop of legislative folks is way too indebted to the financial powers that be to not support something, but we live in a time of rising anger, so we'll see.
Pray for Failure, Hank
Frankly, the big-time banksters had best hope the Paulson Plan does NOT pass, in my opinion. This stabilization plan is not going to help regional banks much (it may actually hurt them via price discovery and forced write-downs) and the average consumer/debt-slave won't be helped in the short term either. The big investment houses (now commerical banks) like Goldman and Morgan Stanley desparately need something like this, but I have faith in Goldman Sachs that they will find a way to weasel a taxpayer bailout of some sort before this is all over.
If the bill DOES pass and the inevitable stock market correction and serious recession still occurrs as I expect, the elites will have wasted a lot of political capital, trotted out Warren Buffett to shill for them and had El Senor Presidente Bush interrupt prime time TV to no avail.
Now, if the plan doesn't pass, the elites and academics can sit back and say "I told you so, you ignorant peasants" and possibly have a chance to rebuild some credibility (earned or not) and a chance to try out some other "big fix" in the future - which will be equally doomed due to the indebted nature of the average consumer, but let's ignore that for now...
Wow. Much more to talk about, but my day job is killing me with research and a huge project, so we'll see how it plays out this afternoon and revisit this over the weekend.
Beware October, friends. Be prepared.
Wednesday, September 24, 2008
Tuesday, September 23, 2008
The potential for these investigations to turn into show trials to feed an angry public is huge. Giuliani made his name fighting the mob. The next up-and-comers will make their names feeding the mob...FBI investigating companies at heart of meltdown
By LARA JAKES JORDAN Associated Press Writer
(WASHINGTON) The FBI is investigating four major U.S. financial institutions whose collapse helped trigger a $700 billion bailout plan by the Bush administration, The Associated Press has learned.
Two law enforcement officials said Tuesday the FBI is looking at potential fraud by mortgage finance giants Fannie Mae and Freddie Mac, and insurer American International Group Inc. Additionally, a senior law enforcement official said Lehman
Brothers Holdings Inc. also is under investigation.
The inquiries will focus on the financial institutions and the individuals that ran them, the senior law enforcement official said...
I recall years ago reading and re-reading the final chapter of At the Crest of the Tidal Wave, where Bob Prechter lays out a scenario for the crash as it unfolds in time. The past few weeks, it is like watching that book come to life every time I turn on the television.
Right on cue, as predicted in Socionomics: The Science and History of Social Prediction:
Resentment Grows - Voters on both sides of the political divide express anger over a plan to use $700 billion of taxpayer money to bail out Wall Street firms...
Bailout Bill Backlash: Anger Rises Over Cost, Fair Play - The White House and Democratic congressional leaders tried to stitch together a compromise Wall Street bailout package yesterday amid a growing backlash across the political spectrum...
Experts See a Need for Punitive Action in Bailout - “This administration is asking for a $700 billion blank check to be put in the hands of Henry Paulson, a guy who totally missed this, and has been wrong about almost everything...”
Voodoo may get rid of mean boss - "...Westerners are increasingly interested in voodoo," agrees Jacob Limikpo, president of the fetish market in Lome, capital of the West African nation of Togo. "I think it's part of a growing fascination with the supernatural..."
Anger, resentment, pessimism, the death of reason are all riding high. Socionomic Theory says they are but the outriders for the more vicious horsemen of violence, secession, xenophobia and the blind anger to tear down the structures of the old era, be it buildings, infrastructure, social norms or old heroes.
Beware October. Be prepared, friends.
UPDATE: And then there is this rabble-rousing gem:
Bailout CEOs who refuse pay cuts unpatriotic - Wall Street titans who refuse to take a pay cut to join a proposed $700-billion U.S. financial system bailout were "selfish and unpatriotic", a senior Democrat said on Tuesday...
One thing to remember as you read various headlines or blog posts - yes, there will be much sound and fury over this proposed "stabilization" plan (I was watching CNBC early this morning and they have decided that the public anger over the plan is because it is described as a bailout - if we don't use bad words, nothing bad will happen), yes there will be much anger and venting of frustration over this transfer of wealth from Chinese buyers of U.S. debt to Paulson's banker friends, yes there will be much anger and frustration over the continuing beat-down to the Constitution that is occuring. All of it will be justifiable and none of it will matter to you over the next month.
The financial elites are scared shitless. You should be too. I strongly, strongly, strongly advise you to go to a site like Ready.gov and build up an emergency kit. Have some food on hand. Have cash.
If you haven't done so already, take advantage of the latest EWI offer and get Bob Prechter's latest forecast for FREE. He has been preparing for this meltdown for a decade. He was early, but he was right. Take advantage of his insight.
If the banking system locks up and the ATMs lock up, then the supply chain locks up. Gasoline doesn't get delivered. Coal trains don't get loaded. Brownouts start rolling.
October will be bad. Be in a position where you could make it through the month without having to go to an ATM or use a credit card for food or necessities. Have enough to share with friends and family.
Monday, September 22, 2008
What is there really to say? Lot's to discuss, but nothing really new to offer you.
- The "bailout" plan will screw taxpayers. There are better ways to recapitalize banks (here's a solution offered up by Mish), but the pressure play that SecTreas is putting on the Congress makes me assume they will fold like a house of cards, roll over and give in. Then we get to see the blowback - dollar crash? Bond crash?
- Pakistan continues to simmer. Fighting between U.S. and Pakistani forces would normally be front-page news. This will end badly.
- There is still no grand bargain with Iran. I had assumed we would have wrapped that up by now. The longer things drag on with no agreement between the U.S. over how to divvy up Iraq and over the Iranian nuke program, the higher odds we face of someone making a huge mistake and plunging the region into a war that would devastate the world.
- The dynamics at play are very negative for the U.S. short term. If you read only one other blog post this week, make sure you read John Robb's posting entitled ONWARD TO A HOLLOW STATE. Think about what that means to you, your finances and your community.
No answers. Just many questions. Be ready for anything.
Sunday, September 21, 2008
I got this link from a friend of mine who votes Democratic a lot. I won't repost the profane parts here - click over and get a full blast:
...I also find myself drawn to provisions that would serve no useful purpose except to insult the industry, like requiring the CEOs, CFOs and the chair of the board of any entity that sells mortgage related securities to the Treasury Department to certify that they have completed an approved course in credit counseling. That is now required of consumers filing bankruptcy to make sure they feel properly humiliated for being head over heels in debt, although most lost control of their finances because of a serious illness in the family. That would just be petty and childish, and completely in character for me...
It's up over at Calcuated Risk as well. If it is "real" and not agit-prop, then the socionomically predicted anger may actually be swelling from unfocused irritation to a "heads will roll" focused hate. Show trials and witch hunts to follow and the financial elites will have built the bonfire for their own immolation.
Comments From Digg and the Blog Post"Finally, someone is pissed instead of cowed. "
"More like this, please..."
"... I wanna have his/her baby...."
"...There's a Class War raging in this country, and it was the rich few percent that declared war on the rest of us. Now it's time to let them know that they're in a war. Not only did they declare war on us, but they expect us to fight the war against ourselves..."
The usual caveats. I don't endorse violence against CEOs of corrupt institutions, nor do I condonce violence against Treasury Secretaries who presume to request laws that exempt any decisions he makes with $700 billion in taxpayer money from ANY oversight. Not at all.
Frankly, I think this is probably agit-prop. The Democratic brand of politics has been the prison bitch of politics for so long, I can't imagine they have anyone with the cajones left to really stand up to the finance elites, even via email - especially when most of them have been on the receiving end of massive bribes, pardon me, donations from the Fannie Maes and Freddie Macs of the world along with their Republican colleagues. I certainly don't regard them as more competent than the Republican brand that has been marketed to us over the last 8 years, so don't take this post as partisan support of either brand.
I really try to steer away from commenting on U.S. politics as I think the massive problems about to wash over this great country will transcend petty party politics and to discuss how we should rearrange the deck chairs on the Titanic seems pointless to me, but others find it enjoyable and who am I to piss on their parade?
I'm posting this solely for the sheer pure socionomic signal it gives off. Anger is rising. This credit crisis will be the largest economic collapse in 1500 years. The storm of rage is just now brewing. I suggest you re-read the two volume set that lays out socionomics. It is proving itself to be a very viable and valuable model.
Thursday, September 18, 2008
The SEC has decided to ban short selling of any financial stock. I suggest you click on the link and read the document. The text part is reasonably short and I regard it as fascinating reading.
To actually see some of the things I've jabbered about over the years actually come true, in my country, is sickening and amazing. It's one thing to talk in the abstract about the potential for market lock-ups or ham-fisted government intervention. It's not so bad - to me - watching this foolishness play out in places like Argentina. But to watch the USA betray centuries of economic theory and generations of hard work by overt subsidization of corrupt institutions that leveraged themselves into this situation stings because it is personal. This isn't some Banana Republic doing this - it is the USA. Well, the USSRA, I guess.
The SEC Document
I suggest you read the SEC announcement linked to above, mainly for the entertainment value. You know that the wording of this document was vetted by numerous functionaries. I love some of the language -
SEC: "...we are concerned about the possible unnecessary or artificial price movements based on unfounded rumors regarding the stability of financial institutions..."
FJ: What about the facts of balanced sheets highly leveraged to toxic assets?
SEC: "...Recent market conditions have made us concerned that short selling in the securities of a wider range of financial institutions may be causing sudden and excessive fluctuations of the prices of such securities in such a manner so as to threaten fair and orderly markets..."
FJ: And when it was manufacturing companies going out of business or the tech companies getting killed when the dot com bubble blew up, that was fine - just don't threaten the financial elites in the USSRA - screw everyone else.
SEC: "...the Commission has concluded that there continues to exist the potential of sudden and excessive fluctuations of securities prices generally and disruption in the functioning of the securities markets that could threaten fair and orderly markets..."
FJ: By what standard? By whose measure?
SEC: "...we have concluded that, to prevent substantial disruption in the securities markets, temporarily prohibiting any person from effecting a short sale in the publicly traded securities of certain financial firms, which entities are identified in Appendix A ("Included Financial Firms"), is in the public interest and for the protection of investors to maintain or restore fair and orderly securities markets..."
FJ: The balance sheets of the financial firms must be even worse than I'd feared.
And then there is the list. Curious. I wonder about the standard used to create that list. What about GE? It's one of the largest financial institutions in the USSRA, but it is not on the list. Hmmmm. Just something to ponder.
UPDATE: GE doesn't pay those lobbyists massive amounts of dough for nuthin'... GE Expected to Be Added to SEC's No-Short List Watch the panicked jackals clamor for more.
The Treasury to Backstop Money Market Funds
The Politburo has also decided to backstop money market funds, "to temporarily protect investors from losses on money- market mutual funds."
Hey - my investment club bought some GE awhile back and it has been slammed. Maybe the Treasury will step in and "temporarily protect" me from this bad investment decision? Where's my check?
Okay, enough rambling. What will the effects be to me and thee? Not sure, to be quite honest. Over the past few weeks I've mentioned, sort of tongue in cheek, that watching los federales respond to this crisis is like reading Atlas Shrugged, especially towards the middle and end where we see the blowback effects of the various failed government policies that get implemented. Love her or hate her, Ayn Rand was onto something there.
I wouldn't be shocked to see the DJIA up 1,000 points today. That said, Bill over at Calculated Risk (one of the BEST places on the web for financial analysis of the credit and mortgage markets) was kind enough to answer a question for me regarding current shorts - it looks like they won't be forced to unwind and the big players with over $100 million in assets will have new reporting requirements, so maybe we won't see an enormous run-up like we'd have if they forced all existing shorts to unwind.
Like any big dose of Meth, life seems like on big party now, but the after-effects are going to be awful.
No future shorts on these financials means that you won't have a new group of speculators to add liquidity to the system. Now, when there is a bid on a stock it won't be from someone who is covering their short position, possibly buying the stock at a higher price than the fundamentals say, just so they can take profits. You will only have money coming in at prices investors think is realistic for financial companies. This should scare the living hell out of the financial elites.
Why? Because the panic we are seeing would indicate that the powers that be know something we little people don't. What if the value of many of these firms is zero? Think that's too over the top? Washington Mutual, one of the largest banks in the USSRA is trying to pimp itself out on the auction block. After having several big banks inspect its balance sheet, no one has yet stepped up to buy WaMu, even at what are being claimed are "fire sale" prices. No one knows how deep the rabbit hole of toxic "assets" goes. The value of many of these financial firms could actually be negative once exposure to all potential liabilities is figured in. WaMu may get a deal done, especially if there is federale money involved to backstop it, but can los federales do this for every bank in the USSRA? Maybe. Nothing would surprise me anymore.
No new advice here, friends. Keep your head, keep an eye on the markets. Don't believe anything officially announced until you have researched it fully.
You can rail against it all you want but, in my experience, fighting a fixed game is something to be done at carnivals; not stock markets. - Jeff Macke
Think about that when your broker calls you up and wants you to jump in and scoop up a bunch of "great deals" at this "historic market bottom."
I have a couple of longer posts still cooking, but I do want to drop a few comments.
The DJIA whipsawed today, up, down, then up 400 to close. You'd hope that outright nationalization of major economic entities and a flood of liquidity would at least give the stock pimps a little bang for their buck. This was a good ol' fashioned short squeeze. Expect more volatility like this. Beware October.
The Brits have lost their minds and banned short-selling of financial stocks. I kid you not. Good luck with that as it will create "air pockets" beneath the stocks' prices and make them susceptible to massive volatility. To actually make their money, shorts must BUY to cover positions, thus putting an eventual floor under stock prices. Yes, I know, I know, Great SuperGeniuses like Cramer are bitching about using short positions to crush financial stocks. It's a load of crap. Now, naked short selling is fraud and I agree with ending that. Short-selling itself is not abusive. As a matter of fact, it was shorts who found the rot in companies like Enron and Tyco long before the media and Cramer and other bubbleheads got around to it. Question for those who think short-selling is the cause of this debacle - would these companies be in this shape if they were leveraged 2:1 as opposed to 20:1? Oh gosh, it can't be the balance sheet or the fact that these financial companies have been operated in a reckless manner. Gotta blame someone. Oh well, if nothing else, blaming shorts has a long pedigree.
UPDATE: Wow. The SEC is now talking about a ban on short selling here in the USSRA. Dear God, did I die and wake up in a Marxist Hell?
I've held off on commenting about the unrest in Bolivia and the continuing violence in Mexico. Mainly it is because there is nothing else to say. Memes such as secession and the rot of the nation-state are taking root in the periphery. They'll make their way to the core all too soon. If the hundreds of posts on the coming wave of 4GW actions that could potentially sweep America haven't convinced you to at least pay attention to this trend, well, then there ain't much else to say about it.
Be prepared. DJIA 12,000 is pretty solid resistance. The market movers may try and run it up that high, if nothing else than to kill the shorts and "validate" current government actions.
Did I mention, beware October?
Pay attention folks. We are living in historic times.
UPDATE: Just a reminder. The Elliott Wave people are making their Safe Banks Report available for free. It consists of Top 100 Safest U.S. banks (two for each state), their recommendations on how to choose a safe bank, five warning signs to look for in risky banks (well worth checking out), their view on the ability of FDIC to really protect you, and for those of you who swing a big line in the financial world, they provide tips on safe international banking.
The usual disclaimer applies - I do get a small credit for people who sign up for this free service. If you don't like that, then please type in the Elliott Wave International address directly and sign up, thus avoiding the tracking ID. This is a free report and may turn out to be a "must have" soon. It doesn't matter to me if I get credit or not. It may matter to you whether you have this information in hand now or later.
Wednesday, September 17, 2008
I made it clear back on 31 July that Cramer was high for calling a bottom in stocks (please replay the CNBC video clip and judge for yourself if Cramer is out of touch or is trying to snowball you). As of 10:30 a.m. central time, the DJIA is down 339 at around 10,719, below the 15 July lows.
If you aren't moved into safe harbor financial products by now, well, either do it now or get ready to suffer some significant pain.
Lies or Mistakes by the Experts
- Stocks won't retest the July 15th lows
- House prices never go down for long
- U.S. economic fundamentals are sound
- The U.S. financial elites believe in the free market
- Deficits don't matter
YOU have to take full responsibility for judging events. We are in a transition period. The experts are in no better position than you to gauge events. The experts are actually in a worse position to deal with this new world, their egos are bound up in all this knowledge they think they have.
The lies will continue. The elites will continue to try and steer your thought patterns in directions they want them to go. This may not necessarily be the best thing for you and your family. Look beyond the media and the email chains and the message board propaganda. A world of hurt is coming our way. Be prepared.
UPDATE: This is ominous. Pressure is building on the pristine "AAA" rating of the United States after a federal bailout of American International Group Inc, Standard & Poor's sovereign ratings committee chairman said on Wednesday...
The AIG story is big, yes, but after the federales dove in to save Fannie and Freddie, you knew more of the same was going to occur. It is what it is. The potential exposure to U.S. taxpayers is huge, but everyone is betting that things will turn around.
All this "sideline money" that is supposed to eventually save the market is now even more nervous. When one of the bedrock financial products starts to fall apart, it is another sign that this is not just some ordinary bear market.
Tuesday, September 16, 2008
Recent events and a series of email questions has led me to dig up a reply I put up on the LATOC Forum last year, back when I was still active there. This was in response to a post by someone who had just learned about the concept of peak oil and was hoping for some way to rally the masses to rise up and ween themselves from oil. I think the following applies not just to peak oil, but to the new situation I believe our civlization will find itself in come early next year.
...If we can restructure society to not be dependent on growth we can save ourselves I think there has to be a way. Spread it out the hardship, ween off oil, put a positive hopefull spin on it but make sure everyone realizes whats going on but doesn't panic and there is a huge push for local sustainable agriculture, population control, etc....
You might want to stop hoping for a big collective change of attitudes - remember, we have multiple generations of people in the U.S. who have their entire mental software coded to operate in a world of cheap fossil fuels, cheap personal transportation and ever-increasing standards of living. That's "normal" to the only frame of reference they've ever had and acting against that behavior pattern is "abnormal" - and most folks will move heaven and earth not to stand too far out of whatever crowd they have chosen to associate with. Their entire self-worth and egos are bound up in a future that will always be faster, richer, tech-enhanced and easily accessed in a big SUV. In addition, think about the vast, vast majority of the population - they are skilled only in office trades or service work intermediated by computers. What are they going to do, move out to a 20 acre plot of land, raise goats, compost their own manure and raise close to 90% of their own food in intensive ag? We are talking about people who have been literally hypnotized by various media and government promises for their entire lives. They aren't going to move to an eco-commune in rural Missouri in large numbers, even if they intellectually believe what they see when they read about oil depletion because, in my opinion, it hasn't reached their gut level of emotional buy-in and probably won't until things have gone off the cliff.
On one level, you can completely understand it. The vast majority of folks have profited and benefited directly by buying into a fossil-fuel intensive, consumerist lifestyle. Big cars, big homes that "always" go up in value, great food, booze, easy access to credit, no social restraints that you would find in insular communities that require certain behavior patterns be observed in order to survive, etc. - it's all most people are familiar with, all they've experienced their entire lives. They've seen doomers get "proven wrong" time and time again. Their minds are wired to function properly only in this consumerist, cheap fossil fuel world.
I guess my point is, if you are new to Peak Oil, do yourself a favor and don't waste time waiting for the masses to rise up against the Man or the workers of the world to unite or the o-ppressed proletariat to do whatever it is they are supposed to do. You have opened your mind to the reality of Peak Oil - you are no longer one of them. You have taken the red pill and it is time to realize that you have parted ways with 99% of your fellow countrymen. You can control you attitude, the kind of knowledge you stockpile in your skull, the people you tie yourself to through the bonds of friendship or family and your geographic location. Find a place you want to live when TSHTF, find a group of friends and family to act as a support (and more important, be a supporter to them), learn to be a producer - not a consumer and keep as cheerful an attitude as you can.
Maybe the financial markets will miraculously recover and we can all go back to going deep into debt buying stuff we don't need. However, if the worm has turned, then some of the above might be worth thinking about.
Monday, September 15, 2008
NASDAQ down 3.60%
S&P 500 down 4.71%
Russell 2000 down 4.23%
These numbers matter. The systemic problems that are being blamed on the downdraft matter. The descent of social mood into anger matters most of all. The world is changing before our eyes - today was a key marker.
How will this affect Main Street America?
Let's pose a series of questions and let you answer it yourself.
What does a rapid decline in asset prices do to the balance sheet of the local and national banks? What happens to you if you can't borrow money?
When banks have to repair their balance sheets, one avenue is via credit card fees and charges. Do your credit cards allow the issuer (the bank) to raise the interest rate whenever they want, for whatever reason? Might want to check that if you carry a balance.
We've discussed it before here, but as a refresher, go over the theory of fractional reserve banking - the system we have in place in most of the world today - and ask yourself what happens when the reserves of banks begins to go down in value?
If the following industries continue to slow down, how quickly will it affect retail spending and local tax collection in your area: Mortgage Lending, House Construction, Commercial Real Estate Construction, Stock Brokerage Services, Auto Sales.
At the end of the day, the key question is - what happens to your and your community when people can't borrow money anymore? Or lending is reduced to say levels not seen since 1982?
Don't panic. The time is now for clear thinking.
I'll keep it short right now as the day job is crazy-busy (but thank heavens I am no longer working as a code-jockey in the financial "industry").
Personally, I think the Powers That Be will be able to stem the worst of the sell-off today and by afternoon, we may even be in positive territory. But it is only temporary and every action you see being touted as a big fix to the system has been tried before during the Great Depression. They all failed.
For instance, we are supposed to cheer as Banks, Firms Set Up $70 Billion Fund for Liquidity. Well, back in 1929, it was called a Bank Pool. Setting up these huge pools of liquidity is ultimately futile, though you can get a big pop up in price over the course of a day or week.
I'll say it again - THIS IS NOT A LIQUIDITY CRISIS. This is a solvency crisis. The assets that underpin the banking system are declining in value. The debt taken on by huge number of U.S. consumers has outstripped their ability to service that debt.
The game is over. No one will fix this system. The question is how quickly will the various financial playerz let this current system die. If it is quickly, then we are in for a few years of very hard times as we rebuild a new method of dispensing capital and supporting the division of labor so necessary to a non-agrarian economy. If they try to keep the system alive for many years, then prepare yourself for an ongoing, agonizing wheel of pain that won't end for a decade.
If you don't have your assets in as safe a condition as you can by now, then me suggesting it yet again won't help much.
Be safe. Remember, if this is more than just a passing financial hiccup, and turns out to be the precursor to the Mother of all Crashes sometime in October, then we are all going to have to shift to an old school way of thinking and behaving, and that right soon. Family matters - reconnect with them. Friends and associates can help - choose them wisely. Charity begins at home - be prepared.
Sunday, September 14, 2008
Calculated Risk has posted the text of the Fed announcement that they are taking more garbage onto their balance sheet in exchange for Treasuries.
On the CR comment string for the story, NSA writes: "What about Second Generation Star Trek trading cards? I have 2 Khans."
Laugh or cry, choose one.
Too Big to Suffer a Loss
by Doug Noland of Prudent Bear Funds
...The last thing the crippled leveraged speculating community needs right now is dislocation in the CDS marketplace. Again, the attention this week was on Lehman, while I believe a much more unwieldy facet of today’s crisis mounts with the bursting of the historic hedge fund Bubble. Perhaps Sunday we’ll read news of BofA acquiring Lehman – and perhaps the markets will rally big on such news. But such a transaction would have little if any impact on crisis dynamics that have engulfed the leveraged speculating community. The various markets – global equities, real estate, mortgages, energy and commodities, currencies, CDS and risk assets generally – have all become an absolute and unmitigated mess. Money is being lost in waves; scores of favorite trades are being unwound; redemptions are gathering pace; and the ugly side of Ponzi Finance Dynamics has taken firm control.
Importantly, there is today no magical cure – no government bailout – that is going to rejuvenate robust speculator returns. The Credit Bubble burst, and now the speculator Bubble is bursting. As we have been witnessing of late, stock market rallies tend to show their greatest force in the sectors where the speculators are short. Meanwhile, stock market declines tend to see the favored sectors lead on the downside. Worse yet, astonishing volatility throughout the markets has created a backdropwhere it has become too easy to “get your face ripped off.” Repeated government interventions have only exacerbated market instability and
TEOTWAWKI cometh, and that right soon.
I've been saying for some time to expect an ugly October as far as the equity and debt markets are concerned. With the slow collapse of Lehman turning into a landslide, it could turn bad a month early.
Please, if you have any money in a U.S. bank or own a stock, pay close attention to this deal - or non-deal.
UPDATE: from Bloomberg - Wall Street Prepares for Potential Lehman Bankruptcy Filing
UPDATE 2: Mish's take on the the debacle
FYI: For those with financial assets in the U.S. banking and investing systems, consider taking up Elliott Wave International's offer to look at one of their financial prediction documents for free. If you are not signed up with EWI already, it is free and painless. The usual caveat applies - I get a credit as an affiliate if you do sign up. If this bugs you, type in EWI's web address directly in your browser and then sign up - I won't get credit and you will still get access to their free products.
UPDATE 3: We'll know for sure on Monday, but it looks like Lehman will be pronounced dead - suicide by leveraged balance sheet. The quotes coming out about LEH are, in a black humor sort of way, funny. Take this quote from the New York Times, which matches up well with dialogue from the classic comedy movie Fletch. Talk about life imitating art...
NYT: "...[Lehman's] abrupt failure would send shock waves through the financial world..."
FutureJacked: Abrupt? Lehman's been a dead man walking for months. Even my amateur level of ability to analyze a balance sheet and annual report told me that.
Dr. Joseph Dolan: You know, it's a shame about Ed.
Fletch: Oh, it was. Yeah, it was really a shame. To go so suddenly like that.
Dr. Joseph Dolan: He was dying for years.
Fletch: Sure, but... the end was very... very sudden.
Dr. Joseph Dolan: He was in intensive care for eight weeks.
Fletch: Yeah, but I mean the very end, when he actually died. That was extremely sudden.
UPDATE 4: Well, we'll see how deep the rathole of exotic derivatives goes now, as Lehman to File for Bankruptcy Protection
Friday, September 12, 2008
Think about this quote, then pay attention to what McCain/Palin and Obama/Biden are spending all their time debating as the important issues of the day:"...[The deprivatization of Fannie Mae and Freddie Mac] is the biggest bailout ever. If 10% of the $5 trillion of guarantees must be made good by the government, the payments would be $500 billion. That is the size of the annual U.S. defense budget. The outstanding debt of the U.S. held by the public is the size of the guaranteed mortgages. It is huge..." - Doug Casey, Guest Commentary at Prudent Bear
Thursday, September 11, 2008
Watching the billionaire playerz that CNBC has trotted out this week to give us all happy talk about Lehman and WaMu (or stern, "hard edged" commentary that dodges any real conclusions about the system itself or the fact that they are watching it burn to the ground) I've been asking myself the same question that I asked about Countrywide and Bear Stearns - what is it that these guys really do that can't be done better by someone else?
Seriously - what value does Lehman or WaMu add to America that we don't already have 1,000 other corporations doing as well? What makes them so special that they need special handholding instead of the forced rationalization of their operations by a bankruptcy trustee? What is it they say they do here, besides beg for government protection while attempting to keep a failed business model afloat or whore themselves out to another bank?
Wednesday, September 10, 2008
If this doesn't piss you off, then me writing a rant about it won't do any good either. Read it and weep:Pimco's Total Return Fund Has Record Day
NEW YORK -- The world's biggest bond fund, Pimco's Total Return Fund, had its best ever day on Monday relative to its benchmark index as prices of mortgage-backed securities rose after the government seized control of mortgage finance agencies Fannie Mae and Freddie Mac.
"Our mortgage overweight and the performance of mortgages on Monday gave the Total Return fund its greatest one day relative performance (compared to our index) in its history," Bill Gross, chief investment officer of Pacific Investment Management Co. told Reuters on Tuesday...
Let's see, buy up crappy assets. Lobby the federales to backstop said crappy assets. Pocket huge gain without any productive labor.
Current events sound more and more like anecdotes out of Atlas Shrugged every day.
Monday, September 8, 2008
Getting ready this morning I had Squawk Box on in the background. The DJIA futures were up around 250 on the news that the federales had seized Fannie Mae and Freddie Mac. Joe and Carl were about to wet themselves with glee at the news, talking about how great it was to have a Treasury Secretary that understood complex financials and how great it was he could move in and do such a great thing as putting the U.S. taxpayer on the hook for private financial losses.
Here is their talk with Warren Buffett, as they all did their best to smear lipstick on this pig (sorry, no embedded video, CNBC is not friendly in that way).
My favorite part - the discussion about how Buffett used to be a huge investor in Freddie Mac and Becky Quick asked if he would be tempted to get back in. He laughed and then went on to describe the two mortgage giants in terms of whores. Nice. But it is a great idea for the Feds to use your money and mine to bail them out. Just not the money he is entrusted with.
More socialization of financial losses and continuing privatization of profits.
These economic "experts" spent the last twenty-five years preaching to us common folks how the free market was the only way to go, they presided over the destruction of the industrial regions of the U.S. and making bad jokes at the expense of the "Rust Belt." No hundreds of billions of dollars in bailout money for them. But when it comes to some dipshits who might lose their home in the Hamptons because of this squeeze, the federales jump right up to step and fetch for them.
Paulson has shot his load
In honor of this move, I give you Falco, singing about what I assume will be Paulson's new title here in the coming years if we continue to move from being a United States of America to a Union of American Socialist States
Well, he's fired off his bazooka, now we get to see the result.
Personally, I am strong believer in the free market. It can be harsh and rough, but it is the only truly just system available - and it should apply to EVERYONE. This sort of politicized finance (to use Bob Prechter's term) is croney capitalism at its worst. If the system is rotten, let it fail. Pretending we can make it all go away with guvmint money is delusion of the highest sort. They'll get a short-term pop out of this, but it still won't heal the stucco-and-vinyl-siding-investment-vehicle market.
Sunday, September 7, 2008
Anyone who worries about the status of NATO forces in Afghanistan, like me, is praying hard that this is just a very temporary way of sending a message to the U.S. that sending soldiers into Pakistan to kill Pakistanis is not taken lightly.Pakistan stops NATO supplies
by Iqbal Khattak
PESHAWAR: Pakistan stopped supplies to the United States and NATO forces in Afghanistan through its western Torkham border on Friday, citing security concerns. A senior official said the measure followed increasing Taliban threats to trucks carrying the supplies.“All Afghanistan-bound supplies for the International Security Assistance Force have been stopped as the [Torkham] highway is vulnerable,” Khyber Agency Political Agent Tariq Hayat told Daily Times..
We worried a lot about Pakistan earlier in the year. I haven't blogged much on the recent change in government as I don't believe it has altered the fundamentals - yet. The tension between Salafists and the old guard in the Army is still high and rising. This messy new civilian government is not going to do any better, in my amateur opinion.
Whey should anyone outside of South Asia care? Pakistan is playing a dangerous game, as is the U.S. here. Pakistan is fracturing. Pakistan is the bridge that supplies the lifeline to the forces fighting in Afghanistan. The other main route into Afghanistan? Via Russia - who we just got done pissing off through our crackheaded "ally" President Saakashvili of Georgia in the recent Georgia - Ossetia - Russia fight.
If that supply is disrupted, our troops could be reduced to fighting for survival out of a few Fort Apaches like Bagram Airbase and not doing much "searching for Bin Laden" like I thought they were.
And if our response to Pakistan destablizes that country even more, we could look at a chaotic situation where this nuclear-armed country plunges into an active low-level civil war.
Plus, this just reeks of blowback to continuing idiot foreign policy decisions made by the geniuses inside the Beltway. Braindead civilians playing games with the lives of the bravest of a generation of U.S. war-fighters.
Think about the effects on U.S. policy and world markets in general. Keep an eye on it.
UPDATE: It's back open. Message delivered. Pakistan reopens vital border crossing to NATO
Friday, September 5, 2008
I asked a similar question below in Drying the Tinder for the Bonfire of Revolt - a rather dramatic title for some observations that boil down to - why are the "elites" apparently so scared at the moment?
Why are we seeing policy proposal after policy proposal that is stupid, at least from the perspective of rational economics or long-term health for the U.S. What in the hell is going on?
When I say elites, I'll re-emphasize that I don't always mean it as a pejorative. A culture, a society, a nation is only as strong as the political, military, business and academic elites that it nurtures and holds up as its leaders and guides. That's why I get very concerned by the following news items:
...This rarely observed systematic debt liquidation is what confronts the U.S. and perhaps even the global financial system at the current time. Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami. Central bankers, of course, adopting the cloak and demeanor of firefighters or perhaps lifeguards, have been hard at work over the past 12 months to contain the damage. And the private market, in its attempt to anticipate a bear market bottom and snap up “bargains,” has been constructive as well. Over $400 billion in bank- and finance-related capital has been raised during the past year, a decent amount of it, by the way, having been bought by yours truly and my associates at PIMCO. Too bad for us and for everyone else who bought too soon. There are few of these deals now priced at par or above, which is bondspeak for “they are all underwater...” - Bill Gross, Managing Director, PIMCO and all-around stud of the investment world.
Mr. Gross then goes on to say "if we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury – not only to Freddie and Fannie but to Mom and Pop on Main Street U.S.A."
My first instinct is to wrinkle my brow in confusion. Isn't that exactly what the old USSR was all about? How did that end up for them? Isn't that how we got the housing bubble in the first place - Fannie and Freddie flaming the fires of speculation in vinyl-siding-and-stucco investment vehicles, driving them to higher prices than fundamentals allow, encouraging overbuilding and now resulting in a devastated house market? But he wants more of that?
My second thought is, maybe he really does think we are on the brink of a failure of the entire system and he is panicking for any solution he can find. This is not a dumb guy by any means.
And of course there was the post from earlier in the week mentioning that the super-rich are moving to cash. The are the smart money for a reason...
The "Big Three" U.S. automakers are looking for a huge bailout as well. Well, I guess when you are spending $10 billion a month in Iraq, $50 billion in loan guarantees here at home doesn't look so painful. Assuming the Chinese, Japanese and Koreans keep buying all that juicy Treasury Debt and if you lose two of those three automakers, the follow-on effects to suppliers and other manufacturers would be catastrophic, so instead of taking the pain now, they opt to keep these companies alive, putting too much production out into the market and not allowing the weak to fail (do you hear me, Chrysler LLC?) and make room for Ford and GM to have a chance a survival.
Then there is this story from the New York Times, a paper of the elites if there ever was one, describing how Given a Shovel, Americans Dig Deeper Into Debt. This has got to scare the living hell out of economists all over North America. If the consumer stops being that - a consumer, and goes back to what made this country great - being a producer and a saver, then the current system of finance and every business model from restaurants to nail salons to money management implodes.
The Common Thread
I have two possible theories on what has the elites so spooked. Maybe all this talk of inflation is a smokescreen and what is really going on is credit, and eventually price, deflation. If we get a full-blown credit deflation in the U.S. the debt defaults would litter the country, the tax base would shrivel to nothing and the fractional reserve banking system itself might evaporate into the fraudulent smoke that is its philosophical basis.
Remember, in a fractional reserve banking system, you extend lot's of credit based on a thin layer of capital assets that is held in reserve. Well, maybe it is worse than the media are letting on. Maybe that asset base is evaporating as badly as PIMCO's Gross indicated above. Maybe it is even worse than is being discussed.
When lenders can't lend and, gasp, must even call in existing loans to rebuild the capital base, then the inflationary dynamics we've lived with all of our lives also end. When banks can't lend, the consumer society is dead. The tax base built on sales taxes and property taxes dries up. Life as we know it ends. A new society has to be built up on the ashes. Not something the current power brokers and elites want to contemplate, so I guess they figure if they throw enough money at the problem, it will eventually go away.
Here's hoping they are right, because if they are wrong, we are all hosed.
The other competing theory is that the upper echelons in power know the earth is going to be smashed by an asteroid or something like that in a few years and so they are encouraging one last party to keep us all happy. That's about the only thing I can think of that would explain Vice President Cheney's famous line: "deficits don't matter." These are not dumb people. They know what the debt and deficits will do to the long-term strength of the U.S.
Don't they? I mean, they all took economics, didn't they?
We shall see. I still say October is going to be bad, in my opinion. Get your stuff together my friends and get your head wrapped around the idea that very soon the markets may just correct to reflect the reality being fretted about by the elites.
UPDATE: Gary North reports on some remarkable statements from the U.K.'s Chancellor of the Exchequer Alistair Darling. Another freaked out elite.
Tuesday, September 2, 2008
Wow. The Powers That Be have become so insecure that big protests are now considered dangerous and a threat. In the past, huge protests and civil disobedience were a way to vent frustration and send messages - great ways to do that, in fact, that usually kept the property damage at a minimum, loss of life at a minimum and let the protestors feel like they had a way to fight the System.Massive police raids on suspected protesters in Minneapolis
Glenn Greenwald, Salon
Protesters here in Minneapolis have been targeted by a series of highly intimidating, sweeping police raids across the city, involving teams of 25-30 officers in riot gear, with semi-automatic weapons drawn, entering homes of those suspected of planning protests, handcuffing and forcing them to lay on the floor, while law enforcement officers searched the homes, seizing computers, journals, and political pamphlets. Last night, members of the St. Paul police department and the Ramsey County sheriff's department handcuffed, photographed and detained dozens of people meeting at a public venue to plan a demonstration, charging them with no crime other than "fire code violations," and early this morning, the Sheriff's department sent teams of officers into at least four Minneapolis area homes where suspected protesters were staying...
Normally, my supply of patience for whiny hippie protestors is, shall we say, limited. That said, let them protest. Generally they make fools of themselves to the majority of people watching them and it makes them feel superior, as if they have struck a blow for justice. Everyone gets to look down on the other party, every goes home happy and smug.
Squashing these fringe voices, though, is like the old Forest Service theory of fighting every single forest fire that erupted. By squashing the natural tendency of forests to cleanse themselves through small fires - it eventually led to forests primed for a huge explosion. By allowing "controlled burns" you can reduce this risk. Protests are the controlled burns of the political world.
For some reason, the elites seem terrified of any sort of dissent these days. It's amazing and unnecessary. By crushing these protest groups through pre-emptive strikes, you are are making the same mistake the Forest Service made back in the 20th century, you are priming the political landscape with the tinder for a huge firestorm in the future.
These raids will only serve to fuel the paranoid fantasies of these groups. Instead of feeding their psyches with the smug self-righteousness of big protests, allowing these groups to feel heard and validated, you are feeding their anger, their hate and their paranoia, which is guaranteed to drive some of them over the edge into an open-source insurgency frame of mind. Do you really want to prime the pumps of 4GW on U.S. soil? Especially with hundreds of thousands of U.S. war veterans returning home to an economy that is sluggish if not already in recession?
And just what are the cops thinking here? What in the world has the elites so spooked that these types of raids seemed like a good idea?
This type of resistance to any sort of dissent or non-mainstream thinking has infected every level of U.S. society it seems. If you were among those calling the run-up in house prices in 2005-2007 a bubble, you were a fool to be castigated. If you point out that the federal government is bankrupt, you are called unpatriotic. If you protest the RNC, apparently you are a target for police raids - BEFORE YOU EVEN PROTEST.
I don't get it. What am I missing? What is so frightening to the security apparatus in the U.S. that a bunch of smelly old hippies are regarded as a big threat?
Monday, September 1, 2008
I wonder how the "it's always a great time to buy stocks" folks are going to spin this one:
HSBC says super-rich clients moving into cash
By Laura MacInnis
GENEVA (Reuters) - Many of the world's wealthiest people have moved their money out of stocks and bonds and into cash, the head of HSBC's Swiss private banking unit said on Monday.
"The first half of 2008 has seen a notable change in client expectations and investment choices," said Peter Braunwalder, chief executive of HSBC Private Bank (Suisse), the British-based bank's main affiliate catering to the ultra-rich...
It's called the Smart Money for a reason folks...