The Fed Begins to Reveal the Extent of Its Malfeasance in re Bear Stearns

Bloomberg. com is running Fed Releases Details on Bear Stearns, AIG Portfolios. The key part of the article is:

“No one should have been surprised that it looks like the Bear and AIG portfolios are junk,” said Robert Eisenbeis, a former Atlanta Fed research director who is now chief monetary economist at Cumberland Advisors Inc. in Vineland, New Jersey.

What was suspected is now known. And the key man in the NY Fed purchase of this junk is quoted today as saying that it is "deeply unfair" that some financial institutions are coming out of this mess in such better shape as many individuals. Thanks, Tim. You've got quite the conscience.

Wall Street and government jointly engineered a housing and general credit boom/bubble, extended it with the subprime shenanigans and securitization thereof and wild and crazy corporate takeover action, and then per Michael Lewis' "The End" helped end the saga. Knowing all this, the former Nixon operative Henry "Hank" Paulson, was "persuaded" to accept the position of Secretary of the Treasury. The President then had plausible deniability. From this position Mr. Paulson worked hand in hand with supposedly independent Ben Bernanke and Timother Geithner to hand JPMorgan Chase the trophy of Bear Stearns on a platter. He also presumably worked hand in hand with the chiefs of Big Finance. Later, shortly after Barney Frank assured everyone that Fannie and Freddie were sound and an alleged housing fix legislation was passed in summer 2008, and Fannie and Freddie sold debt worldwide, all of a sudden they had to go into conservatorship. By not shutting them down, they became unending sources of commissions for stockbrokers. The same is true for AIG and even Citigroup.

The next phase of the looting involves the "surprise" failure Lehman. It was something out of a bestseller from the 1960's: "The Magus". At the end, the anti-hero realizes there is no god. He's on his own. So briefly, stockholders were panicked by the collapse of Lehman. The Fed God had stepped away! Goldman Sachs and the offspring of J. P. Morgan & Co., Morgan Stanley, became the only 2 survivors of the Big 5 investment banks, as the Fed bypassed normal procedure and converted them to bank holding companies on the spot. AIG was used a conduit to pass more newly-printed money to enrich various Big Finance institutions including foreign ones. And so on. All this of course was with the approval of candidate and then President-elect Obama. Thus the Geithner nomination despite the tax-fiddling revelations.

In a carefully planned set of operations, the favored large Big Finance traditional banks were each allowed (or commanded) to swallow one failing competitor. Wells Fargo got Wachovia; JPM got WaMu; BofA (in)famously got Merrill Lynch.

We learned that even money in the bank is of dubious value in a crisis, as the FDIC would have needed a bailout had Congress not pledged to do whatever it took to support it.

(We also learned once again that when pictures of the Depression make the front pages of Newsweek, it's getting near the bottom of the stock market.)

Anyway, unprecedented money-printed ensued. We are now reading about surging stock markets as economic growth accelerates. Since for every buyer there is a seller at the same price, all the indicators such as sentiment are of only mild value. Ultimately stocks and bonds are financial assets that have an unknowable value. How does an investor decide what to do in a world such as the above where the powers that be are in such control of macro matters and have so much more knowledge about what's really going on than you or I?

We always knew that Wall Street was never interested in anything but its own well-being, but we never knew how much on its side the Feds and the Fed were. Most Americans are effectively renters in their own homes and have minimal savings. Corporations and their chieftains are prospering in another "jobless recovery".

The debt:GDP ratio continues to climb even as households are tapped out, with government expanding its balance sheet to more than make up the difference.

With a left-of-center government, liberal economists rule the roost. Robert Shiller is calling for yet more government support for housing. The administration is doing more in that regard--at what cost?

The cost of government borrowing is at rock-bottom rates. An expanding state requires more taxes. We should look forward to a combination of rising business and personal taxes along with the effects of all the money-printing showing up as rising prices as the coincident economic indicators catch up with the forward-looking indicators that continue to be stable to rising. Yet as employment income and interest income lag, discount and deep discount stores look to stay strong. DLTR has sharply rising earning estimates and trades at about 14X current-year earnings.

Watson Pharma (WPI) has broken out to a multi-year stock price, has record earnings and a lowish valuation; as credit money flows more freely, takeover activity will pick up and unlike Teva, WPI is a bite-sized acquisition for many companies.

MCD fits the theme of financially strong companies with rising earnings estimates. Its dividend yield exceeds that of a 7-year Treasury and likely will rise substantially by 7 years from now. So it's a classic growth and income play.

Financial strategists who have gotten this bull move right, namely Barry Ritholtz and David Kotok, are on similar pages. They are thinking that most of the good news is out now and that S&P 500 1250-1300 represents an important target. It is 1169 now. Another 7% upward move will put Andrew Smithers' estimate of fair value as judged both by q and cyclically-adjusted P/E (CAPE) at around 60% above fair value. Going back to 1900, this was perhaps seen in 1929. It was only seen in about 1997 and then through 2001 and then not again according to his chart, though CAPE hung around the 60% overvalued mark through much of the aughties, q was a bit lower.

Putting the two themes together, the public has no idea of what anything is really worth or what it will do. We can say that we are already close to 1929 levels of stock overvaluation, which was only exceeded in the past 110 years by the millenial, post-Cold War fervor of the late 1990s. An economy cannot function on rising asset prices. Eventually we can hope for, or even expect, new technologies such as economical green energy-related ones to help improve our lives fundamentally. But those companies that will implement that will likely be ones you have never heard of and that will eat the lunch of some seemingly safe big names that are now in the indices.

There is no easy solution. Remembering the lessons of the historical record and the recent past are not certain to be useful in predicting the future, but at the least they are certain to be useful in understanding it as history unfolds.

As the Fed apparently moves toward a world in which depository institutions need NO reserves, there is every reason to think that the yang to that yin, gold, will at least retain its current relative value to other financial assets. The thing about gold is that one has to earn it, or at least steal it. It's either present or it is not. Whereas, electronically-created "money" with a corrupt Federal Reserve Bank of New York in charge of said creation and distribution, acting on behalf of its corporate owners such as JPM, is not a glittering example of responsible wealth creation or accumulation.

The speculation here is that gold prices will fall less than stocks if stocks fall and that they will more or less match or exceed the performance of stocks in a renewed up-move for stocks.

Copyright (C) Long Lake LLC 2010

Bloomberg Joins Gold Bears as Proven by Misleading Headline and Intro to Article

The gold bears are growling. This time they have been joined by Bloomberg.com, which titles a piece on gold, apropos of no breaking news, with the slanted headline of Soros Signals Gold Bubble as Goldman Predicts Record.

The obvious take-home message for those who read only the headline is that Goldman is getting people into gold at the top. The first paragraph continues that message:

George Soros is helping drive up gold prices by doubling his bet in a market even he considers a “bubble” as Goldman Sachs Group Inc., Barclays Capital and HSBC Holdings Plc predict more gains before it bursts.

If you read "below the fold" on the computer screen by scrolling down, however, here is Soros' actual position:

“When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment,” Soros said at the World Economic Forum’s annual meeting in Davos, Switzerland, in January. “The ultimate asset bubble is gold,” he said.

In a Jan. 28 Bloomberg Television interview, the 79-year- old billionaire recalled that former Federal Reserve Chairman Alan Greenspan warned of “irrational exuberance” in financial markets three years before the technology bubble burst in 2000. The Standard & Poor’s 500 Index rose 89 percent in the period. Buying at the start of a bubble is “rational,” Soros said.

The article then goes on to show that Soros has been joined by independent stars of the hedge fund industry, whose own money is at risk in the positions of the fund:

Gold’s fourfold rally since the end of 2000 has also attracted money managers John Paulson, Paul Tudor Jones and David Einhorn. Paulson’s Credit Opportunities Fund soared almost sixfold in 2007 by betting that subprime mortgages would plummet. Einhorn said in October that his Greenlight Capital Inc. bought gold to bet against the dollar.

‘Just an Asset’

Tudor Investment Corp., based in Greenwich, Connecticut, increased its stake in Newmont Mining Corp., the largest U.S. gold producer, almost fourfold in the final quarter of 2009. Gold is “just an asset that, like everything else in life, has its time and place. And now is that time,” Paul Tudor Jones said in an October letter to clients.

Soros, Jones and the unquoted Paulson and Einhorn do not do what Goldman did with CDOs, which is sell one thing to the bagholder and then bet against it. Will they be correct? That's of course another story. I am personally long gold, because I do not trust the promises of the authorities who deal in electronically-created and printing press "money". I hope gold does poorly and the real economy does great for years to come, with real wealth creation so that gold can become a barbarous relic indeed. But one needs to invest with one's head as well as one's heart. My head says that a Federal government with about $2 T in revenues and uncountably large promises to pay its debtholders and especially its own retirees and poor is leverage at least as much as were Bear Stearns and Lehman Brothers and nearly as much as Fannie and Freddie.

The structural bull market that the price of gold has traced out-- a fact not a prediction-- and the growing number of top-tier investors as described in the Bloomberg article-- and the out-of-nowhere transparent effort by Bloomberg to assist the gold bears-- all suggest to me that the gold bulls are aligned with the major trend, whether or not ultimately the price of gold will ultimately crash and thus could be bought at today's price some years in the future.

Copyright (C) Long Lake LLC 2010