A post went up on Seeking Alpha suggesting that even equity-oriented investors should consider diversifying their portfolios with Treasury bonds, such as with the widely-traded ETF TLT.
This is the LINK.
The theme is familiar; there is updated information here and there, so it may be of interest.
The US markets continue to follow the Reinhart-Rogoff pattern. Economic data is coming in OK, but adjusted for Federal deficits paid for by Fed money rather than by borrowing out of real savings, it would, I think, probably still be seen to be recessionary or at best troughing.
Bill McBride of Calculated Risk is looking at yoy sales data in depressed markets such as Sacramento and noting that aggregate "used" home sales are sharply down in volume yoy. Now that Obama has been re-elected, there is less need to cheerlead the economy. In fairness to him, a year ago he was more cautious on housing for the next couple of years than he got more recently. (I use him because he links almost exclusively to Paul Krugman and his ilk on his featured blogs and columns.) Also, Robert Shiller came on CNBC and expressed a distinct lack of enthusiasm about housing prices for the next several years.
Meanwhile, over-bullish signs regarding not just sentiment but also bullish behavior by the "dumb money" are being documented not just by the short-seller's favored blog (ZH), but by the unbiased subscription-only publication SentimenTrader (behind a firewall). One can never know how long this condition persists, and it can taper off with little damage to stock prices. However, the Russell 2000 (R2K) is trading around 25X trailing earnings, and that P/E excludes the contribution from companies such as biotechs that have negative earnings. This index is wildly overvalued. The trailing 5-year growth rate
from the R2K is 5%. Meanwhile you can buy CVS at about an 8% free cash flow yield (12.5X projected free cash flow for the next 12 months), with a 20% growth rate the past 5 years and unending projected growth ahead as it begins to expand internationally. Thus I see this as an overvalued stock market but also, as it was in the 1998-2002 period, one in which some sectors are too cheap but the average stock is too expensive.
Futures positioning in the R2K is at its most bullish as far as I can find data easily (LINK). The speculators are heavily long in copper as well. The last time they went quickly from moderately bearish to heavily long was coming out of the Great Recession. Copper was $3.50 a pound when they bulled the price up. As of December 2012, the price was $.350. Copper went nowhere for 3 years.
Should this pattern recur, Treasury yields are getting near or have already seen their peak.
With the Fed loose and the Federal government loose but less lose than in 2009, I do not foresee a collapse in stocks. The lack of good competing alternatives leads me to cover the bases with recession-resistant securities that pay dividends. Stocks in that category generally are shrinking or holding steady the share count. This includes Blackrock (BLK) and IBM (IBM). Stocks are risky; bonds with any "decent" yield are risky. Pick your risk. I choose some from column A and some from column B.
Finally, per the name of this blog, there are two posts up recently worth reading and thinking about:
LINK and LINK. Please check them out. The second one is a Seeking Alpha article that improves part-way into the body. I have not even finished it. Both linked articles are interesting.
Futures are, not unusually, bright green again. The inflationary 'boom" that the Fed and the Feds are engineering is going on apace. This could be 2011 again. Please don't chase hot stuff unless it's with a well-defined profit goal.
Showing posts with label Calculated Risk. Show all posts
Showing posts with label Calculated Risk. Show all posts
Tuesday, February 12, 2013
Sunday, July 18, 2010
Why Krugman and Roubini Are Wrong About Slow Growth
Calculated Risk has a post today titled Double Dip Discussion which double quotes two academics of the gloomy persuasion, Drs. Krugman and Roubini. These doctors decry slow growth as follows. First the Krugman quote:
Let’s be clear: a recovery that involves growth so slow that unemployment and excess capacity rise, not fall, isn’t really a recovery. If we have only have 1 1/2 percent growth, that will amount to a double dip in all the senses that matter.
Next, the Roubini quote(s, from his article on Project Syndicate titled Double-Dip Days:
The likely scenario for advanced economies is a mediocre U-shaped recovery, even if we avoid a W-shaped double dip. In the US, annual growth was already below trend in the first half of 2010 (2.7% in the first quarter and estimated at a mediocre 2.2% in April-June). Growth is set to slow further, to 1.5% in the second half of this year and into 2011.
Whatever letter of the alphabet US economic performance ultimately resembles, what is coming will feel like a recession.
(The above Roubini quote is from the linked article found at CR's post, but is not from his excerpts from Roubini, but rather are my own for purposes of this post.)
The action point of the Krugman and Roubini arguments is for more stimulus, which I have always called "stimulus". There is a difference between stimulus and "stimulus". Repaving roads in decent repair is "stimulus". Rebuilding a closed bridge that when open allows useful commerce between nearby regions is stimulus. Maintenance of existing structures and infrastructures is not necessarily either stimulus or "stimulus". It is simply needed maintenance; it is a cost, and proper accounting shows it as a depreciation expense to be matched by capital expenditure, in general. Making ammunition is "stimulus". So is using it. The part of the 2009 ARRA "stimulus" bill that supported Medicaid was humanitarian expenditure and neither "stimulus" nor stimulus. It was, as the Wizard of Oz might have said, good deed-doing.
If population grows 1% per year and national output grows 1 1/2% per year, that's OK IF IF IF the output is useful. What happened in the last decade is that home construction far outstripped household creation; and house construction was larger and fancier than before. As it turned out, the economics behind that surge in homebuilding was faulty, and led to the fall of Fannie and Freddie. Further, the lending surge that supported all the homebuilding also supported other malinvestments.
When Drs. Krugman and Roubini say that slow growth equal to or above population growth will feel like a recession, of course it will in today's world, because no one I know feels that the recession/depression has really ended. In some parts of the country, it has lessened, but nationally everyone living in the real world knows that times remain (relatively) tough. In better times, growth slowdowns such as occurred in 1994 and many other times were correctly not perceived as feeling like recessions, because the economy acted healthy.
If the United States government is really of, by and for the people, then said government should come up with good new ideas for how it should allocate resources. More war in Asia? Okay, then pay for it. Yet more road paving? Okay, justify the need and pay for it; and account for the extra strain on oil prices caused by asphalt production (for example). More healthcare spending out of Washington? Okay, but pay for it, because that is an ongoing expense, not an extraordinary one. The idea of borrowing from China to pay medical expenses for American elderly or poor is bizarre, especially considering that per capita GDP is 10X here than there.
One point of accounting is to allocate costs and benefits, andto allow market forces to help people allocate resources. In a healthy economy where investments and expenditures have good reasons to be done, growth above per capita growth would not feel like a failure. The obvious solution is to limit the distortions and coercions caused by government-- the only legitimate economic actor in this country which acts with the barrel of a gun implied when it wants others to do something-- and allow a free society to work, spend and save as much or as little as it wants, with government respecting those choices within the rules society sets government to enforcing.
Drs. Roubini and Krugman are statists always arguing for more government regulation and control. They may claim to believe in limited government (at least, Roubini may so claim), but it is always in the future. In the meantime, they advocate pushing more debt onto this debt-addicted society and more central control onto a country that grew to be the world's largest creditor during a period when the Federal government had almost no debt and had limited interference in the workings of the economy.
Central planning only works if the planners are humble, hard-working public servants who present governmental finances and plans honestly, and regulate fairly and consistently.
It is the failure of government and its cronies in Big Finance and other "Bigs" to perform on behalf of society at large that have led to the extensive cynicism that abounds in America. The solution is not the Krugman/Roubini solution of more "stimulus" and more "growth" but a return to freedom and an of-by-for the people reordering of the economy. In other words, bottom-up beats top-down right now.
If that (unlikely for now) result occurs, there will be a new rebirth of economic growth.
For now, count me as dubious.
Growth slowdowns are not the important problem. The economy has arteriosclerosis and the Federal finances threaten to turn cancerous given the threat of accelerating money-printing. The Krugman/Roubini wailing over allegedly inadequate growth ignores these much more important problems.
Copyright (C) Long Lake LLC 2010
Let’s be clear: a recovery that involves growth so slow that unemployment and excess capacity rise, not fall, isn’t really a recovery. If we have only have 1 1/2 percent growth, that will amount to a double dip in all the senses that matter.
Next, the Roubini quote(s, from his article on Project Syndicate titled Double-Dip Days:
The likely scenario for advanced economies is a mediocre U-shaped recovery, even if we avoid a W-shaped double dip. In the US, annual growth was already below trend in the first half of 2010 (2.7% in the first quarter and estimated at a mediocre 2.2% in April-June). Growth is set to slow further, to 1.5% in the second half of this year and into 2011.
Whatever letter of the alphabet US economic performance ultimately resembles, what is coming will feel like a recession.
(The above Roubini quote is from the linked article found at CR's post, but is not from his excerpts from Roubini, but rather are my own for purposes of this post.)
The action point of the Krugman and Roubini arguments is for more stimulus, which I have always called "stimulus". There is a difference between stimulus and "stimulus". Repaving roads in decent repair is "stimulus". Rebuilding a closed bridge that when open allows useful commerce between nearby regions is stimulus. Maintenance of existing structures and infrastructures is not necessarily either stimulus or "stimulus". It is simply needed maintenance; it is a cost, and proper accounting shows it as a depreciation expense to be matched by capital expenditure, in general. Making ammunition is "stimulus". So is using it. The part of the 2009 ARRA "stimulus" bill that supported Medicaid was humanitarian expenditure and neither "stimulus" nor stimulus. It was, as the Wizard of Oz might have said, good deed-doing.
If population grows 1% per year and national output grows 1 1/2% per year, that's OK IF IF IF the output is useful. What happened in the last decade is that home construction far outstripped household creation; and house construction was larger and fancier than before. As it turned out, the economics behind that surge in homebuilding was faulty, and led to the fall of Fannie and Freddie. Further, the lending surge that supported all the homebuilding also supported other malinvestments.
When Drs. Krugman and Roubini say that slow growth equal to or above population growth will feel like a recession, of course it will in today's world, because no one I know feels that the recession/depression has really ended. In some parts of the country, it has lessened, but nationally everyone living in the real world knows that times remain (relatively) tough. In better times, growth slowdowns such as occurred in 1994 and many other times were correctly not perceived as feeling like recessions, because the economy acted healthy.
If the United States government is really of, by and for the people, then said government should come up with good new ideas for how it should allocate resources. More war in Asia? Okay, then pay for it. Yet more road paving? Okay, justify the need and pay for it; and account for the extra strain on oil prices caused by asphalt production (for example). More healthcare spending out of Washington? Okay, but pay for it, because that is an ongoing expense, not an extraordinary one. The idea of borrowing from China to pay medical expenses for American elderly or poor is bizarre, especially considering that per capita GDP is 10X here than there.
One point of accounting is to allocate costs and benefits, andto allow market forces to help people allocate resources. In a healthy economy where investments and expenditures have good reasons to be done, growth above per capita growth would not feel like a failure. The obvious solution is to limit the distortions and coercions caused by government-- the only legitimate economic actor in this country which acts with the barrel of a gun implied when it wants others to do something-- and allow a free society to work, spend and save as much or as little as it wants, with government respecting those choices within the rules society sets government to enforcing.
Drs. Roubini and Krugman are statists always arguing for more government regulation and control. They may claim to believe in limited government (at least, Roubini may so claim), but it is always in the future. In the meantime, they advocate pushing more debt onto this debt-addicted society and more central control onto a country that grew to be the world's largest creditor during a period when the Federal government had almost no debt and had limited interference in the workings of the economy.
Central planning only works if the planners are humble, hard-working public servants who present governmental finances and plans honestly, and regulate fairly and consistently.
It is the failure of government and its cronies in Big Finance and other "Bigs" to perform on behalf of society at large that have led to the extensive cynicism that abounds in America. The solution is not the Krugman/Roubini solution of more "stimulus" and more "growth" but a return to freedom and an of-by-for the people reordering of the economy. In other words, bottom-up beats top-down right now.
If that (unlikely for now) result occurs, there will be a new rebirth of economic growth.
For now, count me as dubious.
Growth slowdowns are not the important problem. The economy has arteriosclerosis and the Federal finances threaten to turn cancerous given the threat of accelerating money-printing. The Krugman/Roubini wailing over allegedly inadequate growth ignores these much more important problems.
Copyright (C) Long Lake LLC 2010
Thursday, February 11, 2010
California Controller Ignores Overspending, Sales Tax Rate Increase While Accentuating the Positive
In a press release titled Controller Releases January 2010 Cash Update, Democratic Controller John Chiang refers the reader to the more detailed "summary analysis" linked to at the bottom of the release. This is a nicely produced, informative document which contains the following:
The State’s General Fund revenues improved again in
January 2010. Compared to estimates found in the 2010-11
Governor’s Budget, total General Fund revenues were $1.28
billion higher (18.6%) than expected. Personal income tax
revenues were $930 million better (17.2%) than anticipated.
Corporate tax revenues came in above projections by $189
million (73.4%), and sales taxes were also up by $157
million (17.5%).
Compared to January 2009, General Fund revenue in
January 2010 was up $452 million (5.9%). The total for the
three largest taxes was above 2009 levels by $255 million
(3.4%). Corporate taxes were up by $134 million (42.8%).
Sales taxes were $469 million higher (79.8%), and personal
income taxes came in $348 million below (-5.2%) last
January.
Sounds hopeful, correct? The above positive tone continues throughout the document in what may unfortunately just be more a puff piece than anything else, as I will get to shortly. For example, on page 2, large right-hand box, of this document puts forth the Obama administration's (and MSM's) hopeful prognosis for the economy (no quote, and no argument here for or against a positive outlook for the economy).
Only on page 4 does the bad news get a brief mention. This involves a deterioration in projected cash balances despite the above good news. Why is this so, if revenues were above plan? Well, so were costs:
Local assistance payments were $525 million
higher (1.2%) than the 2010-11 Governor’s Budget
projected, and State operations payments were
also up by $156 million above (1.2%).
Why were State operations a large 1.2% above projections? I would not know, but this smells like mismanagement to me.
The net effect is that on page 4, Mr. Chiang finally comes clean: the state had a worse cash balance at the end of January than projected -- a massive negative $24.1 billion negative cash balance -- $126 million below projections.
Basically, per Table 1, while General Fund revenue was $1.465 B over projections, something called "non-revenue" was $1.00 B below projections. This line item was explained as comprising transfers into the General Fund from other State funds. Why this was so far below projections was unexplained; one wonders if perhaps the other State funds have been sucked dry already?
Amongst the smaller details, one line item stands out. Mr. Chiang says:
Year-to-date collections for the
three major taxes were $1.66
billion below (-3.7%) last year at
this time. However, retail sales
taxes were up $1.21 billion
(9.4%) from last year’s total at
the end of January.
Sounds OK, but . . .
He neglects to point out that the State base sales tax rose on April 1, 2009 from 7.25% to 8.25%. This is about a 14% increase in rate. An increase in sales tax receipts of only 9.4% sounds like a significant shrinkage in real sales volume, both in nominal dollars and assuming mild inflation, an even larger shrinkage in actual transactions.
Full disclosure: I linked to the above through a Calculated Risk post, in which CR called the Chiang reports "good budget news". CR is an immensely valuable blogger, with generally very insightful points of view. In this specific case, I would humbly tend to differ. A medical analogy to the Chiang summary: an overweight patient has been put on a calorie restriction and exercise regimen. She (let us say) points out that she exercised above plan last month, thus burning off more calories than expected. Yet her weight rose. Why? She ate even further above plan than she exercised. This is what Mr. Chiang reluctantly tells us, but well "below the fold".
Until California gets spending under control, it will not have good budget news, in my opinion. Note that the rise in State operations above projections of $156 million exceeds the worsening in the cash balance. If California had actually come in below expectations on spending, then it would have something to crow about.
Why was there no discussion of the overspending?
In California, the controller's office is a partisan elected office.
Per Wikipedia, John Chiang is a lawyer with an undergraduate finance degree. He has worked for Gray Davis (who was controller before he became governor) and for Barbara Boxer. His summary of California's finance as described above appears to be the work of a politician more interested in spin/damage control than in truly holding the rest of the state government's feet to the fire till good fiscal health is restored.
Perhaps California should consider changing the position of controller to be a non-elective, non-partisan job, with a requirement that the controller possess an advanced degree in business or finance. In that situation, one would hope that the public would not get official publications that accentuate the positive but instead would receive the truth/whole truth/nothing but the truth in a way that serves the general good rather than the interests of politicians.
Copyright (C) Long Lake LLC 2010
The State’s General Fund revenues improved again in
January 2010. Compared to estimates found in the 2010-11
Governor’s Budget, total General Fund revenues were $1.28
billion higher (18.6%) than expected. Personal income tax
revenues were $930 million better (17.2%) than anticipated.
Corporate tax revenues came in above projections by $189
million (73.4%), and sales taxes were also up by $157
million (17.5%).
Compared to January 2009, General Fund revenue in
January 2010 was up $452 million (5.9%). The total for the
three largest taxes was above 2009 levels by $255 million
(3.4%). Corporate taxes were up by $134 million (42.8%).
Sales taxes were $469 million higher (79.8%), and personal
income taxes came in $348 million below (-5.2%) last
January.
Sounds hopeful, correct? The above positive tone continues throughout the document in what may unfortunately just be more a puff piece than anything else, as I will get to shortly. For example, on page 2, large right-hand box, of this document puts forth the Obama administration's (and MSM's) hopeful prognosis for the economy (no quote, and no argument here for or against a positive outlook for the economy).
Only on page 4 does the bad news get a brief mention. This involves a deterioration in projected cash balances despite the above good news. Why is this so, if revenues were above plan? Well, so were costs:
Local assistance payments were $525 million
higher (1.2%) than the 2010-11 Governor’s Budget
projected, and State operations payments were
also up by $156 million above (1.2%).
Why were State operations a large 1.2% above projections? I would not know, but this smells like mismanagement to me.
The net effect is that on page 4, Mr. Chiang finally comes clean: the state had a worse cash balance at the end of January than projected -- a massive negative $24.1 billion negative cash balance -- $126 million below projections.
Basically, per Table 1, while General Fund revenue was $1.465 B over projections, something called "non-revenue" was $1.00 B below projections. This line item was explained as comprising transfers into the General Fund from other State funds. Why this was so far below projections was unexplained; one wonders if perhaps the other State funds have been sucked dry already?
Amongst the smaller details, one line item stands out. Mr. Chiang says:
Year-to-date collections for the
three major taxes were $1.66
billion below (-3.7%) last year at
this time. However, retail sales
taxes were up $1.21 billion
(9.4%) from last year’s total at
the end of January.
Sounds OK, but . . .
He neglects to point out that the State base sales tax rose on April 1, 2009 from 7.25% to 8.25%. This is about a 14% increase in rate. An increase in sales tax receipts of only 9.4% sounds like a significant shrinkage in real sales volume, both in nominal dollars and assuming mild inflation, an even larger shrinkage in actual transactions.
Full disclosure: I linked to the above through a Calculated Risk post, in which CR called the Chiang reports "good budget news". CR is an immensely valuable blogger, with generally very insightful points of view. In this specific case, I would humbly tend to differ. A medical analogy to the Chiang summary: an overweight patient has been put on a calorie restriction and exercise regimen. She (let us say) points out that she exercised above plan last month, thus burning off more calories than expected. Yet her weight rose. Why? She ate even further above plan than she exercised. This is what Mr. Chiang reluctantly tells us, but well "below the fold".
Until California gets spending under control, it will not have good budget news, in my opinion. Note that the rise in State operations above projections of $156 million exceeds the worsening in the cash balance. If California had actually come in below expectations on spending, then it would have something to crow about.
Why was there no discussion of the overspending?
In California, the controller's office is a partisan elected office.
Per Wikipedia, John Chiang is a lawyer with an undergraduate finance degree. He has worked for Gray Davis (who was controller before he became governor) and for Barbara Boxer. His summary of California's finance as described above appears to be the work of a politician more interested in spin/damage control than in truly holding the rest of the state government's feet to the fire till good fiscal health is restored.
Perhaps California should consider changing the position of controller to be a non-elective, non-partisan job, with a requirement that the controller possess an advanced degree in business or finance. In that situation, one would hope that the public would not get official publications that accentuate the positive but instead would receive the truth/whole truth/nothing but the truth in a way that serves the general good rather than the interests of politicians.
Copyright (C) Long Lake LLC 2010
Thursday, August 6, 2009
Fannie Mae Stock Market Value Near One Billion Dollars Is Lunacy
Per Calculated Risk, Fannie Mae has reported another gigantic loss and has unfathomably large nonperforming loans approaching $200 Billion.
Why is this a public company with a stock value near $1 Billion?
Copyright (C) Long Lake LLC 2009
Why is this a public company with a stock value near $1 Billion?
Copyright (C) Long Lake LLC 2009
Sunday, June 28, 2009
A Crisis That Just Won't Die
Calculated Risk has a multiply-worthwhile post this evening: http://www.calculatedriskblog.com/2009/06/bis-toxic-assets-still-threat.html.
It links to a Guardian (UK) article "scooping" a Bank of Int'l Settlements report that calls for more action on toxic assets on the books of large complex financial institutions; links to a WSJ article detailing the incredible shrinking PPIP; and, interestingly, repeats CR's prior view that certain Big Finance companies should have been allowed to be "pre-privatized".
Linking to the above will then allow cross-links as described.
Those who have not read CR should know that this is the most factual, least opinionated financial blog I have seen. For CR to still, in retrospect, favor the view that BofA should have been put out of its misery is compelling.
Copyright (C) Long Lake LLC
It links to a Guardian (UK) article "scooping" a Bank of Int'l Settlements report that calls for more action on toxic assets on the books of large complex financial institutions; links to a WSJ article detailing the incredible shrinking PPIP; and, interestingly, repeats CR's prior view that certain Big Finance companies should have been allowed to be "pre-privatized".
Linking to the above will then allow cross-links as described.
Those who have not read CR should know that this is the most factual, least opinionated financial blog I have seen. For CR to still, in retrospect, favor the view that BofA should have been put out of its misery is compelling.
Copyright (C) Long Lake LLC
Wednesday, May 27, 2009
Human Sacrifice Before the Altar of Big Finance
On Jan. 6, I posted Land of the Setting Sun, which began: "We are Japan."
Matters are going from bad to worse regarding the cause of the current economic problems, Big Finance. Please stick with this post, which grew from a planned brief one into something longer, due to breaking news.
Along that unfortunate theme of chronic depression or near-depression in real estate and other markets, yesterday I posted, Everybody Knows That Housing is Bottoming, Right? Today (Tuesday) there is some new commentary and news worth reviewing. First, the Case-Shiller house price data for March came out, per Calculated Risk:
The Composite 20 index is off 31.4% from the peak, and off 2.2% in March.
Prices are still falling and will probably decline for some time. The second graph shows the Year over year change in both indices. (Emph. added. CR is superb on real estate; what he predicts quite generally happens.)
The Composite 10 is off 18.6% over the last year.
The Composite 20 is off 18.7% over the last year.
OK, so this is "backward looking". Let's look forward toward the coming housing and economic recovery, which the global stock markets are ebulliently doing, per the San Francisco Examiner, also courtesy of CR: Signs of more trouble ahead for housing market. Excerpts include:
Warren Buffett and Alan Greenspan say the housing market is near bottom.
Peppy real estate agents and gloomy stock-market traders alike eagerly embrace that supposition. Wall Street is so hungry for good news that stocks rallied at the barest hint of upbeat indicators several times this month.
But an array of serious pending issues undercuts the turnaround theorists. . .
Here is a rundown of key problems that could continue to undercut real estate.
Demand still softens
-- Rising unemployment.
- - No "move-up" buyers.
-- Tight credit. (Ed.: Actually, back to normal old-fashioned credit, such as requiring 20% down. In the Great Depression, 50% down was standard, and cash purchases were common.)
-- Homes still overpriced.
Supply likely to surge
-- Foreclosure moratoriums end.
-- Shadow inventory.
-- Walk-away underwater homeowners. (This section is a "must-read". The couple referenced may elicit mixed reactions in you.)
-- Loan modification shortfalls.
-- Option ARM, Alt-A time bombs.
-- High end taking a hit. "The mid- to upper-end housing market is sitting on the exact precipice that the lower-end market was sitting on in early 2008 . . ."
OK. The article is worth a read, but who can stand more and more of the same old bad stuff. Time for good banking news, per Bloomberg: JPMorgan’s WaMu Windfall Turns Bad Loans Into Income.
JPMorgan Chase & Co. stands to reap a $29 billion windfall thanks to an accounting rule that lets the second-biggest U.S. bank transform bad loans it purchased from Washington Mutual Inc. into income. . . (Emph. added)
“It (the accounting rule) will benefit these guys (many banks) dramatically,” Willens said. “There’s a great chance they’ll be able to record very substantial gains going forward.”
The discounted assets purchased by JPMorgan and Wells Fargo make the stocks more attractive because they will spur an acceleration in profit growth, said Chris Armbruster, an analyst at Al Frank Asset Management Inc. in Laguna Beach, California.
“There’s definitely going to be some marks that were taken that were too extreme,” said Armbruster, whose firm oversees about $375 million. “It gives them a huge cushion or buffer to smooth out earnings.”
Let's translate. Banks that went bust, more or less, were taken over by politically-favored bank holding companies (BHCs). These BHCs were bailed out and are scheduled to have all the bad assets they want removed from their possession at unrealistically high prices with more massive taxpayer subsidies (via PPIP, see below). Now in a cynical sleight of hand, these same politically favored BHCs are scheduled to meet Wall Street's demanding standards for "acceleration in profit growth" or less demanding standards to "smooth out" alleged earnings simply because they undervalued the assets they purchased. NO economic earnings will have been created via this "accounting rule".
Like magic, the same guys who caused this global disaster are going to be able to pretend to be managers of growth stocks. Yet in the real world, there is no real recovery in residential housing, and commercial real estate, which is typically a late-cycle actor, is imploding, with NYC sublets down up to 67%.
Even at this hour, the news is coming fast and furious. Once again courtesy of CR, I see while writing this that the WSJ is reporting: Banks Aiming to Play Both Sides of Coin:
... Banking trade groups are lobbying the Federal Deposit Insurance Corp. for permission to bid on the same assets that the banks would put up for sale as part of the government's Public Private Investment Program....
The lobbying push is aimed at the Legacy Loans Program, which will use about half of the government's overall PPIP infusion to facilitate the sale of whole loans such as residential and commercial mortgages.Federal officials haven't specified whether banks will be allowed to both buy and sell loans ...
Some critics see the proposal as an example of banks trying to profit through financial engineering at taxpayer expense, because the government would subsidize the asset purchases...."
The notion of banks doing this is incongruent with the original purpose of the PPIP and wrought with major conflicts," said Thomas Priore, president of ICP Capital, a New York fixed-income investment firm overseeing about $16 billion in assets.
Mr. Priore is being polite. The entire purpose of PPIP was to corruptly recapitalize the banks using, inter alia, the fiction that hundreds of billions of dollars of inventory that they own as assets/capital are suddenly "illiquid" rather than the truth that these assets have lost vast amounts of value that the BHCs and Mr. Obama (like Mr. Bush before him) don't wish to admit. That the BHCs want in on both sides PPIP proves the fact that the financial community wins coming and going from PPIP. The taxpayer loses. Period. Abe Lincoln would turn over in his grave. Government of, by and for the bank holding companies.
This is beyond revolting. The idea that Barack Obama is a populist is absurd. For the banks to even lobby for this concept shows how in control they are. The President has surrounded himself with hedge fund types such as Larry Summers. Tim ("triumph of the will") Geithner is such an incompetent tool that the WaPo has dumped big time on him, and his staff has gone over his head to the White House.
The economy, and more than the economy, of the United States are being sacrificed upon the altar of Big Finance, using voodoo economics and the Big Lie technique. A bleeding country cries out for relief.
Copyright (C) Long Lake LLC 2009
Monday, March 23, 2009
More on Treasury's Plan for Toxic Assets
Given its importance, perhaps there are some people who would like a summary of comments across the Web on the Obama-Geithner plan to deal with bad assets on the books of large complex financial companies.
Now that I have read numerous comments, I remain appalled. Please see, e.g., Krugman's analysis in the first section below. The taxpayer is taking almost all the risk for only half the upside. Better the taxpayer take all the risk for all the upside. Even better, the bond holders need to pay. That's simply how it is in business.
Here are excerpts from each website presenting opinions. In addition, First, from RGE Monitor:
Reactions:
- FT Alphaville: At the heart of this complex plan is liquidity, which Geithner has identified as both the problem and the answer. Increase liquidity and assets price will rise towards fair value, banks’ capital ratios will improve and they will start lending again. What if value of assets is low because of reduced cash flow expectations--> see also 'Fire-Sale' Vs. 'Hold-to-Maturity' Prices: Is The FASB Yielding To Pressure From The Industry?
- Alea: The plan is good in theory as private investors have no incentive to overpay because they are in a first-loss position. However, there is likely to be a gap between the mtm value of the toxic assets and what a rational investor would pay, reducing or eliminating the incentive for banks to participate. Only the truly cash-starved banks will jump.
- Blog comments: private investors will take long positions in the selling banks’ stocks (or other long positions in derivatives) and will then have an incentive to grossly overpay for the securities in this program. They’ll gladly take some losses in this program to boost their other positions outside the program.
- Krugman: Huge taxpayer subsidies to the private sector are involved: Suppose that there’s an asset with an uncertain value: there’s an equal chance that it will be worth either 150 or 50. So the expected value is 100. But suppose that I can buy this asset with a non-recourse loan equal to 85 percent of the purchase price. How much would I be willing to pay for the asset? The answer is, slightly over 130 [in a competitive auction.] Why? All I have to put up is 15 percent of the price — 19.5, if the asset costs 130. That’s the most I can lose. On the other hand, if the asset turns out to be worth 150, I gain 20. So it’s a good deal for me.
- cont.: Another way to say this is that by financing a large part of the purchase with a non-recourse loan , the government is in effect giving investors a put option to sweeten the deal.
- John Mauldin (via TechTicker): I'm in the hedge fund business myself but as a taxpayer I don't believe Treasury should subsidize hedge funds.
Next, from CR's post, first showing commentary from Wells Fargo (surprise, they like having money thrown at them) and then CR's personal comments:
“My gut reaction is that this is an excellent plan. This plan will go a long way toward getting banks in better position to lend more aggressively and break the deleveraging feedback loop that is now in place."I think this is a myth that banks will lend "more aggressively" once the toxic assets are off their balance sheets. To whom? Perhaps Anderson is making the moral hazard argument here - maybe he is saying since the banks (and their investors) are being bailed out with above market prices for toxic assets that they will once again engage in risky lending. I hope that isn't his argument.
Scott Anderson, senior economist, Wells Fargo
The key problem with the Geithner plan is that it incentivizes investors to pay more than market value for toxic assets by providing a non-recourse loan and with below market interest rates. (See Krugman on the price impact of a non-recourse loan). The investors do not receive this incentive, the banks do. And the taxpayers pay it, so this is a transfer of wealth from taxpayers to the shareholders of the banks.
Finally, I take the liberty of posting all of a somewhat lengthy commentary from the blog Information Arbitrage (www.informationarbitrage.com), because this blogger, Roger Ehrenberg, also presents his own plan and how it is superior, in his view, to Treasury's plan:
March 23, 2009
The PPIP: It's NOT the Liquidity, Stupid. It's the Marks.
You can say something about the current Administration: they are really trying. The recently released Public-Private Investment Program ("Program") details show both a lot of thought and some really good ideas. Unfortunately, the essence of the Program and its messaging are still missing the boat on a few important fronts. The main issue: the Government perceives the problem to be one of investor liquidity and the ability to finance broken asset portfolios. The problem is that they are wrong. It is all about banks not wanting to own up to inflated balance sheet values. But here are some other problems with the Program and its positioning:
- Still enamored with short-term stock market movements. Larry Summers stated that the Administration is "gratified" by the stock market's reaction to the Program. Why, oh, why, do Senior Government officials, especially those with ostensibly high IQs, say such stupid things? Guys, the focus should be on doing the right thing for the long-term, not on what will goose the market for a day or two. And while Summers et al claim to be all about the long term, then why do they keep on talking about stock market reactions to policy decisions? If there is one thing we know for sure, it's that the market is very, very jittery and volatile, and is apt to make sharp moves in response to almost any news. While the Dow could rally 500 points today, it could just as easily fall 500 points if liquidity fears rear their ugly head, another bank runs into trouble, populist rantings by Congress spook the markets, Pandit is given a long-term employment contract, etc. Bottom line: the Administration needs to stop talking about and caring about short-term stock prices. Stock prices are not unlike the Treasury yield curve: easy to manipulate on the short-end, difficult if not impossible to impact for a sustained period on the long end.
- Forgetting the appetite of the supply side. The Program, with all the benefits provided to approved buyers - equity matching funds, cheap leverage, etc. - lists only a single line when addressing a key weakness: Participant Banks don't actually have to participate. Participant Banks can submit portfolios for auction, Approved buyers can line up, valuation firms can estimate the worth of portfolios submitted for auction, buyers can submit their bids and Participant Banks can say: no. I fail to see how the Program is a material departure from the current landscape, except for the fact that the Government is providing cheap financing. The buyers are still running equity risk regardless of the 1-1 Government match (as they should), and will only submit bids that reflect their assessment of risk and return. This may result in prices that are still far out-of-line with current bank carrying values, causing banks to reject the highest bids in a move to avoid further asset write-downs. So even a protracted auction process could result in a whole lot of nothing. What does Larry Summers think a failed auction will do to stock prices? I shudder to think.
- Perpetuating entrenched and failed managements. The Program is a vehicle for helping broken firms liquify broken asset portfolios. What it doesn't do is help broken firms get rid of broken managements that got us into these problems in the first place. In the rush to protect major lenders from going out of business (and protecting stockholders and debtholders in the process), the US taxpayer is given scant protection from the cadre of poor leadership teams that led firms into troubled waters. Why is AIG the sole whipping boy for the Government when plenty of other firms were complicit in damaging the financial system? While legacy AIG management deserves much of the scorn they've received, most broken bank executives have gotten off with nary a scratch. This I do not understand.
- Not reflecting the true magnitude of the Government's involvement in the numbers. If I read the materials properly, it seems as if the only money being counted against TARP are the equity matching funds being provided. What about the leverage being guaranteed by the FDIC? Depending upon the values realized for the purchased portfolios, those guarantees might come into play, increasing costs well beyond the equity commitments. This is more an issue of truth-in-advertising. While yes, having the private sector side-by-side is a good thing, the Government via the FDIC is providing the debt guarantee. If this isn't incremental exposure to the US taxpayer, then I don't know what it is. This needs to be clearly factored in as an explicit cost of the Program.
Why is the Government wasting so much time and taxpayer money dancing around the issue? If my read of the situation is wrong and the Program is a smashing success, I'll be the first one to say so on this blog. But if my perception is right - the same perception I've had for, oh, nine months - then I'd like Treasury, the Fed, the FDIC and the President to move quickly to address the toxic asset issue once and for all. The PPIP contains many of the mechanics necessary to pull of Good Bank/Bad Bank: the main difference is compelling the supply side - the big, broken banks - to participate. Guarantee depositors funds without limit. But say goodbye, stockholders. Goodbye, unsecured debtholders. Goodbye, loser managements. Hello private investment in Good Banks. Hello, private investment in Bad Bank assets with profit sharing along with the US taxpayer at current market levels. Can't we just skip the PPIP and go straight to this? Because we know who will participate in my program: Everybody.
Copyright (C) Long Lake LLC 2009
Friday, March 6, 2009
To Dither or Not to Dither, that is the Question
Score another one for CR, who reports today that a Fed President has finally come around to the idea that the big banks are too big and sick to succeed, in "Fed's Hoenig: 'Too Big has Failed'" (this links to Calculated Risk's post on the topic).
Here is one small quote from the Hoenig speech itself, the link to which is here.
• Third, if institutions -- no matter what their size -- have lost market confidence and can’t survive on their own, we must be willing to write down their losses, bring in capable management, sell off and reorganize misaligned activities and businesses, and begin the process of restoring them to private ownership.
Meanwhile, if you are wondering why the stock market goes down almost every day and almost every week, Dr. Krugman opined in a New York Times op-ed yesterday as to why; the title gives his point away: "The Big Dither".
MSN Encarta defines "dither" as a noun meaning a state of nervous agitation or indecisiveness.
Clearly Krugman means the latter. From his op-ed:
Last month, in his big speech to Congress, President Obama argued for bold steps to fix America’s dysfunctional banks. “While the cost of action will be great,” he declared, “I can assure you that the cost of inaction will be far greater, for it could result in an economy that sputters along for not months or years, but perhaps a decade.”
Many analysts agree. But among people I talk to there’s a growing sense of frustration, even panic (emphasis added), over Mr. Obama’s failure to match his words with deeds. The reality is that when it comes to dealing with the banks, the Obama administration is dithering. Policy is stuck in a holding pattern.
While the Hoenig speech is lengthy, please read CR's post on it, and please read the Krugman editorial, which is concise.
As predicted in this blog since last year, the Obama administration early on made up its mind to continue the Bush-Paulson-Bernanke-Reid-Pelosi-Frank plan of doing nothing other than throwing money at the banksters who caused this mess and have been extorting money in unbelievable quantities, threatening to huff and puff and blow the house down if they didn't get the money. But they are bluffing. Their wealth is in the house, too.
At least there are hopeful signs that more than some bloggers and academics are realizing that dithering is no policy and that the public has an interest that is opposite from that of the banksters.
Everyone knows that the stock market is poised for a sharp move in one direction or the other.
The end of the first phase of the bear market is in sight if President Obama would find an excuse for Tim Geithner to resign and persuade Dr. Bernanke to go back to Princeton, and bring in some Swedes and Japanese who resolved their banking crises a decade or more ago to advise the President and the new heads of Treasury and the Fed.
In the meantime, the more the new president focuses on healthcare, green energy, and war in Afghanistan, the more he looks out of touch. The economy is the only paramount issue, and the major problem with the economy is the parlous state of the large complex financial institutions. Be not fooled by early polls. Mr. Obama is actually trailing one G W Bush in popularity at an equivalent time in each presidency.
Adjusted for inflation now vs. deflation in 1929-31, the stock market crash to date is the worst in the last century for the length of the bear market to date (about 17 months). Sooner rather than later, Barack Obama will own this economy in the minds of the public.
Dither no more, Mr. Obama. Tear down these banks.
Copyright (C) Long Lake LLC 2009
Here is one small quote from the Hoenig speech itself, the link to which is here.
• Third, if institutions -- no matter what their size -- have lost market confidence and can’t survive on their own, we must be willing to write down their losses, bring in capable management, sell off and reorganize misaligned activities and businesses, and begin the process of restoring them to private ownership.
Meanwhile, if you are wondering why the stock market goes down almost every day and almost every week, Dr. Krugman opined in a New York Times op-ed yesterday as to why; the title gives his point away: "The Big Dither".
MSN Encarta defines "dither" as a noun meaning a state of nervous agitation or indecisiveness.
Clearly Krugman means the latter. From his op-ed:
Last month, in his big speech to Congress, President Obama argued for bold steps to fix America’s dysfunctional banks. “While the cost of action will be great,” he declared, “I can assure you that the cost of inaction will be far greater, for it could result in an economy that sputters along for not months or years, but perhaps a decade.”
Many analysts agree. But among people I talk to there’s a growing sense of frustration, even panic (emphasis added), over Mr. Obama’s failure to match his words with deeds. The reality is that when it comes to dealing with the banks, the Obama administration is dithering. Policy is stuck in a holding pattern.
While the Hoenig speech is lengthy, please read CR's post on it, and please read the Krugman editorial, which is concise.
As predicted in this blog since last year, the Obama administration early on made up its mind to continue the Bush-Paulson-Bernanke-Reid-Pelosi-Frank plan of doing nothing other than throwing money at the banksters who caused this mess and have been extorting money in unbelievable quantities, threatening to huff and puff and blow the house down if they didn't get the money. But they are bluffing. Their wealth is in the house, too.
At least there are hopeful signs that more than some bloggers and academics are realizing that dithering is no policy and that the public has an interest that is opposite from that of the banksters.
Everyone knows that the stock market is poised for a sharp move in one direction or the other.
The end of the first phase of the bear market is in sight if President Obama would find an excuse for Tim Geithner to resign and persuade Dr. Bernanke to go back to Princeton, and bring in some Swedes and Japanese who resolved their banking crises a decade or more ago to advise the President and the new heads of Treasury and the Fed.
In the meantime, the more the new president focuses on healthcare, green energy, and war in Afghanistan, the more he looks out of touch. The economy is the only paramount issue, and the major problem with the economy is the parlous state of the large complex financial institutions. Be not fooled by early polls. Mr. Obama is actually trailing one G W Bush in popularity at an equivalent time in each presidency.
Adjusted for inflation now vs. deflation in 1929-31, the stock market crash to date is the worst in the last century for the length of the bear market to date (about 17 months). Sooner rather than later, Barack Obama will own this economy in the minds of the public.
Dither no more, Mr. Obama. Tear down these banks.
Copyright (C) Long Lake LLC 2009
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