Short-Term Market Comments: Tear Down These Policies

Recently I have posted some strategic thoughts about changing relative investment merits given the huge move down recently in bond rates.

On a more tactical basis, I have been commenting for many months about the technical deterioration in the financials. This continues and is worsening. In addition, the general stock market as judged by the SPY looks terrible based on moving averages, with the SPY now below a down-sloping 50-day simple moving average (SMA) and a down-sloping 150 day sma about to drop below a flat 200 day sma. Ugly, to the point of being fugly.


One of my favorite relatively unknown financials, UMBF, has moved below its 2009 low despite rising earnings estimates. NTRS (banker to young Barack Obama back in Chicago when a crook named Rezko helped enlarge Mr. Obama's backyard) also is one of the non-Big 5 (or whatever the number is) financial firms I have followed to see what the real world is doing, and its chart is definitely fugly. And NTRS's earnings estimates have been declining, and it still sells for over 13X projected 2011 earnings; and who knows what they will really be?

The bigger bellwethers of JPM and WFC have ugly and fugly charts, respectively. Uh-oh.


In the meantime, though, if the American consumer is so badly off, why is DLTR going to new highs and Tractor Supply (TSCO) holding up so well?

Other stocks holding up well so far in this decline are CB and RE, which are an insurer and a reinsurer; and McDonald's, which has a picture-perfect chart.

So there are lots of cross-currents now.

Meanwhile, gold has an even more picture-perfect chart than MCD or CB, and silver looks OK as well.

The dean of stock analysts in America is probably Richard Russell, and he is uber-bearish on stocks. His view deserves respect; I do not look at him as someone to be contrary against.

Putting matters together with seasonality, matters are setting up as I projected in May when I stated that stock rallies should be sold. I am concerned about the tw0-year pattern in stocks.

Two years after the 1987 stock collapse, a mini-collapse occurred in fall 1989; that did not take the averages to the 1987 lows, as in retrospect the stock market was only partly through its structural multi-year bull market. Stocks are certainly acting as if they could reprise 2008, just as 1989 reprised 1987. Now, however, stocks are mired in what I believe to be a structural bear market. Any collapse, I believe, carries with it real risk of new lows, given that the 2008 low fell below the 2002 low in nominal terms (worse in inflation-adjusted terms).

The U. S. and the world are in more unusually uncertain times than usual. Regular readers of my blog know that I have excoriated Ben Bernanke as amongst the worst Fed chairmen of all time, and perhaps the single worst. For all the blame Sir Alan deserves, he left when the leaving was good, and who knows whether what he would have done when the rubber was hitting the road in 2007-8? This is Helicopter Ben's Fed and Barack Obama's government, and IMVHO they are and have been stinking up the joint with ineffective and harmful policies.


Just as I believed at the time that Paul Volcker (a Dem) and Ronald Reagan (a former Dem) were the right men for the problems facing the country, and invested accordingly, I want them back! I think that we have just the wrong men for today's problems in these key offices. If Mr. Obama were to give Tall Paul real authority, wouldn't that make a statement that the President is willing to face up to our very solvable financial and economic problems and overcome them? But he didn't do so, and he won't. So we have a tax fiddler running Treasury (and IRS) and a Wall Street hanger-on sitting by the President advising him to make Big Finance happy as a way to help Main Street (assuming LS really cares about Main Street).

Historically the stock market has gone up more under Dems than Repubs, but the ineffective inflationist with two inflationist Fed chairmen named Jimmy Carter was an exception. Mr. Obama may be following in Mr. Carter's footsteps.

The path of least resistance for the stock averages is down. Fundamentally the S&P 500 can be considered to be a massive 40+% above fair value. The experience of the 1930s and 1940s prove that low Treasury rates can easily coexist with depressed stock market values. Japan for the last many years proves that as well.

America is blessed with a hard-working population and a lot of smart businesspeople who want to make money the old-fashioned way, which unfortunately is neither the Chicago way nor the modern Big Finance way. What the old-fashioned types need is for government and the Fed to be old-fashioned as well. No matter how pure the motives, statism in very large, complicated economies is very different from statism in small Scandinavian countries where "everyone" is related to each other.

Money should be treated with respect, not with zero interest rates. And the standard financial principles that failure should not be rewarded with bailouts should be restored post-haste. If Citigroup is still insolvent after all that has been done (unfairly, IMO) to assist it, so be it.


There is no surprise in this observer that the stock market is acting badly. An economy that creates neither jobs nor optimism amongst small businessmen is a very troubled one. "Don't fight the Fed" worked when the Fed could engineer lower rates and the real world extended more and more (imaginary, to be sure) credit.


In this era of all-time record low interest rates, the Japan scenario shows that the next shoe to drop after a credit collapse is equity valuations if prices don't rise. While longer term I vote for stagflation, in the very short term a rerun of 2008 with collapsing commodity prices could occur. There's no way to even guess. And to be sure, I agree once in a while with Keynes: as he said, if the facts change, I do adjust my thinking.


The stock market is voting lately against the policies of appeasing the titans of Wall Street. Where it goes nobody knows, of course; at least I don't know; but I do know what I think about freedom-friendly and economy-friendly governmental and Fed policies.

What ails the economy is not all that complicated. The money-printing has stayed almost hermetically sealed within the Street. The statist and Big Finance-friendly policies of the Bushbama Continuity just aren't allowing the inherent dynamism of the American worker and business community to do what comes naturally.

Money should be treated with respect, not zero return (while lenders charge crazy high rates on credit card debt even to credit-worthy borrowers).

Mr. Bernanke and Mr. Obama, tear down these policies. You have nothing to lose but your failures.

Copyright (C) Long Lake LLC 2010

R. I. P. Financial Reform We Can Believe In?

While I do not like the post's title, the body of a blog from Charles Gasparino re financial reform is spot on.
How Obama Screwed Volcker begins and ends as follows:

The president needed the gravitas of the former Fed chairman to sell his bank reform to Wall Street. And when the “Volcker Rule” didn’t fly, Obama sold him out. . .'

And just like that, the wise old man became the crazy uncle that no one listens to anymore.

According to Gasparino, Big Finance is in control.

Assuming this interpretation is more or less correct, one wonders how long Tall Paul will hang around with this crew. Party loyalty only extends so far with him, or at least that's his image.

Copyright (C) Long Lake LLC 2010

Bad Things Happening; Better Things Coming?

Barack Obama has been punched in the face several times lately. His poll numbers are following the labor force participation rate downward, as everyone living in the real world knows that the real national economy is poor, whether or not inventory restocking and other pro-cyclical forces mean that the depression aka Great Recession is technically over. He has overpromised and underdelivered. If he were a stock, he might be a contrarian "buy", at least for a bounce. The truth is that his poll numbers are tracking the economy and are their path is roughly superimposable over the track that Ronald Reagan's poll numbers took during his first year, when the economy also truly stank. It's the economy, stupid and all that.

The good news is that the president is signaling flexibility given the national mood. Even better is the following, as reported by Bloomberg.com in Obama to Propose New Rules on Banks’ Size, Trading:

President Barack Obama will offer proposals to limit financial institutions’ size and trading activities as a way to reduce risk-taking, an administration official said.

Obama will announce the rules today after meeting with former Federal Reserve Chairman Paul Volcker at the White House. The proposals will be part of an overhaul of regulations and will specifically address firms’ proprietary trading, the official said yesterday on the condition of anonymity.

It would be great news if (it would appear) that Mr. Volcker has growing influence within the White House.

Up Volcker means down Summers/Geithner.

We shall see whether the Bushbama Continuity on favoring Big Finance over the people is, at least at the margins, evolving away from the extreme pro-Big Finance stand that the Establishment imposed on the country and that has strangled the real economy for about the past 2 years.

A return to more centrist politics and toward sensible regulation of the financial parasites--which will free them to get back to where they once belonged (facilitators of the real economy rather than pretenders)--will have short-term benefits to the national mood and the economy.

In that context, yesterday's sell-off in stocks means little. The downside action in precious metals relates to a more fundamental problem, which is the possible cooling off of the wild economic action in China, and thus a possible correction in commodities such as platinum and copper. This correction would, however, be good for many companies that EBR has commented favorably on. Two-way markets can be fun in normal or quasi-normal times.

The pubic is depressed over the economy and is spending minimally per numerous polls; there are numerous fundamental negatives in the economy. Ten years ago the public was ebullient; there were no obvious negatives in the economy. No one can time it, and I think we remain in a secular bear market for stocks and the economy, but if this secular bear (if that is indeed what it is) is similar to the inflationary bear of the 1970s, then we must remember that there were huge investment opportunities for those who went with the trend for periods of time but did not buy and hold. The classic time to truly beware of owning risky assets is when times are too good for too long and the Fed is making money tighter. Times are dangerous now and there is lots of downside risk all over the place. But one precondition of good investment returns is present: the fundamentals appear to stink. What is lacking is low prices. Whether these low prices occur in nominal terms or in real terms (adjusted for price inflation that may or may not be coming soon) is one of the key questions of the day.

This remains one of the few times in my 30 years in the investment field when my best idea is diversification across many asset classes. Quality is the watchword.

Copyright (C) Long Lake LLC 2010

What You Think You Know is Sometimes Precisely What You Don't Know

The perils of predictions:

Here is a chart I was Emailed, but I cannot identify the original source.

The chart shows the Obama administration's predictions at the time the "stimulus" ("ARRA") was going through Congress. The figures reflect the thinking of the best minds that Team Obama could find.

Making predictions about the past is a lot easier than doing so about the future, even the near future.

Many things have changed in the financial world recently, just as they changed in 1979-81 when first Paul Volcker and then Ronald Reagan came to the fore with new strategies for the financial system and the economy. It is not, however, 1982, when it became clear that neither Volcker nor Reagan was "for turning" and when the 16-year bear market in financial assets came to a loud end that was so obvious that the New York Times headlined it when it happened (August, 1982).

What sort of "flations" face us, and in what sequence; and how much like Japan post-bubble will be the U. S. economy's intermediate-term course, are murky. Usually yours truly does NOT believe in much financial diversification; usually trends in motion worth joining appear clear. Not now. Thus the recommendation for overweighting in cash, with the rest of one's funds in high-quality assets that provide a yield, with the exception of gold.

Copyright (C) Long Lake LLC 2009

Economic Banana More or Less Confirmed as Depression

From the WSJ, Sharper Drop Is Forecast for Factory Production:

U.S. manufacturing output is expected to decline 12% this year, a much sharper pullback than the 8% predicted just three months ago and a sign of how the downturn is hitting factories particularly hard, according to a new report.

"Everything has gone to rock-bottom levels that I thought was unattainable," said Daniel Meckstroth, chief economist at the Manufacturers Alliance/MAPI, a public-policy group in Arlington, Va., that published the report.

This downward revision is late coming. As the Government has been reporting and this blog has been one of the few noting in print, wholesale trade figures are closer to a 20% year on year ("yoy") decline, and the dollar volume of this trade is enormous, around one trillion dollars monthly. It is pretty much the whole economy minus such personal services as legal fees, haircuts, etc.

If the conventional differentiation between a recession and a depression is a 10% drop in output, then a manufacturing depression is essentially confirmed. It is not the Great Depression, but if one considers all the outsourced manufacturing to Asia and look at Asia's truly enormous manufacturing/export declines, it is not so clear that this event and the 1929-32 events are all that different. Of course, there is much greater material wealth now, and non-cyclical endeavors such as health care are a much greater part of the economy now. With retail down about 10% yoy, though, I'm inclined to call this downturn a Depression.

Unlike the mid-1970s near-Depression that was caused by an oil embargo and quadrupling of oil prices, or the severe but less severe 1981-2 recession that was deliberately caused by Paul Volcker using very high interest rates and slow money supply growth, this downturn was self-inflicted but not deliberately so and is thus closer to the 1929-32 crash than the more recent severe economic downturns.

Depressions end; this one may soon end, but Depressions are like major hurricanes or earthquakes. Each is its own event. This one is/was a Katrina, hitting our major industries of finance and auto manufacturing with devastating force. Simply knowing that Katrina was passing, or even that the flooding had peaked, did not change the devastation that was wrought on New Orleans.

Live, and invest, accordingly.

Copyright (C) Long Lake LLC 2009

Why the SIGTARP Report Suggests Both Looting and that a Depression Is Underway

Today's Quarterly Report of the Special Inspector General for the Troubled Asset Relief Program is quite troubling.  Early on, it summarizes matters:

The Troubled Asset Relief Program (“TARP”) now includes 12 separate, but often inter-
related, programs involving Government and private funds of up to almost $3 trillion
— roughly the equivalent of last year’s entire Federal budget. From programs involv-
ing large capital infusions into hundreds of banks and other financial institutions, to
a mortgage modification program designed to modify millions of mortgages, to public-
private partnerships purchasing “toxic” assets from banks using tremendous leverage
provided by Government loans or guarantees, TARP has evolved into a program of
unprecedented scope, scale, and complexity.

Any effort this immense, "unprecedented" in peacetime, including the Great Depression, will only be done for a truly major catastrophe, not just a "recession".  Paul Volcker, who is still at least nominally allied with the Administration, uses the euphemism "Great Recession" to describe the current downturn.  Since the word "recession" was introduced solely for PR reasons and means what "depression" meant before the Great D, we must interpret his use of the term for what it is.  TARP is response to an economic depression.  

Re the looting charge, SIGTARP has already initiated almost 20 preliminary or full criminal investigations.  These may be non-trivial:

. . . the cases include large corporate and securities fraud matters . . . insider trading, public corruption . . .

In addition, six areas of audit are underway.  These include special mention of BofA and BofA/Merrill; all 9 initial TARP funds recipients; and the payments to AIG's counterparties.

SIGTARP is specially critical of Treasury's refusal to monitor what has happened to the funds given to large financial institutions in return for preferred stock.  On its own, SIGTARP looked into the matter and received significantly detailed responses as to what the companies had done with the funds, sometimes in "granular" detail.  Why has Treasury refused such a simple matter?

SIGTARP has numerous complaints about the PPIP, which will be thoroughly analyzed by other bloggers much more expert than I.

There will be multiple "bottom lines" in this mess.   It is clear that at best Chairman Bernanke incompetently misdiagnosed matters as rosier than they were.  I wonder if Big Hank Paulson also misdiagnosed things.  In my humble opinion, he knew exactly how bad things were, given that he had recently run Goldman Sachs, which more or less runs Wall Street.  He exposed himself by waiting for the crisis that he knew was coming after he put Fannie and Freddie into receivership, then making sure in a 2 1/2 page document to request immunity for any misdeeds he might be accused of doing in implementing TARP.  How well is he sleeping these days?  

We have had unprecedented stock market manipulation by the SEC, twice putting short squeezes on to harm those who (correctly) were shorting financial stocks, then taking the pressure off after insiders and favored institutions were allowed to unload a lot of stock at unfairly high prices.

We have a Democratic Congress that would not even investigate a Republican President for alleged contractor abuses in Iraq.  One has to worry about how much zeal it will have to investigate a Democratic President's Treasury Department, especially when the Treasury Sec'y has been the glue in this disaster all along.

What is going on has elements of the Great Crash, in its financial and economic dimensions; and Watergate, with its political dimensions; as well as the S&L fiasco writ large.  One cannot think of anything like this festering toxic mix within the past hundred or more years in this country.  In this situation, where Big Finance and Big Government have been lying both by commission and by omission, there is no way to use historical economic tools to predict the future.  We just do not know what we may not know, other than that as a pretty young bride said to Rick in Casablanca, the devil has the people by the throat. 

Copyright (C) Long Lake LLC 2009

The 2% Solution of Gold

From a strategic standpoint, probably the worst current news involves confirmation that Paul Volcker has indeed been marginalized, as reported in Volcker Assumes Smaller-Than-Expected Role With Obama in the WSJ. Bottom line is that he's out of the loop.

Regarding growth in the economy, it remains to be seen if A) Bernanke's green shoots are nothing but a false "Prague spring" or even if it is springtime in America's economy, B) will we then suffer T. S. Eliot's "unimaginable zero summer".

Unfortunately, the bears on the large financial companies such as Michael Mayo, Meredith Whitney and Nouriel Roubini give no ground. The Wells Fargo pre-announcement means little given such factors as the low level of loan losses. The Fed's TALF securitization program has not demonstrated any pent-up demand. The bulls argue that unemployment has peaked, which as a coincident indicator indicates that the economy is turning. Is the economy at a bottom? Doubtful . . .

The Economic Cycle Research Indicator's Weekly Leading Index, which historically has about an 8-month lag time before the economy turns, is still below the level of 3 months ago, consistent with Nouriel Roubini's prediction that growth in Q4 will remain negative; and it is far below the level of 6-8 months ago, suggesting the potential for a lot of economic shrinkage before the bottom is hit.

How bad can things get based on extrapolations from the data, not assuming new unknowable adverse events?

Researchers at Boston University report in Credit Market Shocks and Economic Fluctuations: Evidence from Corporate Bond and Stock Markets that the degree of disruption of corporate bond spreads seen over the past half-year predicts, with a strong degree of statistical correlation
that mid-high grade credit spreads over Treasuries predicts 12-24 months forward industrial production and employment and adds significant new predictive ability over prior forward-lookings. Figure 2 on page 18 suggests employment and industrial production dropping much further, bottoming at year-end 2009, with a wide confidence interval, the best of which is "bad".

To quote the article, their models forecast:

"that over the 12 months ending in December 2009, U. S. non-farm payrolls will fall about 7.5%, while industrial production is projected to drop around 20%, declines that are four times greater than those experienced during the 2001 recession." (page 19)

Please note that this is for a further drop from a starting point one year into the "recession". Consistent with the this, the ECRI noted this week that its coincident indicators of economic activity were poor, per ECRI's managing director Dr. Laksman Achuthan:

" . . .growth in the Weekly Coincident Index fell to a record low...in the week ending April 3. This follows the earlier plunge in WLI growth and confirms that we are in the worst recession since World War II."

After the close Thursday, both Boeing and Chevron pre-announced earnings disappointments. Boeing has been accruing negative sales gains, which is to say that cancellations have been exceeding new orders. Chevron said that both upstream and downstream business is poor. Dow often do you see that from an integrated oil?

Earnings are poor and dropping, dividends are being cut, personal and corporate income taxes to the Federal Government are down, the FOMC recently lowered its assessment of the economic prognosis (not many green shoots of spring seen in that report), and the housing market is only being kept alive by massive Government intervention. Fannie and Freddie are reportedly back to making 105-110% loans to value, but bankers actually have no idea what "value" is. The trustees of the Social Security Trust (hah!) Fund very recently drastically lowered their positive cash flow projections.

With the economy in continued decline and various accounting games being played with earnings of Big Finance, the bottom line is that the true lack of profitability of the economy absent substantial leverage is being revealed. This is not the end of the world, but likely indicates more disappointment for the bulls ahead. Given that the ECRI's largely-unnoticed U. S. Future Inflation Gauge is at 1958 levels, one can do worse than purchasing a one-year C. D. from a solid bank backed by FDIC insurance yielding 2%.

Longer term, all these deficits and promises to all sorts of constituents by the Federal Government will largely be fulfilled as necessary by printing money. No matter if or when the Oil Age will end, gold will continue to remain a store of value that will be accepted by most of the population all over the world for as far the eye can see.

Copyright (C) Long Lake LLC 2009

EBR to Get Its Wish: Geithner Out?

Sometimes dreams do come true.

Geithner Out at the Treasury: Source

By PAUL JACKSON
April 1, 2009 8:31 AM CST

Despite assurances to the contrary, President Obama has personally asked Treasury Secretary Timothy Geithner to step down, sources told HousingWire early Wednesday morning. Geithner, who has seen a whipsaw of public opinion over his handling of bonuses at American International Group(AIG: 0.98 -2.00%) and the introduction of a so-called public-private investment program designed to clear bad assets off of bank balance sheets, has been the subject of strong criticism from Republicans and even a few prominent Democrats.

The stunning move comes after Geithner’s popularity on Wall Street has gained momentum in the past week, as investors have largely cheered a proposal to see the Treasury, Federal Reserve, and FDIC partner with private investors to clear toxic assets off of of the hands of troubled banks.

“It’s being done quietly, but the President has asked Geithner to step aside,” said a source close to the Cabinet with knowledge of the decision. “He feels there is too much of a lack of trust, and he was frankly expecting more of a bounce in financial markets from the PPIP than what’s been seen so far.”

The Geithner-led Treasury has had difficulty filling key positions since his appointment. After the fourth potential senior Treasury roster nominee dropped from the running earlier this month, sources told the Washington Post that under-staffing issues might hamper the Treasury’s ability to handle the financial crisis.

Gus O’Donnell, Cabinet Secretary for the British government, suggested to various British media in recent weeks that it has been “unbelievably difficult” to talk to people at the U.S. Treasury, saying “there is nobody there.”

Let's see if the above, reported by Housing Wire.com, is accurate or just a trial balloon that pops.

If it's true, and Paul Volcker comes in from the cold and takes over at least as interim Treasury Sec'y, one could expect a stock market pop as powerful but fleeting as those that greeted Michael Dell's and Howard Schultz's returns as CEO to Dell and Starbucks.

The worst news in the above would be if part of the reason for any dismissal of Mr. Geithner was that the stock market was not happy enough about the PPIP bailout plan for Citi and BofA.

The other worst news would be rehiring Hank Paulson or the equivalent.  What about someone on the side of the customers of Big Finance?

That would be change we could believe in!

Copyright (C) Long Lake LLC 2009

Bad News Cycle

The Bloomberg.com headlines look poor today:

Volcker Chafes at Obama Panel Delay, Strains With Summers Rise:
The story is that Volcker looks to be more of a figurehead than an influential person. TOO BAD.

Goldman, JPMorgan Won’t Feel Effects of Executive-Salary Caps:

Some analysts said the new rules wouldn’t have much effect.

Obama, 47, “is not proposing to go back and get that $18.4 billion in bonuses back,” Laura Thatcher, head of law firm Alston & Bird’s executive compensation practice in Atlanta, said of the cash bonuses New York banks paid last year, the sixth- biggest haul in history. “Right now, we have not clamped down” on pay at banks.

Huge Paydays

In addition, some executives may be compensated for the potential reduced salaries with restricted stock grants, which may result in huge paydays after the bank repays the government assistance with interest.

“They’re just allowing companies to defer compensation,” said Graef Crystal, a former compensation consultant and author of “The Crystal Report on Executive Compensation.”
The restrictions are “a joke,” he said, because “if the government is paid pack, you can be sure that the stock will have risen hugely.”

So yesterday's headlines by the president look to be mostly PR.

U.S. Automakers ‘Choking’ Without Credit Await Fed Loan Program

“This is what is choking us to death,” Mark LaNeve, GM’s sales chief, said in an interview Feb. 3 after the biggest U.S. automaker posted a 49 percent drop in January sales in its home market. “If you can’t get credit, you can’t sell vehicles.”

The comment here is that everyone in the industry has known for years that the "Big Three" were finance companies masquerading as manufacturers. The country has to get away from debt-financed production and consumption. A modest proposal: given how rapidly Big Three cars depreciate, ban auto loans for more than, say, half the value of the car.

Eventually supply and demand will come into balance. The demand, however, will be real demand. Environmentalists such as Barack Obama should be in favor of a lower trend-line auto sales chart.


GSK delivers EPS of 104.7p before major restructuring
Dividend increased 8% to 57p

(See GSK.com for above, not Bloomberg)

Not stated in the GlaxoSmithKline press release is the fact that earnings were actually down 40% year on year, the stock buyback program was cancelled to pay for the dividend increase, and a mysterious legal charge occurred in the quarter that apparently shareholders are not supposed to know anything about.

Back to Bloomberg.com:

Russia Fueling Ruble Tumble With Loans, Banks Say

Russia’s central bank is exacerbating the ruble’s 35 percent plunge since August, even as it struggles to defend the exchange rate, by providing loans to banks that speculate on the currency, say Alfa Bank and UniCredit SpA.

And from their video section, this headline:

(Jimmy) Rogers Says Russia May Break Up

Cheery!

Worker Anger Sees Brown Facing Winter of Discontent

Spreading strikes, reduced workweeks and tens of thousands of job cuts are throwing British Prime Minister Gordon Brown back to the 1970s.

I have been saying for some time that what is happening is a toxic mix of the 1930s and 1970s.
Another Bloomberg article reports that the Bank of England lowered rates to a further record low of 1%.

Senate Adds Homebuyers’ Tax Cut to Stimulus as Final Vote Nears

Swiss Re Gets $2.6 Billion From Buffett After Loss

However, a man named Grodzki is pictured on Bloomberg.com's video section as saying that Buffett's stake in Swiss Re is "reassuring". Perhaps he was making a great pun. The truth is that Buffett is a shark. Perhaps he means that he is reassured that Buffett knows that Swiss Re lost its shirt venturing into derivatives in a vain search for growth and that Berkshire will probably prosper. It is not reassuring that the giant reinsurer Swiss Re joined the insurers Ambac, MBIA and others in forgetting that its role in society was to be a strong reinsurer, not to produce profits generated by gambling.

Senate Adds Homebuyers’ Tax Cut to Stimulus as Final Vote Nears

Closer to home, Republicans were allegedly making progress in getting the "stimulus" bill to eliminate non-stimulating spending. It appears that just as in the TARP bailout bill last fall, the Congress really just wants to borrow and spend more. The debt culture remains on top for now.

Perhaps you can be reassured that living in Japan in the 1990s post-bubble was not so bad. On the other hand, from the Leslie Howard movie The Scarlet Pimpernel is the great quote (which I attempt to repeat from memory): "There is nothing quite so bad as that which is . . . not so bad".

Have a good day.

Copyright (C) Long Lake LLC 2009

"It May Be Distasteful"

Banking remains at the epicenter of the economic news, unfortunately. The Establishment has been executing its plan over the last year to massively transfer national wealth to the financial giants. This transfer of wealth in this sort of quantity has never been overtly done to any other industry in my memory. (The closest one can come is to blame wars such as Iraq, Viet Nam and World War I on a desire to enrich the captains of industry, if one has that sort of belief. And even if such were the case, at least the companies actually provided goods and services in support of the war(s).) Here, the companies being aided are keeping the funds rather than producing anything with them (because they are more or less insolvent).

To keep things positive, before reading me beat up on a Bloomberg.com article, please consider reading two articles by the noted economist Willem Buiter (both published by the Financial Times.com:

No change, no hope: Obama’s Transition Economic Advisory Board
November 10, 2008 (this is actually an entertaining, witty writeup)

and

Time to take the banks into full public ownership
January 16, 2009 (more important and sober).

Dr. Buiter has impeccable academic, governmental and regulatory credentials (listed by his writeups) and is famous for having "spoken truth to power" last summer, as reported by Naked Capitalism: "Buiter Provokes Wrath at Jackson Hole, Says Fed Too Close to Wall Street".

In any case, the Establishment continues to keep up a pathetic but in the aggregate effective drumbeat of concealed advertising in favor of the bailouts. To wit, from today's Bloomberg.com:

"Obama Bank Rescue May Make New Effort to Resolve Toxic Assets"

"President-elect Barack Obama is likely to back a financial-rescue effort that channels capital to banks and deals with troubled assets clogging balance sheets, according to people familiar with the matter."

“We have a deteriorating real economy and deteriorating financial sector feeding on each other,” said Raghuram Rajan, a former chief economist for the International Monetary Fund who’s now a professor of finance at the University of Chicago. “It may be distasteful but we need to put more money in the banks.”

DoctoRx here: No we don't. We should follow the lead of Sweden about 15 years ago and let the failed ones fail, no matter how big, but in an organized way. This will save the "system", and let taxpayers reap the profits from "Newco" banks that we will finance, grow, and privatize later on.

Another snippet from the article:

"Obama is set to take office on Jan. 20 and his advisers have been working to craft a comprehensive blueprint for overhauling the bailout."

The bailout bill was written entirely by Congress, under control by the Democrats, the party that has been led by Barack Obama since summer 2008. Mr. Obama voted for the bill; I recall that he expressed no reservations with the Reid-Pelosi-Frank etc. legislation at the time. Now Bloomberg is reporting without saying so that the bill, passed merely 3 months ago, has failed and needs an "overhaul". What Bloomberg should have been reporting is what I just wrote, not what it wrote. I have been writing consistently in my posts that Congress held no hearings of any substance in putting together this bail-out turkey. Oh, it was an "emergency" (such an emergency that the smart money starting exiting the financial stocks at least as far back as 2006 and the housing stocks in Q2 2005). Bush and Paulson are going, going, gone. They were good pinatas for putting the left-wing side of the Establishment in total control of the Federal Government. I have also been writing that the Obama Administration was going to continue the Bush-Paulson-Bernanke-Reid-Pelosi consensus policies on finance. These policies are to use all necessary efforts to continue the failing and flailing policies that support the Merchants of Debt.

I said yesterday in On "Financial Reform" that I would have more to report on the RiskMetrics/Volcker etc. G30 report and recommendations on Financial Reform. I have reformed my thinking. Please read that post and Dr. Buiter's posts referenced above. 'Nuff said.

What is going on now is momentous. Because the stakes are so high, the Establishment media such as the New York Times and Bloomberg.com are virtually ignoring the core issues. The same NYT that put Abu Graibh abuses on its front page for daily for well over one month should be doing the same with this issue.

Will society get back to where we once belonged, where people actually owned things free and clear and adjured debt? The profitability of selling debt can be seen in the unbelievable number of credit card solicitations sent out yearly even now and in the hysterical Establishment reaction to "save" the banks, "distasteful" though it is.

It is looking more and more as if the Obama Administration is going to simply re-market the same debt-based system that brought us to the most severe economic downturn since the Great Depression, but with more regulators sucking more money from you and me to support them. Mr. Obama now has the bully pulpit. If he were to issue a clarion call for greater personal responsibility, restraint in purchasing material goods until personal savings were available to properly pay for them or conservatively finance them, and took on the Merchants of Debt as Teddy Roosevelt took on the "malefactors of great wealth", his popularity would soar and he could become as transformative a President as was TR. He needs to decisively set the tone and put forth policies that guide the country from a finance-based economy to a 21st Century one. The outlines of a 21st Century economy are clear: medical technologies, information technologies, cost-effective energy-generating and energy-transmitting technologies: knowledge-based stuff. Stuff with real products such as life-saving drugs. No more creating "wealth" that is simply a financial construct.

To do this, he needs to clean house. Force the "too-big-to-fail" failing "banks" - which are really giant holding companies with no real interest in the boring job of taking insured consumer deposits and doing prudent (i.e. low-profit) things with them, to disclose all details of their "Tier 3" and even "Tier 2" assets. Don't have the Federal Government buy them. They should sell them for what they are worth. Then all institutions that have Government guarantees should be banned from holding illiquid assets such as those.

Who will buy these "assets"? I don't care and neither should you. A modest proposal: over the last decade, individuals working for financial firms have snarfed up hundreds of billions of dollars of personal income, perhaps trillions, from bonuses and capital gains made by building up this system that has now suffered a heart attack/stroke/short-circuit/disaster. Let these gentlemen, huge numbers of whom are rich beyond Croesus' imagination, buy them at the same price at which the former IMF official expects the Federal Government to buy them at. Let Bill Gates and Warren Buffett, who are so generous to so many non-Americans (and on occasion to Americans as well, to be fair), help us out and spend a portion their tens of billions of net worth on paying generous sums to these financial institutions for their troublesome assets. That would be an act of real charity to a suffering populace and to their country. Unlike Haim Salomon, who helped save the Revolution, and who died a pauper, they need not go quite so far!

It would be nice to believe that after a disaster of the current magnitude, there would be real hearings in Congress as well as an independent commission (not the G30), a la the "Pecora Commission" (see my Jan. 7 post, Where Is Jurassic Park When You Need It?) about the root causes of how matters came to the current sorry state.

Don't hold your breath. But please contact your Congressional representatives to let them know that you need your money, the Federal Government needs its money, and you find it "distasteful" and more than that for our money to keep being thrown down a rathole.

After taking the oath of office, President Obama will give a great speech Tuesday. Will that be associated with an Obama stock market rally? I don't know and I don't care. Because he has already signaled that in the fields of economics and finance, the candidate of change is not going to make any fundamental changes.

Copyright (C) Long Lake LLC

On "Financial Reform"

Please considering reading the recommendations of the "Group of 30", also known as G30.

The recommendations are available by clicking on the title, "Financial Reform: A Framework for Financial Stability".

This is likely to be a very important document, headed as it is by Paul Volcker.

My quick read of its recommendations leads to the following first reactions:

1. Of course, some of its recommendations are positive.
2. It mostly misses the mark. For example:

A. It does not truly reform the Credit Default Swap system. CDS is either insurance or it is gambling. The world did very well without it. If an entity does not want to make a loan, or wants partners, or after making the loan wants to sell it, so be it. All a CDS does from an overall systemic standpoint is add costs. No value is created by a CDS and therefore it is inefficient.
B. The Project Director is the head man at a company called RiskMetrics. Unsurprisingly, the report calls for more risk management. My reaction is that fewer risks should be taken. If you take a look at the members of the G30, they are all insiders. Many work for JPMorgan Chase, Morgan Stanley, etc. To expect them to support a real downsizing of their industry is naive.
C. The report calls for more and better regulation of financial institutions that pose a systemic risk. I respond that such institutions should not be allowed to exist.

I will have more comments in the future.

Copyright (C) Long Lake LLC