Tuesday, September 30, 2008

Does Wall Street Have Congress In Its Back Pocket?

posted by TimingLogic at 7:32 PM

Good Old Fashioned Economics Defeated Bailout Plan?

posted by TimingLogic at 7:26 PM

A Few Timely Remarks On The Current Environment

First off, I would highly encourage you to watch this clip from the excellent movie Network. It is very appropriate for the times.

I'm really quite amazed at the general media panic we see because of the failure of this bailout bill. It seems wherever I turn, there is an excoriation of those who voted against this bailout bill. The media is contributing to a panic and pressure to pass this bill in its current form as opposed to the intellectual discourse and peer review we have talked about as necessary to hone the blade of any government involvement in the banking crisis. We started down this process with Congressional hearings and lost all momentum.

I have no doubt much of the media response is the corporatocracy at work. It is also human behavior at its best - ridicule anyone who presumes to take a different position from the herd. Especially in a panic. This has been reinforced by less than Presidential remarks coming from the White House over the past two weeks. That includes both content and tone. We have leadership (a term I use very liberally) that either doesn't know how to manage without interjecting fear or that knows how to manipulate using fear as a motivator. It is wearing in its usefulness on the electorate. I have written about effective management styles and how destructive negative or fear-based management is. Surely this outcome is predictable for the exact same reasons we talked about in a prior post on leadership. Either way, life is not a contextual allegory for Aesop's fable, The Boy Who Cried Wolf. The current political leadership has lost its ability to lead because of its very management style. The implications are much broader than political leadership.

Remember, very few in the television press are actually qualified to comment on the validity of any bill. Instead, what they should be doing is educating the electorate with facts. Not to be providing us with this incessant commentary pawned off as news. Our media has turned into a never ending mind bender of the electorate's thought. Evidently, they generally don't know what ails the economy or the banking system and don't understand any methodology or process-driven resolution required to deal with this crisis. Can I just get the damned news? Instead, we have generally seen Ready, Shoot, Aim! from both government and the media.

The media simply sees someone in a position of authority telling them this bill is necessary. The best way to serve in a democracy is not through blind faith. Rule by the people works, amongst many other reasons, because of discourse. Media panic seemed reinforced by the stock market drop. Well, I hate to break it to anyone but asset prices have been dropping for years. Additionally, given the relative orderliness of yesterday, I wouldn't put it past some on Wall Street to dump the market to reinforce their displeasure. That isn't a stretch. Wall Street has thrown tantrums before and used such schemes to get their way. Any bureaucracy trying to save itself, and that is Wall Street's core concern as opposed to the stock market, will go to great measures. Manipulation is one of them.

Many in the media were saying this bill's failure is a sign government is broken. Actually, this is the first sign in years that government still works for the people. Even if it is only because we are a month away from election for every House member. Don't worry. Congress is in the middle of a great transformation. They just don't realize it yet.

Let's be clear. Few, if any, in Congress are stating there should be no involvement in restoring liquidity to the markets. But, there are many better ideas that might actually have some chance of working on some level. That includes methods used during the Great Depression as a starting point. Additionally, there are other methods that can be studied from around the world when similar situations arose. I can think of a half dozen ideas and there are many people who are exponentially more qualified than I am to assist in resolving this. We need less talk from politicians and media. We need more action in the form of reaching out to experts to craft a bill that will attempt to accomplish specific, documented objectives. What we don't need is a rehash of this same bill that seems to be circulating as the next step. How do we know what we are attempting to solve unless we document the objectives. And, how do we create a feedback process as to whether attempted fixes are not working or that we need to try a new method unless we document objectives? I still literally have no idea what the objectives were for this bill. Is it to save the banking system? To restore liquidity to nonfunctioning markets? To recapitalize banks? To keep banks from failing? To help homeowners? Stop home prices from declining? To bail out Wall Street? To bring God back to earth to save us from ourselves? All of the above? What is the objective?

How much confidence would Congress bring to the process if it were to set up a task force of subject matter experts headed by someone with great name recognition and trust. Volcker? Buffet? They don't need to be the subject matter experts. Just to be associated with confidence in financial markets. If Congress had done this initially with a two week deadline, we'd be well on our way to passing a reasonable bill that wasn't the result of political objectives instead of economic objectives.

Make no mistake, both parties are very complicit in this mess. Every politician with more than a handful of years of experience has knowingly and actively created policy that contributed to where we are. My point is this process needs to be taken out of the political environment and into the hands of people that can help us solve the issues before us. I don't know about you but I wouldn't ask Hank Paulson or Nancy Pelosi to solve a complex physics problem if Albert Einstein were available. Why is this situation any different?
posted by TimingLogic at 2:57 PM

Raymond James Joins Goldman Sachs And Morgan Stanley - Run From Free Markets To The Safety Of The Federal Reserve

Raymond James is the latest financial firm to run from free markets to the safety of Federal Reserve bailouts and lotsa free money. It is laughable that these firms can't stand the heat after all of the executives have personally benefited from the environment they created. Of course, Raymond James qualifies this move by stating that they were considering it before this crisis. Uh...sure.
posted by TimingLogic at 10:32 AM

Monday, September 29, 2008

The Voted On Bailout Plan Was A Complete Scheme

I wrote earlier in the day in my Godzilla post that it looked like the verbage of this plan had watered down from what had been presented to the American people. Now, my bailiwick is not breaking down legislation but from what I saw of the changed framework on television this evening, the actual plan the House voted on had little in common with what Congress told the American people was originally in the plan. This plan reeked of rot. In many ways the voted on plan was even more representative of cronyism and terrible oversight than Paulson's original plan. Seemingly a bait and switch surely impacted by Wall Street lobbyists. The failure of this bill was a victory for Americans.

This process needs to start over and be exposed to greater rigor, more light and more accountability to the sovereign. Back to contacting Congressional leadership for me.
posted by TimingLogic at 8:19 PM

Weekend NYT - The Real Story Behind AIG's Failure And How It Alone Could Have Sunk Goldman Sachs

posted by TimingLogic at 7:55 PM

Initial House Vote Totals Defeat Bailout

I seriously doubt this will change before the gavel drops. It's quite interesting to see the disconnect on Wall Street. One comment I heard from the floor of the New York Stock Exchange is that the Congress needs to do the will of the people. Indeed they do. And, they just did. Now get back to work and produce a working plan that people will support before the world comes to an end. You can do substantially better than this. Now hopefully they will.

Update: It's official. House Republicans steamrolled their President's plan. Update 2: Based on House Republican remarks it was because of the partisan foolishness of Speaker Pelosi. Her railing on Republicans right before the vote showed her complete lack of leadership skills and a lack of understanding that the 2006 vote was not a mandate for Democrats. It was a mandate to get rid of the status quo regardless of party. Pelosi might want to take that hike I recommended Hank Paulson should take. Let's use this opportunity to actually put a better bill on the table.
posted by TimingLogic at 1:46 PM

Comrade Paulson Urges Global Central Bankers To Unite!

As central planners and central bankers around the globe unite in their effort to defeat the demons of short selling - the root cause of their pain - and save globalization - unbeknownst to them, its current incarnation is already dead - I thought it appropriate to encourage the central planners onward with a motivational singing of the Soviet National Anthem. We must encourage confidence the planners will be successful in their efforts to convince the legions of labor to produce more beans and rice for the benefit of the ruling elite. Long live the state!

posted by TimingLogic at 1:12 PM

Frankenstein And Rodan Meet Godzilla - Godzilla Wins By Knockout

The latest? Wachovia is sold to Citigroup with government assistance. Ironically, Wachovia's CEO seemed quite bullish a week or so ago. Sale price? I believe without looking I heard $1 per share. This was really a bankruptcy kept from officially becoming one in hopes of stemming further erosions of confidence. Did the short sellers force Wachovia management to jeopardize the company, its deposits and its shareholder's equity? Again, those who don't understand the markets or want to divert attention from their own mistakes use the ruse of blaming short sellers.

How often have we said banking stocks have not bottomed? Wachovia stock dropped 95% in two days. Opinion, in oversupply, is worthless. Rational analysis of the data, in undersupply, is undeniable. It's apparent most analyists, mutual fund managers and other prognosticators making these bottom calls flunked their high school math classes. Last week Washington Mutual. This week Wachovia. Next week...........? (I'm pandering to the populist movement.)

National City, a super regional bank, is also seeing its stock moving down sharply over the last week. Draw your own conclusions. While a bottom is not in for banks what we do see is many big banks becoming bigger. Large deposits and investments fleeing weak institutions for the perceived safety of banks that the Federal Reserve will not let fail. Or who appear to have skirted catastrophically foolish mistakes so far. The key is so far as the target is a moving one as we have watched the virus spread over time. JP Morgan Chase is one of the darlings that apparently is considered safe for now. Is JP Morgan's success purely the result of free markets? The fact that JPM's CEO sits on the Board of the New York Fed (responsible for Wall Street) plays no role? Those terms on Bear and WaMu were based on market forces? And, I suppose that GE was added to the list of financial institutions that are on the banned short sale list has nothing to do with its CEO also sitting on the New York Fed's board? GE has a large financial services division but are its shares the target of potentially illegal activity? Are the dreaded short sellers threatening the future of GE as they are with Wachovia?

Maybe New York Federal Reserve Governor Geithner should make a public statement about these issues. Just to make sure we don't have any perceived cronyism or conflicts of interest since recent policy appears to lend that perspective. Maybe it's coincidental but in today's world of no transparency in the banking industry and government-corporate cronyism, it's a valid concern.

Ultimately, we would have most assuredly seen the failure of Wall Street's darling, Goldman Sachs, as well. But, the government saved Goldman for the time being by allowing them to become a bank holding company and to gain access the the Federal Reserve beyond today's temporary facilities. (In other words, they are now officially on the bailout list as opposed to on the "let the market decide" list.) Can you imagine the government letting the Treasury Secretary's creation, the current incarnation of Goldman Sachs, collapse? How much confidence would the American people have in a bailout plan created by a Treasury Secretary that would have been linked to the destruction of Goldman Sachs, the crown jewel of American finance? Instead we have a bailout plan created by a Treasury Secretary that is linked to the crony capitalism of allowing Goldman to be saved by the government while market-based forces drive millions of Americans, other banks and other businesses into bankruptcy. I feel so much better now. Now that Goldman has a reprieve so does Hank Paulson. And, now he can impart more of his wisdom on the American people through the deployment of the government's grand bailout plan. It looks like the verbage of that plan is being watered down from what was presented in the media yesterday. If that is the case, we could see a defeat in the House. What do politicians fear more than anything else? Losing their job. Every member of the House is up for election this fall. If the bill's language is watered down, ie, made less palatable to the sovereign, and I don't really know if it is beyond initial comments as such, we could be back to the drawing board. Frankly, that would be a very good thing in my estimation.

In a month, the market has literally dismantled Wall Street. I guess now we call it Wall cul-de-sac.........with a twist - the cul-de-sac is one way and that means there is no way out. Remember the Wall Street mantra? The market knows best. Indeed it does. The market knows Modern Finance is based on mumbo jumbo and it is dismantling it. The market knows without regulation, the end state is disarray. The market knows the Wall Street bleating that led to society's adoption of a finance-based economy is pure nonsense. The market knows cronyism is over. Indeed, the market is all knowing. Just not in the way society, Wall Street and the current incarnation of free-marketeers has been brainwashed into believing through their fallacious conclusions.

Godzilla (the market) has met Frankenstein finance (Wall Street's latest incarnation) in a rematch of the original bout fought in 1929. Not only has Frankenstein's defeat been even more brutal than the first bout but Frankenstein's tag team partner Rodan (Global finance) has been defeated as well. It's time to call the fight a knockout as Godzilla has torn Frankenstein and Rodan limb from limb. Once again Godzilla is still the undisputed champion. History books will write the fight of the century turned out to be pure hype. And, many who paid much of their life savings for a ticket to the bout of the century will be decimated. What can we learn from this? Never believe the hype of promotors.
posted by TimingLogic at 9:02 AM

Sunday, September 28, 2008

House Readies For Vote On Bailout Bill

I'll have more remarks on the bailout bill. Nothing earth shattering beyond what I have already said. ie. It won't do what government is praying it will do. The President tells us in this Times article that it's a very good bill. Well, I'm not sure how anyone in the current government would know what a bad bill looked like given incarnations of both parties are the biggest group of spend-happy dunces we've ever seen. (Government is also in the OPM or other people's money business. Accordingly, their judgement often ain't much better than Wall Street.) But, this bill is substantially better than writing the Treasury a blank check with what were arguably unconstitutional authorities according to an examination on Law.com. Surprising how little respect government officials have the the Constitution at times. Even though I support government involvement in the current mess, there is a part of me that hopes the House can't muster the votes to pass the bill so we have a chance to get one with more transparency, market-based price discovery and involvement of private capital.
posted by TimingLogic at 11:49 PM

Saturday, September 27, 2008

Marc Faber On Bloomberg

I've posted videos from Marc Faber before. I have a tremendous fondness for Marc's unvarnished views and great grasp of fundamentals.

That said, he has had a hard time recently adjusting to global market dynamics with some messy calls over the past handful of years including bullishness on China and Vietnam and bearishness on the dollar. Faber's most current view is short-term bullish on the dollar but long term bearish. I believe some remarks in this interview are going to be proven inaccurate but we shall see. Regardless, his perspective is always worth considering.

posted by TimingLogic at 2:43 PM

SEC Acknowledges Government Complicity In Economic Mess

posted by TimingLogic at 1:21 PM

Friday, September 26, 2008

Hank Paulson And His Buddies Partied Like It Was 1929 While Destroying Our Banking System And An Update On The Bailout

I'm still awaiting my portion of that $3 billion for taking us very close to the edge of global chaos. The number is exponentially larger than $3 billion if you add in all of the major players who built and benefited from this crisis. It's probably more like $300 billion.

It might have sounded a bit extreme when I called for Hank Paulson to resign last Friday. Not so much any more as I hear rumblings in mainstream circles calling for his resignation. Those rumblings will likely grow if an agreed to plan cannot be reached soon. Or even if the market rejects his concept all together. Of course, his resignation is not going to happen. We are literally weeks away from his departure. I find it almost hilarious that at one time he was asked if he would stay to serve a new administration. We don't need any more Hank Paulsons in a representative government.

It's amazing to see the repeated gaffes of politicians. Their handlers have a very altered view of reality. What is so amazing is that needed action to deal with this crisis could have been packaged and presented in such a way that the majority of the population would have easily supported it from day one. All they needed to do is what they are doing now in a public forum as a pro-active measure. The people of this country would not have panicked. Transparency is the cure for most every ill. That includes the ills of government. But, the good news is this has engaged the sovereign in a much more transparent process of making sausage. Most around the globe are probably aghast at this uniquely American process of public bickering, attacking and carping. Many will incorrectly view this as more signs of the inevitable implosion of America. But, that would be exactly the opposite of the reality we see in this amazingly constructive process. As I wrote in my initial thoughts last week, this plan needed peer review and intellectual discourse to hone the blade.

If I were to purely speculate, I would guess we are about half way to a compromise. I realize the general consensus is that we are minutes away from an agreement but I am dubious of this position. The "half way" is that we have opened the problem to public dialog. The bureaucrats have agreed in principle to a bureaucratic solution of their favor. Those who believed in more transparency, disclosure and market involvement in any plan were shoved to the side early in the process. That is for obvious reasons. One, the bureaucrats are more likely to believe a government solution is the best solution. Two, both parties in our government are big spenders and Paulson needs an education and introduction to representative government. Three, panic was a driving force in crafting a solution - ie we don't have time to adopt any market-based solutions as part of this plan. Four, the status quo is trying to keep their game going. Transparency, disclosure and market forces would upset their ability to do so.

In order to get to closure and put pen to paper, the current discourse needs to be subjected to market-based solutions. An honest discourse as to how a plan would work considering government, and market-based solutions or a combination of the two would increase the probability of the outcome being what is in the best interests of the sovereign and the economy. The real sticking point to market-based components is lack of confidence in markets as we speak and that market-based solutions would require great disclosure that banks, regulators and government surely all fear. But, we need not fear the state of fear. What we should fear is power grabs by the state. Or, as Franklin Roosevelt told us, the only thing we have to fear is fear itself.

In closing, here's some irony to think about. As the entire world jabs their sticks into our solar plexus, prodding us to fix our mess, wouldn't it be ironic if an ultimate solution to the U.S. crisis required full transparency? All the while the global markets ridiculing the U.S. generally have similar or worse issues of transparency. So, were we to adopt a solution requiring transparency, would the world follow suit or would they keep their own problems behind an opaque wall as they do today? Suffer the economic and social consequences rather than allow full transparency? This isn't just a statement of the crisis we see before us. This is a statement of the global crises we will see develop in the coming economic environment.
posted by TimingLogic at 11:58 AM

Bernanke To Cut Rates?

I wrote last week before the Fed decision on interest rates that my opinion was they should cut immediately and deeply. They did nothing. Now a week later we see a report from Bloomberg that a rate cut may be imminent.

I wrote in that post, "Somehow I think many believe we can wish away rates near the zero bound. Well, forget it. That ship sailed years ago." This is a key point I want to make again. This concept of wishing for interest rate policy seems to be prevailing wisdom by many with the microphone. The market needs lower rates and unless the government bails out everyone on earth, short term rates are most assuredly going lower.
posted by TimingLogic at 10:03 AM

Thursday, September 25, 2008

Update To The Demise Of Modern Finance Video

I thought I'd throw up a video update as a follow up to the September 3rd video update titled The Demise Of Modern Finance where I again mentioned 1995 prices as a possible downside target to the S&P. Keep in mind the prior Market Profile and Volume at Price posts where we talked of major volume levels determining price support. In other words, where large sums of buyers and sellers exchange shares.

Again, as in the last video update, you will need to click on the picture above to be taken to my video server.
posted by TimingLogic at 1:14 PM

Tuesday, September 23, 2008

We Wrote Nearly A Year Ago Of Exactly What Happened Last Week With Paulson's Bailout Plan

A few timely comments before the post. I'm writing this as Senators interrogate Paulson and Bernanke. Paulson must have said root cause at least six or seven times. Housing prices are not the root cause. And, neither is debt. The questioning by Congress is some of the most brilliant I have ever witnessed. It actually makes me proud that our form of government still has the ability to rise to the occasion in time of crisis. It is substantially apparent this workout of intellectual discourse will be to the benefit of society as this is an ill-thought out plan. All Senators are on their "A" game. Quite frankly, Senator Bennett has made a point that I think could be twisted into another potential solution. This should be a reverse auction open to anyone that wants to bid. Not just the Federal Reserve but anyone interested in buying distressed debt. One bidder attempting to set market pricing for hundreds of billions of distressed assets and a handful of sellers does not leave me feeling warm and fuzzy that market pricing will be achieved. But, then this really isn't about achieving true transparency and market pricing. It's a ruse for a scheme meant to bail out banks without any concern for taxpayers built into the plan. Why can't I bid on some of this debt? I would most assuredly like to bid if I knew what I was bidding on. And open bidding to market buyers would reduce the taxpayer risk and would require transparency in advance of the auction. This would assist the sovereign to determine what they are buying. It shouldn't take too much time for financial institutions to prepare the appropriate documentation. Okay, on to the post.

This moment in time is an appropriate opportunity to re-post some remarks I made on here last January - I posted a game and then an outcome or answer to the game. That game described our banking and finance system at the time. Below is a re-post of the game and outcome. Last week we witnessed the exact outcomes to that game as I wrote it would happen at the time.
-The Lehman failure
-The Merrill failure (Their failure led to the merger with B of A.)
-The imminent failure of Goldman and Morgan Stanley
-The failure of AIG
-The hedge fund crisis associated with Lehman & AIG's failure
-And as a final culmination, the proposed Paulson bailout needed to stabilize the players in the game

It was inevitable we would get to the point where a bailout was necessary. I could have just as easily written that post ten years ago. The outcome would be the same. And, were Wall Street actually driven by market forces, we never would have gotten to this point. The market would have determined these outcomes well before this crisis unfolded. But, because Wall Street is a monopoly, this was let to build to levels of disaster. Incompetence becomes systemic in systems of monopoly. There is no doubt Wall Street is systemically incompetent. Now we face dire economic consequences regardless of what plan is approved. So much for free markets.

Remember, since my original post every major CEO on Wall Street told us the system would be fine. Hank Paulson told us everything was fine. Nearly every Federal Reserve governor told us everything was fine. And, at differing points between then and now a vast majority of Wall Street talking heads told us to get back into the stock market. And, all of these actions happened over and over and over again. It is important to remember the John Kenneth Galbraith quote I have put up on here many times - we assign values to people that are completely without merit.

Do you still assign the same values to these people? Do you really think any of these people understand the basis for this crisis or how to solve it? Do you really believe Wall Street executives making tens to hundreds of millions of dollars by handling your money really deserve that pay? You want to believe because most likely much of your belief system would be shattered not to believe it. Questioning your belief system is not a place many people feel comfortable going. But, if you take away your bias, do you really believe?

Here is the prior post of the game...............................


After watching this video, we can play a game. A quick game. A game involving the Socratic method and Socratic questioning. Here goes. What if an environment existed where there was significant leverage in many assets and very large bets across all assets. And, let's say some of those assets are more liquid than others. And, that some assets are actually quite illiquid. By that I mean there is not a clearinghouse or large auction market with substantial players to trade that asset. A piece of art may be an example of an illiquid asset. And, let's say any one of those bets turns against one of the players or many players. And, let's say one day players have to recognize that bad bet(s). In doing so, the players have to recover a stable financial position. In other words, they need to raise capital to remain liquid and stay in the game. Or, in a bank's case, remain solvent. And, let's say it has become impossible to raise that capital through the sale of semi-liquid or illiquid assets. And, in a worst case scenario, let's say the illiquid assets are the ones that have turned against those players. What are the players forced to do? And what are the consequences for the players and for the asset markets they've invested in? Both short term and long term?


There are many outcomes. One is forced selling. Even many deeper angles on the selling. One of them is that players are left with continually deteriorating BAD bets while they sell their good bets to remain in the game. That has a self-reinforcing or recursive effect of selling more and more good bets while more and more bad bets draw down their capital positions over time and thus continually erode their capital positions until either bankruptcy, capital injection or bad bets stabilize. Selling of good bets are not just paper assets or traded assets but could be other parts of the company, people, their trading businesses, etc. And, what might that mean for hedge funds that rely on them to stay in business? And, what does that imply for intrinsic value of these players? That said, there are still so many other angles.. .....But, we'll all watch as it unfolds.

And many are saying banks are a buy. Is that a joke? I'm sure it seemed bizarre when I wrote that Wall Street was peaking but they still don't understand what is happening. But, do they ever? And, for that, we all pay.
posted by TimingLogic at 12:18 PM

Monday, September 22, 2008

Paulson's Plan Is Dead. Congress Has Taken Its Mantle As Representatives Of The People.

"I have every confidence that there will be a revival of activity (economic) in the spring, and that during this coming year the country will make steady progress."
- Andrew W. Mellon, U.S. Secretary of the Treasury, December 31, 1929

"I believe what we are seeing is a strong global economy. This is the strongest global economy I've seen in thirty two years. I think this is being driven by strong growth outside of the U.S.....I would say there is less risk in the markets today than there was a few months ago."
- Hank Paulson, U.S. Secretary of the Treasury, July 27, 2007

I just pulled those quotes off of one of my July 2007 posts. I've been on Paulson since he came out with those statements. Not because of some emotional perspective. I have no reason to believe Paulson is not sincere. But because the facts remain that Goldman Sachs originated much of Frankenstein finance under his leadership and he seemingly appears completely out of touch and unable to get anything done as Treasury Secretary.

To even ask for supreme control with no legal recourse tells me a lot about his true persona. If there was anything to panic about over the last week, it was that one person could even ask for what his plan entailed. I don't believe anyone who supports the ideals of representative government or our Constitution would come close to asking for supreme control and verbage actually protecting him from legal recourse then attempting to frighten Congress with imminent doom into signing it with a gun to their head.

Thanks God cooler heads prevailed. Paulson's plan is dead.
We will not have an emperor any time soon. Now we let Congress debate a plan. Although they had better do so quickly. The market is likely to remind them often that this is not business as usual. Of course, were we to have seen its approval, I would have drawn parallels to the fall of Roman Republic that ultimately led to the fall of Rome. A fall of the Republic that was cemented by seizure of power by a single person. A bit melodramatic but sardonically appropriate. Americans have not died throughout centuries to give Hank Paulson or anyone else total control of anything. We don't need a 'decider'.

Hank really should take all of his marbles and go home. Now. People seeking this type of power and control are very dangerous. I take solace in the fact that he is a short timer and won't have a chance to pull this stunt again.

In closing, in times of crisis it is telling of the character of both Presidential candidates that they both stood up and said the right thing - no Paulson plan. And, they both did so for the right reasons. Anyone and everyone who spoke out to stop this should take heart in the fact that your single voice helped stop this potential disaster.

posted by TimingLogic at 6:35 PM

Schumer Plan Back On The Table

I'm not of these people that fires up the fax machine and spams Congress on every major issue. In fact, I have only contacted someone in Congress on four issues over my life. It just so happens all four have happened over the last five years.

The Schumer plan we wrote constructively about last week is back on the table and is being put forward by Banking Committee Chairman, Senator Dodd. (Not reported by Bloomberg but by other sources that this is the Schumer plan being sponsored by Dodd.) I contacted both of these offices last week given Dodd's role on the Banking Committee and Schumer's reputation as a New York Senator with Wall Street experience. I am now confident this plan was put on back on the table because of my big mouth. Haha. Not!

Seriously, if you contacted Congress, you most assuredly made an impact on their change in strategy. Late last week Congress was ready to sign anything including any plans put forward by Joey "the knife".

Also, oil markets just hit the daily up limit and is up about $10 today. An unintended consequence of government attempting to manipulate the stock market with the short selling ban? Hot money moving to another deep and liquid market? Most probably.
posted by TimingLogic at 1:55 PM

Effects Of SEC Short Sale Ban - Washington Mutual Rallies To 2X Price No One Would Pay To Buy The Company In The First Place

I believe banning short sales has the potential to be reversed relatively quickly because of its negative impact on true price discovery - a process that is now impossible. Just like all of those other illiquid assets on bank's books that escape true price discovery for similar reasons. That's what happens when liquidity is removed from markets or when instruments are being offered up in an illiquid market as we have with bank assets. We don't have open, transparent and liquid markets just because it is fun to play the casino. Secretaries Paulson and Cox, being free marketeers, seem unable or unwilling to acknowledge this truth either as it relates to stocks or bank assets or anything else. Or, as it relates to their solutions to problems arising that will truly and severely distort price discovery.

The market had already determined there were no takers for Washington Mutual's stock when it was trading at $2 and the company had itself up for sale. With the euphoria surrounding Paulson's bailout plan, the gamblers have bid up Washingtom Mutual to more than doubled its pre-SEC short selling ban price. So, now we have its stock trading at 100% premium to a price already determined to be too high by an open and functioning market. Thank your friendly SEC chairman for this scheme that will end up causing more problems than it solves.

Update: I realized I left out the punchline right after posting this. Doh! If true price discovery cannot be achieved, there is a reasonable probability many market participants will not bid the market. Do you want to buy an asset that is not determined by a working, open and transparent market? We could see prices fall because of a lack of bids due to a vote of no-confidence. Just like the no-confidence outcomes we are seeing in other markets.
posted by TimingLogic at 12:42 PM

Paulson Urges Congress To Act Quickly - Before Anyone Has Time To Think This Through And While Fear Is Still The Motivating Factor ...................

The key factors allowing me to ramrod this bill through Congress. And, be sure to sign this bill unchanged so I have unlimited power and all legal recourse against my actions would be protected by immunity. Sounds a little like the broad powers and immunity granted under the FISA bill, eh? Hurry. Sign it. And do so while trashing our Constitution.
posted by TimingLogic at 10:19 AM

Sunday, September 21, 2008

Fed Attempts To Save Goldman Sachs & Morgan Stanley

Unlike Paulson's move, which is the lone move I don't agree with in this crisis, I see this as having potential upside for the American economy. Although it surely is an example of the government picking winners and losers in the market place. And, specifically, it is the Federal Reserve deciding who receives monopoly access to capital in this country. But, then as we wrote some time ago, access to capital is far from a free market activity in the U.S. It is a monopoly or cartel. Pick your wording. If foreign banks, global businesses and individuals had access to the same capital that Wall Street does, the world would be a substantially better place for a substantially larger number of people. And, it would go a long way to prevent these types of disasters in the future. But, that likely is not going to happen any time soon.

Morgan and Goldman were very likely headed for the scrap heap before this plan. Relatively substantiated stories last week had Morgan's CEO saying they weren't going to survive without a partner and both company's business models are broken. This move will help these organizations deal with the unfolding economic environment and potentially transform themselves into sustainable entities. The key word is potentially. In other words, it gives them a fighting chance to survive.

Update: The latest Bloomberg article on the Goldman & Morgan bailouts.
posted by TimingLogic at 10:19 PM

Other Perspectives On The Current Paulson Plan

I've spent the last thirty minutes clicking through to financial blogs and financial press on the internet to see what others may be saying. Sadly, there doesn't appear to be much in the way of any reporting this weekend.

The change in my tone since last Friday will become apparent as I have time to formulate further posts on my initial remarks over time. That said, I believe my posted remarks are enough to bring into serious question the form of this bailout plan.

As I have consistently and adamantly said since Bernanke started lowering rates, I fully support government involvement in the resolution of these crises. And I have fully supported all of the steps taken to date. But, I simply cannot in good conscience support something that I know will likely have significant unintended consequences and potentially make this crisis longer and deeper than it will already be. And, I cannot support plans that I know do not address the primary interests of a free society when there are clearly better choices available. Rushing this process without time for thought and without any legal opportunity to question it in the future is not in the best interests of anyone.

Along those lines, I would encourage you to click through and read this post on Progressive Conditions for a Bailout and Why You Should Hate the Treasury Bailout Proposal

I'm moving a reply I made to a question to the front of the blog as I believe the question is an important one.

Question: What is the potential for this bailout to re-inflate the credit bubble? And will the Fed feel comfortable enough with the plan to let rates rise?

My reply:

I think I wrote in a post over this past week that this will not likely have any effect on asset deflation. The perspectives on deflation being driven by debt, that are fueling broad support for this plan, are misguided in my estimation. Other drivers are at work pushing deflation.

If I am right, there are other primary data points that I believe would need to be addressed to re-ignite a strong credit cycle. That doesn't mean asset markets might not rally for some period of time but I think that will be relatively short lived, if at all. We shall have to see. We are very oversold and right at a level where I wrote we would see some type of interim bottom but I'm dubious in this environment.

Additionally, I see an extremely low probability of rates rising for any reason other than a rising bankruptcy cycle. That is a surety regardless of what this bailout plan looks like.

Central bankers look at this from a dogmatic perspective that I believe is fundamentally illogical and inacurrate. I believe it is a fundamental flaw with Bernanke's view of the Great Depression and why we are repeating history.

Finally, , I believe this fiddling with the markets by the SEC in concert with the Treasury has a very serious potential to have the exact opposite effect they intend. If fiddling with markets would so easily affect outcomes in a constructive fashion, our economic model would surely take this into consideration. For, to give any credence to solutions created by concentrated power would surely not be missed by those in a position to realize it.

When government tries to dictate policy in markets with millions of moving parts, it most always has significant unintended consequences. Much of their plan will likely result in substantially reduced market liquidity and create pricing vacuums and air pockets in the market. Just ask the Russians about this one.
posted by TimingLogic at 6:03 PM

Another Great Artilcle By Floyd Norris On Paulson's Growing Scandal

posted by TimingLogic at 4:40 PM

Hank Paulson And His Cronies Are Attempting To Walk Off With Society's Wealth As Part Of This Bailout

"If we design it so it's punitive and institutions aren't going to participate, this won't work the way we need it to work," Paulson said. "Let's talk executive salaries: There have been excesses there. I agree with the American people. Pay should be for performance, not for failure. We've got work to do in that regard. We need to do that work. But we need this system to work. And so reforms need to come afterwards. -- Hank Paulson today

I really despise class warfare politics but I can't help but believe those who benefited from this mess are indeed engaging in class warfare for their own benefit. From the above statements it is clear Hank and his complicit cronies on Wall Street want to rob the people blind, then after we bail them out and they walk off with tens of billions of society's money gotten by creating this mess, we worry about any reforms to those left to clean up the mess while those complicit head for the beach.

How many people know that under a little known piece of law that is meant to encourage our brilliant business leaders to become public servants that Happy Hank was able to cash out about $500 million from Goldman Sachs without paying taxes when he agreed to become Treasury Secretary? That money was granted for his complicity in creating modern finance and society never received any benefit. Is society really going to let Paulson rob it blind under this plan or are they going to demand accountability to the people? To instead adopt a plan similar to Schumer's.
posted by TimingLogic at 4:21 PM

China's Latest Product Scandal Involves Tainted Milk

Milk has been knowingly spiked with melamine in an attempt at profits over safety. 6,000 babies (likely substantially more) have been impacted. This is simply the latest in a systemic problem with corruption in the communist Chinese economy. We seem to be in this never ending cycle of dealing with deaths and sicknesses around the globe due to intentional 'mistakes' that a corrupt government seems unable to control. Of course, you might consider these never ending dramas would never be possible were the Chinese government subservient to the sovereign. In other words, this problem has no cure in its current form.

You might also remember the case of pet food originating in China and sold in America that killed many pets. They too, as is the case with these infants, suffered melamine spiking that caused renal failure.

I have two very interesting and even bizarre upcoming posts surrounding this topic. They are already finished but I limit the amount of time I spend on the blog and current events are trumping my post schedule.
posted by TimingLogic at 4:13 PM

Backlash Building Over Bailouts

Doug Elmendorf, a former economist at both the Fed and Treasury, said he doesn't oppose government interventions, though he's "opposed to doing it wrong."

"I think it would be a major challenge for the government to design a fair and effective program to inject funds into financial institutions,"' said Elmendorf, now a senior fellow at the Brookings Institution. "Structuring either of those in a way that doesn't reward mistaken private investments is very difficult."

As much as I don't like it, I have been universally supportive of efforts the government has undertaken until now. But, Elmendorf's comments reflect my feelings exactly. Paulson's plan is a major mistake in my estimation. And, our economy will be put under significantly more economic burden for longer than necessary if this plan is not reswizzled. There are too many other solutions that have actually been undertaken in the past that have worked. This is completely without precedence. These alternatives preserve the integrity of some type of market while better protecting American citizens. Hopefully Congress will awaken to their primary responsibility to their constituencies with any solution.

posted by TimingLogic at 11:07 AM

Paulson's Plan Seeks Abolute Power To Buy Worthless Paper And Wall Street Created Instruments Of Destruction

Do I still live in a democracy? What is the greatest crisis any country could see unfold? Even greater than a banking crisis? Abuse of absolute power. What is most disconcerting to me is that anyone would even seek it. That is the last person I would trust with unchecked power. Paulson should resign.

The Bush administration sought unchecked power from Congress to buy $700 billion in bad mortgage investments from financial companies in what would be an unprecedented government intrusion into the markets.
posted by TimingLogic at 10:58 AM

GM Taps Last Credit Line

This GM CEO interview with CNBC is indicative of the welfare state mentality that has developed in corporate America. And, that mentality has developed due to an enormous lobbyist bubble in Washington. A bubble that has put corporate interests above those of the sovereign. Too many lawyers and idle time being the devil's playground has led to everyone living large in Washington. Not much longer. That bubble is going to pop.

To listen to this interview is very upsetting. GM has no right to any government money yet Wagoner stands behind this ruse that a bill was passed and all he is asking now is what was promised. I'm still waiting on my handout. That $25 billion Wagoner refers to is not for the Big Three. It is for innovation in the automotive segment of the economy. Right now many new car startups in the U.S. are creating jobs and leaving GM in the dust with innovative ideas. I don't really have a problem with the market receiving $25 billion to help with development of new vehicle technology but to give it to GM because they need it to survive does not help with innovation and new industry jobs. It is pure pork. Small business creates jobs in this country. GM's incompetence has probably led to more than a million domestic job losses over the years.

Wagoner tells us that GM has made the tough moves to restructure the company. With Ford, I would generally agree. With GM, I don't. I wrote many years ago that I didn't believe Wagoner was the leader to take GM out of this and I still question his ability to effectively manage a manufacturing & engineering organization. There are many issues left to address at GM. How many years does Wagoner get? I'd be willing to give him that GM is 60-70% through a transformation. After forty years of failure, that's not much of an accomplishment. As an example, GM could likely free up tens of billions in free cash flow by overhauling its global product development process. Yet, GM has already apparently done so. I'm confused. We don't need twenty mid to full sized cars in the U.S. and another twenty different mid to full sized cars sold around the globe. I don't know that the number is twenty but I'm making a generalization.

GM is so close to becoming a powerhouse company again but there is more to do and government handouts would short circuit the focus and effort the market is demanding. Personally, I would prefer bankruptcy as a method to force change as opposed to government handouts. It's time GM shareholders give Wagoner an ultimatum or gentle nudge out the door. GM is bleeding cash at a rate only exceeded by Wall Street and Wagoner had many years of a very strong economic environment to prepare GM for this moment. He has failed.

Seemingly lost in the last week is the fact that GM tapped their last credit line and that is most assuredly why GM has been so aggressive over the past few weeks in seeking government handouts.

In closing, I remain extremely bullish on the future prospects of the American automobile industry. And, a potential bankruptcy or credit crisis within GM does nothing to change that perspective.
posted by TimingLogic at 6:12 AM

Friday, September 19, 2008

Hank Paulson Should Resign. Congress Must Take The Lead.

As I think through the consequences of this rush to judgement by Paulson, I am left with nothing but worry. Worry about an impulsive rush to judgement. Cooler heads must prevail. We must not let a ramrodded, ill-thought plan be approved by Congress in a moment of their panic. Paulson's plan simply has undefinable risks for America and the economy. We must remind our Congressional leaders that they should not panic into following Paulson's lead. They are people just like us and prone to irrationality in a moment of crisis. And, they are looking for leadership just as we are. Hank Paulson does not provide that leadership.

A free people are able to hone and refine solutions to problems by bringing together subject matter experts and having an intellectual discourse amongst disparate views. Give and take and competition of ideas refines and improves the course of action. It is the very foundation of our country's greatness at solving crises. Hank Paulson is most certainly not a subject matter expert and his idea has not passed a stress test of discourse. Need I remind you that every single expert in the free world told our government or had a clearly expressed opinion that we would end up in a quagmire in Iraq before the Iraqi war started. It is a major reason why we didn't take over the country in the first Iraqi war. Instead of intellectual discourse, we relied on the judgement of a single person who was also not a subject matter expert. The outcome was a disaster. This outcome will be no different. It will be a disaster.

At least a few are awakening to Paulson's helter skelter bailout. Politico, linked paragraph below, cites this bill could cost taxpayers $1 trillion. That is a number of fantasy. It is simply undefinable. To free banks of bad loans so they can make more bad loans is an incredibly irresponsible strategy. I seriously doubt this would stop at $1 trillion in its current vision espoused by Paulson.

In our post "It's Time For A Pro-Active Policy For Bailouts, Loans And Investments In Failing Companies" I wrote The government doesn't have the money to give everyone a handout and given the extent of this crisis, they are going to need to start prioritizing.

Some Republicans are expressing concerns about writing essentially a blank check to the Bush administration. “They're lurching from one crisis to another,” (Senator) Shelby said. “They don't seem to have a superplan to deal with this. ... We want to see the plan. This is not a done deal yet.

It doesn't appear Paulson has any training in crisis or problem management - overlapping sub-disciplines with a very specific methodology to root cause analysis, problem scope, problem management and problem resolution. Of course, the most important component to a successful problem management methodology is is pro-active management. On that note, it has just come across the newswires that Paulson is now quoted as saying, "Wall Street executives have remade the financial world.". I have a different perspective we have espoused repeatedly on here. That is, Wall Street executives have destroyed the financial world. And, Paulson helped create that destruction. Were Paulson aware of pro-active problem management methodologies which involves risk management, something else we have harped of on here, his cronies never would have created Frankenstein finance. And, we wouldn't be bailing them out. Paulson should recuse himself of this process. He should resign effective immediately.

What should then happen is an apolitical task force of our country's brightest minds on this topic should be defining government and market roles in managing this crisis and defining courses of action while we still have the time to do so. This doesn't need to take months. It could be convened and a framework developed in a week or two. If more crises erupt while that task force is convened, we could easily continue dealing with them as they arise. Which, frankly is no different than the helter skelter of today's approach. This should have happened ages ago. We had plenty of time to have such a task force put in place given this has been building with the public knowledge for well over a year.

This lack of action and seemingly incredible incompetence makes me wonder if a bailout was the plan all along. To do nothing until the wheels fell off. To let the people see how close to the edge we have come to build consensus for a bailout. Now, that is really hard for me to believe that idiots could actually be capable of such a plan. The alternative view is that we have the most incompetent politicians this country has ever seen. And, if that is the case, we are letting systemic incompetence decide the fate of our country. Neither perspective is reassuring.

I have thought a lot before posting this. Hank Paulson should resign effective immediately. And, the Congress should convene an emergency task force of our countries best and brightest. That includes Volcker, Greenspan and Bernanke.

I would encourage you to talk to everyone you know and encourage everyone to contact our Congressional leaders for both parties via phone or email immediately. To encourage them to take action in the form of a task force of subject matter experts. To not panic into a misguided mess.

Senate Leadership

House Leadership
posted by TimingLogic at 10:20 PM

Too Reckless To Fail. Groucho Marx Would Be Proud.

A great article by the always insightful Floyd Norris at the Times.

My favorite quote from the article, "If these nationalizations smack of socialism, it is closer to the Marxism of Groucho than of Karl.".
posted by TimingLogic at 7:39 PM

Senator Schumer Interview On Financial Crisis

Many sectors of noncredit related stocks have already given back 50% of their gains from the open today. In other words, as I wrote early today, I am very dubious of this upward move as being short covering that is going to leave a pricing vacuum in its wake. I wrote a few months ago that I expected our next downside to be 1100-1150 on the S&P and that we are right at a trendline going back to the Great Depression so we should expect tremendous volatility here. But, I see no sign of any bottom in my work. That may come but we are just two days removed from the largest panic markets have seen since the Great Depression.

Listen to Schumer's description of where the financial markets were just 48 hours ago re my remarks of a few days ago that there was a real potential for a disaster. We really were on the precipice.

When Schumer states that Paulson said we couldn't wait because setting up a program that Schumer originally recommended would require too much time, I see a ramrod job at work. If the Feds could inject $85 billion into AIG within twenty four hours, there is enough time to announce a plan similar to Schumer's and shotgun the first few moves if necessary. I talked to Schumer's staff today and expressed that same perspective. I'm not against assistance as opposed to complete chaos. I'm against a potential con job shoved down the American people's throat. Any plan should first and foremost protect the people of this country. You remember us. We, not you, run this country.

Click on the graphic to be taken to the video.

posted by TimingLogic at 3:29 PM

The Government Bails Out Wall Street And Now Wall Street Bails Out The Government

Since the government now going to bail out Wall Street, Wall Street now has money to bail out the government. It has just hit the wire that Morgan Stanley wants to use their new found liquidity to bail out the government takeover of AIG. So much for the government bailout of Wall Street sending money back into the economy. Thanks Hank. In the mean time AIG's debt continues to deteriorate even after the government bailout.

Government bails out Wall Street. Wall Street bails out government. Government bails out Wall Street. Wall Street bails out government. Government bails out Wall Street. Wall Street bails out government. Government bails out Wall Street. Wall Street bails out government. Government bails out Wall Street. Wall Street bails out government. Government bails out Wall Street. Wall Street bails out government. Government bails out Wall Street. Wall Street bails out government. Government bails out Wall Street. Wall Street bails out government. Government bails out Wall Street. Wall Street bails out government. Government bails out Wall Street. Wall Street bails out government. Government bails out Wall Street. Wall Street bails out government. Government bails out Wall Street. Wall Street bails out government. Government bails out Wall Street. Wall Street bails out government. Government bails out Wall Street. Wall Street bails out government. Government bails out Wall Street. Wall Street bails out government. Government bails out Wall Street. Wall Street bails out government.

Maybe if we are lucky, we can keep doing this back and forth for another five years until the economy stabilizes.
posted by TimingLogic at 12:50 PM

Hank Paulson Has Finally Done It. We Are Officially Bailing Out His Wall Street Cronies.

Secretary Paulson is on television today again telling us the root cause is housing and as I have said he is completely wrong. These programs will do nothing but burden the taxpayer for a massive bailout and put a larger drag on the economy. I could have said that three years ago and no one would have listened. But, then every major global outcome we see unfolding today was discussed in advance on this blog. And Hank Paulson was telling us just months ago this was the strongest global economy he has ever seen in his lifetime. He either didn't know what he was talking about or he was being less than forthright. Either way, he lacks the fundamental understanding of what is wrong with the economy and that has the potential for more damaging effects due to poor policy decisions. By now most people have a clear sense something is wrong well beyond the fact that housing prices are falling as Paulson would have us believe. To date, I have actually been a moderate voice on here supporting the government's actions to stabilize markets and save the banking system but we have now entered the next phase of the Orwellian world.

As an aside, if there is some form of economic terrorism that the government is worried about as has been rumored for weeks, they created it. How often have we harped that hedge funds, unregulated pools and offshore capital of unknown sources playing in the casino needed to be transparent or regulated? In fact I wrote over a year ago that we had no idea where much of this capital was coming from. There have been rumors for years that the Russian mafia is a major trader in global markets. Who else? We don't know because we have no regulation of capital. We didn't hear Wall Street complaining about this when the market was going up and Goldman, Morgan, Lehman and others were minting money from hedge fund and offshore capital services. Were the SEC working on behalf of the sovereign instead of at the behest of lobbyists, none of this ever would have unfolded. In fact, even as I write this the SEC should be proposing regulation to fix this environment yet they do nothing. Ban unregulated capital. Now. Ban potentially criminal trading in the CDS market. Now. Ban unregulated overseas capital flowing into our markets. Now. Bring back the uptick rule and restore the liquidity and economic benefit of short selling with it. (Why is short selling banned for two months? Does November 4th, election day have anything to do with it?)

I still have doubts the exact form of this plan will gain traction with Congress. I realize there was a meeting last night and Congress is supposedly behind this plan. But, what price is the government going to pay for worthless or distressed debt? Par? Burdening the American people and benefiting those who created this mess? 50c on the dollar? 10c on the dollar? Let's see how Congress feels after they have had a few days to field phone calls from their constutuency.

What would be much preferable is some type of program similar to what I wrote of a week or so ago in the post Pro-active Policy For Bailouts, Loans and Investments In Failing Companies. Senator Schumer chimed in on just such a structure yesterday. He must have read my blog post last week. haha. This is a much preferable structure. It can be accomplished with "temporary" money, it keeps potentially worthless and toxic debt off of the government (taxpayer) balance sheet and in the markets where it should be, and it provides an opportunity for the government and society to potentially profit via an equity stake and to mitigate risk. But this approach doesn't bail out Wall Street as Paulson's plan does. Instead the plan is to now buy debt that not a single entity in the world wants. Not one. At seemingly any price. Who is going to buy it under Paulson's plan? Why, of course, you are.

I'm still highly dubious of a sustainable rally. Given this is witching week, there is too much money to be lost by letting markets fall. As we have said, counter trend moves are very common during this week and strong technical reasons often support it. And, if we see substantial short covering, it will drive the market for some period of days. We wrote of this in banks quite a few months ago before they imploded again. Short covering has the potential to create a deleterious vacuum in pricing as we saw before. Let's watch in coming weeks.

None of this does anything to address a single root cause. And this will likely do nothing to stop the decline of assets. I could actually see outcomes that worsen it but we shall see. The government believes this will free up capital in the banking system to be loaned into the economy as both Paulson and the President have said today. In closing, I'll leave you with a common sense perspective lost in these times. And definitely lost on Paulson and the President. Corporations and people borrow money when they can make money. The interest rate is often irrelevant. But, the fact that rates are so low today and the money multiplier in the economy has ground to a halt, as we have talked of before, should tell you something. So, what is going to induce society to borrow money now? Borrowing now is often to stay out of bankruptcy and hope an environment returns where borrowing leads to making money. And, how does this help the banking system? Banking's problems are far from over. That means this crisis could recreate itself again. And again.

Contact your Congressional representation and let them know how you feel about this. Regardless of which side you are on. Their email addresses and telephone numbers are on their web sites.
posted by TimingLogic at 10:03 AM

SEC Chairman Cox Attempts To Ban All Short Selling

I have been generally supportive of Chairman Cox but that's about to end. Now it appears he is part of a government run amok. Government attempting to hide its complicity in the mess we now see. It appears Cox needs to find something to do with his time given John McCain called for his dismissal.

I have no idea why we did away with the uptick rule. And, I have no idea why the SEC can't seem to consistently enforce the regulation of naked short selling or any of the other rules on its books. But, now Chairman Cox wants to blame short sellers following the law but only for two months. How absolutely and utterly ridiculous. This reeks of political moves attempting to sway election or save his boss's legacy as a short term band-aid that will surely accomplish nothing. This is no different than the Russian or Chinese government trying to control their stock markets. What next? No trading in the cratering bond market? No selling allowed at all?

Chairman, if you can't figure out what you should spend your time on, I would suggest a remedial education as to why stock prices are down - completely incompetent CEOs, no risk management, trillions of dollars in bad loans, hundreds and hundreds of billions in losses, business models that aren't sustainable, insolvent companies, Frankenstein finance and on and on and on. I think there's plenty of law on the books for you to focus on until your term comes to pass. To blame short sellers is a political ruse that will likely have one impact of taking billions of dollars out of the economy as well as many other unintended consequences.

AIG didn't go to $1 for grins and giggles. The government had to spend $85 billion and counting to keep them afloat. May I ask what that had to do with the actions of short sellers following the law? And, we see no financial institutions willing to bid for Washington Mutual trading down from $50 to $2 a share. I guess if we didn't have short sellers, WaMu would be trading at $30 or $40 eh? And the fact that no company on earth is willing to bid $2 a share is because of short sellers? How ironic a Republican administration espousing the ideals of free markets has turned into the most big spending, bloated government, fiscally irresponsible, anti-free market, socialist, anti-American idealed administration in history.
posted by TimingLogic at 12:18 AM

Thursday, September 18, 2008

Banking Liquidity

I said in one of these prior banking bottom calls by the clowns on Wall Street that one of the things I model is banking liquidity and there were no signs of any bottom. Do we need any more evidence? State Street has dropped from $65 to $30 today. Quantitative data trumps clownish opinion all day long.

Update: Oops, the just UK banned short selling and now the financials turned on a dime. Of course, short selling isn't the problem so banning it really accomplishes nothing longer term. Although, there appears to be a tremendous amount of naked short selling, which is illegal and may contribute to manipulation shorter term. But, that should be no surprise. Your government helped create this environment.
posted by TimingLogic at 1:16 PM

Gold Explodes While Many Gold Stocks And Funds Implode

U.S. Global Investors Precious Minerals Fund

Random samples of gold junior stocks.

In a prior post I wrote: I believe gold is a proxy for credit and oil is a proxy for Merrill, Goldman, Morgan Stanley and their hedge fund compatriot's ability to create liquidity.

If you believe the above statement is reasonably accurate, and you should, the fact that gold has recently cratering should be telling you something about the global credit markets. Hint, hint - gold peaked within weeks of global credit's peak. I surely don't consider falling gold or oil as a positive sign for the global economy as is the prevailing view perpetrated in the press. To the contrary as I wrote back in 2006, you should wish for inflation. That's not a commonly held view either as both bulls and bears howled over the last few years at incredible inflation. There never was any inflation in the true sense of the word. What you have witnessed with rising food and energy prices is trickery by the great deceiver, the Satan of economics, deflation. Of course, none of this is anything new on this blog.

In another prior post regarding U.S. Global Investors Precious Minerals Fund, the top performing precious metals fund this cycle, I wrote: Anyhow, I expect the next big move (written in context referring to this fund) to be in 2008. And I expect that move to be down. Of course, I am anticipating fundamental factors leading to this move and I'm reasonably comfortable with these fundamentals developing into a tipping point. It's simply a matter of when. Well, that fund is now down about 60% as shown in the above chart.

This was the year gold was supposed to go to $1600, $2500 or $5000 depending on which gold camp one subscribed to. One had to know gold was doomed on some level when Jim Cramer hopped on board with a price target of $1600 at the very top of gold's ascent. Cramer is seemingly the consummate emotional investor.

As I have said, gold is telling us something and we should listen. Only fools dare not listen to the shiny metal. But, the reality is gold is not an investment. It is a hedge against risk. But, as I have written before, gold is worth no more against the inflation-ravaged dollar than it was forty years ago. Stocks are up what? 90,000% since the Great Depression? Need I say more?

It is nearly impossible for a segment of the gold bug population to redeem themselves with the implosions we see in many of the juniors. Most of the junior gold stocks are down 90-95%. Even the major producers are down 40-60%. Silver is down about 50% and its associated mining stocks have had similar implosions. Platinum and palladium have also imploded. No surprise here since a major theme since starting this blog is that we are in the mother of all commodity bubbles.

So, does anyone care to guess why gold was up so much yesterday? Well, I'm glad you asked. Gold's rise doesn't have anything to do with the durty, durty dollar as many would have you believe. Or that the Fed is printing money as was incorrectly reported. Here's the real reason why gold shot higher yesterday. As those who created this Frankenstein finance realize their monstrosity isn't going to be resuscitated, they are finally having an epiphany many of their incarnations are potentially failing....permanently. And, that their paper hedges were never really a hedge at all. Is there any intrinsic value in a derivative hedge? In this environment paper hedges potentially have zero value. Most definitely serious risk to much less than face value. Buy a car with a derivative? Pay off your mortgage? Buy gold? Trade it for legal tender? How about letting your dog use it for potty training? Bingo! The reality is there always was an eventuality that the only true hedge is the dollar, gold and Treasuries. In other words money equivalents. Yesterday we got a glimpse of reality - Wall Street is pissing on its potty paper. But, in a bit of irony, Wall Street now loves cash. And, as a great punishment, the market is going to make them pay up for it. And, that is one reason why I wrote before markets started imploding my favorite investments are dollar and yen. Cash is king.

In closing, I wrote on here back in 2007 that gold and the dollar could eventually rise in unison. I don't really follow the dollar closely but it has run higher very quickly. Those types of moves aren't typically sustainable. At least without consolidation or retrenchment. But isn't it interesting that the world's best investment in the last year has been the dollar? Even as the U.S. financial system implodes? I still think gold could have further downside risk but be watching in the future to see if the correlation between gold and the dollar changes from inverse to direct. If this does come to pass on some type of sustained basis, the world is likely to be a very volatile place.
posted by TimingLogic at 12:18 PM

Wednesday, September 17, 2008

Michael Greenberger Speaks On The Economy Again

I'm obviously very fond of Michael Greenberger - we've linked to many of his audios and videos. Today, he speaks again on National Public Radio. Here's the link to the audio.

Remember Greenberger's comments about hedging and insurance because tomorrow I'm going to talk about exactly what he is explaining.
posted by TimingLogic at 9:00 PM

We Are Witnessing The True Potential For Some Type Of Disaster

As I have repeatedly said and is in the Terms of Use for this blog, I don't give financial advice. Credit markets today are completely broken. We have not seen this type of environment since the Great Depression. I'm not sure if this will abate in coming days but if you haven't done so, you might consider seeking out a financial advisor to protect yourself.
posted by TimingLogic at 12:06 PM

The Fed's Loan To AIG

As I have said with some of these prior moves by the Fed, I too support this move. This, again, is not a bailout. Nor does the taxpayer likely have substantial, if any, obligation in this move. That is, unless you believe nothing in the economy is worth anything anymore. That money is worthless, all assets are worthless and your productive labor is worthless. Then, of course, this is the end of the world and your only tangible assets are a gun, shelter and food. But, if you believe that, you were likely cheering for AIG to implode - then you may work for Der Spiegel and suffer from schadenfreude. The reality is the taxpayers effectively own AIG and what has been reported as $1 trillion worth of assets in return for an $85 billion loan.

Many people will howl that this creates moral hazard and that free markets should be allowed to work. That is absolutely hilarious. The insurance industry is the poster child for a business that short circuits free markets. It is a racket. And, I do mean that in the legal sense of the word. Why do you think Warren Buffet owns so many insurance businesses? Because he can mint money without being exposed to many of the free market forces. People really need to think before they open their mouths and say 'free markets'.

If you want 100,000 people to lose jobs in a viable business overnight and hasten a depression, then AIG's implosion is the deal for you. Hank Greenberg, the former CEO, seemed a little disoriented in his television interview yesterday by stating AIG had a liquidity problem but was not insolvent. They are one in the same. He meant to say AIG was not bankrupt, it had a liquidity problem. Of course, he was likely nervous being on television and he is something like three hundred years old. (Hopefully he has AIG insurance.) AIG's insurance business is profitable according to Greenberg. And, this deal will likely force AIG out of noninsurance businesses. This is where Greenberg said the problems exist - the unregulated businesses. What a surprise. I think by now we realize regulation is necessary and free markets as defined by corporations and neo-dogmatic types is a secret code word for legalized theft of society's wealth.

If AIG is ultimately to fail, they will do so in an orderly fashion under the terms of this deal and without bringing down the entire financial system. If they are not to fail, then this facility will keep them from doing so. In other words, any outcome is enhanced by this move.
posted by TimingLogic at 9:17 AM

Insert Foot In Mouth

I just couldn't let this pass. Here's a bit of humor to break the mood. Carly Fiorina has somehow weaseled herself into a political role after a very unsuccessfully stint as CEO of Hewlett Packard. What else do you do when you've got a few hundred million dollars and no job prospects? I suspect she's a short timer in this role as well. She was unsuccessful at HP because, as we say in Texas, she had "big hat, no cattle.". But, when she left, she took well over one hundred million dollars of shareholder money with her.

Not only does Fiorina make it clear none of our Presidential candidates could run a company but it is quite obvious she couldn't either. And, it appears neither could the CEOs of AIG, Lehman, Citigroup, National City, Wachovia, GM, Delphi, Bear Stearns and hundreds of other companies flailing due to CEO incompetence. Or maybe the thousands that have hit the bankruptcy skid over the last century. Seemingly, it also appears her skills as a politician aren't any better than her skills as CEO. Correct me if I'm wrong but I'm pretty sure the goal is to assist those you represent in politics.

posted by TimingLogic at 12:36 AM

Tuesday, September 16, 2008

The Fed & Rate Cuts

While we await the Fed's decision on what they will do next, I'll throw up a few timely remarks. It was really quite interesting this cycle to listen to much of the Fed commentary from both the bulls and the bears. Now we wait to see if the Fed cuts rates. The markets are convulsing and begging for a rate cut as I write this. So, if you believe we should listen to the market, the Fed should cut rates substantially. If you think that will cause inflation as almost every bear has been blathering about this cycle, the Fed should raise rates. Remember those days? Just a matter of weeks ago we had people stating the Fed was going to raise rates in the second half of the year. And, when the Fed lowered substantially, the bears were roaring.

Personally, I think the Fed should lower short term rates to 0.5% right now. That's right about what the market wants. Somehow I think many believe we can wish away rates near the zero bound. Well, forget it. That ship sailed years ago. And, I think we can all conclude the hyper-inflationary Weimar Republic absurdity is just about dead. We've never waivered from a deflationary outcome because the data never supported anything but.

And, I'll close by saying something even more radical. I believe the Fed could print a reasonable amount of money and we will not see inflation. That might be needed before this is all said and done. You won't hear that anywhere else. But, then most of what is reported is nonsense anyway.
posted by TimingLogic at 1:40 PM

Banking Volatility Explodes

We have talked substantially about volatility on here. When it comes to markets, economics and sociology, volatility is just a fancy word for bad mojo ahead. Substantially increasing volatility usually portends a change in trend. (Hint, hint.) One may measure volatility in many ways. An example may be the amount of reported nonviolent thefts given its correlation to economic opportunity. (Remember this because I have a post written that will go up in the next month citing this very data point.)

Here is a pictorial of volatility in red and the associated banking index below it. It's often hard or impossible to look at a price chart and see volatility. So, this is just a visual representation of volatility that is easier to digest. In this case, a picture is literally worth a thousand words.

The data goes back ten years and includes one of the largest stock market collapses in history. Notice that volatility never really increased in the market collapse in 2000-2003 except for a slight spike in 2002 yet we saw banking stocks have major declines. But, as the market was topping in 2007 and still within 3-5% of its peak we started to see greater volatility (range expansion along the y-axis or the vertical of the graphic) than seen any time during the market collapse in 2000-2003. Using this data point alone, one might surmise this truly is a different kind of bear market than the last. That is, unless you have rocks in your head.

If I were to look at nothing other than this metric, I would steer clear of bank stocks until this period of volatility returned to something more comparable to pre 2007 levels.

Click on the graphic for a larger view

posted by TimingLogic at 10:25 AM

Moodys and S&P Downgrades AIG's Credit This Evening - The Monkeys Are Running The Zoo. Could We At Least Get Some New Monkeys?

Insurance companies have been eating risk fed to them by financial institutions this cycle. I don't know specifically about AIG but why would they be any different? July 12, 2007

I wrote that on a money manager's blog when he posted a plethora of positive reasons why he was adding AIG to his portfolio back in 2007. At that time AIG was at $65. Now I surely never expected AIG to go out of business but I also never would have touched AIG at any time over the past few years either.

Now, this evening Moodys and S&P finally downgrades AIG's credit. Are you shitting me? I mean really. Moodys and S&P, could you possibly be so completely incompetent? The company is within hours of learning a possible terminal or unknown fate and you now decide it's time to issue a credit report? We really do need some new monkeys. I suggest the ones running FreeCreditReport.com Their analysis is more timely and generally more accurate.

Closing price tomorrow? $0? $1? $2? Rebound to $10? Does it really matter? The Fed can't let AIG fail because they would bring down the financial system. But, could they put it in some sort of conservatorship? Who knows. But we won't have to wait for long to find out its fate.

posted by TimingLogic at 12:12 AM

Monday, September 15, 2008

China To Loosen Lending Standards, Lower Interest Rates, Cut Bank Reserves And Other Generally Ridiculous Actions To Assist Economy Growing At 10+%

posted by TimingLogic at 6:28 PM

Update on Bank of America & Merrill Deal and Hank Paulson's Bucket Brigade.

We've had close to a day to see what would unfold re Merrill and Bank of America and it appears the markets don't like this deal either. S&P has downgraded Bank of America's credit rating and Moodys will likely follow. Did I miss something or are we literally seeing the arbitrageurs and market participants back completely away from this deal?

If this deal is in jeopardy before twenty four hours have passed, then what? Through his actions John Thain, the CEO of Merrill, has effectively acknowledged what I have written of on here. That the company is broken and their prior business model is gone forever. If Thain is trying to cash out after such a short stint as CEO, what else can we conclude? He'd rather spend time at the beach? The stock was recently trading at near $100 and now he is willing to hand the company over for $29?

I wanted to put up the Paulson press conference but C-SPAN doesn't have a direct link. So, here is a video link to his press conference at CNBC. Paulson again states housing is the root cause of this problem. And, again, he is completely wrong. Paulson didn't even realize there was a problem until Wall Street started imploding. In other words, he doesn't understand the extent or root cause of this problem and he is simply reacting to what he sees.

Again because we are not dealing with the root causes, market forces will continue to act unabated with Wall Street, government and society only able to act in response. In other words, we are in a reactionary policy environment that is doomed to failure in stopping any worst case outcomes. When you have a leak in a basement pipe, do you solve it by having an ample supply of empty buckets to catch the never-ending deluge? Hoping at some point the water runs out before you run out of buckets? That is exactly what we are seeing - throwing buckets pell-mell under the leaks while hoping the water runs out. So, unless something changes, we will watch buckets being deployed left and right. When they start to run low on buckets, they will likely only put them under the major leaks. When will it end? When there is no more water or no more buckets. The difference in those two scenarios is quite stark.

Have you figured out the solutions to this environment yet? Not one CEO in any industry and not one single person on Wall Street is talking about them. And, I do mean not a single person.
posted by TimingLogic at 5:08 PM