Rantings on Markets, Economics and Business Strategy
Our goal is to provide reasoned, relevant and often contrarian commentary on topics of international investing, global economic developments and business strategy in a format that is easy to understand and thought provoking.
QUOTES FOR DAILY REFLECTION, SELF-IMPROVEMENT AND SUCCESS
"Sometimes it falls upon a generation to be great. You can be that great generation."
- Nelson Mandela
"A leader is best when people barely know he exits. When his work is done, his aim fulfilled, they will say, 'We did it ourselves.'."
- Lao Tzu
"Do not fear to be eccentric in opinion, for every opinion now accepted was once eccentric."
- Bertrand Russell
"Courage is the power to let go of the familiar."
- Raymond Lindquist
"My religion is very simple. My religion is kindness."
- Dalai Lama
"Hard work has made it easy. That is my secret. That is why I win."
- Nadia Comaneci
"Dream no small dreams for they have no power to move the hearts of men."
- JW von Goethe
"There are no secrets to success. It is the result of preparation, hard work and learning from failure."
- Colin L. Powell
"The fishermen know that the sea is dangerous and the storm terrible, but they have never found these dangers sufficient reason for remaining ashore."
- Vincent van Gogh
"Success is not final. Failure is not fatal. It is the courage to continue that counts."
- Winston Churchill
"Kindness can become its own motive. We are made kind by being kind."
"Until he extends the circle of his compassion to all living things, man will not himself find peace."
"In the fields of observation, chance favors only the prepared mind."
"Ours is a world of nuclear giants and ethical infants. We know more about war than we know about peace, more about killing than we know about living."
"Fall seven times; stand up eight."
"He who asks a question is a fool for a minute; he who does not remains a fool forever."
"A single conversation across a table with a wise man is worth a month's study of books."
YOU CAN BE THAT GREAT GENERATION. DO SOMETHING GREAT TODAY BY SUPPORTING A CHILD IN NEED:
I'm an electrical engineer and mathematician by training. My career has spanned diverse areas of expertise from being part of a team which designed the world's most powerful computers to corporate consulting around business transformation and information-based solutions to being a corporate sales and marketing executive in the information technology and business consulting space. I’ve led teams responsible for innovative and transformative solutions and been part of teams that helped set strategy for many of America's greatest companies. Two of my interests are econometrics and quantitative - qualitative analysis. Over the years I have developed risk-based models and trading systems meant to identify significant investment opportunities and periods of extreme risk. My blog is an outlet for another of my passions, writing. I generally consider myself a contrarian. Therefore, many of my rantings are meant to encourage people to question what they believe to be true.
Final GDP Numbers - Technology & Software Spending Implodes
You have to click on the graphic for a clear visual but what I want to highlight is the spending for technology and software in the 4Q GDP numbers. Sector rotation, a strategy used by many market timers to rotate through the business cycle, rolled many investors out of banking stocks and into technology in 2007 and 2008. Stocks like HP, Sun, Oracle, IBM, Dell, & SAP to name some of the larger firms. In actuality this strategy was going from one fire to another.
One can gain an appreciation of what Wall Street expects will be the next hot investment by listening to the buy recommendations. Sector rotations almost always come in waves. In other words, one firm will issue a call and most will follow suit as it pertains to this type of strategy. While these stocks were still making new highs we wrote that 40% of the domestic consumption of technology and software was in the finance sector. And, that these companies were going to suffer re our concerns over the biggest Wall Street bubble in history.
Many technology stocks remain significantly overvalued. One we highlighted a few years ago when everyone was jumping on it was IBM. Without going back and reading that post, I believe our two potential downside targets were in the mid $50s or high $20s. At that time IBM was the second most richly valued company in the Dow. The most expensive was Boeing. Boeing has already fallen 70%. Again, without looking, I would now suppose IBM is now far and away the most expensive Dow component.
This is a perfect example of what I have often talked about on here. Wall Street firms were heavily pumping China for the last eight years. Showing extrapolated growth ad infinitum, China inheriting the mantle as the world's largest economy, 1.3 billion consumers, China graduating 30x the number of engineers as the U.S., China driving the commodity supercycle and on and on and on. Guess what? All of it was wishful thinking. And for the companies that have now invested permanently in China, ie capital projects, where their investments can't be taken out of the country, now what? We've hammered on every one of these fallacies and more.
I don't think I read a single cautionary perspective out of a single firm on Wall Street with regards to China. That is, until it was too late. Now Goldman Sachs comes out in the last few days and states that China is likely to experience a larger slow down than anticipated. Ya think?
We've been anticipating a complete bust for years. There is not a single factual reason to believe China's bust will not be magnitudes larger than the U.S. depression post 1929. Not a single reason.
Now, look at today's chart of the Shanghai Index. What is one supposed to do with cautionary remarks on China today? Use it to make paper airplanes? Print off as many copies as as possible for abrasive toilet paper? I think the best thing one could do is pray. Because if anyone owns Chinese equities, they have held through one of the greatest equity market collapses in history. Now, they should pray any rear-view mirror analysis is wrong.
Did anyone learn anything from the prior pumping and dumping internet bubble? Where was the concern two or three or four years ago? Where was the risk management?
The link above contains both the text and a video. It's rather lengthy at about 17 minutes. ie, There is some substance to the interview.
I have expressed my concern that Geithner was not an appropriate pick for Treasury Secretary given his prior job was the chief regulator of Wall Street. He presided over the largest regulatory failure in history and was rewarded for it. Is that democracy? Or is that cronyism? If the media were doing its job and informing the American people, as it is constitutionally protected to ensure this role is achieved, what chance would Geithner have at being elected as Treasury Secretary? Just about zero. That said, I wish Geithner well because society's success is tied to his success.
I want to digress a bit since this discussion of a public-private partnership, as it is being framed by Treasury, is now front and center. Public-private partnerships are another example of crony capitalism. This is not "letting the market work". Or, market-based capitalism. We haven't talked about public-private partnerships but we can now overview the concept. Public-private partnerships are really nothing more than selling off traditionally public responsibilities into private hands. Partnership makes it sound more palatable. But the reality is it is a transfer of wealth from the public into the hands of a chosen few. It is secret code for stealing from society. You own(ed) these properties. Did you get a profit check when any public properties were sold to the private sector? Governments around the world have been selling off assets that are paid for and are owned by the public. And, then allow businesses to do what they will by soaking the public for these facilities or profiting from them. Did the public vote approve these asset sales? The ideas to privatize are a function of crony relationships and their implementation is to burden those who can least afford higher and higher fees while a small few accumulate greater wealth. This has been happening a lot in developing countries where political favors, pressures from major political powers and indebtedness to major political powers drives these deals. You might often call them extortion. The end result is that major global monopolies are often granted contracts for basic necessities of a particular country. A prime example has been to provide clean water at extortionary rates.
If this concept is applied to any bank bailout, as is being bandied about, it will allow Treasury to sell assets, likely priced well below market value, to private equity and hedge funds that have the potential to make massive riches at society's expense. And, private equity is a primary example of crony capitalism. We've written an extensive post on this fact and I'll probably be posting futher remarks since I believe there is a very reasonable chance that many forms, if not all of private equity will literally cease to exist in the future.
In basic terms, cronyism allowed the banksters to steal wealth from society and a solution using a public-private partnership would allow the same crony financial structure to rob society again as a fundamental solution to the banking crisis. In other words, cronyism made the mess, stuck society with the bill and ultimately made off with even more money by buying back the assets they dumped onto society at bargain basement prices. Sounds like the perfect racket to me.
I don't think the American people voted in a new political leadership for more of the same. To date, that is what Geithner is giving us.
The chart below is very easy simple to interpret. If you haven't seen the format before, it might appear confusing. Anything above the horizontal zero line is a cumulative contributor to growth. Anything below the line is shrinking and cumulatively adding to its contraction.
The economy literally collapsed in the fourth quarter. In other words, imports, a build in inventories and government spending accounted for approximately 4% growth in GDP. Investment, exports and consumption together declined at approximately a 9% clip.
I guess we can keep building things and putting them on a shelf until someone buys them. That's a favorite policy of the Chinese communist party. It's also foundational to supply-side economics that led to a new wave of thinking in Washington. Thinking that we can spend our way out of problems. Thinking that still drives our government today regardless of party affiliation. Thinking that George Bush senior coined as voodoo economics. That is, until he became a convert for his own political gain. Or, is that a sellout for his own political gain? And, you trust politicians to solve this?
You should only trust the American people as knowing how to solve this. Not elitist political hacks, brainwashed Harvard MBAs and ideologically driven economists. For God's sake this is common sense. Have we lost that? If politicians want to solve this crisis, they should do what they are elected to do - listen to their constituency. The people. And, then drawing some very obvious conclusions that no politician, mainstream economist, business leader or the media seems to grasp.
Government Seeks To Introduce New Banking Regulation To Replace The Banking Regulation It Destroyed
I don't have a link for this post. I simply want to make a few stream of conscience remarks given President Obama has started to tackle the issue of bank regulation with his remarks today.
I've seen a lot of people make a lot of claims about the fact that bank innovation somehow has been front-running regulations. This is simply a preposterous lie perpetrated by those that are complicit in this crisis. We were harping about the deregulation of banking when bankers were supposedly kings of the universe. And, mind you, this dismantling has been going on for decades. Whether it is the regulation that allowed banks to become monopolies or regulation that kept banks from scheming with depositor's money or regulation that allowed banks to get into other businesses or regulation that stripped the states of regulatory banking power or regulation that kept banks from offering these 'innovations' of corruption, all were knowingly dismantled from the regulatory system. All. There is no lack of regulation. There is only a conscious and knowing dismantling of regulation by the Federal government.
When Treasury Secretary Paulson first publicly announce a new framework to provide a new and needed central regulator for banks, I refuted that notion on here. Paulson's plan was for a super regulator with total control. This type of structure defeats the concept of a democracy and regulatory checks. It will lead to substantially more abuses than it will fix. Our system of government must have checks and balances. The argument that our regulatory structure is fragmented is a non sequitur. It is akin to arguing that three branches of government are too fragmented and we should just give the next Adolph Hitler total control. It is absolutely no coincidence that a Wall Street banker turned Treasury Secretary wants a super regulator. And, the fact that the Federal government wants this structure is the very reason it should not be granted.
The main argument I hear for a super regulator is the overlap of responsibility or that the right hand doesn't know what the left hand is doing. Well, with regards to overlap, that is preposterous. If there is any, and there is likely little, then fix it. If a firm must prepare documentation for different regulators, deal with it. It provides a check against fraud and worked just fine during the greatest economic prosperity this country has ever experienced. That is, until we saw the final fraudulent dismantling of regulation. As it pertains to the left hand not knowing what the right hand is doing, this is absolutely ridiculous. Have you ever heard of a phone? The argument that the SEC doesn't know what the Federal Reserve is doing or that state regulators don't have the national scope is a ruse.
Transparency should be the primary design point for regulation. Transparency for the people. Society is just as likely to spot irregularities in both oversight and the market as a regulator. And, can voice ideas and potential red flags. As far as the left hand knowing what the right hand is doing, any first year computer science student knows how to develop a common data repository so that the SEC, the Treasury, the OCC, the Federal Reserve and the state regulators all have access to the same data and know what actions are being taken by the other departments.
To consolidate control is exactly what the banking crooks want. The Federal Reserve or any other department of government as a super regulator makes it easier for corruption to take place. Five agencies with different points of authority and oversight makes that nearly impossible. It's no coincidence banksters have been lobbying to remove these burdens under the ruse of it's too expensive to deal with. And, frankly, that brings up another point. The Federal government should never have complete authority of anything not explicitly granted in the Constitution. Case in point - were the Federal government not to have destroyed the interstate banking laws and usurped power from state regulators, we wouldn't be in this crisis. This entire environment has developed because of corruption perpetrated by private bankers lobbying our public officials with our very deposit money. To give bankers only one organization they have to lobby and manipulate is a bloodless coup d'etat.
We don't need any new regulatory structure. All we need to do is document the banking laws that have been destroyed over the last forty years by banking lobbyists and simply re-institute them. That's a lot cheaper and less open to manipulation than creating some new scheme. And, we know it works. Why? Because bankers spent billions defrauding it.
Well, as I remarked in a comment last week, I am getting up a post on gold. I figured it was time to chime in since door-to-door salesmen are now pumping gold. Gold's run from the bottom set in late October/November has been from about $700 to $1000 in four months. That run has been coincident with a generally strong dollar. A unique perspective we said could unfold contrary to the general blabber that gold's strength is because of a weak dollar. In fact, right before this last gold rally we wrote:
"As I have written on a few occasions, there is a scenario that could develop where gold rises in unison with the dollar. We saw a glimpse of something similar to this in the last month. Gold didn't truly rise in conjunction with the dollar but it didn't go down appreciably either. In other words, it showed glimpses of breaking its inverse relationship with the dollar as we said it might. The key word is might. If there was ever a time in the last one hundred years to pay attention to gold, it would be from this point forward.........Should gold and the dollar become positively correlated, global volatility will likely reach crisis levels..........".
I still believe this environment is going to hit gold very hard at some point. Yet the yellow metal has held up very well to date. Might I add that in a bit of irony a substantial support for gold prices has been the actions of the Federal Reserve that are so criticized by buyers of gold. In other words, were the Fed not to have stopped the unwinding in the economy via unparalleled measures taken in the fall of 2008, gold would have likely unwound to levels well below $700. In fact, it might have collapsed. It's not a coincidence that gold found a bottom at the same time other paper assets did in late 2008, courtesy of the Federal Reserve. So, if you own gold, thank the Federal Reserve for bailing you out. Mark my words. It won't happen again.
I don't have an outright sell signal on the most recent gold rally ..... yet .... but I am expecting one to develop. So, why not stick my neck on the chopping block for everyone to swing at? Some potential reasons why are included in the list below.
1) We are attempting to push through a prior top with substantially weaker market participation yet near universal bullishness and even chest beating - a common behavior of monkeys and lower primates. 2) Gold's pricing action appears to be driven exclusively by short term technical traders. Gold has just completed a standard five wave rally. The 5th wave has completed at 1.6x the 1st wave - a classic exhaustion ratio. 3) Gold is entering a seasonally weak period. 4) Gold is seeing a tremendous amount of "odd-lot" demand. Generally a sign of homogeneity better known as 'group think'. 5) Buying pressure for the shiny metal and gold stocks is waning. 6) Gold ratios comparative to other assets are very extended. 7) This is my favorite. Every Tom, Dick & Harry loves gold for a variety of reasons. Reasons that have shifted repeatedly over the years - inflation, deflation, printing money, middle eastern economies are going to convert petrodollars to gold, banking collapses, dollar collapses, China is going to quit buying dollars, hyper-inflation, fiat money ist kaput, Russia is going to convert petrorubles to gold, the dollar is worthless, debasing currencies, the commodity cycle is 20+ years, bankers are manipulating gold, the Chinese central bankers are going to add to their reserves, etc. Each one has often been represented as the primary reason until a new reason invalidates the old reason. Some of these have validity but most were and are baloney. Many of these were reasons used to support a dollar collapse. How well did that work for you? None of the above reasons necessarily support even higher gold prices. Instead, the justifications keep shifting as the herd mentality shifts. This investment technique is better known as I don't know what I'm doing but it's working. And, there is safety in numbers. Aka rationalizations of lies of the mind. 8) Gold stocks haven't confirmed new highs. 9) Traditional demands for gold are imploding while investment demand is exploding. Sound familiar? It should. And, it should be of concern if you are a gold bull. 10) Jeane Dixon told me so.
I don't hate gold. I don't love gold. I don't have a money-making motive to pump gold. I review it with some attempt at rationality. For those who bought gold a decade ago, it has been a good trade. Congratulations. And, it might be a good trade again. But, those buying in the price band of slop over the last few years with an eye towards long term holdings are playing a game of chicken. I prefer to play games where I have a unique edge. Chicken never seemed to be one of them. Are we starting a new game of chicken? Let's watch and see.
It's really amazing to me to see people cringe at the thought of nationalization for large banks. That it's somehow un-American. I guess no one has read the Constitution or remembers how banking existed in the United States through out history. Printing money is a commodity. Distributing it is a commodity. This has nothing to do with capitalism or democracy.
Banking exists as a method to support private production in the economy and a safe haven for savings. We have said this quite a few times but one more for emphasis - all of this other scheming and scamming that goes on in our mega banks adds zero value to economic production or wealth creation. Instead they are schemes of wealth transfer from society. There is no wealth creation in these schemes. It is a mathematical fact. And, isn't life a bitch that those who have stolen from society now want us all to scoff at assisting many who have been destroyed by these schemes. It's Socialism!
I don't think the average citizen should have to bail out anyone so I have a better idea. A tax levied on those who have benefited from this scheming. Not an income tax. An asset tax for the betterment of society. Put the money into an investment pool that is available to every citizen for training, education and for entrepreneurs willing to rebuild our production system. Democratization of capital instead of these schemes supported by crony-crooked capitalists such as hedge funds being able to buy distressed assets on the cheap with American citizens insuring them. In other words, carrying the burden on our backs for the same crooked scheming that created this mess.
I supported the Fed stepping in and saving AIG because of the interconnectedness of the financial Frankenstein that government is complicit in creating. I have no desire to live in a post-modern world where we forage for grubs and eat rats as an afternoon snack. But it seems Washington is hell-bent on sending us to the Rat House for lunch.
AIG should have been put into receivership while Federal and/or private sector auditors determined an immediate course of action to unwind its interconnectedness and allow AIG to then either find a buyer, present a business plan to get back on its feet or fail. We wrote about a need for external auditors to be engaged into this crisis to recover transparency the first week this mess unfolded. We still don't have a clue what the hell this money is being spent on. This has turned into a goddamn mess. Bernanke's testimony today finally seems to be crystallizing he is extremely competent regarding monetary policy but has some bizarre notions about economics. He still thinks globalization is coming back and that is the primary key to a recovery. There is zero chance of this happening. Zero. We've hired a bunch of whac-a-mole gamers.
For God's sake, I could have built five companies the size of AIG from the ground up for all of the money the Federal Reserve is pumping into this mess.
The Dow Transportation Index is a major window into the health of the economy. We are nearing very substantial price attraction in the Transportation Index. Let's take a cursory look at where the Index stands today. (This video was made over the weekend and the Transports dropped substantially on Monday.)
Click on the graphic to be taken to my server to watch the video.
We've been bearish on semiconductor stocks this entire cycle. In fact, when Wall Street started pumping semiconductor stocks to cycle highs in mid-2007 and blathering that technology was going to pull us out of this, we were reaffirming our dislike for anything related to capital equipment and semiconductors. We highlighted that strength in semiconductor stocks was because of its non correlation to the Frankenstein Wall Street had created. And the fact that capital equipment companies were thought to be less impacted by the developing credit crunch. We also highlighted the substantial drop in equipment orders that was developing. But, nothing stops Wall Street.
We wrote specifically that that rally would fail and indeed stock prices of these companies have collapsed. Now the EE Times is reporting those falling orders in 2007 have turned into a collapse as well. (Story at the title link)
Right On Time - MBA Programs Are In The Early Phases Of Their Transformation As We Anticipated
"Truth has to be repeated constantly, because error also is being preached all the time, and not just by a few, but by the multitude. In the press and encyclopedias, in schools and universities, everywhere error holds sway, feeling happy and comfortable in the knowledge of having majority on its side." -- JWvon Goethe
That's a pretty radical statement. But one you should always find comfort in for its timelessness. von Goethe was one of the most enlightened people ever to pick up a pen. Frankly, what he was stating is much of what we accept as truth are actually lies. I prefer the term lies to that of errors. Not necessarily malicious lies or overt lies but lies of the mind based on worthless data and associated conclusions. While in a free society the lies are less inclined to be overt, indeed many are. Just not as overt as they might be in the Soviet Union. And, who better to perpetuate such lies than the finest institutions of learning money can buy.
I talked to a friend a few days ago and he said everyone he talks to says the same thing - I can't believe this is happening. Mind you, he is surrounded by finance MBAs in his professional capacity. For this environment to develop, our educational system has to play a key role in perpetuating misinformation for quite some period of time. I would guesstimate at least twenty to forty years of misinformation has been mistaken for education as it pertains to mainstream business, finance and economics taught at some of the finest universities. The range in years is dependent on the topic. Economics has generally been deluded for a longer period of time. Then, I would probably classify business and finally finance as the latest casualty only being hoodwinked for the last twenty years or so.
Ultimately, what this should alert everyone to is that no one who caused this problem is likely to represent any useful truth in getting out of it. That includes mainstream business executives, economists and Wall Street executives. In other words, anyone associated with generally accepted dogma over the last generation is unlikely to provide an ounce of useful information moving forward unless they have had some type of epiphany. But, then these are the people who generally have the microphone. So, we'll all witness the global disaster worsen as they keep trying what hasn't been working from the supposed experts recommending the wrong solutions. And, mind you, there are solutions. Letting the global debt pound down around us while we keep doing the same thing is one solution. One I prefer to mitigate to some extent. Not by bailing out crooks. But, we'll get to the solutions phase of this environment at some time in the future.
We have written on here a few times that U.S. MBA programs were lining the cattle up for slaughter as a record number of finance MBAs headed to Wall Street ready to apply their newly minted mind full of error. I mean education. And, we wrote that even though these MBA programs didn't realize it yet, they were going to have to transform their programs from pushing around money to something else to remain relevant. I left you with the question of what that something else would be. I left the hint that it wouldn't be finance. Do you know yet what this transformation will involve? It's not that difficult.
Pretty amazing image. The coordinates are 31 15'15.53N 24 15'30.53W
To view the image yourself, open or download Google Earth and paste the above coordinates into the "Fly to" box in the upper left-hand corner and hit enter. Once Google Earth centers on the coordinates, the image will be a blank blue screen. You will need to use the image control button shown on the graphic above to pan out (the "-" button) until the underwater formation comes into view. Probably ten or fifteen clicks.
You will never read on here that the cause of the mortgage fiasco is that foolish homeowners are to blame. Never, ever, ever. There were speculators in all aspects of the housing crisis and many who made very poor decisions but the schemes of today must have a root cause which is national in reach. It lies within a predatory business community enabled by and often created by politicians. To ridicule buyers as foolish or uninformed or intellectually incapable is exactly what many want society to believe. Blame-shifting is a scheme unto itself. Blame-shifting is a necessary scheme to mentally prepare the American citizens for the risk shifting-scheme. In other words, for citizens to bear the financial burden of systemic fraud. Were this environment to be blamed exclusively on its creators, no Americans would ever agree to bear any burden. Given most Americans have either lost their job or their home or know someone who has lost their job or their home, it becomes easier to place the bailout burden on the people. In other words, building empathy or fear, two easily manipulated emotions, is necessary for risk-shifting. This compares to a completely defiant populace that would develop were the root cause of business and politicians to be clearly understood by everyone.
I saw an interview with a famous bank CEO a few days ago where the interviewer asked him about people walking away from their mortgages. His response was that we needed to teach people to be responsible. What? Who are you to teach anything? Not only might you consider that you should be taught a lesson but do you have some eminently unique position to tell anyone in society what to do? Since when have we elected bankers as kings? So, if I purchase something, anything, and later lose a substantial sum of money on that purchase and find out there was widespread fraud involved, and there is no recourse or assistance in the resolution of my situation, maybe I need to teach you a lesson - that I seek legal counsel to void the purchase, remove myself from the transaction or have my money returned. Well Mr banker, what legal obligation do I have to remain in a mortgage that might be hundreds of thousands of dollars upside down if this environment was perpetuated by fraud? Speak of fraud, I think society might like its money back to the Wall Street Ponzi scheme called the Internet bubble or any of the other scams we see before us. I don't think we need any banker teaching us lessons. How many people have lost their life savings on at least a dozen bank schemes in the last ten years? So, I guess the new rule of law in America is that if I play a game and the opponent breaks the rules, I am responsible for the consequences of losing? Cheaters always win and playing by the rules are only for those without the intellectual wherewithal to game the system?
We are supposed to live in a society of equality. Where the least among us, by any measure, should be granted equal opportunity and equal protection. Some of us will be janitors and some of us will be CEOs. All of us deserve dignity and protection from predation be it from the state or business or in this case both. A point I have written on here before and want to stress is that consumer protection laws exist for a reason. There are few people that have the intellectual or financial resources to match wits with a bureaucracy employing millions or billions of dollars and thousands of marketing, legal and sale professionals attempting to bilk money and savings out of society. When we go to buy a home, people should not have to prepare for a battle of wits under some premise that it is our responsibility to outmaneuver predation. Blaming those who were swindled infuriates me. It is an elitist perspective that, at its core, has a very dark motive of implying only a certain class of people are worthy of rights and prosperity under the law. And, it is no coincidence many of those who profited from this environment are some of the most vocal to point a finger at the general populace as foolish or responsible. It's also the same perspective that has led to CEOs making a king's ransom while those not deemed to be worthy fight for their daily pittance of gruel.
I see the victims of the dozens of frauds before us and it outrages me. Children living in their parent's cars, people at food pantries and even people who may have put their live savings into a home or investment only to have been swindled with the jackboot of tyranny on their neck. Elderly and the working poor were often easy prey for many of these schemes as is typically the case with swindlers. Mind you, I'm not just talking about equity investments or housing, I am talking about how people have been bilked of economic opportunity while elitists line their pockets with the sweat of society. And, now government is on the verge of bailing out the finance industry without any investigation as to whether there was overt fraud? Maybe the taxpayers should demand an investigation of government before the sovereign bail them out.
I wonder if or when we shall see the wheels of justice start to grind. When will government peel back the layers of every major financial organization as was done with Enron and other Ponzi schemes. No firm on Wall Street should be spared the oversight and watchful eye of the American people. Ever. In this case, especially the tentacles of investment banks. Where is our elected leadership? Where is our government? Who will stand witness for the American people? For those who are struggling to maintain some semblance of dignity? Who? Will it be you?
60 Minutes is one such organization that is starting to hit its stride. 60 Minutes will stand witness.
Rick Santelli is one three people on CNBC that uses the noggin God gave them. Santelli, Deutch and Ratigan. (See the link at the title post.) Outcomes to this environment are extremely unpredictable. Why? Primarily for reasons no one anticipated - the collective psyche of society.
We talked of impending doom associated with Goldman Sachs' perceived brilliance while the world was partying. Any time society values employment playing with other people's money more than economic production, the world is in a very interesting place.
The harsh lesson learned by allowing all troubled banks to leave the system would definitely teach society and those involved to never again embrace such foolishness. But, the problem is so systemic that unfortunately, allowing these monstrous monopolies/oligopolies to fail willy-nilly would destroy everyone's way of life. So, instead we are presented the beast of burden of bailouts by government. That means we are left with a corrupt banking system that now has the political wherewithal to attempt to keep the scam going at society's expense. Something that surely would not happen were they left to their own devices of failure.
This bailout for partners (owners) in Goldman (at the post title link) while many in society are left with no access to capital highlights a very serious shortcoming of our current financial system - access to capital has class, gender and racial bias in the U.S. and is a major driver for social disparity, perpetuation of many social stereotypes and often limited economic opportunity for society's most capable individuals. In other words, many who have achieved economic success didn't necessarily achieve their standing primarily because of merit but rather do so via access to capital. I wrote a paper on this some years ago and maybe I'll post a link to it some time in the future. We'll have to see how events unfold because it's based on many social dynamics that some might find controversial and are often hard-wired into society's psyche. But, as time goes on there might be a greater acceptance to reality. Regardless, the fundamental conclusion is that U.S. must adopt a democratization of access to capital to achieve its full economic potential. How the world would change constructively and instantly were that the case.
Anyway, I want to know is if these Goldman loans are somehow tied to TARP funds or Goldman gaining access to capital as a bank holding company.
Is there a person on this earth would wouldn't risk life and limb to cross the U.S. border in search of a better life for their family given these dynamics? I would. About five families in Mexico control the preponderance of its wealth and its caste system leads to chronic repression. Reform is nearly impossible with such concentration of power. That is, without civil disobedience. Indeed, this recent spate of chaos and lawlessness is rooted in years of repression and corruption.
Valero Foretold The Implosion Of Oil. What Is It Telling Us Now?
I've written on here quite a few times about Valero. The company was one of my favorite investments this past cycle. That is before its valuations reflected insanity. We highlighted numerous times in the late stages of the oil blow off that Valero was not responding constructively. And, it was telling us something. In fact, Valero was more closely following the underlying fundamentals we were writing about - that oil was coming out of our ears contrary to what peak oilers and talking China bobbleheads were telling us. China's energy use has imploded and global demand has followed suit. It was no coincidence there was unprecedented insider dumping of Valero stock by some of the savviest executives in the energy business. Massive dumping we wrote about while Valero was blowing to the sky. Even without an understanding of the fundamentals driving this environment, the signs were there if anyone was willing to entertain the data without bias.
Valero is still the same company it was six or seven years ago. It is an excellent company with excellent management. But the rules of the game, they are a changing. Many of the yammering crowd on Wall Street are now citing that commodities are bottoming and a new bull market is about to begin. And, may I ask what data supports this thesis? The widening spreads on gasoline or the price disparity in various oil markets are being used as a validation point by many that prices have bottomed. A fool and his money soon part ways. If one would have bothered to do a little research, they would learn that Valero's fundamentals are still deteriorating. Valero is running its refinery business at about two thirds of capacity and is actually shutting down complete refineries. A far cry from the nearly nonstop operations near capacity just a few years ago. And, a far cry from any type of stabilization in supply & demand characteristics.
While one might consider this cut back in production as positive, one might also consider such substantial cut backs as an act of survival. With fundamentals still deteriorating, there is no sign of a bottom in commodities. We've seen some type of stabilization in oil near $38 but this is a reflection of market technicals rather than any reflection on fundamentals. How do I know that? How was I able to write on here three years ago that oil would likely stabilize at $38?
What we have witnessed is already the biggest commodities crash in history. That's right. In history. A crash we uniquely and consistently said would happen. Regardless of the interim meandering direction in oil, expect the price bottom to drop back out of oil at some point in the future. I would suspect real pressure on oil will start to develop again in the second half of 2009 but that is simply a guesstimate of unfolding fundamentals. We shall see. Regardless of when, I still expect oil to drop to substantially lower price levels. That will likely start a new round of painful unwinding around energy businesses, firms with substantial commodities investment exposure and energy-dependent economies.
What is terribly frightening is private investment fell by 33% in the fourth quarter. Even though there is substantial political tension and rhetoric between China and Taiwan, the reality is somewhat more complex. Taiwan was one of the largest investors in mainland China over the past fifteen years with estimates north of $200 billion in direct investment. Might you anticipate an impact on this relationship and economic consequences with Taiwan's private investment falling so precipitously? Do you remember my posts on The Game a few years ago?
I'm not sure it matters what Greenspan believes at this point unless he has had an epiphany. Given his ideology is so deeply ingrained, I am dubious of any motives for making such statements. Are they pure or tainted by the large consulting contracts he is benefiting from with financial firms? That said, our position has been consistently clear - these mega institutions represent systemic risk and should be permanently removed from the economy. How its done is really irrelevant to me. Let those qualified make the decision. But let's look at a simple fact - 93% of the TARP money has gone to two dozen failing banks. The trillions of dollars being bandied about for more bailouts involves those same banks.
When we have twenty thousand lending institutions in the U.S., why do we care if there are all of a sudden nineteen-thousand nine-hundred? These banks should be removed at shareholder and debtholder's expense. From my perspective nationalization is a perfectly fine way to start the process. Over time those that are too unhealthy to be broken up and sold into healthy pieces are dismantled. I believe the major desire to pump all of this money into two dozen banks is two fold. One, lobbyists from these firms have deep pockets with our politician's best interests at heart. And, two because our current bank operating model relies on large institutions. In other words the system is trying to save itself regardless of the cost to society or what is best for society.
In closing, the Frontline story last night was rather disappointing in its scope. But, one thing I kept thinking while watching it was how many unregulated hedge funds and Wall Street bank trading desks, especially unregulated investment banks, had naked credit default swaps open against many troubled financial firms. (Re the remarks in The Great Scam post.) While any failed firms were indeed insolvent, so are banks that still exist today. Possibly banks that created the run on these failed firms through rumor mongering. The reality is these failures were caused by electronic runs on the bank caused by rumors. Rumors possibly planted by major financial firms or hedge funds that had naked bets made that these firms could be toppled. If that is true, criminals in the financial industry have purposefully attempted to destroy our banking system while financially benefiting from society in the process. And, possibly even received TARP money to continue the practice. Now, no one knows exactly what happened. But, the potential for this type of behavior is in place under the current structure. We have already seen firms benefit from naked bets against other financial firms. This is why it is so important that oversight be restored.
So, how might we know if there is any validity to this possibility? The trading books of hedge funds, banks and financial firms should be investigated by the FBI and appropriate financial regulatory arms of the government. Will that actually happen? Quite likely only if you demand it.
A reasonably golden rule is that productivity is inversely related to the amount of meetings tolerated in an organization. The problem is that there is seldom anything of value accomplished in a meeting unless it is well-planned. Yet well-planned meetings are typically an oxymoron. In fact, the problem is recognized as so systemic that there is a developed methodology to productive meetings. And, there are consultants trained in that methodology called meeting facilitation. Ironically, I have been trained in meeting facilitation so spotting a boondoggle is as easy as a squirrel locating an acorn.
As an aside, a few simple requirements - an agenda, a problem definition, anticipated meeting objectives and the required attendance of any decision makers required to adopt these objectives - cuts an overabundance of meetings to a minimum and helps crystallize their purpose.
Now that we have some background we can combine this with the fact that politicians generally have a common talent - talk. And talk. And talk. They'll even talk as Rome burns. In fact, that is exactly what is happening in today's environment. Most political leaders have no idea what is going on in the global economy and no idea how to resolve it. Yet there is comfort in numbers. In other words, it's time to call a meeting. About what? Does it really matter? Problem definition and constructive action aren't often part of the skill set of politicians. And, the decision makers are not in attendance to these G7 meetings. That would require all lawmakers, the doers of politics, from each and every country. Finally, none of the attendees have enough knowledge about the cause of this crisis to recommend specific solutions. Therefore, these G7 and G20 meetings hold little hope of accomplishing anything. Instead we see continued handshakes for the cameras and a vow to continue to work together. Again and again and again. Meeting after meeting after meeting. And, what did the G7 leaders just decide? To cooperate. And, how many meetings have they had to confirm this resolve? Now tell me what has really come out of these meetings? Absolutely nothing. The meeting monster has consumed global politicians as they are stricken by the current crisis. That is not a good sign. We need less talk more of walking the talk. There are answers to this crisis but the status quo is so blindly consumed with saving itself, we shall likely continue into the abyss until the pain is greater than the desire to save current economic ideology. We will reach that point. It's simply a matter of when and how much damage has been inflicted in the interim.
Of course we will and shall cooperate where it makes sense. But, that doesn't mean the U.S. policy should benefit another nation over its own. Or, American taxpayers are going to support more repressive policies designed to benefit another nation. Especially a nation that does not embrace similar ideals. And, let's be clear. That is what we are talking about. Government actions across the globe since this crisis started are repressive. These bailouts are repression and tyranny for the benefit of an elitist few. Intervention on some level may be necessary to keep society from collapsing but they are still repressive. So, to apply them on a global scale is absurd. It would cause outright revolt against said politicians.
Yet now we see the knit-picking has already begun. It has not developed into all-out verbal attacks but countries have begun criticizing each other. Germany's Merkel is my current favorite for the skill of double-speak or talking out of both sides of her mouth. Merkel is calling U.S. domestic sourcing policies for any stimulus as illegal. Yet Germany has substantial policies in place to protect domestic investment and government sourcing. Substantially more protection than America. Germany's economy is comparatively a prison in its openness. I don't mention this because I have some specific concern with Germany's policies. They support a domestic agenda as they should. But Merkel is chiding the French bailout, chiding the European Union, chiding the U.S. and generally ridiculing everyone outside of Germany. Talk, talk and more talk meant for her constituency. Yet I don't see Germany volunteering to bail out the United States or to institute global bailout policies using Germany's money. In fact, Germany's heavy hand is why many European Union members are already in a depression and more are on the way. I'm not advocating the German people bail out anyone, because they shouldn't. But I am saying that this heavy hand is actually driving spikes into globalization and Germany's eminently beneficial economic position. In other words, Merkel is contributing to an ever growing economic crisis in Germany.
In the end politicians will do what has the greatest political value - addressing the domestic agenda. It's the principle Adam Smith talked about with the invisible hand applied to governance. In other words, people act primarily in their own self-interest when it comes to survival. So, we can really discount these G7 and G20 meetings as talk, talk and more talk. Instead, what we should watch for are cues as to a change in tone by one or many global politicians. Merkel's tone has changed. That bodes ill for the European Union.
The Dubai government represents the epicenter of some of the world's greatest incompetence this cycle. The available data is hazy but it appears Dubai might have gone bankrupt recently. But, since there is no transparency into the "kingdom", (do we still have kings in today's world? Oh, that's right. A timeless truth is that there are always people who would be kings if the world would let them.) we only know that Abu Dhabi has made a substantial financial infusion into the country.
Back in late 2006 or early 2007 we put up a video on here of Thailand nearly ten years after their financial crisis. And, the half finished skyscrapers rotting on their skyline. We wrote at the time that we should expect it could happen again. And, as we have written, the modern day Tower of Babel resides in Dubai. The end result probably won't be much different. There is substantial potential for Dubai to develop into a rotting skyline with an imploding population. (at the link)
By the way, I thought this comment at the story link was more than a little telling. And, quite appropriate. Not only for Dubai but as a more pervasive statement.
"Built on the sweat, blood n tears of Pakistani, Indian n Bangladeshi construction workers, this land of the rich treated us like mules n made us live in inhumane conditions for far too long. Allaah's justice is served. How the mighty have washed away in the very sweat, blood n tears of the meek." --Abdul Razaak, Karachi, Pakistan
Indeed Abdul, let this be a lesson to elitism. The meek shall inherit the earth.
The global mess continues to grow. And, the monkeys are still running the zoo. Friday I saw one of the biggest monkeys on the game show Fast Money state that China can afford to spend 30% of GDP on stimulus because they don't have a banking problem. Uhhhh..........The biggest banking problem in the world is likely in China. How the hell did the world become so insane? It's a madhouse! A madhouse!
Wall Street's Frankenstein Takes A Dive While Timeless Investing Ideals Re-emerge
Let's start this post with a quick review of the last three or four years as it pertains to the financial community and investing. There was no one I am aware of in the financial community talking about the risks in China, Russia and emerging markets until it was too late. After these markets imploded and investors lost a lifetime of savings, everyone on Wall Street was there to give an opinion. Even to rewrite history by telling us they anticipated such an outcome. The same can be said with small cap stocks, transportation stocks and commodities. Even within banking there were only a handful of concerned voices that were completely drowned out by the Wall Street herd. The voices of concern across the board were almost nonexistent until the markets crashed. And, may I ask how is that actionable advice or intelligence? Did these voices save any of their client's portfolios? Did they accumulate cash to take advantage of the repricing of risk that was ahead? Did they protect the livelihood of their clientele needed to weather this economic tsunami?
What we did see were a handful of people willing to embrace timeless investment ideals and underlying economic values. Not many were associated with Wall Street but instead most were free thinkers on the fringe of the system. In fact, all but a handful of people expressing very serious concern leading up to this crisis don't even work on Wall Street.
My point is that actionable intelligence or advice is nearly nonexistent on Wall Street. That is, until it is too late. This is something we have discussed often on here. It's easy to be an expert when you can look in the rear view mirror and see a particular market or investment has collapsed. But, how has that helped one's clientele? There are many voices now stating that they expressed concern in some attempt to protect their pocketbooks or careers. Yet, an analysis of reality paints a very different picture.
There are many conclusions we can draw from this. As it pertains to this post we can conclude long term active money management is generally a very shaky proposition at best. Numerous studies which back out many of the false data used to support active money management concludes active money management is just about worthless. The vast majority of fund managers underperform their benchmark indices. 80-90% is probably an accurate metric from unbiased studies I have read. And, active fund managers always charge substantially higher fees than a passive fund while consistently underperforming. These fees contribute to the delta in underperformance. In other words, these fees perpetuate a system that is broken. That could never consistently happen in a free market where underperformance would be punished. I don't care if that refers to an equity or bond hedge fund, an equity fund, a commodities fund, a balanced fund, an alternative investment fund or a bond fund. There are obviously a few exceptions. Those exceptions are typically firms marching to their own drum beat. Free thinkers who deploy a blend of money-making creativity and substantial knowledge of fundamentals. Because they are drowned out, we seldom hear of them.
It was no coincidence Warren Buffet built a war chest of $50+ billion in cash we highlighted on here while the world was partying. It's also no coincidence Buffet prefers to lead a life where he remains in touch with average Americans. While living in a modest house in a regular neighborhood may seen absurd for the wealthiest person on earth, it misses the point. Living outside of Wall Street's bubble sharpens his edge. It hones the blade by which he punishes his competition. And, it is strictly a competition. A competition whose outcome directly impacts your survival. Those that embrace competition and free markets are often the best investors because they are willing to make the investment required for investing excellence. Remember, the dulling of the blade for most who are at the core of this crisis is a timeless reminder of why value investing and its timeless ideals should never lose favor. How many investment professionals could really explain value investing principles as described by the master, Ben Graham? Or his protege, Warren Buffet? And, do so in the detail necessary to qualify them as successful investors? Then actually practice these ideals?
On this blog we love Michael Greenberger. A friend of mine sent me this video link after reading the last post. Greenberger talks about the topic I outlined in that post whereby entities use CDS's to try to drive a company into failure for financial gain then collecting on contracts using taxpayer money. Think about that. Your tax dollars are going to entities trying to drive firms you own or work for into failure. This brings to mind an old song with the lyrics "A man with a breifcase can steal more money than any man with a gun.". Appropriately the title of that song is Gimme what You Got and the title of the album is End of the Innocence. This is stealing from society. It's time to dust off the guillotine.
It is repugnant to watch this other thing disguising as a human being in the video attempt to refute Greenberger's testimony. It seems quite apparent who butters his bread.
Wall Street Ponzi Schemes, Market Disequilibrium And Transparency - The Great Scam
I haven't really talked much of derivatives on here. First, it's not a topic area I'm very interested in. Second, while they represent extreme risks in the system, they aren't even really tied to the cause of this crisis. Third, there are many voices who have a much greater understanding of the depth and breadth of the derivatives messes. We've had quite a few voices out there warning about the derivatives market for ten to twenty years. Literally. Martin Mayer is probably the foremost voice who has been outspoken on the topic. If you are interested, you can read two of his very well written discussions of the derivatives madness from 1999 here and here.
Rather than focus on the obvious, that is the derivatives mess that has been beaten like a rented mule, the focus of this post is on the less than obvious motives behind derivatives, the schemes of Wall Street and the future impact of a financial world vastly different than today. I'll focus primarily on credit default swaps given their enormous popularity over the last handful of years.
A perspective, often floated in the media, that no one could have predicted the derivatives mess or any of the other financial messes is based on lies from those who swindled money from society and now want us to bear the burden while they walk away with our money. That's right. Our money. Any outsized earnings in the finance industry over the last fifteen ten years likely contributed to destroying the economy. Nary a dime was earned. Again, literally. Instead it was literally part of the greatest wealth transfer in history. It was taken from society via financial scheming. Interestingly, one of Mayer's perspectives that is relevant to the bigger picture today is that risk-shifting typically transfers risk to those less able to bear it. How ironic and prescient. One might consider how this statement applies when it comes to the transfers of risk from the banksters to the Federal Reserve. From the goons on Wall Street to the American taxpayer. This environment has nothing to do with moral hazard. It's much deeper and exponentially more sinister.
Derivatives, while meant to provide some semblance of business value when first introduced, have become havens for the incredibly self-destructive gambling mindset so prevalent on Wall Street. Wall Street has taken incredible risks with our money at the exact time when the underlying economy could not afford it. Now these risks belong to society courtesy of the Federal Reserve and Washington politicians. Stabilizing the banking system is one thing. Bailing out the criminally insane is something else. Bernanke and Washington may feel there is no choice and therein lies a serious dilemma. This brings up a very significant point that has been lost in the derivatives discussion. The most obtuse impact of derivatives is not the products themselves. It is that they encourage immoral speculators to take massive risks in assets that are substantially riskier than would otherwise be taken in an attempt to reach for personal profit.And, to do so with a false sense of security that these assets are insured via the derivatives market. Or at least the appearance of security in any cases of outright fraud. In other words, derivatives reinforce a behavior of reckless gambling in the banking system. Reckless gambling with society's money. Were derivatives actually confined to business use, much of the finance employment in the U.S. would cease to exist. What does this tell us? Much of our economy is based on Ponzi economics.
One of the most popular fad "hedges" on Wall Street right now is the credit default swap or CDS. Mind you, it was this same paranormal notion that a hedging vehicle would allow undue risk to be taken that contributed to the 1987 crash, the 1998 mini-crash and the LTCM debacle. In fact, there is substantial evidence that attempts at hedging risk actually caused the stock market crash of 2008. Remember, all of these crises were the result of excess greed and lack of regulatory control of society's money. How often must government be beaten over the head until they realize our money must be protected and, by conclusion, Wall Street behavior needs to be regulated? It appears timelessly. We could easily fix this with additions to our constitution as we wrote long ago. This would protect our society from the endlessly profligate politicians and their partners in crime, financial lobbyists. We have had these Wall Street near death experiences so often that it is only corruption, favors or naivety that can explain why nothing has been done about it.
Frankly, the majority of Wall Street's current businesses aren't sustainable but lobbying and special interests play a role in sustaining them such that we constantly deal with these crises and end up bailing out these scams every handful of years. We'll see if this time is different. If it is, it will be at the hands of the people that change takes place. The political arrangement with Wall Street is far too handsome for it to be changed by the foxes guarding the hen house. That includes the foxes in Washington and on Wall Street. Lobbyists will continue to infiltrate our government and attempt to convince politicians to save these corrupt games that are being played with our money.
Credit default swaps really aren't a complex topic although the terminology may make it appear as such. Credit default swaps are simply insurance contracts. Mostly for corporate debt. Instruments that have skirted regulatory oversight. As Michael Greenberger told us, Wall Street was able to lobby politicians so they eluded regulation and ballooned into a multi-trillion dollar gambling component of Frankenstein finance. Below is a nice video explanation of how credit default swaps work. That said, the use of credit default swaps is overly simplified in this video. Many of the real risks and uses that involve outright casino gambling aren't discussed.
An unregulated CDS market ironically provides a basis to mount an electronic run on the very financial institutions that have profited so handsomely by keeping them unregulated. How? Simple. Speculators can purchase protection (CDS contracts) against the prospects of a company defaulting on their debt without even owning the underlying corporate bonds. In other words, rather than hedging for business purposes, gamblers can pile on to debt instruments by speculating without limit in the CDS market. They can then illegally (naked) short the company's stock, driving its price down. To anyone watching the credit markets and a company's stock price, this creates an artificial appearance that a company is in more serious trouble than is really the case. The speculators can then ring up substantial profits on their bets. And, I do mean substantial. Isn't this just rich? I haven't followed the game in detail but I would assume many gamblers in these scheme have been paid billions by the Federal Reserve on many of these bets. Billions in taxpayer dollars. What should be done is to tear up any contracts that aren't legitimately taken as a business hedge on the underlying debt. This is a case of using tremendous leverage to gamble with our economy and financial system. It is one of the great swindles of all time. It involves a great transfer of wealth from society to many immoral speculators. Remember, there was no wealth creation using any of the current schemes. Only transfers of wealth. Strictly winners and losers. Look in the mirror for the loser. This is why we are seeing a great concentration of wealth at the top of society - they are robbing the rest of society of its wealth. Yet, we hear it called free market capitalism by those doing it. Who want to continue to do it. Of course, it's easy to bend the media message when one has so much money. Ask the laid off steelworker in Ohio or the laid off autoworker in Michigan or the laid off construction worker in California what they think. We are witnessing the last great bubble to pop. That is, the bubble of robbing society and getting away with it. That party is over. Those who have taken from society are going to be paying much of it back because regardless of whether low taxes are preferred, the government will eventually use these gains to pay for programs to support basic services for society and those experiencing economic hardship. Those who took from society are the only ones able to pay higher taxes. Unfortunately, many who honestly earn substantial incomes are also going to be punished.
I saw Jason Trennert comment one time on the ability to create a "run" on a company using CDS contracts. He said it was akin to taking out a life insurance policy on someone and then killing them to collect the policy. And, doing it legally. Unfriendly governments attempting to destabilize the U.S. or hedge funds raiding a targeted firm or Wall Street firms attempting to destabilize a competitor could possibly attempt to manipulate the CDS market. It is almost a surety that illegal activity in the CDS market has led to the demise or financial instability of at least one firm. But we don't know because no one knows anything about this market. It is completely deregulated. There were even rumors some of the recent panics created by the CDS market came from overseas locations friendly to terrorists. Legal shorting methods cannot cause insolvency. Illegal shorting coupled with manipulation of the CDS market does have the potential to literally destroy a firm that might otherwise survive. So, what does the SEC do? They leave the CDS market unregulated and ban legal short selling. I wonder what role lobbying played in these decisions.
The CDS market is just a sample of the concerted efforts at removing transparency from financial markets. Lack of transparency extends into nearly every financial market and has fueled remarkable and completely unsustainable profits for Wall Street. Profits that were often achieved at the expense of some legitimate concern be it a municipality, a homeowner, an individual investor, the taxpayer, governments and on and on and on. Even stock trading is being removed from public view. Lack of transparency is systemic and has no basis I can find except for criminal intent. Why? Because it fuels massive profits. Who cares if they are sustainable or even ethical.
One must understand an environment lacking in transparency to understand why firms would spend billions lobbying government and even more billions creating vehicles outside of the scope of transparency. These schemes present tremendous opportunity for profit by anyone who controls the flow of market information - that typically being a monopoly or someone able to distort market forces by subverting government oversight. In this case, that would be Wall Street who has monopoly access to capital. Restricted access to transparency creates an environment where manipulation and substantial profit is possible at the expense of any counter party be it individual investors, governments, businesses, school districts or anyone else partaking in the scam.
Let me use a simple analogy to drive home the concept of outsized profits created by those who control the flow of information. Look at the automotive business Forty years ago. It was a complete oligopoly. There were no consumer protection laws nor any consumer advocacy groups. If someone wanted to buy a car, they were at the mercy of negotiating a price from an oligopoly without any idea what the transaction costs or profits were. And, given the market was very illiquid, in other words, few dealers to chose from, firms could actually collude to make it impossible to achieve any type of price discovery or transaction costs. That is the situation which exists today with the variety of financial shenanigans on Wall Street. The biggest Ponzi scheme today is not Bernie Madoff. Not even close. It is the trillions of dollars Wall Street bilked from the world.
As an aside, this lack of transparency is also a foundational strategy for the financial supermarket concept that has led to these massive consolidations of financial firms buying up complementary businesses. Let's take a short paragraph to digress and explain what I mean by this. Monopoly firms bundling complementary services at a bottom line price versus piecemeal solutions from smaller or niche competitors gives unfair advantage to "bottom line price" deals across a wide array of solutions. This allows profitable lines of businesses in a monopoly to subsidize less profitable or unprofitable ones and theoretically allow these huge firms to illegally price below cost to drive smaller or niche players from the market. This approach reduces competition and increases profits. Free markets? Why when the government will allow firms to do as they wish? (I have had a post outlined for some time on why this financial supermarket strategy will fail regardless. I'll try to get it up at some point.)
I want to take a moment here to reiterate something we have talked of before. Many of the business models on Wall Street are broken. Permanently. Firms need to find new methods of making money in the future as unsustainable business models implode, never to return. I remain dubious that most will successfully make the jump. This is not like GM or Chrysler where they have proven business models and market forces caused by the banksters along with poor management decisions have joined forces to jeopardize these firms. As an example, many financial firms made substantial profits in an unregulated CDS market. On a go forward basis, these profits will erode substantially. In fact, on a go forward basis, most participating in the CDS market won't even find a legitimate reason to actually participate in the market as Mayer told us. In other words, much of the business undertaken on Wall Street is make-work that becomes totally worthless in a transparent and regulated world. Even legitimate CDS-related profits will likely stabilize at a level 70-90% less than today. So, as an example, are CDS-related businesses even viable in the future? Probably not. Now multiply this across all of the schemes on Wall Street and what will the employment impact be? Even if the Federal Reserve has made it clear JP Morgan, as an example, will be saved at any cost, I believe its stock price has yet to reflect substantially lower profits on a go forward basis. Not just because of a changing economic environment but because heretofore viable businesses will no longer be viable or may require substantial business unit restructuring to survive at lower profit levels. While it is impossible to determine a precise future valuation, JP Morgan's fair value is likely to be substantially lower than today's stock price. And, I do mean substantially. And, JP Morgan is light years ahead of most Wall Street firms in its depth and breadth of strong management. We still haven't seen the awakening to the extent of the exodus out of the financial sector that has yet to take place. Most still believe this environment can be revived. It can't. It won't.
As I write this, the government is reeling in many of the derivatives markets. I don't know exactly what the future holds but the speculative parties are over. Regulation and transparency is coming to the financial markets regardless of the billions spent by financial institutions lobbying government. Any time the government gets involved in providing a regulated and transparent exchange and clearing house for financial instruments, it drastically reduces the ability to make money. Drastically. In fact, when the government got involved in providing transparency in the bond market, bond traders cumulatively lost $1 billion within the first year. Why? Because all buyers and sellers have access to the same information including counter party risk. In other words, the scam is no longer possible or desirable. Spreads are drastically reduced. Liquidity and transparency will increase efficiency and reduce profitability achieved by gaming the system. This has happened time and again as regulators clamp down on financial schemes. Hence, the constant Wall Street desire to stay one step ahead of the regulators with new "inventions" that steal from society. Frankly, there's an easy way to stop this as well. It would be a nonprofit or highly regulated banking system that was designed to support real investment in the economy rather than the perpetual scams we see decade after decade. And, that is exactly where we are going. Not nonprofit but with rules meant to support the real economy. Don't buy the argument of over regulation. Financial innovation is not a source of wealth creation in the economy. It's more often than not a method of stealing from the economy. And, it has been going on for decades. As we now see across a wide array of problems from the unregulated commodities scheme to unregulated derivatives to unregulated hedge funds and even to many private equity schemes, financial innovation and financial control over the economy has cost the economy trillions and trillions of dollars, has led to trade agreements that raped America of wealth and has created the largest financial bubble in history. The economy will suffer for years to come because of these and many more schemes. Financial firms spent billions of our deposit money lobbying our own government to destroy trillions of dollars of our money, our employment and our livelihood.
The only way the world will change is if you change it.
The Global Economy Was Hours From Complete Collapse
This is an amazing admission by Representative Kanjorski. The first two minutes of this video involve a very upset citizen calling in to C-SPAN. But, at the two minute mark this video gets very interesting. Kanjorski talks of what happened on Thursday, September 18th. It is more than frightening. It is a validation that Frankenstein finance has been completely repudiated by the markets. Ironically, the day before, September 17th, I put up the post in italics below as I watched markets completely fall apart unlike anything that has been witnessed in modern times. Within days the market collapsed and fell 40% in two months.
Now what should you take away from this? Well, from my perspective a few things. One, 'free market' dimwits who thought the Federal Reserve should sit on their hands rather than responding aggressively to this crisis would have lost their entire life savings, their jobs and their way of life if the Fed had listened to them. Two, this is the financial system our government allowed to develop without a watchful eye to regulation. In other words, the root cause of this crisis lies in the fault and complicity of the Federal government. Three, this happened because the banksters spent billions lobbying our government to do whatever they damn well pleased. And, that is exactly what they went about doing. Four, that we have not addressed any systemic risks since this happened is because lobbyists are likely blocking meaningful reform - see point Two and Three again. Five, anyone toying with their life savings in this market is a complete idiot. And six, Geithner's interview today stating that this is just as 'recession' and by next year at this time we will be in recovery is patronizing and untrue at best. At worst it is a blatant mischaracterization of what we see before us. Seven, if you aren't religious, it's time to get religion because it's time to start praying.
The day summarized in 100 seconds. I think this video sums up the madness that our political and media machine has become. Is it any wonder Americans are outraged? The asylum has been taken over by the inmates.
I pulled an intraday look at pricing on the S&P. Included on the chart is an intraday oscillator based on buying pressure. As you can see, price trend is in the direction of the oscillator. And, often buying pressure predates price movements. Yet, while the financial media was cheering yesterday, buyers had started to walk away from the market as is clearly contained within the red vertical lines . Smart short term traders would have been short today's market. Better known as buy the rumor and sell the news or more likely that Wall Street had some indication of what Geithner was going to announce today and had planned to dump the market in a tantrum of disapproval for a Treasury framework that leaves Wall Street responsible to clean up much of their own messes. Government cannot fix this problem. There is no free lunch.
It appears we are about to pound one of those nails into the coffin.
There have been plenty of voices telling us what a great buy Russian equities are now that they have imploded. Generally the same voices are starting to grab the microphone again to tell us what a great buy Chinese equities are. Maybe this will finally give these asshats something more productive to do. Like playing in traffic.
How much foreign capital is trapped in Russia? Right now is appears there is going to be a whole lot less in terms of both actual value and in quantity.
I thought I would take this opportunity to rain on our Treasury Secretary's parade as he prepares to announce a plan to solve the world's problems. Mostly because any announced plan is going to be driven substantially by lobbyists and special interests regardless of political rhetoric to limit their involvement in government. In other words, I never watch a politician's lips regardless of how charming they appear to be. Instead I watch their feet. The reality is we have yet to see anyone walk the talk. Anything that does not quickly restore full transparency into the banking system is talking to the hand.
Unfortunately, this environment becomes even more bizarre as time passes. Any mandate for banks to lend in return for government aid borders on frightening. Does a politician really understand anything about risk management? Federal government mandates to the states are a major reason why eleven states have so far drafted State's Rights legislation directed to Federal government abuse. In other words, mandates have extremely negative consequences. I'd like to see the fiscal impact of Federal government unfunded mandates on state and local government. In other words, how many of the fiscal crises at the state and local government level have to do with Federal government edicts without any funding to support them? (Let's digress for a minute here. In American history State's Rights has been manipulated for racism, bigotry, segregation and other abhorrent human rights crimes by special interests and small-minded politicians. In fact, in recent times State's Rights have often been secret code for racism and hatred. The original intent of State's Rights was actually quite elegant and pure. In fact, State's Rights has been used as an economic bulwark in our history as appears to be gaining ground today. I feel compelled to make this clarification because I consider any type of 'ism' be it communism, socialism, racism or even the corporate socialism of the last few decades to be the greatest of crimes against humanity with no exception.)
The reality is banks and government are likely building an even larger crisis in our economy. A perfect example is the real estate situation that every politician is focused on making worse. I recently had lunch with a gentleman who owns a real estate and title business. He told me that bank lending standards have improved only marginally since this crisis hit. And, the talk of banks now requiring 20% down is generally a myth. Additionally, we see that the government just overdosed on the Stupid Pill - the timeless narcotic of choice for politicians. What this means is the government is encouraging banks to lend with marginal improvements over the lending standards employed in the creation of the housing bubble. Now tell me again why it would be different this time around? It won't be. For God's sake, are politicians capable of learning anything or did they lose that gene on their journey to Washington? What this will do is reinforce the recursive outcomes we have so often talked about in the various posts re 'The Game'. And, do so for years to come thus making this crisis even worse.
My point to this is if the government approves a bank bailout plan and requires the banks to loan, we are employing an extremely risky scheme. Government is continuing to shift the burden of risk onto its balance sheet with more and more bad bets. While the government's balance sheet is theoretically limitless, the practical implications make it substantially more constrained. I've hinted at implications of this for some time in numerous posts but we'll wait a bit to expand upon this discussion. Unfortunately we have plenty of time. I just have other topics to post on here in the interim.
Let's close with one critical point seemingly lost in translation. We have written on here that much of any borrowing in this environment is to survive until a recovery develops. In other words, extending credit in this environment involves substantially higher risks. Especially since we have discussed that the economy is not going to recover to potential without a substantial repudiation of current economic mythology taught at our finest institutions of learning.
I actually support extending credit as it pertains to a well thought out policy by the Federal Reserve - something that has not developed the way I would had hoped. This conduit by the Fed would keep credit available for proper government and private business actions to take effect. You can fuggedabout that.
The problem is to date we have seen no signs of any appropriate policy actions from any President or any member of Congress or business. And, I see none on the horizon. So, the extension of credit as Obama is going to mandate, means that the vast majority of lending simply deteriorates the balance sheet of American business, citizens and government. In other words, while we have been talking for the last two months that an environment is building for a possible rally starting in the first few months of 2009, it reflects no long-term improvement in underlying fundamentals. In fact, with these types of policy decisions, there is every reason to believe fundamentals will continue to deteriorate.
Unless otherwise indicated, the written and graphic material on this site is the copyrighted intellectual property of "the company", LLC (the actual company name is withheld for privacy purposes. Contact the site owner for the actual company name.) and may not be reproduced without written permission. Copyright 2006-2017, "The Company", LLC. Unauthorized reproduction of this material is prohibited, protected under copyright laws and defended by "The Company", LLC. For educational purposes the material on this site may be linked to other websites. Fair use notice: This site may make use of copyrighted material, the use of which has not always been specifically authorized by the copyright owner. Use for purposes such as criticism, comment, news reporting, teaching, scholarship, or research is not an infringement of the 1976 Copyright Act and is considered “fair use” of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed without fee or payment of any kind to those who have expressed a prior interest in receiving the included information for research and educational purposes. If you wish to use copyrighted material from this site for purposes that go beyond “fair use”, you must obtain permission from the copyright owner. These terms may change at any time and it is the responsibility of the reader to review, understand and abide by any updated terms.