Friday, July 24, 2009

Long TIme No Post

Three and a half months since my last post. Why? Frankly I got tired of it. Tired of being depressed about the state of our economy. Tired of everyone I know telling me things are turning around. Tired of hearing some friends and colleagues attest that the worst is past us and citing CNBC as their source.

But I am tired of it no more. I am angry again. And here is why.

Yesterday I read several headlines from CNBC to AP to Yahoo to even President Obama himself state that things are turning for the better. (some) Banks are making profits again. Existing home sales improved May to June. Companies like Caterpillar are posting upside surprises to their earnings. The stockmarket rocketed past 9000. Jobless claims went from 700k+ per month when Obama took office to 400k per month in June. The recovery is here and in fact it may end up (if they are right) being the shortest recession ever. How amazing! Considering the dire straits we were in just six months ago, our leaders at the Treasury and Federal Reserve have picked us up and we will be walking, no running again soon. I wonder if everybody feels better.

Shouldn't we look at these signs of turnaround a little closer before declaring a turnaround, though?

Take Banks. There are several known (and unknown) direct reasons for their sudden health, but chew on this indirect ultimate cause: The US money supply has DOUBLED in the past one year! The US Government collected 30% less personal and corporate taxes so far this year than last year ($11.13T to $787B), meaning companies and citizens are making less. Read that again: Twice the money supply, but 30% less income. You may be thinking where is all that new money? Doesn't it seem funny (and wrong) that the government hands out lots of free money and suddenly banks are profitable (and paying record bonuses again no less)?

And that doesn't even speak to the inflationary threat from increased money supply. I suspect the only reason we have not seen massive inflation (yet) is that all that new money has not left the banks vaults except in the form of bonuses to the bank executives who have fooled us into thinking they have saved themselves (and us very soon I suppose). One thing is for sure, that new money is definitely not creating any new jobs (more on that below).

I hate to blame Obama because I don't see him as any worse (or better) than any other president. But it is all happening on his watch now, and he actually campaigned on change. Is this any kind of change? What kind of change gives the Federal Reserve even more power than it had before to cover up its constituents' (the banks) bad mistakes? And hurt the common folks in the process? Is that change we can believe in? I am as fair and open as anybody when it comes to considering Obama's goals and actions. But I don't blame Obama as much as to point out that no matter who the president is this situation was allowed to happen.

Then there are all the earnings upticks. Caterpillar (one of many examples) surprised on its earnings yesterday so the market cheered and bid its stock up along with all the other stocks. But look any deeper. They have laid off 17,000 of their workforce (in 2009) with more to come. Their equipment sales were down 49%. Their profits were down 66%. This is a company that is supposed to benefit from the stimulus! Does that look or feel like a recovery?

And jobs. Even I can't deny that first time jobless claims going down by 40% is a good sign, right? Well, official unemployment is at 10% and hasn't slowed its assent, which means those who lost their jobs earlier are not finding work. In fact I read yesterday that there are 6 jobless for evey 1 job available compared to 2 to 1 in April 2008. In fact 6 to 1 is the highest ratio ever since records started being kept in 1949. Is that good news? Doesn't that make the lower new jobless claims number feel a little cheap?

And then there is the housing market. Existing home sales are up from last month. For the third month in a row! ( This one is the most foolish reports of them all. It should be a crime to report this data in this fashion. Does it seem honest in light of the chart below? (see that blip up at the end of the red line? that is the three month uptick. Look how many upticks like that since the peak in early 2005).

I hope I have successfully made my point. I cannot understand why all the mainstream press, from Fox to NBC on the spectrum and everything in between feels the need to tow the line. All the reporting is one sided. Our fourth estate has become a cheerleading section. It is irresponsible in my opinion to present the idea to the American people that things are about to get better when most of the data clearly indicates otherwise.

I hate to bring you down if you have bought into the green shoot idea. And I hope I am wrong in my outlook for our economy. But despite being pessimistic about the economy, I am optomistic about our society. I know we can overcome the hard times ahead of us because Americans are the best in the world and banding together to help each other and others. And that hasn't changed. But it is foolish to believe that things are going to turnaround soon until the unemployment rate actually takes a turn for the better, and retail sales start an uptrend. And none of those two things seems imminent in the data I review.

Thanks for your time.

Wednesday, March 25, 2009

Bernanke, Giethner, Obama

I haven't written in awhile because my anger had turned to malaise in watching all the speeches and interviews and actions that the economic leaders of our nation have been putting forth on our behalf. It has taken a long time to read the plans and watch the interviews and review the speech and I have finally started to boil again. My reaction has come down to a single question.

What is their objective?

Now, the answer to that may seem easy if you believe Obama last night. They are looking out for us, the American People. Obama clearly believes that the best thing for us is growth, and he intends use the predicted 2.2 or 2.6 percent growth to pay for not only all the debt we are adding to stimulate the growth, but also for all the new initiatives included in his plan (health care, renewable energy, etc.) which will aslo account for some or most of that growth.

But are they really looking out for us? From the actions, I am not so sure they are not just looking out for the banks. Weather they believe that the banks honestly need to be rescued at any cost, or if they believe armageddon will ensue, or if they are simply worried about losing the power they have attained, I don't know. But clearly their priority is saving the banks (including Wall Street), and the people are secondary.

I am one who believes that any President, be it Bush or Obama or Clinton or Reagan or Carter, genuinely has the best interests of the country at heart. I also believe Obama is a smart man. Last night he was asked about the stimulus and how we are really going to pay for all this. On 60 minutes he was asked if we have reached the limit on how much we can borrow to pay for it. Obama's dodge insisted healthcare reform and green energy will spur growth, but he flipped the question around claiming if we don't spend, we can't grow and the deficit will be even worse.

Huh? Less spending means a higher deficit? Does he REALLY believe that? What on earth are those meetings with Geithner like? Is Volcker in any of these meetings? Obama is a smart man, but if he really believes this, then I wonder what his priorities are.

And then there is AIG. All the outrage in the press, and from Congress, and from the President himself on the bonuses, when not only are the bonuses less than a fraction of a percent of what has been spent on AIG, but all the players have completely lost sight of what is really happening at AIG (or have they?). During all the bonus outrage, AIG also released the list of the top receivers of the payments made from the bailout money. And who were they? Goldman Sachs, Societe General, and all the banks. Bank after bank after bank. Turns out bailing out AIG is just another way to give money to the banks without saying we are giving money to the banks. Number one on the list was GS and ain't it funny how the first fed meeting back in September about what to do with AIG was attended by Paulsen, Giethner, a bunch of other government and Fed officials and one Private bank's CEO. Want to guess which company had a seat at this "governmental" meeting? Yes Goldman Sachs.

This stinks so bad.

It is obvious that Washington is made up of three kinds of people. Blind people, people who don't understand, and evil people. Unfortunately those are the only people who can get elected or appointed because they are the only ones the banks will give money to to run for office. I think Obama is blind. I think Barney Frank doesn't get it. I think Paulsen is/was evil. Ron Paul, who recently introduced a bill to abolish the Federal Reserve Bank may be the only one who managed to get elected despite his ability to see, understand, and care. Remember Ron Paul? The presidential cantidate who looked and sounded like a nut? The guy nobody gave a shot in the GOP race? He is getting more and more floor time lately in congress and it is no wonder. He is turning out to be right.

I can see a silver lining though. For all those who worry about the next generation having to pay for all this, I say no need to worry about that. The USA will have defaulted by then. And default means you don't have to pay back your debts because they have been written off. So as long and Ben and Tim and Barry try to avoid writing off all those bad loans by moving them to the taxpayer's balance sheet, that is how long it will be before the economic recovery will begin. And the more debt they try to pile on in avoidance of that, is how much longer it will take to recover. Welcome to the new Great Depression.

Saturday, February 28, 2009

The real reason we're in such trouble

Everyone mostly blames the downfall of real estate for the economic crisis we face these days. And while that surely has contributed to the problems banks face today, it would not be nearly as bad if the derivatives market had been regulated at all. But it wasn't. And AIG was/is at the center of the whole mess.

AIG is about to post an even bigger loss than before and come to the troth for government funds again. And there is little reason to think the government will not help out still more. Why? Because the government knows that letting AIG fail is basicly spreading banruptcy to probably every major bank in the world, let alone other countries as well.

I am re-printing this article by Joe Nocera of the New York Times because posting a link may require you to join . I feel this is a mandatory read for anybody trying to understand the heart of the problems we face.


Next week, perhaps as early as Monday, the American International Group is going to report the largest quarterly loss in history. Rumors suggest it will be around $60 billion, which will affirm, yet again, A.I.G.’s sorry status as the most crippled of all the nation’s wounded financial institutions. The recent quarterly losses suffered by Merrill Lynch and Citigroup — “only” $15.4 billion and $8.3 billion, respectively — pale by comparison.

At the same time A.I.G. reveals its loss, the federal government is also likely to announce — yet again! — a new plan to save A.I.G., the third since September. So far the government has thrown $150 billion at the company, in loans, investments and equity injections, to keep it afloat. It has softened the terms it set for the original $85 billion loan it made back in September. To ease the pressure even more, the Federal Reserve actually runs a facility that buys toxic assets that A.I.G. had insured. A.I.G. effectively has been nationalized, with the government owning a hair under 80 percent of the stock. Not that it’s worth very much; A.I.G. shares closed Friday at 42 cents.

Donn Vickrey, who runs the independent research firm Gradient Analytics, predicts that A.I.G. is going to cost taxpayers at least $100 billion more before it finally stabilizes, by which time the company will almost surely have been broken into pieces, with the government owning large chunks of it. A quarter of a trillion dollars, if it comes to that, is an astounding amount of money to hand over to one company to prevent it from going bust. Yet the government feels it has no choice: because of A.I.G.’s dubious business practices during the housing bubble it pretty much has the world’s financial system by the throat.

If we let A.I.G. fail, said Seamus P. McMahon, a banking expert at Booz & Company, other institutions, including pension funds and American and European banks “will face their own capital and liquidity crisis, and we could have a domino effect.” A bailout of A.I.G. is really a bailout of its trading partners — which essentially constitutes the entire Western banking system.

I don’t doubt this bit of conventional wisdom; after the calamity that followed the fall of Lehman Brothers, which was far less enmeshed in the global financial system than A.I.G., who would dare allow the world’s biggest insurer to fail? Who would want to take that risk? But that doesn’t mean we should feel resigned about what is happening at A.I.G. In fact, we should be furious. More than even Citi or Merrill, A.I.G. is ground zero for the practices that led the financial system to ruin.

“They were the worst of them all,” said Frank Partnoy, a law professor at the University of San Diego and a derivatives expert. Mr. Vickrey of Gradient Analytics said, “It was extreme hubris, fueled by greed.” Other firms used many of the same shady techniques as A.I.G., but none did them on such a broad scale and with such utter recklessness. And yet — and this is the part that should make your blood boil — the company is being kept alive precisely because it behaved so badly.

When you start asking around about how A.I.G. made money during the housing bubble, you hear the same two phrases again and again: “regulatory arbitrage” and “ratings arbitrage.” The word “arbitrage” usually means taking advantage of a price differential between two securities — a bond and stock of the same company, for instance — that are related in some way. When the word is used to describe A.I.G.’s actions, however, it means something entirely different. It means taking advantage of a loophole in the rules. A less polite but perhaps more accurate term would be “scam.”

As a huge multinational insurance company, with a storied history and a reputation for being extremely well run, A.I.G. had one of the most precious prizes in all of business: an AAA rating, held by no more than a dozen or so companies in the United States. That meant ratings agencies believed its chance of defaulting was just about zero. It also meant it could borrow more cheaply than other companies with lower ratings.

To be sure, most of A.I.G. operated the way it always had, like a normal, regulated insurance company. (Its insurance divisions remain profitable today.) But one division, its “financial practices” unit in London, was filled with go-go financial wizards who devised new and clever ways of taking advantage of Wall Street’s insatiable appetite for mortgage-backed securities. Unlike many of the Wall Street investment banks, A.I.G. didn’t specialize in pooling subprime mortgages into securities. Instead, it sold credit-default swaps.

These exotic instruments acted as a form of insurance for the securities. In effect, A.I.G. was saying if, by some remote chance (ha!) those mortgage-backed securities suffered losses, the company would be on the hook for the losses. And because A.I.G. had that AAA rating, when it sprinkled its holy water over those mortgage-backed securities, suddenly they had AAA ratings too. That was the ratings arbitrage. “It was a way to exploit the triple A rating,” said Robert J. Arvanitis, a former A.I.G. executive who has since become a leading A.I.G. critic.

Why would Wall Street and the banks go for this? Because it shifted the risk of default from themselves to A.I.G., and the AAA rating made the securities much easier to market. What was in it for A.I.G.? Lucrative fees, naturally. But it also saw the fees as risk-free money; surely it would never have to actually pay up. Like everyone else on Wall Street, A.I.G. operated on the belief that the underlying assets — housing — could only go up in price.

That foolhardy belief, in turn, led A.I.G. to commit several other stupid mistakes. When a company insures against, say, floods or earthquakes, it has to put money in reserve in case a flood happens. That’s why, as a rule, insurance companies are usually overcapitalized, with low debt ratios. But because credit-default swaps were not regulated, and were not even categorized as a traditional insurance product, A.I.G. didn’t have to put anything aside for losses. And it didn’t. Its leverage was more akin to an investment bank than an insurance company. So when housing prices started falling, and losses started piling up, it had no way to pay them off. Not understanding the real risk, the company grievously mispriced it.

Second, in many of its derivative contracts, A.I.G. included a provision that has since come back to haunt it. It agreed to something called “collateral triggers,” meaning that if certain events took place, like a ratings downgrade for either A.I.G. or the securities it was insuring, it would have to put up collateral against those securities. Again, the reasons it agreed to the collateral triggers was pure greed: it could get higher fees by including them. And again, it assumed that the triggers would never actually kick in and the provisions were therefore meaningless. Those collateral triggers have since cost A.I.G. many, many billions of dollars. Or, rather, they’ve cost American taxpayers billions.

The regulatory arbitrage was even seamier. A huge part of the company’s credit-default swap business was devised, quite simply, to allow banks to make their balance sheets look safer than they really were. Under a misguided set of international rules that took hold toward the end of the 1990s, banks were allowed use their own internal risk measurements to set their capital requirements. The less risky the assets, obviously, the lower the regulatory capital requirement.

How did banks get their risk measures low? It certainly wasn’t by owning less risky assets. Instead, they simply bought A.I.G.’s credit-default swaps. The swaps meant that the risk of loss was transferred to A.I.G., and the collateral triggers made the bank portfolios look absolutely risk-free. Which meant minimal capital requirements, which the banks all wanted so they could increase their leverage and buy yet more “risk-free” assets. This practice became especially rampant in Europe. That lack of capital is one of the reasons the European banks have been in such trouble since the crisis began.

At its peak, the A.I.G. credit-default business had a “notional value” of $450 billion, and as recently as September, it was still over $300 billion. (Notional value is the amount A.I.G. would owe if every one of its bets went to zero.) And unlike most Wall Street firms, it didn’t hedge its credit-default swaps; it bore the risk, which is what insurance companies do.

It’s not as if this was some Enron-esque secret, either. Everybody knew the capital requirements were being gamed, including the regulators. Indeed, A.I.G. openly labeled that part of the business as “regulatory capital.” That is how they, and their customers, thought of it.
There’s more, believe it or not. A.I.G. sold something called 2a-7 puts, which allowed money market funds to invest in risky bonds even though they are supposed to be holding only the safest commercial paper. How could they do this? A.I.G. agreed to buy back the bonds if they went bad. (Incredibly, the Securities and Exchange Commission went along with this.) A.I.G. had a securities lending program, in which it would lend securities to investors, like short-sellers, in return for cash collateral. What did it do with the money it received? Incredibly, it bought mortgage-backed securities. When the firms wanted their collateral back, it had sunk in value, thanks to A.I.G.’s foolish investment strategy. The practice has cost A.I.G. — oops, I mean American taxpayers — billions.

Here’s what is most infuriating: Here we are now, fully aware of how these scams worked. Yet for all practical purposes, the government has to keep them going. Indeed, that may be the single most important reason it can’t let A.I.G. fail. If the company defaulted, hundreds of billions of dollars’ worth of credit-default swaps would “blow up,” and all those European banks whose toxic assets are supposedly insured by A.I.G. would suddenly be sitting on immense losses. Their already shaky capital structures would be destroyed. A.I.G. helped create the illusion of regulatory capital with its swaps, and now the government has to actually back up those contracts with taxpayer money to keep the banks from collapsing. It would be funny if it weren’t so awful.

I asked Mr. Arvanitis, the former A.I.G. executive, if the company viewed what it had done during the bubble as a form of gaming the system. “Oh no,” he said, “they never thought of it as abuse. They thought of themselves as satisfying their customers.”
That’s either a remarkable example of the power of rationalization, or they were lying to themselves, figuring that when the house of cards finally fell, somebody else would have to clean it up.

That would be us, the taxpayers.

Monday, February 23, 2009

The "Fight Club" Solution

One of my favorite bloggers is Rolfe Winkler over at Option Armageddon. He hits the nail on the head time and time again and I appreciate it. Among the many financial blogs I read when I can, his is the one that is the most educational and honest and forthright. This past weekend he mentioned the "Fight Club" Solution. One of my favorite movies, in which two guys plan to blow upthe buildings of all the credit card companies. Actually that is just a side plot, but it is amazingly funny how it relates to the situation we are in today. As Rolfe points out:

Few appear to recognize the depth of the crisis we face. Most still aren’t
prepared to ask the hard, fundamental questions about our economic system.
Anyone who mentions the gold standard, for instance, is treated as a
novelty. Nevermind that fractional reserve banking—or perhaps our central
bankers’ management of it—is the most important contributing factor to the

The problem, I think, is that so many of our leaders are tied immovably
to legacy ways of doing business. A man will make himself believe most
anything if his salary depends on it. Lots of salaries are at risk, so
lots of heels are digging themselves in.

Anyway, as I’ve argued for awhile, the only way to “solve” the crisis is to let asset prices fall. And that means the balance sheets on which those assets currently reside need to recognize substantial losses. Call it the “Fight Club” solution*—everyonegoes back to $0. This would be highly painful for ALL Americans. But it would be most painful for those with the most to lose…

The good news is that this will eventually happen. In a way it already has started. Our major world banks are insolvent and it is only a matter of time before our governments are forced to recognize this fact and close them down in their present form. How do I know this and the government doesn't? Good question. I listen to what the markets tell me, and when Citi is under $2 and Bank of America is under $3, that tells me the market is only waiting for certain events to happen (nationalization among them) before dowgrading to zero. But nationalizing the banks, which even some Republicans are beginning to endorse, will not fix the problem. Because then the government would become the bank that won't write down these assets. Which will put the government in trouble instad of the banks. Not good. (Unless you are short the US dollar).

Restoring confidence in the financial system can only be acheived when the financial companies themselves become honest about their activites. Which means admitting their assets can't cover their equity/liabilities. Why why why won't/can't the government and the banks see what we americans can easily see? I used to ask this question every day, but I found my answer even though I secretly (from myself) already knew it: "it would be most painful for those with the most to lose."

The banks and the politicians are the ones with the most to lose.

Friday, February 20, 2009

Weekend of Doom?

The Dow gapped down 200 points on heavy volume this morning and is weakening every minute. Citibank is under $2. The banks are taking a pounding. Is this the reckoning? Are we looking at S&P 500 at 500 by Monday? Is Nationalization upon us? This just feels big.

Funny how all americans seem to know the banks are insolvent, but the markets still value them at even $1. Betcha that won't be the case anymore come Monday...I wonder how many banks will be gone...Citi, BofA, both under $4. That's two Dow components for goodness sake. Wells Fargo under $10. Who am I missing here?

Tuesday, February 17, 2009

Can't get Worse, you say?

YIKES! This from Marketwatch:

"A sixth quarter of negative growth (in the S&P) ties the prior record
set when Harry Truman was president, running from the first quarter of 1951 to
the second quarter of 1952.
“‘Next quarter, we’re expecting a new record of seven quarters of negative growth,’ said an analyst.
“As of the close of business Thursday, [he] calculates S&P earnings per share, on a reported basis, at a loss of $10.44 for the quarter. If financials were taken out of the equation, that deficit would drop to $2.35 a share."

So we are about to witness the first ever amalgamated LOSS for the S&P, according to estimates. Of course 80% of the red ink comes from the Financials. Have I mentioned I am short S&P Financials by way of owning SKF (ProShares Ultra Short S&P Financials)?

And I still see pundits on NBC and Fox (yes I watch both) talk about finding the bottom! The bottom of what? The toilet? I had told friends to look for the S&P to test 600 in this quarter (which hasn't come true yet). But a smarter trader I know has reset his target to 450 based on technical analysis of many charts, and I'd have to say that the Fundamentals now seem to agree with him.

Friday, February 13, 2009

Stimulus and Bank Bailout Won't Work

Spend Spend Spend. These days republicans and Democrats may disagree on the nature of the stimulus, Democrats want jobs and social spending and Republicans want tax cuts, but they both agree that something has to be done now. Even waiting to examine the plan for mistakes is too big a mistake in itself. Obama tells us we need stimulus to avoid disaster. Bush told us the same thing last year. This is an emergency. Nevermind that the first stimulus and the first bailout didn't work. We need action! And Fast! It doesn't matter what caused our problems, spending has always worked in past recessions, so spending is the answer to this recession. Hurry!

But what if this is not a recession? A friend of mine recently told me "nobody I've seen has started calling this a depression yet. things haven gotten THAT bad!" Well I fear that depends on who you ask. It has gotten that bad for more people than you think. And its going to get worse, because spending your way out of debt is non-sense and we all know it. Fundamentally, we all know this can't work.

Here's a chart showing the debt to income of the USA. This doesn't include "off the balance sheet" obligations like Social Security and MedicAid. It also doesn't include the stimulus bill that just passed (which will add another 30%) or the final cost of the actual bank bailout. Our GDP has grown at 3-5% per year, yet the growth in debt has been much faster. It is taking increasingly larger units of debt to fuel the same unit of growth in the economy.

And that is the biggest lie of all. GDP. It is not Gross Domestic Product any more. We are not producing anything, we are consuming it. It is really GDC, or Gross Domestic Consumption that our government is trying to grow. And we all know on a very fundamental level, that once you borrow enough, you have to stop spending, if only because you are forced to by your creditors, who stop extending credit.

What is happening to America today, is we are running into a wall, and the government is pushing us head-first into it by moves like the spending bill that just passed. Supposed to be about creating jobs, infrastructure and tax cuts, it instead has items like a $8 billion for high speed rail lines, $200 million in compensation for WW2 injuries, $2 billion in grants and loans for battery companies, money to build schools in towns who are losing population, an AMT rollback costing $70 billion, and much much more that simply doesn't relate to the task at hand, regardless weather or not they are good programs.

Honestly, instead of giving me $13 back per paycheck, Obama and Congress should be asking us for $26 and sinking it into a better healthcare plan for all the people who are losing their jobs.