Trillion Dollar Meltdown

 

“Credit is the air that financial markets breathe, and when the air is poisoned, there’s no place to hide.” – Charles R. Morris

 

With the help of the Fed, the hissing from the big bubble is not done.  There are no Black Mondays with housing prices, when prices fall 23 percent in a day.  They occur much more slowly than stock prices.  But not subtley.  So wrote Paul Krugman on August 8, 20005.  His book published earlier this year deals with economic times in the Great Depression, and how they relate today.  No wonder he won the Nobel Prize in Economics this year.

 

On December 22, 2008, Paul Krugman wrote in the New York Times that whatever the new administration does, “we are in for months, perhaps even a year, of economic hell. After that, things should get better, as President Obama’s stimulus plan ― O.K., I’m told that the politically correct term is now “economic recovery plan” ― begins to gain traction. Late next year the economy should begin to stabilize, and I’m fairly optimistic about 2010.” 

 

When he was asked his thoughts on the prospect that gasoline could go over $4 a gallon this summer, George W. Bush, Jr., responded, “I hadn’t heard that!”   At the White House press conference, on Feb. 28, 2008, he also denied the country was headed into a recession.  Economists now say that recession began in December 2007. 

 

Looking for wisdom.  It was always out there.  In Charles Kindleberger’s book, Manias, Panics, and Crashes.  I am reading it now. 

 

One of the New York Times 100 notable books of 2008 is the book, The Trillion Dollar Meltdown: Easy Money, High Rollers and the Great Credit Crash, by Charles R. Morris. 

 

Morris is author, attorney, former banker, and software company executive.  He puts the readers through the factors which created “the greatest credit bubble in history.”  His book had been published before St. Patrick’s Day, long before talk of activating the Large Hadron Collider machine on September 10, 2008.  I was suspicious about the LHC and its affect on Wall Street.  I lived next door to Calvin Coolidge’s secretary in 1969.  Miss Braddock felt that landing someone on the moon was gonna set off the ocean tides. 

 

From the Bloomberg News last week.  “You’re up to $1 trillion now and this is still going to run for some time,” said Charles R. Morris, whose book “The Trillion Dollar Meltdown” was published in March. In September 2007, “the first back-of-the-envelope calculation I did came up with $1.1 trillion and this was using really low-default estimates.”

 

Mr. Morris writes in his book: “The sad truth…is that [the] subprime [mortgage market] is just the ‘first big boulder’ in an avalanche of asset write-downs that will rattle on through much of 2008.  An overhaul of subprime-like assets, at least as large, is sitting in corporate debt, commercial mortgages, credit cards, and other portfolios.  Even municipal bonds may be at risk.  Loss estimates of $400 billion to $500 billion barely get your halfway there…When large wobbly objects tumble, they go very fast…I lay out…the likely course of write-downs and defaults on the whole asset gamut–residential mortgages, commercial mortgages, high-yield bonds, leverage loans, credit cards, and the complete bond structure that sits atop them.  It comes out to about $1 trillion.” 

 

I do not think that the financial meltdown of 2008 was a temporary dislocation.  William Hughes wrote a book review of “The Trillion Dollar Meltdown” in March 2008.  He included in his review the coming conflict in fiscal policy in a recession, involving lower wages to keep US Government bonds more attractive than stocks, the ugliest of ugly conflicts of interest by the US Fed.  He predicted the bailout put together by Ben Bernanke and Henry Paulson 6 months before it was raised.  “We will see money overflowing everywhere. We will see more money directed towards speculation again. We will see more price inflation. The only big question in my mind is whether higher wages will be tolerated. They call them ‘Secondary Inflation Effects’ which are halted, thus enforcing the destruction of the Middle Class. Lower wages permit the long-term interest rate to stay suppressed.”

 

If there is something fundamentally wrong with the US economy, then spending more will not fix it.  A physician listens to subjective complaints and then goes in search of objective data.  What do the findings show?  Because getting the right diagnosis means finding the right treatment plan.  These symptoms include massive debt and overspending, both individually and collectively.  By people.  By companies.  By municipalities.  Drinking, smoking, carrying on.  All the excess.  Of high income concentration.  The contagion of too much debt in the neighborhood.  The subprime collapse was just another symptom of little regulation over time, with a loss of transparency.  Too much reliance on money from overseas.  China was booming based upon the appetities of the American consumer.  So foreigners have joined the feast because of all of the US debt. The United States continues importing more than it exports.  The “customer” was lost amidst all of this.  That customer who was always right.  Customers once got attention, whereas consumers got no real attention.  Many feel there was not  enough tax revenue to maintain what we had, in the way of roads.  Despite the reckless government spending.   

 

Writes Harvard University vice provost for international affairs and a professor of Mexican and Latin American Politics and Economics, Jorge Dominguez, and Juan Enriquez, author of “The Untied States of America: Polarization, Fracturing, and Our Future”: 

 

“Austerity. Because we have been spending 5 to 7 percent more each year than we earn, a forced restructuring, triggered by a currency collapse, would have the same effect on wages and purchasing power that the housing collapse had on housing prices. All talk is of payments, supports, subsidies, incurring more debt, stimulus packages. The thesis seems to be: If only we spend more the party can go on. The thesis seems to true only if the financial meltdown is a temporary dislocation in housing and credit markets, a temporary mismatch. 

 

“Middle Easterners and Asians who save and invest bought dollars for decades, but some of this money is now fleeing. The dollar has dropped sharply. Gold has skyrocketed. In financial crises, huge pools of capital cross borders very quickly; a few can make a great deal of money shorting the country’s currency. The solution requires the country to begin to spend what it earns, reduce its mountainous debt, and address massive liabilities, restructure Social Security, pension deficits, military, and Medicare. No wonder politicians would rather spend more of your money now rather than address these problems.

 

William Hughes did a book review of Morris’ book.  “The massive financial chicanery, shady corporate insiders’ dealings, really stupid government policies, predatory lending practices, stockholders’ conning schemes, and the outright fantasies.  This is scary stuff!  What makes it even scarier is that one of the most culpable parties to this ongoing crash, President Bush, is in total denial.  And he’s going to be in office for another nine months!   Author Morris warns that to continue ‘to downplay and to conceal the current crisis will lead the country on a path to disaster.’”

 

Writes William Hughes, “Like a whirlwind, the crisis triggered by the housing crisis and mortgage debacle has extended to almost every phase of the landscape in US economic and financial life. And the rookies running the US Federal Reserve initially said the problem would be contained.  My claim made in late June 2007 was that it involved absolute contagion to the system, which is what we see vividly now.  Let’s review some high level stresses in several arenas, examine the response potentials, and check on the gold and US Dollar impact.  One should note, the gold and silver prices will soon demonstrate strong independence from the US dollar.  Just like in 2005, gold can rise even with some bounce in the buck.  Unlike 2005 though, the buck is likely not to make much in the way of advances.”

 

The story of 2009 will be foreign currencies.  Hughes predicted the weakness in foreign currency.  In the early part of 2008 as problems with banking, bonds, and now economies went global.  “In reaction to policy changes, primarily monetary and now fiscal, gold will react to an acceleration in monetary inflation after a long period of heavy money growth over 10% annually in many leading industrial nations.”

 

In March 2008, Hughes wrote, “The US Fed has been playing a dangerous secretive game. They denied the depth and power of the bond debacle in order to wait for Europe to feel the same problems.  The US Fed wanted to wait until Europe saw banking problems, economic slowdown, and bond losses.  Some degree of arrogance might have crept into their thinking that the US system was more resilient, more robust, and had stronger markets with greater safeguards installed.  All were untrue.  The US Fed figured they could cut interest rates faster later, only after Europe started to show signs of similar problems, joining them in the easing cycle.  Well, Europe took a few months more time to detect damaging signals, and their problems on the continent are much less imposing in their degree of destruction than what is seen in the Untied States.”

 

In March Hughes wrote, “The bigger reasons for the US Fed to fiddle and diddle, delaying and postponing, are more profound to the problems faced. They are two-fold.  Primarily, the US Fed is a private firm, with primary loyalty not to America but to owners who reside in London and Old Europe, with no desire to eat a trillion dollars or more in losses.  So their initial repurchase loans to member banks and other banks have been for high quality US Treasuries, not mortgage bonds, and certainly not collateralized debt obligations.  Up to the time when the Term Auction Facility opened shop last month, the US Fed only took US T-Bonds of various maturities. Since the Term Auction Facility began to lend against broader assets, they began to accept Fannie Mae & Freddie Mac bonds. Think their corporate bonds and mortgage backed (in)securities. Why would the US Fed take Fannie Mae & Freddie Mac bonds?  Because they eventually will be bailed out by the US Government.  Though they might not really be fully guaranteed, they will be at crunch time.

 

“The other reason the US Fed delayed in prescribing and delivering the needed monetary medicine again points to their private firm status. They wanted to have the US Government take the $1 trillion tab for bailouts, to put the kibosh on the US Dollar, not the private US Fed owners. They are no more a public benefactor than Wall Street. Both the US Fed and Wall Street firms are the quintessential parasites in the modern financial era.

 

“Finally, the US Government has proposed a measly $150 billion bailout proposal, the first of several.  My forecast has been firm, that the rescue packages will be numerous, greater in scope in succession, and each inadequate until a master Resolution Trust Platform is instituted. The price tag on the full blown rescue will be at least $2 trillion and possibly as much as $4 trillion. The US Government fiscal packages will include tax cuts for households, permanent installation of lower taxes for the wealthy and corporations, greater tax incentives for business investments and job hiring, items directed to the poor, and more.

 

“When the monetary stimulus takes root from lower interest rates and easier repurchases to assist the mortgage process, while at the same time the government fiscal stimulus packages spread out more broadly, we will see money overflowing everywhere. We will see more money directed towards speculation again. We will see more price inflation. The only big question in my mind is whether higher wages will be tolerated. They call them ‘Secondary Inflation Effects’ which are halted, thus enforcing the destruction of the middle class. Lower wages permit the long-term interest rate to stay suppressed. Lower wages ensure the recession necessary to keep US Government bonds more attractive than stocks, the ugliest of ugly conflicts of interest by the US Fed. The US Dollar takes heavy blows when the US Government stimulus package takes form as less an unknown. The gold price has risen since January, in part because of the foreseen combination of heavy US Fed monetary medicine and heavy US Government fiscal medicine working. It smells more inflation in all forms.  

 

“When prescription moves to application, gold will vault past $1000 per ounce easily. Also, silver will vault past $20 easily.  The major rub will be the effect on long-term US Treasury bond yields.  The solution requires more price inflation, asset inflation, wage inflation, and spillover, all of which contribute to rising long-term interest rates. Already, we see the rub in higher mortgage fixed rates, higher jumbo mortgage rates, higher corporate bond yield spreads, higher junk bond yield spreads, higher fixed rate swaps. My gut feeling is that Rookie Chairman Bernanke harbors quietly his biggest fear, that enacting a full blown rescue of the banking & bond & economic system will trigger a bear market in US Treasury Bonds. That would ensure a credit derivative meltdown an order of magnitude worse than just from Credit Default Swaps off mortgage bonds, and an order of magnitude more swift.”

 

So wrote William Hughes in March 2008.  

Fuzzy Wuzzy in 2009

 

The U S Treasury in my view is not being honest with its people, in the battle between the housing market, credit markets, and equity markets.  What has really changed?  There still are credit derivative markets?  Boards of directors who allowed their corporations to underwrite credit derivatives with no reserves set aside have been dissolved?  And a trigger to a credit derivative event almost occurred this week except for the vote in the Senate over the Detroit bailout.  The $15 billion bailout would have cost the market more than that with the inclusion in the bill of an auto czar.  Who was the genius who wrote this legislation?  Such an event was the proposed auto czar created in the bailout bill for Detroit that never passed the Senate.  pundits.  

 

Exactly how many chairmen of the boards have been deposed in the last 90 days?  Bankers looked on in September unwilling to lend, as reflected in the LIBOR rates charged to each other.   A banks’ reluctance to lend is set to continue now that banks face further write-downs, due to the recession. 

 

Perception is what drives stock prices.  Not reality.  So if this all along has been an earnings driven bull market, why would anyone be buying the S&P 500 at 890, where it closed today?   At 10 to 15 times $42 a share earning, the S& P should be fairly traded at 660.  So before casting a vote in a market sentiment survey, read this weeks financial

 

From Howard R. Gold is executive editor of MoneyShow.com.

 

I believe that the world economy will not be a hospitable place for equities for some time. A long, deep recession, massive debt liquidation, fiscal strains on governments around the world, and a new frugality among consumers could produce sub par economic growth well into the next decade.  And by some key measures, stocks aren’t very cheap at all.  According to S&P’s senior index analyst Howard Silverblatt, the S&P 500 now trades at above 19 times reported earnings for the 12 months ended Sept. 30.   Yale University’s Robert Shiller thinks the S&P 500 is “fairly valued” at current prices below 900.  Currently, S&P’s senior index analyst Howard Silverblatt anticipates about $42 a share in reported earnings for the S&P 500 next year. That’s about half of what those companies earned in the 12 months ended June 2007.  For the last 70 years, the average yield on the S&P 500 has been 3.82%. At the end of the third quarter, it stood at 2.47%. Historically, markets haven’t been considered cheap until dividend yields top 4% or even 5%, as they did in 1974 and in 1981, the year before the 25-year bull market began. The yield got up to 3.87% in the third quarter of 1990, which also turned out to be a good buying point.  But as companies cut dividends, S&P is projecting a slight decline in dividend payments next year, to around $28 — the first expected decrease since 2001. So, assuming $28 dividend payments, a 4% yield gives us 700 in the S&P, not too far from recent lows. But 5.5% brings us close to 500 — a lot lower.

 

“Members of the American Association of Individual Investors (AAII) hold 37% of their portfolios in cash, approaching previous peak levels of October 1990 and October 2002. In the AAII’s most recent sentiment survey, bulls and bears were about evenly divided, in the high-30% range. Back in 1990, bears topped bulls by more than 40 percentage points, and the number of bulls fell to a minuscule 13%. (The spread approached 40 in January and March of this year, but bulls never dipped below 20%.) It’s hardly doom-and-gloom now.  Our recent MoneyShow.com sentiment indicator revealed little capitulation, either.  So, it should be no surprise that smart traders and technicians like Sandy Jadeja, who called the top of equities markets last fall and crude oil this summer, don’t believe we’ve hit bottom.” 

 

“’I'm looking at that as a suckers’ rally,’ he says. “Longer term, the trend is still down.’  He doesn’t see a bottom for the Dow until somewhere in the 6,000 range, maybe lower.   If you’re retired or getting close, I’d stay invested in stocks but sell a little into rallies to lighten your equity holdings. And I’d be looking for bonds and more stable, dividend-paying stocks to give you income while you wait for the market to recover. Because unfortunately, that may take a long, long time.”   

 

The only real trouble, as was witnessed in those days between September 15^th and early October, was when no one was buying

 

From Nick Atkeson, (Editor, Big Money Options, Partner, Delta Force Capital, LLC) in  MoneyShow.com.

  

The $8.5 trillion chip stack is what the United States government pushed into the middle of the table. Not until the hand is played to the end will we know the fate of that bet. This all-in bet could be a winner. The US government has removed its sunglasses and is looking the world directly in the eye, as it has shoved this humongous chip stack into the pot. Staring right back is a cast of unsavory financial characters and negative economic forces. These are the same characters and market forces that have won every hand so far—market forces that spell “deep recession” and financial speculators willing to purchase credit-default swaps and then short the equities into the ground. Treasury borrowing costs are now down to 1% or less for a two-year term. With corporate bond yields now at about 9%, the spread is at historically very high levels and leaves a lot of room for profit if the default rate does not become excessive. In some sense, the government has rigged the game in its favor. It is capturing profitable spreads with one hand and using the other hand to keep the default rate under control through loan guarantees and direct liquidity injections.  The bet the government is making is to flood the troubled parts of our economy with support money to allow natural market forces to take effect in a controlled, gradual manner. Slowing the rate of economic deterioration may allow some healing economic forces to gain traction.

   

Says John Authers in Moneyweek.com:

  

“While equities jumped, credit investors remained wary. German bond yields barely fell, while dollar interbank rates ticked up for a second successive session on Monday. “This is still first and foremost a credit crisis,” says Tony Jackson in the FT. So if the two markets disagree, “go with credit”. What’s more, a “relief bounce” will need to feed on firmer economic data if it is to endure, says Mark Lovett of RCM. Unfortunately, we’re getting exactly the opposite.”  Following losses on credit instruments, the banks will have to raise more money or decrease lending to deal with these. A British think tank this week estimated that high-street banks could require another £110 billion to resume normal lending.  Retrenching consumers, plunging commodities, and the lending squeeze all add up to the makings of a “perfect deflationary storm”, says John Mauldin on Investorsinsight.com. US GDP could fall by 5% in the fourth quarter, reckons Goldman Sachs, which also sees profits across the economy declining by 25% in 2009, the biggest drop since 1938.  The last secular bull for the S&P was 1982-2000, taking p/es from seven to a record 44. They then fell as the post-2000 bear began; by the 2002 low the p/e was at 25 and at the peak of the market rally last year it was 21, says Adam Hamilton on Zealllc.com 

 

Bill Gross in his December Pimco newsletter:    

  

“Stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing, and even lower corporate tax rates. That world, however, is in our past not our future.”

  

And in the last 3 months the yen has risen 27% against the Euro.  Currencies are moving a lot like the airlines raising or lowering ticket price.  Who can figure out the psychology in the fiat system?  But 2009 will be the year where big money will be made in currency fluctuations based on the fundamentals.  I am uncomfortable with the

$8.5 trillion stack of chips on the table put there by the United States government.  

Disbelief

 

 

Belief was always personal.  A possession like your own body.  Only it was in your mind.  Or maybe deeper.  I owed a lot of my belief to nuns.  There were a lot of people throughout time who were born without a belief in God.  Actually every one of us.  Certainly for the majority, belief had to be either discovered, as Abraham discovered it, or it had to be taught.  In my case it was taught.  At home.  In parochial schools.  At a Jesuit university.  And my own curiosity then pursued it.   

 

Belief is an interesting thing.  The measurement of belief, how much you had, really was a lot like family medical history.  It was based upon genes yet, seemingly, it was not in the chromosomes.  But I had owed it to someone.  But belief was formed by the degree of time I went in search of my own curiosity, a lot like those nuns had. 

 

Concerning self-made men, women, and half-ass ideas in times of crisis, the degree of belief which always was personal could be determined by the amount of tine spent in pursuit of that curiosity. 

 

If you had no belief ever, it wasn’t your fault.  Whose fault is it that in India more than half the women are illiterate?  It was the times they were born into.  And education took time and money.  Primogenitor was always “let’s concentrate on the eldest boy, in a male dominated world.  In the Philippines, which seems to me a matriarchal society, the eldest was educated and expected to start supporting the next youngest so that they might be educated.  A perversion of that idea was to see so many young girls who are unable to afford college who are expected to sell themselves at any cost to support family, in a world with no safety net.  That was what one westerner saw there.  A small sector of the population. 

 

Primogenitor was always “let’s concentrate on the eldest boy.  That system was replaced these days by government.  Government had created a system of education.  That system grew into elitism without much of any belief.  Too many of the best and the brightest went for post degrees, some to professional school, who then made riches.  Too many who supported lobbyists to promote their own power in a “tax system?”  Too many who allowed a massive shadow banking system with unregulated investment banks, hedge funds and brokerage firms, with no restraints.  Too many Democrats and Republicans.  It was not the traditional system of trading on Wall Street that had caused this revolution but the new traders themselves.  Henry Paulson had come out of this culture.     

I would suggest that public education with its recent emphasis on moral relativism was part of the cause of what had destroyed capitalism.  Graduates who seemed self-made and did not care about the plight of the uneducated, angry that their incomes were over-taxed.  At least with primogenitor, with family, someone cared.  With primogenitor, there was authority at home.  We had lost, with moral relativism, a belief in absolute authority.  That authority was not male or female but God. 

 

Over twelve months, reflecting on what I have written about, symbolic in steroid use in sports, credit swaps on Wall Street, the system looked to be on the edge of destruction, which would one day involve this form of government.  There has been a revolution in capitalism.  Yet Wall Street continues to trade as if there was no new world order.

Ad Hoc: Latin for when there is no plan

“Fascism should rightly be called corporatism, as it is the merger of state and corporate power.” – Benito Mussolini

Who would have thought that era of Mussolini in Italy would end up feeling so palpable in the United States as 2008 drew to a close? Since George Washington was inaugurated though the times of William Jennings Bryant, whether the United States had a National Bank was like the abortion issue of today day, argued in every national election. The Fed seems to me to be that National Bank. Over the last 12 months news about the Fed and the Treasury Department has been front and center on page one. From the New York Times this week:

“It is clear that regulators still lack a comprehensive plan to address problems in our financial markets,” Senator Richard Shelby of Alabama, the ranking Republican on the Senate Banking Committee, said through his spokesman Jonathan Graffeo. “It is unclear whether they have carefully considered the implications of their continued ad-hoc approach.”

Eric Hovde wrote in the Washington Post: “Looking for someone to blame for the shambles in U.S. financial markets? As someone who owns both an investment bank and commercial banks, and also runs a hedge fund, I have sat front and center and watched as this mess unfolded. And in my view, there’s no need to look beyond Wall Street — and the halls of power in Washington. The former has created the nightmare by chasing obscene profits, and the latter have allowed it to spread by not practicing the oversight that is the federal government’s responsibility. Without Wall Street, the housing bubble would have ended shortly after the Fed started to raise interest rates in 2004, because no lenders would have originated these toxic mortgages if they had to keep the loans on their own balance sheets.”

From the New York Times: “The Fed’s balance sheet expanded $1.3 trillion in the past year as the Fed auctioned $415 billion of cash to banks and purchased $272 billion of commercial paper.

 

“’The model is that there is no model,’ said V. Gerald Comizio, senior partner in the banking practice at the Paul, Hastings, Janofsky & Walker law firm in Washington. ‘It is an improvisation battle plan.’”

“Fed officials have pushed to keep the risks involved in future bailouts at the Treasury, which would be forced to negotiate with Congress about the use of taxpayer funds. Now, the Fed is stepping outside the liquidity boundary once again. The central bank took a step toward risk sharing earlier this month when it opened two new facilities with up to $52.5 billion in loans to help American International Group wind down its portfolio.”  

“‘The Treasury and the Fed are doing what they can do to hold the pieces together, and it hasn’t been easy,’ said Martin Regalia, chief economist at the U.S. Chamber of Commerce, which lobbies on behalf of 3 million businesses. ‘If we don’t keep the financial system going that is going to impose costs on the American public that will be real and palpable.’”

“’Many investment professionals operating in my world believe, as do I, that we are facing the greatest financial crisis since 1929…We have a 35-year-old technology investment banker running the TARP that has no background in financials or in real estate or was around during the last banking crisis. Then they switch and change to what should have been done and that’s injecting capital into the banks,” Hovde said. “However, they’ve even messed that up.’”
From the New York Times: “U.S. authorities acted after Citibank, the second-biggest U.S. bank by assets touched $3.05, the lowest level since 1992, threatening confidence among its depositors and counterparties. Citigroup had already received a $25 billion infusion under Paulson’s $250 billion capital-injection program.”

“Other banks ‘are going to show up’ and ask for the Citigroup deal, predicted Joseph Mason, a professor at Louisiana State University in Baton Rouge who previously worked at the Treasury Department’s Office of the Comptroller of the Currency.”

 

As noted on the blog of Fred Norris of the N Y Times: Bob Prince of Bridgewater Associates, on downward spirals:

“The pressure on corporate margins is now passing through to employment cuts. Employment cuts will reduce incomes which will raise defaults. Rising defaults will hinder bank capital adequacy, which will constrain credit growth, which will slow spending, which will hurt profit margins, then employment. This chain of events was virtually sealed when demand dropped off the table in October, although it was highly probable earlier this year when credit conditions deteriorated rapidly. We are now in the middle of it and there really isn’t much that anyone can do besides hang on.”

 

For the time being, Americans are in denial. Listening to GM ask for help came my own realization that all cars were luxuries. What happened when you were in a luxury position? When your employer was involved in products that were luxuries. We are going all going to learn that the only necessities are food, clothing and shelter. In Minnesota there was discussion by the retired Minnesota House of Representative leader, Dee Long, about a sales tax for the first time on clothes here.

It is difficult to see how the political parties are going to line up on issues of bailouts. The quote above from the U.S. Chamber of Commerce, traditionally a Republican Party supporter, seems to favor of bailouts. Nancy Pelosi and Barney Frank are supporters of bailouts, as Democrats. A sales tax on clothes does not seem to be a populist position.

 

The “merger of state and corporate power” sounds an awful lot like what is coming from Republican and Democrats. There has been a silent revolution that occurred in America, perhaps because of a government formed by lobbyists and what it takes in the way of capital to acquire a seat in Congress. One of those seats cost a lot more now than one on the Chicago Mercantil Exchange.

 

Bill White said, “But in the end, if the fundamental position is that there is too much credit in the system, something has to give.”

On Lame Duck Ideas on Bridge Loans

 

Deflation was here, no matter what Henry Paulson has done.  When you lose half the value of the equity market in 12 months, people were not going to have the resources to spend on things.  The lost value, the downward spiral, was here.  It was why GM and Ford were looking for money, “bridge loans.”  It was why the prices of gasoline has dropped by sixty percent.  Gasoline had to be the best every day barometer of deflation.  Home values had to drop.  Gross domestic product growth actually went negative in the third quarter.  People were not going to spend like they had over the last 20 years.  If 70% of the economy was based on consumers spending, well those sectors were in trouble.  I see the deflationary trend to occur slowly and continue for more than the next 12 months.  And those money managers on Wall Street who had cash seemed to want to buy stocks.  Some people on Wall Street see this as only a market correction.  

 

Bill Gross defined equity valuation in a column released this week as “that mysterious fragile flower where price is part perception, part valuation, and part hope or lack thereof.”

 

In September 2008, a news story was released that 30% of the economist did not think we were in a recession.  This week we learned that the recession officially had started in December 2007.  It did give pause to those paying economists why they were not the first people cut in employee lay-offs.  I compare these economists to those market managers who seemed to breathe the financial air of other money managers with huge egos and, as we learned with smoking, second hand breathing was hazardous to everyone’s health. 

  

A Reader’s Digest for the weekend:

Bond yields up:  Treasury prices declined, with benchmark 10-year note yields rising 16 basis points to 2.72%, near lows not seen since the 1950s.

 

December 5, 2008…..NEW YORK (Reuters) – Mohamed El-Erian, the chief executive of bond giant Pacific Investment Management Co., or Pimco, said the 533,000 drop in U.S. non-farm payrolls in November points to a contraction of gross domestic product of 4 or 5 percent in the fourth quarter.  “A very sharp drop in the GDP growth rate to negative 4 or 5 percent for this quarter is now definitely in the cards,” El-Erian told Reuters on Friday. El-Erian helps oversee $830 billion in assets at Pimco.

Bill Gross, noted bond guru at Pacific Investment Management Co., said because of Federal Reserve steps to inject massive liquidity into the banking system and bolster parts of the fixed income markets, Treasury yields will be much lower than previously expected for the next several years. Gross said on Tuesday when viewed in relation to the direction the market is heading, with more regulation, lower leverage and higher taxes on the way, stocks aren’t cheap yet.  “Recognize that roughly 20% of bank capital is now owned by the U.S. government and that a near proportionate share of profits will flow in that direction as well. Better to own corporate bonds than corporate stocks, but that’s a story for another Investment Outlook.”  His stock market outlook is this: “Stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing, and even lower corporate tax rates. That world, however, is in our past not our future.”

From Larry Elliot, economics editor, in The Guardian

“Forget all talk of soft landings. Banish from your mind the comforting thought that the credit crunch may be just a bad dream. Today’s shocking jobs data from the United States should remove the last shred of complacency from those still in denial about the potential of the current crisis to turn into the most serious economic shock to the global economy since the 1930s.  Make no mistake, the fact that the world’s biggest economy shed 533,000 jobs last month smacks of a slump.”

Dec 05, 2008

 

PRNewswire-USNewswire via COMTEX/

 

The Mortgage Bankers Association (MBA) said today that at least one out of every 10 homeowners is behind on their mortgage or already facing foreclosure, a fact that underscores what we already know is the gloomiest housing picture in the United States in decades, possibly ever. The MBA’s newest numbers for the three months ending September 30 also underscore what we and others, including many economists with expertise in housing issues, have been saying for over a year: Avoiding foreclosures that don’t need to happen is our country’s best hope for economic recovery.  The reason Treasury Secretary Paulson has had to announce a new plan to prop up the economy every few weeks for over a year is that none of the plans launched so far — however well-intentioned and necessary — has addressed the runaway foreclosures that are at the root cause of today’s crisis, driving losses at financial institutions and driving down property values nationwide.

 

 

MarketWatch  Last update: Dec. 5, 2008

 

“Through its 16,000 retail brokers known in the industry as the “thundering herd,” Merrill was a retail brokerage first, peddling stocks and bonds to everyday Americans seeking to put something away for retirement or for the kids’ college education.  Friday, Merrill essentially took a final step toward disappearing as an independent firm as shareholders of both Bank of America Corp. and Mother Merrill voted in favor of what was once a $30.3 billion bid when it was announced in September, but had ebbed to just $19.7 as the stock of both companies had sunk.”

 

It seems appropriate as their ID is absorbed, the bull market is over.  Government seems to be positioning itself to print money, like in the Weimar Republic, to address debt forgiveness.

 

I spent 30 minutes tonight listening to the request for $34 billion in “bridge loans” to the 3 American auto makers.  And I wondered even if they got their bailout, who possibly is gonna buy your cars?  Having heard some testimony for these CEOs in the second appearance in front of Congress, these 3 dorks led their companies to their disastrous point.  Do these people follow markets?  Did they not see a bubble?  Did they not have economists who saw the day the bubble would burst with an affect on their business?  Every CEO asking for a bailout has been paid way beyond common sense, unrestrained by boards of directors, and now they expected taxpayers to rescue them. 

The way markets work is that companies go bankrupt.  Old ways no longer always work.  The market would be as cruel to the manufacturers of BMWs and Hondas.   Bailouts were a form of illusion, to continue what will not work.   Bailouts and bridge loans were for putting good money into bad.  Why did the government not just buy GM stock and take over the business?  That would be true nationalization.  And we would not have anyone making incomes and stock options worth $5 million to $15 million a year.  Means could be found to put an end to United Auto Workers’ wage of $60 an hour or more so American cars could compete in ten years in foreign lands.  And government could stand behind guarentees to retired United Auto Workers who had earned their health care benefits over a lifetime.  Government as the owner could actually maintain pension benefits. 

 

The CEO from GM was discussing about how “we use our global capabilities.”  I half expect any bridge loans to finance the building of new plants overseas where labor rates can be cut in half.  The revolution in the world of auto sales has arrived.  The compensation paid to the United Auto Workers is as much part of the problem.  Here 2 sides of the aisle have come together, equity holders and blue collar workers, to keep what they always have had.  It was like watching a loved one with cancer.   And too many people were living in denial as to what all this meant.  I was left wondering about the motives of CEOs who always paid themselves well, whose concerns were shareholders and not the government that they had come to asking for help. 

 

Instead of a “bridge loan,” I would insist these CEOs be required to read On Death and Dying by Katherine Kubler Ross, on their ride home.  But they were probably getting prepared  to announce job cuts next week, like the  CEO at Citibank last month, instead of shared paycuts. 

Waiting Room

 

Newspapers on the brink.  Devalued currency.  Writing.  Ever since the introduction of the internet, writing and the value of the local newspaper was devalued.  It was worth so little, it was given away free.  Never before have opinions been worth less.  There was an anger in the writer, the columnist, who depended upon the survival of the paper for his survival. How could this be happening?  Would his self worth follow his net worth, downward?  The written word had become devalued. 

In a world of distractions, of ideas, there have never been more.  And never have fewer books been bought.  There was a downward cycle coming to Barnes and Nobles, in the 120,000 books published each year.  The newspapers business was compared to that of selling telephone booths in an age of the cell phone.  Even Superman was struggling to jump into the action.

Ironically, the world of ideas was challenged by the changing business model that threatened real freedom.  Never before has it been easy to pull a plug, to censor ideas.  The written word had always been sacred.  The radio and television airways were regulated bu government that granted licenses, showing favoritism to the recipient.

Where was God in all of this?   In this change?  In a world with a diminishing number of Catholic priests.  In a Protestant world of diminishing numbers of denominations supported by fewer and fewer.  Where was God in the world of devalued currency, of downward markets?   

He was, as always, just waiting.  Perhaps for more attention soon.  It was the Advent season.    

Star Tribune To Go After $30 Million in Cuts

 

The  Minneapolis Star Tribune announced today the immediate need for $30 million in cuts, in a newspaper that has made a number of reductions throughout the year.  Its survival was on the line.  

In the information age, there are a lot of insensitive people who leave their insensitive postings behind.  The age of the internet has revealed a lot of stupidity all around us.  The death of a newspaper, its role in a democracy, its role in a community, is incomprehensible.  If you were not following the story, the Tribune credit rating, the newspaper that serves Chicago and Los Angelos, is about as low as it can go.  This is not a local phenomenon.  It is time to change the business model of this newspaper.  Now.  A business model similar to Minnesota Public Radio with voluntary sustaining memberships, corporate sponsors, should be in the works.   On August 12, 2008, Nordic Capital and Avista Capital Partners paid $4.1 billion for ConvaTec, a company that specializes in advanced wound care management and ostomy (artificial skin opening) barriers.  It is time to put this wound care company to work with a new business model on the Star Tribune.  It is not too late.  These announced cuts are another short sighted solution to ongoing management of a media throughout the country in need of help.  Hopefully the people at Avista, with ConvaTec are, are more now thoughtful than those who read the news for free, those who bite the hands that feed us the news.  For free.  You actually need writers, sales people, staff to put out a product.  Too many good people have already been let go.