FEELING ILL LIQUID

 

Illiquid.  Over swerved.  Henry Paulson.  Who to save?  How many?  How many before that circular device that people jumped into as firemen held onto wore out?  Before the firemen wore out?  I was beginning to feel ill liquid. 

  

“I believe we have taken the necessary steps to prevent a broad systemic event. Both at home and around the world, we have already seen signs of improvement,” Paulson said in a speech at the Treasury Department.  Huh?

 

Nasdaq composite index closed below 1,500 for the first time in five years.  Oil closed at $56.16 a barrel.  If you have not noticed it, the price of gold fell to $712.30.  And since the economy is more perilous than it was in 1996, the Dow would be below 6500 before January 15, 2009.  These closing numbers will look unbelievably great at this time in April.  All the earmarks of deflation are setting in.  The New York Times quoted Mark Zandi, chief economist at Moody’s Economy.com. “Wall Street is increasingly taking its cues from D.C.  Policy makers are deciding who survives and who doesn’t.” 

 

And the system was never supposed to operate this way.  I have heard of inverted yield curves.  This seemed more like inverted sliders and knuckleballs.

 

From Floyd Norris:  “Five of every 10 risky borrowers have their debt trading as if default were likely. That could indicate panic, dysfunctional markets or impending disaster. Or it could reflect a combination of all three.   The S&P financial index has lost nearly a quarter of its value since Election Day, with every share in the index falling.”

 

 Goldman Sachs Group Inc. is down to $66.70 per share from its $240 high over the previous 12 months.  The firm may have suffered even more damage, based on an article in the LA Times. “Goldman, Sachs & Co. urged some of its big clients to place investment bets against California bonds this year despite having collected millions of dollars in fees to help the state sell some of those same bonds.”   

 

 According to Elizabether Moyer in Forbes, “Fighting the financial crisis has put the U.S. on the hook for some $5 trillion a report says. So far.  For all the fury over Treasury Secretary Henry Paulson’s $700 billion emergency economic relief fund, it seems downright puny when compared to the running total of the government’s response to the credit crisis.  According to CreditSights, a research firm in New York and London, the U.S. government has put itself on the hook for some $5 trillion, so far, in an attempt to arrest a collapse of the financial system.” 

  

As goes GM, so goes the nation.  Or does not go.  In virtually every U.S. industry, companies are openly asking the government to lend them money. 

  

Torii Hunter was a distraction in Minnesota in 2007.  He had gotten bigger than the game.  It can happen with media focus.  The same thing was going to happen in Denver this year.  That was why Matt Holiday was traded today to Oakland.  “He was going to be a distraction,” Dan O’Dowd said. ”And that’s nothing against Mattie. He’s earned the right to be a free agent after next season.  He’s earned the right to pick where he plays after next season.”  And a team also has a right to say enough of this nonsense.   Holiday turned down a contract offer in excess of $100 million.  He must not buy the newspaper. 

 

 And a lot of guys on Wall Street got bigger than the game.  Enough of this nonsense.  The Wall Street bailout put into perspective the past spending on new football stadiums whether for major league baseball teams, NFL teams, or Big Ten teams.  They were all playing for the money.  These big times players on Wall Street, in YAnkee Stadium.  Bailouts for Wall Street or bailouts in good times for athletes who thought they deserved these salaries.  Was it a wonder that present day politicians were paying for all of this, after politics had paid to build these stadiums? 

 

Matt Holiday.  Torii Hunter.  They were distractions.  It will be interesting to see what happens to Citibank’s $400 million commitment to the new Mets’ stadium for naming rights, as the valuation of their company has plummetted, as 52,000 employees get laid off, with billion of dollars of losses.  There was a need for a correction when the whole world had tilted and the world had over swerved. 

The Fix Was On

Money & Sex.  Making it too easy.  Making it too available.  Then the payback.  Men. Women.  Together.  Apart.  Financial engineers, social engineers trying to fix the problem.  In an election year. 

 

So what was the state of your relationships with bankers.   Had you taken or given too much? 

 

Abortion:  whose fault was it?  Public policy?  The guy?  The girl?  Or me?  What was my role?  Was it all a crisis in valuations?  Was it all about how much I was valued?  How much I was needed?  How much I had taken, irresponsibly?  How much I needed someone?  Who would survive?  Government could fix all this?  Seatbelt laws.  Speed limits.  Bailouts.  And we all really had a vote? 

 

 We all knew deep inside there would be a payback for all of this one day. 

 

Should government decide who survives all this? 

 

The Hartford.  A financial company.  When people start redeeming cash, the company was gone.  Who was contaminated?   How many others?  Who could you trust?  The market reaction was all based upon trust. 

          

Showing real love for someone, to somebody, was another story. Real love.  Real love was not just a short ride.  As I overheard a woman say two days ago, people do not change their religious or political affiliations quickly.  Or to get divorced.  It took a lifetime to acquire these beliefs.  It took time to make a decision. 

 

Roe versus Wade.  The War of the Roses.  Rescue and rescue plans. 

Wanting some more.  Money.  Sex.  Hunger. 

 

Money.  Sex.  Law without order.  Order without law.  Hunger.  Oversight.  Enforcement.  Public policy.  A deeper pocket.  

 

Law.  Order.  Should government decide who survives all this?  In the Last Judgment, government can fix all of this? 

 

Plan.  Listen to constituents.  Act quickly.  Vote.  The House of Representatives is expected to vote Friday.  

 

 

Those Dog & Pony Shows

Valuations.  Can there be any doubt that in America, we have been living with false valuations?  

 

Journalism was never supposed to be about dog and pony shows.  Television had helped hijack truth that a daily newspaper was supposed to be after.  At the time a president actually had press conferences, the event was televised.  There once had been an age when the truth was highly valued.   

 

What have we passed on the generation that was born in the 1980s?  They actually were raised to believe that homes were worth what they sold for.  And in the era that they grew up, they never batted an eye at Dow 10,000. 

   

I remember coming home from a fishing trip on August 13, 1981.  I had been away from civilization for the week.  And when I heard the Dow closed at 798, I could not wait to make my first mutual fund purchase the following Monday. 

       

I was fortunate for the times I was born into.  I had grown up with parents of the Depression.  Although I never heard a great deal of stories, a lifestyle was reflected in day to day living.  I never expected my parents to give me a car to drive to school.  Some things can only be absorbed. 

   

At some point in time, I learned there was no such thing as magic.  I appeciate that most of us live in an age of illuison, promoted by the media.  It was why people bought People magazine.  It was the era of the dog & pony show, climaxed every four years. 

 

I spend a lot of time following the business news.  It is funny the words that are used –valuations, redemptions, rescue.  Rescue was synonymous with salvation.  Most of us spent time on the unimportant.  These times are teaching us what to really value.   

                             

These Septembers of this presidential administration are bookends that can never be forgot.  Times of grave concern, not yet panic, are teaching moments, about true values.  I am learning a lot about myself. 

 

Paul Krugman is a professor of Economics and International Affairs at Princeton University and has written for the joined The New York Times since 1999 as a columnist.  In August 2005, he wrote:  “This is the way the bubble ends: not with a pop, but with a hiss.  Housing prices move much more slowly than stock prices. There are no Black Mondays, when prices fall 23 percent in a day. In fact, prices often keep rising for a while even after a housing boom goes bust.”

 

That column closed with, “Now we’re starting to hear a hissing sound, as the air begins to leak out of the bubble. And everyone – not just those who own Zoned Zone real estate – should be worried.” 

 

http://www.nytimes.com/2005/08/08/opinion/08krugman.html

 

He also offered a well reasoned opinion piece on September 24, 2008 as to why to vote against the Paulson Plan. 

 

History had come alive much more vividely with this crisis.  The years of 1905 and 1916 in Russia.  Fear and trembling did that.  Emotions are being stirred and opinions are becoming more passionate.   

 

What have we passed onto the generation that was born in the 1980s?  The kids who were born in the suburbs, after America had become an urban society in the 20^th Century.  These suburban people seemed scared, as fearful as city people, as did the people on both sides of the aisle.  There was fear now and division.  The fear was real.  What whites had of blacks following the riots of the 1960s.  What blacks had of whites in the days of slavery.  There had always been fear. 

There was fear, but why was there anger?  Was anger directed at the government over wealth and disbursement of wealth?  People felt believed that self-worth was based on dollars?  Public policy was based upon dollars or people?  The anger was reflected in how representatives got along in state legislatures and the federal legislative bodies.  Or did not get along.  These states were not real united.

 

The younger generation actually had come to believe that homes were worth what they sold for.  And once poor people also bought into the idea, using sub-prime mortgages, those financing vehicles that allowed at its end only payment of interest, not principal.  And in the era that they grew up, the young, the new capitalists, never batted an eye at Dow 10,000.

 

How could valuations be false?  I had always been taught you could not believe everything you read in the paper.  I am not sure that caveat is ever made about television and all the commercials that are aired.  And it seems that politicians are elected only by commercials these days, not on either ideas or ideals.  

The lack of ideas seem to have shown up in the Paulson Plan.  The House seemed to see its transparency.  Our houses are not worth what we think.  And nothing was going to prop up thses values.  Not any new dog and pony show by any politician in the House or The Senate. 

The Financial Sector is not worth what CNBC thinks.  And like Rin Tin Tin, the movie star who paid a publicist, it was time to realize that he was not as great as the publicists had been telling everyone.     

ABOUT THOSE CASH MACHINES

 The revolution is here in the financial markets.  There was never a new paradigm.  In a crisis of debt the best action is to pay off debt completely.  That is how you win back a credit rating.  Those are the cardinal rules.  And the cardinal rule of savings might be the real solution.  You can no longer create wealth in this environment with leveraged borrowing.  Big money realizes that in a deflation, you need cash to keep going, to keep your business in operation.  In the new era of deflation accompanied by low interest rates, you want cash.  Hence the coming sell-off in stocks, to raise cash to support an income stream over time.

Alan Sloan wrote a piece in Fortune about market sentiment, without stating the obvious, that the fundamentals are unchanged.  The problem is debt.  You need cash.  You want cash. 

It was ten years ago in August that the Russian government ended up defaulting on $40 billion dollars in obligations. There was a “Minsky moment” with the Russian financial crisis at the time  when debt-heavy investors all rush to market with their assets at the same time, triggering de-valuation and ultimately a liquidity crisis.  

Hyman P. Minsky was an economics professor at Washington University.  Minsky believed there was an “inherent instability” in unchecked capitalism ay its core, which in turn led to “recurrent bubbles or stampedes or over-exuberance.”  He believed that finance was the bloodstream of the economy, and any poison entering it soon would pollute the whole system.  Instability was not an aberration in finance.  “He pretty much just harped on the fragility of the financial system and the economy.  It was the greatest curse because here was this guy harping on this thing nobody believed.  I had to labor under his tutelage, and I wasn’t sure I believed it either,” University of St. Thomas economics professor Mel Gray told a MinnPost reporter.  

The Minsky’s model of the credit cycle has five stages: displacement, boom, euphoria, profit taking, and panic.  George Magnus, senior economic adviser to UBS AG in London, is credited with coining the term the “Minsky moment,” describing the point at which credit supply starts to dry up even to sound borrowers and the central bank is obliged to intervene.  In August 2007, Magnus said, that moment arrived.  While equity markets have stabilized temporarily in anticipation of a Fed loosening, credit markets “remain deeply troubled,” he said.   

“It is apparent to me that Washington’s attempt to bail out banks and brokers will do nothing but add to consumer debt, weaken the US dollar, and literally waste $700+ billion dollars which could have gone to more productive uses. Since the markets blew up in the summer of 2007, Paulson and Bernanke have tried one thing after another to stimulate lending and restore confidence but nothing has worked for more than a brief period.  For the past 14 months Paulson and Bernanke have thrown hundreds of billions of dollars of fed assets into the market, yet lenders still won’t lend.”                                                            – Alan Sloan in a piece in Fortune this week

 

The revolution is here.  The panic phrase.  Some $1.2 trillion in home equity was borrowed against from 2002 to 2007, says the public- policy group Demos in New York.   Those days are over.  The downward pressure is in place on housing.   Deflation was coming to a theater near you.  And not just in real estate. 

Market sentiment might be temporarily sustained but the fundamentals are unchanged.  The problem is debt. 

According to Richard Russell, “From what I see, the markets are telling us to prepare for hard times and a global spate of the worst deflation to be seen in generations. This is why gold has been sinking, this is why stocks have been falling – big money, sophisticated money, is cashing out, raising cash, preparing for world deflation.”

The fear is what has been presented as a credit problem, one on liquidity, essentially turns into one of solvency, solvency among homeowners, builders, mortgage providers and financial institutions.  My fear with infusion of money is the day if eventually arrives when the government that prints money stays solvent.  Germany in the 1920s. 

So why, with the “bailout,” a concentration on credit markets?  To build more?  If this was a revolution, why do we need more Burger Kings, more Lowes, more strip malls, and more new houses?   With the past credit binge in the last 20 years, there are too many strip malls and stores.  Why, especially in a recession?  In the new world order, it was all about paying off what you wanted to keep.  Expansions were followed by contractions. 

In a deflationary environment, people have an incentive to put off spending.  The profit motive is dimished, and the economy weakens.  Government has few tools to stop deflation. 

 (Posted on August 23, 2007 by Gwen Robinson)

The immediate focus is on short-term funding, financing flows and counterparty risk. This week, three-month US Treasury bills touched 2.99 per cent, compared with a yield of 5 per cent a month ago. Investors are avoiding securities collateralised against or invested in mortgages. This ‘Minsky moment’ is not yet over – interest rates in the US and perhaps elsewhere will come down sooner or later. The path ahead is littered with losses, lawsuits, and greater regulation.

But what about the economic consequences?, asks George Magnus.

In Magnus’s view, two main propositions define the outlook: “First, the flight from debt in this downswing may be as potent as the rush towards it on the upswing”. It is most likely, he warns, that the reduced availability of cheap credit is going to lead to a sharp reverse in US spending on goods and services and assets.

Second, “current credit cycle concerns are about solvency, not liquidity per se, as was the case in 1998, after which the world economy recovered quite promptly”. This time, the problem is about solvency among homeowners, builders, mortgage providers and financial institutions, he notes.

Added to these worries is an increase in the cost of capital, a cyclical switch from building up debt to rebuilding savings and probable declines in consumer and business confidence. It is hardly surprising , then, that Magnus’s conclusion is that all this suggests “the business cycle is going to get quite rough.”  (end of Gwen Robinson’s post from August 23rd, 2007)

That Minsky Moment has lingered on and on, since Ms. Robinson’s post. 

It was two weeks ago yesterday that Hank Paulson and Ben Benacke had convened a meeting on Wall Street at the close of the business weeks.  UBS economist Larry Hatheway pithily observed about that meeting in a note to clients yesterday: “Put differently, if a (quasi) private sector solution was in the offing this past weekend, then Secretary Paulson and New York Fed President Tim Geithner invited the wrong financiers on Saturday-Sunday.”  He invited the top executives from Lehman Brothers, Goldman Sachs, J P Morgan Chase, Citigroup, Morgan Stanley, and and other financial companies.  Larry Hatheway’s view was that the nature of the on-going de-leveraging, in which declining asset values, debt reduction and asset sales reinforce one another, called for additional intervention by government. Hadn’t that intervention come and failed over the last 12 months? 

 

No one knew what to do.    

 

Charles Kindleberger, the MIT professor, leaned heavily on Minsky’s work.  Kindleberger is the author of Manias, Panics, and Crashes: A History of Financial Crises.  Cash generated by their assets no longer is sufficient to pay off the mountains of debt they took on to acquire them, prompt lenders to call in their loans. “This is likely to lead to a collapse of asset values,” Mr. Minsky wrote.  Forced to sell even their less-speculative positions to make good on their loans, markets spiral lower and create a severe demand for cash.  It was all about cash

 

 

 

.