Obama’s Folly?

Monday, December 29, 2008

Bush’s folly was/is Iraq. Will Obama’s be the stimulus?

Peter Schiff in the Wall Street Journal:

It would be irresponsible in the extreme for an individual to forestall a personal recession by taking out newer, bigger loans when the old loans can’t be repaid. However, this is precisely what we are planning on a national level.

The hope, with all of this printed money, is that it will stimulate the economy to grow again and that, once the growth begins, the Fed can start taking dollars out of circulation without undoing what it just did. It’s a very, very delicate act they’re trying to pull off and Schiff is arguing that, ultimately, it can’t be done. At some point, the piper will have to be paid.

I don’t disagree, but I do think we have to forestall a massive depression. Recession, yes. Long and hard, yes. But let’s not have 25% unemployment ever again. Let’s have plenty of pain. Just soften the blows a little.

On an even gloomier note, Marc Faber says short treasuries and buy gold. Hyper-inflation is coming and it’s going to be brutal.

This I believe. I don’t know the timing, but we are going to have massive inflation at some point likely coupled with a lagging economy (stagflation).

The only solution after we run through this cycle? Some day, and not far off, America is going to go bankrupt. We are all going to lose our shirts and suffer the harsh austerity measures of a vengeful globe’s bailout (or conquering).

America, we need to take our medicine now. It’s time to cut spending everywhere. By all means, Obama, borrow and spend, but phase in cutting, too. I can see $100 billion from defense right off the top.

This simply can’t go on forever.


Free Money, Baby: The Fed Targets 0%

Tuesday, December 16, 2008

There’s no where left go after this.

First thoughts: Japan, Inflation… and holy shit.

Even if this (the Fed and Treasury plan) works and keeps us out of a severe depression, which is the goal and, likely, the result, we are going to have long, long hangover.

Where are all these dollars gonna go? And how, in the long run, are they going to maintain their value?

Just remember, ultimately, a loose monetary policy is what caused this mess in the first place.


Ugh-ly

Monday, November 24, 2008

I don’t know what the market is rallying about.

I understand that they feel cheered about Citi taking the Feds to school and there is general (and justified) excitement about Obama’s economic team, but our problems remain. To wit: (emphasis added)

The inventory of existing homes for sale slipped 0.9 percent to 4.23 million from 4.27 million in September. The median national home price declined 11.3 percent from a year ago to $183,300, the lowest since March 2004 when a median price of $183,200 was recorded. The percentage drop was the biggest since the NAR started keeping records in 1968

So prices are now at 2004 levels and still have more to go (especially in New York City).

Also, Bloomberg points out that the real cost of the bailout is $7.4 trillion so far, of which the Fed is responsible for $4.4 trillion.

I’m too busy right now to write more about this, so read the article yourself.


Merry Christmas to Citi

Monday, November 24, 2008

It had to happen, and so it has.

The Treasury department in coordination with the FDIC and the Fed has bailed out Citigroup. Here is a summary of the deal terms.

The bottom line is that this is a very good deal for Citigroup. They get $20 billion and a 90% guarantee (from you) on all of their junk assets (after the first $29 billion in losses) and in return they merely have to issue a little preferred stock to the U.S. Government. Citi should no longer have liquidity problems as they will likely be able to raise cash against the government’s guarantee (after all, if there’s no downside risk, why not?) Two other key sections:

USG will provide institution with a template to manage guaranteed assets. This template will include the use of mortgage modification procedures adopted by the FDIC, unless otherwise agreed.

Compensation: An executive compensation plan, including bonuses, that rewards longterm
performance and profitability, with appropriate limitations, must be submitted to, and approved by, the USG.

The mortgage modification aspect is important and the FDIC is involved (they have a smart, workable plan). Although I am opposed to all of these bailouts in principle (in practice, something must be done), it is essential that we provide relief to homeowners as well. They are the root of the problem, and though they are as guilty as anyone, fairness and financial common sense dictates that we help them too.

As for compensation, the Feds should insist on a UBS model of pay for performance. That is, payment spread over three years with modifications based on continued performance. They should also set ceilings on reward.

There is one other problem with this bailout. From the Wall Street Journal:

The agreement marks a new phase in government efforts to stabilize U.S. banks and securities firms. After injecting nearly $300 billion of capital into financial institutions, federal officials now appear to be willing to help shoulder bad assets, on a targeted basis, from specific institutions…

…Government officials could face requests from other banks for similar help shoring up their balance sheets. Banks, hedge funds, and private equity firms have urged Capitol Hill and government officials to restart the asset-purchase program in recent weeks.

“The problem is that other banks would want to get in line” for such government support, says Thomas B. Michaud, a vice chairman of investment bank Keefe, Bruyette & Woods Inc. “Is there enough money to do that?”

This is the problem, isn’t it? We simply can’t afford to take all of the junk assets off the books of financial institutions. And yet, ultimately, I’m afraid, that’s exactly where this is headed. Who’s next in line for some taxpayer largess?

I now see an outline of how this will end. The Government will pick and choose who to bailout and guarantee their junk. Working with these institutions, they will aggressively prune irredeemable loans and modify the rest. Taxpayers will take the loss. And on the guarantee the institutions will raise the cash they need to begin soaring again.

Uncle Sucker (you and me) will take it on the chin while a lot of bankers and irresponsible borrowers get away with it. Sure, there will be a few prosecutions, but for the most part, we’re just going to have to like it.

And, by the way, it’s still going suck out there.

Merry Christmas to Citigroup.


Market Closes at 8046.42

Friday, November 21, 2008

All hail Geithner!

Seriously, though, this was well-timed relief.

I don’t like being below 8000. It’s a complete arbitrary number, but it feels really wrong to go below it. When we’re there, I fear that there is nothing stopping us from Dow 3000.

Let’s just tread water for a while at around 8000 (Citi, what say you?). We’ll call a market bottom at 7,200 at some point in the future and never go below that number again.


Euro Nations Agree to Guarantee Bank Debt

Sunday, October 12, 2008

Too tired to write about this but here are the basics:

The key measures announced were: a pledge to guarantee until the end of 2009 bank debt issues with maturities up to five years; permission for governments to buy bank stakes; and a commitment to recapitalize what the statement called “systemically” critical banks in distress.

Good move. Futures up everywhere. U.S. must follow suit.

This isn’t going to solve everything but it will help get money flowing again and that is absolutely essential.

Mr. Paulson, it’s your move.


Morgan Stanley, Goldman to be Nationalized?

Saturday, October 11, 2008

There are so many bad things happening that it is hard to keep track. Here are two of the worst:

1) Lehman’s debt sold at auction on Friday for below 9 cents on the dollar; meaning the owners of the CDS contracts that insure these securities will have to pay more that 91 cents on the dollar to fulfill their obligations. There is speculation that the figure to do so might run as high as $400 billion. Somebody owes a lot of money that they probably don’t have. (This defines the credit crunch in a nutshell.)

2) In a related story, Morgan Stanley and Goldman Sachs both appear to be on the ropes. From CNBC:

“I don’t wish to spread alarm on the line people but the big issue confronting the market is I’m afraid the health and sustainability of Morgan Stanley and Goldman Sachs” Hugh Hendry, Partner and CIO at Eclectica, told CNBC early Friday. “It is unimaginable that they can be allowed to go, I suspect that they will be nationalized at some point today or over the weekend,” he add.

Not much else to say, is there?