Thursday, September 3, 2009

Smelly P/E

S&P is the White line. Values for various P/E levels are within the Key in the upper left of the chart.

Monday, August 31, 2009

The Government Can

by Tim Hawkins. Enjoy.

Tuesday, August 25, 2009

Monday, August 3, 2009

Refresh Your Memory: Obama on Healtcare

I encourage you to read 'Health Care Mythology' on

Wednesday, July 29, 2009

More Optimism from Bloomberg

Dow Sends Buy Signal That’s Worked Since 1921: Chart of the Day . New reasons to keep driving this irrational rally keep sprouting. Excerpt:

"The Dow Jones Industrial Average is sending a buy signal that has foreshadowed
gains of 18 percent during the past nine decades. "

Here's the Chart, which only goes back historically to 1989, and is not attached in the above article:

Legg Mason Capital: S&P 500 to 1,350 by End of 2010

Bloomberg article:

The Standard & Poor’s 500 Index may reach 1,350 points by the end of 2010 or the first half of 2011 as the U.S. economy emerges from recession, Legg Mason Capital Management Inc. forecast in a statement.

Growth won’t be soft but will see a clear acceleration, followed by a period of stability, and “massive” quantities of liquidity may feed the market rebound, Legg Mason said.

The S&P 500 has surged 11 percent since July 10 after companies including Caterpillar Inc. and 3M Co. reported earnings that beat forecasts and gains in new and existing home sales added to signs the recession is easing. The rally left the S&P 500 trading at 16.25 times its companies’ profits at the end of last week, according to data compiled by Bloomberg.

“The improvement of fundamentals, in addition to the abundance of liquidity should limit market corrections to a range of -10 to -15 percent,” wrote Robert Hagstrom, a fund manager at Legg Mason.

Economic data must show improvements for the stock market to continue gains,
and that should happen in the second half of the year, Legg Mason wrote.

I guess they're counting on the same type of liquidity that inflated housing. Perhaps they should distinguish between Nominal S&P values and Real Values. In either case, bookmark this post and revisit it in 1.5 years.

Tuesday, July 28, 2009

Dow '29-'39 vs Nasdaq '99-'09

So now, let's take Dow 1937 - 1943 and compare that to Dow 2007 - Dow 2013, granted most of the latter data points don't exist. But if we look, so far, they match almost exactly.

From 1937, actually mid 1938 Dow topped out around 190 and then fell to 106. After that it rebounded to 145 a year later and hovered around that for almost 2 years, with 1 major dip which also bounced back toward 145. Eventually, however with a couple of years, the Dow went below the previous low of 106, down to 96.

Comparing to current situation: Dow topped around 14,000 and went down to 6,600. So in late the 1930's Dow experienced from 190 to 106, a 45% drop, and currently 14,000 to 6,600, a 53% drop -- close.

Back then Dow advanced from 106 to 145 is a 37% advance.
Recently from 6600 Dow moved to 9100, also a 37% advance.

Concidence? Perhaps. If not, within a year or two we'll be once again below 6600. With all these bailouts, stimuli, unfunded liabities, higher taxes, and universal health care, 6600 isn't too far away.

Monday, July 27, 2009

A Policy of Hypocrisy

As the horrifically flawed 1,000+ page health care bill is being rushed through congress, I invite you to listen to the audio clip below. No further introduction is needed.

Saturday, July 25, 2009

India Embraces Frugal Prudence

It appears that, at least for the time being, India has thwarted the West's bold commitments to action for the sake of action and a justification of detrimental means to idealistic, and questionable, ends -- the move to prevent 'global warming'.

India has taken the hardest line in the negotiations so far. Along with China, India refused at the meeting of the Group of Eight industrialised nations this month to sign up to a target of cutting global emissions by half by 2050. The countries were holding out to gain concessions from the west on financing.

The claims from Mr Ramesh that Western science was wrong on the question of melting Himalayan glaciers appeared to reinforce Delhi’s recalcitrant stance.

Mr Ramesh on Friday reiterated that India would not accept emissions caps to held curb global warming, Bloomberg reported. “The world has nothing to fear from India’s development ... An artificial cap is not desirable and not even necessary as we haven’t been responsible for emissions in the first place,” he said.

Earlier this week, he also challenged Hillary Clinton, US secretary of state, over her appeal to India to embrace a low-carbon future and not repeat the mistakes of the developed world in seeking fast industrialization.

Yes, of course, brilliant! Who would want to industrialize quickly? We should have more people impoverished for longer periods of time. I'm sure all impoverished people in the third world would love to hear that. I wonder how many gallons of jet fuel Hillary consumed in order to tell the poor in person that they should continue living in the slums longer for the sake of the environment.

Hillary Clinton is about as useful, and intelligent, as a stress ball. All joking aside -- asking a poor and developing nation to curb its growth outright by cutting energy use, or undertaking more expensive (cleaner) energy alternatives, is like telling a person who makes minimum wage to buy an $80,000 Lexus instead of a used $2,000 Chevy because of its cleaner running engine and safety features.

As detrimental as 'green' policies like cap & trade are to developed nations, burdening countries that cannot provide clean water to most of its citizens with expensive emission caps will likely lead to significantly higher and prolonged levels of poverty amongst its citizens, as well as decreased economic growth. Maybe Clinton can visit Darfur next, and tell them how they ought to install solar panels immediately.

Tuesday, July 21, 2009

Is a Successful Exit Strategy Likely?

Below is an excerpt from Ben Bernanke's testimony on March 3, 2009. Highlighted in red are my comments, which were not part of the original speach.

Unfortunately, the spending for financial stabilization, the increases in spending and reductions in taxes associated with the fiscal package, and the losses in revenues and increases in income-support payments associated with the weak economy will widen the federal budget deficit substantially this year. Taking into account these factors, the Administration recently submitted a proposed budget that projects the federal deficit to increase to about $1.8 trillion this fiscal year and to remain around $1 trillion in 2010 and 2011. As a consequence of this elevated level of borrowing, the ratio of federal debt held by the public to nominal GDP is likely to move up from about 40 percent before the onset of the financial crisis to more than 60 percent over the next several years--its highest level since the early 1950s, in the years following the massive debt buildup during World War II.

Of course, all else equal, this is a development that all of us would have preferred to avoid. But our economy and financial markets face extraordinary challenges, and a failure by policymakers to address these challenges in a timely way would likely be more costly in the end. We are better off moving aggressively today to solve our economic problems; the alternative could be a prolonged episode of economic stagnation that would not only contribute to further deterioration in the fiscal situation, but would also imply lower output, employment, and incomes for an extended period. (They would not be more costly in the long run, the current policy will -- read on).

With such large near-term deficits, it may seem too early to be contemplating the necessary return to fiscal sustainability. To the contrary, maintaining the confidence of the financial markets requires that we begin planning now for the restoration of fiscal balance. As the economy recovers and resources become more fully employed, we will need to withdraw the temporary components of the fiscal stimulus (It will be years before our economy can be fully employed). Spending on financial stabilization also must wind down; if all goes well, the disposition of assets acquired by the Treasury in the process of stabilization will be a source of added revenue for the Treasury in the out years (Bernanke is speculating on behalf of the tax payers?). Determining the pace of fiscal normalization will entail some difficult judgments. In particular, the Congress will need to weigh the costs of running large budget deficits for a time against the possibility of a premature removal of fiscal stimulus that could blunt the recovery. We at the Federal Reserve will face similar difficult judgment calls regarding monetary policy.

As I mentioned earlier, the President has recently submitted a budget, and it proposes an ambitious agenda, including new initiatives for energy, health care, education, and tax policy. These are all complex policy issues in which the specific design of each program is as important as the budgetary amount allocated to it. The Congress will have considerable work in evaluating how to proceed in each of these areas. (Bernanke is warranting Congress to determine what will ultimately benefit economic growth. In other words, Tweedle-Dee is giving Tweedle-Dum the reigns.)

As part of that evaluation, it will be critical to consider the formidable challenges and tradeoffs needed to simultaneously achieve an economic and financial recovery, fiscal responsibility, and program reforms that accomplish their desired goals effectively and efficiently. In particular, policymakers must remain prepared to take the actions necessary in the near term to restore stability to the financial system and to put the economy on a sustainable path to recovery. But the near-term imperative of achieving economic recovery and the longer-run desire to achieve programmatic objectives should not be allowed to hinder timely consideration of the steps needed to address fiscal imbalances. Without fiscal sustainability, in the longer term we will have neither financial stability nor healthy economic growth. (Bernanke conveniently concludes that economic success, or armageddon, will reside in the lap of congress. He is, of course, partly correct. The other part of that equation would be the Fed, whose negative effects on the economy he does not acknowledge. In either case, congress has never been able to be fiscally responsible, which is why Bernanke is covering his Fed A**).

Monday, July 20, 2009

Peter Schiff for Senate

Looks like Peter Schiff is seriously considering running for the senate seat in Connecticut against current senator Chris Dodd. I encourage you to view the enclosed videos in their entirety.

Friday, July 17, 2009

From Einstein to Feinstein

Even though Einstein did not work directly in the creation of the nuclear bomb, his breakthroughs in physics made the nuclear power a possibility. As a result of having contributed to the development of atomic weapons, Einstein grew to regret his contributions in that field.

Now it seems, a scientist by a similar name, may have found a cure for deadly radiation sickness. The implications are profound and go as far as enable doctors to treat cancer patients more effectively with higher level of radiation and a higher level of safety at the same time.

The experiment's results were dramatic: 70% of the monkeys that did not receive the cure died, while the ones that survived suffered from the various maladies associated with lethal nuclear radiation. However, the group that did receive the anti-radiation shot saw almost all monkeys survive, most of them without any side-effects. The tests showed that injecting the medication between 24 hours before the exposure to 72 hours following the exposure achieves similar results.

Another test on humans, who were given the drug without being exposed to radiation, showed that the medication does not have side-effects and is safe. Prof. Gudkov's company now needs to expand the safety tests, a process expected to be completed by mid-2010 via a shortened test track approved for bio-defense drugs. Should experiments continue at the current rate, the medication is estimated to be approved for use by the FDA within a year or two.

Senator Boxer: Ad Hominem > Logic

Thursday, July 16, 2009

Goldman Sacked!

Biden More Than He Can Chew

Here are a couple of gems from Biden.

On healthcare:
“We're doing things that we know are going to save you, your children and your grand children billions of dollars over the next years. But we're not able to prove it." emphasis added
On the economy:
“Folks look, AARP knows and the people with me here today know, the president knows, and I know, that the status quo is simply not acceptable. It’s totally unacceptable. And it’s completely unsustainable. Even if we wanted to keep it the way we have it now. It can’t do it financially.We’re going to go bankrupt as a nation. Now, people when I say that look at me and say, ‘What are you talking about, Joe? You’re telling me we have to go spend money to keep from going bankrupt?’ The answer is yes, that's what I’m telling you." Audio
This reminds me of a posting I made a few months ago about a quote from Timothy Geitner:
" wary of any organization that claims to guarantee success and demands upfront fees."
Not only should you be wary, based on the above quotes, you should be scared sh*tless.

Let us hope Biden won't be giving advice on sobriety to drunks -- I can only imagine: " 'What are you talking about, Joe? You're telling me to get sober I need to drink more alcohol?' The answer is yes, that's what I'm telling you."

I encourage you to read Mish's coverage, which offers 2 more historic examples of similar tomfoolery.

Audio: Ron Paul on the Fed

Monday, July 13, 2009

Housing 'Happiness'

I came across the following video at Zero Hedge, from the creator Nick Gogerty. Great video, and the backgrownd tune is great too -- "Happiness" by De Phazz.

Thursday, July 9, 2009

Protest Outside Standard & Poor's

Below is the details of the protest, in a form of a handout given to passerby's. Transcript below.

S&P is an agency which should hold zero credibility when it comes to ratings. Having said that, protesting against S&P for what the tenants consider bad business practices may, ultimately, be somewhat of a stretch, though the reasoning toward a refinement in credit rating considerations seem legitimate.

First, I must note that as long as the the owner (Vantage) abides by the leasing agreements and any other contractual obligations it has, then I see nothing wrong with them adjusting asking prices or changing terms of services from those of the prior owners. If those are unsatisfactory conditions and prices, then ultimately Vantage will suffer a monetary loss by losing money on their investment when its business practices drive away customers.

However, when it comes to credit ratings, if the above holds true, then such business practices would indeed provide conditions for increased risk for a highly leveraged company, and any impact toward risk for a company should be an indicator for S&P to factor that into their rating system -- if they don't already do so. Unfortunately, the problems with S&P rating system is far more flawed than this protest would have us believe.


What Standard and Poor's Should Know About Problems
with Vantage Building Portfolio Loans

Standard and Poor's has provided credit ratings for a number of commercial mortgage-backed securities (CMBS) that include large portfolio loans for New York City apartment buildings owned by Vantage Properties. These CMBS have been sold to investors, and include CSMC 2007 C 1. CSMC 2007 C2, CSMC 2007 C4. and CSMC 2006 CS.

Tenants who live in some Vantage Properties buildings have concerns about physical and financial distress in the buildings. The tenants believe that Standard and Poor's should know the following information:

  • Vantage Properties, and their equity partner AREA Real Estate Advisors, have been described in the press as a "predatory equity" developer who purchased buildings with outsized mortgages that could only be justified if low-rent-paying tenants were forced to move out and building services were cut back In fact, a judge recently ruled that actions alleged by tenants constitute illegal harassment, and that a lawsuit against Vantage may proceed in State Supreme Court (Jose Ricardo Aguatza, et al. v Vantage Properties LLC. et al. Index 9 105197108)
  • Information from the loan serv►cer for the CMBS suggests that the buildings were badly
    overleveraged when the financing was underwritten, and may now be in financial distress. In June. 2006, loan servicer reports indicated that two of the above mention four portfolio loans were on the servrcer's "default watchlhst". By December. 2008. all four of the above loans were on the servicer's default watchlist According to notes from the loan servicer, one of the primary reasons that these loans were marked as being potentially distressed is that the debt-servrce-coverage-ratios (DSCR) were low. In June. 2008. the average DSCR for the four Vantage Property bars was .7111. By December, 2008. the average DSCR had fallen to SO/ 1. That is, that only 50 cents was being produced by the properties for every dollar of debt owed.
  • Tenants have complained to the New York City Department of Housing Preservation and
    Development that Vantage is denying necessary services to tenants These complaints include
    the fact the on-site superintendent has been removed from puny of the buildings, which tenants behave has reduced the maintenance and repair of the buildings.

Tenants are calling on the Securities and Exchange Commission to issue rules for credit rating agencies such as Standard and Poor s to insure that all relevant information, such as the above, is taken into account when a rating Is issued (or a mortgage-backed security

For further information, contact
Teresa Pere, President - 718.926-9225; Meah. Vice President - 718.709.19&1 Lauren Spnnger, Secretary - 917 805-1905

Tuesday, July 7, 2009

It's Not Just That Global Warming Is Fake. What Matters Is Why This Fakery Is Being Promoted.

by Gary North
July 3, 2009

Global warming is based 100% on junk science. The most vocal promoters are not interested in the details of physical science. They are interested in two things: political control over the general public and the establishment of international socialism.

Junk Science vs. Real Science

For a detailed, footnoted, 12-page article, written by three scientists, two with Ph.D's from CalTech, click here.

This paper was sent to tens of thousands of natural scientists in the United States.
Over 31,000 scientists have put their reputations on the line and signed a politically incorrect petition opposing the 1997 Kyoto agreement or protocol. Here is a photocopy of a signed petition.

Here is a letter from a former president of the National Academy of Sciences. He asks recipients of the petition to sign it.

Back in the 1970's, the bugaboo was the coming ice age, as this Time Magazine article promoted. Not to be outdone, Newsweek got on board. The article warned: "Climatologists are pessimistic that political leaders will take any positive action to compensate for the climatic change, or even to allay its effects." Want more examples? Click here.

It, too, was based on junk science. It, too, had the same solution: government control over the economy. The goal never changes: government management over the economy. The justification has changed. If the voters won't accept control over their lives on the basis of one brand of junk science, maybe they will accept another. As they used to say in the Nixon Administration: "Let's run this up the flagpole and see if anyone salutes."

Socialism's Last Stand

The global warming movement is not about global warming. It is about the creation of an international political control arrangement by which bureaucrats who favor socialism can gain control over the international economy.

This strategy was stated boldly by economist Robert Heilbroner in 1990. Heilbroner, the multi-millionaire socialist and author of the best-selling history of economic thought, The Worldly Philosophers, wrote the manifesto for these bureaucrats. He did this in an article, "Reflections: After Communism," published by The New Yorker (Sept. 10, 1990).

In this article, he made an astounding admission. He said that Ludwig von Mises had been right in 1920 in his article, "Economic Calculation in the Socialist Commonwealth." Mises argued that without private ownership, central planners could not know what any resource is worth to consumers. With no capital market, the planners would be flying blind.

Heilbroner said that for 70 years, academic economists had either ignored this article or dismissed it without answering it. Then Heilbroner wrote these words: "Mises was right."
Heilbroner was one of these people. There is no reference to Mises in The Worldly Philosophers.

This admission was the preliminary section of Heilbroner's manifesto. He was cutting off all hope by socialists that there is a theoretically plausible response to Mises. The free market economy will always outproduce a socialist economy. Get used to it, he said.

Then, in the second section, he called on his socialist peers to get behind the ecology movement. Here, he said, is the best political means for promoting central planning, despite its inefficiency. In the name of ecology, he said, socialists can get a hearing from politicians and voters.

The article is not online. An abstract is. Here is the concluding thought of the abstract.

The direction in which things are headed is some version of capitalism, whatever
its title. In Eastern Europe, the new system is referred to as Not Socialism. Socialism may not continue as an important force now that Communism is finished. But another way of looking at socialism is as the society that must emerge if humanity is to cope with the ecological burden that economic growth is placing on the environment. From this perspective, the long vista after Communism leads through capitalism into a still unexplored world that roust [must?] be safely attained and settled before it can be named.
Heilbroner did not care that a worldwide government-run economic planning system would not be called called socialism. He just wanted to see the system set up.

Heilbroner's peers got the message. That was what Kyoto was all about.


If you like poverty, inefficiency, and bureaucratic controls over the economy, and therefore control over your choices, the "climate change" movement is ideal.

If you want to subsidize China and India, neither of which will enforce the rules laid down by unelected international bureaucrats, this movement is for you.

If you want to pay more for less energy, there is no better way than to pass the cap and tax bill which the House has passed. It will be sent to the U.S. Senate next week.

The rest of us should oppose it.

I hereby authorize anyone to reprint this article or post it on any website, just so long as the text is not changed.

Tuesday, June 30, 2009

Protest Outside GS

I recommend that this protest patron the following places instead: Fannie Mae, Freddie Mac, Congress, and the Federal Reserve.

Market Valuations: A Look at Inflation and Volatility

The Technical Take has an interesting article (which is really a commentary on an article posted by William Hester with the Hussman Funds) on the characteristics of the current market as compared to prior bear markets.

Excerpt from William Hester:
"...secular bear markets of last century shared three characteristics. They each lasted for more than 15 years, they each ended at extremely attractive levels of valuation (generally about 7-9 times trailing 10-year earnings), and , and they each endured many years of growing volatility in output and inflation, which eventually created the mindset for investors to price stocks at attractive levels of valuation. The current secular bear market can claim none of these characteristics yet."

Friday, June 26, 2009

Arizona to Outlaw Global Warming Legislation

For the first time ever, I am posting positive news. Dailytech reports:
One state looks to ensure its citizens do not have to pay for climate change efforts.

Climate change is a controversial topic. Some believe man is causing the world to warm. Others point out that the Earth has undergone solar warming and cooling for millions of years and that current temperatures are well within historic levels. A recent report challenging AGW theory showed significant support with 31,478 U.S. researchers and scientists, many of whom hold Ph.D's, signing a statement that they believe that man has not played a part in the current warming trend.

Arizona is now close to becoming the first state to outlaw climate change legislation. The state Senate voted Monday, 19-10 to approve a bill banning the Department of Environmental Quality from enacting or enforcing measures with language pertaining to climate change. The bill is now awaiting House approval.

The bill will likely pass and be signed into law thanks to a switch in power. Formerly, Janet Napolitano (D) was governor of the state, but she left to join Barack Obama's Cabinet. Napolitano was replaced by Jan Brewer (R), who has not indicated a strong desire to support AGW theorists.

If Senate Bill 1147 passes it will block rules passed by the DEQ that set harsher emission standards. The proposed increases were hastily pushed through by the former governor, despite complaints from industry leaders. It would also end work on "cap and trade" carbon legislation, which has been opposed by the utility industry. Such a scheme could help to raise power prices for the state's citizens significantly.

A passage could also give the state means to challenge the federal government in court over the proposed Waxman-Markey bill, which would put over $1,600 in yearly costs on American citizens to cut carbon emissions. The legislation, which has also received criticism for potentially hurting farmers, is currently making its way through a Democrat controlled House and Senate, awaiting Barack Obama's approval.
This is a nice follow-up to yesterday's piece on Cap & Trade -- it's refreshing to see renewed resistence to the 'hell in a hand basket' policies that have been propigating throughout our country with ever increasing speed.

Thursday, June 25, 2009

Cap & Tax

WSJ opines on new inane legislation that continues to pave the path of economic destruction. The weed-be-gone policy to any economic greenshoot has gained new footing and is working its way into law as the House tries to pass even tighter restrictions on Cap and Trade.

The hit to GDP is the real threat in this bill. The whole point of cap and trade is to hike the price of electricity and gas so that Americans will use less. These higher prices will show up not just in electricity bills or at the gas station but in every manufactured good, from food to cars. Consumers will cut back on spending, which in turn will cut back on production, which results in fewer jobs created or higher unemployment. Some companies will instead move their operations overseas, with the same result.

When the Heritage Foundation did its analysis of Waxman-Markey, it broadly compared the economy with and without the carbon tax. Under this more comprehensive scenario, it found Waxman-Markey would cost the economy $161 billion in 2020, which is $1,870 for a family of four. As the bill's restrictions kick in, that number rises to $6,800 for a family of four by 2035.

Note also that the CBO analysis is an average for the country as a whole. It doesn't take into account the fact that certain regions and populations will be more severely hit than others -- manufacturing states more than service states; coal producing states more than states that rely on hydro or natural gas. Low-income Americans, who devote more of their disposable income to energy, have more to lose than high-income families.

Even as Democrats have promised that this cap-and-trade legislation won't pinch wallets, behind the scenes they've acknowledged the energy price tsunami that is coming. During the brief few days in which the bill was debated in the House Energy Committee, Republicans offered three amendments: one to suspend the program if gas hit $5 a gallon; one to suspend the program if electricity prices rose 10% over 2009; and one to suspend the program if unemployment rates hit 15%. Democrats defeated all of them.

Lovely. I still think these are rosy estimates, as other laws requiring a minimum usage of more expensive 'alternative' energy will increase costs further. All of these initiatives, as well as the health care 'reforms' I wrote about a few days ago will guarentee higher unmployment and lower real income for Americans.

Initial/Continuing Jobless Claims Up

An economic recovery by year-end is wishful thinking. Clearly, the current 'bubble' is consumer confidence.

Wednesday, June 24, 2009

Mad Hatter Strikes Again

...and by 'Mad Hatter' I'm referring to Rep. Barney Frank. Bound to repeat history from which he has not learned, Frank has asked Fannie & Freddie to relax their lending practices.
In March, Fannie Mae said it would no longer guarantee mortgages on condos in buildings where fewer than 70 percent of the units have been sold, up from 51 percent, the paper said. Freddie Mac is due to implement similar policies next month, the paper said.

In a letter to the CEO's of both companies, Representatives Barney Frank, the chairman of the House Financial Services Committee, and Anthony Weiner warned that a 70 percent sales threshold "may be too onerous" and could lead condo buyers to shun new developments, according to the paper.

The legislators asked the companies to "make appropriate adjustments" to their underwriting standards for condos, the paper added. In an interview with the paper, Weiner said the rules have "had a real chill on the ability to get these condos sold," at a time when prices of condos have fallen enough to attract potential buyers.

If the condos aren't selling, then the price hasn't fallen enough and/or people don't have the means or desire to purchase them. Relaxing lending standards would be an act of sheer lunacy.
Both Fannie and Freddie are preparing a response to the lawmakers, according to the paper.

I eagerly await their $0.02.

Sunday, June 21, 2009

Expecting Record Bonuses at Goldman

The Observer observes:
Staff at Goldman Sachs staff can look forward to the biggest bonus payouts in the firm's 140-year history after a spectacular first half of the year, sparking concern that the big investment banks which survived the credit crunch will derail financial regulation reforms.

A lack of competition and a surge in revenues from trading foreign currency, bonds and fixed-income products has sent profits at Goldman Sachs soaring, according to insiders at the firm.

Staff in London were briefed last week on the banking and securities company's prospects and told they could look forward to bumper bonuses if, as predicted, it completed its most profitable year ever. Figures next month detailing the firm's second-quarter earnings are expected to show a further jump in profits. Warren Buffett, who bought $5bn of the company's shares in January, has already made a $1bn gain on his investment.

In April, Goldman said it would set aside half of its £1.2bn first-quarter profit to reward staff, much of it in bonuses. It is believed to have paid 973 bankers $1m or more last year, while this year's payouts are on track to be the highest for most of the bank's 28,000 staff, including about 5,400 in London.

Ok, so a "A lack of competition and a surge in revenues from trading foreign currency, bonds and fixed-income products has sent profits at Goldman Sachs soaring." How will politicians spin this, I wonder:

Critics of the bonus culture in the City said the dominance of a few risk-taking investment banks is undermining the efforts of regulators to stabilise the financial system. Vince Cable, the Liberal Democrat treasury spokesman, said: "The investment banks more than any other institutions created the culture of excessive leverage, excessive risk and excessive bonuses that led to the downfall of the financial system. Now they are cashing in and the same bonus culture has returned. The result must be that we are being pushed to the edge of another crash."

No, Mr. Cable, the Federal Reserve created the culture of excessive leverage. Without all of the cheap money provided by the Fed, no such excessive leverage could have existed!

"These banks are intermediaries in the bond markets where governments and companies are raising billions of pounds of new money. There is also a lack of competition that means they can charge huge sums for doing business."

Last week, the firm predicted that President Barack Obama's government could issue $3.25tn of debt before September, almost four times last year's sum. Goldman, a prime broker of US government bonds, is expected to make hundreds of millions of dollars in profits from selling and dealing in the bonds.

You can't blame Goldman Sachs for taking advantage of our Government's asinine monetary policies. But that is exactly what will happen, you can bet on it -- stay tuned for updates.

Horror Health Care Bill Drafted

Slashdot summarizes:
House Democrats on Friday answered President Obama's call for a sweeping overhaul of the health care system by putting forward a 852-page draft bill that would require all Americans to obtain health insurance, force employers to provide benefits or help pay for them, and create a new public insurance program to compete with private insurers.
Passage of this legistlation will result in a double-edged sword against American jobs. Not only will the cost per employee rise, leaving less money to expand business and hire more workers, it will, at best, put downward pressure on salaries, and, at worst, provide an incentive for moving jobs abroad. And that's the 'good news'.

Arguably more damaging would be an establishment of a public insurance program. A government-run program will slowly kill private insurance companies, since a government insurer can offer significanly cheaper rates than private insurers (think Fannie Mae & Freddie Mac), even while operating at a loss (tax to make up the difference). Naturally, with cheaper rates, the government plan will grow as it takes business away from private insurers. On a longer time horizon, this will be bad news for doctors when the government-run monopoly, not the free market, will start enforcing more rules, regulations, and price controls.

In the end, we'll be left with a decrease in American jobs and/or salaries, higher taxes, and a hobbled medical environment where doctors will be forced to work more for less --and that's just from the highlights. We'll learn more as this legistlation evolves.

For those of you interested in probing further, here's a full length PDF of the Bill.

Saturday, June 20, 2009

Healthcare Woes: Two Wrongs Don't Make Right

If I wanted to view something utterly absurd, I would've patroned the movie "Land of the Lost." Instead, I got the same fill of lunacy from the following paragraph from a story ran by Forbes 'Obama's Doctor Knocks ObamaCare':

What should the president be focused on? Scheiner thinks that a good health reform would be "Medicare for all," a single-payer system where the government would cover everyone and pay for it by cutting out waste in the system. "A neurosurgeon gets paid $20,000 for cutting into the neck of my patient. Have him get paid $1 million a year instead of $2 million or $3 million. He won't starve," Scheiner says.
Let me get this straight, the advised 'solution' to overpriced healthcare is Medicare for all?! Leaving the 'cutting of waste' in the hands of beaurocrats is a recipe for disaster. If you want a quick example of the quality and inefficiency of Government-run services, take a look at the DMV and the Post Office.

Government intervention in health care can only have 3 possible outcomes: 1) Higher Cost 2) Lower Quality 3) Higher Cost & Lower Quality.

Friday, June 19, 2009

Reverse Engineering Economics of Music Industry

A recent ruling in Minnesota awarded the plaintiffs (record companies) a payout of $80,000 per song.
The recording industry has blamed online piracy for declines in music sales claiming it has lost billions of dollars through illegal file-sharing.
Here's a novel idea: Let's pretend that the internet existed before music. If record companies attempted to sell/distribute music into the digital marketplace that was as we know it now, it would have been a joke to think that large premiums can be charged for something that can be so easily distributed.

Piracy has always existed, and will exist. But you cannot blame piracy as the sole reason behind the decline in music sales. Newspapers are facing even larger margin reductions, and it has nothing to do with piracy. The source for their woes is the same; when something of comparable value, or even greater value, can be acquired for less (less time, less money, less hassle), then there's no doubt that a company will face declining sales.

Apple's iTunes is the perfect example of being able to monetize an old business model. While the true costs of violating intellectual poperties may never be known, what is known is that Record Companies should be more focused on pushing products and services that are naturally competitive in the marketplace -- something they have neglected to do so for years.

Thursday, June 11, 2009

Administration Seeks To Rein Private Sector Pay

The Obama administration says executive compensation must be better managed to prevent the sort of risk-taking that jeopardizes the economy.
Excessive Risk means potential for both excess profits AND excess losses. If our government wasn't in the business of bailing out failed companies, then the consequences of those excessive risks (financial ruin) would mitigate future risk taking.

Bailing out excessive risk takers will simply promote such risk taking on the basis that the government will make whole any losses you are to sustain for taking said risk.

Even more egregious is the fact that the excessive risk taking, which most banks engaged in, was encouraged by the government with all of the 'free' money given to banks via low interest rates. Such excessive risk taking could not have happened without the government's encouragement to take those risks in the first place!

Tuesday, May 5, 2009

From the Trenches: Defending Against Attack on Private Enterprise

In its entirety below, an open letter from a hedge fund manager:

Unafraid In Greenwich Connecticut
Clifford S. Asness
Managing and Founding Principal
AQR Capital Management, LLC

The President has just harshly castigated hedge fund managers for being unwilling to take his administration’s bid for their Chrysler bonds. He called them “speculators” who were “refusing to sacrifice like everyone else” and who wanted “to hold out for the prospect of an unjustified taxpayer-funded bailout.”

The responses of hedge fund managers have been, appropriately, outrage, but generally have been anonymous for fear of going on the record against a powerful President (an exception, though still in the form of a “group letter”, was the superb note from “The Committee of Chrysler Non-TARP Lenders” some of the points of which I echo here, and a relatively few firms, like Oppenheimer, that have publicly defended themselves). Furthermore, one by one the managers and banks are said to be caving to the President’s wishes out of justifiable fear.

I run an approximately twenty billion dollar money management firm that offers hedge funds as well as public mutual funds and unhedged traditional investments. My company is not involved in the Chrysler situation, but I am still aghast at the President's comments (of course these are my own views not those of my company). Furthermore, for some reason I was not born with the common sense to keep it to myself, though my title should more accurately be called "Not Afraid Enough" as I am indeed fearful writing this... It’s really a bad idea to speak out. Angering the President is a mistake and, my views will annoy half my clients. I hope my clients will understand that I’m entitled to my voice and to speak it loudly, just as they are in this great country. I hope they will also like that I do not think I have the right to intentionally “sacrifice” their money without their permission.

Here's a shock. When hedge funds, pension funds, mutual funds, and individuals, including very sweet grandmothers, lend their money they expect to get it back. However, they know, or should know, they take the risk of not being paid back. But if such a bad event happens it usually does not result in a complete loss. A firm in bankruptcy still has assets. It’s not always a pretty process. Bankruptcy court is about figuring out how to most fairly divvy up the remaining assets based on who is owed what and whose contracts come first. The process already has built-in partial protections for employees and pensions, and can set lenders' contracts aside in order to help the company survive, all of which are the rules of the game lenders know before they lend. But, without this recovery process nobody would lend to risky borrowers. Essentially, lenders accept less than shareholders (means bonds return less than stocks) in good times only because they get more than shareholders in bad times.

The above is how it works in America, or how it’s supposed to work. The President and his team sought to avoid having Chrysler go through this process, proposing their own plan for re-organizing the company and partially paying off Chrysler’s creditors. Some bond holders thought this plan unfair. Specifically, they thought it unfairly favored the United Auto Workers, and unfairly paid bondholders less than they would get in bankruptcy court. So, they said no to the plan and decided, as is their right, to take their chances in the bankruptcy process. But, as his quotes above show, the President thought they were being unpatriotic or worse.

Let’s be clear, it is the job and obligation of all investment managers, including hedge fund managers, to get their clients the most return they can. They are allowed to be charitable with their own money, and many are spectacularly so, but if they give away their clients’ money to share in the “sacrifice”, they are stealing. Clients of hedge funds include, among others, pension funds of all kinds of workers, unionized and not. The managers have a fiduciary obligation to look after their clients’ money as best they can, not to support the President, nor to oppose him, nor otherwise advance their personal political views. That’s how the system works. If you hired an investment professional and he could preserve more of your money in a financial disaster, but instead he decided to spend it on the UAW so you could “share in the sacrifice”, you would not be happy.

Let’s quickly review a few side issues.

The President's attempted diktat takes money from bondholders and gives it to a labor union that delivers money and votes for him. Why is he not calling on his party to "sacrifice" some campaign contributions, and votes, for the greater good? Shaking down lenders for the benefit of political donors is recycled corruption and abuse of power.

Let’s also mention only in passing the irony of this same President begging hedge funds to borrow more to purchase other troubled securities. That he expects them to do so when he has already shown what happens if they ask for their money to be repaid fairly would be amusing if not so dangerous. That hedge funds might not participate in these programs because of fear of getting sucked into some toxic demagoguery that ends in arbitrary punishment for trying to work with the Treasury is distressing. Some useful programs, like those designed to help finance consumer loans, won't work because of this irresponsible hectoring.

Last but not least, the President screaming that the hedge funds are looking for an unjustified taxpayer-funded bailout is the big lie writ large. Find me a hedge fund that has been bailed out. Find me a hedge fund, even a failed one, that has asked for one. In fact, it was only because hedge funds have not taken government funds that they could stand up to this bullying. The TARP recipients had no choice but to go along. The hedge funds were singled out only because they are unpopular, not because they behaved any differently from any other ethical manager of other people's money. The President’s comments here are backwards and libelous. Yet, somehow I don’t think the hedge funds will be following ACORN’s lead and trucking in a bunch of paid professional protestors soon. Hedge funds really need a community organizer.

This is America. We have a free enterprise system that has worked spectacularly for us for two hundred plus years. When it fails it fixes itself. Most importantly, it is not an owned lackey of the oval office to be scolded for disobedience by the President.

I am ready for my “personalized” tax rate now.

Thursday, April 23, 2009

Sanity Under Pressure

German chancellor Merkel rejects new stimlus programs as ecnomic data worsens.

"Chancellor Angela Merkel stood firm in rejecting any new German economic stimulus program even as the International Monetary Fund said the recession is worse than previously thought and called for measures to spur demand."

Merkel shrugged off calls for more spending despite a report by Germany’s leading economic institutes which will show tomorrow that Europe’s biggest economy may shrink as much as 6 percent this year -- almost three times the contraction of 2.25 percent forecast by the government in January.

The coalition won’t expand its 82 billion euro ($107 billion) stimulus agreed under two separate programs, Merkel told reporters in Berlin today after a meeting with business leaders and economists. “We shouldn’t talk about a third stimulus package,” Merkel said. “Instead we’ll let current measures take effect.”

While I don't agree with the reasoning behind rejecting more stimulus, I do agree with the action itself. What the IMF and Keynesian economists fail to realize is that there is infinite demand. The problem is not that there isn't any demand, but rather that there aren't the resources to fulfil that demand.

I have demand for a Ferrari, but the lack of financial resources prevent me from making such a purchase. If the government wants me to fulfill my demand for a Ferrari in order to 'grow' the economy by stimulating jobs associated with Ferrari production, the stimulus money that it uses to fulfill these demands must come from somewhere, or more specifically, someone. That someone is a group of people called wage earners who will subsequently be taxed to pay for my new Ferrari. And if there's not enough money coming in from taxes, the rest can be procured by inflating the money supply.

The opportunity costs that arise from distribution of wealth and manipulation of currency, as well as the distortions created to natural supply and demand of goods and services, will, at best, act as a road block to an economic recovery.

Monday, April 13, 2009

Surge in Taxpayer Delinquency

Apparently, more Americans are wary of the U.S. tax man this year.

"Our calls are up 280 percent," said Richard Boggs, founder and chief executive of Los Angeles-based Nationwide Tax Relief, a firm that helps delinquent taxpayers resolve tax issues.

With household balance sheets under pressure, more U.S. households are having trouble keeping up with their day-to-day bills and struggling to pay their taxes.

"Folks are not paying their taxes because they are spending it on necessary living expenses," said Kristin Lavieri, an accountant with Weinstein & Anastasio, PC in Hamden, Connecticut.

Many withdrew funds from 401k and IRA retirement savings accounts before the permitted time, unaware of the punitive taxes and penalties this would generate, said Larry Walker Jr, president of the financial and tax services firm 4-Serenity Inc in Snellville, Georgia.

"Folks are not paying their taxes because they are spending it on necessary living expenses," said Kristin Lavieri, an accountant with Weinstein & Anastasio, PC in Hamden, Connecticut."

These tax burdens will only serve to hinder an economic recovery. Meanwhile, law makers are up to more tax shenanigans - 20% tax on cell phones?!

On a positive note, the Anti-Tax Tea Party movement is gaining traction.

Tuesday, April 7, 2009

Communities Printing Their Own Cash

From an article in USA Today,
"The systems generally work like this: Businesses and individuals form a network to print currency. Shoppers buy it at a discount — say, 95 cents for $1 value — and spend the full value at stores that accept the currency.

Workers with dwindling wages are paying for groceries, yoga classes and fuel with Detroit Cheers, Ithaca Hours in New York, Plenty in North Carolina or BerkShares in Massachusetts."
You read that correctly, they are printing money. They assign it an abritrary value and then they print it. This system is far worse than our national currency, which at least at one point in time was pegged to a real asset.
"Ed Collom, a University of Southern Maine sociologist who has studied local currencies, says they encourage people to buy locally. Merchants, hurting because customers have cut back on spending, benefit as consumers spend the local cash."
But is Mr. Collom aware as to why people are encouraged to spend? Local currencies are doomed from the start. Since local currency is worthless everywhere else, there is no incentive in holding on to it. Whoever is a recipient of a local currency would want to convert it to something that has value everywhere. Thus, no one would really want to hold a local currency. Hyperinflation of that currency will be the only outcome.
"Pittsboro, N.C., is reviving the Plenty, a defunct local currency created in 2002. It is being printed in denominations of $1, $5, $20 and $50. A local bank will exchange $9 for $10 worth of Plenty."We're a wiped-out small town in America," says Lyle Estill, president of Piedmont Biofuels, which accepts the Plenty. "This will strengthen the local economy. ... The nice thing about the Plenty is that it can't leave here." "
Apparently they did not learn their lesson the first time. On the bright side, local currencies will hyperinflate out of existence before they can cause real damage like our current currency is doing. How long will that $0.95 cents on the dollar last? My guess is not long, after all, there will be 'Plenty' more where they came from.

Monday, April 6, 2009

Timothy Geitner: "Don't Believe Us!"

On a speech given at 11:10am on April 6, 2008, Timothy Geitner advised Americans to

" wary of any organization that claims to guarantee success and demands upfront fees."

The only organizations that I can think of that fit that description is Bernie Madoff's Hedge Fund and the Federal Government. In fact, when testifying before Congress, Tim Geitner repeatedly stressed two facts: 1) That his plan will work. 2) That it requires upfront funds provided for by the tax payer.

Saturday, April 4, 2009

Housing Bubble + FASB Solution Analogy

Taken directly from BoomBustBlog. Enjoy:

Heidi is the proprietor of a bar in Detroit. In order to increase sales, she decides to allow her loyal customers - most of whom are unemployed alcoholics - to drink now but pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans). Word gets around about Heidi's drink-now pay-later marketing strategy and as a result, increasing numbers of customers flood into Heidi's bar and soon she has the largest sale volume for any bar in Detroit. By providing her customers' freedom from immediate payment demands, Heidi gets no resistance when she substantially increases her prices for wine and beer, the most consumed beverages. Her sales volume increases massively.

A young and dynamic vice-president at the local bank recognizes these customer debts as valuable future assets and increases Heidi's borrowing limit.  He sees no reason for undue concern since he has the debts of the alcoholics as collateral. At the bank's corporate headquarters, expert traders transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS - all rated AAA by Snooty's Investor Services, Snitch and Standard and Get Poor's - for a fee, of course. These securities are then traded on security markets worldwide. Naive investors don't really understand the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics. Nevertheless, their prices continuously climb, and the securities become the top-selling items for some of the nation's leading brokerage houses.

One day, although the bond prices are still climbing, a risk manager at the bank (subsequently fired due his negativity), decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi's bar. Heidi demands payment from her alcoholic patrons, but being unemployed they cannot pay back their drinking debts. Therefore, Heidi cannot fulfill her loan obligations and claims bankruptcy.

DRINKBOND and ALKIBOND drop in price by 90 %. PUKEBOND performs better, stabilizing in price after dropping by 70 %. The decreased bond asset value destroys the banks liquidity since the banks borrowed up to 32x their initial capital to buy the bonds (even more in their off balance sheet bar companies) and a mere 20% drop in these bonds would wipe them clean, save government intervention. The events effectively prevent it from issuing new loans since the market won't give them more than 30 cents on the dollar for the best of them. The suppliers of Heidi's bar, having granted her generous payment extensions and having invested in the securities are faced with writing off her debt and losing over 80% on her bonds. Her wine supplier claims bankruptcy, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 50 workers. The Detroit stock market drops, then rallies vociferously as the Fantasy Accounting Standards Boards states, under duress and a sleeper choke hold from honest politicians that causes them to tap out (UFC style), that the bank may now use their discretion in valuing these bonds due to the fact that no on in the entire world wants to buy them really has no bearing on their true value!

The bank and brokerage houses are saved by the Government following dramatic round-the-clock negotiations by leaders from both political parties. The funds required for this bailout are obtained by a tax levied on employed middle-class non-drinkers.

Finally an explanation that alI can understand...

Wednesday, April 1, 2009

Zero Credibility

Straight from the horses' mouths, a quick time line of Paulson's & Bernanke's economic assessments:

February 28, 2007 - Dow Jones @ 12,268

March 13th, 2007 – Henry Paulson: “the fallout in subprime mortgages is "going to be painful to some lenders, but it is largely contained."

March 28th, 2007 – Ben Bernanke: "At this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained,"

March 30, 2007 - Dow Jones @ 12,354

April 20th, 2007 – Paulson: "I don't see (subprime mortgage market troubles) imposing a serious problem. I think it's going to be largely contained." , "All the signs I look at" show "the housing market is at or near the bottom,"

April 30, 2007 - Dow Jones @ 13,063

May 17th, 2007 – Bernanke: “While rising delinquencies and foreclosures will continue to weigh heavily on the housing market this year, it will not cripple the U.S.”

May 31, 2007 - Dow Jones @ 13,627

June 20th, 2007 – Bernanke: (the subprime fallout) ``will not affect the economy overall.''

July 12th, 2007 – Paulson: "This is far and away the strongest global economy I've seen in my business lifetime."

August 1st, 2007 – Paulson: "I see the underlying economy as being very healthy,"

October 15th, 2007 – Bernanke: "It is not the responsibility of the Federal Reserve - nor would it be appropriate - to protect lenders and investors from the consequences of their financial decisions."

December 31, 2007 - Dow Jones @ 13,265

January 31, 2008 - Dow Jones @ 12,650

February 14th, 2008 – Paulson: (the economy) "is fundamentally strong, diverse and resilient."

February 28th, 2008 – Paulson: "I'm seeing a series of ideas suggested involving major government intervention in the housing market, and these things are usually presented or sold as a way of helping homeowners stay in their homes. Then when you look at them more carefully what they really amount to is a bailout for financial institutions or Wall Street."

February 29th, 2008 – Bernanke: "I expect there will be some failures. I don't anticipate any serious problems of that sort among the large internationally active banks that make up a very substantial part of our banking system."

March 16th, 2008 – Paulson: "We've got strong financial institutions . . . Our markets are the envy of the world. They're resilient, they're...innovative, they're flexible. I think we move very quickly to address situations in this country, and, as I said, our financial institutions are strong."

March 18th, 2008 - Bear Stearns Bailout Announced

May 7, 2008 – Paulson: 'The worst is likely to be behind us,”

May 16th, 2008 – Paulson: "In my judgment, we are closer to the end of the market turmoil than the beginning," he said.

May 30, 2008 - Dow Jones @ 12,638

June 9th, 2008 – Bernanke: Despite a recent spike in the nation's unemployment rate, the danger that the economy has fallen into a "substantial downturn" appears to have waned,

July 16th, 2008 – Bernanke: (Freddie and Fannie) “…will make it through the storm”, "… in no danger of failing.","…adequately capitalized"

July 20th, 2008 – Paulson: "it's a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation."

July 31, 2008 - Dow Jones @ 11,378

August 10th, 2008 – Paulson: ``We have no plans to insert money into either of those two institutions.” (Fannie Mae and Freddie Mac)

September 8th, 2008 - Fannie and Freddie nationalized. The taxpayer is on the hook for an estimated 1 - 1.5 trillion dollars. Over 5 trillion is added to the nation’s balance sheet.

September 16th, 2008 - $85 Billion AIG Bailout “Loan”

September 19th, 2008 - $700 Billion Bailout Plan Announced

September 19th, 2008 – Paulson: "We're talking hundreds of billions of dollars - this needs to be big enough to make a real difference and get at the heart of the problem," he said. "This is the way we stabilize the system."

September 19th, 2008 - Bernanke: "most severe financial crisis" in the post-World War II era. Investment banks are seeing "tremendous runs on their cash," Bernanke said. "Without action, they will fail soon."

September 21st, 2008 – Paulson: "The credit markets are still very fragile right now and frozen", "We need to deal with this and deal with it quickly.", "The financial security of all Americans ... depends on our ability to restore our financial institutions to a sound footing."

September 23rd, 2008 – Paulson: "We must [enact a program quickly] in order to avoid a continuing series of financial institution failures and frozen credit markets that threaten American families' financial well-being, the viability of businesses, both small and large, and the very health of our economy,"

September 23rd, 2008 – Bernanke: "My interest is solely for the strength and recovery of the U.S. economy,"

October 31, 2008 - Dow Jones @ 9,337

March 31, 2009 - Dow Jones @ 7,609

If Bernanke and Paulson were doctors, and our economy was the patient, they would be in jail for malpractice.

Monday, March 30, 2009

Daniel Hannan is Wise

It takes a smart man to learn from his mistakes. It takes a wise man to learn from other people's mistakes. Below is a transcript from U.K. MEP Daniel Hannan's speech directed at British Prime Minister Gordon Brown. President Obama would be wise to note Hanna's conclusions:

"Prime Minister, I see you’ve already mastered the essential craft of the European politician, namely the ability to say one thing in this chamber and a very different thing to your home electorate. You’ve spoken here about free trade, and amen to that. Who would have guessed, listening to you just now, that you were the author of the phrase ‘British jobs for British workers’ and that you have subsidised, where you have not nationalised outright, swathes of our economy, including the car industry and many of the banks? Perhaps you would have more moral authority in this house if your actions matched your words? Perhaps you would have more legitimacy in the councils of the world if the United Kingdom were not going into this recession in the worst condition of any G20 country?

The truth, Prime Minister, is that you have run out of our money. The country as a whole is now in negative equity. Every British child is born owing around £20,000. Servicing the interest on that debt is going to cost more than educating the child. Now, once again today you try to spread the blame around; you spoke about an international recession, international crisis. Well, it is true that we are all sailing together into the squalls. But not every vessel in the convoy is in the same dilapidated condition. Other ships used the good years to caulk their hulls and clear their rigging; in other words – to pay off debt. But you used the good years to raise borrowing yet further. As a consequence, under your captaincy, our hull is pressed deep into the water line under the accumulated weight of your debt We are now running a deficit that touches 10% of GDP, an almost unbelievable figure. More than Pakistan, more than Hungary; countries where the IMF have already been called in. Now, it’s not that you’re not apologising; like everyone else I have long accepted that you’re pathologically incapable of accepting responsibility for these things. It’s that you’re carrying on, wilfully worsening our situation, wantonly spending what little we have left. Last year - in the last twelve months – a hundred thousand private sector jobs have been lost and yet you created thirty thousand public sector jobs.

Prime Minister, you cannot carry on for ever squeezing the productive bit of the economy in order to fund an unprecedented engorgement of the unproductive bit. You cannot spend your way out of recession or borrow your way out of debt. And when you repeat, in that wooden and perfunctory way, that our situation is better than others, that we’re ‘well-placed to weather the storm’, I have to tell you that you sound like a Brezhnev-era apparatchik giving the party line. You know, and we know, and you know that we know that it’s nonsense! Everyone knows that Britain is worse off than any other country as we go into these hard times. The IMF has said so; the European Commission has said so; the markets have said so – which is why our currency has devalued by thirty percent. And soon the voters too will get their chance to say so. They can see what the markets have already seen: that you are the devalued Prime Minister of a devalued government."

Monday, March 9, 2009

To Mark To Market?

Imagine that I'm in the business of selling a peanuts. The highest price the market (you, and any other peanut shopper) that is bidding is $500 per ton. Now, personally, I think a ton of peanuts is worth at least $3,000. If I apply for a loan, and the bank asks for collateral, if I use the mark to market rule, it'd mean that I'd have equivelent of $500 (which is the case if I was to liquidate/sell my peanuts). However, if I don't use Market To Market, I can claim the peanuts are really worth $3,000, and thus be able and borrow $3,000 instead of $500... or can I?

The question becomes, which story does the bank believe? If I was to default on the loan, the bank would have to liquidate/sell the collateral I gave them... and the most they'd get is $500.

Thus, at best, removing mark to market will not change the market's perception about the value of your assets. At worst, removing mark to market will remove transparency, which would only add to more uncertainty, and subsequent risk in the market place. It will be much harder to judge which banks have toxic assets and which don't. In the end, removal of mark to market doesn't change the underlying reality. What removal of mark to market does is far worse -- it gives banks permission to make up the value of their assets as they see fit.

Automakers: Driving Up The Debt

Thomas & Krisher from the Associated Press reported on Obama's auto task force.
"Members of the Obama administration's autos task force will test drive the Chevrolet Volt rechargeable electric car and tour a Chrysler LLC pickup truck
factory when they visit the Detroit area on Monday, an administration official
said Sunday.---GM and Chrysler are living on $17.4 billion in government loans
approved by the Bush administration last year, and they have asked for a total
of $39 billion. Obama appointed the task force to review the automakers'
viability plans and decide if they should get additional aid.

The reason GM went to the government for loans in the first place is because no one else would loan them money. And why should they? GM was losing money, and the perception of lenders was that it will continue to lose money... and so it has. The tax payer dollars that the government 'loaned' to GM will not be paid back if the company goes bankrupt.

Essentially, the government invested tax payer dollars into a company no investor in their right mind was willing to give money to -- a company that had plummeting sales and a negative profit margin.

Now that the first round of loans has run out, GM is back asking for more. The idea behind a couple of people going to test drive a $40,000 car in order to determine whether to loan GM billions of dollars is nothing short of asinine.

People test drive cars to determine whether or not they want to buy it, not whether or not someone else wants to buy it. The fact is, whether or not the Auto Czars like the $40,000 car, there may not be a market for it, if for no other fact than few people can afford a $40,000 car.

Even with the $7,500 tax rebate offered at taxpayer's expense to Volt buyers, it would still be priced at $32,500 -- over $10,000 more than a gas-sipping Toyota Prius.

Giving money to GM is a double edged sword. Not only is that money going down the drain, where an inefficient company continues to produce cars that no one is buying, it also diverts billions of dollars away from other areas of the economy.

As an extension of the bailout programs the government is undertaking, these auto loans only serve to siphon assets away from productive, tax-paying, areas of society and subsequently funneled toward a company that sells cars for less than it costs to make them.

Thursday, March 5, 2009

A Lesson From Bernie

Mark Pittman from Bloomberg on Fed Refusing to Release Bank Lending Data:

"Bloomberg sued Nov. 7 under the U.S. Freedom of
Information Act requesting details about the terms of 11 Fed lending programs.
--- In response to Bloomberg’s request, the Fed said the U.S. is facing
“an unprecedented crisis” in which “loss in confidence in and between financial
institutions can occur with lightning speed and devastating

The question ultimately comes down to, what is confidence based on? Confidence stems from certainty. If you are certain about a particular outcome then your confidence regarding that outcome is high. If uncertainty of an outcome is increased, confidence in that outcome drops. Increase in uncertainty, therefore, increases risk. The less certain you are about a particular outcome, the greater risk you take on.

Therefore, confidence, or lack thereof, ought to be a reflection of perceived risk.

As Bernie Madoff turned his hedge fund into a Ponzi Scheme, he closed off transparency into his fund. Inquisitive managers conducting due dilligince on Madoff's fund were turned away with their concerns marginalized and their questions left unanswered. This decrease in transparency of business operations inherently increased risk to investors, yet for those that invested significant amounts of their wealth with Madoff, their confidence, as judged by their actions, was as high as ever.

What, then, was that confidence based on? As transparency decreased, confidence should have decreased as well. But that's not what happened. Instead, for those that invested with Madoff, confidence became a criterion for investment rather than a byproduct of other factors, like his investment strategy and risk profile of that strategy.

Friends encouraged friends to join, and their confidence, detached from reality as it was, bred confidence in others. This is why Madoff's scheme worked for as long as it did. As long as new investors had confidence -- more aptly, blind faith -- in Madoff, then the cogs could continue going for longer than they fundamentally should have. The added duration of Madoff's ponzi scheme only served to compound the problem to $50 billion.

Those that had their money with Madoff were confident, but that confidence was illusory. When baseless confidence becomes a criterion for action, then risk is no longer being considered when decisions are made.

And therein lies the problem -- our government treats confidence as the underlying source of our woes, when it is really a symptom. Instead of dealing with reality for fear of 'devastating effects' our government continues its 'ponzi scheme' policies and uses faux confidence to continue their destructive actions. This, as with the Madoff debacle, will only serve to compound our problems -- not solve them.

Wednesday, March 4, 2009

United States of Venezuela

Reuters ran a story that looked eerily familiar to economic policies within our own borders. Excerpt:

CARACAS, March 4 (Reuters) -
President Hugo Chavez seized a local unit of American food giant Cargill on
Wednesday and threatened to nationalize Venezuela's largest private company,
Polar, as he demanded industry produce cheaper rice.

The clash with the food companies came less than three weeks after Chavez, a Cuba ally who has nationalized swaths of the Venezuelan economy, won a referendum on allowing him to run for reelection.

"I warn you this revolution means business," said Chavez.

The anti-U.S. president is popular among the poor for pressuring companies to produce cheap goods and for government programs that provide subsidized food in city slums.

In recent days Chavez has seized some Polar rice mills after accusing the food industry of skirting his price controls and failing to produce enough cheap rice.

Replace "cheaper rice" with "affordable housing" and it will become self-evident how misguided American policies are. History has demonstrated, repeatedly, that Government run projects are counterproductive and wasteful. Moreover, government manipulation of market prices causes distortions within the market place which create more problems without solving the underlying objective.

This was the case when Nixon implemented price controls on Oil, which invariably led to massive gas shortages. Even today, price fixing exists in various forms, such as minimum wage, which creates a shortage for many jobs.

Venezuela is a good paradigm for what not to do. Instead, it seems, we're following in their footsteps.