Wednesday, April 29, 2009
Related articles and posts:
1. FT in-depth: Obama's first 100 days - FT.com
2. Obama says he is 'remaking America' - Bloomberg.
Tuesday, April 28, 2009
Today we'll hear Tom's recent interview on the Financial Sense Newshour, in which he talks with host Jim Puplava about the true nature of our current economic crisis.
Tom Woods sees the crisis very differently from the media-driven consensus view of a panic fueled by "free market failures". Responding to calls for more government intervention to mend these supposed failures, Woods points out that the financial crisis is actually an outgrowth of past government interventions into the markets and economy.
Meltdown places particular emphasis on the artificially low interest rates and easy money policies created by the Federal Reserve under Alan Greenspan, and continued under current Fed chairman Ben Bernanke. Now as the crisis continues, the same people responsible for fostering the conditions that created this economic mess are somehow placed in charge of fixing the situation.
Hear Tom Woods and Jim Puplava discuss why the media slept through the buildup (and collapse) of this economic boom-bust cycle, and how people can better understand the root causes of our current economic troubles, as detailed in Meltdown.
Related articles and posts:
1. Tom Woods: Meltdown (interview) - Lew Rockwell Show.
2. Government intervention fuels the crisis - Finance Trends.
3. Thomas E. Woods: the 33 Questions - Mises via Finance Trends.
Monday, April 27, 2009
1. Paulson's 'gift' to Ken Lewis delivered at gunpoint: Caroline Baum - Bloomberg.
2. 'Photo op' plane stunt terrorizes NYC, Goldman Sachs evacuated - Clusterstock.
3. Fed suffers unrealized $9 billion loss on Bear Stearns & AIG assets, delivers $35.5 billion in comprehensive earnings in 2008. - FT Alphaville.
4. Doug Noland interview, "Credit Bubble Crisis", w/ Financial Sense Newshour - FSN.
5. Monday's linkfest: Stockholm syndrome & flu-like symptoms - Abnormal Returns.
6. Bill King on problems w/bank "stress tests" - Big Picture.
7. Life planning: the search for meaning - Financial Philosopher.
Good reading, and we'll see you back here tomorrow for an in-depth look at the economic "meltdown" of 2008, along with a free-market view of how we might better deal with such crises in the future, courtesy of Thomas E. Woods. Until then!
Friday, April 24, 2009
Meanwhile, Barry Ritholtz takes a look at, "The Elusive Housing 'Fair Value'", and argues that US housing prices will not only revert down to their historic mean, but will continue straight down through the mean price on the way to becoming undervalued. Click the link to see Barry's full post and his arguments for why this is so.
You may also be interested to read The Economist's take on why, "It still looks early for a housing rebound", which compares American and British housing price data. Hat tip to Abnormal Returns for the two links above.
Related articles and posts:
1. House prices finally approaching fair value - Clusterstock.
2. New home sales: 356 thousand SAAR in March - Calculated Risk.
Thursday, April 23, 2009
Last night, Bear Mountain Bull highlighted Mish's post on the "woefully underfunded" FDIC, whose declining Deposit Insurance Fund (DIF) ratio has left it "ill prepared" to deal with future bank failures.
Here's a chart from Mish's post which illustrates that decline:
As outlined in the post above, this declining reserve ratio has (according to some) left the FDIC ill prepared to deal with the likely raft of upcoming bank failures. As you can see from the chart, the reserve ratio was at 0.40 percent as of December 31, 2008, down from an already low 1.01 percent level and below its legally mandated funding level of 1.15 percent.
And as Mish points out, these figures don't even take into account the FDIC's temporary boost in bank account coverage to $250,000. So, isn't that a bit of a problem, especially since more bank failures are expected throughout the year?
Well, not really, according to Bankrate.com. In an October 16, 2008 article entitled, "How the FDIC pays for bank failures" (which I just happened to be reading the other day while reading up on bank insurance), Bankrate's Laura Bruce explains that the money will just have to come from the US Treasury:
"...Christopher Whalen, co-founder and managing director at Institutional Risk Analytics, as well as a writer and former investment banker, says the FDIC will always be able to reimburse customers for their insured deposits.
"The FDIC is like any federal agency; the government runs on cash. Money comes in and money goes out and each of these little funds gets a piece of paper that says I owe you money plus accrued interest. But really, in most cases, it just evidences legal authority to spend money. In the case of the FDIC, it merely evidences funds paid in by the industry, minus losses. But it's still just a theoretical balance because it doesn't reflect at all the cash available to the agency to fund resolutions."
As long as the FDIC has a positive balance in the fund, the agency is just asking for the industry's money back. If that money is gone, the FDIC runs a tab at the Treasury because, by law, it has borrowing authority.
Traditionally, the FDIC's borrowing authority at the Treasury is limited to $30 billion, but Congress bestowed unlimited borrowing authority temporarily as part of the Emergency Economic Stabilization Act of 2008."
So there you have it. It's all good; if there's not enough money in the till, they'll just get the money from the Treasury. But where does the Treasury get the money from?
In the meantime, small banks are feeling the pinch from special assessment fees that the government wants to levy on them for the purpose of refilling the FDIC coffers. Note the irony: a large percentage of those funds were spent last year dealing with the failure of large banks like IndyMac.
Meanwhile, the FDIC collected no insurance premiums from most banks from 1996-2006.
Given all the recent information about the agency's precarious financial condtion, the question becomes: who will bail out the FDIC if it becomes insolvent?
Tuesday, April 21, 2009
Here's an excerpt from that piece:
"Recently, Rogers talked to Barrons.com by phone from his Singapore home.
Q: When you last did a lengthy interview with Barron's magazine a year ago (see "Light Years Ahead of the Crowd," April 14, 2008) you were lightening up on emerging markets investments. Well, you called that one right. But now that many of those markets have fallen from their highs of recent years, are you more optimistic?
A: No. I've sold all emerging markets stock except the ones in China. I bought more Chinese shares in October and November during the panic, but I have not bought China or any other stock markets including the U.S. since then.
I'm not buying anything in China right now because the Chinese market ran up maybe 50% since last November. It's been the strongest market in the world in the past six months and I don't like jumping into something that has been that run up. Still, I'm not thinking of selling these stocks either. I think if it goes down I'll buy more. I think you will find that it's the single strongest market in the world since last fall."
Good stuff, and there is more on Rogers' continued fondness for the commodity sector, the outlook for US bonds, and his thoughts on China's rise to power and prominence on the world stage, and what that could mean for investors and young people today.
Speaking of Jim Rogers and China in the 21st century, if you haven't already seen Rogers' recent interview with UK Channel 4, I highly recommend it. Check it out when you have a few moments to spare.
Monday, April 20, 2009
"Strong banks will be allowed to repay bail-out funds they received from the US government but only if such a move passes a test to determine whether it is in the national economic interest, a senior administration official has told the Financial Times.
“Our general objective is going to be what is good for the system,” the senior official said. “We want the system to have enough capital.”
His comments come as Goldman Sachs, JPMorgan Chase and other relatively strong banks are pressing to be allowed to repay their bail-out funds..."
Pretty amazing, isn't it? Some of these banks were strong-armed into taking TARP funds in the first place (so as not to "stigmatize" banks that truly needed the money).
Now the government is trying to control the repayment schedule of said funds, or at least give the impression that they are successfully directing the economy and driving a shattered industry to act in the "national interest" by providing "credit to support the recovery", etc.
Is the government simply trying to maintain control over the troubled banking industry, or are conditions on TARP repayments a way to ensure that all banks look the same (with none visibly stronger or weaker than the others) in the eyes of the public?
Naked Capitalism has some additional commentary on the issue of TARP repayments, and Paul Kedrosky offers up this chart of the S&P 500 financials which illustrates how well the industry has done in recent months, thanks largely to taxpayer funded bailouts (H/T to Howard Lindzon).
Related articles and posts:
1. Jamie Dimon eager to pay back TARP funds - Finance Trends.
2. William Black: "stress tests are a farce" - Finance Trends.
3. Nationalization in Denial? - Naked Capitalism.
Friday, April 17, 2009
Black says that the so-called "stress tests" do not test bank reserves at all, because they do not test for asset quality or for losses. While citing the leaked expectation that all banks will likely pass the tests, he questions how it is that the banks could be deemed healthy while requiring $2 trillion in taxpayer bailout funds.
Related articles and posts:
1. Stress tests are "a complete sham" - Tech Ticker.
2. William Black interview on stress tests - Naked Capitalism.
3. William Black on Bill Moyers Journal - PBS.org.
Thursday, April 16, 2009
Bloomberg has the story:
"JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon, who today reported first-quarter profit that beat analysts’ expectations, said his firm could repay U.S. government rescue funds “tomorrow.”
Dimon, calling money received through the Troubled Asset Relief Program “a scarlet letter” and “the TARP baby,” said on a conference call today that the New York-based bank is awaiting guidance from the U.S. Treasury Department. “We could pay it back tomorrow,” he said.
The 53-year-old CEO took $25 billion in U.S. government rescue funds last year. He’s fared better than most of his rivals in guiding the company through the financial crisis, taking $33.3 billion in writedowns, losses and credit provisions through the fourth quarter. That compares with $88.3 billion at New York-based Citigroup Inc. and $55.9 billion at Merrill Lynch & Co., now part of Bank of America Corp., the biggest U.S. bank..."
You'll remember that JPMorgan Chase & Co. was strong-armed into accepting the rescue funds last year as part of the Treasury's "voluntary" bank plan, in which nine major banks accepted government funds (whether they needed the money or not, in order to avoid "stigmatizing" truly needy banks) in exchange for newly-issued ownership stakes in said banks.
Dimon also said that JPMorgan Chase will not be participating in the Treasury's Public-Private Investment Partnership (PPIP), saying "we learned our lesson" on borrowing from the government.
This puts Dimon and JPMorgan Chase in league with hedge fund giant Bridgewater Associates and its chairman, Ray Dalio, who have also declined to participate in the PPIP.
Tuesday, April 14, 2009
Rather than bore you with the details of the entire piece, entitled, "Let us put markets to the service of the good society", allow me to reproduce one excerpt which purports to show that "market-generated monopolies" have driven out smaller competitors and led to the growth of "too big to fail" firms in banking and retail.
The following is the author's description of the modern oligopoly system at work in retail shopping today:
"If markets tend to monopoly, creating banks too big to fail, it follows that similar cartels exist elsewhere. Indeed, such “Chicago school” monopolies predominate.
In Britain, four supermarkets control more than 70 per cent of food retailing, while in the US, Wal-Mart has eviscerated competition. Local businesses from pubs to post offices are eroded by conglomerates that benefit from hidden subsidies and whose costs to society are not priced in. They out-compete everything else on economies of scale."
There is no question that the large chain stores have come to dominate the American retail landscape. But is this a good example of a market-generated monopoly or a "market failure" at work?
As Timothy Carney and economist Robert Higgs would point out, the success of a firm like Wal-Mart might actually highlight big business' skillfull use of government and taxpayer subsidies and business regulations in defraying operating costs and reducing competition.
As both Carney and Higgs illustrate in their discussions on the alliance of big business and big government, these companies and the "too big to fail" financial firms are not, as popularly supposed, true champions of laissez faire economics. They are merely opportunists who will use free-market rhetoric when it suits their purpose and cry out for government assistance when the threat of failure (or even just a bit of honest competition) looms.
Related articles and posts:
1. Tim Carney on big business & big government - Finance Trends.
2. Boudreaux on market failure, government failure - Econtalk.
Monday, April 13, 2009
From The Independent's Johann Hari, "You are being lied to about pirates", makes the case that while "some are clearly just gangsters", many Somali pirates are simply members of a failed state who are trying to survive and protect their waters from toxic waste dumping and illegal fishing trawlers.
Here's an excerpt from the lead-in:
"Who imagined that in 2009, the world's governments would be declaring a new War on Pirates? As you read this, the British Royal Navy – backed by the ships of more than two dozen nations, from the US to China – is sailing into Somalian waters to take on men we still picture as parrot-on-the-shoulder pantomime villains. They will soon be fighting Somalian ships and even chasing the pirates onto land, into one of the most broken countries on earth. But behind the arrr-me-hearties oddness of this tale, there is an untold scandal. The people our governments are labelling as "one of the great menaces of our times" have an extraordinary story to tell – and some justice on their side.
Pirates have never been quite who we think they are. In the "golden age of piracy" – from 1650 to 1730 – the idea of the pirate as the senseless, savage Bluebeard that lingers today was created by the British government in a great propaganda heave. Many ordinary people believed it was false: pirates were often saved from the gallows by supportive crowds. Why? What did they see that we can't? In his book Villains Of All Nations, the historian Marcus Rediker pores through the evidence..."
Judging from the comments on this editorial, I'd say the author has stirred up quite a debate over the assertion that pirates have been, historically and presently, unjustly villified.
What do you say? Is there enough evidence to support either side's argument (pirates as villians vs. egalitarian thieves/survivors) in this this debate, or is the bulk of what we've heard about pirates just a total fantasy?
Sunday, April 12, 2009
Timothy Carney, author of The Big Ripoff: How Big Business and Big Government Steal Your Money, gives a speech entitled, "Building a Culture of Enterprise in an Age of Bailouts", at the Heritage Foundation.
As Tim notes in the beginning of his talk, the idea that big business and government are sworn enemies is more of a well-promulgated myth than a current reality. In fact, as Tim explains in this video, big business is often an advocate for big government and increased regulation of industry.
While the idea that big business "wants more government involvement in industry" was, until very recently, an unbelievable proposition to most casual observers, the recent financial crisis (with its ensuing bailout mania) has revealed how the two can often be closely allied.
Hat tip to John Carney for highlighting this recent clip.
For those who would like to hear more about the alliance of government and big business, see our past commentary and Robert Higgs' recent interview on C-SPAN in our related posts section below.
Related articles and posts:
1. Government and big business - Finance Trends.
2. Robert Higgs interviewed on C-Span - Controlled Greed.
Friday, April 10, 2009
With that in mind, here's a think piece from the FT's Gillian Tett on the gold standard and recent calls for a new reserve currency to take us into the weekend.
Excerpt from Tett's article, "In uncertain times, all that glisters is a gold standard":
"...since the world abandoned the gold standard on August 15, 1971 credit creation has spiralled completely out of control.
But this four-decade long experiment with fiat currency is not just something of a historical aberration, it argues - but potentially very fragile too. After all, the only thing that ever underpins a fiat currency is a belief that governments are credible. In the past 18 months that belief has been tested to its limits. In coming years it could be shattered, particularly if the current wave of extraordinary policy measures unleashes a wild bout of inflation.
Hence that chatter about a gold standard. Indeed, as the debate bubbles up, some financiers are now even e-mailing each other an extraordinary little essay that Alan Greenspan himself wrote in support of a gold standard back in the 1960s, called "Gold and Economic Freedom".
Be sure to check out the full article for more insight into the rapidly-changing economic order. You'll also find a handy link to the now-famous 1966 Greenspan essay, "Gold and Economic Freedom", mentioned above.
Have a great weekend, and a Happy Easter and Passover to all those celebrating.
Wednesday, April 8, 2009
Here's a very cool interview with investor Jim Rogers, taken from the UK's Channel 4 (of which Luke Johnson, FT writer and entrepreneur, is chairman).
This relaxed interview setting provides us with a much needed antidote to some recent TV appearances that have devolved into cable "news" channel shout-a-thons. Thankfully, in this clip we are able to hear Rogers express his thoughts on the markets and the world in full, without interruptions.
Hat tip to Mark at Fund My Mutual Fund for bringing this clip to our attention.
Related articles and posts:
1. Jim Rogers on CNBC, Fox Business - Finance Trends.
2. Jim Rogers talks to Bloomberg TV - Finance Trends.
3. Jim Rogers on Bloomberg "Night Talk" - Finance Trends.
On April 7, Bloomberg filed a story on Marc's view of the current bear-market rally in US shares. The piece notes that Faber sees a likely 10% correction ahead for the S&P 500, after which US shares may resume their rally into the summer months.
"Marc Faber, the investor who recommended buying U.S. stocks before the steepest rally in more than 70 years, said the Standard & Poor’s 500 Index may drop as much as 10 percent before resuming gains.
The measure may decline to about 750 and rebound after July, Faber, 63, said in a Bloomberg Television interview in Singapore. Global stock markets are unlikely to fall below their October and November lows, he said.
“We need some kind of correction, maybe around 5 to 10 percent, and after that we can maybe rally more into July,” said Faber, the publisher of the Gloom, Boom & Doom report. “The economic news, while it won’t be good, the rate of getting worse will slow down.” "
This "deceleration of bad news" theme was touched upon by Marc in a previous March interview with Bloomberg TV. Meanwhile, Marc's outlook for Asian shares is especially favorable, as these share markets are where he finds the most value.
See also: Marc's pointed comments on the US government's plan for the banks' toxic assets and the "rotten apples" that are Tim Geithner, Ben Bernanke, and Larry Summers. Your thoughts?
Related articles and posts:
1. Stocks may see correction, Faber says - Bloomberg.
2. Soros: gain in stocks is bear-market rally - Bloomberg.
Monday, April 6, 2009
As you can see from the enlarged version of the chart (click chart to expand), all three indices are down by 30-40 percent over the two year period (April 2007 - April 2009).
You'll note that while US shares entered their bear market at the end of 2007, commodities to continued to outperform stocks (by a wide margin) up until the summer of 2008, when commodities joined the "liquidation party" which hit most major asset markets worldwide. Both stocks and commodities have taken their fair share of abuse on the downside since.
The three indices have staged a bit of a rally off of their early March lows, with ^DJC and ^DJI leading the way in relative performance (now down the least in percentage terms) on this two-year chart.
However, if you flip to a one-year timeframe, the stock indices, ^DJI and ^GSPC, are shown to be outpacing the commodities, ^DJC, in terms of relative performance (with commodities showing a - 45% return over the period).
Some of the long/index commodity ETFs such as DBC, DJP, and DYY seem to have been forming a base and showing strength lately (Disclosure: no position in any of these at time of writing).
Will the leading commodity indexes begin to outperform shares, or do the major US stock averages still have some juice to the upside?
Friday, April 3, 2009
As it turns out, Bridgewater has decided not to invest in the PPIP. Ray Dalio offers his reasons for not joining the plan in this letter to investors, excerpt courtesy of Clusterstock.
I'm not sure I understand all the issues at work here, but the gist of the argument seems to be that Dalio sees a clear conflict of interest for the few investment firms eligible to be the "fund managers" that would purchase toxic assets from banks.
He also sees a great deal of political risk for investors in the plan, due to perceived collusion among the group:
"Then there is the issue about the political risk, which we are more concerned about because there will be such a limited number of managers being allowed to participate in this program that it raises possibilities (or at least perceived possibilities) of them colluding because they all know each other. Either these investments will make a lot of money for their investors or the government will lose a lot of money -- in either case, there will be reasons for politicians to complain and to focus on the five winners to see how they "abused" the system."
Today, Bloomberg reports that Geithner's plan to rid banks of toxic assets will benefit Pimco and Bill Gross, among others.
"Treasury Secretary Timothy Geithner’s plan to rid banks and markets of devalued assets may be a boon for Pacific Investment Management Co.’s Bill Gross.
The plan may reward investors with 20 percent annual returns on “really ‘toxic’” mortgages bought at 45 cents on the dollar by allowing them to borrow six times their money with “non-recourse” government-backed debt, New York-based Credit Suisse Group AG analysts Carl Lantz and Dominic Konstam wrote in a March 27 report. That loan would be worth 15 cents to an investor seeking the same return who can’t use borrowed money.
Geithner’s Public-Private Investment Program, or PPIP, promises to boost prices enough to encourage banks, insurers and hedge funds to sell their mortgage holdings, freeing them to make loans while creating a potential windfall for investors. Federal Reserve Chairman Ben S. Bernanke said March 20 that “credit market dysfunction” is countering efforts to fix the economy."
Bloomberg calls it "Geithner's non-recourse gift" that keeps on giving. Nice work, if you can get it.
Related artices and posts:
1. Treasury's very private asset fund - WSJ.com.
2. Geithner's gift to Pimco - Bear Mountain Bull.
3. On PPIP and Geithner's amazing power grab - Finance Trends.
Wednesday, April 1, 2009
Jim Rogers appeared on CNBC recently to speak about the G-20 meeting, investments, and the notion (myth) of systemic risk at AIG, GM, et al. Thanks to my friend Dave in NYC for the heads up on this clip.
I have to tell you, I watched this CNBC clip right after I saw a YouTube clip of Jim Rogers on Fox Business, and that almost made CNBC and Maria Bartiromo look charming and well-informed by comparison.
Talk about painful; I actually felt dumber for having seen this Fox Business segment. This was not due to Jim Rogers, who was amazingly patient in explaining (again and again) why he felt the way that he does about the economy and the US government's panoply of failed rescue policies.
Rather, the pain I felt was due to the horribly shrill and moronic teleprompter reader who insisted on shouting her talking points back at Rogers, in a full display of the intellectual dishonesty and willful ignorance which are, sadly, so evident in America today. So, fair warning if you decide to watch it.
James Altucher shares his thoughts on a new "inflation/depression-proof" stock play in this recent Street.com video clip.
Oh, and reason # 5 of why I like James Altucher: like a true contrarian, the man enjoys a tasty beverage (as opposed to standard-issue coffee in a to-go cup) at 9am while filming odd stock-picking segments on the streets of New York.
I too, share a fondness for Bloody Marys, a fact made evident by some rather incriminating college photos which I still have somewhere. No, not that one.
Anyway, here are the vitals on Altucher's new inflation play, CEDC.
Disclosure: No position in this stock, although I often find James' stock ideas to be rather interesting and uniquely delivered. Also, I'm starting to realize that he and Jim Cramer kind of do the same thing (each in their own unique way), don't they?