Jun 05 2008
Now that we’ve seen the collapse get into high gear over the last ten months, its time to revisit the great game that goes on in Wall Street after every bubble bursts — its called the Bailout Game, and you and I have been seeing lots of that since Bear Stearns’ hedge funds blew up in July of 2007.
Understanding the historic relationship between the Fed and its member banks / big Wall Street banking is essential in figuring out what’s transpiring as we speak.
Mar 17 2008
A list of articles worth perusing to grasp the depth of our problems:
Feb 14 2008
Nick Vardy is a well respected guru by most of Wall Street. He’s posted up a mocking critique of those of us contemplating the worst of what’s transpiring in the U.S. economy at the moment. The issue at hand is the consequence of “cry wolf syndrome”, where decades of warnings about horrid Fed policy and decadence in finance were, bluntly, way too early, causing mainstream analysts and bulls to dismiss them entirely as poppycock.
We’ll address Vardy’s comments below, piece by piece:
The Global Financial Crisis Of 2008 by Nicholas Vardy
Here we are yet again in the midst of another “global economic crisis.” From the hilltops of Davos, Switzerland, Morgan Stanley’s permabear Stephen Roach has shouted warnings of potential economic “Armageddon.” Superinvestor George Soros designated the current state of the global economy “the worst market crisis in 60 years.” Bill Clinton labeled it “the biggest financial crisis since the Great Depression” — even as global stocks responded by slumping 7.7% in January — the worst start to an investing year since Morgan Stanley began publishing data in the 1970s.
Uhh, but Stephan Roach has largely been right in his predictions since 2003, and where he erred was in underestimating the credit bubble’s blow-off. Soros has been similarly correct. Clinton? Well, opportunists always know when to hop on a bandwagon!
Bottom line, though, who do you trust? Those who failed to see any of this coming and were conceitedly dismissing warnings as crazy talk? The same ones who then failed to comprehend how severe the implosion would be, and whose advise encouraged investors to overextend and lose $ billions if not $ hundreds of billions?
But before you liquidate your financial assets, buy gold bullion, and move to a cave in Montana, you may wish to consider that current predictions of global economic collapse may be simply hyperbole. It has happened before. Clinton’s quote above actually refers to the collapse of Long Term Capital Management in 1998 — right before NASDAQ clocked an 88% gain in 1999.
Clinton’s a politician and a particularly adept one at saying whatever he needed to placate his power alliance. He’s a lousy example. However, what’s the point of bringing up the NASDAQ’s huge gains in 1999? Most who participated in that run-up gave that gain and a whole lot more back the following three years. Indeed, this was a bubble of insane proportions and who on earth can credibly use that as part of their defense for the health of today’s credit bubble economy?
Nor does this global crisis stand up to the scrutiny of historic comparison. Remember the S&L crisis in the early ’80s? It cost the U.S. economy about 3.5% of GDP — about 5x the size of subprime write-offs so far. Or how about the dark days of 1981, when the Federal Reserve drove its key interest rate to 19% in an effort to whip inflation? Bill Clinton’s “Great Depression of 1998″ doesn’t even merit mention.
Jan 15 2008
If we said it once, we’ve said it a thousand times: Inflation ain’t the price of things going up. Its the consequence of printing too many dollars and expanding too much credit out of thin air, which is all the Fed has ever done since its creation. Hence, while many can’t figure out why, we’ve predicted this for several years now:
Wholesale Prices Rise in 2007 by 6.3 Percent, Largest Amount in 26 Years
The Labor Department reported that wholesale inflation was up 6.3 percent for all of 2007, reflecting a huge increase for the year in various types of energy costs ranging from gasoline to home heating oil.
Meanwhile, retail sales fell by 0.4 percent in December, the worst showing in six months, the Commerce Department reported. Consumer confidence has plunged, reflecting the worsening housing slump and a lingering credit crisis.
Sure enough, the trade deficit gave the impression that we could enjoy the modern alchemy of printing money out of thin air while having prices drop. Well, that was during the honeymoon period of deficit inflation. As the fantasy gives way to reality, all those dollars circulating around the globe are being exchanged at an ever increasing pace for things that can’t be printed so effortless as they are. Folks also wake up to the reality that money supply expansion is being implicated in the housing bubble and subsequent collapse. And so the dollar is slowly repudiated for what it is: a worthless piece of paper backed by excessive amounts of debt that can only be paid if more pieces of these paper are printed to enables it.
And so, America — having paved over her factories for mega mall parking lots and golf course communities — has begun to sell herself to the world so she can pay her bills. As Patrick Buchanan so aptly observed of the United States’ self-indulgence and reckless leadership, “We are prodigal sons, and the day of reckoning approaches.”
I wish the story weren’t so dire for so many. But it doesn’t have to be. Perhaps the cheapest import you can get for China right now is a tiny bit of historic philosophy, which aptly translates to “chaos is opportunity.” And boy is there ever large doses of both at the moment.
Are you confidently making the most of it?
Nov 30 2007
This from Nouriel Roubini at NYU yesterday:
“Certainly yesterday’s (Wednesday’s) equities rally was totally driven by Fed governor Kohn signaling the obvious, i.e. that given that the liquidity and credit crunch is now worse than at its August peak the Fed will cut rates in December, January and for as long as needed. In this game of chicken between the Fed and the bond market (with the latter signaling already for a while that the Fed will keep on cutting) the Fed was obviously the one to blink: this was no surprise to anyone who had noticed the meltdown in financial markets (a ugly liquidity and credit crunch) in the last few weeks. But for some reason the stock market on Wednesday discovered what analysts, the bond market and credit markets knew all along, i.e. that the Fed will have to keep on cutting rates as we are headed towards an ugly recession that is now inevitable regardless of how much the Fed cuts rates.”
Call it a Bernanke Put if you believe that the Fed is trying to avoid a financial meltdwon; call it a need to bail out the economy rather than bailing out the markets if you believe - as I do - that the Fed actions are more driven by its concerns about the economy rather than an attempt to rescue investors; call it a moral hazard play if you believe that the Fed is trying to rescue investors and risks to create down the line another asset bubble. You can call it whatever you like but one thing is obvious: the Fed easing is perceived by the stock market as an action aimed to prevent a recession from occurring and stock prices rally - in spite of worsening macro news that are signaling recession ahead - because of the hope - that I will show is only wishful thinking - that the Fed will be able to avoid such a hard landing. Thus, what has been mostly driving up the stock market in the cycles since last summers is Fed policy expectations of easing.
Dr. Roubini raises some great issues. Just the same, we should not forget that all this policy action is engineered with the money printing press. The fed’s lower interest rate encourages more borrowing, which otherwise would normally dry up the naturally occurring pool of savings, which in turn would force interest rates back up. Instead the Fed provides the liquidity necessary to keep interest rates below the natural rate that the existing pool of savings would demand. Consequently, all these dollars that are freshly minted are suddenly bestowed with purchasing power. Of course, that’s not magic — It is simply inflation, which in turn comes out of the hide of all those who are storing their wealth in pre-existing dollars. Any wonders why gold, oil, and a host of other hard assets are up so dramatically since the gargantuan liquidity injections of Bernanke and his anointed predecessor, Alan Greenspan? Continue Reading »
Oct 22 2007
“At least one bank representative suggested that Treasury step in with some money to help bail out the firms, the people who attended say. Mr. Steel told the group that wasn’t an option: Treasury would only back a private-sector, market-based solution. “We bought the sandwiches, and that’s it,” Mr. Steel told those assembled.”
I’ve seen the “bought the sandwiches only” sentence quoted all over, but this is the only time I’ve come across the sentence prior to it. That makes me feel really confident the taxpayer won’t be backing any of this in some form or another. Of course, stabilizing the credit markets and all the inflated asset values (artificial pricing vs. natural pricing mechanism in the economy) it supports doesn’t fall under the Treasury’s Plunge Protection Team’s authority, right?
We are joking, of course. When the Wall Street Journal is also publishing articles like this one [Super-SIV Could Be Super Flop For Market It Is Meant to Help] we encourage readers to keep their eyes open.
Sep 19 2007
Interest rate pro, James Grant, who is among the few who predicted accurately that the credit markets would be in for dire problems well in advance of the current mess, has a WSJ review of Greenspan’s new biography, “The Age of Turbulence“. We’ve not yet read the book ourselves, so we can’t fully comment other than to say that Grant has been reliable on interest rates and economic observations for many years now, and has shown a good deal of character in remaining steady despite his opinions causing mainstreamers to throw flack his way for being such a wet blanket on the credit bubble party.
We can, however, agree with Grant’s non book-specific implied conclusions about Greenspan and all central bankers: In the end, they are nothing more than price fixers and central planners, and given the disruptions and massive dislocations invariably caused by fixing the price and supply of credit and money, probably deserve less respect than any other bureaucrat assigned such a role.
Aug 29 2007
If you don’t take my word, take that of David Walker, U.S. Controller General, whose been on tour telling the truth about the real Federal deficit vs. the headline number. The numbers used by politicians: $315 and $265 billion in 2005 and 2006. The real numbers: $3.5 and $ 4.6 trillion, when the slight of hand that returns to the balance sheet the many social obligations that were removed thanks to the creativity of L.B.J and Congress back in the 1960s.
Cut programs? Raise taxes? Show me a politician who’d dare run on that — a scarcity confirmed in this video.
To us, this smells like more money printing in the future. Add that to the current credit market fiasco, and suddenly there’s a real issue regarding the slumping dollar!
Apr 22 2007
The following is a guest article from Doug Wakefield and Ben Hill
“The federal government’s financial condition and fiscal outlook are worse than many may understand. Despite an increase in revenues in fiscal year 2006 of about $255 billion, the federal government reported that it costs exceeded its revenues by $450 billion (i.e., net operating cost) and that its cash outlays exceeded its cash receipts by $248 billion (i.e., unified budget deficit). Further, as of September 30, 2006, the U.S. government reported that it owed (i.e., liabilities) more than it owned (i.e., assets) by almost $9 trillion. In addition, the present value of the government’s major reported long-term ‘fiscal exposures’ - liabilities (e.g., debt), contingencies (e.g., insurance) and social insurance and other commitments and promises (e.g., Social Security, Medicare) - rose from $20 trillion to about $50 trillion in the last 6 years.” (Parenthesis his)
Mar 30 2007
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Mar 27 2007
Taking a view from 30,000 feet, I can’t help but remind myself that Wall Street is the beneficiary of an artificial construct of legislation that creates inefficiencies and barriers against what was once considered to be the American Dream / the free flow of capital.
On the simplest level, most entrepreneurs I work with have their retirement tied into their business. Easily 50%++ of what they have was invested there. Good luck at putting that asset into a non-taxed qualified plan or IRA. Only approved Wall Street paper is allowed, and so we have $ trillions directed to Wall Street for most folks. As for the hurdles of doing business, small biz is severely hampered by excessive legislation and fewer and fewer people bother to try, especially in an era where many lines of biz require establishing facilities abroad. That attitude of passing on giving it a shot was heavily reinforced in the 1990s when it became much easier to earn 20-30% a year simply by investing into Wall Street. Why bother with the extra headaches? The American Dream? Invest in the stock market, retire.
All that said, what is Wall Street these days? Is it representative of the free market? Or something else?
Mar 19 2007
There will be those who will be quick to blame the free market for the problems in housing and the mortgage markets, especially if we’re only seeing the beginning of serious problems as we suspect. But don’t be fooled.
March 19, 2007
The U.S. housing market, long considered vulnerable by many economists, is now on the verge of suffering a serious collapse in many regions. Commodities guru and hedge fund manager Jim Rogers warns that real estate in expensive bubble areas will drop 40 or 50%. Mainstream media outlets like the New York Times are reporting breathlessly about the possibility of widespread defaults on subprime mortgages.
When the bubble finally bursts completely, millions of Americans will be looking for someone to blame. Look for Congress to hold hearings into subprime lending practices and “predatory” mortgages. We’ll hear a lot of grandstanding about how unscrupulous lenders took advantage of poor people, and how rampant speculation caused real estate markets around the country to overheat. It will be reminiscent of the Enron hearings, and the message will be explicitly or implicitly the same: free-market capitalism, left unchecked, leads to greed, fraud, and unethical if not illegal business practices.
But capitalism is not to blame for the housing bubble, the Federal Reserve is. Specifically, Fed intervention in the economy– through the manipulation of interest rates and the creation of money– caused the artificial boom in mortgage lending.
Mar 06 2007
The following is from Congressman Ron Paul on March 5, 2007
David Walker, Comptroller General at the Government Accountability Office, appeared on the show “60 Minutes” last evening to discuss the federal budget outlook. If you saw the show, you know that he painted a very sobering picture regarding the federal government’s ability to meet its future obligations.
If you didn’t see the show, Mr. Walker’s theme was simple: government entitlement spending is like a runaway freight train headed straight at American taxpayers. He singled out the Medicare prescription drug bill, passed by Congress at the end of 2003, as “probably the most fiscally irresponsible piece of legislation since the 1960s.”
When it comes to Social Security and Medicare, the federal government simply won’t be able to keep its promises in the future. That is the reality every American should get used to, despite the grand promises of Washington reformers. Our entitlement system can’t be reformed – it’s too late. And the Medicare prescription drug bill is the final nail in the coffin.
The financial impact of the drug bill cannot be overstated. Government projections that the program would cost $400 billion over the next decade were a joke, as everyone in Congress knew even as they voted for the bill. The real cost will be at least $1 trillion in the first decade alone, and much more in following decades as the American population grows older.
The Medicare “trust fund” is already badly in the red, and the only solution will be a dramatic increase in payroll taxes for younger workers. The National Taxpayers Union reports that Medicare will consume nearly 40% of the nation’s GDP after several decades because of the new drug benefit. That’s not 40% of federal revenues, or 40% of federal spending, but rather 40% of the nation’s entire private sector output!
The politicians who get reelected by passing such incredibly shortsighted legislation will never have to answer to future generations saddled with huge federal deficits. Those generations are the real victims, as they cannot object to the debts being incurred today in their names.
The official national debt figure, now approaching $9 trillion, reflects only what the federal government owes in current debts on money already borrowed. It does not reflect what the federal government has promised to pay millions of Americans in entitlement benefits down the road. Those future obligations put our real debt figure at roughly fifty trillion dollars – a staggering sum that is about as large as the total household net worth of the entire United States. Your share of this fifty trillion amounts to about $175,000.
Don’t believe for a second that we can grow our way out of the problem through a prosperous economy that yields higher future tax revenues. If present trends continue, by 2040 the entire federal budget will be consumed by Social Security and Medicare alone. The only options for balancing the budget would be cutting total federal spending by about 60%, or doubling federal taxes. To close the long-term entitlement gap, the U.S. economy would have to grow by double digits every year for the next 75 years.
The answer to these critical financial realities is simple, but not easy: We must rethink the very role of government in our society. Anything less, any tinkering or “reform,” won’t cut it. A good start would be for Congress to repeal the Medicare prescription drug bill.
Mar 02 2007
On today’s show we had the plunge postmortem, which we discussed with market technician, Tony Cherniawski. During the show, the in the final minutes of the trading day — a Friday — the market flushed about 70 points. What does this mean? What’s going on in the broader economy? Should you be worried? Is this the beginning of something bigger?
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Jan 30 2007
The following piece is from Congressman Ron Paul.
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January 29, 2007
The Pentagon recently reported that it now spends roughly $8.4 billion per month waging the war in Iraq, while the additional cost of our engagement in Afghanistan brings the monthly total to a staggering $10 billion. Since 2001, Congress has spent more than $500 billion on specific appropriations for Iraq. This sum is not reflected in official budget and deficit figures. Congress has funded the war by passing a series of so-called “supplemental” spending bills, which are passed outside of the normal appropriations process and thus deemed off-budget.
This is fundamentally dishonest: if we’re going to have a war, let’s face the costs– both human and economic– squarely. Congress has no business hiding the costs of war through accounting tricks.
As the war in Iraq surges forward, and the administration ponders military action against Iran, it’s important to ask ourselves an overlooked question: Can we really afford it? If every American taxpayer had to submit an extra five or ten thousand dollars to the IRS this April to pay for the war, I’m quite certain it would end very quickly. The problem is that government finances war by borrowing and printing money, rather than presenting a bill directly in the form of higher taxes. When the costs are obscured, the question of whether any war is worth it becomes distorted.
Congress and the Federal Reserve Bank have a cozy, unspoken arrangement that makes war easier to finance. Congress has an insatiable appetite for new spending, but raising taxes is politically unpopular. The Federal Reserve, however, is happy to accommodate deficit spending by creating new money through the Treasury Department. In exchange, Congress leaves the Fed alone to operate free of pesky oversight and free of political scrutiny. Monetary policy is utterly ignored in Washington, even though the Federal Reserve system is a creation of Congress.
The result of this arrangement is inflation. And inflation finances war.
Economist Lawrence Parks has explained how the creation of the Federal Reserve Bank in 1913 made possible our involvement in World War I. Without the ability to create new money, the federal government never could have afforded the enormous mobilization of men and material. Prior to that, American wars were financed through taxes and borrowing, both of which have limits. But government printing presses, at least in theory, have no limits. That’s why the money supply has nearly tripled just since 1990.
For perspective, consider our ongoing military commitment in Korea. In Korea alone, U.S. taxpayers have spent $1 trillion in today’s dollars over 55 years. What do we have to show for it? North Korea is a belligerent adversary armed with nuclear weapons, while South Korea is at best ambivalent about our role as their protector. The stalemate stretches on with no end in sight, as the grandchildren and great-grandchildren of the men who fought in Korea give little thought to what was gained or lost. The Korean conflict should serve as a cautionary tale against the open-ended military occupation of any region.
The $500 billion we’ve officially spent in Iraq is an enormous sum, but the real total is much higher, hidden within the Defense Department and foreign aid budgets. As we build permanent military bases and a $1 billion embassy in Iraq, we need to keep asking whether it’s really worth it. Congress should at least fund the war in an honest way so the American people can judge for themselves.
