The Bailout is Crazy

Let’s get this right.  The public was against the bailout, we the public called our senators and representatives and told them so, in very large numbers!  So the House didn’t pass this ridiculous monster of a bill.  If you listen close, the people on TV want the bill to pass to save the bankers, brokers, hedge funds, mortgage companies, and their own investment accounts.  They don’t care about us.  If they cared about the population of the United States they would never pass such a plan to maintain high debt and credit.  If they cared and had the money, then why didnt’ they push for public health?  The professionals who caused this deep debt issue should be forced to continue to hold the bad debt, the bad mortgages, many of which have already been reposessed.  It is wrong for the tax payer to pay for this.

That being said, let’s tell the real story.  We do not have to have a bailout.  This isn’t 1930, this is not the Great Depression and conditions are much different today!  In the 1930’s people did not have savings, stocks and money and only a few companies did.  We have a robust middle-market and the state and local banks, regional banks, and many corporations have cash and cash equivalents stored up in their accounts.

Stocks do not have to crash, that is a symptom of people wanting out based on fear.  At this point they want out just because Top People who should know better, like Paulson, the  President, and some Congressmen are trying hard to scare the public into spending $700 Billion dollars.

So what if we have less credit in the system?  Many good thrifty people came out of the depression years and there is nothing wrong with that.  A cash system exists and we should use it more, not less.  Why do we think we have to have deep debt for the economy to work?  If you have been paying your bills, and your employer can pay your wages, then you don’t need a bailout.  Most people pay their bills and are in great shape.  Also, the family design is much different today.  Grandparents don’t live with their kids and grand-kids very often theses days and they already have money and guaranteed retirement funds, health insurance, and more. 

I can’t say it enough, THIS IS NOT 1930 no matter how much they try to get you to believe it is.  Let the system melt and let’s all get back to good business.

If Paulson and the other leaders get their way on this we will have an extended recession.  If they do not, the market will re-price to a reasonable level which more people can afford to participate in.

Warren Buffett is no Buy Indicator

Warren Buffett is excellent at buying under-valued businesses.  What you have to remember is that what he does is not what you can do.  For the most part, he started very young in managing money for other people and making them wealthier.  If you think he invested his own money, as you would, and everyone else just jumped on board because of his personal success, you are making a mistake.  He is a manager of other people’s money and he has earned his share over the years.  Still not bad, but realize that his only ability is persistence of vision.

Warren Buffett gets the news headlines today because of his investment in special shares of Goldman Sachs.  This is NOT a signal for everyone to jump in the market, although the Media seem to think it could be.  He does not know if the markets will go up or down from this point.  He just knows that he can suddenly purchase special shares of a previously unavailable ownership position, that have recently become indirectly assured by the full faith and credit of the Federal Government.  Remember, Goldman Sachs also just cut a deal with the Fed and Treasury by working with Paulson, who used to work at Goldman.  So think in terms of how this deal benefits them, and not that it signals a great buying opportunity in the markets.  Yes, Buffett is buying cheap, but the rest of us cannot make a similar purchase. Personally I just don’t have $5Billion to invest, do you?  If you choose to invest, and the market then drops 20%, you are likely to be unhappy, but Warren will still have made a good deal.

The benefit to the Fed/Treasury (Paulson) is that they have just gained a new buyer of Treasuries and Bonds which foreign entities have not been buying like they used to.  The Fed needs to sell bonds to increase reserves.  In return, Goldman Sachs, Morgan Stanley, and other “New Deal-Part 2” banks receive FDIC insurance on deposits, deep pockets to borrow from, and now have a Federal mandate to do business within certain terms.  In this, they have the ability to create a new economy of scale that makes the risk taking portion of their business models look less risky.  Warren Buffet gives them a news worthy headline to make them all look good because most people do not understand what he is really buying. Buffett gets a permanent expectation on the performance of the money, and because of the deal with Paulson he does not have to worry about risk with Goldman Sachs.  In a way, Buffett has made a deposit to the Treasury.

How does this affect you?  It really doesn’t.  It is just one symptom of the new economy the Government and Bankers are putting together.

Wall Street Disappears, Goldman and Morgan Sell Out to Socialism

It no longer matters if McCain or Obama becomes president.  The economy is going to be the big issue for the next presidential term, no matter what, and congress will have to do the heavy lifting instead of the executive branch.  Speculation, long the driver of our free economy, will have a much harder time existing.  The capitulation of Goldman and Morgan into banking throws heavy lead weights onto the back of our economy to help assure very slow growth.

Few people will understand what this change in Goldman Sachs and Morgan Stanley really means for quite some time.  It’s good for Goldman and Morgan because it gives them access to quick and easy money in the Federal Guarantees, but believe it or not, it is bad for the rest of us.  Bad because it will slow the economy, bad because it puts caps and limits on creativity in the financial world, where the U.S. has been the big leader for close to 100 years.

There will be perceived benefits.  Less risk rolled downhill to unwary investors.  But this model overall just makes it so we all put our money in one hat and let the bankers do the rest.  People already don’t pay attention to what they invest in.  Now the bankers will make a higher margin and basic investors will just get the small passbook portion even though they are the ones taking the real risk.  They will keep on telling you to just ride out market volatility for the long term.  There are different types of risk.  Under-performance is a very costly risk!

I am hopeful that real stock brokering will make a comeback in some way.  I remember when brokers had to know something.  Talk to an investment adviser lately?  They don’t know much.  They talk about Asset Allocation, Diversification, taking less risk, but even they don’t know what you have in your portfolio.  Do they have good ideas?  Smart ideas?  I haven’t heard any.

You need to know one important thing about Goldman Sachs and Morgan Stanley.  Most of their clients are multi-millionaires and can trade outside the normal rules and limits because they are qualified at a higher level than the average person.  Goldman and Morgan will be business as usual but the rest who are not accredited will fall into the bowels of the bank accounts and market average mutual funds.  An even bigger gap between wealthy and middle class will occur.

Free Capitalism Losing to Socialism

How much of our Free Capitalist Society is being lost in the current financial crisis?

It is no wonder that we don’t have Socialized Medicine, we already spent the money on Socialized Housing.  The roots of this crisis are in pressure from congressmen to make housing loans available to those who do not qualify for normal loans.  This is the basis for the growth of Fannie Mae and Freddie Mac.  Yes, the American dream.  But what is the dream going to cost us now that the financial structure has failed?  So far about $900 Billion, which is the amount the Fed had in the bank (more or less).  It is likely to cost taxpayers about $3 Trillion before it is all said and done.

The whole point is the Government now owns and operates Fannie and Freddie and will soon own and underwrite the entire worthless portfolio of sub-prime mortgages to provide continuing house loans for those who cannot qualify for them.  I am not for putting people out of their homes but I am also not for putting people in homes who should not be there.  There are other alternatives.

What I would like to be able to calculate is the value of the future impact of such a socialist program.  I would contend that allowing the financial firms to collapse in a free market would actually put the assets back to work more quickly and safely than a slow federal process and at much lower cost.  This now limits the ability of those who can invest at reduced price, and would, to do so.

Imagine you have a herd of cattle and the government comes by and says your herd could have a disease and they want to put a fence around them and quarantine the whole herd.  In the meantime they tell everyone that beef is tainted and the price begins to fall.  While you are locked up and cannot sell into the market the demand for beef continues to fall.  Eventually the market bottoms and it is determined that your cattle are not sick, which you knew all along.  Your herd is released back to you and now they cost more to feed than you can ever get back in the market.  Now your only hope is that the Fed will purchase your herd or compensate you for the downturn.  This will be at a discount and a loss to you.  It could now take several business cycles for prices to return to a profitable level.

Should the Government be doing this with housing?  I guess they have.  In this case the rancher loses the beef and those who do not work for it will be eating well.

Blame Democrats or Republicans for this Crisis?

There is, as usual, a lot of finger pointing to try and blame someone for the current financial crisis.  It is crazy to say the the Democrats did this.  It is equally crazy to say the the Republicans did this.  They both did this.  If one party is in the minority, then it is still their responsibility to blow the whistle if the other party is doing something dumb.

Both parties have been close to 50% of the house and senate for a very long time.  Just a few votes above the other party does not make the majority all powerful.  When did any of them stand up and say no to dumb ideas like the repeal of the Glas-Steagall Act?  Look that up in Wikipedia and see what it was all about.  Then you will wonder why they repealed it and why did Clinton sign to repeal it? 

So here we are.  Blame them all, they all knew about the potential fallout from ending the act since they also knew what caused the act in the first place. 

We should all consider our representatives as a whole for any action they take or do not take.

there is no Market Bottom any more

In 1987 I was working for a blue chip company selling computer systems and a friend of mine worked at Dean Witter.  I remember the crash very well because it was exciting to listen to the news and I was not affected by it.  My company had a pension plan, a good health plan, and great perks as well.  So it really seemed isolated from the investors of the time.  Back then not many people had IRA accounts or a 401k.  It was rare that anyone had any money to invest beyond their home and car, or savings for a trip, and maybe a bank savings account for college.

The important thing I remember, is that the news each day ran an update on the ratio of margin to equity in the exchanges.  Okay, this is new to most people who will read this but it is very important because it underlines the real difference between what is happening now and what happened in 1987, 1997, 1998, 2001, and even 1974.  This indicator really told the story of how far over-bought the market was, and how far it could drop to reach the bottom.

How it works is simple.  You just get the dollar value for how much is on margin (borrowed money) and divide that over the current market price, or subtract it directly to find the amount the market would be priced at if nobody borrowed against their shares to buy more.

I remember my friend at the brokerage was literally crying his eyes out when the market crashed.  It made me mad that money could mean so much to someone.  Knowing how great my company was and how well I would do regardless of the market dropping in value just made me think that if this guy were not watching the markets so closely he would see how fast business was increasing.  The momentum would carry us right back up again.

So I called him back on the phone the next day and told him what I thought the market bottom would be.  He was angry with me; how could I know, I wasn’t a broker!  No, I wasn’t but I knew the difference between loaned value and dollar value.  So I yelled right back at him and let him know that it was the best buying opportunity he would ever see for the rest of his career!  He slammed the phone down on me and I gave up on him.

But the story continued.  The next day he called me on the phone and was yelling at me again!  Only this time he said he was doing great, was happy with the market and had pulled in a lot of new money since I last talked to him.  I asked what had changed and what was happening.  He thanked me and said he slammed the phone down because he realized I was right and he needed to start making phone calls to potential clients to get them in the market!  Wow!  I had no idea.  I didn’t understand what he really did over there.

The point is that even I, at the time a total novice, could read the market enough to make a buy decision.  All the numbers were there for anyone to see.  You just had to look them over, consider the meaning, and make a decision.  But today this is nearly impossible!!!

It’s impossible because they no longer print the information you need, or the trading is done in the back room, or on a rarely traveled-to-floor of some skyscraper in New York, London, China…  The markets used to be about stocks and investors making investment decisions.  Now nobody pays attention to what’s going on, it’s the monkey with his hand over his mouth leading the monkey with his hands over his eyes!  Don’t ask, don’t tell what’s in the Allocated and Diversified portfolio.  Now I know that some investors do look deeper than their name and account value on the statement but the vast majority are afraid to open the mail.

Today we have no idea how much Margin is in the marketplace because, funny thing, they don’t tell you that any more!  We can’t tell because so much of it was done between Hedge Funds, Bankers, Brokers, Mortgage Companies, Non-US private accounts, Sovereign Funds of other nations, and on and on.  Nobody knows how much anyone at these places has in real equity!  But we are slowly finding out.  I guess we know for sure that the Fed believes there is at least $300 Billion worth of margin in the U.S. alone, or they would not have put up that amount to sieze control of AIG, shore up money markets, and guarantee other short term loans.  I am guessing that the Fed, in taking over AIG and other funding, probably covered only 20% of “margin”, and “margin” is not really the correct name for it.  It is a blend of margin and failed debt, but still has the overall effect of margin.  So let’s call it that.

Investors are completely in the dark on this, totally, and for the first time probably ever, there is nobody out there to turn to.  Will you call your broker and ask?  Why would you?  They don’t know and the firm they work for is probably part of the problem!  If so, that firm also cannot afford for you to pull your account so they could possibly tell you that everything is great and waiting it out is best.  Some of my friends tested their advisors today with a simple question, “How safe is my Money-market Account?”  And the answer back was the same old line about how money-market funds never lose value.  The advisors had no idea that money-markets were coming unwound this week and so severely that the Fed injected billions and so did many other countries around the world in their own banking system!  Even Russia!

It is very possible that many of today’s Financial Advisers are not any better than a shoe salesperson.  They have no idea what you really want but they will be glad to shoehorn you into something and check you out at the counter.

Copyright 2008 Michael P Arnold, MPArnold

AIG Conservatorship by the Feds

Definition:

  1. A person in charge of maintaining or restoring valuable items, as in a museum or library.
  2. One that conserves or preserves from injury, violation, or infraction; a protector.
  3. Law One that is responsible for the person and property of an incompetent.

Okay, that sounds pretty harsh to me.  I don’t see the benefit of placing AIG in that situation.

How can it be positive for the Government to seize control of the largest insurer in the world?  The best thing to do is allow the company to fall into liquidation, part out the elements which are valuable, let the shareholders take the loss rather than the government (citizens) and then the new owners of those elements can put them back to work again to help get the economy going.  By the way, that is what shareholders are for!  They accepted the risk in the company, but taxpayers did not.  Why reduce the risk of the stockholder and spread it out to the taxpayers?

It would take FOREVER for the government to fulfill the task of protecting and reissuing the assets of the firm.  In a much shorter period of time the assets can be producing again, maybe even return some of the previous share price to stockholders.  This would allow the failed management to exit into the work pool where the belong, and take losses along with the responsibility.

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Update: As it turns out the Fed did take control of AIG and it is going to take a long time… Two years!  That may not sound like a lot but since they are planning to sell off portions of the company and attempt to put it back in shape, this will take much longer than Barclay’s will to utilize the assets of Lehman Brothers.  It would seem that in the end AIG had no choice.  They had to either sellout to hedge funds for let the government take over.

This is a sad state of affairs.  And we thought the war in Iraq was expensive.

Why the Fed Kept Rates the Same

Today the Fed elected to keep interest rates the same and instead decided to use Fed lending to help out the markets.

Why?

First, they may need the cushion to be able to lower rates later in a worsened situation.  Second, they are preparing to see how much more they need available to negotiate bailouts or help mergers along.  Third, cutting rates has no impact if no one is borrowing money.  Fourth, Banks have already de-coupled from the Fed lending targets because of the constraint of having little cash available between them and are causing other banks and institutions to bid up overnight lending.

This is putting pressure on money markets and creating a real threat to average investors and that is why the Fed put $50 billion in the hat, to help maintain money market funds.

Everyone should pay attention to this, since it really underscores the real depth of the problem.

Copyright 2008 Michael P Arnold, MPArnold

You Created the Deficit! Yes, YOU…

If citizens of this country are deep in debt, then why do they expect the Federal Government to be any different?

It’s really a crazy thing. The biggest consumer economy in the world is the United States of America. We consume for lifestyle, reward, fun and entertainment, excitement, and a whole slew of reasons. The fact that we are consumers is also the basis for why the Dollar has value. Our ability to consume allows us to be competitive internationally. If we did not consume as much the dollar would be worth less, just like the Japanese Yen. Instead, we create a very high dollar “velocity”. The faster the dollar travels from one person to another or one entity to another, the faster our economy expands. This brings us to the crux of the current problem.

Just like the economy before the Great Depression, there has been a wild increase in credit and credit-based spending. When credit expands too rapidly then we end up in a situation in which there is not enough cash or velocity of cash to keep up with the debt load. In order to re-set the economy back to a normal credit balance, some loans must be called in.

Example: It’s ironic that some Hollywood movie stars will complain about spending and excess, what they believe to be a high debt load in the deficit numbers, and all along it is the consumer who makes them wealthy in the first place. It is the military fighting for freedom which allows our ability to live our lifestyle in which we can afford such entertainment. But movie stars then seem to be mad at us for it. It’s crazy! lol

Copyright 2008 Michael P Arnold, MPArnold

Political Econocide

How much of the Brokerage Failure has to do with politics? Seems like quite a bit! Just like the easy money of the Roaring Twenties, the easy money of the recent times can easily lead to a new Depression. Much of this had to do with Congress allowing Freddie and Fannie to run wild with low quality loans which the lenders all believed would be guaranteed by the full faith and credit of the US Government. Which they are, but now at a direct cost to the taxpayer. All this bail-out business has everything to do with politicians, bankers, brokers, and other financial institutions trying to save each other’s necks rather than do what they have fiduciary responsibility to do, protect the investors.

Now we are past the beginnings of this and well into the final demise of some of the institutions. Then the price tag rolls into the share holders and the taxpayers. But don’t think it stops here… next we see the loss of small business and many, many jobs. I don’t think they can turn the real estate market around fast enough to save Wall Street. Do you?

Political Econocide. The culprits/perpetrators are: Congress, Wall Street, Big Banks, Hedge Funds, Bond Brokers, and Mortgage Companies to name a few. They killed our economy.  They found easy money in loans to citizens of this country, then leveraged it into more borrowed money for bonds, then more borrowed money for investment in commodities which they all expected to bid up in the exchanges. Now we can see they borrowed to borrow, and then to borrow again. They even ignored good quality business while they wasted their time with “fools gold”.  On top of all of this, it is beginning to look like many congressmen, on both sides of the aisle, received large donations from Freddie and Fannie!  They thought your mortgage, paid for by your hard earned payments, was easy money for them to line their pockets with!

What will happen next? We don’t know for sure but expect a possible 30% reduction in stock prices, expect more bank failures, expect loan money to dry up, expect cash to become constrained, expect lots of job losses, and expect to become very, very thrifty… just like your grandparents who are old enough to have been born near the last Great Depression. Expect to vote for someone who can represent us better in Congress. If the past is a predictor, then about 1 out of 5 people will not have a job in the near future. We may not have wild inflation but if you don’t have cash in your pocket or in your bank account, then what do prices mean?

But this is what happens to us when we bid each other up on homes, and by not being thrifty at home, we cannot expect anyone in Congress to be thrifty either.

BTW… the major earmarks of the last depression were Excessive Credit, Constrained Cash, Real Estate Bubble, Stock Bubble, Natural Disasters, Corporations Hoarding Cash, and 20% Jobless Rate. Pretty much all of this is in place except for the Jobless Rate. Right now, many people are employed by the Government and that alone could be the one thing that keeps us from a total Depression.

(Copyright 2008 Michael P Arnold, MPArnold)