We have another fine example of government stupidity in action. This time it's from the Pension Benefit Guaranty Corp or PBGC. The PBGC is the agency set up by the US government to cover the defined benefit pensions of employees of bankrupt companies.
The agency insures the retirements funds of 44 million Americans. And if GM is forced into bankruptcy, the PBGC will have even more defined benefits pensions to pay out in the coming years.
The PBGC unfortunately manages its own assets. The Boston Globe reports that "Just months before the start of last year's stock market collapse, the PBGC departed from its conservative investment strategy and decided to put much of its $64 billion insurance fund into stocks. Switching from a heavy reliance on bonds, the PBGC decided to pour billions of dollars into speculative investments such as stocks in emerging foreign markets, real estate, and private equity funds."
If the government can't manage pension funds, how do you the think the government will do at managing GM or our banking system?
Tuesday, March 31, 2009
Monday, March 30, 2009
Wall Street Is Teacher's Pet
The Obama administration has forced the resignation of General Motor's Chairman and CEO, Rick Wagoner. On the back of this news, the stock market has hit the skids on Monday. I guess some of the players don't like to see Uncle Sam forcing out the CEO of a private company.
I am also upset by this piece of news. But not because Rick Wagoner was forced out by the government. Mr. Wagoner is an incompetent boob who should have been forced out years ago. If there had been a competent Board of Directors and/or non-complacent GM shareholders, Mr. Wagoner would have long ago found himself unemployed.
I am upset because of the obvious double standard. Wall Street is treated with kid gloves while every other industry is treated harshly. Yes, General Motors is an important company with thousands of employees throughout the country and Mr. Wagoner should be replaced.
However, the damage that Mr. Wagoner has done at GM is negligible to the massive economic damage done globally by Wall Street firms. Yet, not one senior executive of a Wall Street firm has been forced to leave. Instead of being punished for their gross incompetence and sheer greed, Wall Street executives are being "rewarded" with billions of dollars of government monies. In addition, they are allowed to continue with "business as usual".
This is absolutely outrageous! What aren't the people largely responsible for the economic crisis we are in being made to pay a price? Is it maybe because the Wall Street/Washington cabal runs this country?
I am also upset by this piece of news. But not because Rick Wagoner was forced out by the government. Mr. Wagoner is an incompetent boob who should have been forced out years ago. If there had been a competent Board of Directors and/or non-complacent GM shareholders, Mr. Wagoner would have long ago found himself unemployed.
I am upset because of the obvious double standard. Wall Street is treated with kid gloves while every other industry is treated harshly. Yes, General Motors is an important company with thousands of employees throughout the country and Mr. Wagoner should be replaced.
However, the damage that Mr. Wagoner has done at GM is negligible to the massive economic damage done globally by Wall Street firms. Yet, not one senior executive of a Wall Street firm has been forced to leave. Instead of being punished for their gross incompetence and sheer greed, Wall Street executives are being "rewarded" with billions of dollars of government monies. In addition, they are allowed to continue with "business as usual".
This is absolutely outrageous! What aren't the people largely responsible for the economic crisis we are in being made to pay a price? Is it maybe because the Wall Street/Washington cabal runs this country?
Wednesday, March 25, 2009
Latest Treasury Auction Not Well Received
The latest auction of US Treasury securities did not go very well today. This should come as no shock to anyone, but incredibly it does come as a shock to most people on Wall Street.
This gets back to one of my main points about Wall Street - the arrogance of the people who work there. Wall Street is arrogantly assuming that no matter how massive the upcoming auctions for US Treasury securities is, there will always be ready buyers.
Wall Street assumes this because, after all, they "know" that the US is the "safest" place to invest and other such nonsense. Wall Street assumes that the "suckers", aka the foreigners, will always show up to purchase our Treasury securities.
What muddled thinking! Is it any wonder these guys have lost so much money? These Wall Street geniuses are ignoring one important fact - that because of the problems that originated on Wall Street, many countries around the globe also have major problems.
Most of major investors in these countries will simply keep their money at home and purchase their own sovereign debt in order to help their own people. It is simply common sense.
I always like to use the following analogy - Let's say that both your house and your neighbor's house is on fire with both families trapped inside. What would any logical person do?
The common sense answer is that a person would first get his own family out of their burning home and only then would help their neighbor, if possible.
However, according to Wall Street, a person would let his own family possibly burn to death in their flaming home and first race over to help his neighbors get out of their burning home before returning to his own home.
The attitude on Wall Street seems to be - "They wouldn't dare not buy our Treasuries! They'll just let their own people eat dirt. After all, we're Americans!" What sheer arrogance........
This gets back to one of my main points about Wall Street - the arrogance of the people who work there. Wall Street is arrogantly assuming that no matter how massive the upcoming auctions for US Treasury securities is, there will always be ready buyers.
Wall Street assumes this because, after all, they "know" that the US is the "safest" place to invest and other such nonsense. Wall Street assumes that the "suckers", aka the foreigners, will always show up to purchase our Treasury securities.
What muddled thinking! Is it any wonder these guys have lost so much money? These Wall Street geniuses are ignoring one important fact - that because of the problems that originated on Wall Street, many countries around the globe also have major problems.
Most of major investors in these countries will simply keep their money at home and purchase their own sovereign debt in order to help their own people. It is simply common sense.
I always like to use the following analogy - Let's say that both your house and your neighbor's house is on fire with both families trapped inside. What would any logical person do?
The common sense answer is that a person would first get his own family out of their burning home and only then would help their neighbor, if possible.
However, according to Wall Street, a person would let his own family possibly burn to death in their flaming home and first race over to help his neighbors get out of their burning home before returning to his own home.
The attitude on Wall Street seems to be - "They wouldn't dare not buy our Treasuries! They'll just let their own people eat dirt. After all, we're Americans!" What sheer arrogance........
Tuesday, March 24, 2009
Geithner Plan Is Flawed
The stock market roared its approval for the latest plan to help ailing banks from Treasury secretary Tim Geithner. The sharp rally is reminiscent to me of previous hopeful rallies after the US government announced plans to fix ailing Wall Street banks.
This plan attempts to draw in private players which would partner with the US government is buying up toxic assets. Briefly, the plan involves the use of leverage and government loan guarantees to entice private participation. So any private participants would face little risk. The risk would fall mainly on the government and US taxpayers.
The key sticking point, as I see it, is whether the banks will accept the offers made by these public-private partnerships. Let's say a block of toxic assets is valued by the banks at 60 cents on the dollar, but the private-public partnerships are only willing to offer 40 cents for those toxic assets.
What will happen? I would expect that since Wall Street bankers are still living on Fantasy Island that they will refuse to sell the assets at the lower price and take the loss. The toxic assets will remain on the books of the Wall Street banks for many, many years and the problems in the credit markets will remain like a festering wound.
When this happens, the US government will finally be forced to nationalize the Wall Street banks on a temporary basis. Uncle Sam then will sell these toxic for whatever price they can.
This plan attempts to draw in private players which would partner with the US government is buying up toxic assets. Briefly, the plan involves the use of leverage and government loan guarantees to entice private participation. So any private participants would face little risk. The risk would fall mainly on the government and US taxpayers.
The key sticking point, as I see it, is whether the banks will accept the offers made by these public-private partnerships. Let's say a block of toxic assets is valued by the banks at 60 cents on the dollar, but the private-public partnerships are only willing to offer 40 cents for those toxic assets.
What will happen? I would expect that since Wall Street bankers are still living on Fantasy Island that they will refuse to sell the assets at the lower price and take the loss. The toxic assets will remain on the books of the Wall Street banks for many, many years and the problems in the credit markets will remain like a festering wound.
When this happens, the US government will finally be forced to nationalize the Wall Street banks on a temporary basis. Uncle Sam then will sell these toxic for whatever price they can.
Monday, March 23, 2009
Bear Market Rally
Investors need to remember one thing - that bear market rallies are extremely sharp, but they are still bear market rallies. This bear market in equities has been caused by massive global deleveraging.
These type of deleveraging episodes are generally characterized by rising savings, low levels of investment and weak consumption. Economic growth tends to be both below average and fitful. It is common for initial economic recoveries to be followed by subsequent weakness - a so-called W-shaped recovery.
It is always useful to draw upon history as a guide. Experience of the Great Depression reveals that these types of economic downturns can last a long time. Equity markets during such a period can rebound sharply but ephemerally.
In a comparison to the Great Depression, the good news is that we are not at the start of the crisis, but several years into it. The analogue of the 1929 Wall Street crash is not the 2007 credit crunch, but the bursting of the New Economy bubble in 2000.
The difference between the years after 1929 and the years after 2000 is that policy mistakes were almost exact opposites. The Federal Reserve's policies led to a boom in asset prices, extended unsustainable credit levels and induced further growth of the fundamentally flawed financial infrastructure.
In 1937-38, stock markets fell again as markets and business leaders came to doubt the durability of the business foundations of the partial recovery from the Great Depression. In 2007-08, markets and business leaders came to doubt the durability of the financial foundations that had supported consumption and asset price growth after the New Economy fiasco.
Based on history, this bear market probably still has to run before it is finally over.
These type of deleveraging episodes are generally characterized by rising savings, low levels of investment and weak consumption. Economic growth tends to be both below average and fitful. It is common for initial economic recoveries to be followed by subsequent weakness - a so-called W-shaped recovery.
It is always useful to draw upon history as a guide. Experience of the Great Depression reveals that these types of economic downturns can last a long time. Equity markets during such a period can rebound sharply but ephemerally.
In a comparison to the Great Depression, the good news is that we are not at the start of the crisis, but several years into it. The analogue of the 1929 Wall Street crash is not the 2007 credit crunch, but the bursting of the New Economy bubble in 2000.
The difference between the years after 1929 and the years after 2000 is that policy mistakes were almost exact opposites. The Federal Reserve's policies led to a boom in asset prices, extended unsustainable credit levels and induced further growth of the fundamentally flawed financial infrastructure.
In 1937-38, stock markets fell again as markets and business leaders came to doubt the durability of the business foundations of the partial recovery from the Great Depression. In 2007-08, markets and business leaders came to doubt the durability of the financial foundations that had supported consumption and asset price growth after the New Economy fiasco.
Based on history, this bear market probably still has to run before it is finally over.
Friday, March 20, 2009
The Number One Wall Street Myth
Despite the stock market carnage of the past year and a half, there is still one Wall Street myth which continues to live on. That myth is to invest in stocks for the "long term".
When a person hears those words from their financial advisor or broker, they should immediately ask their advisor one question. That question should be - what is your definition of the "long-term"?
How the advisor answers the question will tell you if the advisor is trustworthy or not. If the advisor defines "long-term" as 25-30 years, then they are trustworthy. If they define "long-term" as any shorter period of time, then they are giving you BS and are trying to sell you something on which they will collect commissions or fees.
The dirty little secret that people who work on Wall Street do not like to tell their clients is that stocks move up and down in long cycles of roughly 20 years in length.
Here are some examples: Anyone who bought stocks in 1929 did not reach breakeven until 1956! Anyone who bought stocks in 1966 did not reach breakeven until 1983!
Since stocks are now back to levels seen in 1997, it looks like we are in the midst of one of those long down-cycles for stocks.
So if you are young and have at least 20 years of "investing life" before you will need the money, by all means invest for the "long-term". However, if you will need your money in a decade or so, you should take a long hard look at your current portfolio allocation. In many cases, changes should be made.
When a person hears those words from their financial advisor or broker, they should immediately ask their advisor one question. That question should be - what is your definition of the "long-term"?
How the advisor answers the question will tell you if the advisor is trustworthy or not. If the advisor defines "long-term" as 25-30 years, then they are trustworthy. If they define "long-term" as any shorter period of time, then they are giving you BS and are trying to sell you something on which they will collect commissions or fees.
The dirty little secret that people who work on Wall Street do not like to tell their clients is that stocks move up and down in long cycles of roughly 20 years in length.
Here are some examples: Anyone who bought stocks in 1929 did not reach breakeven until 1956! Anyone who bought stocks in 1966 did not reach breakeven until 1983!
Since stocks are now back to levels seen in 1997, it looks like we are in the midst of one of those long down-cycles for stocks.
So if you are young and have at least 20 years of "investing life" before you will need the money, by all means invest for the "long-term". However, if you will need your money in a decade or so, you should take a long hard look at your current portfolio allocation. In many cases, changes should be made.
Thursday, March 19, 2009
The Federal Reserve Opts for Inflation
The headline from the front page of the Financial Times tells it all - "Fed Purchase Plan Stuns Investors". Yes, the Fed has decided to pursue a policy of quantitative easing - printing money out of thin air.
The Fed has opted for the easy route out of the massive debt dilemna -inflating out of it and paying the debt back with a debased currency. This move should have come as a surprise to no one, except for the deflationist dummies who bought the snake oil that Wall Street and CNBC were selling.
The Fed announced that over the next 6 months they would purchase up to $300 billion of US Treasury Notes with maturities between 2 and 10 years. The Fed also announced that they would be purchasing $750 billion of mortgage securities.
This brings the total of mortgage securities to be purchased by the Fed to a staggering $1.45 trillion. Once all the purchases are made, the Fed's balance sheet will be approaching a once undreamed of $4 trillion! And keep in mind - it is almost assured that after the initial 6 months, the Fed will purchase even more Treasuries.
The reaction in the financial markets was swift and telling - the US Dollar plunged while gold soared. Bonds also soared as the Fed was placing a floor underneath the market. Stocks also rose as stock trading CNBC-zombies never look beyond the very short-term.
The long-term implications of the Fed's actions will be future inflation, a debased US Dollar, higher commodity prices and a lower standard of living for Americans.
I sure that the Fed's actions has the holders of massive positions in Treasuries, such as China and Japan, deliriously happy! These countries have not been able to sell their Treasuries for fear of causing a panic.
Now these countries have a ready buyer - the Federal Reserve. They will be able to sell at a good price and not cause a panic. These countries will be relieved as they finally can get rid of the albatross around their neck of being forced to hold US debt.
Longer-term, this means these countries will not be purchasing Treasuries in vast quantaties. This is bad for the long-term health of the US economy, but of course the CNBC-zombie stock traders never think about the long-term.
The Fed has opted for the easy route out of the massive debt dilemna -inflating out of it and paying the debt back with a debased currency. This move should have come as a surprise to no one, except for the deflationist dummies who bought the snake oil that Wall Street and CNBC were selling.
The Fed announced that over the next 6 months they would purchase up to $300 billion of US Treasury Notes with maturities between 2 and 10 years. The Fed also announced that they would be purchasing $750 billion of mortgage securities.
This brings the total of mortgage securities to be purchased by the Fed to a staggering $1.45 trillion. Once all the purchases are made, the Fed's balance sheet will be approaching a once undreamed of $4 trillion! And keep in mind - it is almost assured that after the initial 6 months, the Fed will purchase even more Treasuries.
The reaction in the financial markets was swift and telling - the US Dollar plunged while gold soared. Bonds also soared as the Fed was placing a floor underneath the market. Stocks also rose as stock trading CNBC-zombies never look beyond the very short-term.
The long-term implications of the Fed's actions will be future inflation, a debased US Dollar, higher commodity prices and a lower standard of living for Americans.
I sure that the Fed's actions has the holders of massive positions in Treasuries, such as China and Japan, deliriously happy! These countries have not been able to sell their Treasuries for fear of causing a panic.
Now these countries have a ready buyer - the Federal Reserve. They will be able to sell at a good price and not cause a panic. These countries will be relieved as they finally can get rid of the albatross around their neck of being forced to hold US debt.
Longer-term, this means these countries will not be purchasing Treasuries in vast quantaties. This is bad for the long-term health of the US economy, but of course the CNBC-zombie stock traders never think about the long-term.
Wednesday, March 18, 2009
The Smart Money Continues Flowing Into Gold
The gulf between the "smart money" and the "dumb money" continues to grow ever wider. To me, the "dumb money" is any investor who watches CNBC or actually reads worthless publications such as Money Magazine or Kiplinger's.
As Tim Iacono, of the blog - The Mess That Greenspan Made, pointed out today Money and Kiplinger's are still in state of denial about the stock market. Not only that, but as Tim pointed out, Kiplinger's continues to rip one of the only investments that has performed well this decade - gold.
So anyone reading Kiplinger's (the "dumb money") will continue to avoid gold entirely and continue to pour money into S&P 500 index funds and make the rich guys on Wall Street even richer.
Meanwhile, the Financial Times today had an article today about someone whom I consider to be "smart money". Billionaire hedge fund manager John Paulson became famous for betting against subprime mortgages in 2007 and securing profits in excess of $10 billion for his funds.
Mr. Paulson seems to have moved from betting against banks to betting against governments. His fund, Paulson & Co., spent $1.28 billion buying Anglo-American's 11.3% stake in gold mining company - AngloGold.
Mr. Paulson is expanding his bet that gold will benefit as paper currencies suffer from the financial crisis and the massive printing of money by governments around the globe, led by the United States' Federal Reserve. He believes that this massive money creation will lead to the debasement of paper currencies and inflation.
I sure Mr. Paulson is being scoffed at now with his bet on gold, much as he was with his bet against the banks and subprime mortgages. My guess is that he will be right again.
As Tim Iacono, of the blog - The Mess That Greenspan Made, pointed out today Money and Kiplinger's are still in state of denial about the stock market. Not only that, but as Tim pointed out, Kiplinger's continues to rip one of the only investments that has performed well this decade - gold.
So anyone reading Kiplinger's (the "dumb money") will continue to avoid gold entirely and continue to pour money into S&P 500 index funds and make the rich guys on Wall Street even richer.
Meanwhile, the Financial Times today had an article today about someone whom I consider to be "smart money". Billionaire hedge fund manager John Paulson became famous for betting against subprime mortgages in 2007 and securing profits in excess of $10 billion for his funds.
Mr. Paulson seems to have moved from betting against banks to betting against governments. His fund, Paulson & Co., spent $1.28 billion buying Anglo-American's 11.3% stake in gold mining company - AngloGold.
Mr. Paulson is expanding his bet that gold will benefit as paper currencies suffer from the financial crisis and the massive printing of money by governments around the globe, led by the United States' Federal Reserve. He believes that this massive money creation will lead to the debasement of paper currencies and inflation.
I sure Mr. Paulson is being scoffed at now with his bet on gold, much as he was with his bet against the banks and subprime mortgages. My guess is that he will be right again.
Tuesday, March 17, 2009
Bear Markets and Local Governments
There are many non-Wall Street institutions in our country that invest into the stock market. There are billions of dollars invested by schools, hospitals, municipal utility authorities, local and state governments.
It seems to me that most of these institutions invest their monies poorly and have really learned nothing from the current bear market. On the one hand, their poor investment performance is understandable - many of the people making the decisions have no real background in the investment industry.
On the other hand, it is inexcusable - the decision-makers should take the time to go out and find unbiased, knowleadable sources that they can rely on to help them make prudent investment decisions.
If decision-makers do not do this, they pay the price. The local Pittsburgh Water Authority was basically "conned" by JP Morgan into getting involved with an interest rate swap. This will cost the Water Authority tens of millions of dollars that they do not have.
Yet, all the decision-makers at the Pittsburgh Water Authority had to was to contact a local unbiased, knowledgable professional (like myself). I would have told them - "Are you nuts? Tell those snake-oil salesmen from JP Morgan to find suckers elsewhere".
Yet none of the decision-makers in any of these type of institutions do that. I offered my services free of charge to my local municipality. I presented my credentials (over 20 years in the business,etc.) to the local decision-makers.
Their answer - but you don't work currently for any financial institutional. That's the whole idea! I would give an unbiased opinion - I have nothing to sell!
Until these governmental and quasi-governmental institutions start getting their investment advice from someone other than Wall Street snake-oil salesmen, their portfolios of PUBLIC money will continue to go down and down.
It seems to me that most of these institutions invest their monies poorly and have really learned nothing from the current bear market. On the one hand, their poor investment performance is understandable - many of the people making the decisions have no real background in the investment industry.
On the other hand, it is inexcusable - the decision-makers should take the time to go out and find unbiased, knowleadable sources that they can rely on to help them make prudent investment decisions.
If decision-makers do not do this, they pay the price. The local Pittsburgh Water Authority was basically "conned" by JP Morgan into getting involved with an interest rate swap. This will cost the Water Authority tens of millions of dollars that they do not have.
Yet, all the decision-makers at the Pittsburgh Water Authority had to was to contact a local unbiased, knowledgable professional (like myself). I would have told them - "Are you nuts? Tell those snake-oil salesmen from JP Morgan to find suckers elsewhere".
Yet none of the decision-makers in any of these type of institutions do that. I offered my services free of charge to my local municipality. I presented my credentials (over 20 years in the business,etc.) to the local decision-makers.
Their answer - but you don't work currently for any financial institutional. That's the whole idea! I would give an unbiased opinion - I have nothing to sell!
Until these governmental and quasi-governmental institutions start getting their investment advice from someone other than Wall Street snake-oil salesmen, their portfolios of PUBLIC money will continue to go down and down.
Monday, March 16, 2009
AIG Shows What Is Wrong With Wall Street
Insurance giant American International Group or AIG has now received four bailouts from the federal government. The total tab for these bailouts, so far, to US taxpayers is in excess of $170 billion!
The entirety of the losses from AIG were generated by their financial products unit. The geniuses at this unit are the people who got involved with credit default swaps (CDS) and other exotic derivative instruments and which has put AIG in such dire straits.
These incompetents were clever though and clever enough to have their contracts pay them $220 million in retention pay for 2008. And they have more bonuses coming to them in 2009 and 2010. Talk about rewarding incompetence!
Not one of these people is thinking of giving back their outrageous bonus because of gross incompetence. I recently wrote an article for the Seeking Alpha site about when bad times hit, why in the world should people in the financial industry be treated differently than any other industry.
Executives at AIG and other Wall Street firms say that lavish bonuses are needed to retain talent. I guess the word "talent" has been re-defined to mean people that are incompetent and/or criminals and that have almost destroyed the global economic system.
You do not see lavish bonuses needed in any other industry to retain talent. These other industries use promotions and other similar ways to reward employees. But not Wall Street.
The response to my article from some people who work in the industry that commented on my article? "We are different, we are smarter, we are better than people who work in other industries, we deserve every penny."
That is one major problem with Wall Street that has to be pulled out by the roots - that sense of entitlement and the sense that they are better than other Americans.
The entirety of the losses from AIG were generated by their financial products unit. The geniuses at this unit are the people who got involved with credit default swaps (CDS) and other exotic derivative instruments and which has put AIG in such dire straits.
These incompetents were clever though and clever enough to have their contracts pay them $220 million in retention pay for 2008. And they have more bonuses coming to them in 2009 and 2010. Talk about rewarding incompetence!
Not one of these people is thinking of giving back their outrageous bonus because of gross incompetence. I recently wrote an article for the Seeking Alpha site about when bad times hit, why in the world should people in the financial industry be treated differently than any other industry.
Executives at AIG and other Wall Street firms say that lavish bonuses are needed to retain talent. I guess the word "talent" has been re-defined to mean people that are incompetent and/or criminals and that have almost destroyed the global economic system.
You do not see lavish bonuses needed in any other industry to retain talent. These other industries use promotions and other similar ways to reward employees. But not Wall Street.
The response to my article from some people who work in the industry that commented on my article? "We are different, we are smarter, we are better than people who work in other industries, we deserve every penny."
That is one major problem with Wall Street that has to be pulled out by the roots - that sense of entitlement and the sense that they are better than other Americans.
Thursday, March 12, 2009
It's Only a Bear Market Rally
Earlier this week Citibank CEO Vikram Pandit leaked a memo which showed that the bank actually made a profit in the first two months of this year. This "news" led to a huge gain in the stock market.
Whew! Thank goodness all the worries about toxic assets on bank balance sheets is over. Now we can get back to passively investing in stocks that only go in one direction - up.
Not so fast! This has all the classic characteristics of a typical bear market rally - sharp but very short in duration. The value of toxic assets held on bank balance sheets will continue to explode like ticking time bombs.
According to the Bank for International Settlements, the world's total of all derivative instruments reached an incredible $700 trillion at its height. The American portion of this total was roughly $420 trillion or some 40 times America's annual production.
If only two per cent of these derivatives fail, it would amount to $14 trillion and $8 trillion of that would be the US share. Meantime, the estimated total capitalization of US banks is only $1.6 trillion.
US taxpayers have forked over roughly $2 trillion in bailouts so far, so that brings US banking capital up to $3.6 trillion. This still leaves a massive $4.4 trillion shortfall.
The stock market is not out of the woods (the bear's domain) yet.......
Whew! Thank goodness all the worries about toxic assets on bank balance sheets is over. Now we can get back to passively investing in stocks that only go in one direction - up.
Not so fast! This has all the classic characteristics of a typical bear market rally - sharp but very short in duration. The value of toxic assets held on bank balance sheets will continue to explode like ticking time bombs.
According to the Bank for International Settlements, the world's total of all derivative instruments reached an incredible $700 trillion at its height. The American portion of this total was roughly $420 trillion or some 40 times America's annual production.
If only two per cent of these derivatives fail, it would amount to $14 trillion and $8 trillion of that would be the US share. Meantime, the estimated total capitalization of US banks is only $1.6 trillion.
US taxpayers have forked over roughly $2 trillion in bailouts so far, so that brings US banking capital up to $3.6 trillion. This still leaves a massive $4.4 trillion shortfall.
The stock market is not out of the woods (the bear's domain) yet.......
Wednesday, March 11, 2009
Public Enemy #1 - Alan Greenspan
Apparently, Alan Greenspan has no shame. There he was again today, with an op-ed piece in the Wall Street Journal. Mr. Greenspan was trying to shift the blame for the current economic mess we're in away from the horrendous monetary policies he implemented as head of the Federal Reserve.
Much of the blame for the current crisis can be laid directly at the doorstep of Mr. Greenspan and his "easy money" policies which encouraged a culture of debt. Mr. Greenspan also encouraged "financial innovations" which brought us all sorts of securitized products and derivatives on those products.
Mr. Greenspan still does not seem to grasp the concept of moral hazard. He also does not want to admit that the big Wall Street firms played him for a sap - allowing them to "socialize" any and all losses they incurred.
Instead of admitting he goofed, Mr. Greenspan pointed the finger elsewhere. He laid the blame on the "global savings glut". Yes, it's the fault of those crafty Chinese and other savers around the globe that brought the US economy to its knees. Yep - it was prudent people around the world that caused the financial crisis.
Mr. Greenspan continues to amaze me. He should be tarred and feathered!
Much of the blame for the current crisis can be laid directly at the doorstep of Mr. Greenspan and his "easy money" policies which encouraged a culture of debt. Mr. Greenspan also encouraged "financial innovations" which brought us all sorts of securitized products and derivatives on those products.
Mr. Greenspan still does not seem to grasp the concept of moral hazard. He also does not want to admit that the big Wall Street firms played him for a sap - allowing them to "socialize" any and all losses they incurred.
Instead of admitting he goofed, Mr. Greenspan pointed the finger elsewhere. He laid the blame on the "global savings glut". Yes, it's the fault of those crafty Chinese and other savers around the globe that brought the US economy to its knees. Yep - it was prudent people around the world that caused the financial crisis.
Mr. Greenspan continues to amaze me. He should be tarred and feathered!
Tuesday, March 10, 2009
Economic Power Is Flowing from West to East
Earlier today I read an article on the Seeking Alpha investing website. The author of the article was wondering why in the world China was stockpiling oil and other commodities now. After all, the global economy is tanking.
The thinking behind the article is further proof of one of my main long-term investment themes. That theme is that global economic power is flowing from the Western economies - led by the United States, to the Eastern economies - led by China.
In China, the leadership thinks in terms of decades. They care little for the short-term. China, therefore, is stockpiling key commodities such as oil for future use. China is also outright buying commodities companies in places like Australia and Canada. This way China can insure future rapid economic growth by having an assured supply of the necessary commodities for their economy.
Then we turn to the United States - the country that is based immediate gratification. We have corporations that rarely looked beyond the next quarter or two. The goal of managements has been to "beat the street", get rave reviews on CNBC, and then see their stock price rise.
The rising stock prices has meant lavish bonuses and stock options for executives. This emphasis on the very short-term in corporate America has definitely come home to roost. Many of the current economic problems stem directly from emphasizing short-term results and ignoring the long-term consequences.
Unfortunately, the emphasis on the short-term extends right down to the individual level. I speak to many individual investors on a regular basis. I am amazed by how they are so short-term focused.
When I mention, for instance, that I expect many commodities to much higher in price within two years, here is the reaction I get - "Who cares! I don't care about two years down the road".
Is it any wonder that most individual investors portfolios are in shambles?
The thinking behind the article is further proof of one of my main long-term investment themes. That theme is that global economic power is flowing from the Western economies - led by the United States, to the Eastern economies - led by China.
In China, the leadership thinks in terms of decades. They care little for the short-term. China, therefore, is stockpiling key commodities such as oil for future use. China is also outright buying commodities companies in places like Australia and Canada. This way China can insure future rapid economic growth by having an assured supply of the necessary commodities for their economy.
Then we turn to the United States - the country that is based immediate gratification. We have corporations that rarely looked beyond the next quarter or two. The goal of managements has been to "beat the street", get rave reviews on CNBC, and then see their stock price rise.
The rising stock prices has meant lavish bonuses and stock options for executives. This emphasis on the very short-term in corporate America has definitely come home to roost. Many of the current economic problems stem directly from emphasizing short-term results and ignoring the long-term consequences.
Unfortunately, the emphasis on the short-term extends right down to the individual level. I speak to many individual investors on a regular basis. I am amazed by how they are so short-term focused.
When I mention, for instance, that I expect many commodities to much higher in price within two years, here is the reaction I get - "Who cares! I don't care about two years down the road".
Is it any wonder that most individual investors portfolios are in shambles?
Monday, March 9, 2009
Gold's Appeal as a Hedge Is Broadening
Many investors have been traumatised by the collapse in stock prices. It seems like that this feeling of insecurity about the economic future may last for awhile too. This feeling of insecurity among investors has broadened enormously the appeal of gold as a hedge.
There was more evidence of this on the front page of today's Financial Times. The article spoke about how some of the same hedge fund investors who made money last year by betting against investment banks are now buying gold as a way of betting against central banks.
The gold bulls include David Einhorn of Greenlight Capital who last year came under the spotlight for correctly arguing that Lehman Brothers did not have enough capital to offset its exposure to falling property prices.
Investors such as Mr. Einhorn are turning to gold because they are worried about the response of the Federal Reserve and other central banks to the economic crisis. A bet on gold is a bet against paper currencies.
In a letter to shareholders, Mr. Einhorn said "The size of the Fed's balance sheet is exploding and the currency is being debased. Our guess is that if the chairman of the Fed is determined to debase the currency, he will succeed. Our instinct is that gold will do well either way: deflation will lead to further steps to debase the currency, while inflation speaks for itself."
I believe Mr. Einhorn's analysis is spot on.
There was more evidence of this on the front page of today's Financial Times. The article spoke about how some of the same hedge fund investors who made money last year by betting against investment banks are now buying gold as a way of betting against central banks.
The gold bulls include David Einhorn of Greenlight Capital who last year came under the spotlight for correctly arguing that Lehman Brothers did not have enough capital to offset its exposure to falling property prices.
Investors such as Mr. Einhorn are turning to gold because they are worried about the response of the Federal Reserve and other central banks to the economic crisis. A bet on gold is a bet against paper currencies.
In a letter to shareholders, Mr. Einhorn said "The size of the Fed's balance sheet is exploding and the currency is being debased. Our guess is that if the chairman of the Fed is determined to debase the currency, he will succeed. Our instinct is that gold will do well either way: deflation will lead to further steps to debase the currency, while inflation speaks for itself."
I believe Mr. Einhorn's analysis is spot on.
Saturday, March 7, 2009
Kudos to Jon Stewart
Here at the Wall Street Mess, I am usually not complimentary of media in general. However, I have to hand it to Jon Stewart and his co-workers at the Daily Show. His March 4th skewering of CNBC is spot on!
The number of people who watched the show and/or viewed the video along with the comments on many different blog sites, I think shows the extent of the outrage of the general public toward Wall Street. This outrage, deservedly so, extends to the Wall Street minions at CNBC.
CNBC has for years trumpted the case for long-term investing in stocks. This case has been shredded. The bull market, in its later years, was phony - sent higher by the biggest credit bubble in history and rampant speculation.
I think the biggest sin that CNBC commited over the years was their poking fun at and basically calling bears, such as Peter Schiff and Jim Rogers, crazy people. The attitude at CNBC was - "C'mon, everyone "knows" that stocks always go up! Especially American financial and American tech stocks". It is these two areas specifically that have been disasters for anyone who invested in them.
It is fitting that with GE's stock price tanking, many CNBC personalities are getting their retirement plans devastated. After all, that is what they did to millions of viewers thanks to their relentless cheerleading for Wall Street.
The number of people who watched the show and/or viewed the video along with the comments on many different blog sites, I think shows the extent of the outrage of the general public toward Wall Street. This outrage, deservedly so, extends to the Wall Street minions at CNBC.
CNBC has for years trumpted the case for long-term investing in stocks. This case has been shredded. The bull market, in its later years, was phony - sent higher by the biggest credit bubble in history and rampant speculation.
I think the biggest sin that CNBC commited over the years was their poking fun at and basically calling bears, such as Peter Schiff and Jim Rogers, crazy people. The attitude at CNBC was - "C'mon, everyone "knows" that stocks always go up! Especially American financial and American tech stocks". It is these two areas specifically that have been disasters for anyone who invested in them.
It is fitting that with GE's stock price tanking, many CNBC personalities are getting their retirement plans devastated. After all, that is what they did to millions of viewers thanks to their relentless cheerleading for Wall Street.
Thursday, March 5, 2009
The Financial N-word
The N-word in the financial world is nationalization. Wall Street is in fear that the Obama Administration may be forced into nationalizing the major Wall Street banks. Nationalization strikes fear into the bankers' hearts - after all, what would they do without their cushy jobs and lavish bonuses?
The government has so far followed the Japanese approach to the banking crisis. The Japanese issued guarantees and piecemeal government bailouts which resulted in what are called "zombie banks". Their malfunctioning banking system has resulted in nearly two "lost decades" for the Japanese economy with virtually no growth.
The current US approach to the banking crisis has helped financial institutions conceal losses, favored shareholders over taxpayers, crippled our credit system and protected senior bank managers from the consequences of their stupid mistakes.
This approach must change and it must change soon! The government must step in and nationalize the banks that are insolvent. This approach, however, will be costly and painful. Most of the pain will be inflicted on US taxpayers who will have to pay for the multi-trillion dollar bill.
But the alternative - a piecemeal pumping of more public money into insolvent banks in the vague hope that things will improve down the road - would truly be historic folly.
The government has so far followed the Japanese approach to the banking crisis. The Japanese issued guarantees and piecemeal government bailouts which resulted in what are called "zombie banks". Their malfunctioning banking system has resulted in nearly two "lost decades" for the Japanese economy with virtually no growth.
The current US approach to the banking crisis has helped financial institutions conceal losses, favored shareholders over taxpayers, crippled our credit system and protected senior bank managers from the consequences of their stupid mistakes.
This approach must change and it must change soon! The government must step in and nationalize the banks that are insolvent. This approach, however, will be costly and painful. Most of the pain will be inflicted on US taxpayers who will have to pay for the multi-trillion dollar bill.
But the alternative - a piecemeal pumping of more public money into insolvent banks in the vague hope that things will improve down the road - would truly be historic folly.
Wednesday, March 4, 2009
Wall Street and Local Media, Part 2
I wanted to re-visit how the Wall Street PR machine affects even the smallest local media sources. Last week, I came across an interesting article in, of all places, the local Monroeville Pa community newspaper - the Times Express.
The article discussed gold as an investment vehicle. Instead of going to some unbiased investment source for input, the staff reporter went to a Wall Street mouthpiece - a financial advisor who works for Ameriprise.
This person, of course, adamantly advised against investing in gold. He said that gold would drop like a rock when the US stock market and the US dollar regained their strength. He did neglect to mention, however, if that would happen any time in the next decade.
The advisor also mentioned the old axiom - to buy low and sell high - and that people should dump their gold immediately since it was trading near alltime highs. He conveniently forgets centuries of history. History shows that gold has, through the ages, acted as financial insurance - protecting people's wealth in times of financial calamities.
I also wonder if he mentioned that old axiom to his clients about buying low and selling high when he discussed the stock market with them. I wonder if he advised any of his clients to get out of the market last year? Obviously not, since that would cut off his source of income.
The message is to take any investment advice you hear from someone who works for a Wall Street firm with a large grain of salt. Remeber that no one cares more about your money you do.
The article discussed gold as an investment vehicle. Instead of going to some unbiased investment source for input, the staff reporter went to a Wall Street mouthpiece - a financial advisor who works for Ameriprise.
This person, of course, adamantly advised against investing in gold. He said that gold would drop like a rock when the US stock market and the US dollar regained their strength. He did neglect to mention, however, if that would happen any time in the next decade.
The advisor also mentioned the old axiom - to buy low and sell high - and that people should dump their gold immediately since it was trading near alltime highs. He conveniently forgets centuries of history. History shows that gold has, through the ages, acted as financial insurance - protecting people's wealth in times of financial calamities.
I also wonder if he mentioned that old axiom to his clients about buying low and selling high when he discussed the stock market with them. I wonder if he advised any of his clients to get out of the market last year? Obviously not, since that would cut off his source of income.
The message is to take any investment advice you hear from someone who works for a Wall Street firm with a large grain of salt. Remeber that no one cares more about your money you do.
Tuesday, March 3, 2009
The Wall Street PR machine just continues to churn out the same old tired message. The Wall Street public relations people make sure that they inundate even the local media markets with the same old message too.
Last evening, I was watching local CBS affiliate KDKA in Pittsburgh. Their fine money and politics editor, John Delano, spoke to a financial advisor from Smith Barney (Citi). Her message to investors was to stay the course and to believe in America!
What rubbish! I hate it when Wall Street PR people tell you that it is your patriotic duty to continue giving them your hard-earned money. The message to stay the course is, of course, the very same message that the captain of the Titanic gave his crew!
No matter that US stock markets are back to roughly the same level they level they were in 1997. No matter that the stocks markets are back to the level where Alan Greenspan spoke about "irrational exuberence". I guess all the "irrationality" is gone now, huh Alan?
It does not matter to Wall Street that some of their "sage" advice such as purchasing S&P 500 index funds for the "long haul" has devasted many people's long-term retirement accounts. The message from Wall Street remains - "Hey suckers, giving us your money. How else can we reward ourselves with lavish bonuses?"
The Buy and Hold for the long haul philosophy seems destined to go the way of the dinosaur.....
Last evening, I was watching local CBS affiliate KDKA in Pittsburgh. Their fine money and politics editor, John Delano, spoke to a financial advisor from Smith Barney (Citi). Her message to investors was to stay the course and to believe in America!
What rubbish! I hate it when Wall Street PR people tell you that it is your patriotic duty to continue giving them your hard-earned money. The message to stay the course is, of course, the very same message that the captain of the Titanic gave his crew!
No matter that US stock markets are back to roughly the same level they level they were in 1997. No matter that the stocks markets are back to the level where Alan Greenspan spoke about "irrational exuberence". I guess all the "irrationality" is gone now, huh Alan?
It does not matter to Wall Street that some of their "sage" advice such as purchasing S&P 500 index funds for the "long haul" has devasted many people's long-term retirement accounts. The message from Wall Street remains - "Hey suckers, giving us your money. How else can we reward ourselves with lavish bonuses?"
The Buy and Hold for the long haul philosophy seems destined to go the way of the dinosaur.....
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