Saturday, September 20, 2008

No Rush to Judgment

Sometimes your first take is your best, and sometimes it isn't.  This is especially true when it comes to trading in the financial markets.  

Ny FIRST take on the bailout, and in no particular order:

  1. Government can wipe the debts clean, but they cannot repair broken business models.  The big investment banks had in reality become primarily mortgage trading and mortgage banking companies.  That business is DEAD.  So after the balance sheets have been fixed, where is the income going to come from to support the current market capitalization (number of shares outstanding x the price of the stock) of these companies?
  2. Short sellers did not cause the collapse of the financial companies.  Poor planning, dumb calls, hubris, arrogance, stupidity, etc... were exacerbated by nearly unlimited access to cheap credit and truly asinine social policy (mortgage lending to the poor as promulgated by the CRA, while noble in concept and purpose, had the absolutely predictable outcome.  Any one who ever lived or worked on the "other side of the tracks" (like me) could have told you you can't help poor folks by lending them money.  Then again, who sponsored such a bill?  The likes of none other than Ted Kennedy.  It is VERY hard to understand the mentality of folks living in poverty when you are the beneficiary of a $40 MILLION + trust fund and opportunity is a f%$&^%g birthright.  And I like old Ted - would love to have a beer with him... but trust fund folks and family members from political dynasties are just so detached from the realities of what makes and keeps people poor in the first place).
  3. Many folks think we were in a deflationary spiral.  I am not sure that we were, but I don't deny the possibility.  If we were, I do not see how this bailout would not reverse that as the plan seems ENORMOUSLY inflationary.  Further, it is the WORLD monetary aggregate that matters, not just the U.S. I don't see that contracting, so I don't see deflation AT THIS MOMENT (that means I will change my mind on a DIME if the data suggest otherwise).
  4. The Finance, Insurance, and Real Estate sectors of the U.S. economy are going to contract DRASTICALLY.  No amount of bailout is going to change, or even slow, this appreciably.  This is going to drive unemployment up, BIG TIME.
  5. By KILLING the shorts, this bailout is going to drive the market higher in the short term.  But markets, like nature, abhors a vacuum, and there is a high likelihood of a Willie E. Coyote moment for the market when it looks down after this rally and realizes there is nothing there (or I could be wrong, and inflationary pressures drive the markets higher NOMINALLY).
  6. The market is comprised of participants. By killing the SHORTS, this bailout might have done some real harm to the market.
  7. By changing the rules on the fly, the government is certainly harming free and open markets.  History will have to judge whether the cost/benefit was worth it.  That is not my game.  My agenda is not to lose a lifetime of hard work.
  8. Oil imports might fall faster than the decline in the economy, revealing yet another chasm of structural discombobulation.  
  9. Home and commercial real estate prices are likely to continue to fall.  Until that correction is complete, everything else is a stop gap and a bandaid as it applies to financial assets.
More to come.

Good Luck!  You are going to need it!

Mentatt (at) yahoo (d0t) com


Bureaucrat said...

Hi again. I think you may not be seeing the deflation in the right light. The Fed has injected no cash (so far) but has injected tons of credit, and in the normal world, this would be inflationary. But this is not that world. You now have a situation where the majority of Americans have no spare cash, their credit cards are maxxed, and banks do not want to lend. People still want to buy stuff, but they can't -- they aren't sure if they can pay any more borrowed dollars back. So after the biggest financial bubble in history, it is not too hard to believe that people are going to stop spending for awhile. Reverse 90210 if you will. :) The deflation will come from a comprehensive collapse of demand across the board (housing, commercial property, cars, furniture, clothes, and some energy), forcing businesses to sell at whatever (reduced) price just to pay their fixed costs. Profit gets squeezed and people start getting laid off, compounding the problem. The big problem is it is very tough to stop a deflation -- Japan has tried for 18 years and nothing has worked. Watch around you at all the things that are/will reduce in price due to lack of demand. It is deflation, just like it was 80 years ago.

Greg T. Jeffers said...

My bet is this: We had a deflationary scare, and it is over. That is my bet at this moment, and will change it accordingly.

You have to make your own bets.

Dan said...

The same ditzy broad on the realtor’s association radio commercials that has been telling us local housing is strong is now telling us that there has never been a better time to invest in commercial real estate.

Deflation is still the order of the day but inflation is coming, these clowns will try to monetize this count on it.

Viv said...

Hey Greg,

I was just going through Matthew Simmons profile and was shocked to learn he was an energy advisor to Bush. This means that this administration KNOWS whats coming and what the worst case scenarios are regarding peak oil.

By implication most of the other top leaders should know what's going on. So if these people know, why aren't they doing anything about it? (apart from invading Iraq) why no big push for alternatives? Or efficiency? What on earth is going on? Why is no other country apart maybe from the Nordic ones preparing for such an eventuality? Mind boggling.

Anonymous said...

>"if these people know, why aren't they doing anything about it? (apart from invading Iraq) why no big push for alternatives? Or efficiency?" <

Because "CONSERVATION" is a dirty word in the Republican Party. Did you hear that word uttered even ONE TIME at their convention? Finite oil means to many Republicans that the USA power is due to a temporary endowment of oil by nature versus a direct supply by the almighty to the US.

And the alternative energies just do not scale up to what we are needing now to run the USA. The energy required to switch over to alternatives is so extreme as to be impossible at current rates of energy usage(oil&gas mainly)wo massive drops in current energy usage and changed way of life.

And just where is the financing to come from to do such as massive buildup? Don't think we are now bankrupt?- then go ask our Asian bankers and they will tell you.

Greg T. Jeffers said...


Contrary to Anon @4:33am's comments, it has nothing to do with Republican or Democrat ANYTHING.

The U.S. IS and has BEEN, since the mid to late 1990's on the verge of financial collapse. Maybe it takes another 20 years, or maybe just 1 more week.

MOST politicians are LAWYERS. Anyone who read my blog would see that YEARS ago that I, and Mish and many other financial bloggers, said that housing/mortgage would drag down Fannnie & Freddie, Leham, Bear and the rest of the mortgage traders, and leave us in REAL trouble. Lawyers are not knowledgeable in finance and the workings of the financial system.

Neither of the presidential candidates has a CLUE as to what is happening and what the liabilities and pitfalls are. Nada. Zip.

Viv said...

The horrible thing is, is that the energy crisis is going to absolutely dwarf everything! This current financial crisis will seem like peanuts when we have actual physical shortages and the super spikes in oil once the peak oil meme gets out and becomes public.

How can the government not know??? The Hirsch report? The 1000% increase in prices of oil since 1999, Twilight in the Desert by Matthew Simmons, not only is he the biggest Investment banker for oil companies and advises the bush administration but he openly says 500 dollar oil is coming along with the fact that he's started to do farming!!! Surely the people in the pentagon must be aware? The CIA? Aren't these people supposed to know and prepare for whats coming?

It is quite possibly the case that if America is on the verge of financial collapse, the rest of the world is in for one too and especially Europe and Asia.(apart from china maybe)

Even if alternatives can never completely replace fossil fuels, we can try minimize the damage by efficiency, small scale community farming, eco-towns,working closer to home or from home. BUT NOPE, NADA, ZIP!

I don't know if it's been mentioned on this site before, but has a great crash course, a series of videos on the financial, environmental and energy crisis and how they intertwine together. If every politician took the time to give 2 hours to the course,we might start seeing global initiative.

Anonymous said...

>we can try minimize the damage by efficiency, small scale community farming, eco-towns,working closer to home or from home. BUT NOPE, NADA, ZIP!<

Oooh! Great ideas. Now if we had only started working on them 20 years ago when oil was cheap and the US had a respectable financial system. See Hirsch report.

Don't forget that it takes a lot of energy to totally transform every area of the society into a low energy operation. So the time to do that is when oil/gas were cheap back in the 80s- not when energy costs are skyrocketing. And the US has no savings and will soon lose access to a lot of foreign financing. Nice idea but no cigar.

And Jeffers- not to get political as I am not a fan of Demorats at this point. However, this last 8 years of Republican rule has produced the greatest disaster the US has faced since the Civil War. The Demorats were surely pulled in and went along for the ride but this coming catastrophe is being marked up to the Republicans. Badly run wars, massive deficits, disemboweling the Consitution, primitive religion being injected into politics, and Wall Street given the green light to run wild and ruin the economy. The Demorats couldn't produce a bigger disaster if they tried.

And you are correct that neither party is capable of any kind of solutions at this point. Both clueless. But not to worry, our Asian masters will soon impose their own ideas of a solution.

Bureaucrat said...

Not to interrupt the "ooooh! The end is near!" crowd but let's keep some truth in mind:

1) Bush and the Congress are doing exactly what the people who pay their salaries want them to do: continue to support jobs by Federal spending, and keeping taxes low. Lots of spending & low taxes -- everyone got that?

2) 99% of gas stations are open and will sell you as much gasoline as you want to buy.

3) The Jewel supermarkets in Chicago have lots of food at modestly low prices. You can get all the food you want.

4) Gasoline and diesel prices collapsed earlier this month and remain low. Natural gas dropped from $13/mbtu to the present $7.50 (so we have cheap heating this winter)

5) A comprehensive deflation means lower prices and closeout bargains for everyone that manages to keep their job. By the Federal statistics, 94% of adults are employed today.

6) We will borrow whatever we have to borrow to keep the American way of life going, and despite years and years of "peak oil" and petroleum inventories that don't ever seem to drop for long, we are doing just fine. Adjusting our budgets, yes, but doing just fine.

7) I bought lots of gold and silver, also thinking the financial world was coming unglued. I won't detail my losses to date.

All is well. Go back to your yardwork.

Dan said...

Thoughts on Nuclear, alternative power, and electrified rail:

I keep hearing where will the money come from, treasuries are trading at near 0 right now, and the global economy is tanking. In practical terms that means government financing will never be cheaper, there will not be much competition for resources thus they will be cheaper, and so will be labor. While I am not much in favor of government intervention they are the only ones that can do it right now, provided they don’t screw the pooch and approve Paulson’s plan, and there will never be a better time

Anonymous said...

>6) We will borrow whatever we have to borrow to keep the American way of life going, and despite years and years of "peak oil" and petroleum inventories that don't ever seem to drop for long, we are doing just fine. Adjusting our budgets, yes, but doing just fine.<

And just how long do you think the Asian economies are going to keep lending us $2,000,000,000/day? Do you think they are idiots?

And just for reference, "peak oil" is the MAXIMUM amount of oil being pumped. It means the party is continuing at full bore until the long long hangover begins.

Bureaucrat said...

The oil will never run out. What peak oil says is that we may be running out of CHEAP oil. But there is lots of oil available to drive people who can pay for it. People find the $ for Bears football tickets, cigarettes, lottery tickets, that new winter coat, etc. People will find the money for expensive oil. I have faith.

Anonymous said...

We're out of gas down here in the deep south. Bagged pumps at 8/10 stations, only RUG available at the few still open. Been like this off and on for two weeks now. How does that square with bureaucrat's analysis?

Anonymous said...

As a side (real world) note on alternatives - I had PV (solar) for my home installed this summer, 4kW worth, grid tied, total cost was $35,000 installed (nearly a year's wages for the average American worker). I live in the Deep South, it's sunny and hot here, good conditions for PV.
Yet the system produces less than 1/2 of what I use in a month. Payback period, given current electricity prices, is thus roughly 27 years.
Given real world experience, I can categorically say that this is not a realistic feasible replacement for fossil fuels for the vast majority of Americans, even if all the vehicles on the road instantly, magically, and costlessly operated on electricity.

Bureaucrat said...

At European prices of $10/gallon, someone would find a way to deliver it to your door. :) Realistically, the Canadian Oil sands and the Venezuelan tar sands have billions of barrels of oil. You just want it cheap. It isn't cheap, but it is there.