Monday, September 29, 2008

Asian Markets in Free Fall

In my previous post I mentioned that the U.S. equity market's lost value of nearly 2X the bail out package.  Let us say, for arguments sake, that it is $1.4 Trillion, OK.  Let us also assume that investors realize the loss this year... at our current top marginal tax bracket of 35% or so X $1.4 T... tax revenues could decline $500 Billion?  Way to go, House Republicans. 

I forgot to mention that in a few hours the Asian markets (you know, those guys that lend us the money we need to fund things like our SOCIAL PROGRAMS) would be open and would pass judgment on the today's vote rejecting liquidity for the banking system by the U.S. Congress.  So far, our trading partners are less than impressed, as Asian markets are having their worst day in 21 YEARS as I write this.

The world wide decline in equity values for the 24 hour period subsequent to the house vote might be 4X or even 5X the $700 Billion package.

If you were looking for politically correct/influenced analysis - this Blog ain't for you.  

The House Republican's aberrant behavior today was nothing short of reckless.  They need remedial classes in economics and how the U.S. fractional reserve banking system operates, but I don't think they would pass the final exam.  What a bunch of Doinks!

Mentatt (at) yahoo (dot) com

Reckless and Uninformed

The WORLD, not just the U.S. markets, will be voting over the next couple of days... on just how badly our Congress has served us.

I am AMAZED at how passionate that people who do not know what a TED spread, CDO, CMO, CDS, etc... and wouldn't know the Fed Funds rate from the Discount Rate, and wouldn't know the Prime Rate from a Prime Rib, etc... were about rejecting this liquidity measure.  SOMEBODY billed it as a BAILOUT, and the public went for it hook, line, and sinker!

Other financial bloggers (who shall remain nameless) have gone on to tell their readers how terrible this bill is, blah, blah, etc...  Well, I have a question for them:

If the U.S. market loses 50% of its value, and several more banks close with company's payrolls, and NO ONE can get a mortgage or a car loan...

Will you be satisfied?  No?  Let me throw in no ability to pay for heating oil this winter...

Are you satisfied now?   

Does New York HAVE to lose its banking dominance to the Middle Ease Sovereign Wealth Funds?  Would that leave you satisfied?

Or perhaps unemployment hitting 25%?

So.  I am curious.

At what point would you admit that maybe, just maybe, you f$#cked up?

Mentatt (at) yahoo (dot) com

Cut your nose off to spite your face!

Well, the vote is in.  The liquidity injection has been rejected.  

The decline in the S&P 500 ALONE, not to mention the impacts on the bond and real estate markets, are, as I write this, is well over $800 BILLION in value.  Whatever Congress was trying to prove, they just proved that, as usual, they do more harm than good.

My best guess is that the Federal Reserve and the U.S. Treasury will try to do a temporary end run around Congress.

In the meantime:  No bank is safe from failure.  Do not keep more than $100k in ANY bank for any reason.

BTW... I am STUNNED. I fully expected the bill to pass.  Just goes to show you...

Mentatt (at) yahoo (d0t)com


When I say that the US$ will collapse, I mean to say that the steady loss in purchasing power will accelerate, perhaps 4 or 5 times faster than it has over the past 50 years.  Ergo, whatever percentage in purchasing power the US$ lost in the past 50 years will be accomplished over the next 10 years or so.

My favorite apples to apples comparison, or metric, is the cost of mailing a first class letter.  There are no other calculations that need to be made for "new and improved" whatever.  The service is the same. 

In September of 1958, the cost of a first class stamp was 4 cents.

In September of 2008, 50 years later, the cost of a first class stamp is 42 cents.

Notice anything?  The U.S. $ has lost collapsed over 90% in 50 years.

My bet is this:

In 2018, a first class stamp will cost between $3 and $6.

Wanna see me do the same trick for a McDonald's Happy Meal?  Or a gallon of gasoline?  Or a loaf of bread?

Now, this is all sort of OK, as long as the median after tax income performs similarly.  My bet is that it will not, and by a SIGNIFICANT shortfall.

I hope this clarification helps the Doomers AND the Cornicopians.

Good Luck!

Mentatt (at) yahoo (d0t) com

Sunday, September 28, 2008

Beware US$ Interventions

This is exactly what I was afraid of... and obviously I am not the only guy concerned.

Interventions do not work in the long run, but they can squeeze your brains out every orifice in your head if you are on the wrong side of it.  This is why you need to be able to buy "stuff" (hard assets) when they are getting killed, not after it has made its move.

This market ain't for the faint of heart.

Good Luck!

Mentatt (at) yahoo (d0t) com

Deal Done, Meltdown Only Slowed, NOT STOPPED

Some form of liquidity injection plan has just been agreed to in Washington, if the reports on CNN are to be believed.  I have no knowledge of the particulars.

I have been in favor of the injection, but in the BEST CASE scenario, the injection will only cause the rate of change, the SPEED of the collapse, to change - it will not change the ultimate outcome, in my opinion.

The American people are going to be forced to change everything - their expectations, their saving and consumption habits, their work habits, their childbearing and divorce habits, their retirement expectations, etc...  Measured against the American people's expectations, we are truly on the verge of earth shaking, economic, social and political, change - and not the "Change" our presidential candidates are talking about.

I get a great deal of email and comments from folks telling me that we are saddling our children and grandchildren with "Debt".  Didn't we just saddle all of America with a huge amount of debt?  And what happened?  We defaulted on that debt.  Our descendants will do no less.  Debts, like promises, are made to be broken.

The following is from J.R. Nyquest's excellent website:

According to Ludwig von Mises, an upswing occasioned by credit expansion can only be maintained by further credit expansion; and, in the long run, “it turns into depression when the further progress of credit expansion stops.” This outcome is absolutely certain and today’s financial crisis underscores the point. The economic boom of recent years has been propelled forward by an unprecedented credit expansion. At each turn, when the market was threatened with contraction, further credit expansion was urged.

The magic wand of credit expansion is like heroin addiction. The more you take, the more you want. The day inevitably comes when you cannot increase the dosage because you run short of supply. And so it is with credit expansion. The markets are accustomed to easy money. They now require easier and easier money. They are addicted. Eventually, however, they must suffer the symptoms of withdrawal.

Did we think this expansion could continue forever without consequence? Evidently we did not consider where we would end up. And now, at last, the United States Government believes it can fill the hunger for credit through a coordinated push – the last gasp of our insatiable credit addicts. President Bush offers a plan. Behind closed doors he reportedly said, “This sucker could go down.” Once again, the president’s grammar is in error. The sucker in question will go down.

Every dollar poured into the proposed rescue operation will be lost. Buying toxic debt is not a solution. The proposed mechanism for rescuing the economy represents a new falsification of values – and a new twisting of the market. The dollar cannot possibly survive this new initiative. A $700 billion bailout is only the beginning. It is merely a foretaste. What we see in Washington is an exercise in self deception. It is the self deception of a country that does not see danger, of a country that ignores the wisdom of ancestors and the ABCs of economics.

They want a booming economy. What they’ve failed to consider is the false nature of the boom thereby engendered. False values, false ideas and promises of false prosperity pepper the program of today’s politicians. They have no business at the helm of a great country. Their leadership consists in pitiful ignorance, and the republic may be in its last days. There has been a shocking willingness to destroy the country’s currency. “If the government does not care how far foreign exchange rates may rise, it can for some time continue to cling to credit expansion,” Mises explained. “But one day the crack-up boom will annihilate its monetary system.”

The proposed plan to save the markets will save nothing. The proposed solution is no solution. Improper investments have been made and massive losses must result. We have to take our medicine before we can get better. Debasing our already debased currency makes things worse. We have avoided economic pain by a continuous expansion of credit. The artificial boom must come to an end. False values must pass away so that real values can be brought to the fore.

Few realize how destructive the boom has been; for the real damage is done by the regime of false values and our collective investment in those values. “The boom is called good business,” noted Mises, “prosperity, and upswing. Its unavoidable aftermath, the readjustment of conditions to the real data of the market, is called crisis, slump, bad business, depression.” The latter, however, is the period of healing and correction."
Original article here*

THe Right appears to want their cake and eat it, too.  The Left appears to want the system to collapse so that they can rebuild it into a "fair" world.  The old line, "Be care what you ask for; you may get it", really applies here.  Only you might only get half of want you want, the other half might just eat you alive.

American investors who continue to believe in financial assets, rather than assets representing an interest in hard assets, are going to come to ruin.  RUIN.  Everybody talks TOUGH when they have a full belly, and a warm place to sleep, and money that can still buy something in the bank.  Remove ANY of those 3, and you find we are not so tough anymore.

The injection will NOT stop the ultimate collapse in the US$ and U.S. financial assets along with the economy, but it might give you the time to get your house in order, while lulling most into a false sense of security.  The Middle Class is going to shrink in ways few thought possible, as will the ranks of the Rich.  In the end, if you re reading this it is likely that you are a middle aged man with a family to provide for and some assets to protect.  You are not running for president, just trying to run your family.  Do not allow your self to be lulled into that false sense of security, or you will have wasted every second of time you have spent reading my stuff.

Good Luck!

Mentatt (at) yahoo (d0t) com

The following is an article written by one of my favorite money managers, Peru Saxena.

by Puru Saxena
Editor, Money Matters
September 26, 2008

BIG PICTURE – Let’s face it, everyone uses commodities, yet natural resources are considered the underdogs within the investment world.

“They’re too risky and sophisticated for a conservative investor like me” is a statement I have often heard at dinner parties. This bizarre notion is further perpetuated by the media who is quick to announce the end of the commodities ‘bubble’ every time tangibles undergo a normal correction. Personally, I do not really see what is so risky or sophisticated about owning oil, gas, copper, wheat or sugar. After all, every human being buys this mundane stuff on a regular basis for their very survival. So it is strange that the same people tremble at the mere thought of investing in resources.

Ironically, whereas commodities are considered hazardous to human wealth, mainstream investors are only too happy to part with their cash in exchange for ‘safe’ financial assets such as stocks and bonds. Those who would never dream of buying that ‘risky’ barrel of oil or bushel of wheat are totally at ease when investing in Citibank, Freddie Mac or Fannie Mae. All in the spirit of ‘long-term investing’ of course!

So, how can we explain this oddity in investor psychology? Why is it that the majority of people feel so “at home” when buying financial assets? I guess the answer to these questions comes down to familiarity and perception.

It is worth noting that between 1980 and 2000, US financial assets were in a massive bull-market. During that lengthy period, those who bought financial stocks and bonds made fortunes. More importantly, most of today’s investors and money-managers grew up during a time when stocks and bonds were clearly the outperforming asset-classes. So, it should come as no surprise then that they feel more comfortable allocating money to yesterday’s winners.

During the 1980’s and 1990’s, when US stocks and bonds were flourishing, commodities were caught in the grip of a vicious bear-market. Back then, most investors lost money in this sector and everybody knew someone who had lost their shirt investing in resources. Unsurprisingly, after two decades of losses, the investment community fell out of love with tangible assets. Needless to say, in the late 1990’s, not many felt it was worthwhile to buy commodities when stocks of technology companies like Cisco Systems, Intel, Amgen or Red Hat were rocketing higher on a daily basis.

Unfortunately, the bull-market in financial assets ended in March 2000 and if it was not for the ultra-loose monetary policies of the biggest inflationist in history (Mr. Greenspan), prices of financial assets would be much lower today. So, Mr. Greenspan’s money-printing efforts extended the boom in financial assets and this time around, financial stocks were the big beneficiaries. As households in the West went on a borrowing rampage, shareholders and senior management of banks and lending institutions made fortunes. There was a total disregard for risk, corporate and household balance sheets were leveraged to the hilt and money-managers were investing their vast pools of money in the red-hot homebuilding and financial stocks.

The credit bubble finally popped in August 2007 and even today, the vast majority of investors (out of habit) are desperately trying to find bargains in the beaten down financial assets. Over the past couple of months, in a highly questionable move, investors have dumped quality resource stocks in an attempt to find deeply discounted gems in the financial sector!

It is interesting to note that the majority of financial companies in the West are exposed to extreme leverage (30 to 1), have no earnings and are plagued with hidden ‘Tier Three’ liabilities. Yet, the mainstream financial journalists and pundits continue to tout them as screaming bargains. On the other hand, top-quality resource-producing companies with significant cash flows, reasonable valuations and record earnings are being labelled as grossly expensive bubble candidates.

I find it absurd that even though America is so over-extended (Figure 1) and most of its financial stocks have declined by at least 50% since last August, the word ‘bubble’ has not appeared even once in the context of financial assets! On the contrary, the ongoing pullback in resources is (yet again) being proclaimed as the end of the ‘bubble’!

Figure 1: Massive debt bubble in the US!


As far as I am concerned, there is definitely a bubble in the financial markets, but it is not in commodities. Remember, investment bubbles or manias always end with excess capacity, over-supply, falling demand and euphoric investor sentiment. W ell, I do not see any of these signs in the world of natural resources. On the other hand, I can observe a massive bubble in ‘Over the Counter’ or unregulated derivatives. Shockingly, the notional value of this market grew by a whopping 44% last year and it now stands at roughly US$600 trillion. To put this number into perspective, let me just say that it is roughly ten times the size of the global economy!

Now, it is impossible to predict when the derivatives bubble will burst, but when it does, the bang will be heard all over the world. So far in this credit crisis, only a handful of banks have gone bust. However, I suspect that dozens more will close their doors in the months ahead. Up until now, Mr. Bernanke and Mr. Paulson have managed to save some institutions at the expense of American tax payers. However, I am sure you will agree that they will not be able to save every institution in the US. Furthermore, banks in Europe are even more over-extended than their American counterparts and I doubt if the European Central Bank will come forward as the lender of last resort. So, whichever way you look at it, the outlook for the financial sector is not rosy.

Now, if the central banks decide to nationalise and bail-out all troubled institutions, the result may be hyperinflation and a further debasement of currencies. In my view, this remedy will be far worse over the long-term and the result will be much higher inflation and sky-high commodity prices. Although our clients will benefit from such an outcome, the majority of people will suffer a great deal from this disastrous scenario.

Original article available here.

© 2008 Puru Saxena
Editorial Archive

I could not have said it any better, so I let Puru do the talking for me.

Mentatt (at) yahoo (d0t) com

Saturday, September 27, 2008

$700 Billion? Try $4 Trillion

I am in favor of the "Paulson plan".  

That does not mean that I believe for 1 SECOND that the U.S. Federal Government will be off the hook at $700 Billion - I believe the number will be at LEAST $2.5 Trillion and perhaps just over $4 Trillion (more on how I arrived at that range in another post, but suffice it to say that I do not believe housing has bottomed).

The U.S. financial system AT THIS MOMENT is a fractional reserve banking system (If you are not familiar with this, this would be an excellent time to click this link and become better informed).  If we do not do something to inject massive liquidity into the system RIGHT AWAY, many companies will simply be unable to make payroll in a couple of weeks, ATM cards will cease to operate at most banks, etc... As American's become less and less confident in the banking system they will continue to withdraw their deposits - a la Washington Mutual.  Just imagine a run on Wachovia and Citibank... it would not take long before Bank of America and J.P. Morgan Chase were in difficulty... and they handle MOST of America's corporate payroll.  With most American's living paycheck to paycheck with less than 3 days supply of food in their homes... (with the notable exception of the Mormons who are required to maintain a year's supply of food in their home.  That tradition is looking more and more appealing all the time...)  well, the response of the masses to this might just a bit more than disconcerting.  Put that in your pipe and inhale deeply...

Good Luck!

Mentatt (at) yahoo (d0t) com

A US$ Collapse is a Certainty... Its only a matter of when

The citizens of the U.S. are going to experience a SIGNIFICANT crisis in confidence of their currency, the US$.

This will not start here in America.  The beginning of the collapse will be initiated by the folks financing the U.S. Trade & Budget deficit (which is really just financing an unsustainable American lifestyle), the spiral downward from there will likely be breathtaking.  

This does not mean the Euro is the answer.  All currencies can lose purchasing power together.

Look folks, long before it happened I published that Fannie & Freddie, Lehman, and Washington Mutual would not survive the summer, and I was close... WaMu did make it into the Fall.  I got a nice email from a reader complimenting me on my calls, and asked me how I could see this but the folks in Washington did not.  Well, I am going to let you in on my secret...

I CAN COUNT, and I have worked on Wall Street for the past 20 years or so.

That's it, that is my secret.  Then, in addition to that rather unremarkable talent, I actually READ the copious data available to the public.

Unfortunately, the VAST majority of the guys voting on the "Paulson Plan" as I write this, are innumerate (mathematically challenged), and have no background in finance, and the American voter is somewhat less informed than our elected representatives.  This is not meant to demean their specific talents - I am sure they have them.  They simply do not have the core competency necessary to do the right thing in this particular area - WHATEVER that is.  

This will be a long, slow, grinding, lurching train wreck, irrespective of the Paulson Plan.  It will be a short drop to the end of the rope in the plan's absence.

Good Luck!

Mentatt (at) yahoo (d0t) com

Friday, September 26, 2008

Democracy does not require competence

If you have been reading me for awhile, I hope you have a sense that I am a fairly apolitical, rabid Libertarian.  I don't have a dog in the political hunt.  I enjoy making fun of the Loonie Left and the Hypocritical Right as much as the next guy.

So I am going to lay out a couple of facts some of you will find hard to swallow:
  1. The "Paulson Plan", or whatever you want to call it, is NOT a bailout plan.
  2. It IS legislation proposing a massive liquidity injection into the SYSTEM.  
  3. The fat cats already GOT their ridiculously excessive compensation, they are not getting "bailed out", nor do "they" need to get bailed out.  They are already rich.
  4. The plan is an "everything to gain, nothing to lose" plan.  If housing prices continues to sink, the economy and the US$ will collapse COMPLETELY.  With the "plan" (injection of liquidity), you at least have a shot of avoiding that outcome.  Without it, you are almost assured a surreal ass kicking, i.e. massive unemployment, fuel and food inflation, credit deflation, political upheaval - really, really bad stuff.
  5. With all of that, even if the plan IS fully funded, it still might not work!  The consequences of that outcome are almost unthinkable.
The average American, and the average American politician voting on the plan on Capital Hill, has NO IDEA what the hell is going on - but, boy, do they have an opinion!  (Not that I am always correct in my assessments, either.  But if you are fighting a war, hire a General.)  Hank Paulson might have been the BOSS at THE firm that demolished the credit market, but he is as competent as it GETS at this (nobody said he was perfect, noble, ethical, etc... just competent in the extreme).  Obama or McCain?  Not a clue.  Not one.  NAFC.

There are some unintended consequences, of course.  One of these nasty consequences was pointed out to me by the Mad Scientist... Look for a $200 billion bailout, and this one REALLY will be a bailout, for Detroit.  Now THAT will be about the dumbest thing we could possibly do, which means it will happen for sure.  Can you imagine the Feds doing something intelligent, like using the $200 Billion to build electrified rail between the major cities on the East Coast?  Again, NAFC.

Mentatt (at) yahoo (d0t) com

Washington Mutual & John McCain

Well, it is official, but no surprise to readers of the American Energy Crisis that Washington Mutual has collapsed. 

The Flame Out in the McCain campaign just goes to show that it does not pay to be a member of the Party in the White House when the the world appears to be coming apart at the seems.  (Looking back on my decision early in my career to work on Wall Street rather than a political operative working in campaigns feels better all the time...)  See?  Life's not fair, even to establishment member politicians.

But lets get back to the debate on bank funding bill going on in Washington.

This is some high stakes stuff.  In their desire to "punish" the "evil doers" (Corporate CEO's), the American public is asking their representatives to vote "NO" or HELL NO".  Be careful what you ask for, you may just get it.

America's most important contribution to the world economy, at this time in history, is the American Dollar and the export thereof.  We are as close to US$/Banking collapse as one can possibly get.

Stay tuned.

Mentatt (at) yahoo (d0t) com

Thursday, September 25, 2008

Wealth Destruction Continues (G.E.)

Anybody notice that G.E., roughly 1% of the economy and market cap of the U.S. equity market (or formerly so), now has a market cap under $240 Billion, down from over $500 Billion a decade (and 40% in inflation) ago?

Same with Microsoft, Intel, AIG (HAHAHALOLOLOL), etc...

Now go back in this blog to 2005 and 2006 and do a little reading...

We are ALL going to get considerably poorer here in the U.S.  This is a phenomenon and we are only in the first 1/3 of the process.  The G.E.'s of the world CANNOT increase their REAL (as opposed to NOMINAL) market capitalization (number of shares outstanding X the price of the stock) in an era of declining energy inputs.  Maybe ONE of these companies, here and there, can, but not in the aggregate.

If you want to steadily lose your life savings, and be finished with it altogether in 10 years or so, just keep owning these investments.  This is not to say that we won't have rip roaring rallies - we will.  Or that INFLATION will not mask the losses in your portfolio to some extent - it will (and you will pay taxes on these illusory gains for the privilege), although the last 40% + in inflation did not do such a great job of masking the disaster...

The only companies that MIGHT be able to stave off disaster for investors, the Oil producers and servicers, will increasingly come under attack by the socialists on the Left for "Windfall Profits" tax.  So you gotta do a little creative thinking...

And no, the Federal Bailout won't change the energy crisis one iota (unless we don't get a Bailout, then Oil could fall to $50, but unemployment will likely hit 20%... hardly seems worth the price of admission).

Back to G.E.... All of the huffing and puffing, sucking and blowing from all of the windbags at the trough will NOT be able to do a good fart about it.  Listening to them will only demolish you financially.

Have a nice day!

Mentatt (at) yahoo (dot) com

From the New York Times 9 years ago...

I get a decent amount of email from folks telling me that the problems in the financial markets are from a lack of regulation (and you know how I feel about regulators).  I try to picture these jerks in my mind... 

But I digress...

The following is from an article in the New York Times in 1999, and was sent to me by one of my Wall Street trading buddies that I used to work with when I was at Bear Stearns (See? Even "right wing" Wall Street types read the New York Times)

September 30, 1999

Fannie Mae Eases Credit To Aid Mortgage Lending

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.
In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.
''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings."

End of NYT article

Good stuff.

Back soon,

Mentatt (at) yahoo (d0t) com

Wednesday, September 24, 2008

You coulda knocked me down with a feather...

This article was published by the San Francisco Chronicle!!!!  Will wonders NEVER cease?

"The average American listening to all the news of bank failures, and Fannie Mae and Freddie Mac (who?) being taken over by the government, and now a “bail-out” of large, privately owned and well known companies, is at first bewildered, and then angry. The average American should be furious.

But whom should Americans be furious? That seems to be the big question as political fingers are pointing in every direction. Was it greedy CEO’s with their “golden parachutes?” Was it the Democrats? Was it the Republicans? Was it Wall Street? (Who, exactly IS “Wall Street?”) The simple answer is that it is all of the above.

Treasury Secretary Henry Paulson, Jr., and Federal Reserve Chairman Ben S. Bernanke were on Capital Hill taking a verbal beating from some of the very people who should not be asking the questions, but answering them and answering those questions under oath.

Senator Chris Dodd, (D-Conn.) and Congressman Barney Frank, (D-Mass.) are the first two who should be grilled, not by fellow politicians, but by an independent and hopefully very clever, angry, and mean attorney hired by the American people. No one from the present Justice Department need apply. Both should be asked how much money they have taken from lobbyists hired by the CEO’s of Freddie Mac and Fannie Mae. Since that is public record, they should then be asked what Fannie and Freddie got in return for that money.

Barney Frank should be questioned about his House Bill, H.R. 3838, that is clearly designed to keep Fannie and Freddie afloat as long as possible despite all the signs that there was serious trouble ahead. But all his bill did was make the hole bigger in the side of the Titanic. Basically all H. R. 3838 did was: “To temporarily increase the portfolio caps applicable to Freddie Mac and Fannie Mae, to provide the necessary financing to curb foreclosures by facilitating the refinancing of at-risk subprime borrowers into safe, affordable loans, and for other purposes.”

Barney Frank and his counterpart in the Senate, Chuck Schumer, (D-N.Y.) did everything they could to delay and cover-up the outright fraud and book-cooking that was going on within Freddie and Fannie.

As far back as 2003, Freddie and Fannie were $9 billion dollars in debt because of bad loans that continued to be accepted on a daily basis. Pressure from liberals in Congress to continue giving out bad loans was relentless and for years it continued with CEO’s, who happen to be friends of Dodd, Frank, Schumer, and Clinton, leaving with millions in their bank accounts as the companies they ran went under.

The truth is that this financial disaster for the American taxpayer didn’t begin under George Bush, or Bill Clinton, or George Herbert Walker Bush, or Ronald Reagan. It started under Jimmy Carter . It started with the passing of The Community Reinvestment Act in 1977. Basically, this act pushed local community banks and lenders, to “bend” the rules a little and give loans to low-income families. Like many liberal schemes, it seemed like a good idea at the time. There was a provision that protected the nervous lender in the clause that stated that loans should be given “in a safe and sound manner.” This gave the bank some leeway and choice in the loans that were given out.

Under Bill Clinton, The Community Reinvestment Act was revised. Basically, the revision started to put pressure on lenders to take more financial risks. It was felt that lenders were not being “fair” to minorities and the poor who only wanted to share in the American dream of owning their own home. Janet Reno began to outwardly threaten banks and mortgage lenders with prosecution if home loans were not approved for those who wanted to purchase homes that, in truth, they could not afford.

Fearing federal retribution, loans started being approved for people who had no down-payment, no jobs, no collateral, and absolutely no hope of ever being able to meet any mortgage payment after the grace period of low interest ran out.

Then, the greed took over. Banks would “bundle” up loans, good and bad, and sell them to Fannie Mae and Freddie Mac, making all their money up front for loans they knew would default eventually. As these loans did default, in larger and larger numbers, even Fannie and Freddie could no longer stand up under the hemorrhage of money loss. Wall Street panicked and so did the federal government.

Were there warning signs that a disaster was looming? Of course, there were. But there was money to be made and politicians and CEO’s alike were not about to give up the gravy train of money being crammed in their pockets. The CEO’s of Freddie and Fannie would hire lobbyists to slip money into the pockets of Senator Chris Dodd, (D-Conn.), chairman of the Senate banking committee, who was supposed to be overseeing the banking industry, to the tune of $133,900 since 1989. Barack Obama was number two at the trough with over $120,000 which was no small feat since he has only been in the Senate for three years. Dodd and Obama were closely followed by the last Democratic nominee, John Kerry, (D-Mass.) and then Senator Hillary Clinton, (D-N.Y.)

What were these lobbyists buying for the millions they sprinkled around the Senate and House of Representatives? They were buying a blind eye. They were buying little or no oversight into the juggernaut that has finally crashed on the heads of the American taxpayer. CEO’s got rich, politicians got rich and they got votes, being able to tell minorities and the poor, “See what we are doing for you?” For years, the red flags were stuffed under the desk and ignored.

Early in his administration, George Bush sounded an alarm over the small amount of working capital Fannie and Freddie had on hand. He urged them to sell more shares to increase their reserve in funding and put them on more stable ground. He urged them to be more selective in the loans they bought. This suggestion was declined because the current stockholders would n ot make as much profit.

Franklin Raines, the Fannie Mae CEO from 1999 to 2004, decided to retire early, taking millions with him, under a cloud of accusations that he had cooked the books to make it appear the company was making money instead of going head-long into debt. Another player in this financial kabuki dance is Jamie Gorelick. That name should ring a bell with every American. She seems to surface right at the heart of every American disaster in the last 15 years. Ms. Gorelick was vice-chair of Fannie Mae from 1997 to 2003. Like all the others, she left with millions in her pocket while declaring that Fannie Mae “is among the handful of top-quality institutions."

The next year it was found that Fannie was $9 billion dollars in the red. Oddly, this $9 billion had been overlooked in the books Ms. Gorelick and Mr. Raines kept.

Let’s put Mr. Raines and Ms. Gorelick on the stand. The American people deserve to hear how much they gave lobbyists to pass on to their friends in Congress to keep the blinders on. That number is a staggering $16.2 million dollars since 1997. That amount bought very large blinders. And, it bought time. It bought time for the likes of Raines and Gorelick to make their millions and bow out before the bottom fell out.

Republican nominee John McCain raised the alarm two years ago but his plan for more oversight was killed in the Democrat-controlled committee. Over 20-year span, McCain took $20,000 but this did not stop him from voicing his concerns. The problem was that Democrats didn’t want to hear about it.

President Bush’s warnings were also ignored. Should Bush have done more? Yes. Unfortunately, Bush was distracted by the 9/11 attack and wars in Afghanistan and Iraq. So now, nearly every hour Americans watch as a pompous Chris Dodd or Barney Frank struts to a microphone to declare the “failed economic policies of the Bush administration are responsible for this mess.”

No, Senator, he is not. YOU and your greedy friends are responsible. It took three decades to reach the point of no return and some were there with their hands out nearly all of those years.

The Federal Bureau of Investigation is launching a full investigation into all of this. This investigation will abruptly end should Barack Obama win in November. The last thing Democrats want is the American people learning how complicit so many of them are in the illegal practice at Fannie and Freddie that led to the taxpayers bearing the brunt of the their unbridled greed.

While politicians want oversight over the “bail-out,” there has been little outcry for an investigation into how all this evolved.

It’s time for Americans to go to their windows and throw them open and yell, “We are mad as hell and we aren’t going to take it anymore!”

Then, in November, vote the lot of them out of office."

Can you believe that a liberal paper in America's most liberal city, 40 days before the presidential election had the GALL to print anything so absolutely factual and accurate?  


Yours for a better world,

Mentatt (at) yahoo (d0t) com

Tuesday, September 23, 2008

What you don't know/see can really hurt

I was speaking with our resident mad scientist last night, the good Doctor Lalani, and he mentioned a liability that I had not considered, but which I think was must be.

What if gasoline prices, for whatever reason, rise to $6.50 + per gallon?  What would that do to suburban home values?  I think it would CRUSH them.  And the government's rescue plan is NOT taking this issue into its calculations.  After all, for ANY plan to succeed, home prices must not collapse outright, and they likely would if people could not get back and forth to their home.

The $6.50 number does not have to happen overnight.  The process of unwinding this disaster is going to take YEARS.  If the intersection of the X & Y graph happens before most of the unwinding is complete, the bailout could fail - with predictable consequences.

Got Gold?

Mentatt (at) yahoo (d0t) com

Monday, September 22, 2008

Dewey, Fugham & Howe!

If you were a deflationist, you would have been short Oil,  Gold, and Silver, and long U.S. Treasuries - and it would have taken a crew from the NYFD to put your smoldering ass out yesterday.

Being a "true believer" will bring you truly to ruin.

Back soon.

Mentatt (at) yahoo (d0t) com

Sunday, September 21, 2008

Things Change

If the bailout package makes its way through the U.S. Congress, the deflationary scare is over.  If you were playing that trade, it is OVER.  

Inflation will be back - HARD.

This is NOT the 1930's.  The U.S. is not on a Gold standard, an Oil standard, or any other kind of standard.  The Fed and Treasury have unlimited ability to debase the currency, the ability to bring the Fed Funds rate to near (or to) zero, and inflate credit.  If you are not a believer, you will be soon, so don't hold on to losing positions betting on continued deflation.  You would be better off FLAT (no positions).

No, this won't happen overnight (does anything ever?), but it will happen, in  my humble opinion. The entire planet will be following the U.S. on its hyper-inflationary mission, so I like the "stuff" more than any particular currency.

Don't waste time shouting into the wind.  This bailout package is GOING to happen, and it was probably the ONLY rational thing that could have been done.  No, it ain't right, it ain't fair, blah blah, blah... that's life.  Hopefully, Congress won't try to tag it with too much baggage.

For this week, trading is only for the stout hearted, and the VERY disciplined.  If that ain't you, take your football and go home.

BTW... Did I mention that the US$ rally is over? Kaput. Sunk. Glug.

Back soon...

Good Luck! 

Mentatt (at) yahoo (d0t) com

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

Friday, September 19, 2008

When the Music Stops

Remember musical chairs?  That is what this market is like.  The rally engineered by the "mother of all" short squeezes will end badly.  Don't overstay your welcome, and make sure you have a seat before the music stops.

The bailout did not FIX the problems.  Not even a little bit.

Careful out there.

Back soon...

Mentatt (at) yahoo (d0t) com

The end of the beginning of the end

Despite today's short covering rally, we are a long way from being in the clear.

I have spent the last several months concentrating my blogs on the coming housing/mortgage/financial system blow up... but now that it is here, I want to get back to the bigger "gorilla in the room" - OIL.

The over supply of housing and housing credit could hardly have come at a worse time.  Let's take a walk down through history, shall we?

The U.S. was a CREDITOR nation (until the 1970's) and an OIL EXPORTING NATION (up until the 1960's).  In the 1970's, the U.S. domestic production of Oil began its inexorable decline, and by NO COINCIDENCE the U.S. budget deficit exploded ever since into the monkey we now have on our backs.  

During this time, the "Yes Men" advising our Presidents (remember, these guys (the presidents, that is) were for the most part Lawyers,  with an Actor and a Spook thrown in for good measure, not economists or Wall Street types) that we could "grow" our way out of the accumulating debt - and that was TRUE, as long as the U.S. could continue to grow its supply of imported Oil.  Therein lies the rub... we can't.  As a matter of simple mathematics, not only is the U.S. unable to grow its Oil imports, but Oil imports into the U.S. are in significant decline to date in 2008 from 2007.  I expect this trend to continue, and even accelerate.

In the final analysis, the U.S. finds itself with a large budget and trade deficit that needs to be financed either by an expanding GDP - OR - taxes.  Now "GDP" is in the "eye of the beholder".  GDP does not have to be REAL, an unethical government can use INFLATION instead of real GDP... and if THAT fails (Inflation is truly the lessor of two evils)... then the U.S. heads into a deflationary/monetary contraction event, something that TPTB will want to avoid at all costs, if they want to maintain their positions.

And there it is, and that is where we are now.  Nothing in the government's bailout plan addresses this issue - not that there is much they could do.  If the government publicly ADMITS that the U.S. is in the beginning throws of an Oil import crisis, the US$ would plummet.  Considering the gyrations that the Fed and Treasury did to get the US$ to trade up against the major currencies and precious metals (precisely because Paulson and Bernake could see this even from miles away, even while proclaiming "the U.S. banking system is sound"... remember that one?) prior to enacting the RTC thing... well, let us just say that it would be counter productive.  So they cannot come out and address the 800 pound gorilla, and everything else is the financial equivalent of a Princess stepping on your foot in the middle of a dance as compared to the Gorilla stomping your face in.  Gee, thank goodness TPTB are addressing that clumsy Princess.

Back soon.

Mentatt (at) yahoo (d0t) com

P.S. on 9/20/08 My friend Jeffrey Brown, otherwise known as Westexas sent me an email correcting my data point.  As it turns out, the U.S. became a net oil importer in the second half 1940's.  My bad.  Thanks Jeff!

Close Call, and it ain't over yet...

I wonder if Americans realize just how close to the precipice of a banking and financial collapse the U.S. is or was.  "Was" remains to be seen.

You can't cure a fire hazard in a building by arresting the guy out on the street who is pointing it out to the people thinking of entering the place.

This is a tradable rally, and I am going to trade it - even though I despair for the future.  Thank G-D! I am not short!  But when this rally ends, I will be short with a vengeance.

If you are not buying Gold, Silver, and Ag land with your cash NOW, it will be too late at some point should the oil import numbers stay on trend.  At some point the market is going to notice that boogey man.  What is the point of working hard and being frugal only to have your asset values destroyed?  You would be better off taking a trip around the world and spending all your money.  In the end you will be in the same financial place, but you will have lived a more interesting life.  

Good Luck!

Mentatt (at) yahoo (d0t) com

Wednesday, September 17, 2008

What UP?

I gotta take my hat off to Henry Paulson.  

I may disagree, intellectually, with the idea of nationalizing the financial system, but when it comes to excellent execution on the move - Paulson is pretty darn good.  Give the devil his due.
While Paulson's firm might be guilty of starting and profiting from the disaster, it is Paulson, not Bernake, Bush, Greenspan, etc... that might keep the system from imploding in 2008/2009.

This is sort of like the presidential campaign for me.  I don't have a dog in the hunt, I am not trying to convince anybody of anything, other than how to interpret the environment so that we can best profit or avoid loss.  Paulson has bobbed and weaved, never letting principal get in the way of doing what is most expedient, exactly what a trader should do. I am SOOOO impressed with the mercenary son-of-a-B. Remember, in his current capacity, he represents the president as principal, and he has executed brilliantly - SO FAR.  That means he ain't out of the burning building/woods just yet... and ANYTHING can still happen.  YOU need to know that.


If you have been reading my stuff for a while, you know my call on residential real estate, the financial system and the companies that would fail has been spot on.  Unfortunately, my RESPONSE call, to own Gold and Silver, has not exactly worked out according to plan (especially Silver) - SO FAR.

The egg on my face is a GIFT to you.  If you didn't buy them when they were down, and you are not buying them here, I think you are doing a disservice to yourself.

The only market that has not blown up yet is the U.S. Treasury market.  That market is in a BUBBLE as I write this.  I have no idea WHEN it will blow up, but I have bet my bottom $ that it will, and one of the beneficiaries will be Gold & Silver.

Not that you will get rich investing in Bullion.  Unless you use leverage, which I caution you NOT to do, you will not.  But at least you will have something of value left.  Particularly for you folks 55 and under.  When it comes time for you to go ugly early and grasp the social security brass ring and begin to liquidate your portfolio in 10 years or so, you are going to be sorely disappointed at best, and more likely angry and bitter at the purchasing power of your financial assets.


How many folks have noticed that the Financial world is coming undone - and crude Oil is $100 per barrel even after an UNPRECEDENTED  20% + rally in the $ (remember the inverse relationship of  commodity prices to the currency)?  Crude is up 900% this decade even as our financial system is in collapse!  What will the price of crude be if we right our economic ship?  What will the price be if you compound that with a retracement of the US$?  Don't listen to the Media angle on this.  They serve a different master.


It is a tough market out there.  Lower highs and lower lows, not the stuff that engenders confidence.  But opportunities do exist in the energy sector.  That is all I can say.  Be smart, and don't be a true believer.  That means be disciplined and take losses when you are wrong.

We are entering a very different phase in the crisis.  The credit bubble is at least half deflated, but I see little possibility of TPTB being able to reinflate.  Oil is THE ingredient that runs the economy, but if the economy is not running, it won't need as much oil.  The data at THIS moment says one thing, and can say something else the next.  It is all about the data.

Good Luck!

Mentatt (at) yahoo (d0t) com

Free Market Capitalism - R.I.P.

Welcome to the United Socialist States of America! Where everybody can win, and everybody is above average, a gifted student, or a poor test taker!

The loser, social programs mentality has spread FULLY to our economic warriors. What a bunch of bloody wimps! I am embarrassed to be a capitalist.

Did we learn nothing from Japan's lost decade (0r 2)? Dragging out the failures only prolongs the pain. It would be one thing if a socialist like Bill Clinton (and he was only a socialist until he made $100 million) was overseeing the nationalization of American industry, but a free market Republican? Thank G-d I'm Libertarian.

Speaking of social programs. In order to operate, these programs need a functioning capitalist demographic to hate and tax. The latter are no more, and the former won't be for much longer.

So the Treasury finally fessed up, announcing a debt auction with the proceeds to shore up the Federal Reserve's balance sheet. This will not be over in the 35 day maturity of the offering, nor will it stop at $40 billion. This is the beginning of the end for the financial system as we know it. No, it won't happen overnight, and at time it may appear as if we pulled it off... but the energy import crisis is going to crimp the availability of the BTU's necessary to increase real GDP, and without that growth the Budget Deficit's percentage of GDP will grow until it consumes us. How long will this process take? Less than 10 years, and maybe less than 5.


When the fair winds blow and the sun shines our "best and brightest" took HUGE compensation packages - and the members of the various board's of directors claimed they HAD to pay up: "That is the market for top CEO talent" went the explanation.

Talent??!! What talent? CEO's barely work. They have teams of highly paid consultants, minions, and assistants to collate and massage the data so that the "Talent" can make brilliant executive decisions, look good in a suit, and get paid 120 times more than some secretary or administrative assistant, whose IQ, by the way, is higher than the CEO.

These corporations are so big, they are like drift wood floating in a tidal current. When things are flowing, the tide can make up for all of the waste, over compensation and poor decisions the "Talent" can muster. But when things go the wrong way, not matter how brilliant the "Talent"... well, they still get paid.

I remember when the previous CEO of Exxon Mobil, Lee Raymond, had a $400 million year! Was it his brilliant execution? Hardly. It was the doubling and tripling of the price of Oil that led to those profits. Was Lee Raymond's contribution responsible for that? NAFC. Peak Oil was responsible, and Raymond denied its existence. I would have done the same, for $400 million.

Tax payer bailouts had better mean the end of the "Talent" rip off.

Back soon.

Mentatt (at) yahoo (d0t) com


On The Precipice

In my recent post "If you ain't scared" I laid out how close we were to a Financial Meltdown.  A couple of times between here and there I thought that it would be bad, but we would avoid Armageddon.  Whoops!  It sure LOOKS like Armageddon.

Citigroup, Goldman Sachs, and Morgan Stanley do not appear to me to be able to survive the defaults on all of the loans on their books.  What was so hard to understand?  When people default on over $1 Trillion in mortgages someone else has to take the hit.  Those "someones" were the banks, bond insurers and brokerages.

This is why you can't have  all your eggs in one basket.  If you have the means, you should own a farm or rentable farmland, precious metals in the form of bullion, cash, energy equities, a small business that produces something for local consumption, etc...

The energy crisis has not even hit the market in force - yet.  What will things look like when that inevitable event comes to pass?  Still believe in miracles?  Where is the capital required to invest in "alternative" energy going to come from now?  The banks? HAHAHAHAHAHAHAHA!  Get a GRIP!!  And get a bike.

Back soon,

Mentatt (at) yahoo (d0t) com

Tuesday, September 16, 2008

The Fed, AIG, etc...

Well, the Fed refused to lower interest rates.  

I know a lot of folks in the investment community are PO'd right now, but I am not sure what a cut would have done.  At a 2% Fed Funds rate, the U.S. has negative real interest rates. If negative interest is not stimulative at 2%, what more will 1.75% do?  

Also, the Fed has a real problem in that it cannot cut rates below 0 - much as they might like to.  We all know what happened to Japan when they lowered rates to near 0 - NOTHING.  Maybe pretending to matter is more important for the Fed to do than to show that they don't matter.


The nationalization of the American economy is in full swing.  Pretty ironic that the U.S. would go Socialist under a fundamentalist christian, Republican president!  I wonder what a liberal Democrat would have done...

The bailout of AIG is just one more in a long line of Nationalizations to come, though we might not call them that.  Ford, G.M. Citigroup, etc... ALL will get nationalized eventually.  The American people are addicted to government bailouts in addition to Oil and social programs.  I don't hold a great deal of hope out for the political environment when the Energy S.H.T.F.

Got Gold? Get yours while the getting is good.  This goes for Silver, too.

At this pace at some point the US$ will join the reich mark in the dust bin of history.

Back soon,

Mentatt (at) yahoo (d0t) com

Holly Molly

Stuff like this always happens when I try to take a few days off...

Anyway... I went long some Oil (futures) today!  I plan to add over time and own contracts up and down the curve.  I don't give specific advice in this forum (although I speak very directly about commodities as I am not registered in this area), so I won't say where I bought, but it was not in size anyway.  But I figured oil cannot go down $5 per day forever, and that at some point we are going to bounce, and I want to be long when we do - even if just a little.

I grew up on a Wall Street dominated by Goldman Sachs, Bear Stearns, Lehman Brothers, Morgan Stanley & Merrill Lynch.  It is hard from me to grasp what has happened.   The power shift has been overwhelming.  I know I have been saying for some time now that Lehman was "doomed", but I still felt that they would avoid bankruptcy in a shotgun wedding.  They REALLY screwed up.

On the positive side, I got a couple of calls today from people who avoided significant losses by, they say, listening to my rants.  I was thrilled.  One of my motivations in writing this blog was to communicate the disaster I saw coming for the banks as a result of the real estate melt down.


I seem to attract to my blog folks that want to blame a lack of "regulation" for the housing/mortgage crisis.  Always amazes me to hear super educated folks come to a belief/blame based far more on their political beliefs than the facts.

The housing crisis has at its roots the Community Reinvestment Act, and in particular its amendments of 1995 and 2005.  No CRA, no housing/mortgage crisis.  Simple like that.  No amount of "regulation" would make people who put nothing down on their home from walking away from that home during a recession, layoff, price decline - whatever.

The good news is that with the demise of Lehman, Bear, etc... the business of making home loans will migrate back to the local bank.  You know, the guy you coach little league with, attend church/temple with, his wife knows your wife, your kids go to school together.  The bad news for New York City and State is that the mortgage money pipeline has been shut down. Kaput.  Taxes that New York was able to extract from its populace as a result of this largess to fund silly and unsustainable programs are no longer there to collect.

Speaking of "sustainable"... Why is it that smart folks on the left can easily see the realities of the country's oil addiction, but cannot see the same in the country's addiction to social programs?  The exponential function applies to all things growing and expanding: energy, pollution, Medicare, Social Security, etc...  Our politics are getting in the way of real solutions. 


The unwinding continues in the financial sector.  There is nothing left to unwind in the commodity sector.  That is one of the reasons I went long Oil.  No one is leveraged to Oil, or Silver, or Gold from what I can see.  If you disagree, please email me and show me what I am missing in my interpretation of the CFTC commitment of traders report.

The problem is that the financial markets have great effect on the commodity markets and the economy.  But that is the risk you take.

Back soon.

Mentatt (at) yahoo (dot) com

Monday, September 15, 2008

Markets Zig and Zag...

Markets zig and zag.

I would not short much right now, even if you are not willing to go long. Read what you like into that. Also, wait for the Fed.

Back soon.

Mentatt (at) yahoo (d0t) com

Sunday, September 14, 2008

If Merrill and Lehman are gone, Who's Left?

This is what stock market bottom's look like.  Yes, tomorrow the market is going to be down, BIG (if Lehman files for bankruptcy protection).  It has been reported that Merrill Lynch has agreed to be acquired by Bank of America.

So who is left?  Washington Mutual, Wachovia, and AIG.

WaMu has no shot of surviving.  Wachovia and AIG could make it.  If they appear they are to survive, it would seem that most of the bad news is prices and discounted into the market.

In addition, we have the Fed Funds rate at a highly stimulative 2%.

So that is what the market has going for itself.

Our Mad Scientist tells me that the only "fly in the ointment" is gasoline prices.  Granted, Oil has fallen and that should help, but the 2 Gulf hurricanes have left our inventories in TERRIBLE shape and have shut several large refineries for at least a week, and perhaps longer, and refiners make GASOLINE and DIESEL - you know, the stuff our economy runs on - and prices could spike for finished products decimating the economy and the market.

I went long the energy equities last week and I felt pretty good about the price action friday, but tomorrow might be painful.  I can't say now that I would add tomorrow or not... but this is what stock market bottom's look like (unless energy comes in for the knock out).

Good Luck!

Mentatt (at) yahoo (d0t) com

The United States of Crisis

Housing Crisis, Monetary Crisis, Fiscal Crisis, Healthcare Crisis, Budget Crisis, Trade Crisis, and now the Energy Crisis... I know it is a bit on the dramatic side... that aside, just how did we get here?  Didn't we hire our best and brightest in Economics, the Law, Medicine, Economics, Finance, etc..?  

Not only were they not so smart, but they lacked the ability to see right from wrong once admitted to "The Club".  Most were born into "The Club", some worked, fought, and cajoled their way in.  But any student of history would be hard pressed to see much of a difference between the U.S. now and the Soviet Union in their death throws. I love my country and the freedoms we enjoy.

 I am reminded of that line from Al Gore's movie: "no man can understand something that his salary requires he NOT understand".  These "Members of the Club" saw no reason to mention that the emperor had no clothes.  Why risk being dismissed from "The Club"?

You don't know how much that fit Lehman Brothers and Bear Stearns.

I used to work for Bear Stearns.  I watched the guys down in CMO (Collateralized Mortgage Obligations) trading make more money than I thought possible for a bunch of guys that get lost going out for a sunday drive.  Not that they did not have PR firms to profess their brilliance to the masses - they did, and for the most part it worked.  Unfortunately, they believed their own press.  Actually, there WAS one really smart guy.  Warren Spector sold his stock 2 years before the blow up in a political dust up at the firm - and it was his decisions that dropped the firm to the canvas!

So, here is MY idea.  I say we need a NEW club.  We should preclude from executive positions people trained at the institutions whose alumni were most represented at Bear Stearns, Lehman Brothers, Citigroup, Fannie & Freddie, AIG, Washington Mutual, (Should I throw in Enron and Worldcom?) etc...  Harvard, Wharton, Columbia Business Schools... WHOEVER it is.  This would be an easy calculation.  Obviously these institutions failed in their mission, perhaps helping to aggravate the situation by compounding the failures of their ranks with their unwarranted status, which only compounded the poor thinking within these institutions.  Think about it:  How many times have you heard that the Harvard Business School is the "best"?  Or Wharton?  


Certainly not by the performance of their alumni.

Back soon on Lehman Brothers.

Mentatt (at) yahoo (dot) com

Thursday, September 11, 2008

Oil and the ECB

The ECB is going to cut, and relatively soon.  That is going to be a pretty tough day for commodities.  It may or may not create that great buying opportunity.  That remains to be seen, but if you are long going into that, it could be painful.

Mentatt (at) yahoo (d0t) com

The Set Up Cometh

"The world economy is slowing".  OK so far.  "The slowing world economy will cause Oil demand to fall".  Really? I can't find much data to support that conclusion.  Not since the 1970's Oil embargo has the world experienced year over year over year (3 years) declines in Oil consumption and only a couple of very, very small year over year declines.

The world vehicle fleet is growing, and 2008 and 2009 will be no exception.  Oil is primarily used as a transportation fuel, powering this growing fleet... is the fuel supply growing commensurate with the increase in the number of vehicles?  

The world's population, and the number of new energy consumers, increases by the equivalent 1 U.S. every 4 years.

That, in my opinion, is the "Set Up".  In order to make money in the markets in excess of Treasury yields one must think ahead, and think better than the other guy (and, no, you cannot hit every pitch.  Thinking that you, or your broker/manager/advisor is going to be right on every position/trade/investment will only get you into trouble.  Unreasonable expectations will cause you to make bad decision after bad decision after bad decision.  If this describes you, and in my experience it describes a lot of investors, you are better off with your money in a mattress).  Right now, the world financial community is undergoing a forced unwind of positions.  Some see this as a great conspiracy, some as the normal, and unpredictable, nature of markets.  Whatever it was that caused the snowball to roll down hill does not matter.  What matters is this:

Markets ALWAYS over do it.  They always overreact.  For some, this creates tremendous opportunity.  Oil became overbought.  Blame it on speculators if you like, and speculative bets certainly drove that market to extreme overbought conditions, but the REASON the speculators were speculating in the first place was because many, many market participants have recognized the Oil supply problem facing the world.  This problem is real, and it is immanent.  That does not mean that Oil will not soar and fall by greater than 35% from its average point in any given year.  I think that that will be the new norm, but that new norm is not that far outside the previous norm of something north of 25%.  It also does not mean that Oil cannot fall 50% from its trading high - it can.  It does mean that the traders that recognize the next bottom are going to make an awful, awful lot of money.

The Oil market in the U.S. has become an emotional and political football.  It is as if we are watching a sporting event, and we are rooting for our favorite team - cheap oil prices.  But like cheering your team from the stands, the impact of your rooting will not be felt on the field of play.  That will only be impacted by its participants. 

If the markets drive Oil prices down, and U.S. & OECD inventories and imports continue to fall, you have your set up.  Then the question is where on the futures delivery curve you place your bets.

Good Luck!

Mentatt (at) yahoo (d0t) com

Wednesday, September 10, 2008


The Oil inventories reported by the U.S. Department of Energy showed a draw of over 15 million barrels of total products.  Next week should show a significant drawdown as well.  

It would appear that TPTB have successfully driven all of the speculative money out of the Oil futures market.  But the physical market still rules, and with inventory drawdowns like this, and the less than spectacular production data, going into the Northern Hemisphere winter heating season, it is my bet that the climax selloff/capitulation in oil, whenever it comes and whatever it looks like will be the moment to reenter the Oil futures market.

With oil down with draws like today, a sell off down to $80 or $90 is not only possible, but probable.  Then you got to pick your spots.

Mentatt (at) yahoo (d0t) com

Intervention Data Piling Up

I don't believe that the government has a slush fund to manipulate the price of commodities or financial markets.  However, the data that a significant intervention was made on behalf of the U.S.$ is starting to pile up.  The 10x increase in the short positions in the futures markets for silver does not at appear to be a risk that anyone but a central bank or sovereign wealth fund could withstand... unless the Hunt brothers are back.

Some readers have been forwarding me data points on this issue.  If you have any data points you would like to share, please forward them to me at the email address below.

Mentatt (at) yahoo (d0t) com

Tuesday, September 9, 2008

Lehman Brothers, RIP

Fannie, Freddie, IndyMac... today Lehman Brothers fell below $8 (you know what that means...), and Washington Mutual is on the ropes at $3...  

The problem is, I only got it 90 % right.  I got the bank failures, housing market, Fannie & Freddie, and Oil DEAD ON.  But I thought the flight to safety would have been to Silver and Gold, and boy, has that not worked out according to plan - yet.  Unfortunately, it is the PRICE response that matters, and at the moment it ain't going my way.

I am long December 2010 Silver & Gold Spreads - something has to give in the next 28 months or I will have egg on my face.

Tomorrow is Oil inventory day.  It is inconceivable that inventories of Crude, Gasoline AND Distillates are not down BIG, with Gasoline near minimum operating levels in the South and Southeast.  However... 

Anyway, I am still waiting for my entry point in Oil.  It will come, but no point in hurrying.  That goes for house buying, business expansion, hiring, buying a new car (HAHAHA!!) etc... these are ALL activities that can wait.  No need to be a hero.  The next move in Oil can make a career, even a lifetime... 

Back soon,

Mentatt (at) yahoo (d0t) com

Where is the Bottom?

Added to positions in Oil Services, Drillers, and Producers today.  Boy, it is hard to buy them when it appears the world is coming apart at the seams.

But if you want to sell them when they are up, you got to have bought them when they were down.  And when you are looking over the precipice, it is awfully uncomfortable.  

Mentatt (at) yahoo (d0t) com


Many of you have been watching the debate between Mish Shedlock and the inflationists.

Turns out, Mish appears to have been dead on.  Even if things turn back to the inflationary, it was an extraordinary bit of research.

Great call Mish!

Mentatt (at) yahoo (d0t) com

Monday, September 8, 2008

Whither Crude Oil?

I have been an Oil bull for years.  Years and years.  But this year we sold every barrel of the commodity, and I have not bought a single contract back for an overnight hold since we punted a couple months ago.  Pretty simple, really.  Oil got "overbought", and when everyone started talking about the inevitability of $200 Oil, I remembered my favorite American, Samuel "Mark Twain" Clemens' famous line:

"Whenever you find yourself on the side of the majority, it is time to pause and reflect."

That pause saved me a great deal of aggravation, because we all know that market's zig and zag, they don't zig and zig.

So now what?  Oil is $106, and is in "flip a coin" land at the moment - could go to $80, could go to $125.  Worse, looking at the data, incomplete and inaccurate as they are, it would appear to me that it is very likely that Oil will enter a trading range for the next year, 18 months, maybe even 2 years (though I think 2 years a stretch).  Is the trading range $80 to $120? $70 to $130? Too many variables and unknowns at the moment for my money.

Still, this is a lot like hunting.  Patience is in order, and the moment will come to strike.  

Another question is: what will the shape of the futures curve look like?  Will Oil be in contango(later months delivery prices higher than the front month) or backwardation (the opposite of contango)?

The decline in the price of Oil, and the decline in the economies of Europe and Asia, have done wonders for the US$.  I will be the first to admit that I really thought that the long feared monetary crisis was upon us, and still wonder how the markets think the collapse of Fannie and Freddie are a positive...  Just think, let's blow up Lehman, Merrill, and Citi and get filthy, stinking rich!

In this regard, we are truly in the "Land of the Philistines". (Or at the very least members of the Great Native American "Wairdafukaawee" Tribe.  Perhaps you never heard of them?  They got their name after a long hunt in which they followed their prey night and day, through rain and darkness, only to finally pick up their heads and look around.  After a few moments their leader uttered the famous line which gave them their name. "Hey, where the f&%ck are we?"  And, to this day they carry their lineage with pride - The "Wairdafukaawee".)

In short, I have no idea where we are vis a vie the US$ because at the moment up appears to be down.  This can, and very well might, change quite abruptly.  Until then, it is tough to make a bet.

Not that the US$ has had any of its issues solved - it hasn't.  But currencies are a relative thing, and at the moment the economies of the other currencies are performing worse than the U.S. economy, and the U.S. in not doing anything to write home about.  And this is having an impact on Oil, which is supportive of the US$... When does this cycle start to spin the other way?  I can't say for sure, but I can say it will for sure, and deciphering that moment will be everything.

Soooooo, while the great bull market in Oil may not be over, this is likely to be a bit more than "the pause that refreshes".  Patience will be rewarded.  So will courage.  Because, "when you should be buying, you won't want to".

Things change, markets change, data changes.  The moment it does, I will likely be long Oil once again.  Could be today, tomorrow, next week, next month... but it WILL happen.

Good Luck!

Mentatt (at) yahoo (d0t) com

Tough Stuff

The intraday turn around for the energy equities is nothing short of terrifying to me.  It would seem that the world economy is pretty sick.  Trying to guess the bottom is tough stuff.

So I bought some of the stuff that is terrifying me.  You gotta take positions when things are getting destroyed, and this would meet that definition.  But I had to hold my nose while I did it.

To say that it has been a tough month on energy equities is an understatement like no other.  But "this is the business we have chosen", and here we are.

Having fun yet? Me neither.

Mentatt (at) yahoo (d0t) com

Sunday, September 7, 2008

"End of an Era", the demise of Freddie & Fannie

As predicted here many times, Fannie & Freddie, those great experiments in socialism, have failed and are now property of the people - like it or not.  How far behind is Lehman, or even Merrill?  Stay tuned.

The funny thing is that the markets might actually LIKE this.  I suspected that in any event on friday, with the market's mid session turn around.  Not that I went long except a little silver, because it is better to wait and see the trend before the trend comes and leaves foot prints up the front of you...

Remember that jerk from the National Association of Realtors?  Dr. David Lareah?  As Chief of the "independently minded" NAR, those good people who ALWAYS have your best interests at heart, Lereah penned a couple of books about the never ending housing love story.  He should share a prime spot with U.K. Prime Minister Neville Chamberlain  as utterer of  "most famous of last words".

No amount of government seizure money is going to do much for the U.S. housing market.  Time and lower prices will work it all out, not the National Socialists.  I am curious as to when the SS shows up at homeowner's doorsteps: "Zvee have ways of making you PAY".

See, that is the problem with big government, or government programs of any kind.  Someone with a gun and a badge has to enforce the program.  Increase taxes on the rich!  (And if they don't pay, goons with guns and police batons will come and do violence to them - jails and prisons are merely societal organized violence.  If you think not, just skip paying your taxes for a few years, see what happens to you.  On second thought, don't do anything so stupid and just trust me.)

Every time I hear some jag off popping off about regulating the banks, brokers, shoemakers, bakers, and candlestick makers... I hear the sound of jack boots goose stepping down the strazza.  Clearly the folks advocating said regulation have never been regulated before.   Regulation sounds great, and in areas of food, water, and public health, it is an absolute necessity.  In business?  Well folks, we have not got what we paid for, and we paid dearly for what we did not get.  It would have been cheaper to have just GIVEN everybody a house, a la the  Soviet Union, than what we have paid for the patchwork of FAILED regulators, services, and the final bailout.  But this is government, and these guys wouldn't know a cost/benefit analysis from a digital rectal exam.


I don't have a dog in the hunt in this presidential election, but it is hysterical (to me) to watch the MTVization of American politics get turned on the folks that unleashed it (the Obama campaign) in the first place.  McCain may or may not win, but you gotta hand it to him re the Palin selection.  No matter how many women's focus groups, or how they are constituted and presented, that the Dems trot out to tarnish her appeal, the pitch backfires in the amusing glare of a "cat fight". This will NEVER work.  If I were an operative for the Dems, I might have a woman standing with her FAMILY saying that Palin's views/stances/positions/whatever would harm her and her family.... you MIGHT get her negatives up a little with something like that (and then again you might not.  It is very hard to lay a hand on a woman in politics, even by another woman), but having a group of well groomed, prep and pearls professional women who APPEAR to have had every advantage come out swinging against Mom and Apple Pie?  Not too smart.  The Dems better go find James Carville - and fast.


I just read an excellent book by another brilliant, testosterone challenged, ivory towered socialist,  - "Plan C" by Pat Murphy.  I highly recommend the book, even though it is inconceivable that any of his suggestions would be put into practice.  And not because his ideas are great and we are just too dumb, but because we are talking about PEOPLE here.

One line in the book really got me - "this process will have to be carefully managed and controlled", I assume by benevolent socialists/communists with armies of thugs with guns and badges.  Count me out.  I would prefer Plan D, free people competing with one another for the continuation of their genes to Mr. Murphy's Plan C.

Wanna know why?  Because plan C is f^%$ing fools errand.  Allow me to explain human nature:

Scenario #1:

4 people have been marooned on a desert island with no hope of getting off.  The 4 are composed of 3 young men, and 1 young, nubile woman.

Net result:  After 1 year, 1 of the men has killed the 2 other men.

Scenario #2:

4 people have been marooned on a desert island with no hope of getting off.  The 4 are composed of 3 young, nubile women, and one young man.

Net result:  After 1 year, all 3 women are pregnant.

If you missed something here, email me and I will explain the birds and the bees much more fully than that conversation you had with your dad when you were 8.

Yours for a better world,

Mentatt (at) yahoo (dot) com

Friday, September 5, 2008

Markets Zig and Zag... Chapter 224.5

How many times have you heard me say that "markets zig and zag, they don't zig and zig."?

Yes, the Credit Default Swap is going to crash into the Oil import crisis - but not next week.  The market's intraday turnaround today MUST be heeded - ESPECIALLY if you are short.

Look how many highly trained, well educated, fantastically experienced hedge fund managers BLEW UP this year.  What happened?  They forgot Jeffers rule Numero Uno, "Markets zig and zag..."

If the market gets something it wants, be it an interest rate cut, a ruling, or a bailout of Fannie Mae, you do not want to be on the short side of things or you will be picking your guts up off the floor and stuffing them into your suit pockets for that long train ride to oblivion, and as an occasional unfortunate commuter of that train I can tell you that it really, really sucks.  It is hard to enjoy a good meal with your guts hanging out of your pockets and dragging on the floor. When it is really bad you occasionally trip on your own guts.  Yuck!

When the wind changes, don't just stand there, do something!

Mentatt (at) yahoo (d0t) com

Not The End of The World

The markets have been getting the stuffing kicked out of them.

My bet is we are close to a near term bottom, and are overdue for a rally.  Still, not every industry is going to hold onto their gains, so I would not have a great deal of patience with any particular trade.

Oil does not "feel" as heavy to me.  As I look in the commitment of traders report, it looks to me like every speculator with 2 nickels to rub together has fled the country.  Of course, OPEC is the ultimate arbiter with help from the global economy.

Silver looks to be cheap, especially compared to Gold with the Silver/Gold ratio at roughly 66, my bet is Silver is an excellent speculative bet.  Of course, I said that at $15.  Just don't confuse speculating with investing and you will do OK (that means take losses quickly when speculating in commodities).  Keep in mind that Silver has not broken its downward momentum, and I like to buy things that are going up and short things that are going down.  

The Oil "Shoulder Period" has 6 to 8 weeks to go, but that is when Oil is to be bought.  Still, downward momentum has not been broken here, either.  The inventory data and position data support a contention that Oil is bottoming... only for the disciplined, though.

Things change, markets change, data changes... 

Good Luck!

Mentatt (at) yahoo (d0t) com

The Great Unwinding Continues

Some Americans think they are wealthy if they have a good credit score.  Some Americans think they are wealthy if they have a boat load of their company's stock in their 401k.  Some recently thought they were wealthy because they were astute enough to buy a house, and said house would actually PAY THEM to live in it.

Is it any wonder that people who think like this elect people that think we can cure economic problems with "stimulus packages"?  

This is only "dress up" for the real dance to come.  When the Oil import crisis meets the Great Credit Default Swap Default (and that is not from the department of redundancy department... there really will be a default on the Credit Default Swap), you may look back on this period with fond memories.

The markets are imploding for good reason.  The Banks are dead, the Brokerages are dead, and the Hedge Funds are looking to the left and right, trying to determine which of the 3 of them won't be here at the end of 2009... so who is left to buy?  John Q. Public?  He's broke and about to get broker trying to figure out how to make payments on that luxury care he can't afford to drive.  The Feds?  Give me a break.

Let us go back one year from today.  Ready?

What if I told you then that the economy would be going down like a rock in a pond, unemployment would top 6%, AND oil would be north of $100 for the entire year?  What would you have said?  That $100+ oil and the rest of the scenario are mutually exclusive events, right?

This is not to say that Oil might not win the race to the bottom.  Right now the economy is falling faster than U.S. oil imports, and Oil likely will not bottom until that reverses - with the exception of WINTER.  Remember WINTER?  You know, HEATING OIL?  Our fondness for warm homes?  That might trump the economy, and then again, if it is a mild winter, it might not.

Wait for more data.


So much for the bottom in housing.  So much for Fannie Mae & Freddie Mac.  So much for if's and and's and candy and nuts...

Our economy will remain broken until we figure out that:

  1. People must be productive, not doing "make work".
  2. Building houses and condos does not count for much when measuring "productive".
  3. Neither does Government employment.
  4. "Productive" means creating things of value, not false paper wealth.
  5. "Productive" does not mean wasting energy driving around in circles trying to find the next mall to go shopping in.
  6. That the "great social programs" are destroying our living standard and our way of life.
Now, since we are not going to figure this out until it has been jammed down our throats, the best thing you can possibly do is to un-complicate your life.  Cut every recurring expense that you can live without, lower your overhead, and get used to the simple life.  Because once we get past this economic issue, the Oil import shortages will be the second shoe to drop.

"May you live in interesting times"

Mentatt (at) yahoo (d0t) com

Thursday, September 4, 2008

"A Star is Born"

Sarah Palin!  

It was thrilling to watch this "hockey mom" put the sexist jag offs in the media back on their heels.  For whatever reason, Racism is is OK for some voters and unacceptable for others, but sexism is just fine for all.  Consistency was never the strong point of the Main Stream Media.

Palin is certainly not going to ingratiate herself, being the attractive, feminine, family woman, self made success story that she is with certain childless members of the political left, but they were never in play.  My bet is Palin put married women with children back in play, and it is this group that will decide the election.  

This whole thing is a complete DISASTER for Hillary.  If Obama wins, he will certainly run again, leaving Hillary on the sidelines for the next 8 years.  If McCain wins, he will almost certainly be a 1 term president, and Hillary would have her hands FULL in taking Palin to task. Still, I think Hillary did a service to her country and wish her well in her senatorial retirement. Sorry Hillary, but Palin is a self made mother of 5, a  real American Horatio Alger.

Nevertheless, it remains to be seen whether or not Palin can capture enough of the women vote to overcome Obama's formidable organization.  But I love a good fight, and now I would like to see the 2 sides talk about the fact that America's oil imports have fallen by over 7% in 2008 from 2007.  Not to mention, what are we going to do next year and the year after if that trend continues?

Somebody ping me when these folks start to talk about the REAL issues.

Yours for a better world,

Mentatt (at) yahoo (d0t) com