From the article, "Treasury Secretary Henry Paulson said the U.S. is working to have a standardized government program for purchasing equity in financial companies up and running "as soon as possible."
I guess we can all look forward to worthless stock certificates in the future instead of 5 pound blocks of cheese when we are all unemployed. At least we will have something to use in lieu of toilet paper...
SRC,
You had asked about the distribution of T bills vs notes and bonds sometime ago. I had responded in that thread but never knew of you saw the post. Bulk of the treasury issuance has been at the short end of the yield curve...
This is a coordinated sham. The bankers are in line for trillions of dollars because they refuse to operate like banks, and governments promise to give them so much more.
The 700 Billion is earmarked solely to get the big boys out, not just without a loss, but with a profit. The details will remain fuzzy for some time, but count on it. Warren Buffet does not stick 5 Billion in an investment unless the fix is in. With Paulson in there, it is simply a matter of devising a cover story.
SRC -
How do you know what they are going to be asking for based on this report?! Are you a mind reader? Let's see what they come up with before you jump to conclusions. My guess is that it will look a lot like a private sector security because their intent is to have the private sector participate as co-investors per Paulson last night. That ain't going to happen if they handle the banks gently as you have already concluded. Lets see where this goes before we start to gripe....
Shame they don't seem to be demanding senior preferred shares with voting rights. AIG stakeholders get crammed down, but the banks are handled gently.
... which means this plan won't do diddly, because this is a confidence crisis. And the only way to restore confidence is to remove the rot from the system, not perpetuate it.
Earlier in the previous Volker thread a comment was made that a return to the Gold standard was "never going to happen" I disagree:
As recently as Yesterday, Merkel suggested that she wants out of the Euro. She is not going to tow the line any longer and Germany will be the first to abandon the Euro for a newer-D Mark or North EU Type "Gold-backed " Euro.
Expect a split in the EU into two factions of those EU Countries that are using the Euro as its currency.
Call it the Latin Euro and the Northern Europe Euro.
France and Germany will most likely revive the Franc and the D. Mark respectively as a companion currency alongside the Northern Europe Euro currency as a back-up. Both will be accepted currencies until a final determination is made on the longevity of any common Northern Euro currency.
Latin Based Euro Countries
Cyprus
Greece
Ireland
Italy
Malta
Montenegro
Portugal
San Marino
Slovenia
Spain
Vatican City
Andorra
Northern Euro Countries "Gold Backed"
Austria
Belgium
Finland
France
Germany
Luxembourg
Netherlands
Monaco
Russia has already begun formal discussions on a Gold backed Rouble and given their immense Natural Resources reserves and the build-up of their Gold mining investments over the course of the last 10 years it will be a very easy switch for them.
Argentina and Brazil have already broken form the USD Reserve for settling trade accounts between each country. This was adopted over the Summer and went off with out a hitch.
China has been building it gold reserves and is now the largest sovereign nation invested in African Gold Mining, as well as oil exploration in Canada, and the Caribbean (Cuba).
What should concern the US and the UK the most is that no inclusion of the USD as a reserve currency going forward or the pound sterling as a benchmark currency for European Trade is being considered on a going forward basis.
What we are witnessing is a stern demand by BIS and stronger EU nations like Germany to Paulson, that the toxic bonds need to be repatriated to explode on American soil. The dollar rally is nothing more than the closeout of that debt being settled after which the USD will most likely shed 30%-50% of it value in a stunningly short amount of time. Months not years.
Don't underestimate Gold in the new World order. Just go out and try to buy some physical bullion today. Every Sovereign Mint in the world has either stopped or dramatically suspended any sales to the Public. And Every Central Bank has publicly said that it has suspend any future sales. The Paper futures manipulation on COMEX and LME are about to implode, as no Physical deliveries can be made on contracts the demand delivery at settlement. This may occur before the month is out.
The theory I've seen about whether to go for preferred or common is this: the government needs to buy common not pref shares, as otherwise nobody in the private sector is going to step up and buy into the banks below where the government is in the capital structure.
And based on how the markets are now acting, that seems to reflect reality.
The only alternative structure that appears to work is the governnment buying warrants: pay cash for deep in-the-money warrants (calls). This way, they don't get the issue of the government ending up being a major shareholder (at least until the warrants are excercised), the bank gets some cash (the warrant premium), and there is no huge disincentive for other private sector actors to step up and buy new common or prefs.
Having thrown Lehman under the bus, it's safe to say that a lot of moral hazard issues are now dead.
They should buy shares, get voting rights, fire HR, replace it with government employees, extend benefits (give pregnant women enough paid time, give employees time to spend with theire family without worry about layoff). If we are going to be socialists, let's do it now and right.
Looks to me like the federal government will be forced to nationalize banks. Of course they'll give it some fun capitalist name. But McCormick's frustration is utterly universal.
If people want to see how this is going to work check out how the govt money ($12B) was structured to go into Citi as part of the proposed merger with WB. SENIOR PREFERRED WITH WARRANTS!!!!!!!!!! DUH!!!!!! Where you guys are all coming up with your common stock theories is absolutely mind boggling to me. The template was already put out there.
The bankers are not altruists--they're in it for the money. In this crisis, the government's aim is different and thus they need clout--they need voting power.
MW writes:
"Don't underestimate Gold in the new World order. Just go out and try to buy some physical bullion today. Every Sovereign Mint in the world has either stopped or dramatically suspended any sales to the Public. And Every Central Bank has publicly said that it has suspend any future sales."
I'm very happy to underestimate gold in the New World Order ("novus orderem seclorem" - from what I recall; where did I see that?).
The mints are stamping out gold coins as fast as they can; they've only suspended sales because inventories ran out. And central banks have only stopped gold sales as they are waiting to dump another load into the market if it hits $1000/oz - which is what they did when it hit that level last time.
There's no doubt that a lot people are panicking and buying gold. But you gotta remember someone - who apparently had a better grasp of market timing - is selling it to them. I wonder who's right?
Nemo -
You are correct - lots of discussions going on between treasury and private investors. The Citi example is out there as is Buffet's (who the treasury would love to have as a co-investor). Its pretty clear to me that the senior preferred structure with warrants is the path all have moved down. I fully expect that will be exactly the approach done here as well - the precedent is there. Also, preferred is none voting - but will be able to block dividends IMHO.
Looking to the future, does anyone have a link to a good explanation of Bretton Woods II? I am a peak oil hatter who saw this site linked from the oil drum, and am trying to get informed on what kind of policy decisions might get made in a revamping.
personally, I do not see a new intl. currency as likely to arise out of it. If the current predicament has taught the world anything, it is that an area's economic output is linked closely to its governance. I think there would be complete resistance, if proposed. And an intl. currency for the purposes of exchanging value is relatively useless.
I could see the creation of a new standardized govt. treasury vehicle that would vary with inflation, in order to protect the lender. This would be jumped upon by those willing to help shore up the US and world economies, and would set up for continued funding the US in the event of (hyper)inflation. Think of it as a similar move to setting up the legalities of a conservatorship 6 months before the tool needed to be used.
Additionally, I think we will see a set of regulations geared towards minimizing systemic risk (insert house of cards analogy).
Possibly we could see some sort of intl. debt-forgiveness program wherein participants open up their books, and chains of debt are erased from bank to bank in an effort to deleverage the system from leverage that is actually artificial, in situations where a debt has a sufficiently similar counter-debt at another institution (think of the process of doing algebra for a good example). Also, note that this could be done among three or more parties, and that mutual forgiveness among more than two parties would require some sort of centralized dB analysis. If the writing of default swaps was prevalent, the entire market for them could get reduced substantially in this fashion, perhaps.
We may also see some new system for how leveraged assets may become, with some slippery slope for the overleveraged instead of o.k.-> bankruptcy. And we already have a recapitalization program for the overleveraged.
This is from a noneconomist, noninvesting American, so take it for what it's worth. What actions might have the highest reward? Are any impossible?
Anyone think of anything else that might be done?
Oh and I really would like a good link to a Bretton Woods II primer. Thanks
MW, this scenario is what worries me most. As I talk about this with my friends, they can not comprehend what this would mean to their lives. Absolutely NO comprehension. Do you see regional currency blocks or a world currency exchange agreement? TIA
Until the weak banks are permitted to fail, no investment into the walking dead can repair the destruction being kept undercover on their books.
This is about not permitting what "must occur" to redeem a viable system in the marketplace.
If any impaired company can cry uncle to Hanky & Co. each time they have a failed business model, where does it end?
We are witnessing the total collapse of the Auto industry, how many want to own an auto maker alongside the insurance company we all bought 3 weeks ago. Why don't we buy and airline or two as well?
How is it that so many are ready to buy stock in companies that have admitted that they will not mark their assets to "Market?"
Nemo writes:
"One idea I have seen is for government to come in alongside private investors.
So, if a bank is so weak that nobody will invest even with Treasury as a co-investor, then it is too weak to save..."
That would be pretty good if that could be arranged. Right now, people are somewhat panicked, and may not want to wait for the arrangements to be hammered out.
And you can't just back anyone in the private sector. Apparently, there's a lot of idiots investing private sector money. For example, it probably wasn't governments throwing cash at the commodity markets a few months ago on the eve of a global recession (or depression, if you're morbid).
"The Paper futures manipulation on COMEX and LME are about to implode, as no Physical deliveries can be made on contracts the demand delivery at settlement. This may occur before the month is out."
This is huge, and pregnant. What is the source of this information?
Was poking around one of the links above- very interesting that the average interest rate for all outstanding 30 year bonds is still above 7%. Somebody made some good investments there - hopefully pension funds.
Nemo -
I agree 100% - it will penalize the common but improve stability. Net net the best idea available and where they should have gone from the beginning. The trade will become long bank credit, short bank equities. This preferred will be structured to yield a mid-teens returns. That is bad news for bank equities.
I agree with this approach... at least I prefer it to the initial idiocy.
Having said that, about the only thing I think Greenspan made sense on was when, back when we were comically expecting surpluses as far as the eye could see, he pointed out that "investing" government money in the private sector would really, open some ugly doors.
But now that he has (thankfully) been discredited, who is going to have a big enough voice to alert the people to watch this process very, very carefully.
lurker bee writes:
"Looking to the future, does anyone have a link to a good explanation of Bretton Woods II? I am a peak oil hatter who saw this site linked from the oil drum, and am trying to get informed on what kind of policy decisions might get made in a revamping."
Maybe on Wikipedia? The best explanation I was from the original Deutsche Bank research papers that coined the phrase; but you need to be a client to get research.
Brad Setser's blog has the best running commentary on the issues revolving around BWII. If you want a primer, there must be something written by the Federal Reserve -
the keywords would be central bank reserves, or the current account.
The one paragraph version of the BWII arrangement: China acts as the manufacturing base of the U.S. China gets the factories and employment (and pollution) and ships the stuff to the U.S. In return, the U.S. ships China Treasury Bills. The Chinese like it as they get to build a manufacturing economy that is competitive on the global stage, and the U.S. likes it as China ships them stuff in return for electronic entries in the Fed custody accounts.
"I could see the creation of a new standardized govt. treasury vehicle that would vary with inflation, in order to protect the lender. This would be jumped upon by those willing to help shore up the US and world economies, and would set up for continued funding the US in the event of (hyper)inflation."
There is such a vehicle - index-linked bonds (U.S. version are TIPS).
That market has been annhilated over the past few weeks. Nobody is very worried about inflation protection right now; they want deflation protection.
To Bailout Nation's comments and that of Bond Guy:
Bond Guy: I don't agree that they are stamping coins as fast as they can make them. That makes for a tidy PR release but it is not what is occurring. I don't know if you have ever invested in physical bullion but don't be persuaded by fluctuations in paper market prices.
What we saw yesterday was Hedge Fund liquidation in the COMEX that was for pure cash raising needs. It has nothing to do with actual bullion demand.
There is no evidence that any Central Bank intends to "dump" gold at the next $1000 level. If that were true it would happen today. The actual price for gold is well over $1000 per OZ. Go to E-Bay or call any bullion dealer, Gold is trading for $100-$125 above spot.
You and I have disagreed before and I respect any conflicting opinions, but just a few weeks ago you balked at the idea that our debt would somehow not continued to be purchased. The Long Bond is going to have a coupon that will be mind boggling in a few weeks given the reluctance of any foreign creditor's desire to hold what most likely will be a defaulted asset.
Bailout Nation: I think it will be every nation for itself. I know that new alliances are begin forged today that do not include the US and the UK, I could see tight trading alliances and currency pacts between Russia, Iran, China and Venezuela for example. I think the The Gulf States will unite under a single form of currency that will not be pegged to the Dollar.
Fed/FDIC decide how much capital will stabilize the institution. The companies issue preferred, non-voting, shares. Fed will hold auctions for the shares and buy 1:1 with the 700bn.
Companies that fail the audit or fail to sell 75% of the offering are shutdown.
Oh, I should add that comments like this show that the people here are very, very aware:
AIG stakeholders get crammed down, but the banks are handled gently.
Paulson is a banker, so he is biased towards his peeps. If he was an auto magnate, GM would get capital and the banks would get loans.
Thus the problem.
At least we have this: I hate to reveal what in the halcyon days of the financial Underware Gnomes was dismissed as a "manufacturing fetish", but I really don't see basic banking and insurance as that hard to do.
The government has plenty of computers and accountants.
"Gold Prices May Spike
Within the gold complex, there is a disparity between the paper market and the physical market, notes Jurg Kiener, CEO of Swiss Asia Capital. He tells CNBC's Maura Fogarty & Rebecca Meehan that if the paper market collapses, gold prices may double very quickly."
My interpretation is quite different. In order to spur private investment alongside, you must not take a super senior position, you must invest along current market standards.
Potential dilution to the common, sure, super senior, no, with no ability to block dividends, this would rule out the encouragement of private investors stepping in.
Under the Paulsen plan with currently available comments, they would buy existing common/preferred with equivalent rights as other market participants. If they really wish to add confidence, go into the secondary market with no further issuance.
We probably had the worst two weeks for commodities ever after the worst week in 50 years a week ago. At Fridays low in Scams the 12-month deflation of Scams and Real Estate reached 100% of the GDP, something that has never happened. We are likely to see another 100% deflation in these two assets over the next 2 years. Scams had the worst week since 1933. You get the picture and that is what happens before the depression. Markets are the best leading indicators of recessions and depressions to come and not the econ-meisters and the Fed Chairmen.
Why Printing Money IS Highly Deflationary?
The increase in the US govt borrowing crowds out the private borrowing and, most importantly, private investments! Both are highly deflationary. The Japanese govt had borrowed like crazy during 1990s and we had deflation. Please remember that US govt borrowing went negative during the boom of late 1960s & late 1990s. The govt borrowing shoots up during very bad economic times and major wars (War On Iraq is not a major war) and NOT during good times.
When President Obama proposes the $5Tr. Fair Deal you would know that the US is already in depression. Stay tuned. The US has the worst govt that money can buy!
US Recession -- > Commodities Bust (WE ARE HERE) -- > Depression -- > Deflation -- > Greater Depression.
Thanks all for letting me check out all your ideas and silly jokes. Time to make the boys some bomb-diggity waffles.
p.s. I think deflation will be easier to fight (and probably to overshoot in fighting) in the digital age than it could have ever been in any previous deflationary predicament.
Plus there's a lot more room towards infinity than 1/infinity .
When President Obama proposes the $5Tr. Fair Deal you would know that the US is already in depression. Stay tuned. The US has the worst govt that money can buy!
A New Bretton Woods
Submitted by midtowng on Fri, 10/10/2008 - 10:20. bank holiday Macro Economics
The days of the dollar being the world's reserve currency are quickly coming to an end.
Oct. 10 (Bloomberg) -- Italian Prime Minister Silvio Berlusconi said political leaders are discussing the idea of closing the world's financial markets while they rewrite the rules of international finance.''The idea of suspending the markets for the time it takes to rewrite the rules is being discussed,'' Berlusconi said today after a Cabinet meeting in Naples, Italy. A solution to the financial crisis can't just be for one country, or even just for Europe, but global.''
The Dow Jones Industrial Average fell as much 8.1 percent in early trading and pared most of those losses after Berlusconi's remarks. The Dow was down 0.5 percent to 8540.52 at 10:10 in New York.
Group of Seven finance ministers and central bankers are meeting in Washington today, and will stay in town for the International Monetary Fund and World Bank meetings this weekend. European Union leaders may gather in Paris on Oct. 12, three days before a scheduled summit in Brussels, Berlusconi said today, while Group of Eight leaders may hold a meeting on the crisisin coming days,'' he said.
Berlusconi didn't give any details about what kind of rules leaders were looking to change, except to say that leaders are ``talking about a new Bretton Woods.'
Huckabee on Fox saying the stock mkt drop was a financial terrorist attack. What a bloody moron leading larger morons.
Brian in New Orleans | 10.11.08 - 10:12 am | #
I'd say it was an attack of the political/financial elite on the taxpayer!
One idea I have seen is for government to come in alongside private investors.
So, if a bank is so weak that nobody will invest even with Treasury as a co-investor, then it is too weak to save...
This structure would allow government to act as an "amplifier" for private equity infusions. I think the idea has some merit.
Nemo | Homepage | 10.11.08 - 9:42 am
Sounds like the best idea yet...if buffett (or maybe even the ceo) wants to pony up a few billion, the treasury could match- with the same or better terms of course.
bond guy: Having thrown Lehman under the bus, it's safe to say that a lot of moral hazard issues are now dead.
CNBC believes the moral hazard issue is dead. Large investors are another matter. This is a confidence crisis, and the only way to restore confidence is to remove the rot/restore integrity.
No large investor is going to rush to buy stock of a company that receives a government reward for poor/dishonest performance.
Think of this. GM is possibly not going to survive. They produce cars which have value and people use. Should our resources be going to carmakers or the makers of CDOs, CDSs and those who supported providing loans to people who cannot pay the loans down? Whatever happens here should support the real economy and not the creators of the funny money. I realize that GM also had a hand in some of the financial funny paper with GMAC, but that is not really what GM was about making. I just think we need to be careful what is being encouraged by the actions taking to stop the collapse of the financial system, that the cure might not be better than the disease.
I guess we can all look forward to worthless stock certificates in the future instead of 5 pound blocks of cheese when we are all unemployed. At least we will have something to use in lieu of toilet paper...
Mike in Long Island | 10.11.08 - 9:17 am | #
They were also used as wallpaper after the GD, I saw some of that many years ago in southern Illinois which really hasn't recovered from that event. I think they still get the cheese.
There is a market for these things, but the current owners don't like the market's price. They would love to unload them onto someone willing to pay more than current market price. I think that at the bottom of this effort is the knowledge that no one can ever make money on an asset that he/she has paid too much for. They hope that taxpayers will be greater fools than they were.
ok have a questin about gm
Services Financial services
Revenue ▼ US$ 181.122 Billion (2007)[1][2][3][4]
Operating income ▼ US$ -4.390 Billion (2007)
Net income ▼ US$ -38.732 Billion (2007)[5]]
Total assets ▼ US$ 148.883 billion (2007)
Total equity ▼ US$ -37.094 billion (2007)
Employees 266,000 (2008)[6]
total assets 148b but total equity minus 38b what does this means? that they owe 110b or even 186b? i red they have a lot of corporate bonds out there
Do you look to Mr. Krugman for all of your life decisions? I was unaware that he had begun assembling Disciples? Have you ever looked to differing opinions that are published as well that may not agree with those of yours and your new leader?
Again, I respect your difference of opinion. You only amplify your ignorance with the tone of your defense.
"And central banks have only stopped gold sales as they are waiting to dump another load into the market if it hits $1000/oz - which is what they did when it hit that level last time."
Really? Is that how it went down? You must be quite dialed in to have such inside info with the the mysterious "Central Bankers". If indeed they've "dumped a load", as you say, I'm a bit puzzled as to why I can't seem to find any of it lying around. Rob Kirby has quite a different take, one I'm more inclined to agree with-
The private equity should come from converting the corporate long-term debt to common shares and from mutualizing a portion of customer deposits in banks and insurance companies in to equity.
MW - fascinating scenario, and though recent events have shown that even the most absurd or unexpected events can occur, the idea of multiple currencies overlaid on multiple currencies is just a bit too imaginative for my taste.
Not to mention my experience living in Germany for more than 15 years. However, the point about Merkel is at least valid to the extent that she is East German, and East Germans almost all universally regard the EU the same way they viewed Comecon - a plot to strip hard working Germans of all the fruits of their labor.
However, the ca. 17 million East Germans are outweighed by the ca. 62 million West Germans, who will pretty much follow the lead of Bundesbank and ex-Bundesbank and former Bundesbank and current ECB leaders. Merkel doesn't really count more than any other modern German chancellor in terms of financial system decisions. That power, since the start of the D mark, has rested in the hands of the Bundesbank - a group noted for forcing the political establishment to back down and follow what the Bundesbank feels is the correct course of action.
In other words, if you want to speculate about the future, follow what somone like Weber or Issing write or say, not what a fairly disposable German politician states for public consumption.
Gold has been caught up in hedge fund liquidations. The story is that two multi-billion dollar hedge funds had margin calls yesterday and their portfolios were unceremoniously liquidated.
There is no mystery about gold. The more supply of currency, the more something in fixed supply rises in price in that currency, all else equal.
All else is not equal for oil or copper as demand for those commodities is falling. All is not equal for real estate. All is not equal for art. You get the picture.
There will be supply of gold from margined sellers. There will be supply from guileless Central Banks. It will be dwarfed by the rising tide of dollar creation. Why? Because the value of gold relative to financial assets is now about 4% and used to be 30%. Let's say a fourth of that gold is sold by margined accounts and CB's. That's about 1% of financial asset value. Now assume the global CB's will print enough money to rescue 20% of financial assets. That demand would equal five times the value of the gold stock. Five times demand vs. one fourth supply.
Of course there's also money printing from rescuing or paying for: state budgets; unemployment insurance; the auto makers; social security; the FDIC; socialized medicine, etc.
Granting the government voting rights in exchange for injecting capital is a two-edged sword. It implictly dilutes the value of other stock by impiaring the other stockholders' control. It further socializes the management of the company. And, it directly inserts Congressional politics into the company's decision-making. Maybe we are so far down the slippery slope of socialism it hardly matters, but there is a balancing of concerns that must be considered when dealing with the voting rights issue. And, as usual, it seems impossible to predict which choice makes the most sense since we've never really been down this road before. On balance, I vote for no voting rights and place my bet on market forces, for better or worse.
El Cliffo writes:
"For market discipline to effectively constrain risk, financial institutions must be allowed to fail," --Henry Paulson, July 10, 2008, in Congressional testimony.
El Cliffo | Homepage | 10.11.08 - 10:44 am | #
Following on my prior private equity capitalization notion, why not settle all CDS as newly issued equity in the counterparty. I can see it now - "Congratulations, you hedged correctly and now are our majority shareholder."
MW writes:
"Bond Guy: I don't agree that they are stamping coins as fast as they can make them. That makes for a tidy PR release but it is not what is occurring. I don't know if you have ever invested in physical bullion but don't be persuaded by fluctuations in paper market prices."
I thought about buying physical coins (gold, silver) a couple years ago, but I stupidly went to a cafe or movie instead. Otherwise, I have only traded commodity equities in my personal account. (In my day jobs, investing in commodities has never been an option.)
Anyway, I understand that the retail gold market is much tighter than wholesale. But face it, central banks have to sell into the wholesale market - the Swiss National Bank can't set up a stall and hawk their inventory $300 at a time.
I understand the impulse that people have about wanting to buy gold or silver coins. But the monetary pretensions of the gold believers makes no real sense to me.
I'm involved in markets where entities routinely raise from $1bn -$40bn in auctions; I will assert that there's no way the physical gold market can support transaction levels of that magnitude. Gold was insuffiecient to support global transactions in the 19th century; there's no hope for it doing so now.
As recently as Yesterday, Merkel suggested that she wants out of the Euro. She is not going to tow the line any longer and Germany will be the first to abandon the Euro for a newer-D Mark or North EU Type "Gold-backed " Euro.
Breaking up the Euro would be a disaster. Currency exchanges are expensive - fees, hedging, uncertainty; it's a mess. It would be like a Smoot-Hawley within Europe; losses are smaller than those tariffs were; but they're lost; they don't go to the government. Similar level of bad.
As long as the individual governments can't issue Euros, there is actually no need to coordinate policy. Banks can fail in Ireland while the Euro and German banks continue on. Again, that's how it worked in the pre-Civil War US.
Is there a link for Merkel actually wanting out of the Euro? I thought she was smarter than that.
Rent-To -own: Thanks for your input. It may be that the very concept I am proposing is absolutely consistent with the wishes of the Bundesbank.
I spent 18 years building manufacturing infrastructure and factories in Europe primarily in the UK and Norther italy.
I know first hand how unsuccessful the Euro has been given the huge disparity between the "latin based" countries Spain, Portugal, et al. and the northern participating EU counterparts.
I think there is no question in my mind that a break is imminent.
I was in Barcelona and Madrid in July 2007 and again 5 months ago consulting for a US based private equity group and I can tell you that all is not well in the EU.
soxx writes:
"Following on my prior private equity capitalization notion, why not settle all CDS as newly issued equity in the counterparty. I can see it now - "Congratulations, you hedged correctly and now are our majority shareholder.""
Tin foil hat-wearing gold bugs who insist that the government wants to drive down the gold price should reconsider.
The Fed now has an interest in getting gold to rise.
Public Enemy #1 is now deflation; a drop in velocity caused by flight to T-bills, mattresses and Fed reserve deposits.
So what can Bernanke do about velocity? He has to reverse expectations from deflationary to inflationary. He has to PENALIZE people for hoarding currency. There's only one way to do that. Print enough money to change expectations. How much money will that take? Its irrelevant. However much it takes, that's how much he will print.
I'm not saying Bernanke will target the gold price instead of Fed Funds. I'm saying he may as well...
There is such a vehicle - index-linked bonds (U.S. version are TIPS).
That market has been annhilated over the past few weeks. Nobody is very worried about inflation protection right now; they want deflation protection.
bond guy | 10.11.08 - 9:59 am | #
For those thinking 1-2 years out, you are correct, but anyone preparing for coming dollar destruction is especially worried about inflation protection and is buying TIPS on sale.
Granting the government voting rights in exchange for injecting capital is a two-edged sword. It implictly dilutes the value of other stock by impiaring the other stockholders' control. It further socializes the management of the company. And, it directly inserts Congressional politics into the company's decision-making. Maybe we are so far down the slippery slope of socialism it hardly matters, but there is a balancing of concerns that must be considered when dealing with the voting rights issue.
He who pays must also have control - basic economics. Socialization of losses must be accompanied by socialization of control or it will degenerate into companies looting the Treasury. Losses are so enormous some degree of socialization is inevitable. So, basically, our choice to avoid walking the road of socialism (at least for a while; we can sell stuff off later) was taken away by Wall Street's staggering waste and fraud. We are already committed to at least a temporary socialization of the finance system.
Can I summarize Mr Paulson's plans in this way: he has been handed $ 700 billion on the unerstanding that he spends it in buying useless rubbish, and at first he thought that subprime mortgages were the most rubbishy stuff he could buy in great quantities, but now he has found something that is even more worthless, namely equity in US banks? I'm not trying to sound cynical, it't just that I'm trying to find out how his mind works.
solohedger writes:
"bond guy - Why do you always say exactly what Goldman Sachs would say?"
Cause maybe I'm their head of fixed income?
More seriously, I have an understanding of the plumbing of the fixed income markets. And banks are the center of the fixed income markets - they are the market makers.
What happens when a pension fund sells a bond? They sell to a bank. The bank then has to warehouse the bond until they can find a buyer. In the current environment, banks are unwilling to take on inventory. This has meant that all the fixed income markets are essentially broken.
A lot of money is raised in the fixed income markets. If they are non-functional, I would guess that there's going to be a lot of collateral damage in the real economy.
As someone involved in the government bond markets, not credit, this has been a great money-making opportunity. But face it, I'd rather avoid a depression, even though one would be great for the Assets Under Management.
Although I am generally positive toward the PMs, I can imagine a situation where compulsory paper settlement in Gold is "papered over" somehow without the physical market price dominating, at least for a while. The position limits for silver are so small, that this is essentially the situation there, which has persisted for some time.
I think differently:
The guise was a few weeks ago by the Fed that we must raise rates while gold was pushed down in preparation for exactly the opposite. It was clear to me that rates would be lowered not raised and I fully expect us to go to a ZIRP before yearend.
The argument, at least for public consumption is that inflation expectations are now negative and the inflationary threat has been reduced. All clear to print.
Bernanke has told us that DEFLATION must be avoided at all costs otherwise we will have GDII.
Take a look at the Fed-Faltion handbook:
"Monetary Policy in a Zero-Interest-Rate Economy" Published by the Dallas Fed in May 2003. and availalble on their website.
They haven't veered from their strategy once.
What is interesting is although our analysis is different the outcome is identical.
@ Fair Economist: the Dutch govt announced that they will inject EUR 20 billion in the banking system, but made clear that it comes at a price: seats on the board, and probably large cuts in bonuses. (Over here, we use the PM's salary as a yardstick, I think somewhere around EUR 200.000 all told, perhaps less than that.) Van Lanschot, a bank for the sort of people who don't bother to scrutinize their pay slips, has already said they applaud they idea but they don't think they will need to participate. I think that this is he correct way. You made such a mess that you nedd outside help, OK, you can get it, but you lose (a part of) your independence.
Fair Economist writes:
"He who pays must also have control - basic economics. Socialization of losses must be accompanied by socialization of control or it will degenerate into companies looting the Treasury. Losses are so enormous some degree of socialization is inevitable."
How much control would you want to give the government? Would you want Congress acting as the loan officers?
Most of the things the government should want to control (risk management, incentive structures, capital adequacy) is largely under their control already (other than compensation). It's just that the regulators rolled over and played dead for last decade, and thus did not use the controls they had.
Going forward, I have have no complaints against banking being a boring, strictly regulated industry with fairly modest return on capital. However, the issue of getting to that world from here is currently the problem.
"I'm involved in markets where entities routinely raise from $1bn -$40bn in auctions; I will assert that there's no way the physical gold market can support transaction levels of that magnitude. Gold was insuffiecient to support global transactions in the 19th century; there's no hope for it doing so now."
Is that because of current valuations of Gold?
Would this be true if Gold was at $5000 per oz, $10,000 per oz?
Is it a supply issue or a valuation issue? I can have a lot of one thing which is cheap, or just a few of another that are worth a lot.
The Hanky Panky hedge fund is going to rip the shorts a new one along with all the new banks liquidity.
This panic will be contained before the people sell out of their stocks to the bottom and hold endless treasury bonds paying nothing. Then what would they buy with their money?
No, now we enter into a new kind of stock market, one that is regulated to stop panics.
As for the dollar- not now. We still are too powerful, and the rest of the world is too uncertain to begin to forge a new way. As for anybody listening to Bertie the Italian- that fossil from a fossilized country can't leave the EU- that would cause an economic collapse.
He will do whatever the Bundesbank and the French decide is best. The comments on Merkel are spot on. She is making noises for domestic consumption.
Reality dictates that long term solutions to this crisis rest in the hands of the next administration, and that the HP Hedge Fund will provide the full faith and credit of the US government to the markets.
I don't care what anybody says, I am not trading against unlimited dollars that can roll right over me.
You want to get in the way of the steamroller, ask the folks who were margin called out of their gold on Friday. I refuse.
Once again, everybody thinks the government can't keep a lid on this problem until well after the elections. Looking at what the Treasury can now do, combined with all the remaining big banks, I would go with the waterfall of money.
After the panic, they will decide who the winners and losers are on Wall Street, but for right now, there will be no more large failures. Period.
I believe you will see direct injections of capital through the issuance of convertible preferred/straight preferred, no voting rights, you could also see a like amount committed to purchases in the secondary market to shore up confidence and encourage private investment, bringing in spreads, this in turn, lowering borrowing costs over time.
The smart and important people on TV who are against Mark to Market confuse me.
Doesn't MTM take into account the probable future value of an item. It just discounts it for risk and time.
If I have a fixed item that is safely worth $100k in 10 years when it is redeemable then it has an intrinsic value of $100k discounted for 10 years. Its MTM would be that discounted value further adjusted down by a small percentage to encourage someone to buy it.
If the MTM value is close to zero then it is unlikely to ever increase in value. But the smart guys pretend that if it is close to zero now, it most likely will be worth a lot in the future. I don't understand the logic.
bond guy - Everybody here is talking their book, except for AllenM, who is talking his epiphany. Just looking for a little full disclosure, that's all. Facial hair? Eww.
I for one am looking forward to my stimulus checks since without them we will not have inflation. Anyone looked at salaries and employment lately?
Make $10/hr and bread is $50 a loaf. Come on people, think about this. If the Fed injects capital into the markets it is going to be destroyed faster than it can be printed.
What happens when a pension fund sells a bond? They sell to a bank. The bank then has to warehouse the bond until they can find a buyer. In the current environment, banks are unwilling to take on inventory. This has meant that all the fixed income markets are essentially broken.
Alternatively, you could say that they are finding their new equilibrium, one that pays a sufficient interest rate for the risk incurred.
And the low transaction count is due to the sellers not willing to come down to the price (or up to the yields) that the buyers are offering. This will get resolved; it will get resolved faster if Paulson and crew would get the hell out of the market. Painful, but faster.
Brian in New Orleans writes:
"Would this be true if Gold was at $5000 per oz, $10,000 per oz?"
Also, how will anyone be able to make change on a $5000-$10,000 coin the size of a quarter?
Brain:
Look to your example of Zimbabwe, its the translation of Gold into currency: Gold has it all time highs in the Pound, Ero, Austrailian dollar etc. I can go into any dealer in the worl dand exchange my 1oz coin for local currecy and buy a loaf of bread, or the bakery for that matter.
The dollar won't cease to exist, we will just be using it for bedding and something to burn in the winter.
MW writes:
"Is that because of current valuations of Gold?
Would this be true if Gold was at $5000 per oz, $10,000 per oz?
Is it a supply issue or a valuation issue? I can have a lot of one thing which is cheap, or just a few of another that are worth a lot."
The physical supply is fairly limited, and only grows at a small pace. Thus the valuation would have to go through the roof to support transaction volumes. Maybe $50,000/oz would do it (wild guesstimate).
But, you have to ask yourself - do you think that people would be willing to trade a house for a few ounces of metal that someone dug out of the ground for a cost of $1000? Would people want to wear wedding rings that would be worth more than most people's retirement savings?
Plus, the transfer of wealth to existing gold holders would be so astronomical that I owuld guess that there'd not be a huge popular base for such a move.
Bond Guy, be the first to suggest staring to sell your entire inventory of Treasuries. The constrained supply problem is about to break.
Once again on in this discussion people start to think this is the equivalent of the 1930s, you only get that with a hard money system.
You can't do a gold standard when you would have $1 million per ounce to make it work. That would seriously crimp a lot of Wall Street's style.
Of course, the Government could set a nice high price and get all the gold again, just like last time. Roosevelt made one critical error. When he devalued the dollar, he should have paid the new price for all the gold in private hands- instantly providing mucho liquidity.
Japan's market and real estate were overvalued but it stayed cash flow positive. There was still huge demand for their products as Boomers around the world were entering their most economic productive years and spending more than they could afford! We could argue that Japan mostly suffered and asset revaluation while the US has to go through both an asset revaluation and an economic overhaul. The world is set up to export to the US, if the US becomes a world exporter we're in trouble, for a while anyway.
Japan was a strong player but not THE world leader. When its market fell, it did not force all other countries to change their economies.
Since Japan was a net exporter in a strong world economy with easy credit, it made it easy for government to borrow at low rates. (Carry trade already forgotten?)
US investor money flows much more easily out of the US than out of Japan. Japanese typically kept their savings in Japan.
I still believe that if all this government intervention fails, we'll get deflation but the odds of inflation in a year or two are overwhelming. Here are the reasons:
Boomers retiring or forced into retirement start collecting their SS.
Government creating all kinds of employment producing projects areas where there is a lack of expertise (scientists, engineers, etc). Infrastructure is one. Healthcare is another.
Wider credit spreads shrink profit margins and force out weak players. The winners increase costs.
Materials price increases have probably not yet fully impacted earnings because revenues have been inflated by bubble demand and so many other cost lines have gone down in the last few years: DD&A low because of low investment, low interest expense because of low rates and a movement toward shorter term debt, etc. All these cost lines are on the way up.
As boomers retire you're probably going to get small firms shutting down or sold to larger firms, this implies lower capacity.
Between the snarky comments I'm actually finding your debate enlightening - it's starting to catalyze thoughts that had been stuck sideways for a while behind my sloping forehead. Just keep it civil and adult, please. The personal stuff is just high school posturing, and the situation is a bit more important than that. Even my book is less important than sussing this out.
How would you value the equity of a pension fund?
bond guy | 10.11.08 - 10:52 am | #
Great question. I suppose in that case the CDS holder would have to become a "participant" in the pension plan and receive their equity over time or accept a discounted settlement from the plan now. I understand this happened, but isn't even holding a potentially liability-laden transaction like CDS a disqualifying event under IRS rules? It would be for an IRA. I'm not an attorney, but I would question whether a CDS liability for a pension plan is even enforcable; does a pension plan have the legal capacity to even enter into this type of contract?
Bondguy:
People today trade paper for a house for pulp made form a tree.
Look to your example, since the housing bubble peak in August 2006, there has been a whole lot less "paper" required to purchase a house and a lot less Gold required to do the same
I can guarantee you that I could go out and buy a house today with gold coins or a few kilo bars.
Look at a chart of housing values vs. gold for the past 5 years.
Citizen AllenM
Isn't about time Wall Street's style got crimped? If the products they have designed and sold are dangerous and defective, shouldn't we be discussing alternatives that are safer? Are we all just waiting for a new product from the people that just about destroyed us with the last brilliant idea? When do we say "thanks, no thanks?"
Why do gold reserves have to be an either - or proposition?
Does it not make an excellent hedge against wild currency appreciation/depreciation? Would it not be in following with portfolio theory?
1-5% of global central bank reserves would still make a large impact.
Gold ETFs, easy to make sharia compliant, are very popular throughout the Arab world right now.
As for COMEX/LME, it is only logical that holders might choose to exercise delivery in order to take advantage of the spot & physical spread that occurred because the market is moving so fast. If a group are forced to deliver gold, then that will increase the physical price due to overwhelming short term supply and create a self-fulfilling prophecy.
Lyndon LaRouche today mocked Treasury Secretary Hank Paulson's bailout scheme, warning that Paulson and all the other central bankers have been lying through their teeth about their ever-changing so-called bailout swindles. The real problem, that none of them wish to talk about, is the mass of derivatives obligations, that are in the quadrillions of dollars.
LaRouche called the derivatives bubble the hyperinflationary bomb, crushing the international financial system, warning, Until you just shut down the whole derivatives trade--wipe these gambling obligations off the books of the financial system--you are just kidding yourself. LaRouche declared, It is time to break the silence on derivatives. The true, hyperinflationary factor in the situation is the unregulated, insanely leveraged derivatives trade. This is what is killing us. This is the great crime of Alan Greenspan.
LaRouche concluded: Unless and until you deal with this derivatives bubble, which cannot and should not be bailed out, you are just kidding yourself. It is time for Hank Paulson to swallow the only real medicine: bankruptcy reorganization of the entire, dollar-based financial system. And the first step in any such bankruptcy reorganization would be the cancellation of these quadrillions of dollars in pure gambling obligations. Without such action, this planet is doomed to a horrible dark age, just like the dark age of the 14th century, that followed the collapse of the Lombard banking system.
JP writes:
"Alternatively, you could say that they [bond prices] are finding their new equilibrium, one that pays a sufficient interest rate for the risk incurred."
Certainly true.
But, the price discovery mechanism appears broken. If the bank has no inventory, you can't buy from them either. Thus the buyer and seller cannot meet to set a clearing price.
What you see is that Treasury bills are now extremely close to 0%. However, you can now buy federal government-guaranteed paper and swap it into a synthetic floating rate note that pays LIBOR+50 basis points. This makes very little sense from a valuation standpoint. However, it is a sign that the mechanisms that flow money through the financial system aren't working.
The people in charge just can't admit their entire world philosophy has been wrong for 20 years now. Watching the financial world crumble is almost worth the tens of thousands of dollars I've "lost" this week.
Welcome to the reality lots of Americans have lived with for many long years now, guys. You thought you were safe from what you've created. Hah.
Sorry for that poor spelling, I can't stand that tiny text box for submitting a post:
Bondguy:
People today trade paper for a house "made from the pulp of a tree." What's wrong with shiny rocks instead?
Look to your example, since the housing bubble peak in August 2006, there has been a whole lot less "paper" required to purchase a house and a lot less Gold required to do the same.
I can guarantee you that I could go out and buy a house today with gold coins or a few kilo bars.
Look at a chart of housing values vs. gold for the past 5 years.
rent_to_own - I think that's got it about right. The treasury may be able to inject enough capital into major institutions here to keep them technically solvent, but the beat is going to continue worldwide. I'll believe a real coordinated global response led by the U.S. when I see it. The cynics have been right about government responses so far, and I'll be amazed to see that change.
As far as how the overall equity market is going to trade on that? I think AllenM is wildly optimistic. My conclusion is that it's a great time to get out of the way. Nobody says you have to have money in the equity market.
And as far as safe havens go, all kinds of unusual places are going to blow up. Spread it out and hope you lose less than the next guy. And yes, I've got a prudent amount spread out into the barbarous relic.
rent_to_own,
Not bold at all, take them at their word. Lehman was the "Lesson" about risk, now everybody will play along or else. Look at the results, not the endless spin cycle of the deflationists.
My epiphany. Lol! Yeah, sort of, but not really. After I work in government. Look at how the FDIC is operating, we had a couple of big failures, and then when that was considered too destabilizing, forced mergers that provide safe havens for the public. The damage is hidden for a while, and the public is not allowed to totally panic.
No one has mentioned the bubble in the treasury market. As the treasury market reaches its limit, money will flow to other options of which that avoids withdrawing the money from the US is to buy gold.
As for inflation/deflation, the treasury bubble will pop and we can all follow the pressures in real-time.
If the treasury bubble does pop, there will be even less demand for the debt market, and I see no signs that the equity markets will stabilize enough to attract and absorb the money leaving treasuries.
If that money goes anywhere but the American equity or debt markets, there will be inflation (Forex outflows, investment in commodities) or a step-shift in the standard of living if you consider increasing wages necessary to the definition of inflatio
MW writes:
"People today trade paper for a house for pulp made form a tree."
I think there's some cotton in there as well. But in most cases, the kind of people I tend to associate with don't plop down a load of fed reserve notes to buy a house, they actually move some electrons in accounts to do the deal.
But keep in mind that despite the apparent worthlessness of paper/electronic balances, there is a large body of people who apparently are willing to work in exchange for that paper. That ability to "command labor" (I think is the correct economist-speak) is the true fundamental value of a fiat currency.
Evil Henry:
"As for COMEX/LME, it is only logical that holders might choose to exercise delivery in order to take advantage of the spot & physical spread that occurred because the market is moving so fast. If a group are forced to deliver gold, then that will increase the physical price due to overwhelming short term supply and create a self-fulfilling prophecy."
You are correct, the problem has been the "excess" of contracts that don't begin to mirror the actual supply that have been used solely to push and pull the market.
Large players have entered the scene demanding delivery.
Here was an interesting story out of Dubai this week. They are fast pushing for a new default exchange for precious metals:
DGCX Concludes Largest Ever Physical Settlement Worth US$25.20 Million
Thursday October 9, 5:00 am ET
- Transaction Involves Physical Delivery of Gold and Steel Rebar Futures
Contracts
- Participants Included Leading Banks and Players From the Physical
Market
DUBAI, United Arab Emirates, October 9 /PRNewswire/ -- Dubai Gold and Commodities Exchange (DGCX) today announced the successful completion of its largest-ever physical settlement of gold and steel rebar futures contracts, valued at US$25.20 million, by the Dubai Commodities Clearing Corporation (DCCC).
But, the price discovery mechanism appears broken.
Not really, this is a common situation when markets turn. Perhaps you have been paying attention to the housing transactions? It is exactly analogous:
1. Large volumes of transactions went down to small volumes of transactions while the median prices stayed nearly flat.
2. Prices fell precipitously as forced selling occured.
3. Next phase: Higher volumes of transactions at low prices.
Price discovery occurs, just not at the speed that folks are used to in large-volume markets. It will correct, but it won't be pretty.
Bailout Nation, that process is here. We are from the government and are here to help. What do you think that means?
More rampant fake insurance? I don't think so. That is why I am arguing the fundamental landscape has changed.
The price of salvation is capitulation to the state. Gee, talk about Faustian bargains. But they want it, so they get it. I am saying too much, I had better shut up before the phone call.
"No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money;
emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts. . ."
MLM:
"And as far as safe havens go, all kinds of unusual places are going to blow up. Spread it out and hope you lose less than the next guy. And yes, I've got a prudent amount spread out into the barbarous relic."
What are some of the others you are moving into?
I liked a quote I heard the other day:
The 4 G's
Gold
Guns
Grub
Ground (real estate, rural most likely)
If there was only $1, then people would make a billionth of a cent per hour. So what?
Would people be willing to trade a house for an ounce of gold? Why not? They trade them for 100,000's of pieces of paper now. What difference does it make?
At least the metal, who no one can create at the push of a button, would ALSO be a store of value.
Very interesting reflections from Bond Guy, Nemo, and several more comrades on different ways of taking equity stakes - preferred, common, warrants, voting/non-voting . . . out to nationalization.
What I find at the core of all this, however, is the still startling fact that many on this blog were onto 3 weeks ago when Paulson first delivered his 3 page plan:
Paulson still has no plan! He is saying that not only is implementatin still several weeks away, so, too, are details of a plan.
Now this is remarkable not only because Treasury lied about working on the original Paulson plan for months as an emergency contingency plan, but it is more remarkable because all of the measures being discussed are actions that have been used before and have been studied - in many instances in the US, itself, but also in European countries and around the world. It is just a little bit of an exaggeration to say that there are off the shelf recipe books on how to do this stuff. The delay of weeks before announcing the order of a plan, let alone implementing it, is mind boggling.
One part of this failure must be ideological. The players in the Bush cabinet, led by Paulson, have just refused to consider many options and refused out of hand on nothing else but ideological grounds (Paulson originally fought against equity stakes, against limits on executive pay, etc).
But another part, and perhaps the greater part, is pure, simple, staggering incompetence.
Bond Guy said it best:
"Going forward, I have have no complaints against banking being a boring, strictly regulated industry with fairly modest return on capital. However, the issue of getting to that world from here is currently the problem."
Going forward through then next couple of years, the US will need to learn to look critically and pragmatically into its self-righteous ideological soul.
But it is not just a question of ideology and flexibility. It is also a question of basic competence and leadership. The failure of the Bush Administration continues to amaze me, and I have been appaled by Bush & Co from the beginning.
As Bond Guy said, "the issue of getting to that world from here is currently the problem."
We ain't going nowhere until January 2009. Bush/Paulson don't have the political capital, they don't have the skills, they don't have the pragmatic flexibility, they don't have the competence, and they have neglected preparation for this moment in way that makes Bush's response to Katrina and the insurgency in Iraq look good by comparison.
The only hope I see is that people might start to look forward to January 2009, and to look forward to the long, hard climb that might begin then that attention to that horizon pulls us though the next two and a half months of confusion, panic, and crisis.
I'm doing my best to avoid becoming a tin-foil hat wearing survivalist (with some success so far). If things go so far south that the U.S. middle class is marching on the White House banging pots and pans, I plan to take the advice of Surviving in Argentina (Blogger: Page not found and move.
So to your list I'd add cash and passports.
As far as financial assets go, I'd add long foreign sovereign bonds in places that look like they might hold up.
We ain't going nowhere until January 2009. Bush/Paulson don't have the political capital, they don't have the skills, they don't have the pragmatic flexibility, they don't have the competence, and they have neglected preparation for this moment in way that makes Bush's response to Katrina and the insurgency in Iraq look good by comparison.
"I think the The Gulf States will unite under a single form of currency that will not be pegged to the Dollar."
No way, nev-ah. Way too much ancient, tribal discord among them. And the West (and Russia) will stir the pot furiously at the first sign that they are getting too chummy with each other.
Regarding GM (and the US auto industry overall): the political will to keep them alive is gone. As recently as 25 years ago, the Detroit 3 had enough tentacles spread out across the country that everyone had a vested interest. They built tanks, missiles and locomotives and they owned banks. They employed a vast swath of the population, not just in the Midwest. The very offshoring and divestiture that has augmented their profits in the last 10 years has also lost them a lot of friends. Very few people I know really care if most of the cars on the road in this country are Chevys or Fords anymore, and thats the only business they are in.
If you're in the US auto industry or dependent upon it, I strongly suggest you begin diversifying your livelihood. Yesteday.
Well as a connoisseur, I start the first layer with lead foil. Now, you need to wear gloves at this stage, because it is a bit toxic. Al foil is my preferred next several layers. (I find 10 to be sufficient, but due to paranoia, I use 15). Also, remeber to keep the shinny side of the foil outward. It's arguable if this impacts efficacy by more than a few %, but why take a chance.
How much control would you want to give the government? Would you want Congress acting as the loan officers?
That's a strawman. Congress can, and almost always does, delegate.
They have to have overall control of the company. Managers work for their own benefit. They only work for the owners if forced by the threat of firing. If the non-governmental shareholders have fire authority but the preferred government shareholders don't, then the management will respond by betting the company on wild deals that will either make a lot of money (for the common) or lose a lot (mostly for the government).
If the government has money in the companies but not the ability to police its use, the management will find a way to divert much of that money to other people. The only way to avoid this is to be so deep into seniority that no reasonable manipulation will hit you; that's not possible now even with senior notes because most banks are so shaky. Certainly not possible with preferred shares.
Ministry of Truth writes:
I have some chocolate filled gold coins, does that count?
If approached at the right moment, I might trade these for my house as well.
Here is some interesting perspective regarding inflation and the quantity argument.
In the 1970s, you could buy a home for $26k. You probably earned about $9k per year. A gallon of gas might run you $0.36. And a letter to Mom would set you back 6 cents.
I'm sure $700,000 for a $26k house would have seemed laughable. Who'd ever pay that? And $5 for gas? No way.
So when I see the inflation-adjusted price of gold, a huge rise doesn't look all that outrageous to me. At least no more outrageous than 36 cent gas appears looking backwards.
I think this discussion should be less to do with physical assets, and more to do with the Treasury bubble.
We have never seen ~0% interest, or a yield curve so low and so flat. Now, there is also a record issuance of Treasuries.
Once we see the short term yield-rise/price-fall the Treasury market will just rip. There should be no expectation of people willing to hold Treasuries for a nominal loss, even cash is better than that. So once they go into cash, the re-inflation of the Treasury yield curve will be a positive feedback loop. Next question is what will that cash be used for, the increase in Treasuries rapid and violent due to its low margins and high volume will make existing debt even less attractive, and equities all but untouchable.
Commodities and capital outflows will then become the off-setting bubble because the more money that is spent on them, the more likely the short-term supply is binding. Once the supply is the binding constraint, they become a positive feedback loop as we saw recently before the present unwinding of positions.
What we did not see before was a large capital outflow from the US as would be expected in order to auto-regulate Forex prices. The argument can no longer, or rather will no longer, be able to be made that its risk level is of relative value, or that lower transaction costs are worth the price.
So I presented 2 cases for why commodities will rise, but by 2 different mechanisms with the difference essentially being the expectation that the US Dollar will or will not be a safe currency to hold value and process transactions for the duration of investing
No one really knows what will or will not work or what the consequences of any particular course of action will be because we haven't been down this road before -- hell we never saw the exit sign and this place isn't on any map. So, in a time of uncertainty we lurch about, convinced only that some action is better than no action.
Very few people I know really care if most of the cars on the road in this country are Chevys or Fords anymore, and thats the only business they are in.
If you're in the US auto industry or dependent upon it, I strongly suggest you begin diversifying your livelihood. Yesteday.
Scooby | 10.11.08 - 11:52 am
Scooby, I believe they are in finance too. Any future in that?
Funny you should mention Faustus. Last summer we saw the tower in Maulbronn Cloister where he worked in the early 1500s. He convinced the abbot there, Johann Entenfuss, that he could transmute lead into gold. The Abbot is keen on this idea because he has driven the Abbey into debt by constructing up lots of pretty buildings. Faust says he can do this, he just needed significant infusions of money and lots of time. And some nice digs to work in.
There is a parable in there somewhere, I just know it.
I see no reason why to not accept at least the regular voting rights of a share. It is possible, as has been the case both in America and abroad, to simply not exercise those voting rights.
If you want someone competent to oversee taxpayer's interests, there is no better institution than the Government Accountability Office. They deliver excellent reports and recommendations, even if they are too often ignored.
I vote for no voting rights and place my bet on market forces, for better or worse.
Concerned Observer | 10.11.08 - 10:48 am | #
That's my money they're playing with--and i don't give up my voting rights without a fight. We're not investing in banks, we're trying to save the banking industry--we need the bankers to lend out their liquidity. As the investor, my aim is Board action, that is not facilitated by weakness and silence.
Citizen AllenM
Government workers are people, too. I know a few. They do not like to work weekends and nights for months on end. They will not enjoy running the whole system on a continuing basis. Private sector folks work much longer hours. And the folks you think are watching are probably glued to CNBC.
What I'm saying is that people are motivated by different things, but nearly all of us like rules. And there is a big difference between having mutually agreed rules and being ruled.
Americans, dopes that we are, generally know the difference. We just want well thought out rules that work so that we can play our free enterprise games. Right now, I have no idea what the rules are or what they will be next week. Do people on this site really believe that they know the rules right now? Is anyone besides me troubled by this?
So much of what I read here seems to revolve around:
1) I didn't know they could do that?
2) Isn't that illegal?
3) What will the laws be next week?
4) Is that Constitutional?
5) Can one man (group) write good rules on the fly?
How do we have a nation of laws in this environment?
"If the government has money in the companies but not the ability to police its use, the management will find a way to divert much of that money to other people. The only way to avoid this is to be so deep into seniority that no reasonable manipulation will hit you; that's not possible now even with senior notes because most banks are so shaky. Certainly not possible with preferred shares."
Are you into the Public Choice School?
I'm rather a bit of a fan of it. Did my thesis on the linkage between Austrian thought and Public Choice.
I don't mean to be the resident Goldbug at CR, in fact I am not inclined to be that pessimistic, but my experience tells me otherwise.
My background is a residential developer and prior to that a commercial factory developer in Europe.
But since 1991 I was building homes in the US either as a land developer in association with a group of homebuilders or directly as a homebuilder myself primarily in CA and FL.
Making a long story short, here is the critical component that I think is behind all of our concerns and discussions:
There is no doubt that what began as an orgy of securitization of MBS engendered all types of new and fantastic financial products that never were really designed to
survive the stress test of actual circumstances and human behavior. The housing bubble inflated as did our creativity to finance it.
However, based on my routine analysis of the Case-Shiller numbers each month for several years now, we are in for a very accelerated race to the downside in housing value.
I don't know if any of you caught a story on Nightly News earlier in the week about homes that recently sold in Cape Coral, Florida. Briefly, people were buying homes for $40K - $50K that were selling two years earlier for $250K+
That is an 80% discount. I have observed and spoke with fellow developers about the replacement value alone for these home ex. land is far greater than these purchase prices.
This is the most intriguing part, it doesn't matter, replacement costs as they were! Not as they are today. My point is that pretty soon, given the deflation of assets and unemployment, I could build that same house for far less today than I could two years ago given cheap (hungry) labor and the vastly reduced costs of raw materials, plywood, drywall, land, etc.
The question I pose, is that all of the TARP's and bailouts can't accommodate for an 80% loss in housing values in 24 to 36 months time.
The Case-Shiller trend proves out that from August to Feb. we can expect another 25% of losses from current levels and I think they will be more amplified this year as we are starting to see denial replaced with real desperation and fear now in the marketplace.
P.S. Yes, I practiced my own book. I sold out of all of my developments in 2005, with one last multi-unit condo property to a group out of the UK in August of 2006. The writing was on the wall for me.
"That's my money they're playing with--and i don't give up my voting rights without a fight."
You don't have any voting rights. You don't even have voting rights as to your congang rep, let alone on some executive branch beurorat appointed by a president elected by the elctorial college. This is all boiler plate nonsense.
Allow Carl Icahn to create a list of reforms, a standard shareholder's list of rights and powers.
Then promise not to exercise voting interest, provided the company being invested in by the government accepts and passes the reforms proposed by Carl Icahn.
It currently is not fair to expect existing shareholders have the power to exert market forces on the companies.
Yes, of course. That clause prohibits that. But what do you think that phrase about gold and silver is about, then?
They are free to trade in hard assets. BFD.
None of them are equipped for such a barter system. No scales, no purity measurements, no storage vaults, no minting equipment.
The nature of that clause is to create a common national currency, and to keep every state honest in their finances relative to the next state.
The Government doesn't manufacture pixie dust. They had reserves of credit but they have been used. For them to intervene in any market they must borrow in another and (roughly) cause as many losses there as gains where they intervene. Sure, Paulson can drive the stocks of banks sky-high. But if he does it by borrowing short he crowds out working capital and sends us into a depression. If he borrows long he wipes out the bondholders by sending interest rates soaring.
Hypothetically they could improve on market allocation but I don't expect that from Paulson. Overall I think giving such immense powers to somebody so clueless in macro issues will result in even greater uncertainty, since investors can't predict who he will accidentally wipe out. Hence, on the whole, I think the TARP will worsen things as people will flee even more to cash. If inflation starts up, then we'll see a hoarding panic.
The current plans - purchasing preferred stock and toxic mortgage waste - is bad for the stock market and bank stocks in particular. He simply can't purchase enough to get the toxic drek anywhere near par, and the preferred stock purchases will dilute the common. Bank common stock will remain essentially an out-of-the-money call on an institution probably fundamentally insolvent, but now will be even further out of the money due to the new preferred.
would be willing to trade a house for a few ounces of metal that someone dug out of the ground for a cost of $1000?
why not? They're willing to trade a house now for a piece of paper.
Honestly, free up your mindset a little. There will be some sort of commodity-based standard, the entire problem here is a function of governments issuing promises that can't be redeemed.
The fact that "gold can't handle the transaction volume" isn't a function of gold, it's a function of meaningless transactions.
"The Government doesn't manufacture pixie dust. They had reserves of credit but they have been used. For them to intervene in any market they must borrow in another and (roughly) cause as many losses there as gains where they intervene. Sure, Paulson can drive the stocks of banks sky-high. But if he does it by borrowing short he crowds out working capital and sends us into a depression. If he borrows long he wipes out the bondholders by sending interest rates soaring."
Exactly. Been saying that forever. Those that think the current system can print money are wrong. With the reserve currency flag as well, any monetization would lead to some severe bond market/currency problems.
Lets see where this goes before we start to gripe.... Is that you GWB?
B.S. - Every step of the way the little guy has been shafted. If we had started griping in 1902 we still wouldn't have enough time to pile all of the derision on these criminals that they deserve. Best to get started early and gripe often, it's not as if we can fight back fairly or anything.
MW - I was a small tech company CEO in 2000. Like you I saw the writing on the wall and sold out at the top. I expected what we're going through now to happen after that bubble popped. Greenspan only delayed it and made it worse (as the Austrians pointed out at the time).
I resisted buying any gold for several years back then, because I didn't like tying up value in an asset that doesn't do the world any good. Somewhere around 400/oz my concern for capital preservation got the better of my altruism.
Personally, I think TARP and Equity son-of-TARP are nothing more than pissing on a raging bonfire. Our fearless leaders are under the impression that they can keep the old program working, but it was destined to fail. It's predictable that they don't want to man up to dismantling the large percentage of the economy that is worthless, and starting to work on rebuilding what's left. But we'll get there eventually anyway.
It is quite possible that the formerly expected wave of baby boomer retirement will not now materialize, due to the changing economic conditions.
It is also possible that entitlement programs such as SS & Medicare will cease to exist in their current form.
Old assumptions need to adjust to new reality.
theotherdeb | 10.11.08 - 12:12 pm
I don't know about not retiring, but I'll bet most don't put the money pulled from equities this past week back into the markets during their lifetimes. Don't look for that huge bounce like we got in 87 or after 9/11.
the ability to trick people into working for free by issuing non-redeemable promises in the far future?
That "ability"?
I think that "abiltity" is short on time span, friend. Which is the root of our problem. Everyone likes to focus on the mechanism instead of the cause because it's cool and tricky and has handles and buttons and flashing lights.
I'm rather a bit of a fan of it. Did my thesis on the linkage between Austrian thought and Public Choice.
I largely agree with their ideas. However, I don't think of them as a "school"; to me those ideas are just part of the air. I actually came to those ideas via my (now mostly defunct) libertarianism and they were part of my thinking before I even went to college and did more formal studies. You've probably noticed that I apply the idea that people are (mostly) self-interested and cognitively limited to people functioning in all institutions - government, firm, and market. I'm sure there's a school of thought with similar opinions but I'm not plugged into that stretch of academia anymore. Although I have a degree in Econ, I ended up pursuing different fields professionally.
EvilHenryPaulson writes:
How about a compromise on voting rights.
Allow Carl Icahn to create a list of reforms, a standard shareholder's list of rights and powers.
Then promise not to exercise voting interest, provided the company being invested in by the government accepts and passes the reforms proposed by Carl Icahn.
It currently is not fair to expect existing shareholders have the power to exert market forces on the companies.
The US dollar will be the reserve currency for quite a while longer. Different European countries still basically do not like each other, same with the Arabs, same with Asia.
And none has a governmental system that has shown the ability to survive the shocks ours has. We paid our interest even in the Civil War. The strength of the US has always come from its original political design, as well as its unique geography, with ports open to every continent in the world.
50 years ago, the USSR was the leader in space and a lot of people thought they would be economically dominant in a generation.
The Treasury bubble is an interesting/troubling issue.
I wonder about the way that duration enters into the equation as a factor that would affect a possible run to the exits to cash in gains.
The short term treasuries that have been approaching 0% interest are, well, short term. Would their short duration play some role in limiting a rush for the exits? There's only so much time to exit, and the capital gains to be had would be limited since by definition the notes were bought 30 days ago or 90 days ago, wouldn't they (i.e., it's the yield change in that restricted time period that determines price change, and yield swings in Treasuries have been significant but not enormous)?
I also wonder about your assumption that short term yields can't stay near zero for long. They have stayed very low in Japan for a long time . . . I know the Yen isn't the global reserve currency, etc, but I guess I need a further explanation as to why short term yields can't stay low in the US.
I'm not arguing against your prediction, just looking for more explanation.
"There will be some sort of commodity-based standard, the entire problem here is a function of governments issuing promises that can't be redeemed."
You just think too narrowly. What if a future entrepreneurial space jog in 2043 manages to haul with solar wind sails a big enough meteor from asteroid belt with thousands tonnes of gold and other metals near Earth for some serious low-orbit mining operation AND with low enough costs? The hauling part is already now perfectly feasible...
That would pretty much make him as rich as one big nation. Few of them more and the price of gold would collapse, just like it did after Spain discovered the new world.
"In 2001, it was estimated that all the gold ever mined totaled 145,000 tonnes..."
So tying the monetary base to the output of gold mines is not any better than the current system.
BreakOut writes:
My new model is that we are on the road back to 1982 - wages, house prices, gold, oil, everything. A long and painful march.
I think we're closer to the cusp of a gilded age. Massive de-leveraging will allow the few self-financing people to grow their assets and power at phenomenal rates. This is exactly how the lat gilded age began, except I don't see anyone buying up all the homes nationally to become the world's largest landlord
Paying people to dig a bunch of shiny yellow stuff out of the ground that will then sit around in a vault somewhere doesn't strike me as a great use of my resources. I'd much rather loan a plow to somebody who wants to feed his family. But whatever floats your boat.
Fair, they will be easing the Treasury Bubble by providing infinite liquidity while providing a bottom in the panic equities market.
They have to. The driveby on gold was a warning shot to the big hedge funds that a commodity bubble will not be tolerated- they didn't like the outcome of the June bubble this year.
Now settle down and watch what happens. I too was quite a libertarian in my younger days, until I understood that society as a whole will never make the sacrifices necessary to achieve even small gains in a free society.
People need structure, and a functioning libertarian society would have to have some very nasty rules to keep the worst tendencies at bay.
Good to hear that we are united in our view and experiences.
I am 46 years old and have never seen the things I am seeing now. As recently as 2004, I was being invited to Dubai to participate in the real estate bubble there as merchant developer. I refused in that it was simply an extension of what we had here and what I had seen in Spain and the UK.
This is not a US problem, this is a world problem and I am concerned as to how each player will solve its crisis.
From a personal view, I have been struck by the unravelling that is appearing in the social fabric. Crime is becoming a big concern. I moved my family from South Florida to a little barrier island on the Atlantic outside of Savannah to be safer.
I wake up each morning looking out over the ocean and am happy that it is a 12 mile two-lane road on to the Island with a resident population of 1500 people.
We all carry guns here and kids play freely in the street. I think this could quickly progress into a Depression and that social order may be lost.
Sorry to be so dire, but perhaps again......the writing is on the wall.
"I largely agree with their ideas. However, I don't think of them as a "school"; to me those ideas are just part of the air. I actually came to those ideas via my (now mostly defunct) libertarianism and they were part of my thinking before I even went to college and did more formal studies. You've probably noticed that I apply the idea that people are (mostly) self-interested and cognitively limited to people functioning in all institutions - government, firm, and market. I'm sure there's a school of thought with similar opinions but I'm not plugged into that stretch of academia anymore. Although I have a degree in Econ, I ended up pursuing different fields professionally."
I too pursued a different career. I assumed your meme meant you were still in the professional field. Public Choice is a school, I still read the rags. As a libertarian, I could not find anything better than the Austrian School. But even there there is division. Rothbardians don't care for my Hayekian leanings.
Don't get me wrong I like Rothbard, but Hayek nailed it with information dissemination.
As to interests, of course people act on their own account. Public choice guys say that gov't workers are budget maximizers. Yep. They don't have to earn their keep. Agree completely with you on this point.
"The US dollar will be the reserve currency for quite a while longer. Different European countries still basically do not like each other, same with the Arabs, same with Asia.
And none has a governmental system that has shown the ability to survive the shocks ours has. We paid our interest even in the Civil War."
HAHAHAHAHA! Yeah, sure a lazy fat American kid playing playstation all the time, a grandgrandgrandgrandson of civil war era soldier is automatically a good stand-up soldier! It is just in your genes, right?!
You Americans are going down and hard and most of you have no friggin clue what to do in the time of real crisis.
BTW, where the f*ck YOUR ANCESTORS came from anyway? I'd bet from EUROPE. You might even say your ancestors were a bunch of sissies willing to run away from the problems of their home countries.
He was personally a bit of a whack job, but his nuts and bolts understanding of public choice and information is quite useful in actual implementation of regulation and regulatory structures.
Of course, since he is French, the never mention his name in Chicago.
anon2,
Why would it need to be "at the current market standard" to attract private investors? That is a silly assumption. The current market standard has crushed many private investors for the past 2 years and they will not be burned again.
Private investors want the best deal and that is a deal with the lowest risk possible for the highest return. They also are tired of losing money in this sector and want their downside protected if they are going to be expected to pony up money.
The govt will not invest in common shares nor will private investors. I agree totally with anon and Nemo, the investment will be in preferred (probably senior) and have warrants.
Disclosure, I am with a large private investor and that is the ONLY way we'd be interested in investing. Its also what the govt did in AIG and proposed in Citi. IMHO, that is exactly what's coming and we would consider investing under that type of scenario if asked (and probably no other). I know several other private institutions feel exactly the same way.
joe shmoe
As for the distribution of maturity, the Treasury is heavily weighted to the short term which makes them extremely vulnerable to an increase in borrowing costs -- just like certain AAA rated companies that are reliant on debt to finance their growth.
Why hasn't that stopped Japan? Well first of all it does have an impact on Japan's exchange rate, with the effect of significant swings through the carry trade. Japan I think is better able to self-fund its obligations, with many Japanese savers content to leave their deposits in the post office to earn almost no interest, which then invests in the national debt.
One more difference is that America already had a significant cost to service its debt going into the crisis (pre-crisis final budget had $1tn deficit, $10tn debt at the Federal level alone), also consider that while Japan's federal debt is large the governments below it carry almost no debt. Immediately we're looking at spending $1tn on top of the $1.1tn extended already through the Federal Reserve. Comparing to previous financial crises, the tally should hit $4tn easily although how quickly the government chooses to spend it is another story. Also unlike Japan, America has twin deficits and needs foreign investors to buy Treasuries more than ever at a time foreign central bank reserves at a rate less than the western world's deficits.
Japan has a primarily self-financed debt, had/has a trade surplus, and faced less competition for sovereign debt at the time of its crisis.
Finally, if hoping for Japan's outcome is considered a good future then don't forget the Japanese took a huge hit between pre-bubble and post-bubble.
I just considered these explanations on-the-fly, so I would be interested in hearing further or conflicting opinions.
The International Monetary Fund warned on Saturday that debt-ridden banks were pushing the global financial system to the brink of meltdown and rich nations had so far failed to restore confidence.
Paying people to dig a bunch of shiny yellow stuff out of the ground that will then sit around in a vault somewhere doesn't strike me as a great use of my resources
It does seem silly does it not? But it is a like for like exchange labor for labor. IMO gold has some more to improve against the DOW. It could just mean the dow goes lower and gold goes lower more slowly. At some point the savings have to be invested or spent or it is a self imposed prison.
Citizen Allen M,
I tend to agree with your thought that the market will turn up in the short term and have been buying in. Just didn't want you to think you were alone in that view.
The International Monetary Fund warned on Saturday that debt-ridden banks were pushing the global financial system to the brink of meltdown and rich nations had so far failed to restore confidence.
I didn't say I didn't own gold, or think it was going higher. In both cases I do (in the case of the price, I wouldn't be surprised to see a significant detour first though).
MW writes:
Until the weak banks are permitted to fail, no investment into the walking dead can repair the destruction being kept undercover on their books.
Of course! default and BK is the best path to recovery in the long run otherwise we suffer the same fate as Japan but our outcome is worse given our poor saving rate.
Credit deflation will run its course but the effects on the GDP both in the US and world economy will be negative for many years given the massive leverage credit used during the past 10 years. Nothing much can be done about it now so what we are watching is the politically connected financial elite given a bailout
not pretty but its all about power and how its used.
Most of the posters here and elsewhere overlook the many miraculous properties that gold and silver possess. In ancient times, this was the genesis of it's value. As time unfolded, more and more, to the exclusion of all other mediums of exchange over 5,000 years, the precious metals gold and silver have proven themselves.
Remember, lost in all this evolution is the original powers known to early man and yet to be rediscovered by the brightest minds today.
"jim, re: Krugman Slate article. How do you receoncile his statement {with the fact that central banks hold some gold)," asks solohedger.
Well, solo, I guess Krugman just doesn't know that central banks hold some gold. Princeton professors of economics are pretty limited in their knowledge, you know.
anon3 - Do you think your group would be willing to go in at the same terms as the Treasury? Or need some kind of sweetener. I look at all the SWF money etc. that has gone up in smoke over the past year and can't imagine why anybody would want to take the risk at this point.
I think the concept of the G7 let alone G20 can pul together a coordinated solution to this shit storm is akin to seeign pigs fly:
Today from Mish:
The G-7 officials shied away from endorsing a U.K. proposal to guarantee lending between banks either by turning central banks into clearing houses for the loans or having governments back them. They vowed to take steps that would give depositors confidence that their savings were safe and to restart secondary markets for mortgages and other securitized assets. The guidelines said any steps taken should protect taxpayers and avoid hurting other economies.
My Comment: There you have it, in plain English. They have agreed to do nothing other than create a list of guidelines. Those guidelines will be immediately set on fire as Paulson (and everyone else) does whatever the hell they want anyway.
I think the Dow at 4000 is very likely and what more I think Gold and the Dow will cross there..........at 4000.
I am amazed and amused by all the goldbugs crawling out of the woodwork and gathering on this blog. It must be the attraction exercied by the refresh strip that is so yellow and shiny. LOL.
popeye writes:
Citizen Allen M,
I tend to agree with your thought that the market will turn up in the short term and have been buying in. Just didn't want you to think you were alone in that view
Speculation of all types is dead, while it will take a few years to kill off most of the casino players you can be assured that the bear market will take bulls and bears alike to the poor house.
MW,
If you know the G7, then you know there was never going to be a substantial agreement with Canada heading into elections this week, and the United States heading to elections next month.
The best hope is for a program that will have no net-cost to country's budgets
the bear market will take bulls and bears alike to the poor house.
>
Well the bear market may be 4/5th done. Even the most pessimistic (Roubini) think stocks will drop 50%. They have dropped 40% already. Add in Buffett (a respected investor) and his recommendation to "be greedy when others are fearful."
I am amazed and amused by all the goldbugs crawling out of the woodwork and gathering on this blog. It must be the attraction exercied by the refresh strip that is so yellow and shiny. LOL.
So I guess your point is that it's all contained and they should stop worrying and put their money in treasuries?
Ron,
Yes, it's speculation on my part and not a long term investment. In the event it fails, I will accept the loss and pull out. It's not complicated, it's just a bet.
I never thought that there would be any consensus whatsoever. My comment was that the Markets closed yesterday with "hope" that somehow, King Henry and the Raiders would sprinkle Goldman Dust on the world and make it better.
I am of the mind that a closure of the market and bank holidays are far more imminent.
So I guess your point is that it's all contained and they should stop worrying and put their money in treasuries?
MLM | Homepage | 10.11.08 - 12:57 pm | #
I don't know if it is "contained". I think the market will drop further in all probability. If people feel better having owning gold that's okay with me. Chaque a son gout.
"That's my money they're playing with--and i don't give up my voting rights without a fight."
You don't have any voting rights. You don't even have voting rights as to your congang rep, let alone on some executive branch beurorat appointed by a president elected by the elctorial college. This is all boiler plate nonsense.
If I (my tax money) plop down 700 billion, i either get true voting rights--or the Russian mafia gets a piece of the action. The money is getting stolen in broad daylight--and won't be used for liquidity--no reason to--moral hazard and all. You rarely get away with one extortion payment--the crook finds the reward intoxicating.
The crooks should not get to play with more money unchecked, and yes, I'd rather nationalie the whole system for a couple of years. Begging the villains to loosen up is so naive.
MW,
I don't think hope had anything to do with it. I think it was a rallying effort. So long as the market moves quickly, the bigger players can skim money off of other investors without the same market access -- they are trying to grind out a living by attempting to finish the year without a loss
Add in Buffett (a respected investor) and his recommendation to "be greedy when others are fearful."
The financial press/media will give the bullish info necessary to provide fresh green to the financial sector.
These are nothing more then financial salesan selling various financial brews to the thristy casino players hoping to make that big payoff so they can leave the table and live the easy life.
Well the fourth Crusade got out of hand and the leaders diverted it to Constantinople. Innocent didn't know that it would do so ahead of time. He was intending to reinforce the Crusader states, the medieval equivalent of Israel.
Remember the Cross of Gold Speech William Jennings Bryan made back in the 1890's? The whole point was that in a Democracy we can not live with a currency tied to gold because we cannot create enough prosperity to give eneryone the pony they desire. Democracies print money, that is what we do. So ponies for everyone and let the paper fly!
The gold bugs never ask why the gold dealers accept dollars for gold? Why if the dollar is so worthless would gold dealers part with Gold in exchange for worthless dollars,nor does anyone ask why if Gold will be worth so much more in the future why gold dealers would sell gold at any price today? Trying to created the illusion that Gold is cheap today and will be so much more expensive in the future sounds like another investor bubble trap.
First Krugman, then Roubini, and now Buffet. What a trio of apostles.
Roubini is great but did he say "a drop of 50% from current levels or from peak?" Roubini thinks we are only in the first few innings of what he described earlier in the week as a "L" recovery.
If we could all get deals like Buffet, that would be great. Hell Paulson can't even get the deal Buffet got with Goldman and is only their former CEO.
You sound like a guy who does a lot of investing late at night watching info-mercials.
Did you order your foreclosure kit to get in on the action yet?
I think you've all clearly said, "We are staring into the abyss." I see both sides of most of the arguments being made here. This is a very dark hour.
I have no clue where the bottom is. However, I don't think we are going to find it in a continuation of the virtual straight line fall we have seen thus far.
"he crooks should not get to play with more money unchecked, and yes, I'd rather nationalie the whole system for a couple of years. Begging the villains to loosen up is so naive."
Ummm....Mel, Henry Paulson ran Goldman Sucks...as CEO...No Really he did....Before becoming Treasury Secretary. Hell He cashed out of his investments TAX FREE to the tune of $500,000,000 before doing so.
So the fox is guarding the hen house and you like it. Kay!
I'm not going to link to the site, but this concept left me slack-jawed:
" \t Pope Innocent III Action Figure
Introduce this Pope Innocent III Action Figure to your other figures and watch the spiritual sparks fly! Armed with his formidable power of excommunication and an intimidating scroll inscribed with Latin text, this 6" tall, hard plastic model of the 176th Pope will soon have all your other action figures lining up for confession. Read the back of the illustrated blistercard and you'll find that Pope Innocent III was a good guy in all respects. He was a patron of the arts, cared about orphans, built a hospital and reunified the Papal States! Comes with removable fancy Pope hat."
It seems to me that the Treasury's situation is not a bubble, or at least not a bubble in the same way that real estate was (is still) a bubble, or dot.com stocks were.
The issue isn't that there will be a rush to sell short term treasuries and the price will collapse. Owners hold short term treasuries until they mature.
The problem I think you are describing is the Treasury's continuing ability to finance itself (and thereby the US) by continuing to offer short term notes at low yields. That's not a bursting asset bubble, is it? It seems a different sort of problem to me.
I agree, of course, that Japan 1990-2008 is not an ideal to aspire to. I think the US would be lucky to do as well as Japan has done, but that wasn't my point in our exchange. My point was just that low rates could continue, though there may be pressures against that, and costs to pay, too.
The big issue for the US is foreign buyers of Treasuries, right? Will China and Japan and the Saudis et al pull the plug on the US by not buying any more Treasuries? That's a serious problem that requires political and economic solutions, both domestic and international, and it also beyond the US's control in several respects (global panic may keep investors in US treasuries, recovery somewhere outside the US would lead capital there and away from US treasuries)
I agree completely that the national debt is a problem for the US - a big problem because it was run up for bad reasons, and now the storm has hit when the govt needs to spend for the economy and the country starts from a huge hole of debt.
Increasing the govt's debt is possible now and necessary, but it needs to start to be offest by a reasonable tax regime comparable to that of other industrialized (or post-industrialized) countries. Higher rates for the top few percent are in order now, and lower rates for the middle class that will have a high propensity to spend their tax savings.
Over time, though, as thee economy recovers (how many years in the future????) a fairer tax structure with higher rates for the gainfully employed will be absolutely necessary.
US tax policy has been as unrealistic as its asset markets.
Some elements of standard of living will need to be tightened for a big chunk of the population, but a big chunk of standard of living (or just assets) needs to be tightened a lot among the top couple of percent. The massive increase of inequality has to be reigned in for economic, fiscal, social, and political reasons. Not eliminated entirely, but brought within reason.
Lots of people on this blog won't like that, not a bit.
Not only do I think that is the right course domestically, I think internaitonally the US may not have a choice.
The fact that the treasury will be buying eqity stakes in the financial sector given that they recently suspended mark-to-market accounting tells you that they are the only idiots willing to invest in these worthless companies and that the world investors know that these financial companies are insolvent and putting money into them would be like throwing money away.
"Remember the Cross of Gold Speech William Jennings Bryan made back in the 1890's? "
I'm not that old. : )
I read the speech recently, and to judge from the text I think you had to be there, except of course for that one line.
The US was changing fundamentally, and Bryan fought the change all the way. As we know, he lost. Still, he advocated social welfare policies that in some form or other came to be during the New Deal.
Roubini said earlier he expected the market to decline by 40%. Recently he upped that to 50%. The rest of your post is kinda amusing/insulting, but I don't really mind. I've made lots in the market and expect to continue to do so. By the way there was a previous runup of gold during the hyper inflation of 1979-1980. Then it came crashing down when Volker raised interest rates. You will recall the Hunts of Texas who tried to corner the silver market (easier to do than gold) and who lost their immense oil fortune in the process.
The rules are changing on the fly. No shorts, selected shorts, selected circuit breakers. How anyone could depend on historical analysis of the market over the last 40 years is insane.
Those calling a bottom are in for a rude awakening. To account for forward P/E in light of the economic period we have entered and that is worsening, we would need to see an 80% retracement from peak values, and be willing to ride it out at that level for a minimum of 3 to 5 years.
This is a new world where the casino is rigged. Play at your own peril and don't cry when they drain the water form the swamp.
What a great blog. Someone who recently read the cross of gold speech! I read it fifty years ago as an under grad so may be a bit fuzzy on the details. At my age, I can remember what I want to remember. One of the few advantages of being around this long.
And we all know, do we not, that the Wizard of Oz story is a parabel about bimetallism. Dorothy in the original story skipped up the yellow brick road in SILVER slippers.
If anyone thinks this is the bottom, I would be astonished because
- house prices are still falling
- unemployment still rising
- still de-leveraging
- economy AND trade still falling
- barely into earnings season
- have only faced the acute lending shortages since September, with no end in sight
- let me see some 10K audited reports
- FWIW, CNBC is bragging that a 30% cut to S&P earnings makes the average one cheap with a P/E of only ~15 which is ridiculous from so many perspectives
I do think there will be a rally, as I have detailed before, with a host of reasons behind the idea. I've targeted the turn around as the 3rd week of October since July and I feel comfortable maintaining that, although there are a number of real-time indicators you could follow (not talking T/A/ voodoo) which will signal it has arrived. It is very rare to have a crash and get it out of the way with in one straight shot.
Heck the people making the trades are addicted to rallies and literally experience chemical highs from them, the cheering from the floor on Friday can carry the rally by itself once some momentum comes i
Last week, CDS sellers had to pay up. By definition, they did not have the cash and were forced to sell into a market with poor prospects. At the same time, equity holders in - as Paulson put it, "a wide range of financial companies" - learned that the government was about to dilute the heck out of or seriously impair their holdings. And they sold. Throw in margin calls and out-right panic selling. I think the market went too far and will correct - perhaps only a dead cat bounce, but I suspect more.
"Pavel: If only Innocent III was alive to murder the heretics. It does get worse."
Some guy I met in Kiev as the SU was collapsing proposed that the Communists ought to be killed. I was traveling with a Party member - a very nice, sweet person she was, a kind of secular saint - and we both agreed: Let's not kill anybody.
I still think that way. I don't believe in killing anybody for thought crime. I don't believe it was right in the past, either.
OT, on the question of how deeply the current crisis is imbedded into the consciousness of J6P:
I'm driving to my office to this morning, and I turn on the local ESPN channel to get some college football news.
Lo and behold, they're airing a show devoted to all things video games. Now, I'm in my 40's, and never got into this world at all, but the enthusiasm and passion of the hosts is weirdly transfixing, so I decide to keep listening.
There are three hosts: "Wally", who sounds like an Australian surfer dude and party monster, "Candace", who sounds like a geek working on her fourth Red Bull, and an older guy ("Old Guy") whose name I don't catch who is trying to sound cool by speaking like a black gangster and failing miserably.
Wally and Candace are talking about stuff I don't understand at all - Microsoft Sidewinder controllers, Monk the Pool Master, how E3 totally sucked this year (Comic Con is at fault, they assert, and I feel strangely guilty, since I live in San Diego). Then in the middle of a discussion of a new MMA game, Old Guy, in his hip hop patois, suddenly jumps in with this:
"Yo, Steve Goldstein, are you out there, my brotha?" I need you to perform some jiu jitsu on my portfolio, man! For real! Bernanke gave my investments the spanky! Steve-o, call-in! You gotta put a submission hold on my stocks, my money market!
Candace, laughing: "Who is Steve Goldstein?"
Old Guy: "My accountant!"
Wally: "If he calls, can I talk to him? I'm worried!"
Candace: "Did you see the paper this morning? Pelosi is going to go for another stimulus package."
Wally: "Really? How much?"
Old Guy: "Steve! Call me!"
Candace: "Damn, now I feel sick."
Old Guy (toning down the hip hop): "We'll be right back"
I have no idea what any of this means in the larger scheme of things, but these days, you've got to appreciate a little humor wherever you find it, even at the end of the AM radio dial.
Can someone explain how the Lehman CDS bomb was so diffused without major incident? The fear was the settlements were going to cost counterparties up to 500B-instead they apparently settled for 8B.
"Pavel: If only Innocent III was alive to murder the heretics. It does get worse."
Well there are plenty of Americans as well as Zionists who think Muslims should be killed, especially the kind who are Arab nationalists who might threaten Israel's interests or the interests of big oil. I suspect Bush has killed as many Muslim "heretics" as Innocent ever did.
"Pavel: Based on your past posts here, I assumed that. Perhaps my joke did not translate well to the screen. I did not mean to insult you."
No offense taken. It was a very different world those people lived in, and when the future looks back at us perhaps they too will be puzzled and not a little dismayed.
Markar, $365.3bn of payments are being done today. We wouldn't know yet if things went bad during a bank-rescue-weekend
The 8.675 ¢/$ is the value a Lehman bond, CDS vendors have to make the CDS buyers whole by paying out the 91.325 ¢/$ (there was a $400bn notional amount of CDS)
"It was a very different world those people lived in, and when the future looks back at us perhaps they too will be puzzled and not a little dismayed."
Agreed. My studies of the California Missions taught me as much.
MW Your positions vis a vis gold and the EU make perfect sense to me. Funny the disdain for "goldlbugs" by many. If gold has no monetary value, why are the CBs so afraid of it, and use the bullion banks via COMEX and ETFs to suppress its price?
Nemo
zomg! second!
From the article,
"Treasury Secretary Henry Paulson said the U.S. is working to have a standardized government program for purchasing equity in financial companies up and running "as soon as possible."
I guess we can all look forward to worthless stock certificates in the future instead of 5 pound blocks of cheese when we are all unemployed. At least we will have something to use in lieu of toilet paper...
Shame they don't seem to be demanding senior preferred shares with voting rights. AIG stakeholders get crammed down, but the banks are handled gently.
SRC,
You had asked about the distribution of T bills vs notes and bonds sometime ago. I had responded in that thread but never knew of you saw the post. Bulk of the treasury issuance has been at the short end of the yield curve...
This is a coordinated sham. The bankers are in line for trillions of dollars because they refuse to operate like banks, and governments promise to give them so much more.
Goldman/MS will tell the Sec Tsy to structure the equity as perpetual European call options to maximize the return to taxpayer while minimizing risk.
Sec Paulson will announce this structure with great fanfare saying he has spent $500 billion to accquire perpetual European options on Goldman and MS.
The Repubican media will hail this as another example of how the taxpayer has benefited from the Bush Administration.
The 700 Billion is earmarked solely to get the big boys out, not just without a loss, but with a profit. The details will remain fuzzy for some time, but count on it. Warren Buffet does not stick 5 Billion in an investment unless the fix is in. With Paulson in there, it is simply a matter of devising a cover story.
SRC -
How do you know what they are going to be asking for based on this report?! Are you a mind reader? Let's see what they come up with before you jump to conclusions. My guess is that it will look a lot like a private sector security because their intent is to have the private sector participate as co-investors per Paulson last night. That ain't going to happen if they handle the banks gently as you have already concluded. Lets see where this goes before we start to gripe....
Shame they don't seem to be demanding senior preferred shares with voting rights. AIG stakeholders get crammed down, but the banks are handled gently.
... which means this plan won't do diddly, because this is a confidence crisis. And the only way to restore confidence is to remove the rot from the system, not perpetuate it.
Distribution Of USG Debt
Have a good day all. Going fishing -
Most insane idea is trillions without a vote to change management decisions--unbelieveable.
Earlier in the previous Volker thread a comment was made that a return to the Gold standard was "never going to happen" I disagree:
As recently as Yesterday, Merkel suggested that she wants out of the Euro. She is not going to tow the line any longer and Germany will be the first to abandon the Euro for a newer-D Mark or North EU Type "Gold-backed " Euro.
Expect a split in the EU into two factions of those EU Countries that are using the Euro as its currency.
Call it the Latin Euro and the Northern Europe Euro.
France and Germany will most likely revive the Franc and the D. Mark respectively as a companion currency alongside the Northern Europe Euro currency as a back-up. Both will be accepted currencies until a final determination is made on the longevity of any common Northern Euro currency.
Latin Based Euro Countries
Cyprus
Greece
Ireland
Italy
Malta
Montenegro
Portugal
San Marino
Slovenia
Spain
Vatican City
Andorra
Northern Euro Countries "Gold Backed"
Austria
Belgium
Finland
France
Germany
Luxembourg
Netherlands
Monaco
Russia has already begun formal discussions on a Gold backed Rouble and given their immense Natural Resources reserves and the build-up of their Gold mining investments over the course of the last 10 years it will be a very easy switch for them.
Argentina and Brazil have already broken form the USD Reserve for settling trade accounts between each country. This was adopted over the Summer and went off with out a hitch.
China has been building it gold reserves and is now the largest sovereign nation invested in African Gold Mining, as well as oil exploration in Canada, and the Caribbean (Cuba).
What should concern the US and the UK the most is that no inclusion of the USD as a reserve currency going forward or the pound sterling as a benchmark currency for European Trade is being considered on a going forward basis.
What we are witnessing is a stern demand by BIS and stronger EU nations like Germany to Paulson, that the toxic bonds need to be repatriated to explode on American soil. The dollar rally is nothing more than the closeout of that debt being settled after which the USD will most likely shed 30%-50% of it value in a stunningly short amount of time. Months not years.
Don't underestimate Gold in the new World order. Just go out and try to buy some physical bullion today. Every Sovereign Mint in the world has either stopped or dramatically suspended any sales to the Public. And Every Central Bank has publicly said that it has suspend any future sales. The Paper futures manipulation on COMEX and LME are about to implode, as no Physical deliveries can be made on contracts the demand delivery at settlement. This may occur before the month is out.
The theory I've seen about whether to go for preferred or common is this: the government needs to buy common not pref shares, as otherwise nobody in the private sector is going to step up and buy into the banks below where the government is in the capital structure.
And based on how the markets are now acting, that seems to reflect reality.
The only alternative structure that appears to work is the governnment buying warrants: pay cash for deep in-the-money warrants (calls). This way, they don't get the issue of the government ending up being a major shareholder (at least until the warrants are excercised), the bank gets some cash (the warrant premium), and there is no huge disincentive for other private sector actors to step up and buy new common or prefs.
Having thrown Lehman under the bus, it's safe to say that a lot of moral hazard issues are now dead.
About Brazil and Argentina: That was a very stupid by our gov. because the peso is a very, very weak currency.
They should buy shares, get voting rights, fire HR, replace it with government employees, extend benefits (give pregnant women enough paid time, give employees time to spend with theire family without worry about layoff). If we are going to be socialists, let's do it now and right.
Looks to me like the federal government will be forced to nationalize banks. Of course they'll give it some fun capitalist name. But McCormick's frustration is utterly universal.
If people want to see how this is going to work check out how the govt money ($12B) was structured to go into Citi as part of the proposed merger with WB. SENIOR PREFERRED WITH WARRANTS!!!!!!!!!! DUH!!!!!! Where you guys are all coming up with your common stock theories is absolutely mind boggling to me. The template was already put out there.
bond guy --
One idea I have seen is for government to come in alongside private investors.
So, if a bank is so weak that nobody will invest even with Treasury as a co-investor, then it is too weak to save...
This structure would allow government to act as an "amplifier" for private equity infusions. I think the idea has some merit.
By the way, I nominate "letters of credit" as the most important search term for the news over the next 3-4 weeks.
The bankers are not altruists--they're in it for the money. In this crisis, the government's aim is different and thus they need clout--they need voting power.
MW writes:
"Don't underestimate Gold in the new World order. Just go out and try to buy some physical bullion today. Every Sovereign Mint in the world has either stopped or dramatically suspended any sales to the Public. And Every Central Bank has publicly said that it has suspend any future sales."
I'm very happy to underestimate gold in the New World Order ("novus orderem seclorem" - from what I recall; where did I see that?).
The mints are stamping out gold coins as fast as they can; they've only suspended sales because inventories ran out. And central banks have only stopped gold sales as they are waiting to dump another load into the market if it hits $1000/oz - which is what they did when it hit that level last time.
There's no doubt that a lot people are panicking and buying gold. But you gotta remember someone - who apparently had a better grasp of market timing - is selling it to them. I wonder who's right?
Nemo -
You are correct - lots of discussions going on between treasury and private investors. The Citi example is out there as is Buffet's (who the treasury would love to have as a co-investor). Its pretty clear to me that the senior preferred structure with warrants is the path all have moved down. I fully expect that will be exactly the approach done here as well - the precedent is there. Also, preferred is none voting - but will be able to block dividends IMHO.
Looking to the future, does anyone have a link to a good explanation of Bretton Woods II? I am a peak oil hatter who saw this site linked from the oil drum, and am trying to get informed on what kind of policy decisions might get made in a revamping.
personally, I do not see a new intl. currency as likely to arise out of it. If the current predicament has taught the world anything, it is that an area's economic output is linked closely to its governance. I think there would be complete resistance, if proposed. And an intl. currency for the purposes of exchanging value is relatively useless.
I could see the creation of a new standardized govt. treasury vehicle that would vary with inflation, in order to protect the lender. This would be jumped upon by those willing to help shore up the US and world economies, and would set up for continued funding the US in the event of (hyper)inflation. Think of it as a similar move to setting up the legalities of a conservatorship 6 months before the tool needed to be used.
Additionally, I think we will see a set of regulations geared towards minimizing systemic risk (insert house of cards analogy).
Possibly we could see some sort of intl. debt-forgiveness program wherein participants open up their books, and chains of debt are erased from bank to bank in an effort to deleverage the system from leverage that is actually artificial, in situations where a debt has a sufficiently similar counter-debt at another institution (think of the process of doing algebra for a good example). Also, note that this could be done among three or more parties, and that mutual forgiveness among more than two parties would require some sort of centralized dB analysis. If the writing of default swaps was prevalent, the entire market for them could get reduced substantially in this fashion, perhaps.
We may also see some new system for how leveraged assets may become, with some slippery slope for the overleveraged instead of o.k.-> bankruptcy. And we already have a recapitalization program for the overleveraged.
This is from a noneconomist, noninvesting American, so take it for what it's worth. What actions might have the highest reward? Are any impossible?
Anyone think of anything else that might be done?
Oh and I really would like a good link to a Bretton Woods II primer. Thanks
MW, this scenario is what worries me most. As I talk about this with my friends, they can not comprehend what this would mean to their lives. Absolutely NO comprehension. Do you see regional currency blocks or a world currency exchange agreement? TIA
Until the weak banks are permitted to fail, no investment into the walking dead can repair the destruction being kept undercover on their books.
This is about not permitting what "must occur" to redeem a viable system in the marketplace.
If any impaired company can cry uncle to Hanky & Co. each time they have a failed business model, where does it end?
We are witnessing the total collapse of the Auto industry, how many want to own an auto maker alongside the insurance company we all bought 3 weeks ago. Why don't we buy and airline or two as well?
How is it that so many are ready to buy stock in companies that have admitted that they will not mark their assets to "Market?"
Instead we are marking to "Marx."
Nemo writes:
"One idea I have seen is for government to come in alongside private investors.
So, if a bank is so weak that nobody will invest even with Treasury as a co-investor, then it is too weak to save..."
That would be pretty good if that could be arranged. Right now, people are somewhat panicked, and may not want to wait for the arrangements to be hammered out.
And you can't just back anyone in the private sector. Apparently, there's a lot of idiots investing private sector money. For example, it probably wasn't governments throwing cash at the commodity markets a few months ago on the eve of a global recession (or depression, if you're morbid).
Any day now. Soon, even. For sure. Teams of people working on it round the clock. Not wasting time. Trust us.
puke
anon --
Precisely. "Non-voting" means avoiding the total nationalization of the system (maybe). "Preferred" means you get paid before common sees a dime.
Investing alongside private money means minimizing the risk that you are flushing taxpayer money down a black hole.
It is not perfect; government intervention in the market never is. But if it is necessary, this is the best proposal I have heard.
This is extortion--paying off the banker won't change his behavior because that behavior gets more money.
indian outsourcing co up to nefarious stuff..now that bread & butter projects are disappearing
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@MW:
"The Paper futures manipulation on COMEX and LME are about to implode, as no Physical deliveries can be made on contracts the demand delivery at settlement. This may occur before the month is out."
This is huge, and pregnant. What is the source of this information?
Government - September
Was poking around one of the links above- very interesting that the average interest rate for all outstanding 30 year bonds is still above 7%. Somebody made some good investments there - hopefully pension funds.
Nemo -
I agree 100% - it will penalize the common but improve stability. Net net the best idea available and where they should have gone from the beginning. The trade will become long bank credit, short bank equities. This preferred will be structured to yield a mid-teens returns. That is bad news for bank equities.
I agree with this approach... at least I prefer it to the initial idiocy.
Having said that, about the only thing I think Greenspan made sense on was when, back when we were comically expecting surpluses as far as the eye could see, he pointed out that "investing" government money in the private sector would really, open some ugly doors.
But now that he has (thankfully) been discredited, who is going to have a big enough voice to alert the people to watch this process very, very carefully.
lurker bee writes:
"Looking to the future, does anyone have a link to a good explanation of Bretton Woods II? I am a peak oil hatter who saw this site linked from the oil drum, and am trying to get informed on what kind of policy decisions might get made in a revamping."
Maybe on Wikipedia? The best explanation I was from the original Deutsche Bank research papers that coined the phrase; but you need to be a client to get research.
Brad Setser's blog has the best running commentary on the issues revolving around BWII. If you want a primer, there must be something written by the Federal Reserve -
the keywords would be central bank reserves, or the current account.
The one paragraph version of the BWII arrangement: China acts as the manufacturing base of the U.S. China gets the factories and employment (and pollution) and ships the stuff to the U.S. In return, the U.S. ships China Treasury Bills. The Chinese like it as they get to build a manufacturing economy that is competitive on the global stage, and the U.S. likes it as China ships them stuff in return for electronic entries in the Fed custody accounts.
"I could see the creation of a new standardized govt. treasury vehicle that would vary with inflation, in order to protect the lender. This would be jumped upon by those willing to help shore up the US and world economies, and would set up for continued funding the US in the event of (hyper)inflation."
There is such a vehicle - index-linked bonds (U.S. version are TIPS).
That market has been annhilated over the past few weeks. Nobody is very worried about inflation protection right now; they want deflation protection.
To Bailout Nation's comments and that of Bond Guy:
Bond Guy: I don't agree that they are stamping coins as fast as they can make them. That makes for a tidy PR release but it is not what is occurring. I don't know if you have ever invested in physical bullion but don't be persuaded by fluctuations in paper market prices.
What we saw yesterday was Hedge Fund liquidation in the COMEX that was for pure cash raising needs. It has nothing to do with actual bullion demand.
There is no evidence that any Central Bank intends to "dump" gold at the next $1000 level. If that were true it would happen today. The actual price for gold is well over $1000 per OZ. Go to E-Bay or call any bullion dealer, Gold is trading for $100-$125 above spot.
You and I have disagreed before and I respect any conflicting opinions, but just a few weeks ago you balked at the idea that our debt would somehow not continued to be purchased. The Long Bond is going to have a coupon that will be mind boggling in a few weeks given the reluctance of any foreign creditor's desire to hold what most likely will be a defaulted asset.
Bailout Nation: I think it will be every nation for itself. I know that new alliances are begin forged today that do not include the US and the UK, I could see tight trading alliances and currency pacts between Russia, Iran, China and Venezuela for example. I think the The Gulf States will unite under a single form of currency that will not be pegged to the Dollar.
Can someone explain in layman's terms what this government buying of banks means? I haven't had the time to read up on it.
On face value it appears we've replaced the stars n stripes with the hammer and sickle.
Fed/FDIC decide how much capital will stabilize the institution. The companies issue preferred, non-voting, shares. Fed will hold auctions for the shares and buy 1:1 with the 700bn.
Companies that fail the audit or fail to sell 75% of the offering are shutdown.
Oh, I should add that comments like this show that the people here are very, very aware:
Paulson is a banker, so he is biased towards his peeps. If he was an auto magnate, GM would get capital and the banks would get loans.
Thus the problem.
At least we have this: I hate to reveal what in the halcyon days of the financial Underware Gnomes was dismissed as a "manufacturing fetish", but I really don't see basic banking and insurance as that hard to do.
The government has plenty of computers and accountants.
An article in Bloomberg today states Fannie and Freddie have to purchase 40 billion a month in troubled assets.
What price are they paying? Are they paying face for this stuff? Who is protecting the taxpayer?
Plantagenet:
Look to the Comex and LME yourself:
See this link aired just a few nights ago on European CNBC. It only scratches the surface.
Video - CNBC.com
"Gold Prices May Spike
Within the gold complex, there is a disparity between the paper market and the physical market, notes Jurg Kiener, CEO of Swiss Asia Capital. He tells CNBC's Maura Fogarty & Rebecca Meehan that if the paper market collapses, gold prices may double very quickly."
Comrade Baron Von Helmut III 1
wrt to your question, we are all Fabian Socialists now.
To see specific examples of what this means for banking and taxpayer, visit your local post office or try the airport and see the TSA in action.
Nemo, anon-
My interpretation is quite different. In order to spur private investment alongside, you must not take a super senior position, you must invest along current market standards.
Potential dilution to the common, sure, super senior, no, with no ability to block dividends, this would rule out the encouragement of private investors stepping in.
Under the Paulsen plan with currently available comments, they would buy existing common/preferred with equivalent rights as other market participants. If they really wish to add confidence, go into the secondary market with no further issuance.
In my opinion.
What price are they paying? Are they paying face for this stuff? Who is protecting the taxpayer?
SteveA | 10.11.08 - 10:08 am | #
We need to go back to square one - vote the bums out of office!
--
On the subject of USG borrowing ("Printing Monay") and Inflation/Deflation...
Commodities & Scams FLASH Depression; Why Printing Money IS Highly Deflationary!
We probably had the worst two weeks for commodities ever after the worst week in 50 years a week ago. At Fridays low in Scams the 12-month deflation of Scams and Real Estate reached 100% of the GDP, something that has never happened. We are likely to see another 100% deflation in these two assets over the next 2 years. Scams had the worst week since 1933. You get the picture and that is what happens before the depression. Markets are the best leading indicators of recessions and depressions to come and not the econ-meisters and the Fed Chairmen.
Why Printing Money IS Highly Deflationary?
The increase in the US govt borrowing crowds out the private borrowing and, most importantly, private investments! Both are highly deflationary. The Japanese govt had borrowed like crazy during 1990s and we had deflation. Please remember that US govt borrowing went negative during the boom of late 1960s & late 1990s. The govt borrowing shoots up during very bad economic times and major wars (War On Iraq is not a major war) and NOT during good times.
When President Obama proposes the $5Tr. Fair Deal you would know that the US is already in depression. Stay tuned. The US has the worst govt that money can buy!
US Recession -- > Commodities Bust (WE ARE HERE) -- > Depression -- > Deflation -- > Greater Depression.
Jas
Thanks, Bond.
Interesting that TIPS already exists.
Thanks all for letting me check out all your ideas and silly jokes. Time to make the boys some bomb-diggity waffles.
p.s. I think deflation will be easier to fight (and probably to overshoot in fighting) in the digital age than it could have ever been in any previous deflationary predicament.
Plus there's a lot more room towards infinity than 1/infinity
.
Huckabee on Fox saying the stock mkt drop was a financial terrorist attack. What a bloody moron leading larger morons.
When President Obama proposes the $5Tr. Fair Deal you would know that the US is already in depression. Stay tuned. The US has the worst govt that money can buy!
Lobbyists get what they want for far, far less!
A New Bretton Woods
Submitted by midtowng on Fri, 10/10/2008 - 10:20. bank holiday Macro Economics
The days of the dollar being the world's reserve currency are quickly coming to an end.
Oct. 10 (Bloomberg) -- Italian Prime Minister Silvio Berlusconi said political leaders are discussing the idea of closing the world's financial markets while they rewrite the rules of international finance.''The idea of suspending the markets for the time it takes to rewrite the rules is being discussed,'' Berlusconi said today after a Cabinet meeting in Naples, Italy. A solution to the financial crisis can't just be for one country, or even just for Europe, but global.''
The Dow Jones Industrial Average fell as much 8.1 percent in early trading and pared most of those losses after Berlusconi's remarks. The Dow was down 0.5 percent to 8540.52 at 10:10 in New York.
Group of Seven finance ministers and central bankers are meeting in Washington today, and will stay in town for the International Monetary Fund and World Bank meetings this weekend. European Union leaders may gather in Paris on Oct. 12, three days before a scheduled summit in Brussels, Berlusconi said today, while Group of Eight leaders may hold a meeting on the crisisin coming days,'' he said.
Berlusconi didn't give any details about what kind of rules leaders were looking to change, except to say that leaders are ``talking about a new Bretton Woods.'
Huckabee on Fox saying the stock mkt drop was a financial terrorist attack. What a bloody moron leading larger morons.
Brian in New Orleans | 10.11.08 - 10:12 am | #
I'd say it was an attack of the political/financial elite on the taxpayer!
One idea I have seen is for government to come in alongside private investors.
So, if a bank is so weak that nobody will invest even with Treasury as a co-investor, then it is too weak to save...
This structure would allow government to act as an "amplifier" for private equity infusions. I think the idea has some merit.
Nemo | Homepage | 10.11.08 - 9:42 am
Sounds like the best idea yet...if buffett (or maybe even the ceo) wants to pony up a few billion, the treasury could match- with the same or better terms of course.
I woke up made today - sorry!
mad i mean - mad as he!!
bond guy: Having thrown Lehman under the bus, it's safe to say that a lot of moral hazard issues are now dead.
CNBC believes the moral hazard issue is dead. Large investors are another matter. This is a confidence crisis, and the only way to restore confidence is to remove the rot/restore integrity.
No large investor is going to rush to buy stock of a company that receives a government reward for poor/dishonest performance.
I'd say it was an attack of the political/financial elite on the taxpayer!
Anonymous | 10.11.08 - 10:13 am | #
not the stock market dropping, but the crap the govt. is pulling, the what we are about to see at the G7 will probably be ten times worse!
CR did you see this story?
Fannie, Freddie to Buy $40 Billion a Month of Troubled Assets
Fannie, Freddie to Buy $40 Billion a Month of Troubled Assets - Bloomberg.com
Think of this. GM is possibly not going to survive. They produce cars which have value and people use. Should our resources be going to carmakers or the makers of CDOs, CDSs and those who supported providing loans to people who cannot pay the loans down? Whatever happens here should support the real economy and not the creators of the funny money. I realize that GM also had a hand in some of the financial funny paper with GMAC, but that is not really what GM was about making. I just think we need to be careful what is being encouraged by the actions taking to stop the collapse of the financial system, that the cure might not be better than the disease.
Breaking News: "French and Germans reject Bailout Fund."
As I said above, watch the Germans, they want out of the Euro.
Breaking News: "French and Germans reject Bailout Fund."
As I said above, watch the Germans, they want out of the Euro.
MW | 10.11.08 - 10:20 am | #
So, is Bush/Paulson going to ask for $Ts to keep the Euro together?
MW- link? TIA.
JP: Just came across Fox News Ticker. I am sure Reuters will have it any minute.
OMG, The world is coming to an end. I am in agreement with Dennis Kucinich. He just blamed BOTH political parties, including Clinton.
Kucinich: "This is NOT about Jimmy Carter. We need to help the American people. Why would someone as important as you are picking on Jimmy Carter?"
Cavuto:" well, this is what this segment is about."
What Nemo said at 9:44.
I guess we can all look forward to worthless stock certificates in the future instead of 5 pound blocks of cheese when we are all unemployed. At least we will have something to use in lieu of toilet paper...
Mike in Long Island | 10.11.08 - 9:17 am | #
They were also used as wallpaper after the GD, I saw some of that many years ago in southern Illinois which really hasn't recovered from that event. I think they still get the cheese.
JP: Mish had it on Oct. 2, this has been ongoing: Bloomberg as well:
France, Germany Clash Over Proposal to Bail Out Banks
Tensions are building up in the Eurozone as France, Germany Clash Over Proposal to Bail Out Banks.
European Officials Squabble Over Response to Crisis (Update1) - Bloomberg.com
Apparently they are not changing their position.
Kucinich: "This is NOT about Jimmy Carter. We need to help the American people. Why would someone as important as you are picking on Jimmy Carter?"
One of the few that makes any sense!
MW:
You goldbugs never say die, do you? Well, keep the candle burning. Maybe, five centuries from now.....whatever.... LOL.
"perpetual European call options"
Now that's some esoteric humor. A European option is one that is only exercisable at expiration, and a perpetual option never expires.
Eliminate mark-to-market accounting?
There is a market for these things, but the current owners don't like the market's price. They would love to unload them onto someone willing to pay more than current market price. I think that at the bottom of this effort is the knowledge that no one can ever make money on an asset that he/she has paid too much for. They hope that taxpayers will be greater fools than they were.
MW some remedial reading for you:
Slate - The Dismal Science - November 22, 1996
ok have a questin about gm
Services Financial services
Revenue ▼ US$ 181.122 Billion (2007)[1][2][3][4]
Operating income ▼ US$ -4.390 Billion (2007)
Net income ▼ US$ -38.732 Billion (2007)[5]]
Total assets ▼ US$ 148.883 billion (2007)
Total equity ▼ US$ -37.094 billion (2007)
Employees 266,000 (2008)[6]
total assets 148b but total equity minus 38b what does this means? that they owe 110b or even 186b? i red they have a lot of corporate bonds out there
Jim:
You should be more sensitive to showing your own ignorance.
We can agree to not agree.
Best of luck.
You should be more sensitive to showing your own ignorance MW tells me.
I reply, well my "ignorance" is that of Paul Krugman too. I am quite happy to be as "ignorant" as Krugman.
revro:
as of 6/08, GM had 136B/193B in total assets/liabilities, meaning -56 total equity
GEO Minerals Ltd. - Google Finance
Bloomberg.com refer=europe
Apparently they are not changing their position.
MW | 10.11.08 - 10:27 am | #
Very old news--this means nothing now.
Must go off and attend an Obama meeting.
Happy contemplating the end of the World.
If they are going to use up the 700b doing anything other than buying up toxic crap, then that is, if not ideal, at least an improvement.
"You should be more sensitive to showing your own ignorance."
I thought showing one's own ignorance was what the internet was for.
At least I feel smarter when fools post.
so are they bankrupt?
All of this intervention in markets is absurd. When assets are cheap enough risk vs reward money will step in. It happened yesterday.
All we need is transparency not artificial asset price support.
Do you look to Mr. Krugman for all of your life decisions? I was unaware that he had begun assembling Disciples? Have you ever looked to differing opinions that are published as well that may not agree with those of yours and your new leader?
Again, I respect your difference of opinion. You only amplify your ignorance with the tone of your defense.
Very old news.
Somehow I took the orig post to be a commentary on the recent G7 joint statement. My error obviously.
more coffeeeeee, pleeeeese.
If they are going to use up the 700b doing anything other than buying up toxic crap, then that is, if not ideal, at least an improvement.
Buying up stock in companies that own a ton of that toxic crap may be an improvement, but it's a marginal one.
"And central banks have only stopped gold sales as they are waiting to dump another load into the market if it hits $1000/oz - which is what they did when it hit that level last time."
Really? Is that how it went down? You must be quite dialed in to have such inside info with the the mysterious "Central Bankers". If indeed they've "dumped a load", as you say, I'm a bit puzzled as to why I can't seem to find any of it lying around. Rob Kirby has quite a different take, one I'm more inclined to agree with-
Gold Price Manipulation- Bear Stearns Murdered at the Golden Gates :: The Market Oracle :: Financial Markets Analysis & Forecasting Free Website
JP: It was a statement that just came out on the wire again.
Fox showed it as Breaking News. I imagine that they are reinforcing their position from a week ago.
My understanding is that they reaffirmed it again this morning to the G-20.
The private equity should come from converting the corporate long-term debt to common shares and from mutualizing a portion of customer deposits in banks and insurance companies in to equity.
We're all in this together now.
MW - fascinating scenario, and though recent events have shown that even the most absurd or unexpected events can occur, the idea of multiple currencies overlaid on multiple currencies is just a bit too imaginative for my taste.
Not to mention my experience living in Germany for more than 15 years. However, the point about Merkel is at least valid to the extent that she is East German, and East Germans almost all universally regard the EU the same way they viewed Comecon - a plot to strip hard working Germans of all the fruits of their labor.
However, the ca. 17 million East Germans are outweighed by the ca. 62 million West Germans, who will pretty much follow the lead of Bundesbank and ex-Bundesbank and former Bundesbank and current ECB leaders. Merkel doesn't really count more than any other modern German chancellor in terms of financial system decisions. That power, since the start of the D mark, has rested in the hands of the Bundesbank - a group noted for forcing the political establishment to back down and follow what the Bundesbank feels is the correct course of action.
In other words, if you want to speculate about the future, follow what somone like Weber or Issing write or say, not what a fairly disposable German politician states for public consumption.
Bond Guy,
Gold has been caught up in hedge fund liquidations. The story is that two multi-billion dollar hedge funds had margin calls yesterday and their portfolios were unceremoniously liquidated.
There is no mystery about gold. The more supply of currency, the more something in fixed supply rises in price in that currency, all else equal.
All else is not equal for oil or copper as demand for those commodities is falling. All is not equal for real estate. All is not equal for art. You get the picture.
There will be supply of gold from margined sellers. There will be supply from guileless Central Banks. It will be dwarfed by the rising tide of dollar creation. Why? Because the value of gold relative to financial assets is now about 4% and used to be 30%. Let's say a fourth of that gold is sold by margined accounts and CB's. That's about 1% of financial asset value. Now assume the global CB's will print enough money to rescue 20% of financial assets. That demand would equal five times the value of the gold stock. Five times demand vs. one fourth supply.
Of course there's also money printing from rescuing or paying for: state budgets; unemployment insurance; the auto makers; social security; the FDIC; socialized medicine, etc.
"For market discipline to effectively constrain risk, financial institutions must be allowed to fail," --Henry Paulson, July 10, 2008, in Congressional testimony.
I'm starting to think Fox wants a war to start somewhere (else).
Granting the government voting rights in exchange for injecting capital is a two-edged sword. It implictly dilutes the value of other stock by impiaring the other stockholders' control. It further socializes the management of the company. And, it directly inserts Congressional politics into the company's decision-making. Maybe we are so far down the slippery slope of socialism it hardly matters, but there is a balancing of concerns that must be considered when dealing with the voting rights issue. And, as usual, it seems impossible to predict which choice makes the most sense since we've never really been down this road before. On balance, I vote for no voting rights and place my bet on market forces, for better or worse.
El Cliffo writes:
"For market discipline to effectively constrain risk, financial institutions must be allowed to fail," --Henry Paulson, July 10, 2008, in Congressional testimony.
El Cliffo | Homepage | 10.11.08 - 10:44 am | #
Wow!
Following on my prior private equity capitalization notion, why not settle all CDS as newly issued equity in the counterparty. I can see it now - "Congratulations, you hedged correctly and now are our majority shareholder."
MW writes:
"Bond Guy: I don't agree that they are stamping coins as fast as they can make them. That makes for a tidy PR release but it is not what is occurring. I don't know if you have ever invested in physical bullion but don't be persuaded by fluctuations in paper market prices."
I thought about buying physical coins (gold, silver) a couple years ago, but I stupidly went to a cafe or movie instead. Otherwise, I have only traded commodity equities in my personal account. (In my day jobs, investing in commodities has never been an option.)
Anyway, I understand that the retail gold market is much tighter than wholesale. But face it, central banks have to sell into the wholesale market - the Swiss National Bank can't set up a stall and hawk their inventory $300 at a time.
I understand the impulse that people have about wanting to buy gold or silver coins. But the monetary pretensions of the gold believers makes no real sense to me.
I'm involved in markets where entities routinely raise from $1bn -$40bn in auctions; I will assert that there's no way the physical gold market can support transaction levels of that magnitude. Gold was insuffiecient to support global transactions in the 19th century; there's no hope for it doing so now.
bond guy - Why do you always say exactly what Goldman Sachs would say?
As recently as Yesterday, Merkel suggested that she wants out of the Euro. She is not going to tow the line any longer and Germany will be the first to abandon the Euro for a newer-D Mark or North EU Type "Gold-backed " Euro.
Breaking up the Euro would be a disaster. Currency exchanges are expensive - fees, hedging, uncertainty; it's a mess. It would be like a Smoot-Hawley within Europe; losses are smaller than those tariffs were; but they're lost; they don't go to the government. Similar level of bad.
As long as the individual governments can't issue Euros, there is actually no need to coordinate policy. Banks can fail in Ireland while the Euro and German banks continue on. Again, that's how it worked in the pre-Civil War US.
Is there a link for Merkel actually wanting out of the Euro? I thought she was smarter than that.
Rent-To -own: Thanks for your input. It may be that the very concept I am proposing is absolutely consistent with the wishes of the Bundesbank.
I spent 18 years building manufacturing infrastructure and factories in Europe primarily in the UK and Norther italy.
I know first hand how unsuccessful the Euro has been given the huge disparity between the "latin based" countries Spain, Portugal, et al. and the northern participating EU counterparts.
I think there is no question in my mind that a break is imminent.
I was in Barcelona and Madrid in July 2007 and again 5 months ago consulting for a US based private equity group and I can tell you that all is not well in the EU.
soxx writes:
"Following on my prior private equity capitalization notion, why not settle all CDS as newly issued equity in the counterparty. I can see it now - "Congratulations, you hedged correctly and now are our majority shareholder.""
How would you value the equity of a pension fund?
BTW,
Tin foil hat-wearing gold bugs who insist that the government wants to drive down the gold price should reconsider.
The Fed now has an interest in getting gold to rise.
Public Enemy #1 is now deflation; a drop in velocity caused by flight to T-bills, mattresses and Fed reserve deposits.
So what can Bernanke do about velocity? He has to reverse expectations from deflationary to inflationary. He has to PENALIZE people for hoarding currency. There's only one way to do that. Print enough money to change expectations. How much money will that take? Its irrelevant. However much it takes, that's how much he will print.
I'm not saying Bernanke will target the gold price instead of Fed Funds. I'm saying he may as well...
Your taxpayer money at work
Golden Gate Bridge to get net to catch suicides
Golden Gate Bridge to get net to catch suicides
| Reuters
Wow. The tension this morning on CR is quite palpable.
There is such a vehicle - index-linked bonds (U.S. version are TIPS).
That market has been annhilated over the past few weeks. Nobody is very worried about inflation protection right now; they want deflation protection.
bond guy | 10.11.08 - 9:59 am | #
For those thinking 1-2 years out, you are correct, but anyone preparing for coming dollar destruction is especially worried about inflation protection and is buying TIPS on sale.
Granting the government voting rights in exchange for injecting capital is a two-edged sword. It implictly dilutes the value of other stock by impiaring the other stockholders' control. It further socializes the management of the company. And, it directly inserts Congressional politics into the company's decision-making. Maybe we are so far down the slippery slope of socialism it hardly matters, but there is a balancing of concerns that must be considered when dealing with the voting rights issue.
He who pays must also have control - basic economics. Socialization of losses must be accompanied by socialization of control or it will degenerate into companies looting the Treasury. Losses are so enormous some degree of socialization is inevitable. So, basically, our choice to avoid walking the road of socialism (at least for a while; we can sell stuff off later) was taken away by Wall Street's staggering waste and fraud. We are already committed to at least a temporary socialization of the finance system.
Can I summarize Mr Paulson's plans in this way: he has been handed $ 700 billion on the unerstanding that he spends it in buying useless rubbish, and at first he thought that subprime mortgages were the most rubbishy stuff he could buy in great quantities, but now he has found something that is even more worthless, namely equity in US banks? I'm not trying to sound cynical, it't just that I'm trying to find out how his mind works.
solohedger writes:
"bond guy - Why do you always say exactly what Goldman Sachs would say?"
Cause maybe I'm their head of fixed income?
More seriously, I have an understanding of the plumbing of the fixed income markets. And banks are the center of the fixed income markets - they are the market makers.
What happens when a pension fund sells a bond? They sell to a bank. The bank then has to warehouse the bond until they can find a buyer. In the current environment, banks are unwilling to take on inventory. This has meant that all the fixed income markets are essentially broken.
A lot of money is raised in the fixed income markets. If they are non-functional, I would guess that there's going to be a lot of collateral damage in the real economy.
As someone involved in the government bond markets, not credit, this has been a great money-making opportunity. But face it, I'd rather avoid a depression, even though one would be great for the Assets Under Management.
@MW
Thank you for the link.
Although I am generally positive toward the PMs, I can imagine a situation where compulsory paper settlement in Gold is "papered over" somehow without the physical market price dominating, at least for a while. The position limits for silver are so small, that this is essentially the situation there, which has persisted for some time.
Admit it bond guy, you have an axe to grind with anything involving geologists. Did you get dumped by one at university?
Basel Too writes:
Wow. The tension this morning on CR is quite palpable.
Basel Too | 10.11.08 - 10:59 am | #
Yeah, it was bad enough having that EESA rescue thing passed, now imagine the US trying to rescue the world.
David Pearson:
Interesting approach:
I think differently:
The guise was a few weeks ago by the Fed that we must raise rates while gold was pushed down in preparation for exactly the opposite. It was clear to me that rates would be lowered not raised and I fully expect us to go to a ZIRP before yearend.
The argument, at least for public consumption is that inflation expectations are now negative and the inflationary threat has been reduced. All clear to print.
Bernanke has told us that DEFLATION must be avoided at all costs otherwise we will have GDII.
Take a look at the Fed-Faltion handbook:
"Monetary Policy in a Zero-Interest-Rate Economy" Published by the Dallas Fed in May 2003. and availalble on their website.
They haven't veered from their strategy once.
What is interesting is although our analysis is different the outcome is identical.
Thanks for your input.
@ Fair Economist: the Dutch govt announced that they will inject EUR 20 billion in the banking system, but made clear that it comes at a price: seats on the board, and probably large cuts in bonuses. (Over here, we use the PM's salary as a yardstick, I think somewhere around EUR 200.000 all told, perhaps less than that.) Van Lanschot, a bank for the sort of people who don't bother to scrutinize their pay slips, has already said they applaud they idea but they don't think they will need to participate. I think that this is he correct way. You made such a mess that you nedd outside help, OK, you can get it, but you lose (a part of) your independence.
Fair Economist writes:
"He who pays must also have control - basic economics. Socialization of losses must be accompanied by socialization of control or it will degenerate into companies looting the Treasury. Losses are so enormous some degree of socialization is inevitable."
How much control would you want to give the government? Would you want Congress acting as the loan officers?
Most of the things the government should want to control (risk management, incentive structures, capital adequacy) is largely under their control already (other than compensation). It's just that the regulators rolled over and played dead for last decade, and thus did not use the controls they had.
Going forward, I have have no complaints against banking being a boring, strictly regulated industry with fairly modest return on capital. However, the issue of getting to that world from here is currently the problem.
Bond Guy:
"I'm involved in markets where entities routinely raise from $1bn -$40bn in auctions; I will assert that there's no way the physical gold market can support transaction levels of that magnitude. Gold was insuffiecient to support global transactions in the 19th century; there's no hope for it doing so now."
Is that because of current valuations of Gold?
Would this be true if Gold was at $5000 per oz, $10,000 per oz?
Is it a supply issue or a valuation issue? I can have a lot of one thing which is cheap, or just a few of another that are worth a lot.
I'm not trying to sound cynical, it't just that I'm trying to find out how his mind works.
Comrade Martin | 10.11.08 - 11:00 am | #
Too bad we have to put up with him for three more months!
Once again folks, the moment of alarm has passed.
The Hanky Panky hedge fund is going to rip the shorts a new one along with all the new banks liquidity.
This panic will be contained before the people sell out of their stocks to the bottom and hold endless treasury bonds paying nothing. Then what would they buy with their money?
No, now we enter into a new kind of stock market, one that is regulated to stop panics.
As for the dollar- not now. We still are too powerful, and the rest of the world is too uncertain to begin to forge a new way. As for anybody listening to Bertie the Italian- that fossil from a fossilized country can't leave the EU- that would cause an economic collapse.
He will do whatever the Bundesbank and the French decide is best. The comments on Merkel are spot on. She is making noises for domestic consumption.
Reality dictates that long term solutions to this crisis rest in the hands of the next administration, and that the HP Hedge Fund will provide the full faith and credit of the US government to the markets.
I don't care what anybody says, I am not trading against unlimited dollars that can roll right over me.
You want to get in the way of the steamroller, ask the folks who were margin called out of their gold on Friday. I refuse.
Once again, everybody thinks the government can't keep a lid on this problem until well after the elections. Looking at what the Treasury can now do, combined with all the remaining big banks, I would go with the waterfall of money.
After the panic, they will decide who the winners and losers are on Wall Street, but for right now, there will be no more large failures. Period.
Someday this war's gonna end...
MLM writes:
"Admit it bond guy, you have an axe to grind with anything involving geologists. Did you get dumped by one at university?"
The only geologists I knew has moustaches, and facial hair was always a turn off for me.
Thanks for your concern about my social life.
"Fannie, Freddie to Buy $40 Billion a Month of Troubled Assets"
Nice catch MOT. This is monetization, occuring at this very moment. Fannie/Freddie turn around and sell obligations to the Fed for printed money.
Federal Reserve Bank of New York - Permanent Open Market Operations
I believe you will see direct injections of capital through the issuance of convertible preferred/straight preferred, no voting rights, you could also see a like amount committed to purchases in the secondary market to shore up confidence and encourage private investment, bringing in spreads, this in turn, lowering borrowing costs over time.
The smart and important people on TV who are against Mark to Market confuse me.
Doesn't MTM take into account the probable future value of an item. It just discounts it for risk and time.
If I have a fixed item that is safely worth $100k in 10 years when it is redeemable then it has an intrinsic value of $100k discounted for 10 years. Its MTM would be that discounted value further adjusted down by a small percentage to encourage someone to buy it.
If the MTM value is close to zero then it is unlikely to ever increase in value. But the smart guys pretend that if it is close to zero now, it most likely will be worth a lot in the future. I don't understand the logic.
I've been using Al foil. Is tin foil better?
"Would this be true if Gold was at $5000 per oz, $10,000 per oz?"
When the SHTF and the printing presses are in full swing, a loaf of bread might cost the same (Zimbabwe).
Also, how will anyone be able to make change on a $5000-$10,000 coin the size of a quarter?
bond guy - Everybody here is talking their book, except for AllenM, who is talking his epiphany. Just looking for a little full disclosure, that's all. Facial hair? Eww.
I for one am looking forward to my stimulus checks since without them we will not have inflation. Anyone looked at salaries and employment lately?
Make $10/hr and bread is $50 a loaf. Come on people, think about this. If the Fed injects capital into the markets it is going to be destroyed faster than it can be printed.
What happens when a pension fund sells a bond? They sell to a bank. The bank then has to warehouse the bond until they can find a buyer. In the current environment, banks are unwilling to take on inventory. This has meant that all the fixed income markets are essentially broken.
Alternatively, you could say that they are finding their new equilibrium, one that pays a sufficient interest rate for the risk incurred.
And the low transaction count is due to the sellers not willing to come down to the price (or up to the yields) that the buyers are offering. This will get resolved; it will get resolved faster if Paulson and crew would get the hell out of the market. Painful, but faster.
Brian in New Orleans writes:
"Would this be true if Gold was at $5000 per oz, $10,000 per oz?"
Also, how will anyone be able to make change on a $5000-$10,000 coin the size of a quarter?
Brain:
Look to your example of Zimbabwe, its the translation of Gold into currency: Gold has it all time highs in the Pound, Ero, Austrailian dollar etc. I can go into any dealer in the worl dand exchange my 1oz coin for local currecy and buy a loaf of bread, or the bakery for that matter.
The dollar won't cease to exist, we will just be using it for bedding and something to burn in the winter.
jim, re: Krugman Slate article. How do you receoncile his statement
"The current world monetary system assigns no special role to gold"
With this
Gold reserve - Wikipedia, the free encyclopedia
MW writes:
"Is that because of current valuations of Gold?
Would this be true if Gold was at $5000 per oz, $10,000 per oz?
Is it a supply issue or a valuation issue? I can have a lot of one thing which is cheap, or just a few of another that are worth a lot."
The physical supply is fairly limited, and only grows at a small pace. Thus the valuation would have to go through the roof to support transaction volumes. Maybe $50,000/oz would do it (wild guesstimate).
But, you have to ask yourself - do you think that people would be willing to trade a house for a few ounces of metal that someone dug out of the ground for a cost of $1000? Would people want to wear wedding rings that would be worth more than most people's retirement savings?
Plus, the transfer of wealth to existing gold holders would be so astronomical that I owuld guess that there'd not be a huge popular base for such a move.
Bond Guy, be the first to suggest staring to sell your entire inventory of Treasuries. The constrained supply problem is about to break.
Once again on in this discussion people start to think this is the equivalent of the 1930s, you only get that with a hard money system.
You can't do a gold standard when you would have $1 million per ounce to make it work. That would seriously crimp a lot of Wall Street's style.
Of course, the Government could set a nice high price and get all the gold again, just like last time. Roosevelt made one critical error. When he devalued the dollar, he should have paid the new price for all the gold in private hands- instantly providing mucho liquidity.
Someday this war's gonna end...
Jas:
There are huge differences...
I still believe that if all this government intervention fails, we'll get deflation but the odds of inflation in a year or two are overwhelming. Here are the reasons:
The list goes on.
MLM/MW/Bond Guy
Between the snarky comments I'm actually finding your debate enlightening - it's starting to catalyze thoughts that had been stuck sideways for a while behind my sloping forehead. Just keep it civil and adult, please. The personal stuff is just high school posturing, and the situation is a bit more important than that. Even my book is less important than sussing this out.
How would you value the equity of a pension fund?
bond guy | 10.11.08 - 10:52 am | #
Great question. I suppose in that case the CDS holder would have to become a "participant" in the pension plan and receive their equity over time or accept a discounted settlement from the plan now. I understand this happened, but isn't even holding a potentially liability-laden transaction like CDS a disqualifying event under IRS rules? It would be for an IRA. I'm not an attorney, but I would question whether a CDS liability for a pension plan is even enforcable; does a pension plan have the legal capacity to even enter into this type of contract?
Bondguy:
People today trade paper for a house for pulp made form a tree.
Look to your example, since the housing bubble peak in August 2006, there has been a whole lot less "paper" required to purchase a house and a lot less Gold required to do the same
I can guarantee you that I could go out and buy a house today with gold coins or a few kilo bars.
Look at a chart of housing values vs. gold for the past 5 years.
Citizen AllenM
Isn't about time Wall Street's style got crimped? If the products they have designed and sold are dangerous and defective, shouldn't we be discussing alternatives that are safer? Are we all just waiting for a new product from the people that just about destroyed us with the last brilliant idea? When do we say "thanks, no thanks?"
Why do gold reserves have to be an either - or proposition?
Does it not make an excellent hedge against wild currency appreciation/depreciation? Would it not be in following with portfolio theory?
1-5% of global central bank reserves would still make a large impact.
Gold ETFs, easy to make sharia compliant, are very popular throughout the Arab world right now.
As for COMEX/LME, it is only logical that holders might choose to exercise delivery in order to take advantage of the spot & physical spread that occurred because the market is moving so fast. If a group are forced to deliver gold, then that will increase the physical price due to overwhelming short term supply and create a self-fulfilling prophecy.
I feel like I am on Mish's blog this morning with all this talk of gold.
Lyndon LaRouche today mocked Treasury Secretary Hank Paulson's bailout scheme, warning that Paulson and all the other central bankers have been lying through their teeth about their ever-changing so-called bailout swindles. The real problem, that none of them wish to talk about, is the mass of derivatives obligations, that are in the quadrillions of dollars.
LaRouche called the derivatives bubble the hyperinflationary bomb, crushing the international financial system, warning, Until you just shut down the whole derivatives trade--wipe these gambling obligations off the books of the financial system--you are just kidding yourself. LaRouche declared, It is time to break the silence on derivatives. The true, hyperinflationary factor in the situation is the unregulated, insanely leveraged derivatives trade. This is what is killing us. This is the great crime of Alan Greenspan.
LaRouche concluded: Unless and until you deal with this derivatives bubble, which cannot and should not be bailed out, you are just kidding yourself. It is time for Hank Paulson to swallow the only real medicine: bankruptcy reorganization of the entire, dollar-based financial system. And the first step in any such bankruptcy reorganization would be the cancellation of these quadrillions of dollars in pure gambling obligations. Without such action, this planet is doomed to a horrible dark age, just like the dark age of the 14th century, that followed the collapse of the Lombard banking system.
JP writes:
"Alternatively, you could say that they [bond prices] are finding their new equilibrium, one that pays a sufficient interest rate for the risk incurred."
Certainly true.
But, the price discovery mechanism appears broken. If the bank has no inventory, you can't buy from them either. Thus the buyer and seller cannot meet to set a clearing price.
What you see is that Treasury bills are now extremely close to 0%. However, you can now buy federal government-guaranteed paper and swap it into a synthetic floating rate note that pays LIBOR+50 basis points. This makes very little sense from a valuation standpoint. However, it is a sign that the mechanisms that flow money through the financial system aren't working.
The people in charge just can't admit their entire world philosophy has been wrong for 20 years now. Watching the financial world crumble is almost worth the tens of thousands of dollars I've "lost" this week.
Welcome to the reality lots of Americans have lived with for many long years now, guys. You thought you were safe from what you've created. Hah.
Dr Manhattan, I think Paulson had a tiny bit to do with derivatives and it could be a small reason why he is the Treasury Secretary.
Bernanke = Depression
Paulson = Derivatives
Let the unwinding continue
The real problem, that none of them wish to talk about, is the mass of derivatives obligations, that are in the quadrillions of dollars.
1 quadrillion = 1000 trillion
just tear up the obligations!
Sorry for that poor spelling, I can't stand that tiny text box for submitting a post:
Bondguy:
People today trade paper for a house "made from the pulp of a tree." What's wrong with shiny rocks instead?
Look to your example, since the housing bubble peak in August 2006, there has been a whole lot less "paper" required to purchase a house and a lot less Gold required to do the same.
I can guarantee you that I could go out and buy a house today with gold coins or a few kilo bars.
Look at a chart of housing values vs. gold for the past 5 years.
rent_to_own - I think that's got it about right. The treasury may be able to inject enough capital into major institutions here to keep them technically solvent, but the beat is going to continue worldwide. I'll believe a real coordinated global response led by the U.S. when I see it. The cynics have been right about government responses so far, and I'll be amazed to see that change.
As far as how the overall equity market is going to trade on that? I think AllenM is wildly optimistic. My conclusion is that it's a great time to get out of the way. Nobody says you have to have money in the equity market.
And as far as safe havens go, all kinds of unusual places are going to blow up. Spread it out and hope you lose less than the next guy. And yes, I've got a prudent amount spread out into the barbarous relic.
rent_to_own,
Not bold at all, take them at their word. Lehman was the "Lesson" about risk, now everybody will play along or else. Look at the results, not the endless spin cycle of the deflationists.
My epiphany. Lol! Yeah, sort of, but not really. After I work in government. Look at how the FDIC is operating, we had a couple of big failures, and then when that was considered too destabilizing, forced mergers that provide safe havens for the public. The damage is hidden for a while, and the public is not allowed to totally panic.
Someday this war's gonna end...
bankruptcy reorganization of the entire, dollar-based financial system.
I'm not a Larouche fan, but this is common sense. Can't let a corrupt system fix itself.
No one has mentioned the bubble in the treasury market. As the treasury market reaches its limit, money will flow to other options of which that avoids withdrawing the money from the US is to buy gold.
As for inflation/deflation, the treasury bubble will pop and we can all follow the pressures in real-time.
If the treasury bubble does pop, there will be even less demand for the debt market, and I see no signs that the equity markets will stabilize enough to attract and absorb the money leaving treasuries.
If that money goes anywhere but the American equity or debt markets, there will be inflation (Forex outflows, investment in commodities) or a step-shift in the standard of living if you consider increasing wages necessary to the definition of inflatio
MW writes:
"People today trade paper for a house for pulp made form a tree."
I think there's some cotton in there as well. But in most cases, the kind of people I tend to associate with don't plop down a load of fed reserve notes to buy a house, they actually move some electrons in accounts to do the deal.
But keep in mind that despite the apparent worthlessness of paper/electronic balances, there is a large body of people who apparently are willing to work in exchange for that paper. That ability to "command labor" (I think is the correct economist-speak) is the true fundamental value of a fiat currency.
Evil Henry:
"As for COMEX/LME, it is only logical that holders might choose to exercise delivery in order to take advantage of the spot & physical spread that occurred because the market is moving so fast. If a group are forced to deliver gold, then that will increase the physical price due to overwhelming short term supply and create a self-fulfilling prophecy."
You are correct, the problem has been the "excess" of contracts that don't begin to mirror the actual supply that have been used solely to push and pull the market.
Large players have entered the scene demanding delivery.
Here was an interesting story out of Dubai this week. They are fast pushing for a new default exchange for precious metals:
DGCX Concludes Largest Ever Physical Settlement Worth US$25.20 Million
Thursday October 9, 5:00 am ET
- Transaction Involves Physical Delivery of Gold and Steel Rebar Futures
Contracts
- Participants Included Leading Banks and Players From the Physical
Market
DUBAI, United Arab Emirates, October 9 /PRNewswire/ -- Dubai Gold and Commodities Exchange (DGCX) today announced the successful completion of its largest-ever physical settlement of gold and steel rebar futures contracts, valued at US$25.20 million, by the Dubai Commodities Clearing Corporation (DCCC).
But, the price discovery mechanism appears broken.
Not really, this is a common situation when markets turn. Perhaps you have been paying attention to the housing transactions? It is exactly analogous:
1. Large volumes of transactions went down to small volumes of transactions while the median prices stayed nearly flat.
2. Prices fell precipitously as forced selling occured.
3. Next phase: Higher volumes of transactions at low prices.
Price discovery occurs, just not at the speed that folks are used to in large-volume markets. It will correct, but it won't be pretty.
Bailout Nation, that process is here. We are from the government and are here to help. What do you think that means?
More rampant fake insurance? I don't think so. That is why I am arguing the fundamental landscape has changed.
The price of salvation is capitulation to the state. Gee, talk about Faustian bargains. But they want it, so they get it. I am saying too much, I had better shut up before the phone call.
Someday this war's gonna end..
I don't now about coins or rings, but I'd surely trade my house for a lifesized gold statue of supermodel Kate Moss.
Kate Moss gold statue unveiled at British Museum - Telegraph
I don't know who really hates our freedom, but this probably won't help.
US Constitution, Article I, Section 10:
"No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money;
emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts. . ."
When did the Supreme Court invalidate this part?
When did the Supreme Court invalidate this part?
You lost me. No state is issuing currency.
MLM:
"And as far as safe havens go, all kinds of unusual places are going to blow up. Spread it out and hope you lose less than the next guy. And yes, I've got a prudent amount spread out into the barbarous relic."
What are some of the others you are moving into?
I liked a quote I heard the other day:
The 4 G's
Gold
Guns
Grub
Ground (real estate, rural most likely)
I don't now about coins or rings, but I'd surely trade my house for a lifesized gold statue of supermodel Kate Moss.
The pic didn't look like she was inflatable tho.
Gosh Bond Guy,
Why did the idots in 1920 sell houses for $5000?
If there was only $1, then people would make a billionth of a cent per hour. So what?
Would people be willing to trade a house for an ounce of gold? Why not? They trade them for 100,000's of pieces of paper now. What difference does it make?
At least the metal, who no one can create at the push of a button, would ALSO be a store of value.
Looking at quantity means nothing.
Nostrovia,
I've been using Al foil. Is tin foil better?
Depends on which currency zone you are in. Al foil is better with sterling, as one might expect.
If LaRouche is deriding the "bailout" then that must mean it has a good chance of success.
Very interesting reflections from Bond Guy, Nemo, and several more comrades on different ways of taking equity stakes - preferred, common, warrants, voting/non-voting . . . out to nationalization.
What I find at the core of all this, however, is the still startling fact that many on this blog were onto 3 weeks ago when Paulson first delivered his 3 page plan:
Paulson still has no plan! He is saying that not only is implementatin still several weeks away, so, too, are details of a plan.
Now this is remarkable not only because Treasury lied about working on the original Paulson plan for months as an emergency contingency plan, but it is more remarkable because all of the measures being discussed are actions that have been used before and have been studied - in many instances in the US, itself, but also in European countries and around the world. It is just a little bit of an exaggeration to say that there are off the shelf recipe books on how to do this stuff. The delay of weeks before announcing the order of a plan, let alone implementing it, is mind boggling.
One part of this failure must be ideological. The players in the Bush cabinet, led by Paulson, have just refused to consider many options and refused out of hand on nothing else but ideological grounds (Paulson originally fought against equity stakes, against limits on executive pay, etc).
But another part, and perhaps the greater part, is pure, simple, staggering incompetence.
Bond Guy said it best:
"Going forward, I have have no complaints against banking being a boring, strictly regulated industry with fairly modest return on capital. However, the issue of getting to that world from here is currently the problem."
Going forward through then next couple of years, the US will need to learn to look critically and pragmatically into its self-righteous ideological soul.
But it is not just a question of ideology and flexibility. It is also a question of basic competence and leadership. The failure of the Bush Administration continues to amaze me, and I have been appaled by Bush & Co from the beginning.
As Bond Guy said, "the issue of getting to that world from here is currently the problem."
We ain't going nowhere until January 2009. Bush/Paulson don't have the political capital, they don't have the skills, they don't have the pragmatic flexibility, they don't have the competence, and they have neglected preparation for this moment in way that makes Bush's response to Katrina and the insurgency in Iraq look good by comparison.
The only hope I see is that people might start to look forward to January 2009, and to look forward to the long, hard climb that might begin then that attention to that horizon pulls us though the next two and a half months of confusion, panic, and crisis.
It looks like the actual purchase won't be made until the elections are over.
CSC,
I'll just take Kate Moss. But I'd rather have Jessica Biel.
http://flyboyz.files.wordpress.com/2008/05/jessica_biel_02.jpg
Nostrovia,
MW -
I'm doing my best to avoid becoming a tin-foil hat wearing survivalist (with some success so far). If things go so far south that the U.S. middle class is marching on the White House banging pots and pans, I plan to take the advice of Surviving in Argentina (Blogger: Page not found and move.
So to your list I'd add cash and passports.
As far as financial assets go, I'd add long foreign sovereign bonds in places that look like they might hold up.
I have some chocolate filled gold coins, does that count?
If LaRouche is deriding the "bailout" then that must mean it has a good chance of success.
number2son | 10.11.08 - 11:47 am | #
Got 401k?
We ain't going nowhere until January 2009. Bush/Paulson don't have the political capital, they don't have the skills, they don't have the pragmatic flexibility, they don't have the competence, and they have neglected preparation for this moment in way that makes Bush's response to Katrina and the insurgency in Iraq look good by comparison.
Zing! Good stuff, Shmoe.
"I think the The Gulf States will unite under a single form of currency that will not be pegged to the Dollar."
No way, nev-ah. Way too much ancient, tribal discord among them. And the West (and Russia) will stir the pot furiously at the first sign that they are getting too chummy with each other.
Regarding GM (and the US auto industry overall): the political will to keep them alive is gone. As recently as 25 years ago, the Detroit 3 had enough tentacles spread out across the country that everyone had a vested interest. They built tanks, missiles and locomotives and they owned banks. They employed a vast swath of the population, not just in the Midwest. The very offshoring and divestiture that has augmented their profits in the last 10 years has also lost them a lot of friends. Very few people I know really care if most of the cars on the road in this country are Chevys or Fords anymore, and thats the only business they are in.
If you're in the US auto industry or dependent upon it, I strongly suggest you begin diversifying your livelihood. Yesteday.
You lost me. No state is issuing currency.
Yes, of course. That clause prohibits that. But what do you think that phrase about gold and silver is about, then?
"I've been using Al foil. Is tin foil better?"
Well as a connoisseur, I start the first layer with lead foil. Now, you need to wear gloves at this stage, because it is a bit toxic. Al foil is my preferred next several layers. (I find 10 to be sufficient, but due to paranoia, I use 15). Also, remeber to keep the shinny side of the foil outward. It's arguable if this impacts efficacy by more than a few %, but why take a chance.
Nostrovia,
How much control would you want to give the government? Would you want Congress acting as the loan officers?
That's a strawman. Congress can, and almost always does, delegate.
They have to have overall control of the company. Managers work for their own benefit. They only work for the owners if forced by the threat of firing. If the non-governmental shareholders have fire authority but the preferred government shareholders don't, then the management will respond by betting the company on wild deals that will either make a lot of money (for the common) or lose a lot (mostly for the government).
If the government has money in the companies but not the ability to police its use, the management will find a way to divert much of that money to other people. The only way to avoid this is to be so deep into seniority that no reasonable manipulation will hit you; that's not possible now even with senior notes because most banks are so shaky. Certainly not possible with preferred shares.
Ministry of Truth writes:
I have some chocolate filled gold coins, does that count?
If approached at the right moment, I might trade these for my house as well.
Here is some interesting perspective regarding inflation and the quantity argument.
In the 1970s, you could buy a home for $26k. You probably earned about $9k per year. A gallon of gas might run you $0.36. And a letter to Mom would set you back 6 cents.
I'm sure $700,000 for a $26k house would have seemed laughable. Who'd ever pay that? And $5 for gas? No way.
So when I see the inflation-adjusted price of gold, a huge rise doesn't look all that outrageous to me. At least no more outrageous than 36 cent gas appears looking backwards.
OK, Discobobby, I'm trying to live up to your request. But snark is a lot more fun.
I think this discussion should be less to do with physical assets, and more to do with the Treasury bubble.
We have never seen ~0% interest, or a yield curve so low and so flat. Now, there is also a record issuance of Treasuries.
Once we see the short term yield-rise/price-fall the Treasury market will just rip. There should be no expectation of people willing to hold Treasuries for a nominal loss, even cash is better than that. So once they go into cash, the re-inflation of the Treasury yield curve will be a positive feedback loop. Next question is what will that cash be used for, the increase in Treasuries rapid and violent due to its low margins and high volume will make existing debt even less attractive, and equities all but untouchable.
Commodities and capital outflows will then become the off-setting bubble because the more money that is spent on them, the more likely the short-term supply is binding. Once the supply is the binding constraint, they become a positive feedback loop as we saw recently before the present unwinding of positions.
What we did not see before was a large capital outflow from the US as would be expected in order to auto-regulate Forex prices. The argument can no longer, or rather will no longer, be able to be made that its risk level is of relative value, or that lower transaction costs are worth the price.
So I presented 2 cases for why commodities will rise, but by 2 different mechanisms with the difference essentially being the expectation that the US Dollar will or will not be a safe currency to hold value and process transactions for the duration of investing
Joe Schmoe:
No one really knows what will or will not work or what the consequences of any particular course of action will be because we haven't been down this road before -- hell we never saw the exit sign and this place isn't on any map. So, in a time of uncertainty we lurch about, convinced only that some action is better than no action.
Very few people I know really care if most of the cars on the road in this country are Chevys or Fords anymore, and thats the only business they are in.
If you're in the US auto industry or dependent upon it, I strongly suggest you begin diversifying your livelihood. Yesteday.
Scooby | 10.11.08 - 11:52 am
Scooby, I believe they are in finance too. Any future in that?
Gee, talk about Faustian bargains.
Funny you should mention Faustus. Last summer we saw the tower in Maulbronn Cloister where he worked in the early 1500s. He convinced the abbot there, Johann Entenfuss, that he could transmute lead into gold. The Abbot is keen on this idea because he has driven the Abbey into debt by constructing up lots of pretty buildings. Faust says he can do this, he just needed significant infusions of money and lots of time. And some nice digs to work in.
There is a parable in there somewhere, I just know it.
re: ownership/voting rights
I see no reason why to not accept at least the regular voting rights of a share. It is possible, as has been the case both in America and abroad, to simply not exercise those voting rights.
If you want someone competent to oversee taxpayer's interests, there is no better institution than the Government Accountability Office. They deliver excellent reports and recommendations, even if they are too often ignored.
I vote for no voting rights and place my bet on market forces, for better or worse.
Concerned Observer | 10.11.08 - 10:48 am | #
That's my money they're playing with--and i don't give up my voting rights without a fight. We're not investing in banks, we're trying to save the banking industry--we need the bankers to lend out their liquidity. As the investor, my aim is Board action, that is not facilitated by weakness and silence.
Citizen AllenM
Government workers are people, too. I know a few. They do not like to work weekends and nights for months on end. They will not enjoy running the whole system on a continuing basis. Private sector folks work much longer hours. And the folks you think are watching are probably glued to CNBC.
What I'm saying is that people are motivated by different things, but nearly all of us like rules. And there is a big difference between having mutually agreed rules and being ruled.
Americans, dopes that we are, generally know the difference. We just want well thought out rules that work so that we can play our free enterprise games. Right now, I have no idea what the rules are or what they will be next week. Do people on this site really believe that they know the rules right now? Is anyone besides me troubled by this?
So much of what I read here seems to revolve around:
1) I didn't know they could do that?
2) Isn't that illegal?
3) What will the laws be next week?
4) Is that Constitutional?
5) Can one man (group) write good rules on the fly?
How do we have a nation of laws in this environment?
Fair Economist,
"If the government has money in the companies but not the ability to police its use, the management will find a way to divert much of that money to other people. The only way to avoid this is to be so deep into seniority that no reasonable manipulation will hit you; that's not possible now even with senior notes because most banks are so shaky. Certainly not possible with preferred shares."
Are you into the Public Choice School?
I'm rather a bit of a fan of it. Did my thesis on the linkage between Austrian thought and Public Choice.
Nostrovia,
REBear,
A couple of comments and I became a troll. As far as I knew I was'nt baiting anyone.
I don't mean to be the resident Goldbug at CR, in fact I am not inclined to be that pessimistic, but my experience tells me otherwise.
My background is a residential developer and prior to that a commercial factory developer in Europe.
But since 1991 I was building homes in the US either as a land developer in association with a group of homebuilders or directly as a homebuilder myself primarily in CA and FL.
Making a long story short, here is the critical component that I think is behind all of our concerns and discussions:
There is no doubt that what began as an orgy of securitization of MBS engendered all types of new and fantastic financial products that never were really designed to
survive the stress test of actual circumstances and human behavior. The housing bubble inflated as did our creativity to finance it.
However, based on my routine analysis of the Case-Shiller numbers each month for several years now, we are in for a very accelerated race to the downside in housing value.
I don't know if any of you caught a story on Nightly News earlier in the week about homes that recently sold in Cape Coral, Florida. Briefly, people were buying homes for $40K - $50K that were selling two years earlier for $250K+
That is an 80% discount. I have observed and spoke with fellow developers about the replacement value alone for these home ex. land is far greater than these purchase prices.
This is the most intriguing part, it doesn't matter, replacement costs as they were! Not as they are today. My point is that pretty soon, given the deflation of assets and unemployment, I could build that same house for far less today than I could two years ago given cheap (hungry) labor and the vastly reduced costs of raw materials, plywood, drywall, land, etc.
The question I pose, is that all of the TARP's and bailouts can't accommodate for an 80% loss in housing values in 24 to 36 months time.
The Case-Shiller trend proves out that from August to Feb. we can expect another 25% of losses from current levels and I think they will be more amplified this year as we are starting to see denial replaced with real desperation and fear now in the marketplace.
P.S. Yes, I practiced my own book. I sold out of all of my developments in 2005, with one last multi-unit condo property to a group out of the UK in August of 2006. The writing was on the wall for me.
Mel,
"That's my money they're playing with--and i don't give up my voting rights without a fight."
You don't have any voting rights. You don't even have voting rights as to your congang rep, let alone on some executive branch beurorat appointed by a president elected by the elctorial college. This is all boiler plate nonsense.
Nostrovia,
How about a compromise on voting rights.
Allow Carl Icahn to create a list of reforms, a standard shareholder's list of rights and powers.
Then promise not to exercise voting interest, provided the company being invested in by the government accepts and passes the reforms proposed by Carl Icahn.
It currently is not fair to expect existing shareholders have the power to exert market forces on the companies.
Yes, of course. That clause prohibits that. But what do you think that phrase about gold and silver is about, then?
They are free to trade in hard assets. BFD.
None of them are equipped for such a barter system. No scales, no purity measurements, no storage vaults, no minting equipment.
The nature of that clause is to create a common national currency, and to keep every state honest in their finances relative to the next state.
I'm still missing what you are getting at.
Mel,
Hell you have more voting rights owning 1 share of GE stock than you have with the Fallout Plan.
Nostrovia,
AllenM:
The Government doesn't manufacture pixie dust. They had reserves of credit but they have been used. For them to intervene in any market they must borrow in another and (roughly) cause as many losses there as gains where they intervene. Sure, Paulson can drive the stocks of banks sky-high. But if he does it by borrowing short he crowds out working capital and sends us into a depression. If he borrows long he wipes out the bondholders by sending interest rates soaring.
Hypothetically they could improve on market allocation but I don't expect that from Paulson. Overall I think giving such immense powers to somebody so clueless in macro issues will result in even greater uncertainty, since investors can't predict who he will accidentally wipe out. Hence, on the whole, I think the TARP will worsen things as people will flee even more to cash. If inflation starts up, then we'll see a hoarding panic.
The current plans - purchasing preferred stock and toxic mortgage waste - is bad for the stock market and bank stocks in particular. He simply can't purchase enough to get the toxic drek anywhere near par, and the preferred stock purchases will dilute the common. Bank common stock will remain essentially an out-of-the-money call on an institution probably fundamentally insolvent, but now will be even further out of the money due to the new preferred.
MW,
"I don't mean to be the resident Goldbug at CR,"
No problemo dude, I got it covered.
Nostrovia,
D,
I'm not sure I agree with your assumptions, particularly in regards to baby boomers.
It is quite possible that the formerly expected wave of baby boomer retirement will not now materialize, due to the changing economic conditions.
It is also possible that entitlement programs such as SS & Medicare will cease to exist in their current form.
Old assumptions need to adjust to new reality.
would be willing to trade a house for a few ounces of metal that someone dug out of the ground for a cost of $1000?
why not? They're willing to trade a house now for a piece of paper.
Honestly, free up your mindset a little. There will be some sort of commodity-based standard, the entire problem here is a function of governments issuing promises that can't be redeemed.
The fact that "gold can't handle the transaction volume" isn't a function of gold, it's a function of meaningless transactions.
Fair Economist,
"The Government doesn't manufacture pixie dust. They had reserves of credit but they have been used. For them to intervene in any market they must borrow in another and (roughly) cause as many losses there as gains where they intervene. Sure, Paulson can drive the stocks of banks sky-high. But if he does it by borrowing short he crowds out working capital and sends us into a depression. If he borrows long he wipes out the bondholders by sending interest rates soaring."
Exactly. Been saying that forever. Those that think the current system can print money are wrong. With the reserve currency flag as well, any monetization would lead to some severe bond market/currency problems.
Nostrovia,
Lets see where this goes before we start to gripe.... Is that you GWB?
B.S. - Every step of the way the little guy has been shafted. If we had started griping in 1902 we still wouldn't have enough time to pile all of the derision on these criminals that they deserve. Best to get started early and gripe often, it's not as if we can fight back fairly or anything.
Sorry Ben...
MetLife Ratings Review May Have "Material Adverse Impact"
MetLife Ratings Review May Have "Material Adverse Impact" « naked capitalism
Wondering how all those folks that recently moved their money from banks to insurance company annuities due to FDIC limits are feeling.
MW - I was a small tech company CEO in 2000. Like you I saw the writing on the wall and sold out at the top. I expected what we're going through now to happen after that bubble popped. Greenspan only delayed it and made it worse (as the Austrians pointed out at the time).
I resisted buying any gold for several years back then, because I didn't like tying up value in an asset that doesn't do the world any good. Somewhere around 400/oz my concern for capital preservation got the better of my altruism.
Personally, I think TARP and Equity son-of-TARP are nothing more than pissing on a raging bonfire. Our fearless leaders are under the impression that they can keep the old program working, but it was destined to fail. It's predictable that they don't want to man up to dismantling the large percentage of the economy that is worthless, and starting to work on rebuilding what's left. But we'll get there eventually anyway.
It is quite possible that the formerly expected wave of baby boomer retirement will not now materialize, due to the changing economic conditions.
It is also possible that entitlement programs such as SS & Medicare will cease to exist in their current form.
Old assumptions need to adjust to new reality.
theotherdeb | 10.11.08 - 12:12 pm
I don't know about not retiring, but I'll bet most don't put the money pulled from equities this past week back into the markets during their lifetimes. Don't look for that huge bounce like we got in 87 or after 9/11.
"It's predictable that they don't want to man up to dismantling the large percentage of the economy that is worthless"
I don't even think that what we're seeing counts as sincere denial.
They just have to hang on 'till January. The TARP is nothing more than a slush fund for Hank and his best buds...one last fondle, if you will.
That ability to "command labor"
the ability to trick people into working for free by issuing non-redeemable promises in the far future?
That "ability"?
I think that "abiltity" is short on time span, friend. Which is the root of our problem. Everyone likes to focus on the mechanism instead of the cause because it's cool and tricky and has handles and buttons and flashing lights.
Word MW
They are free to trade in hard assets. BFD. None of them are equipped for such a barter system.
No, it doesn't just say they are free to trade in hard assets, it designates the hard assets as money. Using money is not barter.
I'm still missing what you are getting at.
I asked when this clause of the Constitution was made illegal by the Supreme Court.
Are you into the Public Choice School?
I'm rather a bit of a fan of it. Did my thesis on the linkage between Austrian thought and Public Choice.
I largely agree with their ideas. However, I don't think of them as a "school"; to me those ideas are just part of the air. I actually came to those ideas via my (now mostly defunct) libertarianism and they were part of my thinking before I even went to college and did more formal studies. You've probably noticed that I apply the idea that people are (mostly) self-interested and cognitively limited to people functioning in all institutions - government, firm, and market. I'm sure there's a school of thought with similar opinions but I'm not plugged into that stretch of academia anymore. Although I have a degree in Econ, I ended up pursuing different fields professionally.
Bailout Nation, if you only knew what my day job was, you would understand why I was laughing out loud at your comment.
People want rules!!!!
Oh my.
That is just too much!!!
Someday this war's gonna end...
"Somewhere around 400/oz my concern for capital preservation got the better of my altruism."
Sir with all due respect that is yhe most uniformed opiniom in the universe. Gold is the most moral investment there is!
EvilHenryPaulson writes:
How about a compromise on voting rights.
Allow Carl Icahn to create a list of reforms, a standard shareholder's list of rights and powers.
Then promise not to exercise voting interest, provided the company being invested in by the government accepts and passes the reforms proposed by Carl Icahn.
It currently is not fair to expect existing shareholders have the power to exert market forces on the companies.
Hear hear, Paulson's twin for President
The US dollar will be the reserve currency for quite a while longer. Different European countries still basically do not like each other, same with the Arabs, same with Asia.
And none has a governmental system that has shown the ability to survive the shocks ours has. We paid our interest even in the Civil War. The strength of the US has always come from its original political design, as well as its unique geography, with ports open to every continent in the world.
50 years ago, the USSR was the leader in space and a lot of people thought they would be economically dominant in a generation.
My new model is that we are on the road back to 1982 - wages, house prices, gold, oil, everything. A long and painful march.
Evil Henry and friends
The Treasury bubble is an interesting/troubling issue.
I wonder about the way that duration enters into the equation as a factor that would affect a possible run to the exits to cash in gains.
The short term treasuries that have been approaching 0% interest are, well, short term. Would their short duration play some role in limiting a rush for the exits? There's only so much time to exit, and the capital gains to be had would be limited since by definition the notes were bought 30 days ago or 90 days ago, wouldn't they (i.e., it's the yield change in that restricted time period that determines price change, and yield swings in Treasuries have been significant but not enormous)?
I also wonder about your assumption that short term yields can't stay near zero for long. They have stayed very low in Japan for a long time . . . I know the Yen isn't the global reserve currency, etc, but I guess I need a further explanation as to why short term yields can't stay low in the US.
I'm not arguing against your prediction, just looking for more explanation.
Thanks, BreakOut. I was out of work in 1982, and I'm out of work now (after being continually employed in the intervening years).
Can I at least get younger, to make up for it?
"There will be some sort of commodity-based standard, the entire problem here is a function of governments issuing promises that can't be redeemed."
You just think too narrowly. What if a future entrepreneurial space jog in 2043 manages to haul with solar wind sails a big enough meteor from asteroid belt with thousands tonnes of gold and other metals near Earth for some serious low-orbit mining operation AND with low enough costs? The hauling part is already now perfectly feasible...
That would pretty much make him as rich as one big nation. Few of them more and the price of gold would collapse, just like it did after Spain discovered the new world.
"In 2001, it was estimated that all the gold ever mined totaled 145,000 tonnes..."
So tying the monetary base to the output of gold mines is not any better than the current system.
"People want rules!!!!"
People DO want rules. For the other guy.
BreakOut writes:
My new model is that we are on the road back to 1982 - wages, house prices, gold, oil, everything. A long and painful march.
I think we're closer to the cusp of a gilded age. Massive de-leveraging will allow the few self-financing people to grow their assets and power at phenomenal rates. This is exactly how the lat gilded age began, except I don't see anyone buying up all the homes nationally to become the world's largest landlord
Gold is the most moral investment there is!
Paying people to dig a bunch of shiny yellow stuff out of the ground that will then sit around in a vault somewhere doesn't strike me as a great use of my resources. I'd much rather loan a plow to somebody who wants to feed his family. But whatever floats your boat.
MW wrote: Here was an interesting story out of Dubai this week. They are fast pushing for a new default exchange for precious metals:
Wow! this is good news. Can anyone smell a short squeeze?
And look what they have done to the paper price of silver! I said look dammit!
It's in excess of eighty to one ratio to gold.
Anyone else think this is out of whack?
Anyone else see silver going to 15/1?
How about 1/1?
Fair, they will be easing the Treasury Bubble by providing infinite liquidity while providing a bottom in the panic equities market.
They have to. The driveby on gold was a warning shot to the big hedge funds that a commodity bubble will not be tolerated- they didn't like the outcome of the June bubble this year.
Now settle down and watch what happens. I too was quite a libertarian in my younger days, until I understood that society as a whole will never make the sacrifices necessary to achieve even small gains in a free society.
People need structure, and a functioning libertarian society would have to have some very nasty rules to keep the worst tendencies at bay.
Someday this war's gonna end...
MLM:
Good to hear that we are united in our view and experiences.
I am 46 years old and have never seen the things I am seeing now. As recently as 2004, I was being invited to Dubai to participate in the real estate bubble there as merchant developer. I refused in that it was simply an extension of what we had here and what I had seen in Spain and the UK.
This is not a US problem, this is a world problem and I am concerned as to how each player will solve its crisis.
From a personal view, I have been struck by the unravelling that is appearing in the social fabric. Crime is becoming a big concern. I moved my family from South Florida to a little barrier island on the Atlantic outside of Savannah to be safer.
I wake up each morning looking out over the ocean and am happy that it is a 12 mile two-lane road on to the Island with a resident population of 1500 people.
We all carry guns here and kids play freely in the street. I think this could quickly progress into a Depression and that social order may be lost.
Sorry to be so dire, but perhaps again......the writing is on the wall.
Fair Economist,
"I largely agree with their ideas. However, I don't think of them as a "school"; to me those ideas are just part of the air. I actually came to those ideas via my (now mostly defunct) libertarianism and they were part of my thinking before I even went to college and did more formal studies. You've probably noticed that I apply the idea that people are (mostly) self-interested and cognitively limited to people functioning in all institutions - government, firm, and market. I'm sure there's a school of thought with similar opinions but I'm not plugged into that stretch of academia anymore. Although I have a degree in Econ, I ended up pursuing different fields professionally."
I too pursued a different career. I assumed your meme meant you were still in the professional field. Public Choice is a school, I still read the rags. As a libertarian, I could not find anything better than the Austrian School. But even there there is division. Rothbardians don't care for my Hayekian leanings.
Don't get me wrong I like Rothbard, but Hayek nailed it with information dissemination.
As to interests, of course people act on their own account. Public choice guys say that gov't workers are budget maximizers. Yep. They don't have to earn their keep. Agree completely with you on this point.
Nostrovia,
theotherdeb,
but they get stuck living under the rules, or you have much of the history of Mexico writ large.
Kinda simple actually.
Someday this war's gonna end...
Hope you find something soon, mericless.
"The US dollar will be the reserve currency for quite a while longer. Different European countries still basically do not like each other, same with the Arabs, same with Asia.
And none has a governmental system that has shown the ability to survive the shocks ours has. We paid our interest even in the Civil War."
HAHAHAHAHA! Yeah, sure a lazy fat American kid playing playstation all the time, a grandgrandgrandgrandson of civil war era soldier is automatically a good stand-up soldier! It is just in your genes, right?!
You Americans are going down and hard and most of you have no friggin clue what to do in the time of real crisis.
BTW, where the f*ck YOUR ANCESTORS came from anyway? I'd bet from EUROPE. You might even say your ancestors were a bunch of sissies willing to run away from the problems of their home countries.
BreakOut: Are you predicting the DOW will break 1000 as in 82?
F*ck, man. I thought I was a pessimist.
MLW,
"I'd much rather loan a plow to somebody who wants to feed his family. But whatever floats your boat."
But if you didn't have a plow, you could loan them the gold to buy one.
Or give the gold to them to buy one.
That's the kinda nifty thing about money.
Nostrovia,
Breakout, thanks for the good wishes.
I personally find Laffont to be of much more use:
Jean-Jacques Laffont - Wikipedia, the free encyclopedia
He was personally a bit of a whack job, but his nuts and bolts understanding of public choice and information is quite useful in actual implementation of regulation and regulatory structures.
Of course, since he is French, the never mention his name in Chicago.
Their loss.
Someday this war's gonna end...
anon2,
Why would it need to be "at the current market standard" to attract private investors? That is a silly assumption. The current market standard has crushed many private investors for the past 2 years and they will not be burned again.
Private investors want the best deal and that is a deal with the lowest risk possible for the highest return. They also are tired of losing money in this sector and want their downside protected if they are going to be expected to pony up money.
The govt will not invest in common shares nor will private investors. I agree totally with anon and Nemo, the investment will be in preferred (probably senior) and have warrants.
Disclosure, I am with a large private investor and that is the ONLY way we'd be interested in investing. Its also what the govt did in AIG and proposed in Citi. IMHO, that is exactly what's coming and we would consider investing under that type of scenario if asked (and probably no other). I know several other private institutions feel exactly the same way.
joe shmoe
As for the distribution of maturity, the Treasury is heavily weighted to the short term which makes them extremely vulnerable to an increase in borrowing costs -- just like certain AAA rated companies that are reliant on debt to finance their growth.
Why hasn't that stopped Japan? Well first of all it does have an impact on Japan's exchange rate, with the effect of significant swings through the carry trade. Japan I think is better able to self-fund its obligations, with many Japanese savers content to leave their deposits in the post office to earn almost no interest, which then invests in the national debt.
One more difference is that America already had a significant cost to service its debt going into the crisis (pre-crisis final budget had $1tn deficit, $10tn debt at the Federal level alone), also consider that while Japan's federal debt is large the governments below it carry almost no debt. Immediately we're looking at spending $1tn on top of the $1.1tn extended already through the Federal Reserve. Comparing to previous financial crises, the tally should hit $4tn easily although how quickly the government chooses to spend it is another story. Also unlike Japan, America has twin deficits and needs foreign investors to buy Treasuries more than ever at a time foreign central bank reserves at a rate less than the western world's deficits.
Japan has a primarily self-financed debt, had/has a trade surplus, and faced less competition for sovereign debt at the time of its crisis.
Finally, if hoping for Japan's outcome is considered a good future then don't forget the Japanese took a huge hit between pre-bubble and post-bubble.
I just considered these explanations on-the-fly, so I would be interested in hearing further or conflicting opinions.
IMF warns of financial meltdown as crisis rages
The International Monetary Fund warned on Saturday that debt-ridden banks were pushing the global financial system to the brink of meltdown and rich nations had so far failed to restore confidence.
IMF warns of financial meltdown as crisis rages
| Reuters
Ya think?
Paying people to dig a bunch of shiny yellow stuff out of the ground that will then sit around in a vault somewhere doesn't strike me as a great use of my resources
It does seem silly does it not? But it is a like for like exchange labor for labor. IMO gold has some more to improve against the DOW. It could just mean the dow goes lower and gold goes lower more slowly. At some point the savings have to be invested or spent or it is a self imposed prison.
Citizen Allen M,
I tend to agree with your thought that the market will turn up in the short term and have been buying in. Just didn't want you to think you were alone in that view.
OT - Ebay traffic
ebay.com - Site Info from Alexa
Down almost 30% in the past year.
Alexa used to have the full history available but they cut it back to one year awhile back. But it's still enough to discern trends.
The International Monetary Fund warned on Saturday that debt-ridden banks were pushing the global financial system to the brink of meltdown and rich nations had so far failed to restore confidence.
The faces of confidence:
My Way
I'm feeling better already. Party on, America!
AllenM,
"I personally find Laffont to be of much more use:"
Haven't read him. But I'll give it a look.
Nostrovia,
I didn't say I didn't own gold, or think it was going higher. In both cases I do (in the case of the price, I wouldn't be surprised to see a significant detour first though).
But do I like it? Not so much.
MW writes:
Until the weak banks are permitted to fail, no investment into the walking dead can repair the destruction being kept undercover on their books.
Of course! default and BK is the best path to recovery in the long run otherwise we suffer the same fate as Japan but our outcome is worse given our poor saving rate.
Credit deflation will run its course but the effects on the GDP both in the US and world economy will be negative for many years given the massive leverage credit used during the past 10 years. Nothing much can be done about it now so what we are watching is the politically connected financial elite given a bailout
not pretty but its all about power and how its used.
Most of the posters here and elsewhere overlook the many miraculous properties that gold and silver possess. In ancient times, this was the genesis of it's value. As time unfolded, more and more, to the exclusion of all other mediums of exchange over 5,000 years, the precious metals gold and silver have proven themselves.
Remember, lost in all this evolution is the original powers known to early man and yet to be rediscovered by the brightest minds today.
joe shmoe,
Also the Japanese Yen devalued by ~50-70% from bubble to non-bubble time
"jim, re: Krugman Slate article. How do you receoncile his statement {with the fact that central banks hold some gold)," asks solohedger.
Well, solo, I guess Krugman just doesn't know that central banks hold some gold. Princeton professors of economics are pretty limited in their knowledge, you know.
Remember this? The Tacoma Narrows bridge.
An engineering marvel.
Only they forgot one little thing.
And it brought the whole enterprise down.
YouTube - Tacoma Narrows Newsreel
anon3 - Do you think your group would be willing to go in at the same terms as the Treasury? Or need some kind of sweetener. I look at all the SWF money etc. that has gone up in smoke over the past year and can't imagine why anybody would want to take the risk at this point.
CSC,
Please post warnings before such linkage.
I mean, like this needs no warning:
http://flyboyz.files.wordpress.com/2008/05/jessica_biel_02.jpg
But hell that last one made you did made me loose my beer.
Nostrovia,
Volker the Viking
Sand dollars, other beach shells, and even cigarettes have been used as currency throughout history.
The main source of their value is a stable currency that will hold the same relative value in between transactions. Nothing more, nothing less
I think the concept of the G7 let alone G20 can pul together a coordinated solution to this shit storm is akin to seeign pigs fly:
Today from Mish:
The G-7 officials shied away from endorsing a U.K. proposal to guarantee lending between banks either by turning central banks into clearing houses for the loans or having governments back them. They vowed to take steps that would give depositors confidence that their savings were safe and to restart secondary markets for mortgages and other securitized assets. The guidelines said any steps taken should protect taxpayers and avoid hurting other economies.
My Comment: There you have it, in plain English. They have agreed to do nothing other than create a list of guidelines. Those guidelines will be immediately set on fire as Paulson (and everyone else) does whatever the hell they want anyway.
I think the Dow at 4000 is very likely and what more I think Gold and the Dow will cross there..........at 4000.
I am amazed and amused by all the goldbugs crawling out of the woodwork and gathering on this blog. It must be the attraction exercied by the refresh strip that is so yellow and shiny. LOL.
popeye writes:
Citizen Allen M,
I tend to agree with your thought that the market will turn up in the short term and have been buying in. Just didn't want you to think you were alone in that view
Speculation of all types is dead, while it will take a few years to kill off most of the casino players you can be assured that the bear market will take bulls and bears alike to the poor house.
The faces of confidence
Iraqi War = $700 billion
Bank Bailout = $700 billion
Market Losses = $2 trillion
Paulson's expression? Priceless.
All hell has broken loose and the illusion that they're Masters Of the Universe have disappeared in a puff of smoke.
MW,
If you know the G7, then you know there was never going to be a substantial agreement with Canada heading into elections this week, and the United States heading to elections next month.
The best hope is for a program that will have no net-cost to country's budgets
jim:
Pay no attention to us...be confident in your own views.
Or is that you are looking for someone to agree with you?
the bear market will take bulls and bears alike to the poor house.
Well the bear market may be 4/5th done. Even the most pessimistic (Roubini) think stocks will drop 50%. They have dropped 40% already. Add in Buffett (a respected investor) and his recommendation to "be greedy when others are fearful."
I am amazed and amused by all the goldbugs crawling out of the woodwork and gathering on this blog. It must be the attraction exercied by the refresh strip that is so yellow and shiny. LOL.
So I guess your point is that it's all contained and they should stop worrying and put their money in treasuries?
Ron,
Yes, it's speculation on my part and not a long term investment. In the event it fails, I will accept the loss and pull out. It's not complicated, it's just a bet.
We all carry guns here and kids play freely in the street. I think this could quickly progress into a Depression and that social order may be lost.
*** with the promise of bailouts left and right, too few will take the initiative to be self-sufficient.
Or is that you are looking for someone to agree with you?
If you want to agree with me fine. It not, that's cool too.
Comrade Misean: That was much better. At least part of me is feeling spontaneously confident.
But beer at 9AM? Dude, why do I get the feeling that you are posting from the Sig Ep house at UCLA?
Evil:
I never thought that there would be any consensus whatsoever. My comment was that the Markets closed yesterday with "hope" that somehow, King Henry and the Raiders would sprinkle Goldman Dust on the world and make it better.
I am of the mind that a closure of the market and bank holidays are far more imminent.
Tin foil hat firmly affixed.
So I guess your point is that it's all contained and they should stop worrying and put their money in treasuries?
MLM | Homepage | 10.11.08 - 12:57 pm | #
I don't know if it is "contained". I think the market will drop further in all probability. If people feel better having owning gold that's okay with me. Chaque a son gout.
"That's my money they're playing with--and i don't give up my voting rights without a fight."
You don't have any voting rights. You don't even have voting rights as to your congang rep, let alone on some executive branch beurorat appointed by a president elected by the elctorial college. This is all boiler plate nonsense.
Nostrovia,
Comrade Misean is Dope | Homepage | 10.11.08 - 12:07 pm | #
If I (my tax money) plop down 700 billion, i either get true voting rights--or the Russian mafia gets a piece of the action. The money is getting stolen in broad daylight--and won't be used for liquidity--no reason to--moral hazard and all. You rarely get away with one extortion payment--the crook finds the reward intoxicating.
The crooks should not get to play with more money unchecked, and yes, I'd rather nationalie the whole system for a couple of years. Begging the villains to loosen up is so naive.
MW,
I don't think hope had anything to do with it. I think it was a rallying effort. So long as the market moves quickly, the bigger players can skim money off of other investors without the same market access -- they are trying to grind out a living by attempting to finish the year without a loss
"The state of the world, which is falling into ruins, will be restored by our diligence and care."
--Pope Innocent II, late 12th-early 13th century
Sorry, that was Innocent III.
CSC,
When I get a Saturday off:
But beer at 9AM? Dude, why do I get the feeling that you are posting from the Sig Ep house at UCLA?"
That ain't far off. BTW, you had a load or two yet?
Nostrovia,
Pope Innocent II, late 12th-early 13th century
Pavel Chichikov | 10.11.08 - 1:03 pm | #
I think you mean Innocent III, right?
1198-1216.
Add in Buffett (a respected investor) and his recommendation to "be greedy when others are fearful."
The financial press/media will give the bullish info necessary to provide fresh green to the financial sector.
These are nothing more then financial salesan selling various financial brews to the thristy casino players hoping to make that big payoff so they can leave the table and live the easy life.
Good luck!
Look for France and Germany to announce their own British-style bailout guarantees/packages on Monday.
"I think you mean Innocent III, right?"
Yep. If I had to type for a living I'd be in the poor house - if there was a poor house.
"The state of the world, which is falling into ruins, will be restored by our diligence and care."
...and then he launched the Fourth Crusade.
Evil:
Agreed:
But when all of the baby boomers are gone and their IRA's are all depleted whose pockets will be left to pick?
"But when all of the baby boomers are gone and their IRA's are all depleted whose pockets will be left to pick?"
But that will be in mid-century. A very different world, to be sure.
Well the fourth Crusade got out of hand and the leaders diverted it to Constantinople. Innocent didn't know that it would do so ahead of time. He was intending to reinforce the Crusader states, the medieval equivalent of Israel.
Remember the Cross of Gold Speech William Jennings Bryan made back in the 1890's? The whole point was that in a Democracy we can not live with a currency tied to gold because we cannot create enough prosperity to give eneryone the pony they desire. Democracies print money, that is what we do. So ponies for everyone and let the paper fly!
The gold bugs never ask why the gold dealers accept dollars for gold? Why if the dollar is so worthless would gold dealers part with Gold in exchange for worthless dollars,nor does anyone ask why if Gold will be worth so much more in the future why gold dealers would sell gold at any price today? Trying to created the illusion that Gold is cheap today and will be so much more expensive in the future sounds like another investor bubble trap.
Jim:
First Krugman, then Roubini, and now Buffet. What a trio of apostles.
Roubini is great but did he say "a drop of 50% from current levels or from peak?" Roubini thinks we are only in the first few innings of what he described earlier in the week as a "L" recovery.
If we could all get deals like Buffet, that would be great. Hell Paulson can't even get the deal Buffet got with Goldman and is only their former CEO.
You sound like a guy who does a lot of investing late at night watching info-mercials.
Did you order your foreclosure kit to get in on the action yet?
I think you've all clearly said, "We are staring into the abyss." I see both sides of most of the arguments being made here. This is a very dark hour.
I have no clue where the bottom is. However, I don't think we are going to find it in a continuation of the virtual straight line fall we have seen thus far.
Mel,
"he crooks should not get to play with more money unchecked, and yes, I'd rather nationalie the whole system for a couple of years. Begging the villains to loosen up is so naive."
Ummm....Mel, Henry Paulson ran Goldman Sucks...as CEO...No Really he did....Before becoming Treasury Secretary. Hell He cashed out of his investments TAX FREE to the tune of $500,000,000 before doing so.
So the fox is guarding the hen house and you like it. Kay!
I'm not that enthusiastic about that arrangement.
Nostrovia,
I'm not going to link to the site, but this concept left me slack-jawed:
" \t Pope Innocent III Action Figure
Introduce this Pope Innocent III Action Figure to your other figures and watch the spiritual sparks fly! Armed with his formidable power of excommunication and an intimidating scroll inscribed with Latin text, this 6" tall, hard plastic model of the 176th Pope will soon have all your other action figures lining up for confession. Read the back of the illustrated blistercard and you'll find that Pope Innocent III was a good guy in all respects. He was a patron of the arts, cared about orphans, built a hospital and reunified the Papal States! Comes with removable fancy Pope hat."
Evil Henry
It seems to me that the Treasury's situation is not a bubble, or at least not a bubble in the same way that real estate was (is still) a bubble, or dot.com stocks were.
The issue isn't that there will be a rush to sell short term treasuries and the price will collapse. Owners hold short term treasuries until they mature.
The problem I think you are describing is the Treasury's continuing ability to finance itself (and thereby the US) by continuing to offer short term notes at low yields. That's not a bursting asset bubble, is it? It seems a different sort of problem to me.
I agree, of course, that Japan 1990-2008 is not an ideal to aspire to. I think the US would be lucky to do as well as Japan has done, but that wasn't my point in our exchange. My point was just that low rates could continue, though there may be pressures against that, and costs to pay, too.
The big issue for the US is foreign buyers of Treasuries, right? Will China and Japan and the Saudis et al pull the plug on the US by not buying any more Treasuries? That's a serious problem that requires political and economic solutions, both domestic and international, and it also beyond the US's control in several respects (global panic may keep investors in US treasuries, recovery somewhere outside the US would lead capital there and away from US treasuries)
I agree completely that the national debt is a problem for the US - a big problem because it was run up for bad reasons, and now the storm has hit when the govt needs to spend for the economy and the country starts from a huge hole of debt.
Increasing the govt's debt is possible now and necessary, but it needs to start to be offest by a reasonable tax regime comparable to that of other industrialized (or post-industrialized) countries. Higher rates for the top few percent are in order now, and lower rates for the middle class that will have a high propensity to spend their tax savings.
Over time, though, as thee economy recovers (how many years in the future????) a fairer tax structure with higher rates for the gainfully employed will be absolutely necessary.
US tax policy has been as unrealistic as its asset markets.
Some elements of standard of living will need to be tightened for a big chunk of the population, but a big chunk of standard of living (or just assets) needs to be tightened a lot among the top couple of percent. The massive increase of inequality has to be reigned in for economic, fiscal, social, and political reasons. Not eliminated entirely, but brought within reason.
Lots of people on this blog won't like that, not a bit.
Not only do I think that is the right course domestically, I think internaitonally the US may not have a choice.
The fact that the treasury will be buying eqity stakes in the financial sector given that they recently suspended mark-to-market accounting tells you that they are the only idiots willing to invest in these worthless companies and that the world investors know that these financial companies are insolvent and putting money into them would be like throwing money away.
"Remember the Cross of Gold Speech William Jennings Bryan made back in the 1890's? "
I'm not that old. : )
I read the speech recently, and to judge from the text I think you had to be there, except of course for that one line.
The US was changing fundamentally, and Bryan fought the change all the way. As we know, he lost. Still, he advocated social welfare policies that in some form or other came to be during the New Deal.
Roubini said earlier he expected the market to decline by 40%. Recently he upped that to 50%. The rest of your post is kinda amusing/insulting, but I don't really mind. I've made lots in the market and expect to continue to do so. By the way there was a previous runup of gold during the hyper inflation of 1979-1980. Then it came crashing down when Volker raised interest rates. You will recall the Hunts of Texas who tried to corner the silver market (easier to do than gold) and who lost their immense oil fortune in the process.
"Also, how will anyone be able to make change on a $5000-$10,000 coin the size of a quarter?"
Easy. With $500-$1000 coins the size of a dime.
Which part of inflation don't you understand?
Pavel: If only Innocent III was alive to murder the heretics. It does get worse.
Moses: Help Moses part the Pink Sea!
This old boy can make a rock wet, a bush burn, and get the Pharoah's entire army in hot pursuit!
If you've been wandering in the wilderness too long, Moses is the man to lead you to the promised land.
And haven't you heard about the eleventh commandment?
"XI: Thou shalt have outrageous orgasms!"
welcome to divine interventions
The rules are changing on the fly. No shorts, selected shorts, selected circuit breakers. How anyone could depend on historical analysis of the market over the last 40 years is insane.
Those calling a bottom are in for a rude awakening. To account for forward P/E in light of the economic period we have entered and that is worsening, we would need to see an 80% retracement from peak values, and be willing to ride it out at that level for a minimum of 3 to 5 years.
This is a new world where the casino is rigged. Play at your own peril and don't cry when they drain the water form the swamp.
What a great blog. Someone who recently read the cross of gold speech! I read it fifty years ago as an under grad so may be a bit fuzzy on the details. At my age, I can remember what I want to remember. One of the few advantages of being around this long.
By the way there was a previous runup of gold during the hyper inflation of 1979-1980
I suspect that most of us here actually watched that happen, jim.
Thanks for the tip, though!
And we all know, do we not, that the Wizard of Oz story is a parabel about bimetallism. Dorothy in the original story skipped up the yellow brick road in SILVER slippers.
If anyone thinks this is the bottom, I would be astonished because
- house prices are still falling
- unemployment still rising
- still de-leveraging
- economy AND trade still falling
- barely into earnings season
- have only faced the acute lending shortages since September, with no end in sight
- let me see some 10K audited reports
- FWIW, CNBC is bragging that a 30% cut to S&P earnings makes the average one cheap with a P/E of only ~15 which is ridiculous from so many perspectives
I do think there will be a rally, as I have detailed before, with a host of reasons behind the idea. I've targeted the turn around as the 3rd week of October since July and I feel comfortable maintaining that, although there are a number of real-time indicators you could follow (not talking T/A/ voodoo) which will signal it has arrived. It is very rare to have a crash and get it out of the way with in one straight shot.
Heck the people making the trades are addicted to rallies and literally experience chemical highs from them, the cheering from the floor on Friday can carry the rally by itself once some momentum comes i
Jim:
All the best to you, I intend no insult.
A difference in opinion is what keeps the world from being weighted too heavily on either side.
Last week, CDS sellers had to pay up. By definition, they did not have the cash and were forced to sell into a market with poor prospects. At the same time, equity holders in - as Paulson put it, "a wide range of financial companies" - learned that the government was about to dilute the heck out of or seriously impair their holdings. And they sold. Throw in margin calls and out-right panic selling. I think the market went too far and will correct - perhaps only a dead cat bounce, but I suspect more.
"Pavel: If only Innocent III was alive to murder the heretics. It does get worse."
Some guy I met in Kiev as the SU was collapsing proposed that the Communists ought to be killed. I was traveling with a Party member - a very nice, sweet person she was, a kind of secular saint - and we both agreed: Let's not kill anybody.
I still think that way. I don't believe in killing anybody for thought crime. I don't believe it was right in the past, either.
OT, on the question of how deeply the current crisis is imbedded into the consciousness of J6P:
I'm driving to my office to this morning, and I turn on the local ESPN channel to get some college football news.
Lo and behold, they're airing a show devoted to all things video games. Now, I'm in my 40's, and never got into this world at all, but the enthusiasm and passion of the hosts is weirdly transfixing, so I decide to keep listening.
There are three hosts: "Wally", who sounds like an Australian surfer dude and party monster, "Candace", who sounds like a geek working on her fourth Red Bull, and an older guy ("Old Guy") whose name I don't catch who is trying to sound cool by speaking like a black gangster and failing miserably.
Wally and Candace are talking about stuff I don't understand at all - Microsoft Sidewinder controllers, Monk the Pool Master, how E3 totally sucked this year (Comic Con is at fault, they assert, and I feel strangely guilty, since I live in San Diego). Then in the middle of a discussion of a new MMA game, Old Guy, in his hip hop patois, suddenly jumps in with this:
"Yo, Steve Goldstein, are you out there, my brotha?" I need you to perform some jiu jitsu on my portfolio, man! For real! Bernanke gave my investments the spanky! Steve-o, call-in! You gotta put a submission hold on my stocks, my money market!
Candace, laughing: "Who is Steve Goldstein?"
Old Guy: "My accountant!"
Wally: "If he calls, can I talk to him? I'm worried!"
Candace: "Did you see the paper this morning? Pelosi is going to go for another stimulus package."
Wally: "Really? How much?"
Old Guy: "Steve! Call me!"
Candace: "Damn, now I feel sick."
Old Guy (toning down the hip hop): "We'll be right back"
I have no idea what any of this means in the larger scheme of things, but these days, you've got to appreciate a little humor wherever you find it, even at the end of the AM radio dial.
So the fox is guarding the hen house and you like it. Kay!
Paulson will not be there in January--in a way, the election decides who the people want to do this--and that is democracy.
Pavel: Based on your past posts here, I assumed that. Perhaps my joke did not translate well to the screen. I did not mean to insult you.
Can someone explain how the Lehman CDS bomb was so diffused without major incident? The fear was the settlements were going to cost counterparties up to 500B-instead they apparently settled for 8B.
Evil:
I agree, you forgot the most important think.
Oct 21, the counterparties need to make good on their swaps. That is just 7 trading days away kids.
Just wait and see what liquidation looks like next week.
Dow 400 by Friday....you heard it here first.
When this is over, people won't even remember their is an election on 11/4.
The gold bugs never ask why the gold dealers accept dollars for gold?
And paper buyers never ask why companies and traders are willing to trade valuable paper assets for even more valuable paper dollars!
HAHAHAHAHA!!
"Pavel: If only Innocent III was alive to murder the heretics. It does get worse."
Well there are plenty of Americans as well as Zionists who think Muslims should be killed, especially the kind who are Arab nationalists who might threaten Israel's interests or the interests of big oil. I suspect Bush has killed as many Muslim "heretics" as Innocent ever did.
"Pavel: Based on your past posts here, I assumed that. Perhaps my joke did not translate well to the screen. I did not mean to insult you."
No offense taken. It was a very different world those people lived in, and when the future looks back at us perhaps they too will be puzzled and not a little dismayed.
Markar, $365.3bn of payments are being done today. We wouldn't know yet if things went bad during a bank-rescue-weekend
The 8.675 ¢/$ is the value a Lehman bond, CDS vendors have to make the CDS buyers whole by paying out the 91.325 ¢/$ (there was a $400bn notional amount of CDS)
Corrected spelling, hate when I do that.
Evil:
I agree, you forgot the most important "thing."
Oct 21, the counterparties need to make good on their swaps. That is just 7 trading days away kids.
Just wait and see what liquidation looks like next week.
Dow 400 by Friday....you heard it here first.
When this is over, people won't even remember their is an election on 11/4.
Jim, are you a Catholic?
"It was a very different world those people lived in, and when the future looks back at us perhaps they too will be puzzled and not a little dismayed."
Agreed. My studies of the California Missions taught me as much.
@MW
"Dow 400 by Friday....you heard it here first."
I am deciding whether to go short or double inverse. Could you please indicate whether 400 is a typo or a target?
MW Your positions vis a vis gold and the EU make perfect sense to me. Funny the disdain for "goldlbugs" by many. If gold has no monetary value, why are the CBs so afraid of it, and use the bullion banks via COMEX and ETFs to suppress its price?
Dow 4000, I meant.
Typo.