Financial topics

[mannfm11]

I did read Johns post, one of his best in awhile. I was listening to something on another page when I decided to use another browser and see if John had posted anything. What I was listening to at the time was right up the alley of what John wrote. I think if you listen to it and then read what John wrote, it will all have meaning. In fact, I think John would really see how much more there was to what he wrote than he realized when he wrote it. Here is the link. It is a guy named Hernando De Soto, like the explorer. I had followed a link to a report on property rights put out by some organization in Europe last week and Mr. De Soto was over that organization, so the man has some legitimacy. In short what he says is that the US in general has property where ownership is recorded and that the paper is also linked to recorded property, but what is in the system, the derivatives are linked to nothing and cannot be managed in the sense of real debt, but instead stand like paper from a banana republic. I guess I had better post the link http://www.mcalvany.com/podcast/?p=69

It is facinating when something like this occurs, when I am listening to something that entirely relates to something else that I am reading. When this mortgage mess started I didn't understand the concept of synthetic CDO's, which to my knowledge are merely Credit default swaps (CDS) and a few other items sold as if they are real debt instruments. They perform like the real thing, but they aren't paid as if they are actual mortgages. Instead, one person is paying another for a right or a guarantee. Thus, I could have bought a CDS and now turn around and buy the toxic waste out of a bank at very little risk at a fraction or I could demand to be paid. Being that the CDO's were being paid, it actually means they owe the counter party the loss, as strange as that may seem. So, if I pretended I had $1 billion in some subprime pool as in a synthetic CDO, someone is actually paying me the insurance premium on an imaginary sum and I am reaping this return on some imaginary sum. But, since the return is in the form of a default swap, the person paying the premium actually has the right to be paid the difference between the face value of the pool and the market value, which suddenly I can realize the form of the problem.

The problem was someone had to pay the buyer of the swap. Was it to be the buyer of the CDO, who also had a loss or was it the originator, like Bear Stearns or Lehman? Maybe this is how AIG ended up with so many of these swaps, the firms had to lay them off on someone once they sold the CDO. I have been thinking there had to be some kind of collusion for so much of the synthetic loss to end up at AIG when in fact it was GS, LEH, MER, BS and Citi that were manufacturing these things as fast as they could move them. Of course, they offered great leverage and promise to hedge funds run by guys whose interest was in making a one year killing gambling with the money of others.

This brings us to the next point, the crookedness that went into this. Obama may have been elected to cover this stuff up. So many of his economic advisors are complicit in this matter it isn't funny, guys like Rubin and Raines, who ran FNMA and paid a lot of lobbyists and Congressmen including Obama to stay in his corner will regulators tried to get a handle on the GSE's. http://www.youtube.com/watch?v=_MGT_cSi7Rs I happen to believe that the entire Wall street game is crooked as far as advice and what they peddle to the public goes. The entire market was literally a buy back in 2000 while dividends on the SPX were under 1.1% at one point, some buy recommendations all the way down to 1 cent on the dollar from peak, or in the case of Enron and WCOM, to zero. There was a company in Europe called Parmalet that went broke in 2003. It was in the Dow index for Europe or at least for Italy and they were using fake financials, where they had I think $2 billion in a BAC account in the Caymans, a total fiction. The audit was a year old and while they were rated AAA, firms were shoving bonds out the door to the day they went broke. I think the whole world would have known where their cash was as far as the multinational banking business goes, yet they all played stupid. Loss to the public in Italy was something on the order of $20 billion. WCOM was a billboard for the Nasdaq if you can recall. Wall Street shoved the bonds out the door as fast as they could. They knew it was a pipe dream and they blamed it on Ebbers. I think the whole scheme was concocted in NYC, not Mississippi. Then there was Enron. Legitimate firm using what amounts to off balance sheet SIV's crafted by Bank of America and one of the NY Banks, I think Citi. Who took the fall? Lay, a reputable business man until he fell for some idea of becoming a trading firm and Arthur Anderson. Very little was done to those connecte to the banks. What about Sandy Weill being caught on the phone or in an email attempting to bribe an analyst with a place in a highly rated kindergarten in return for a strong buy rating on an ATT spinoff which went the way of whale crap, to the bottom. Weill was already getting paid $100 milion a year and evidently it wasn't enough to keep him from enticing an underling to lie.

This brings us to one of the great statements I have read anywhere, that now they are coming with regulations when they aren't needed. This is my contention, that this game isn't going to go to the next inning as far as the creative schemes to finance risk. John made note of some that write about interest rates going up when this rebounds. I have made note of this myself, not in the sense that I think we are going to get out of this, but in the sense that if we did get out of this, what then? If you put a floor under housing with 4% mortgages, how are they going to sell these houses with 7% rates, which is where they would normally be. I doubt we are going to see a 20% subsidy to keep rates at 4% so the housing industry doesn't collapse again. My point is the Fed is trying to inflate on its own and if they succeed, no amount of quantative easing is going to make private lending happen at 4% on risky instruments. The government can't backstop all of it. My other point is that without the old schemes and a new pool of virgin borrowers, lending won't return for a long time. What is left are people that still have jobs and mainly people that weren't so stupid as to borrow and spend every dime they could. They aren't going to make that mistake now. This is basically what John wrote from what I understand and I concur entirely. We are in a mess that we can only get through, not around.

[mannfm11]

Firms now have three options: First, they can go out of business. Second, they can fight back by trying even harder to satisfy customer needs and wants better than their rivals. And third, they can now cajole their elected representatives to intervene in the market process by contributing directly to them or to their pet causes—making it costly or even impossible for meaningful competition to develop in the market at all.
The technical term that economists use for the third option is rent-dissipation. It describes what happens when possible investment capital is invested in the political class rather than on customers. When this happens, the wealth creation process is hampered considerably. The successful firms are those that are willing and able to pay up for the implied assurance that politicians won’t throw obstacles in the way of the firms’ attempt to participate in the market. The costs of rent dissipation are perhaps more evident to economists, and they generally admired those for refusing to play this game.
Successful firms today still must satisfy the consumer in order to remain in business, but they also must satisfy the political class as well. Failure to do either can spell doom for the naïve firm.

aedens, I think you missed my point. My point was that management doesn't know how to deal with a nonbubble economy and most firms will go broke. This is true not only in the US, but in the rest of the world as well for larger businesses. I can agree they will attempt to use the government shield of monopoly,which is how monopolies get started and perpetuated in the first place, but management cannot operate in an arena that is contrary to what they used to rise to the top. The cost structure won't allow it and most will be buried under existing debt or mismanage themselves out of business before they learn to adapt.

[mannfm11]

Firms now have three options: First, they can go out of business. Second, they can fight back by trying even harder to satisfy customer needs and wants better than their rivals. And third, they can now cajole their elected representatives to intervene in the market process by contributing directly to them or to their pet causes—making it costly or even impossible for meaningful competition to develop in the market at all.
The technical term that economists use for the third option is rent-dissipation. It describes what happens when possible investment capital is invested in the political class rather than on customers. When this happens, the wealth creation process is hampered considerably. The successful firms are those that are willing and able to pay up for the implied assurance that politicians won’t throw obstacles in the way of the firms’ attempt to participate in the market. The costs of rent dissipation are perhaps more evident to economists, and they generally admired those for refusing to play this game.
Successful firms today still must satisfy the consumer in order to remain in business, but they also must satisfy the political class as well. Failure to do either can spell doom for the naïve firm.

I think you missed my point. My point is that the world of being in a financial bubble is so absolutely different in business to being outside of one that management in most firms won't be able to cope or manage costs. Firms managed costs by borrowing money to fire employees and replace them somewhere else in the past. They will have to not only manage costs, but deal with a much lower level of demand, a missing market. The artificial means of shifting the income statement and balance sheet will not be there to give the immediate improvement. Running a real business will be something foreign to most of them. I kind of concur about the idea of having the government interfere. I think that happened to a significant scale when FDR was in office.

[aedens]

I think we will see the crash. This decline has been a really nice Elliott pattern and Robert Prechters group got off at 7000. I have traded elliott before and when you have a clue what the right count is, it is like shooting fish in a barrel. The market makers are running this game and they know where the orders are. The stock market is a shell game and the players that don't know this will find out.

Emptor
As conveyed of late, by a Bull Market participant will begin to question these “urban legends.” And when they do, they'll come to the rather shocking realization that these mega-bearish theories have very little merit. A “crisis of confidence” in the bearish consensus will induce a concomitant corrective impulse of “repentance” and will sustain the final phase of the countertrend rally. MV
They trade positions as we supply it material assembled by who? Of course we see the trends but are we not the ghost in the machine since my Company where I work is in the Dynamic Basic Material Sector Intellidex Index. Let us accustom ourselves, then, not to judge things solely by what is seen, but rather by what is not seen. The sophism on this point consists in showing the public what it pays to the middlemen for their services and in concealing what would have to be paid to the state. Once again we have the conflict between what strikes the eye and what is evidenced only to the mind, between what is seen and what is not seen. Austrian economists are in general agreement with the proposition that market forces must be traced back to the plans of market participants, particularly the plans of entrepreneurs. Analytical differences arise over whether emphasis is to be placed on the expectations and decisions in which plans originate (an ex ante perspective) or on the experience the testing of plans provides (an ex post perspective). It seems to me that both perspectives are necessary for the analysis of dynamic economic processes, and that neither should be allowed to eclipse the other permanently. * Profit is then seen as the reward not for superior foresight, as Mises viewed it, but for the discovery of a piece of knowledge which others lack.

I call it know it better than your wife. Leverage levels are very hard for policy to affect directly, as they result from millions of decentralized decisions about how much people borrow. Anyone with high levels of debt in any market economy is now reevaluating how much debt is reasonable for the medium term. As a result, while attempts to clean up and recapitalize the US and European financial systems make sense, and are needed to support any eventual recovery, this will not immediately stop the process of financial contraction and economic decline. Fiscal stimulus similarly can soften the blow of the recession but will not directly address the underlying problems. The customer is ruthless since he is the consumer as it should be. What I am saying is Volume and Volatility is what they need and not the market as such. Thus, it goes bust only when no one wants to play, when the market is flat and volumes shrink. This hasn't happened in a long, long time. The last time was the 1970's. The Dow literally yawned its way through that entire decade, fluctuating a mere 100 points around the 900 mark. What you do is neglect maintenance on critical intermediate goods…. The elementary flaw in … objection is that he is ignoring the time structure of production today. The most exposed countries to fallout in Eastern Europe are Austria, France, Italy, Belgium, Germany, and Sweden. Austria alone made loans of $297 billion to Eastern Europe, according to Josef Pröll, the Finance Minister in Vienna. This is the equivalent of 70% of the country's GDP. When workers get laid off in the industries that produce investment goods, they can't simply switch over to cranking out TVs and steak dinners. This is because the production of TVs and steak dinners relies on capital goods that must have already been produced. So, as conveyed of late, by a Bull Market participant will begin to question these “urban legends.” And when they do, they'll come to the rather shocking realization that these bearish theories have very little merit?
* Ludwig von Mises, Human Action, third revised edition (Chicago: Henry Regnery, 1966), p. 871. For an acknowledgment of the difference between his own emphasis and that of Mises, see Kirzner, Competition and Entrepreneurship, p. 86.

Firms now have three options: First, they can go out of business. Second, they can fight back by trying even harder to satisfy customer needs and wants better than their rivals. And third, they can now cajole their elected representatives to intervene in the market process by contributing directly to them or to their pet causes—making it costly or even impossible for meaningful competition to develop in the market at all.
The technical term that economists use for the third option is rent-dissipation. It describes what happens when possible investment capital is invested in the political class rather than on customers. When this happens, the wealth creation process is hampered considerably. The successful firms are those that are willing and able to pay up for the implied assurance that politicians won’t throw obstacles in the way of the firms’ attempt to participate in the market. The costs of rent dissipation are perhaps more evident to economists, and they generally admired those for refusing to play this game.
Successful firms today still must satisfy the consumer in order to remain in business, but they also must satisfy the political class as well. Failure to do either can spell doom for the naïve firm.

[umoguy]

Certainly some momentum in the markets, as long as everyone keeps drinking the cool aid. I really enjoy the talking heads on CNBC, they announce horrible numbers like a 6.3 drop in GDP, and then say it was worse than expected, but not as bad as some analysts expected. Smile!

[umoguy]

This market reminds of of a quote I heard somewhere, "The market can remain irrational longer than you can remain solvent..."

[shoshin]

I believe that was Keynes...

[mark]

John,

I read with interest your article about complicity of politicians et al in the financial system failure.

What is your view of people who now hold common stock in banks?

A) They get wiped out?

B) They increase their net worth, because the government is now a major shareholder (AKA fascism)

or

C) Other

My view is current holders of bank common stock get wiped out, then the banks issue new shares and start over....

Mark

see
link http://www.theatlantic.com/doc/200905/imf-advice/4

see page 4 of link for what former IMF official says about what could happen to banks common stock shareholders

[Joe the miner]

For all you bulls out there that think we are at the bottom, look at the following link - lots of great information that puts things into a realistic perspective. If I could figure out how to paste some of these charts here I would...
http://www.financialsense.com/Market/pa ... /0326.html

[Tom Mazanec]

Forgive the OT, but this is how I best know how to reach most of you.
I posted a quick sequel to "Maybe We'll Get It Right This Time" on the generational history board. If you liked it, here is another taste. And if you haven't read it, now is your chance.