"There's a dollar shortage globally,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``Demand for liquidity trumps the fundamentals. Fundamentally, the U.S. is awful, and Europe is awful. Fundamentals are irrelevant today.''
May you live
Tuesday, September 30, 2008
Monday, September 29, 2008
Inconvenient Truth
Haven’t you heard? The United States dollar is toast. That sucker is going DOWN.
Short interest rates are incredibly low and no rational person thinks longer-term U.S. interest rates are headed anywhere but lower, given a looming, if not already-loomed recession. The American government is planning to borrow 5% of GDP on a single bailout package and that’s just one program added to an orgy of spending. The amount of dollar credit flowing out of central banks into the system worldwide is unprecedented. Gold is through the roof and the U.S. trade balance? Forget about it. It’s huge.
And we have been doing all this incredible stuff for at least a year now. So naturally, unquestionably, the U.S. dollar is finished - D to the O to the A. Cataclysmic inflation is moments away. Ron Paul’s face will be the only one we see on currency commonly used inside our borders within months. So long Kingsford, hickory chips and clean-burning propane. Hello dead, smoldering Presidents. Next summer, it’s “Grillin’ With Greenbacks”. Welcome to Weimar America. Enjoy the tangy, smoky, Fiat Flavor.
If you follow the financial pages, you have read this a minimum of a hundred times already, so surely you should have gotten the message by now. Everybody knows it.
Except, of course, that with all this unprecedented madness the dollar index is flat on the year, up 7% off its July lows.
But don’t get me wrong, here. Other than that one little inconvenient truth, the theory is ironclad. I mean it is bedrock solid. After all, the euro – the world’s next great reserve currency – okay the euro is down 8% off its highs but that’s not important. The point is that ours is now a multipolar world. Earth, she is a BRIC house. Mohamed El-Erian says it and he works for PIMCO.
PIMCO.
‘Nuff said.
And, again, other than the fact that three of the four BRIC currencies have fallen off the table (those being the ones that are actually traded in the marketplace), the theory is as beautiful as the Taj Mahal, as strong as a Russian oligarch and arguments against as scant as a Brazilian bikini.
It’s all about industrial production, you see. Note that the Japanese yen is up against the dollar about 4% this year. That may not seem like much, given the trade deficit between the two countries, and it is also 6-7% down from the highs,…making it seem like even less, come to think of it. But the point is that the yen has been the strong currency of a massive industrial powerhouse for decades and in that time the people of the world have been using it…okay, mainly to buy investments denominated in other currencies, but that is not germane because of...um…hang on, I’ll get it…
China! That’s it! The dollar is down decidedly against the Chinese yuan, no counter-trend, end of story. We all know it. China will dominate the world and soon we will all be using Chinese yuan to buy everything from alphabet soup to bicycles to…well…china. Of course because of currency and capital controls, we will not only have to use our yuan to buy from China but also in China, since that’s the only place on the globe you can actually spend Chinese yuan.
Wow, the lines are going to be murder.
But the important thing, Ron Paul reminds us, is that saving in a strong currency protects the value of your assets from inflation. Now, it’s true that Chinese wholesale inflation is at ten percent, but I’m sure that’s an anomaly. And by “anomaly” obviously I mean: “decade-long, upward trend.” But Chinese consumer inflation is at 5% and the Chinese Communist Party would never manipulate consumer prices to keep the Chinese people from getting upset or intervene in the stock market or anything like that. And by “would never” obviously I mean, “definitely would,” but...
Gold! Today’s gold coins come in convenient denominations between $900 and $900 and are accepted at all Sharia-compliant financial institutions, third-world bazaars and survivalist training camps. Gold has been money for 5000 years. Yes, the trend has been towards the acceptance of book-entry debits and credits over the last 700 of those years, but why be trendy?
The point is that the U.S. dollar is finished. You can read it in all the papers.
May you live in interesting times
Short interest rates are incredibly low and no rational person thinks longer-term U.S. interest rates are headed anywhere but lower, given a looming, if not already-loomed recession. The American government is planning to borrow 5% of GDP on a single bailout package and that’s just one program added to an orgy of spending. The amount of dollar credit flowing out of central banks into the system worldwide is unprecedented. Gold is through the roof and the U.S. trade balance? Forget about it. It’s huge.
And we have been doing all this incredible stuff for at least a year now. So naturally, unquestionably, the U.S. dollar is finished - D to the O to the A. Cataclysmic inflation is moments away. Ron Paul’s face will be the only one we see on currency commonly used inside our borders within months. So long Kingsford, hickory chips and clean-burning propane. Hello dead, smoldering Presidents. Next summer, it’s “Grillin’ With Greenbacks”. Welcome to Weimar America. Enjoy the tangy, smoky, Fiat Flavor.
If you follow the financial pages, you have read this a minimum of a hundred times already, so surely you should have gotten the message by now. Everybody knows it.
Except, of course, that with all this unprecedented madness the dollar index is flat on the year, up 7% off its July lows.
But don’t get me wrong, here. Other than that one little inconvenient truth, the theory is ironclad. I mean it is bedrock solid. After all, the euro – the world’s next great reserve currency – okay the euro is down 8% off its highs but that’s not important. The point is that ours is now a multipolar world. Earth, she is a BRIC house. Mohamed El-Erian says it and he works for PIMCO.
PIMCO.
‘Nuff said.
And, again, other than the fact that three of the four BRIC currencies have fallen off the table (those being the ones that are actually traded in the marketplace), the theory is as beautiful as the Taj Mahal, as strong as a Russian oligarch and arguments against as scant as a Brazilian bikini.
It’s all about industrial production, you see. Note that the Japanese yen is up against the dollar about 4% this year. That may not seem like much, given the trade deficit between the two countries, and it is also 6-7% down from the highs,…making it seem like even less, come to think of it. But the point is that the yen has been the strong currency of a massive industrial powerhouse for decades and in that time the people of the world have been using it…okay, mainly to buy investments denominated in other currencies, but that is not germane because of...um…hang on, I’ll get it…
China! That’s it! The dollar is down decidedly against the Chinese yuan, no counter-trend, end of story. We all know it. China will dominate the world and soon we will all be using Chinese yuan to buy everything from alphabet soup to bicycles to…well…china. Of course because of currency and capital controls, we will not only have to use our yuan to buy from China but also in China, since that’s the only place on the globe you can actually spend Chinese yuan.
Wow, the lines are going to be murder.
But the important thing, Ron Paul reminds us, is that saving in a strong currency protects the value of your assets from inflation. Now, it’s true that Chinese wholesale inflation is at ten percent, but I’m sure that’s an anomaly. And by “anomaly” obviously I mean: “decade-long, upward trend.” But Chinese consumer inflation is at 5% and the Chinese Communist Party would never manipulate consumer prices to keep the Chinese people from getting upset or intervene in the stock market or anything like that. And by “would never” obviously I mean, “definitely would,” but...
Gold! Today’s gold coins come in convenient denominations between $900 and $900 and are accepted at all Sharia-compliant financial institutions, third-world bazaars and survivalist training camps. Gold has been money for 5000 years. Yes, the trend has been towards the acceptance of book-entry debits and credits over the last 700 of those years, but why be trendy?
The point is that the U.S. dollar is finished. You can read it in all the papers.
May you live in interesting times
Saturday, September 27, 2008
Citizen Cramer
I’m watching the debates, listening to two smart guys try to pretend that a $700 billion intervention in the financial markets and a coming economic crisis doesn’t make all talk of “spending cuts” into a lot of hooey.
“Will somebody come on TV and tell the truth about how bad it is?” - Jim Cramer famously asked this about the fixed-income market crisis on August 6, 2007. If the Feds had listened - at least about the severity of the crisis - hundreds of billions could have been saved.
Since then, Cramer’s been stunningly right. But he started out stunningly wrong. And lately Cramer has been saying that there’s no time for hearings on the Paulson Plan.
Hmm.
Fortunately, in a surprise (imaginary) move, Congress has unanimously appointed me Chairman of the Joint Committee to Fix This Crazy Mess. Here’s a transcript of today’s proceedings, so tap the gavel and steamroll the witnesses along with me, won’t you?:
begin transcript
Chairman Bailey (I - WA) : The committee will come to order…(taps gavel)…order please…thank you…will someone get my good friend from the state of Washington, Mr. McDermott an oxygen mask or something? Calm down, Jim. Thank you.
I want to thank my good friends for reaching across the aisle and between the houses of the Congress and making it possible to convene this hearing in a spirit of bipartisanship and service to the nation. I am honored and even a little surprised to be your Chairman here today.
I want to thank the witnesses for coming on such short notice.
One scheduling note: the presentation by Representative Ron Paul, the Goldkopf Group and the Supreme Islamic Juridical Council of the Ulema on “Why Gold is God’s Chosen Currency and All Fiat Money is ‘Haraam’” has been moved to tomorrow. “Haraam” – did I pronounce that right Congressman Paul? Good. I’m sure it will be a fascinating.
With us now, we are honored to have our first witnesses, Secretary of the Treasury Henry Paulson and Federal Reserve Chairman Ben Bernanke. Thank you, gentlemen, for coming.
P & B: (inaudible)
Chairman Bailey: Be sure and move the microphones quite close to you, gentlemen.
I want to thank the Secretary and the Chairman for their opening statements and in the interest of time I move that these be submitted into the record so that we can proceed with questions.
Without objection?...so ordered.
Mr. Secretary, if I may start with you, it is the committee’s understanding that you are coming to the Congress of the United States, telling us you need seven hundred billion dollars to save the financial system. I assume you would prefer that in cash?
Paulson: (laughs) Um, well…-
Chairman Bailey: “Um, well,” what?
Paulson: (uncomfortable pause) …Well, Mr. Chairman -
Chairman Bailey: Your opening statement and previous testimony also indicate that you purport to require these moneys by….let’s see here…the end of the month. Is that right?
Paulson: The situation is-
Chairman Bailey: Secretary Paulson, approximately what percentage of the President’s fiscal 2007 budget would $700 billion represent – ex supplementals?
Paulson: Um, I guess…*shuffles papers** that would be about 25%.
Chairman Bailey: 25%, that’s right. And Mr. Secretary what percentage of the gross domestic product of the United States of America does $700 billion represent – in round figures?
Paulson: I think it would be about 5%, Mr. Chairman.
Chairman Bailey: Indeed it would. So is it fair to say, then, that you have come to the Congress of the United States telling us that you need an amount equal to 25% of the President’s official FY 2007 budget and FIVE PERCENT OF GDP, so that you, Henry Paulson, can personally save the financial system? Do I have those figures right?
Paulson: Well, the numbers…I mean, our staff will determine-
Chairman Bailey: -Get out.
Paulson: I beg your pardon, Mr. Chairman, I -
Chairman Bailey: Thank you for your testimony, Mr. Secretary. You’ve certainly given us a sense of the magnitude of this problem. Now you may leave.
Paulson: Um-
Chairman Bailey: Busy day, Mr. Secretary, let’s go. The door is over there. Don’t let it hit you on the way out….you lunatic.
(turns to staff)
Guy comes in here, with a straight face: “Can I have 5% of GDP please?” Oh, sure. Maybe you’d like an aircraft carrier with that? Would gray be okay?
Paulson: Ahem -
Chairman Bailey: Can't find the door, or just having trouble fitting your colossal nerve through it? There ya go, Mr. Secretary. Buh-bye.
[Paulson exits]
Now, Chairman Bernanke?
Bernanke: Yes, Mr. Chairman?
Chairman Bailey: Chairman Bernanke, can you draw up a list of the firms that claim to be threatened with bankruptcy unless we give Henry Paulson 5% of our nation’s gross domestic product?
Bernanke: Well, the situation is-
Chairman Bailey: I didn’t ask you about the situation. I asked you about a list. Can you draw up a list of these institutions – the ones that trouble you most?
Bernanke: Yes, I think I can put together-
Chairman Bailey: -Good. Now call those firms and tell them that I want their Chief Financial Officers in my office at nine o’clock Monday morning or they get nothing.
Bernanke: Monday, but these are busy people, and…
Chairman Bailey: -And we’re the American people. Monday at nine. Buh-bye.
(taps gavel)
The committee will stand in recess for thirty minutes.
(taps gavel again, 30 minutes later)
Chairman Bailey: The committee will come to order. Thank you.
I would like to thank our next witness, Mr. James Cramer.
Cramer: THANK YOU MR.-
Chairman Bailey: Whoa! Easy there, tiger. In your case, I think we want to push the microphone a bit farther away. Mr. Cramer, I’m going to ask that your opening statement also be added to the record.
Without objection?...so ordered.
Now Mr. Cramer. You have been very clever and very right about this financial crisis from the time of your – shall we say “passionate exhortation”, of August 6, 2007.
(all laugh)
Cramer: Thank you Mr. Chairman.
Chairman Bailey: But my staff has brought to my attention a broadcast of July 16th that same year – a webcast. In it you said and I quote “if every loan in 2006 that was subprime blew up - $500 billion - if they all blew up – you would still not notice…it has no relevance whatsoever…the tranching is the reason why there’s no impact….this is an issue that people want to really, really, really make a just a gigantic hill out of a molehill.”
Is it fair to say, Mr. Cramer, that you changed your mind about that?
Cramer: (laughs) Yes, Mr. Chairman. Very much so.
Chairman Bailey: In that July broadcast, you mentioned documents pertaining to the Accredited Home Lenders takeover. Do you remember doing that? Short answers here, Mr. Cramer.
Cramer: Yes I do.
Chairman Bailey: As I understand it, you used Accredited Home Lenders as an example of why the subprime issue was NOT going to be a huge problem. You suggested that one of the worst lenders in the country had a single-digit default rate and had issued a fairly small amount of debt relative to the marketplace. Is that a fair restatement?
Cramer: Of my words in July? Yes, Mr. Chairman.
Chairman Bailey: Now in your more famous August 6, 2007 broadcast you mentioned that Accredited Home Lenders document again, did you not?
Cramer: In terms of Fed President Poole, Mr. Chairman?
Chairman Bailey: Exactly, in terms of Fed President Poole. Only three weeks later, talking about the same documents you suggested – very loudly – that Mr. Poole should have more knowledge about this crisis - that he was “a shame” and “shameful” and that “he ought to go and read the Accredited Home Lenders document, at least I read the darn thing!”. I’m sure you remember that. So is it fair to say that in July of 2007 you had one attitude about the facts and figures revealed in the Accredited Home Lenders document and in August of 2007 you had another attitude about these same facts and figures?
Cramer: Well, yes the market-
Chairman Bailey: Did you say “yes”? Your attitude did change? You learned new information that changed your attitude?
Cramer: Yes, the Bear Stearns-
Chairman Bailey: So the answer is “yes”.
Now we are going to look at what changed your attitude, because what you have demonstrated, Mr. Cramer, has not only been rising concern, but an increasing disgust with the conduct of America’s financial community. I feel certain this may have some direct bearing on what kind of bailout will work and what won’t.
Mr. Cramer, in an article appearing on your web site July 29th of this year - again referring to Accredited Home Lenders as well as AIG and others - you wrote:
“The amazing thing about these CDOs is how different they are from the actual mortgage market.…These pieces of paper were simply set up to have tremendous losses if we get even 20% to 30% defaults….ultimately for the worst 2006 vintages, we could reach that because of the massive fraud and overvaluation that took place.”
In that same article, you wrote about: “bogus insurance” and you also wrote:
“Who the heck created stuff that could lose that much on mortgages that aren't defaulting anywhere near that?
The creators are a disgrace.
And they are probably making millions, because Wall Street can be an abject cesspool of ridiculously overpaid talent that has destroyed billions.”
Now you’ve been supportive of Mr. Paulson’s plan, Mr. Cramer. You have disparaged the need for hearings. But Mr. Cramer, when you write about a “disgrace”,
an “abject cesspool” producing “massive fraud,” “overvaluation,” and “bogus insurance,” that suggests to me there is something very rotten at the heart of this financial mess – something we need to have out if we are going to fix this - and that you, Mr. Cramer, have a pretty good idea what that something is.
Mr. Cramer, here is how nations solve these problems: somebody stops trying to be smarter than everyone else; stops worrying about reputation; stops doing his job, playing his role, acting out his part and starts being a citizen. Somebody just tells the truth about how bad it is out there.
Mr. Cramer in July of 1973 a smart lawyer kind of like you appeared before a committee kind of like this and started telling the truth about one of our nation’s greatest national crises. I am going to ask you a question kind of like the one he was famously asked:
Mr. Cramer, what do you know and when did you know it?
Cramer: (inaudible)
end transcript
May you live in interesting times
“Will somebody come on TV and tell the truth about how bad it is?” - Jim Cramer famously asked this about the fixed-income market crisis on August 6, 2007. If the Feds had listened - at least about the severity of the crisis - hundreds of billions could have been saved.
Since then, Cramer’s been stunningly right. But he started out stunningly wrong. And lately Cramer has been saying that there’s no time for hearings on the Paulson Plan.
Hmm.
Fortunately, in a surprise (imaginary) move, Congress has unanimously appointed me Chairman of the Joint Committee to Fix This Crazy Mess. Here’s a transcript of today’s proceedings, so tap the gavel and steamroll the witnesses along with me, won’t you?:
begin transcript
Chairman Bailey (I - WA) : The committee will come to order…(taps gavel)…order please…thank you…will someone get my good friend from the state of Washington, Mr. McDermott an oxygen mask or something? Calm down, Jim. Thank you.
I want to thank my good friends for reaching across the aisle and between the houses of the Congress and making it possible to convene this hearing in a spirit of bipartisanship and service to the nation. I am honored and even a little surprised to be your Chairman here today.
I want to thank the witnesses for coming on such short notice.
One scheduling note: the presentation by Representative Ron Paul, the Goldkopf Group and the Supreme Islamic Juridical Council of the Ulema on “Why Gold is God’s Chosen Currency and All Fiat Money is ‘Haraam’” has been moved to tomorrow. “Haraam” – did I pronounce that right Congressman Paul? Good. I’m sure it will be a fascinating.
With us now, we are honored to have our first witnesses, Secretary of the Treasury Henry Paulson and Federal Reserve Chairman Ben Bernanke. Thank you, gentlemen, for coming.
P & B: (inaudible)
Chairman Bailey: Be sure and move the microphones quite close to you, gentlemen.
I want to thank the Secretary and the Chairman for their opening statements and in the interest of time I move that these be submitted into the record so that we can proceed with questions.
Without objection?...so ordered.
Mr. Secretary, if I may start with you, it is the committee’s understanding that you are coming to the Congress of the United States, telling us you need seven hundred billion dollars to save the financial system. I assume you would prefer that in cash?
Paulson: (laughs) Um, well…-
Chairman Bailey: “Um, well,” what?
Paulson: (uncomfortable pause) …Well, Mr. Chairman -
Chairman Bailey: Your opening statement and previous testimony also indicate that you purport to require these moneys by….let’s see here…the end of the month. Is that right?
Paulson: The situation is-
Chairman Bailey: Secretary Paulson, approximately what percentage of the President’s fiscal 2007 budget would $700 billion represent – ex supplementals?
Paulson: Um, I guess…*shuffles papers** that would be about 25%.
Chairman Bailey: 25%, that’s right. And Mr. Secretary what percentage of the gross domestic product of the United States of America does $700 billion represent – in round figures?
Paulson: I think it would be about 5%, Mr. Chairman.
Chairman Bailey: Indeed it would. So is it fair to say, then, that you have come to the Congress of the United States telling us that you need an amount equal to 25% of the President’s official FY 2007 budget and FIVE PERCENT OF GDP, so that you, Henry Paulson, can personally save the financial system? Do I have those figures right?
Paulson: Well, the numbers…I mean, our staff will determine-
Chairman Bailey: -Get out.
Paulson: I beg your pardon, Mr. Chairman, I -
Chairman Bailey: Thank you for your testimony, Mr. Secretary. You’ve certainly given us a sense of the magnitude of this problem. Now you may leave.
Paulson: Um-
Chairman Bailey: Busy day, Mr. Secretary, let’s go. The door is over there. Don’t let it hit you on the way out….you lunatic.
(turns to staff)
Guy comes in here, with a straight face: “Can I have 5% of GDP please?” Oh, sure. Maybe you’d like an aircraft carrier with that? Would gray be okay?
Paulson: Ahem -
Chairman Bailey: Can't find the door, or just having trouble fitting your colossal nerve through it? There ya go, Mr. Secretary. Buh-bye.
[Paulson exits]
Now, Chairman Bernanke?
Bernanke: Yes, Mr. Chairman?
Chairman Bailey: Chairman Bernanke, can you draw up a list of the firms that claim to be threatened with bankruptcy unless we give Henry Paulson 5% of our nation’s gross domestic product?
Bernanke: Well, the situation is-
Chairman Bailey: I didn’t ask you about the situation. I asked you about a list. Can you draw up a list of these institutions – the ones that trouble you most?
Bernanke: Yes, I think I can put together-
Chairman Bailey: -Good. Now call those firms and tell them that I want their Chief Financial Officers in my office at nine o’clock Monday morning or they get nothing.
Bernanke: Monday, but these are busy people, and…
Chairman Bailey: -And we’re the American people. Monday at nine. Buh-bye.
(taps gavel)
The committee will stand in recess for thirty minutes.
(taps gavel again, 30 minutes later)
Chairman Bailey: The committee will come to order. Thank you.
I would like to thank our next witness, Mr. James Cramer.
Cramer: THANK YOU MR.-
Chairman Bailey: Whoa! Easy there, tiger. In your case, I think we want to push the microphone a bit farther away. Mr. Cramer, I’m going to ask that your opening statement also be added to the record.
Without objection?...so ordered.
Now Mr. Cramer. You have been very clever and very right about this financial crisis from the time of your – shall we say “passionate exhortation”, of August 6, 2007.
(all laugh)
Cramer: Thank you Mr. Chairman.
Chairman Bailey: But my staff has brought to my attention a broadcast of July 16th that same year – a webcast. In it you said and I quote “if every loan in 2006 that was subprime blew up - $500 billion - if they all blew up – you would still not notice…it has no relevance whatsoever…the tranching is the reason why there’s no impact….this is an issue that people want to really, really, really make a just a gigantic hill out of a molehill.”
Is it fair to say, Mr. Cramer, that you changed your mind about that?
Cramer: (laughs) Yes, Mr. Chairman. Very much so.
Chairman Bailey: In that July broadcast, you mentioned documents pertaining to the Accredited Home Lenders takeover. Do you remember doing that? Short answers here, Mr. Cramer.
Cramer: Yes I do.
Chairman Bailey: As I understand it, you used Accredited Home Lenders as an example of why the subprime issue was NOT going to be a huge problem. You suggested that one of the worst lenders in the country had a single-digit default rate and had issued a fairly small amount of debt relative to the marketplace. Is that a fair restatement?
Cramer: Of my words in July? Yes, Mr. Chairman.
Chairman Bailey: Now in your more famous August 6, 2007 broadcast you mentioned that Accredited Home Lenders document again, did you not?
Cramer: In terms of Fed President Poole, Mr. Chairman?
Chairman Bailey: Exactly, in terms of Fed President Poole. Only three weeks later, talking about the same documents you suggested – very loudly – that Mr. Poole should have more knowledge about this crisis - that he was “a shame” and “shameful” and that “he ought to go and read the Accredited Home Lenders document, at least I read the darn thing!”. I’m sure you remember that. So is it fair to say that in July of 2007 you had one attitude about the facts and figures revealed in the Accredited Home Lenders document and in August of 2007 you had another attitude about these same facts and figures?
Cramer: Well, yes the market-
Chairman Bailey: Did you say “yes”? Your attitude did change? You learned new information that changed your attitude?
Cramer: Yes, the Bear Stearns-
Chairman Bailey: So the answer is “yes”.
Now we are going to look at what changed your attitude, because what you have demonstrated, Mr. Cramer, has not only been rising concern, but an increasing disgust with the conduct of America’s financial community. I feel certain this may have some direct bearing on what kind of bailout will work and what won’t.
Mr. Cramer, in an article appearing on your web site July 29th of this year - again referring to Accredited Home Lenders as well as AIG and others - you wrote:
“The amazing thing about these CDOs is how different they are from the actual mortgage market.…These pieces of paper were simply set up to have tremendous losses if we get even 20% to 30% defaults….ultimately for the worst 2006 vintages, we could reach that because of the massive fraud and overvaluation that took place.”
In that same article, you wrote about: “bogus insurance” and you also wrote:
“Who the heck created stuff that could lose that much on mortgages that aren't defaulting anywhere near that?
The creators are a disgrace.
And they are probably making millions, because Wall Street can be an abject cesspool of ridiculously overpaid talent that has destroyed billions.”
Now you’ve been supportive of Mr. Paulson’s plan, Mr. Cramer. You have disparaged the need for hearings. But Mr. Cramer, when you write about a “disgrace”,
an “abject cesspool” producing “massive fraud,” “overvaluation,” and “bogus insurance,” that suggests to me there is something very rotten at the heart of this financial mess – something we need to have out if we are going to fix this - and that you, Mr. Cramer, have a pretty good idea what that something is.
Mr. Cramer, here is how nations solve these problems: somebody stops trying to be smarter than everyone else; stops worrying about reputation; stops doing his job, playing his role, acting out his part and starts being a citizen. Somebody just tells the truth about how bad it is out there.
Mr. Cramer in July of 1973 a smart lawyer kind of like you appeared before a committee kind of like this and started telling the truth about one of our nation’s greatest national crises. I am going to ask you a question kind of like the one he was famously asked:
Mr. Cramer, what do you know and when did you know it?
Cramer: (inaudible)
end transcript
May you live in interesting times
Tuesday, September 23, 2008
Why The Paulson Plan Won't Work
Make no mistake, something must be done quickly. WaMu, for example, may be just days away from bankruptcy. The Paulson Plan might possibly succeed in saving WaMu for another couple months. But I believe it will fail to save the financial system. I have been in favor of all the bailout efforts up until now, but the plan put forward by Secretary Paulson might be the worst approach possible. I can actually explain why with a single Wikipedia page. Honestly.
As you may know, the largest financial market in the world has crashed. No, you didn't read it in a headline when it happened. No, nobody in the government told you that it happened. The level of denial and disbelief has been astounding. But I am telling you, that it is 1929 and the market has already crashed. Forget the stock market, we're talking here about a market that is deeper in the heart of our financial system. You can see the crash start August 9th, 2007 in a chart of the LIBOR interest rate many know all too well:
The market was the market for American mortgages, mortgage-backed securities and contracts derivative of this market. Contrary to the irresponsible reporting that prevails in all but the financial press, selling mortgages is NOT a new practice, of course. It is many decades old. It helped get us out of the Depression. It is completely essential to our financial system. But right now, banks cannot sell their mortgages into a crashed market.
Thus the Paulson Plan's simple premise is for the government to start buying these mortgages, putting - they hope - a rational price on them when a crashed market has failed to. It seems reasonable. It would even work and I would support it wholeheartedly and shout down the critics if the problem in the secondary mortgage market was simply a lack of "liquidity" or money. But I fear the problem is different and must be addressed with different means.
As for Secretary Paulson himself, a cynical person might suggest that investment banker Henry Paulson, was previously treating America as his client - getting us equity when we extended credit - but is now treating the banks as his client and America as a "customer" - the lowest form of life for an investment banker. A cynical person might suggest that Paulson is simply "jamming bonds" down our throats. Actually a non-cynical person might suggest that also, because it's true. But let's get to the real problem.
The the real problem in the mortgage market is this guy:
Banks were inviting people into their used car lot of mortgages and saying things like:
"This one? Oh, this one's a beauty. It's a $500K mortgage on a house assessed at $510K, which we made to a guy with a 700 FICO score who makes $125K a year . Oh, and I will throw in an insurance policy on it that's worth $400K. Wanna buy it?"
And people bought.
But it turned out that the loan above was actually a $500K mortgage on a (then) $400K house with its assessment inflated by $110K made to a guy whose credit score had been inflated and who made...well, we really have no idea what he makes, but it's probably more like $45K. And that insurance policy? Yeah, turns out that was actually worth $0K - nothing. Hence, we the citizens now own 80% of AIG. Oh, and that house isn't even worth $400K any more, it's worth more like $300K and dropping.
So the market for these loans quite naturally dried up.
The banks were selling were Lemon Loans. And if you don't think "Lemon Loan" is strong enough and think something like "felony fraud" would be more appropriate, so do I. However, I choose "Lemon Loan" because of a theory for which some guys got the 2001 Nobel prize in economics, but about which Henry Paulson seems to have forgotten.
The Nobel-prize-winning theory is called "The Market For Lemons" and if you follow the link to that single Wikipedia page I promised you, you will see that the Nobel was for a paper which revealed why markets crash when they become filled with bad merchandise passed off as good merchandise. Of course we all know this through common sense, but you don't get Nobel prizes for common sense.
For comparison, let's use another little no-regulation nightmare and yet another market predictably destroyed by fraud: How many of you would buy powdered milk from China right now?
I'm sure China produces many tons of perfectly good powdered milk that would be healthful for anyone to drink. However, it has been revealed in the last few months that they have also been producing fraudulent powdered milk that has proven toxic to some children who drank it. If you are in the market for powdered milk you are not, I predict, going to spend the valuable money in your wallet on something with very uncertain value - Chinese powdered milk - something that might even be toxic. Likewise, America produces and can produce trillions of dollars in sound mortgages that would be wise investments for anyone to buy and own. However, it has been revealed in the last few months that we have also been producing fraudulent mortgages that have proven toxic to the balance sheets of some institutions who bought them.
Would you buy Chinese powdered milk simply because you read that Chinese government had started to buy it? I think not. Therefore, it is my belief that people in the secondary mortgage market are probably not going to start buying American mortgages simply because the American government is buying them. I think people are going to wait for proof that these mortgages are not toxic to their balance sheets before they put down cold cash. If we give buyers good information and sound guarantees, they may come back and buy. If we don't, I fear they will not.
To be technical for a moment, I think the information in the market for American mortgages became too "asymmetric" and thus the market reached a "no-trade equilibrium." This has caused a glut in the supply of high-risk assets so huge that portfolios simply cannot absorb them and maintain a normal risk-weight, let alone the more-conservative risk-weight they desire right now. I think this is also affecting other liquid, high-beta equities and credits. Here's the MSCI Emerging Markets ETF:
By the technical talk I mean that nobody will buy our mortgages until we turn ourselves from this guy:
into this guy:
I believe that the world desperately wants and needs safe American investments. If we are straight and honest with the world; if we reassure them with a next-generation financial information system; if we give them quality government guarantees; they will buy our bonds and mortgages. It will take a huge effort. Ultimately we may have to tell the truth about, and guarantee to the maximum extent possible, every non-fraudulent home mortgage in America. It sounds daunting, but only is such a project possible, it would bring monetizable value and innovation to our economy. It would allow us to survive a disaster which might otherwise destroy whole communities.
To those who would say "let the destruction happen" - you're simply being childish and foolish. We can't afford to lose an entire market every time some fraudsters get together and try to cheat people. We can't let the sleaziest capitalists in our system define the value of our markets. That's not a free market. That's anarchy ruled by villains.
If we the citizens act to bring honesty, information and government-guaranteed quality to our financial system, we can survive this. The choice is ours.
May you live in interesting times
Tidy Anti-Bubbles All Broken?
A trillion or so dollars in dollar-based credit = some promised, some delivered - will do that.
Ah well, back to fundamentals and maybe some brand-new bubbles. Nobody ever said this would be easy. Needless to say, the dollar short-term dollar shortage has been ameliorated.
Wow.
Long-term.
Doubt it.
But because the anti-bubble trends are threatened, while I still believe in the dollar-led deflation scenario, obviously it's a wait-and-see thing. Dollar index has been hit, through the 50-day MA, but still above the 100-day and nowhere near even July levels.
So maybe everything is still in place - except gold - but it's a shame. The trends were so nice and neat.
May you live in interesting times
Ah well, back to fundamentals and maybe some brand-new bubbles. Nobody ever said this would be easy. Needless to say, the dollar short-term dollar shortage has been ameliorated.
Wow.
Long-term.
Doubt it.
But because the anti-bubble trends are threatened, while I still believe in the dollar-led deflation scenario, obviously it's a wait-and-see thing. Dollar index has been hit, through the 50-day MA, but still above the 100-day and nowhere near even July levels.
So maybe everything is still in place - except gold - but it's a shame. The trends were so nice and neat.
May you live in interesting times
Thursday, September 18, 2008
Why I Got Gold Wrong
There should now be no question that America is in a deflationary crisis. Therefore, holding gold - a commodity - is fundamental financial insanity. And yet gold is skyrocketing. I missed the fact that, psychologically, people have little choice.
One always needs to look at one's ideas from different perspectives, especially when one feels surest about them and certainly when developments call them into question. So, I know a guy who does branding and I thought about it from his perspective.
I went through the asset classes, thinking in terms of a simple phrase that might characterize people's opinion of them:
Commodities: See "deflation" above.
Real estate/REITs: Are you kidding?
Mortgage-Backed Securities: Full of Lemon Loans, the whole problem. Next.
Corporate Bonds: Spreads too high, too much risk.
Municipal Bonds: No bond insurance, hurt by falling tax revenues.
Treasury Bonds: Yields INCREDIBLY low.
Foreign bonds: Nobody even knows how to buy them.
American Stocks: Cramer says "1987".
Emerging market stocks: 1987 or 1929, take your pick.
Even Money Market accounts are in trouble as the Reserve Fund "broke the buck".
That doesn't leave much. I come up with MAYBE European/Japanese stocks...and gold.
Gold is the only asset with - if you'll allow me - an untarnished brand.
Therefore, tragically, gold will go up and fast as people lose faith in other assets. It will also go up on the false, chimerical belief that somehow gold is money.
Here's how wrong is the idea that gold is money: Islamic law more-or-less mandates that gold be used as money and yet Islamic states issue fiat currency.
In the modern world, gold operates as a vehicle for currency arbitrage - a place to temporarily park your assets until you decide what currency you want them in. But it is a creature OF the currency system, not a backing for it and certainly not a substitute. For this reason the dollar index - despite unprecedented turmoil and low short-term rates - does little:
Once people decide they need that currency - to buy things - they sell their gold. And that's what people will do - en masse - when they start to need the money they have "saved" by buying gold.
In the meantime, goldbugs, have fun and, as ever...
May you live in interesting times
One always needs to look at one's ideas from different perspectives, especially when one feels surest about them and certainly when developments call them into question. So, I know a guy who does branding and I thought about it from his perspective.
I went through the asset classes, thinking in terms of a simple phrase that might characterize people's opinion of them:
Commodities: See "deflation" above.
Real estate/REITs: Are you kidding?
Mortgage-Backed Securities: Full of Lemon Loans, the whole problem. Next.
Corporate Bonds: Spreads too high, too much risk.
Municipal Bonds: No bond insurance, hurt by falling tax revenues.
Treasury Bonds: Yields INCREDIBLY low.
Foreign bonds: Nobody even knows how to buy them.
American Stocks: Cramer says "1987".
Emerging market stocks: 1987 or 1929, take your pick.
Even Money Market accounts are in trouble as the Reserve Fund "broke the buck".
That doesn't leave much. I come up with MAYBE European/Japanese stocks...and gold.
Gold is the only asset with - if you'll allow me - an untarnished brand.
Therefore, tragically, gold will go up and fast as people lose faith in other assets. It will also go up on the false, chimerical belief that somehow gold is money.
Here's how wrong is the idea that gold is money: Islamic law more-or-less mandates that gold be used as money and yet Islamic states issue fiat currency.
In the modern world, gold operates as a vehicle for currency arbitrage - a place to temporarily park your assets until you decide what currency you want them in. But it is a creature OF the currency system, not a backing for it and certainly not a substitute. For this reason the dollar index - despite unprecedented turmoil and low short-term rates - does little:
Once people decide they need that currency - to buy things - they sell their gold. And that's what people will do - en masse - when they start to need the money they have "saved" by buying gold.
In the meantime, goldbugs, have fun and, as ever...
May you live in interesting times
Wednesday, September 17, 2008
Here's A Headline You Don't See Every Day
Treasury 3-Month Bill Rates Drop to Lowest Since World War II
Short-term rates basically MAKE the value of money in the foreign exchange markets. And yet with short-term rates at almost ZERO, here's the effect on the dollar:
Yes, it is back to the Monday morning opening price.
Lowest short-term rates since WW2, and the value of the dollar goes down to where it was all of Monday morning.
That's basically BANKERS saying: "we are so scared right now that we will give you all the dollars you want as long as you simply promise to pay us back what we gave you - no interest."
That is a statement that right now the ONLY thing serious people trust in the developed world is the United States Treasury bond.
I was so cheerful this morning. With AIG was bailed out and I thought maybe crisis was averted. I want change in this country and the world. I KNOW the changes we need and, interestingly, we are heading there - fast.
But I never expected - or wanted - for it to happen like this.
I think we cannot but surmise that The Crash has already happened and we are just sitting here, waiting for the tsunami.
May you live in times of great interest - or at least more than 0.3%
U.S. Treasury three-month bill rates dropped to the lowest since World War II as a loss of confidence in credit markets worldwide prompted investors to abandon higher-yielding assets for the safety of the shortest- term government securities.
Investors pushed down the rate to 0.0203 percent on concern that credit market losses will widen after the bankruptcy of Lehman Brothers Holdings Inc. and the federal takeover of American International Group Inc. In a sign of banks' reluctance to lend, the rates charged for short-term loans relative to U.S. bill rates rose to the highest on record.
Short-term rates basically MAKE the value of money in the foreign exchange markets. And yet with short-term rates at almost ZERO, here's the effect on the dollar:
Yes, it is back to the Monday morning opening price.
Lowest short-term rates since WW2, and the value of the dollar goes down to where it was all of Monday morning.
That's basically BANKERS saying: "we are so scared right now that we will give you all the dollars you want as long as you simply promise to pay us back what we gave you - no interest."
That is a statement that right now the ONLY thing serious people trust in the developed world is the United States Treasury bond.
I was so cheerful this morning. With AIG was bailed out and I thought maybe crisis was averted. I want change in this country and the world. I KNOW the changes we need and, interestingly, we are heading there - fast.
But I never expected - or wanted - for it to happen like this.
I think we cannot but surmise that The Crash has already happened and we are just sitting here, waiting for the tsunami.
May you live in times of great interest - or at least more than 0.3%
Subscribe to:
Posts (Atom)
