Too Much News, Too Little Time

Below you will see format problems. I apologize. I tried to correct them but they cam back again. Must be some errant key I hit.

I apologize for no earlier posting today, but I got so excited last night to have full speed internet I stayed up to the wee hours reading and posting. It is an addiction. Well, I overslept a bit this morning and had no time to do my morning surfing and posting. Still, it was fun.

The Madoff Affair

I certainly don't think it will take long for Hollywood to turn the largest Ponzi scheme ever into a movie. The story still needs to unfold but it promises to have a lot of intrigue. The real question will be, what will be the cast of characters.

Bloomberg reports that Madoff's wife is under investigation. I have read several articles suggesting that there is no way Madoff could have pulled off this massive fraud for so long without help. Barry Ritholtz at the Big Picture speculated that the current market conditions made it impossible for Madoff to continue the fraud and the sons turning him in may have been a convenient way to clean their hands. Daddy takes a dive for his sons? You never know. Could be he took one for his wife and sons and countless others. This will be interesting to watch.

Nonetheless, between Bear Stearns, Lehman, Merrill Lynch, Madoff and everything else, it is clear that the SEC has been wholly incompetent under Cox. As he himself now admits, self-regulation of financial institutions does not work. There is a reason for regulations and laws and those that enforce them. It is called human nature. Yes, there are plenty of good people out there but check the prison population if you doubt there are plenty at the other end of the spectrum. The seven deadly sins have been around for a very long time and I suggest those in the shadow banking system probably can check off having achieved several of them. Above all else - greed.

Well, it looks like Obama is going to appoint Shaprio to head up the SEC. I know nothing about her beyond what Bloomberg says about her, but I can guarantee that it would be hard to do worse than Cox.

You may not know this but a few years ago several institutions went to the SEC and asked to be exempted from a 1975 law that restricted the debt to capital ratio to 12. The SEC agreed and allowed them to go up to a ration of 40-50 to one AND it allowed them to recompute how they determine their capital levels, making matters even worse. The five companies given this special exception included Bear Stearns, Lehman and Merrill Lynch. Seems to have worked out really well. It also included Goldman Sachs, which just reported a loss - despite being recognized as probably the best of the lot.

http://www.bloomberg.com/apps/news?pid=20601087&sid=accRgQ_2s29o&refer=home

http://www.bloomberg.com/apps/news?pid=20601087&sid=aAAg.XK6BesQ&refer=home

Good and Bad News

And as usual both are the same news. The market responded splendidly yesterday to the news that Helicopter Ben may take rates as low as 0%. Remember "go Ben go." Well here we are a day later and it now dawns on folks that Ben is kinda out of arrows in his rate cut quiver. Not that it matters much because none of the arrows he has launched to date has hit any of his targets, but at least on the interest rate front he is out of ammo. One might say, impotent.

This is not to say Ben is without weapons. He has a helicopter filled with them. Now you may not fully understand it - I sure don't - but it is called quantative easing (okay, some say it is not technically quantative easing, but I think that is more semantics). Quantative is the money supply and easing means to increase it. Thus, the frequent reference to Ben dropping money from a helicopter. And that is just what he is going to do.

Some of us (me) do not think this is the right thing to do and will have some pretty nasty short, medium and long term effects. Moreover, in the current environment it will not work. I could be wrong and I look forward to proclaiming it here if I am, but pouring money on it assumes the crisis is a liquidity crisis. The crisis is one of confidence, trust and solvency. I don't care how much money I have to lend, I am going to hang on to it if I don't know whether you will be able to repay it. And I don't know if you will because I cannot judge - and you cannot judge - the value of the crap on your books (and those off-balance-sheet in SIVs or not properly valued in Level 3 lala land). So I don't think this will work.

For those wanting more on this, Yves has a rather exhaustive post that addresses a lot more angles and she definitely understands this better than me, so I highly recommend you check this out.

http://www.nakedcapitalism.com/2008/12/trepidation-about-quantitative-easing.html

And this take on it is not too bad either:

http://globaleconomicanalysis.blogspot.com/2008/12/quantitative-easing-american-style-free.html


By the way, if Ben would be willing to drop say $200 million on my lawn I would promise to spend at least half of that recklessly. I would buy cars, supporting the Big Three (and BMW, Lamborghini (sp?), Bentley and a few other). I would buy houses all over the place and support a housing bottom. I would buy lots of nice clothes, electronics, furniture (for all those houses) and services (maids and gardners and such for all those homes). I would support the airlines by traveling a lot and Las Vegas would certainly see a fair share of those dollars. If the government wants spending to revive the economy, I am your man. Just give me a chance.

Mind you, if the filthy rich spent half of their money that might help a lot. As Paul Krugman points out, the top end spending significant amounts of their money can support the economy in a similar fashion to the rest of us spending relatively little. There are other alternatives, such as a progressive tax that simply takes the money away from them and redistributes it to those who need to spend it. Either way, we need trickle up economics for a while because the trickle down never worked too well.

http://krugman.blogs.nytimes.com/2008/12/17/do-we-need-the-middle-class/

Treasury Bubble

A flight to safety has caused Treasuries to become wildly popular, but 0% rates - yes people are giving the money to the government for nothing and an effective negative yield - are making Treasuries less appealing otherwise. From what I am reading and hearing, a bubble if forming in Treasuries and it could soon pop. I am getting some mixed signals on this, so this is just a keep your eyes on the situation warning, but things could get hairy quickly. And as Yves reports, 0% is not helping things as it reduces liquidity in Treasuries. Yet another unintended consequence.

http://www.nakedcapitalism.com/2008/12/super-low-treasury-rates-reducing-repos.html

Not Good

Chrysler is idling ALL of its plants for a month. Lest the government come through with some support soon, it could be a very, very long month. Think about the knock-on effect to suppliers, dealerships, employees, etc. As I said, not good.

http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B20EA3667%2D4149%2D4E76%2DAF74%2DF873264CACA4%7D

Big Surprise - OPEC Cuts Output

It is the biggest cut in decades - 2.2 milloin barrels a day. Wow! As you would expect, the market reacted in a big way. Crude oil was DOWN 8% today to close at around $40 a barrel. Now I at one point expected the price to start rising more but then read a more detailed piece, I posted here before, noting how extreme the over-supply is right now. Something on the order of 7 million gallons a day too much in supply given the global slow down, so a 2.2 million cut is just a drop in the proverbial oil bucket.

Mind you, we will one day go back to high prices and the low price of crude is drastically reducing investment in exploration at the moment, so when demand picks up, things can get tight quickly. Just not likely to happen for a while.

Meanwhile, with oil down and perhaps falling a bit more, might we eventually see gas under a dollar. Perhaps, but it may depend on how tough this Winter becomes.

I have noted before that low oil spells trouble for Russia and Venezuela, among others. Venezueala I personally do not care much about. They don't like us and I don't like them. But Russia, that is another problem. It has money to survive for a while, but we do not want a destabilized Russia any more that a destabilized China.

Nonetheless, for now, low gas prices could not come at a better time for us. It will definitely helps us to make ends meet, pay down debt and reach the bottom sooner. And we need to get to the bottom fast.

Have I mentioned we are reverting to a wide array of means and will likely overshoot most. Efforts to avoid this "correction" are fools folley. We should be looking for ways to speed it up. Like take down failing financial institutions (in an orderly government supported fashion) instead of putting them on life support and hoping they feel better in the morning. Oh well, I rant again and no one listens.

Not For The Faint Of Heart

Okay, I mentioned the other day that Michael Panzner's book got too scary for me to initially finish. That was the truth. Well, Michael is quickly replacing Stephen King on my list. The reason, King was pure fiction, while Panzner tells us of things that might come true (and so far have). Well, he has not lost his touch. Here he passes on a tale of Argentina, once - not so long ago - the most affluent country in Latin America. Now, well, just read the attached. I have read of shanty towns popping up out west in Reno and other locations. Yes, things can get worse. By the way, I don't expect this level of worse for the U.S., but our government has to start doing smarter things with our money.

http://www.financialarmageddon.com/2008/12/into-the-economic-abyss.html

Getting Desperate

News of companies cutting jobs, cutting benefits, cutting everything they can cut is getting rampant. Expect more. I have not a single doubt that next year will be worse than this year though I hope it is the worst of the years and 2010 and beyond are not worse still. Either way, 2009 is going to suck wind. As I have said before, hunker down. And if I need to spell that out, I mean cut all discretionary spending you can, save what you can, pay off debt (while maintaining adequate liquidity) and make yourself useful at work. The last is the most important.

I am no expert on this so do an internet search on it. There are plenty of sites that will give useful hints on things you can do to make yourself valuable at work and keep your job. Well worth the investment if you are working for a company where things are lean. Keeping yourself invaluable is, well, invaluable.

http://globaleconomicanalysis.blogspot.com/2008/12/wave-of-frozen-salaries-frozen-pension.html

What I Have Been Saying

This just confirms what I have been saying. We are all spent. We ain't got nothin' more and giving us money to spend is not going to help - other than us saving it and paying off debt. Nonetheless, I just want to show you some others agree with my diagnosis. Besides, Hellasious has a couple of nice cliff diving charts on housing and cars that are worth the view.

http://suddendebt.blogspot.com/2008/12/two-big-sectors.html

One Last Note

Global warming is a fact. Pretty much no one disputes that it exists. The debate is over the cause. I am not going to go there. All I have to say is as long as it is a problem and as long as a significant number of scientists are saying human kind is responsible, then I think we need to act as science will likely come to concensus too late to help. Alternatively, most sources of gases that supposedly lead to global warming undoubtedly pollute, which beyond debate is generally not a good thing. The debate can center on how bad it is, but pretty much all agree it is not good. So what to do.

There are many alernative energy solutions and I want to nominate my favorite. Before I do so, let me disclose that I have less than $500 invested in a company that is active here. The solution I support is algae. Let me give you a few reasons why:

1. Algae can be grown almost anywhere. It does not need to be grown where food sources can be grown, like corn or soy. It can be grown almost anywhere and it grows in putrid water by other standards.
2. Algae needs CO2 to survive. It sequesters it during the growing process so it is ideal for growing near power plants, where it can absorb a lot of this waste. It releases it when burned, but a carbon neutral fuel is a good fuel.
3. It is up to 50% oil that can be converted to diesel. Compared to other crops like corn or soy there is absolutely no competition. Algae per acre is thousands of percent more efficient, and it does not require use of land needed for food crops.
4. What is not oil and used for oil can be used for animal feed or fuel stocks for power compnies. Go figure.

I know algae has a lot of hurdles before becoming viable and its biggest hurdle right now continues to be cost, but in my view it is the best long term alternative once it becomes economically viable, which is why I have a small investment in it. It would be larger but I expect algae could take 10-20 years to truly be a resource the world embraces. For the world, we should speed up this clock. Algae- please spread the word!

Night all!

Disclosures: A small investment in an algae related company, i.e. under $500, but otherwise none.