Parting Shot

Hectic day to say the least, but I am taking a break from it to return for a while to my second job, my blog. You know, the one that does not pay. But as I have always said, it is the work that does not pay that pays the most. You can quote me on that and you can pass it on to the few financial heads who are going without pay or bonus.

Auto Bailout?

Not so much a bailout as a short term lifeline. The government is throwing GM and Chrysler $13.4 billion in aid. This should allow GM and Chrysler to survive a few months though getting continuing aid after that will depend on the companies and their bondholders and union employees making some rather dramatic changes/concessions. I like it generally. It is certainly short term and it passes the buck to the next administration, but I would have done the same thing in W's shoes. I truly hate saying I would do the same thing as W, but I would in this case.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a5s6IaFfulhM&refer=home

I will not begin to try to summarize this blog from Yves as there is too much to it (and I need to load bags in the car for attempting to travel tommorrow in a foot of snow). But the premise here is so very nice. News organizations, and their supporters, from both ends of the spectrum hate the TARP (count me in) and news outlets for both are looking to get to the bottom of it. And both are getting rebuffed. Go figure. Yves take is well worth the read. I especially like the J. Edgar Hoover line.

http://www.nakedcapitalism.com/2008/12/mirabile-dictu-fox-news-is-suing.html

Again, Good And Bad News

Oil down to $33 a barrel. This means pump prices should soon approach a dollar a gallon. While this is incredible, it will be only a medium term happening. Given the world-wide recession, it could last for a while, but sooner or later oil producing companies will do significant cuts in production realizing that it makes more sense to leave that Texas tea in the ground. Either way, oil this low spells out financial instability for Russia, so do not go popping the cork just yet. Their instability is our pain, eventuall.

Executive Pay(ola)

Here is a class assignment. Look for companies that seem to have done very well over time, including in the current financial crisis, and look at what their executives are paid in salary and bonus. I suspect that a lot of them will not be in the class of multi-million dollar salaries or bonuses paid to the failed financial company executives. Personally, I think they should be sued, but I am an attorney and that may be my natural tendencies taking over.

Nonetheless, these are people that should only do well in the long term when their companies do well in the long term.

Here is an idea. Let's set up shareholder meetings where the shareholders, much like the voters in California, can vote on resolutions about their executive pay. Now these executives have few more attractive options these days, so they are probably will just be happy to have a job. And here is another idea, do a resolution where most of the money each year is only paid if the company, and its stock price, continues to do well five or even ten years out. Heck, put in a claw back provision where the company can demand back past bonus payments. Easier yet, pay them bonus in stock options that can only be used after they retire. These are just suggestions, but the point is that we need to stop these insane salaries for executives because they simply try to pump up short term profit to inflate their own salaries.

We need to insure executives have a very long term horizon. Otherwise, just look for companies doing well where the executives are already taking reasonable pay and tying their fortune to their companies and invest in them.

Disclosure: None

Looks like S&P agrees with my discussion yesterday on financial institutions having a broken business model and on Greenspan's prediction of them rebounding in 6-12 months being wrong. It has lowered its rating or outlook on a dozen of them citing "significant pressure." Perhaps the rating agencies are starting to do what they are supposed to do and not just sell ratings.

Sorry for the short post. Getting ready to travel. Happy Holidays!

Not Surprising

Oh Ben Ben Ben, what are we going to do with you? You seem to never learn, or perhaps you don't want to learn. Either way, why do we continue to let you repeat your mistakes of the past. So, what did he do now, you ask.

If you fill a room with the culprits that got us in this mess (a very large room indeed) you would need to most certainly have the major rating agencies in it. After all, these were the companies that generated nice fees for themselves by giving top marks to $3.2 trillion in toxic subprime backed securities. I am not saying that the conflict of interest had anything to do with these lala ratings but . . .. These rating agencies also, by the way, maintained AAA ratings on mono-line insurers MBIA and Ambac long after both companies no longer deserved them. Indeed, a plausible argument exists that any company that is reliant on its triple A rating to survive does not truly deserve a triple A rating in the first place. But hey, what do I know. All things considered, however, they have not shown a great deal of ability to accurately rate anything.

Any hoot, helicopter Ben is relying on these same rating agencies to tell him what debt is safe to lend against. Go ahead and feel free to reread that last sentence slowly to let it sink in. Jaw dropping, isn't it!

If I were a cynic, I might start thinking something nefarious was happening. You know, like Ben going through the steps of getting bogus ratings so he can appease the public and Congress about the quality of the junk he is accepting, all the while knowing it is a load of crap, but he needs to get this crap off the bank books of banks to help out his buds. Naaa, not Ben. He would never do that, would he?

On a connected point, I have not seen anyone talking about this too much, so let me throw it out there to see if it makes sense. The various facilities set up by the Fed for the most part simply provide loans to the financial institutions and take on these toxic securities as collateral. If these financial institutions do survive - which we seem hell bent on making sure they do - then they need to repay the loans eventually and take the toxic debt back. Exactly how on Earth does this help them?

It may give them time but it does not really give them liquidity.
Think about it. They really cannot loan out the money they have from the Fed as they know at some point, a point that they hope is far away but they cannot guarantee, they will have to repay it. Their business model is not working too well right now, so they cannot assume they will generate new cash to repay the hundreds of billions (I believe over $600 billion) in loans they have taken on. And if they do survive they get the wonderful benefit of taking these toxic assets back from the Fed. So all it really does is buy them time to try to devise some new ridiculous scheme to make money.

Oh,I forgot, they already have the new plan in place. They call it TARP and it works quite well for them. They do nothing and are given money by their other friend Paulson with no strings attached. Now this money does not need to be repayed, so they are free to lend it. But who can they lend it to. Certainly not any of the other characters that drank at Uncle Ben's trough. They have all that debt to the Fed too and will be getting toxic securities back. Can't lend much to corporate America as we are in a recession and too many companies are on the brink. Guess they just have to spend it on acquisitions to make sure they are too big for Uncle Sam to let them fail. It is so nice having a couple of rich uncles around in these times of trouble.

Long story short, the day will come when the survivors do indeed have to repay the Fed and by then the collateral will undoubtedly be close to worthless. They may beg and plead then to have the debt forgiven, but let's not go there. Meanwhile the money we loaned to them really cannot be used by them for much more than insuring their own solvency because they continue to lose money. Some of them are undoubtedly already insolvent, but can mask that fact with the loan proceeds. Just kicking the can down the road in my opinion.

http://www.bloomberg.com/apps/news?pid=20601109&sid=af32G4ayfLQY&refer=home

X Rated

While we are on the topic of credit agencies, it does seem they are not hesitating to downgrade some companies. GE was put on negative watch today, which some say caused the market drop, and Citigroup's debt was lowered two grades by Moody's. In the process Moody's said Citigroup will not generate significant retained earnings through 2010. Kinda makes it hard for them to pay back the loans from the Fed, don't it. Of course Citigroup retorted noting its "strong" cash box. I didn't know they kept it in a box. Whose bed is that under?

http://www.bloomberg.com/apps/news?pid=20601087&sid=av3u3ANbl5nY&refer=home

We Are Definitely In Trouble Now

Greenspan says financial markets will rebound in the next six to twelve months as housing bottoms and confidence rebounds. Guess Alan has not been reading my blog. And here I thought he might be my one Follower, Loose Tool. Darn!

Well if you read what I have to say and think it makes sense, do you think Greenspan's estimate is correct? Don' hesitate here, I can take it. Just what I thought. Thanks for the support. Let's list a few reasons why he may be just a tad off:

• If you look at the blog entries above, that is a nice start. With loads of debt and bad assets, why would confidence restore any time soon?
• Housing ain't going to bottom in six months. Sorry Charlie, er, I mean Alan, but adjustable ARMs are about to hit the proverbial fan and I am getting out of the way. Builders are cutting way back, which will help, but foreclosure sales will continue to push down prices well beyond six months from now.
• The economy is in a deep recession that I expect to last a long time. Job losses are mounting and will continue to do so through 2009 and beyond, and that does not bode well for housing.
• The business base of these financial institutions is not going back to what it was. Let's see, no loans, no M&A, limited brokerage, no securitizations, etc. Their business model is broken and they will perhaps never return to the unsupported profit levels of the past few years. Add this to all the toxic mess on their books and I don't see confidence returning too soon.
• As noted here last week, financial insitutions are adding hundreds of billions of assets to Level 3. Remeber my Lala Land post and what I said there? Increasing Level 3 - rather drastically - kills confidence and trust, not the other way around, and this will not change back quickly.

I have more reasons, but this is enough to chew on right now. If you want more, leave a comment and I will be happy to oblige.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aJ0kdydwOmVc&refer=home

Just The Facts, Ma'am

Any Dragnet fans here. For those college level followers, and I know there is at least one (hat tip Cody), it was a TV show way way back in the days when TV broadcasts were in black and white. The black-out here in New Hampshire harked me back to simpler times. I started telling my five year old daughter about all the things we did not have when I was her age, like color TV, computers, DVD players, microwaves, digital cameras, etc. etc. She asked me if we had "arms." She is such a little smarty and I knew she was teasing me. I also know she was not talking about adjustable rate mortgages.

This is not about a big retro thing, however, as I am cluing you into my investment philosophy. This year I have really looked far and wide for facts. Sure I like the discussion blogs that make sense of these facts, but the facts are critical. For example, knowing that a very significant number of adjustable rate mortgages are resetting next year is a nice fact to know if you are trying to judge when housing will bottom or foreclosure rates will slow down. Knowing that financial institutions just moved over $600 billion of assets to Level 3 is a nice fact to know too. Knowing that even when their business models start to recover the financial institutions still have a bunch of debt to repay, is a good fact to know. And most of these facts have relatively obvious consequences.

Two plus two equals four. In matters financial, I have found that it does not always equal four. Sometimes it might migrate up to five or five and a half or down to three or two and a half, but eventually it migrates back to the right answer, as in reversion to mean.

So what I do in trying to anticipate what is happening on a macro level is read a lot and collect together as many pertinent facts as possible. I then try to make sense of them or find someone who does that for me. And if I am happy with what I have found, I try to pass it on here. Truly, knowledge is power. It does not take an MBA to understand some of two plus two situations. For some of them it helps, but I try to bring you those that I can understand, so I suspect anyone can.

Radio Silence

I am leaving Saturday for vacation for a week. I likely will try to do a post or two but I will be in a place where I very well may have no available internet connection. I will definitely be hyperventilating a bit, but probably a good thing.

Slowly We Creap, Step-By-Step

I have been posting for all of, I believe, 52 days, and today I should reach the 1000 page impressions level (I am at 995 right now). No, not per day, but total. Still I think that is respectable. Whether it is or not I am happy with it and thank you for your support.

Did I Mention Greed

I am not going to summarize this as it is too disgusting to give it short shrift. Please read it yourself. It is about how the financial institution officers and head people looted their companies and shareholders, as well as taxpayers. This is revolting and it still continues. I truly hope these people get sued for every cent they have and hopefully get put in jail. They have caused more harm and pain to so many in this country that they should all be in jail. Few have done as much harm to so many in our country's history - all in the name of greed.

The original article was forwarded to me earlier today and is in the New York Times (hat tip Chris) but I like Yves' expansion on the original piece better. This is closely related to a topic I have not seen mentioned lately, which is moral hazard. When these idiots get saved by the government and are allowed to keep their jobs, we the people are simply supporting their idiotic and potentially illegal ways. They now have government incentives - as do others who might immulate them - to continue this short term bonus, risky, looting behavior. This is why, for the first time in a long time, I wrote my Senators and Congress people imploring them to vote against the TARP. Some did and some did not. One that did leaves office next year, so I get some satisfaction.

Any event, this has me upset enough that I am having a hard time keeping this post PG. Folks, if you are not mad, stop reading and go elsewhere. Then again, read the attached and then come back. Then, if you are not outraged you are welcome to go elsewhere. And think about how we are throwing money at these #%^holes to keep them in business.

Okay, I need to try to calm down and get to bed so I need to stop now. You know where I stand.

Disclosures: None

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.

Evening Edition

The Gold Standard

It's been a rather exciting week or two. Last week I had the honor of Michael Panzner quoting me on his blog, Financial Armageddon, and my blog is now linked there as well as to his site for his new book "When Giants Fall," which you can find here:

http://www.economicroadmap.com/

Not to mention, if you visit Amazon.com and look up Financial Armageddon, you will see me quoted with reference to the book, which I highly recommend that you read. Our economy has gone through various chapters of the book already, but several more - perhaps - are still to be played out. We will see. By the way, I finally did get the courage to finish the book and it is well worth the read, including the closing parts about what to do in this crisis. I know you want to know, but I hate spoiling endings. You will have to buy the book.

Also, I am now a Gold Standard certified Seeking Alpha contributor. You won't find any contributions by me there just yet as this just happened, but if you click on the Seeking Alpha Certified emblem on this blog you will be taken to my bio and links to any articles I do that get published there.

Now I must admit that Seeking Alpha is more focused on individual investment strategy and I seek to avoid giving any specific investment advice - as in I do not consider myself qualified to do same - but they do carry some general macro economic oriented pieces, and that is where I come into the picture. Any hoot, things seem to be moving along nicely in 50 days.

50 and 5

The 5 is a reference to the number of days I was without power. Lights back on today as of 5:00 pm and my good neighbor Rob came by and switched us off of the generator and onto the grid before I even got home. Nice having good neighbors - we will all need them in these troubled times.

50 is the number of days I have been doing this blog. Seems longer to me in part because this blog began as a daily email to a group of friends who are in an investment club with me. I decided that it made more sense to use this format, not necessarily intending to take it to a much larger crowd, but I guess you never know.

Enough about me, on to the good stuff.

Gentlemen - Start Your Rotors!!

Helicopter Ben is in the pilot's seat and filling the cargo hold with freshly minted Ben Franklins. Get ready to buy a fishing net and stand outside for Ben to fly over. Yes, the man who remarked on that amazing little invention, the printing press, is now ready to put it to full use.

And squarely in the "how low can it go" category, the Fed announced that it will seek to peg its key rate between 0% and .25%, the lowest ever. Well the markets loved it and were up 4-5% today. Go Ben Go, Go Ben Go!!

Hate to pop your bubble, again, but this is the wrong move at the wrong time. Would have been great during the Great Depression, but this is not the Great Depression. Unfortunately, Ben spent a good bit of his career studying the Great Depression and his Great Depression play book may be the only tool he has for a severe recession, but every economic downturn is different and requires new remedies. Indeed, Ben would have John Maynard Keynes turning over in his grave. Yes, Keynes would have thrown money at it in the Great Depressions because here in the U.S. that was the solution. But that is not our problem this time, and I feel fairly certain Keynes would agree.

Our problem this time is that we have already spent too much. We were spending alcoholics on a spending binge and now we have the debt hangover to show for it. So what does the government do - give us hair of the dog. Yep, booze it up some more with more spending, this time on the government's tab. But lest you forgot, the government's tab is your tab too.

We can take our medicine now, stay in bed and rough our way through one of the worst problems we have ever had, or we can mask it over, make it worse and forge on in the hopes that all will be better tomorrow. I guess the latter is more politically palatable. After all, the last thing the government wants, especially a lamb duck government looking to salvage some glimmer of reputation, is to look like it is not doing everything it can to rectify the problem. For those that understand the problem, which is really not all that difficult, the government is doing exactly what it needs to do to prolong the problem and make it worse.

(As an aside, if this leads to our currency becoming toast or us being unable to beg, borrrow or steal what we need to maintain our foolish ways, then I am moving to Canada. They at least seem to have competent banks, government, health care, etc. At some point, you just have to consider you options and give up on those that no longer make sense.)

Now you may say I don't know what I am talking about with respect to Helicopter Ben. After all, he has spent more time studying this stuff than I have, by far. I am the first to admit I could be wrong and he could be right, but if you are reading this you are likely reading other similarly oriented sites. Ask yourself this:

1. How many sites partially blame Greenspan for our current mess by taking interest rates to 1% and leaving them there too long in response to the dot com bubble bursting?
2. How many sites are saying that Americans have too much debt and are tapped out?
3. What do sites say happens upon rebound when the government throws massive amounts of fiscal stimulus at a recession?

Think about it and then think about what the answers mean. If you are struggling here, let me give you what I think to be the correct answers:

1. Most people do blame Greenspan and his 1% rate over a long period for our probems, at least in part. It made credit too easy and it allowed a new, bigger bubble to form. Guess what, rates are now lower than where Greenspan took them and effectively will likely be negative. What might that cause? Does Ben know enough to raise them soon enough to avoid a new bubble?
2. I don't know any sites that are not agreeing Americans are tapped out and have too much debt. So the answer to this is to push us to take on more debt or spend more? I know the debt we are taking on may be government debt, not individual, but it is still our debt. I cannot fathom how that is a good thing. If you can, please comment as I am eager to learn.
3. The good news may perhaps be that a coming deflation spiral may be fixed by the inflationary effects of massive stimulus. It will likely take quite a while, but we will get there. I personally think this stimulus will take perhaps years before it leads to massive inflation, but in the end that is the likely outcome. Frankly though, I am not too worried about oppressive inflation any time soon. World demand ain't commin' back any time soon.

What we are doing is building a nice foundation for a nice new bubble. And this one will be even more toxic and disastorous than the present one. This one will take years to form, but so did the last one. Just wait, you will seem - or not.

We have identified some of the causes for the current problem, yet we are repeating them and taking them a step further. Go figure. I just hope I am reading this wrong.

Disclosures: None

The Not So Big Three

Bloomberg is reporting that stock futures are up on the expectation that the Fed will ease rates another 50 basis points. I don't see that as being a reason for it. The rate cut has been expected for weeks, so that should already be worked into the market. Moreover, those who know what is going on know that the cut will really have no impact, other than perhaps a psychological one.

http://www.bloomberg.com/apps/news?pid=20601087&sid=alwndV3znKjM&refer=home

It may be the prospect of a Big Three bailout is helping the market. Reuters is saying it could come as early as Wednesday, though reports on this change daily, so I am not counting those chickens just yet.

http://www.reuters.com/article/ousiv/idUSTRE4B50CL20081216

Nonetheless, a bailout probably makes more sense than the other alternatives. Even with a bailout, the Big Three are bound to become the Not So Big Three in due course. They need to drop models and brands that are not performing and focus. Ford began scaling back sooner than the others, as I recall, which is probably a reason it is fairing better. One might say that Ford has Focus (sorry, but I could not resist. At least I didn't say that they have the Edge). Nonetheless, Ford will also need to continue shrinking.

And the shrinking Not So Big Three will put even further pressure on parts manufacturers, who are already on the edge. Less pressure, however, than a Chapter 11 bankruptcy. Yves makes a good point that Chapter 11 could make parts manufacturers wait a long time to get paid on outstanding obligations, which explains why some of GM's suppliers are demanding payment in advance.

http://www.nakedcapitalism.com/2008/12/european-automakers-dispute-assumptions.html

Another important aspect of this noted in the post above is that their failure will lead to many parts manufacturers undoubtedly failing as well. The other auto manufacturers rely on some of these parts manufacturers too. Undoubtedly, in time, the void would get filled, but not before a lot of chaos and further losses.

Smart Move By China

This is too little and too late to help China in the current crisis, but in the long run programs like the one reported on by Bloomberg are the type of forward thinking China needs. This program gets college graduates into the rural areas helping them to make advancements and connect to the rest of the world. In other words, the aim is to build domestically, which is exactly what China needs to do. For a country the size of China this effort is thus far way too small to have any noticeable impact, but you have to start somewhere.

http://www.bloomberg.com/apps/news?pid=20601109&sid=a2c4a3o81mM0&refer=home

For more on the turmoil in China, the following is a good summary. I like the last line:

"It would be a historic irony if the Chinese Communist party was thrown into crisis, not by the collapse of communism in 1989 – but by the convulsions of capitalism in 2009."

http://www.ft.com/cms/s/0/a1ff5944-cac6-11dd-87d7-000077b07658.html

"dramatic and potentially long-lasting change in consumer behavior"

I have talked about the new world order in terms of consumer behavior. Looks like the reality is starting to set in for corporate America. Corporations need to be prepared for when the economy does NOT return to where it was in 2007. Better than now, sure, but nothing like it was. I have beat this drum too much lately, but it is an important point. Best Buy is catching on and the above quote comes from their press release where they announced reduced capital spending plans for next year. Frankly, I am surprised there are any capital spending plans for next year.

http://www.calculatedriskblog.com/2008/12/best-buy-cites-historic-slowdown-cuts.html

Another Day Another Record

Housing starts were at a record low in November; the worst since tracking started in 1959. Just 625,000 starts last month, which compares to 771,000 just the month before. Moreover, the number of permits issued in November was down 12% from the previous month, indicating that there will be even fewer starts in December.

This sounds really bad, but the rate of decline is promising. This will help to reduce inventories which will, in turn, help us get to a housing bottom. The sooner the better.

If you are looking for a good graphic representation of cliff diving, Calculated Risk has a nice chart on housing you have to see. It also provides a lot more detail on the housing starts.

http://www.calculatedriskblog.com/2008/12/housing-starts-decline-to-record-low.html

He's Got Mad in His Name

And a lot of people are going to be just that. I mentioned yesterday how some funds (namely funds-of-funds or FoF) are really just passive investors passing on their client money to other fund managers like Madoff. They justify their 1% fee and up to 10% of the profits pay by claiming their expertise on picking the best hedge funds. To do this, they have a thorough vetting process and ample due diligence. These guys are the best at what they do and they look under every rock to insure your money goes to the best hedge funds. They earn their money with unheard of levels of due diligence. And they have a bridge you can buy if you are interested.

Henry Blodget has a nice write up on Fairfield Greenwich Group, which is a fund I noted yesterday. They apparently had over 50% of their money (as in their clients' money) with Madoff. After all, he had spectacular success, though no one seems to have understood how. Well, now they know.

I mentioned yesterday that Fairfield Greenwich might have some soon to be litigious clients. Based on what they represented to their clients on their due diligence practices, there are some pretty fertile fields for those looking to sue. I doubt their pockets are deep enough, however, to begin to make up for the losses.

http://clusterstock.alleyinsider.com/2008/12/fairfield-greenwich-experts-we-thought-bernie-madoff-was-the-best-money-manager-in-the-world

Stories like Fairfield Greenwich and the following just go to show you, never trust your entire nest egg with one advisor or group. You could do well, but you also could lose everything. Diversify!

http://www.time.com/time/business/article/0,8599,1866398,00.html

Just Ask a CFO

You want hype, ask the CEO. You want the straight and narrow, ask the CFO. These are the folks looking at the books every day and they know first hand just how ugly it is getting out there. Indeed, they seem to be a rather depressed lot at the moment, which is just another way of saying that their "optimism index" is at an all time low. Probably not as depressed as home builders, but not far behind. And most expect our recession to continue for another year or more. I am in the "or more" category myself, though I am open to change.

http://www.ritholtz.com/blog/2008/12/cfos-recession-to-last-another-year/

Disclosure: None

Evening Edition

Calculated Risk - the place to be if you are interested in real estate - has a nice piece, with nice charts, on the National Association of Home Builders' (NAHBs') confidence index remaining at a record low for a second month in a row. Basically means builders are a depressed lot right now. I have a couple of neighbors who are in the trade and can confirm this is the sentiment. Then again, not too many people running around in smiles these days, builders or not.

As you read the piece you will see various records (all bad) are being set. There is a silver lining. Builders continue to build less homes than are being sold so the new home inventory is going down and has been for months. The bad news is that they are building less and less each quarter as sales continue to decline. It is hard to compete with bank fire sales. Why buy a new home when you can get a foreclosure for a fraction of the price.

http://www.calculatedriskblog.com/2008/12/nahb-index-stays-at-record-low.html

Ashes to Ashes, Debt to Dust

The following from Sudden Debt supports the prospect of just letting debt take the big dive and go belly up - in as orderly a fashion as possible. If I am reading it correctly, he wants us to stand back a bit, stop propping up the financial markets and let some fail. After Lehman, that is not going to happen, but it may be closer to the answer than what we are doing.

Personally, I believe they need to pick their companies wisely but the Fed or the FDIC or someone needs to pick the worst of the lot and take them down. Letting Lehman fall was perhaps the right idea with the wrong company, though it was not done in an orderly fashion no matter what the company. Nationalizing some of the financial institutions and doing an orderly liquidation is not the worst thing. Better than promoting mergers and letting these messes grow into ever larger problems that get too large to be saved. Again, the knock-on effect to the CDS market and otherwise needs to be considered. Those damn CDSs complicate everything, pardon the French.

Now the current administration is against nationalizing anything. Bush said so. That is, other than Freddie, Fannie and AIG. But hard times require some hard solutions. I am not saying to nationalize everything and keep it that way. I am saying that until we can restore some order to this chaos, we may need to do some things that in normal times would rub our free capitalistic society the wrong way generally. Just Get-R-Done and get on with it. We are spending too much time and money propping up failed institutions. There are, however, some institutions, like the Big Three, that may still be worth saving. Just too many jobs to lose at the moment. Some day it may be the right time to go to the Big Two or even the Big One, but right now this country cannot afford that level of job loss if it can be avoided at acceptable cost, and so far the cost for the Big Three is much more reasonable than our support for banks that are thumbing their noses at us. (Did I mention the money to the financial institutions really has me a tad upset).

http://suddendebt.blogspot.com/2008/12/zeroeing-in-on-deflation.html

Debt Shifting

From what I have read, despite our massive government spending spree we are not in too bad of shape deficit wise in relation to GDP. Certainly better than some other countries. So here is an idea, take a couple trillion dollars by issuing U.S. debt (Treasuries are flying off the shelf despite pretty much 0% interest) and give it to the people. That is thousands for every man, woman and child in the country. This is not so they spend it. This is so they pay off debt and save. They are going to do this anyway, so let's shift a good portion of the consumer debt to the U.S., so long as we can afford it, and help the consumer get on with it. Again, not spending excessively, just getting by and paying the bills.

Now Obama's plan to do infrastructure spending is a plan that I like as well. Gets money to the people, provides jobs, part of it goes back to the government in taxes, reduces unemployment payments that are a burden, and achieves something we need to achieve anyway - infrastructure improvements.

Either way we are talking about trickle-up economics. This may fly in the face of what some economists think, but in a society that is over two thirds based on consumer spending, the top cannot survive without the bottom being able to spend. I guess the guys making tens of millions in bonuses never quite got that picture, i.e. that their pay checks were dependent on the pay checks of those down the line. Bottom line, this recovery likely needs to start from the bottom line.

Go For It!!!!!!!!!!

According to a California law firm (what do they know) credit lines from credit companies could be reduced by nearly a trillion dollars if regulatory reform of the credit card industry takes place. Now this reform is largely about restricting what these companies can do to milk (I mean charge) their customers. And these folks want the milking machines on high during these distressed times. The higher the rates they can charge, the better they can fill voids left by customers who do not pay. The fact that they can no longer rape, I mean charge, their customers some very high rates and late charges is disturbing to them to say the least. So they warn of doom and gloom to card holders with nearly a trillion in cut credit lines.

Let's be real people, these companies are cutting lines left and right anyway and they are looking for a good government oriented excuse to do so. Either way, less credit from credit card companies is a very promising move in the right direction. I feel for those living off their credit cards (I am related to some of them) but the end is near any way you look at it if this is your lifestyle. Better to end the spending before you rack up big credit card debt. Yes, paying the mortgage with a credit card is NOT a good idea. Just kicking the can down the road and making it bigger.

Any hoot, anything that gets credit card companies to reduce available credit (debt for the card holders) is at the end of the day a good thing in my book. We need to hunker down, stop using debt of any form, pay off existing debt and start saving. I say this daily but it does not seem to be sinking in yet. It is a new world, so get used to it!

Seriously, this is going to be a new world order. This is going to be something very different. For perhaps the next decade, get used to the new order. It seems depressing and difficult, but the reality is that we are returning to reality. We were in a land of make believe for far too long. We just need to adapt to the new order, the new reality, the real reality. Think about it - living within our means. What a concept.

The problem is that our "means" have been stagnant or even going down for a long time. So we are facing the double whammy; living within means and paying off all the debt from when we didn't. I proposed earlier that the government help us with the past debt overload, so long as we spend it on debt payoff and not more reckless spending. Go figure, the government wants to give us more money to spend on reckless spending. Fools in my opinion.

Disclosure: None

I'm Back . . .

sort of. My house still has no power but I scored a small generator yesterday. Enough juice to have heat and hot water. And my cell reception is better today, so I can do minimal surfing from home. Doubt I will do much before I get full power and internet service back, but I will do what I can. So why the big power outage? In a word - ice. Don't take my word for it, check out the photos.

http://www.unionleader.com/uploads/media-items/slideshows/IceStormDay2121308/index.html

Some of these are of work crews, but I drove around a lot this weekend trying to get a generator and did not see a single work crew, not a one. Probably explains why I am one of the 168,000 still without power.

Trimming the Hedges

Solidly in the long overdue category, it seems that a number of hedge funds are about to go belly-up or merge. Hardly a surprise. Mounting redemptions are daily news. Moreover, the whole hedge fund model always seemed a bit questionable to me. Let's see, I will pay you a 1-2% fee and "if" you use of massive leverage on my money and happen to make me money, you will take 20% of it.

Okay folks, a monkey picking stocks with darts and the WSJ pinned to the wall can make lots of money with massive leverage in good times - and you can pay him with bananas. Moreover some of these funds did little more than pass the money on to money managers, who did all the work, yet the funds still collected their fees. Not all of them, mind you, picked the right manager. Those that picked Madoff are going to be dealing with some very unhappy - and perhaps litigious - clients.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a4DPPfKKvPsM&refer=home

Of course, the problem with leverage is that it magnifies things in both directions. And it takes more expertise to make money on the way down. Admittedly, a few funds have done nicely in both directions, but only a few. The fact that only a few of these bozos were smart enough to see this mess coming and make money on the way down is telling. And if you are going to pay ridiculous fees, you would think it would come with the benefit of someone smart enough to see this coming. Oh well, a fool and his money are soon departed.

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

Been There Said That

I have talked a good bit about the pain coming to Asia because that decoupling thingy ain't what it's cracked up to be. Well, here is a good Financial Times article on it that lays it out nicely from a macro economic level. The author is a professor of finance at Peking University, so he is in a position to know what is happening in Asia. He is anticipating something akin to what the U.S. went through in the Great Depression because Asia, and especially China, are now in the role that the U.S. was fulfilling in 1929, i.e. running a large trade surplus as exporter of first resort. The one word in this article that worries me the most is "destabilising." You don't want a destabilised Asia by any means.

The flip side of this coin is that the U.S. is in the opposite role to the one it had in the Great Depression. Throwing money at the problem and trying to spend our way out of it is not going to work. As the author of the attached article notes, replacing debt-laden consumers in the U.S. with a debt-laden government in the U.S. is not the answer, though it is what we are trying to do. The answer is to start living within our means, pay down debt and increase savings. But as my daughter would say, "that's no fun daddy." It rarely is fun the morning after the party.

China does need to throw money at the situation and increase domestic demand, but as the article notes there is a very real limit to what it can achieve. In short, Asia, and China in particular, are in for some very tough years ahead.

Lest some China bashers out there take some hidden pleasure in China's pain, keep in mind that the decoupling thingy turned out to be wrong and coupling is a two way street. We too will fill China's pain.

I will be traveling to China in a few months and I will post then on what I see. I was there four years ago and it was booming. I suspect next time will be a bit different.

http://www.ft.com/cms/s/0/9f5cfb76-ca0b-11dd-93e5-000077b07658.html

For some discussion on why the U.S. throwing money at the situation not necessarily being the best medicine, you might check this out.

http://economistsview.typepad.com/economistsview/2008/12/fed-watch-what.html

The author still seems to be on the fence a bit. Note his caution about the possibility that the bottom is going to fall out on the dollar and Treasuries. That is a very real possibility and not a very pretty one at that.

Detroit Gets No Respect

The next couple of pieces discuss a valid point; Detroit gets no respect. Now I am not saying Detroit deserves a lot of respect, but certainly more than the shadow banking system that is largely to blame for our economic mess. Nonetheless, the big banks get hundreds of billions almost literally thrown at them - even those that did not ask for it - while the Big 3 is on life support with no help yet in sight. I am fairly sure that the Big 3 at this point, at least GM and Chrysler anyway, would agree to some rather onerous terms and conditions, unlike the financial firms that got the money free of conditions, yet they get no money and no respect. If they fail, those that held up the aid will learn quickly how much respect they should have gotten as the knock-on effects will be significant.

http://www.nytimes.com/2008/12/15/opinion/15kristol.html?_r=1&ref=opinion

http://www.portfolio.com/views/blogs/market-movers/2008/12/15/detroit-bailout-no-news-is-bad-news?tid=true

I have talked some on the prospect of the government providing debtor in possession financing for a Chapter 11 bankruptcy for GM. Yves has a nice discussion on some of the pros and cons of same. She is particularly worried that a bankruptcy could drive away customers. Who knows for sure, but it is certainly worth some research, as she suggests. One con she fails to discuss is the impact a bankruptcy would have in the credit default swap world, which is another aspect that is hard to define with much precision.

http://www.nakedcapitalism.com/2008/12/is-gm-bankruptcy-inevitable.html

Unemployment Rising - Unemployment Benefits Running Out

Not a good combination for state funds that pay unemployment benefits to be running out of money just as unemployment rates are really picking up steam. There will be worse ahead. The states can get a loan from the federal government, but then they have that obligation on the books, which will further delay any state level recovery when the economy turns. Or they could do the highly popular tax increase to those businesses that have managed to hold on so far, but that might add to the unemployment woes in the long run. Not good any way you look at it.

http://www.nakedcapitalism.com/2008/12/states-running-out-of-unemployment.html

Gonna Get Worse Before It Gets Better

Said it before and I will say it again. We need to reach a bottom in housing before we have any hope of turning the corner. Unfortunately, there seems to be no bottom in sight. Indeed, with mounting foreclosures, things are going to get a good bit worse before they get better. I suspect the worst of the subprime is behind us, but Alt-A and prime lie ahead. A lot of Alt-A is in the adjustable rate category and a lot of ARMs are resetting now and next year. Many of these are tied to LIBOR, which means they will reset higher. Especially on option ARMs where some fools chose to pay interest only or other forms of minimum payment. Watch out below! Fitch is now revising its forecast on Alt-A and expects things to be much worse than they previously thought.

http://www.housingwire.com/2008/12/15/fitch-alt-a-mortgages-deteriorating-more-rapidly-than-expected/

Becoming Bearish

Obviously I am not talking about myself. You know I am bearish and have been for quite some time. No, I am talking about how some people not previously in the bear category are beginning to reconsider their positions. Sooner or later, folks are going to wake up and smell the coffee and this coffee is a bit on the bitter side. The following post from Seeking Alpha is from a recent convert to the dark side. Mind you, I do not relish in being bearish, but I prefer to say it the way I see it and right now that is bearish. I agree with this guy's rather dismal forecast, for what it's worth.

http://seekingalpha.com/article/110670-we-can-t-spend-and-save-our-way-out-of-this-recession

Disclosures: None