Bloody Monday: Dow dropped 777.7 (6.98%), largest single day point loss in history, and largest percentage drop since 9/11/01 terrorist attack (or more accurately CIA attack). Nasdaq did even worse, dropping 199.76 (9.14%). S&P 500 declined by 106.62 (8.79%). There was no place to hide. Energy was hit the hardest, and even Health Care sector could not escape the sell-off pressure.
After working over the weekend in an attempt to come up with a modified $700B bailout package, the Whitehouse and bipartisan congressional leaders worked out a bill to present to the House for a vote. The bill suffered a surprising and stunning defeat, with 228 nays and 205 yeas. This morning, we were greeted with the news that Wochovia sold its entire banking business to Citi for a mere $2B, or $1/share. It looks like we are going to have only a handful banks left after this turmoil. That is certainly not good for consumers.
What is the root problem of the current financial crisis? In a very simple term, many banks have mortgage securities on their balance sheet that they have no idea how much they are worth. As a result, no one knows whether the banks have sufficient capital to operate. Many banks refuse to lend each other for fear of counterparty risk.
For the main street, many corporations find it hard to re-finance their short term debt now that the commercial papers market almost dried out, because of the scare of money market funds, caused by Lehman bankruptcy and Prime Reserve's Money Market Fund breaking the sacred $1/share mark (it traded 97c) in last week.
It seems that the contagion is spreading quickly. And I start to feel we have to have some sort of rescue plan to address the root problems of the financial market, because the crisis boils over to the main street.
I think the $700B bailout plan in its original form (3-page proposal by Hank Paulson) was a scam. But the insurance proposal by the House Republicans is even worse. Taxpayers may incur even larger loss under that plan.
I think the critical component of any rescue plan should contain the provision that allows the Treasury to purchase the mortgage assets from the banks at a fair value, thus establishing a liquid market for the mortgages that are currently hard to value. Once a market is established, banks' financial health can be easily ascertained. That will lead to banks more willing to lend to other banks with sufficient capital. It should not be a bailout for the failing banks. It should be an intervention of the government to establish and maintain an orderly market for the mortgage securities. I think if the rescue plan is presented in this way, it would be much easier for taxpayers to swallow.
You may ask how the Treasury determines what price to pay for the mortgage securities? Ben Bernanke's idea of paying at the hold-to-maturity price is scandalous. That would be a huge give away to the banks. I think a so called "reverse auction" process is much fairer. Basically banks would submit their bid to sell their assets. Treasury would buy the lowest bidders up to a certain percentage of the total bids (say 50%).
To address the democrats demand that taxpayers should participate the upside of the banks recovery, we may demand the bidding banks to issue warrants to the Treasury valued at 10% of the assets the banks sold to the Treasury. When the banks' stock recovers in the future, Treasury can convert the warrants to non-voting shares in the banks and sell the shares for a profit.
One more thing I think we should be addressing is the potential inflationary effect of the bailout package. In short term, I do not think the bailout to be too much inflationary. But once the market returns normal, the excess cash in the system would create inflation pressure. That is why it is important that when Treasury sells the mortgages it bought from the banks, the proceeds should not be considered government revenue. It should be ear-marked to pay down the national debt, which was taken on to provide the initial bailout money.
But who am I? Who would listen to me? Washington politics is not determined by reasoning or what is right or fair, it is determined by the final compromise among different interest groups.
Sigh!
Monday, September 29, 2008
Wednesday, September 24, 2008
The $700B bailout is a huge scam
Today some detail leaked out about the $700B bailout package that Hank Paulson has requested on behalf of the banks. Wall Street Journal had an article in a very obscure section disclosed some of these details:
First, it appears that the bailout is not restricted to mortgage debt or mortgage backed securities. Even credit card debt may be included. So this is intended to be a wholesale bailout for the pure benefits of the banks.
Second, Paulson and Bernanke believed that these bad debts should be priced based "held-to-maturity: formula, not the current book value. So the bailout is a complete giveaway to the banks.
You may not understand what held-to-maturity (HTM) valuation accounting means. Let me explain, when a bank purchased a debt security, it paid, say, $1000 for that debt. Under HTM, the debt will always be listed as $1000 in value, no matter what the current value of the debt may be. Obviously most of the debt securities that the banks are holding now have declined significantly in value, because the debtors don't have the ability to pay in many cases. It is very common some of the debt securities are trading at below 30 cents on the dollar. That means the $1000 asset that the bank holds is now worth only $300. Yet Hank Paulson and Ben Bernanke would like to give the banks $1000 (HTM value) for the assets that worth only $300.
Now you understand that the whole bailout is a scam. It is a scheme to enrich the banks at expense of taxpayers! How dare they are! They thought the public is so gullible that they would not even understand what is going on. That is why they brazenly requested $700 B complete giveaway for their friends on the Wall Street. When asked why $700 billion? You know what they answered: "we don't know. It is an arbitrary number!"
People, are you really so sheepish that you are willing to be fleeced? You got to stop this criminal deception!
By the way, the US government does not even have $700B to spare. It has been running budget deficit since Bush took the White House. National Debt already stands over 10.6 trillion dollars. Where is this money coming from? It is going to come from printing from paper! That means inflation will for sure to go up. It is just a form a stealth tax on all the savings of ordinary people.
I am really sickened by this. All these criminals! Because they think people are so stupid that they can get away from it.
A lot of people argue that we have to do this bailout. No, we don't. Yes, the banks are not lending right now. That is healthy, because US is already overly in debt. We all need to de-leverage. That means many banks will HAVE to go bust! We cannot simply re-inflate the financial system to create another bubble! We need to take the pain. The banks first, then American consumers. Yes, we have to pay higher interest rate. Borrowing will be more difficult. Consumer spending will slow down. But That would be normal. Isn't overspending and over borrowing that got us into this mess in the first place? Why do we want to give $700B easy money for the banks so they can lend unscrupulously and invest badly again?
You have to watch this video. God bless Marcy Kaptur, the Democratic Representative from Ohio.
First, it appears that the bailout is not restricted to mortgage debt or mortgage backed securities. Even credit card debt may be included. So this is intended to be a wholesale bailout for the pure benefits of the banks.
Second, Paulson and Bernanke believed that these bad debts should be priced based "held-to-maturity: formula, not the current book value. So the bailout is a complete giveaway to the banks.
You may not understand what held-to-maturity (HTM) valuation accounting means. Let me explain, when a bank purchased a debt security, it paid, say, $1000 for that debt. Under HTM, the debt will always be listed as $1000 in value, no matter what the current value of the debt may be. Obviously most of the debt securities that the banks are holding now have declined significantly in value, because the debtors don't have the ability to pay in many cases. It is very common some of the debt securities are trading at below 30 cents on the dollar. That means the $1000 asset that the bank holds is now worth only $300. Yet Hank Paulson and Ben Bernanke would like to give the banks $1000 (HTM value) for the assets that worth only $300.
Now you understand that the whole bailout is a scam. It is a scheme to enrich the banks at expense of taxpayers! How dare they are! They thought the public is so gullible that they would not even understand what is going on. That is why they brazenly requested $700 B complete giveaway for their friends on the Wall Street. When asked why $700 billion? You know what they answered: "we don't know. It is an arbitrary number!"
People, are you really so sheepish that you are willing to be fleeced? You got to stop this criminal deception!
By the way, the US government does not even have $700B to spare. It has been running budget deficit since Bush took the White House. National Debt already stands over 10.6 trillion dollars. Where is this money coming from? It is going to come from printing from paper! That means inflation will for sure to go up. It is just a form a stealth tax on all the savings of ordinary people.
I am really sickened by this. All these criminals! Because they think people are so stupid that they can get away from it.
A lot of people argue that we have to do this bailout. No, we don't. Yes, the banks are not lending right now. That is healthy, because US is already overly in debt. We all need to de-leverage. That means many banks will HAVE to go bust! We cannot simply re-inflate the financial system to create another bubble! We need to take the pain. The banks first, then American consumers. Yes, we have to pay higher interest rate. Borrowing will be more difficult. Consumer spending will slow down. But That would be normal. Isn't overspending and over borrowing that got us into this mess in the first place? Why do we want to give $700B easy money for the banks so they can lend unscrupulously and invest badly again?
You have to watch this video. God bless Marcy Kaptur, the Democratic Representative from Ohio.
Monday, September 22, 2008
Hank a lot (Mother of all Bail-outs)
Over the weekend, Treasury Secretary Hank Paulson deviced a $700 billion bail-out package for all the banks, to take on the underperforming mortgage securities on their balance sheet. Christmas came to the Wall Street early this year. Hank a lot, Paulson!
Most striking is the boldness of Paulson's request. He basically asked for a blank check to do whatever he sees fit. He specifically requested that no court oversight should be allowed! Yeah, we should all trust that Hank Paulson won't do anything hanky panky with his old Wall Street pals. Give me a break! Talking about put a fox to guard hen house!
The reason for the bail out sounded very solid. They have depicted a near apocalyptic outcome if the bailout is not done right now: financial melt down, multi-year depression, loss of jobs, close of factories, end of the civilization as we know it. Fear. No, even more than that. Terror. They want to terrorize all of us into submission (accepting the bailout proposal). I think they have done similar thing very successfully: they have used our fear of terrorism to slowly take away the liberty from us. They have succeeded in doing that. Now they will succeed in taking away our hardly earned savings! American people are gullible sheep! High finance is so complex and who understands it? Let's just trust that these people are doing the right thing and have us taxpayers' interest at their hearts. LOL.
Is this $700 B bail out necessary? Absolutely no. The only argument for the bailout is that: banks have all but stopped lending, even after the Fed vowed to wide open its check book to offer low-interest loans for these banks (through the Fed discount window). So the thinking goes like this: if banks stop lending, economy will grind to a standstill.
Not so fast. As I have pointed out, consumers are de-leveraging: not borrowing! Corporations other than the financial industry are in very good shape. Most of them have sufficient cash cushion to weather the storm. In fact, Microsoft just announced today it is using the cash on its balance sheet to buy back $40 Billion worth of its own stock. So corporation can live without borrowing at least for now.
So it is not end of the world if banks stop lending. Banks will never stop lending anyway. It is their business. If some banks stop doing that, that will cause their own demise. Why would they do that? They are doing it now ONLY TO HOLD THE PUBLIC HOSTAGE. They are acting like cry baby: woo, woo, if you don't bail us out, we will not lend.
We should not cave in. We should not allow them to socialize their losses. When they were making huge profits, they did not ask us to share with them. They dished out hundreds of millions dollars of bonuses to their top executives. Now they are asking us the poor taxpayers to rescue them! Take a hike! You could die. There will be others taking your place! Capitalism does not lack risk takers.
The moral hazard is tremendous. They are all trying to get big so they will be regarded to be too big to fail. Bank of America has bought MBNA, CountryWide, and Merrill Lynch. Wachovia does not want to stay behind. It is trying to buy Morgan Stanley. Nobody wants to end up like poor Lehman, right?
All these banks seem to have a put option written for them against the taxpayers, if you understand what a put option means. This all started from 1998 LTCM bail-out engineered by Alan Greenspan. They used to call it "Greenspan put". More accurately, it should be called "taxpayer put".
Now the $700B bailout package seems to be set in stone. I still think it could work in taxpayers favor if sufficient oversight and accountability are present. We cannot let these banks to dump their bad debts to us at inflated prices. And we also need to make sure we can sell these debts at fair market value later on. If we can accomplish that, the taxpayers may not lose too much in the end. If we allow Hank to do whatever pleases him, then we will have a big bill to pay, for generations to come.
We know American households are broke, and the government is even more broke. We don't have the $700B. We did not have the $39B used to bail out Bear Stearn. Neither the $200B plus for Fannie and Freddie. Nor the $85B for AIG. Where is the money coming from? Printing press. We live in a fiat money system. Worthless paper can turn into green dollars, not so magically. It is a form of stealth tax. We all pay for it, not knowingly. It is reflected in higher prices we pay for food, energy, and everyday stuff. In another word, it is called "inflation". Instead of letting the asset (real estate asset) bubble to burst completely, the Fed is trying to print more money to keep it inflated. No wonder oil price today rocketed up more than $16 to >$120/barrel, largest single jump ever! Hank a lot, Paulson! Way to go Ben!
Most striking is the boldness of Paulson's request. He basically asked for a blank check to do whatever he sees fit. He specifically requested that no court oversight should be allowed! Yeah, we should all trust that Hank Paulson won't do anything hanky panky with his old Wall Street pals. Give me a break! Talking about put a fox to guard hen house!
The reason for the bail out sounded very solid. They have depicted a near apocalyptic outcome if the bailout is not done right now: financial melt down, multi-year depression, loss of jobs, close of factories, end of the civilization as we know it. Fear. No, even more than that. Terror. They want to terrorize all of us into submission (accepting the bailout proposal). I think they have done similar thing very successfully: they have used our fear of terrorism to slowly take away the liberty from us. They have succeeded in doing that. Now they will succeed in taking away our hardly earned savings! American people are gullible sheep! High finance is so complex and who understands it? Let's just trust that these people are doing the right thing and have us taxpayers' interest at their hearts. LOL.
Is this $700 B bail out necessary? Absolutely no. The only argument for the bailout is that: banks have all but stopped lending, even after the Fed vowed to wide open its check book to offer low-interest loans for these banks (through the Fed discount window). So the thinking goes like this: if banks stop lending, economy will grind to a standstill.
Not so fast. As I have pointed out, consumers are de-leveraging: not borrowing! Corporations other than the financial industry are in very good shape. Most of them have sufficient cash cushion to weather the storm. In fact, Microsoft just announced today it is using the cash on its balance sheet to buy back $40 Billion worth of its own stock. So corporation can live without borrowing at least for now.
So it is not end of the world if banks stop lending. Banks will never stop lending anyway. It is their business. If some banks stop doing that, that will cause their own demise. Why would they do that? They are doing it now ONLY TO HOLD THE PUBLIC HOSTAGE. They are acting like cry baby: woo, woo, if you don't bail us out, we will not lend.
We should not cave in. We should not allow them to socialize their losses. When they were making huge profits, they did not ask us to share with them. They dished out hundreds of millions dollars of bonuses to their top executives. Now they are asking us the poor taxpayers to rescue them! Take a hike! You could die. There will be others taking your place! Capitalism does not lack risk takers.
The moral hazard is tremendous. They are all trying to get big so they will be regarded to be too big to fail. Bank of America has bought MBNA, CountryWide, and Merrill Lynch. Wachovia does not want to stay behind. It is trying to buy Morgan Stanley. Nobody wants to end up like poor Lehman, right?
All these banks seem to have a put option written for them against the taxpayers, if you understand what a put option means. This all started from 1998 LTCM bail-out engineered by Alan Greenspan. They used to call it "Greenspan put". More accurately, it should be called "taxpayer put".
Now the $700B bailout package seems to be set in stone. I still think it could work in taxpayers favor if sufficient oversight and accountability are present. We cannot let these banks to dump their bad debts to us at inflated prices. And we also need to make sure we can sell these debts at fair market value later on. If we can accomplish that, the taxpayers may not lose too much in the end. If we allow Hank to do whatever pleases him, then we will have a big bill to pay, for generations to come.
We know American households are broke, and the government is even more broke. We don't have the $700B. We did not have the $39B used to bail out Bear Stearn. Neither the $200B plus for Fannie and Freddie. Nor the $85B for AIG. Where is the money coming from? Printing press. We live in a fiat money system. Worthless paper can turn into green dollars, not so magically. It is a form of stealth tax. We all pay for it, not knowingly. It is reflected in higher prices we pay for food, energy, and everyday stuff. In another word, it is called "inflation". Instead of letting the asset (real estate asset) bubble to burst completely, the Fed is trying to print more money to keep it inflated. No wonder oil price today rocketed up more than $16 to >$120/barrel, largest single jump ever! Hank a lot, Paulson! Way to go Ben!
Thursday, September 18, 2008
Finally someone is bold enough to say something about the crimes Bush/Cheney have committed
This is a reprint of a news item from the Associated Press
Vermont candidate to prosecute Bush if she wins
By JOHN CURRAN, Associated Press Writer Fri Sep 19, 3:45 AM ET
BURLINGTON, Vt. - Lots of political candidates make campaign promises. But not like Charlotte Dennett's. Dennett, 61, the Progressive Party's candidate for Vermont Attorney General, said Thursday she will prosecute President Bush for murder if she's elected Nov. 4.
Dennett, an attorney and investigative journalist, says Bush must be held accountable for the deaths of thousands of people in Iraq — U.S. soldiers and Iraqi civilians. She believes the Vermont attorney general would have jurisdiction to do so.
She also said she would appoint a special prosecutor and already knows who that should be: former Los Angeles prosecutor Vincent Bugliosi, the author of "The Prosecution of George W. Bush for Murder," a new book.
"Someone has to step forward," said Dennett, flanked by Bugliosi at a news conference announcing her plan. "Someone has to say we cannot put up with this lack of accountability any more."
Dennett and two others are challenging incumbent Attorney General William Sorrell, a Democrat, in the Nov. 4 election.
Bugliosi, 74, who gained fame as the prosecutor of killer Charles Manson, said any state attorney general would have jurisdiction since Bush committed "overt acts" including the military's recruitment of soldiers in Vermont and allegedly lying about the threat posed by former Iraqi dictator Saddam Hussein in speeches that were aired in Vermont and elsewhere.
"No man, even the president of the United States, is above the law," said Bugliosi.
The White House press office didn't respond to a request for comment Thursday. But Republican National Committee spokesman Blair Latoff denounced Dennett.
"It's extremely disappointing that a candidate for state attorney general is more concerned with radical left-wing provocation than upholding the law of Vermont," Latoff said. "These incendiary suggestions may score points among the most fringe elements of American society, but can't be settling for anyone looking for an attorney general."
Anti-Bush sentiment runs deep in Vermont. It's the only state Bush hasn't visited as president, and one whose liberal tendencies make it unlikely he will.
In 2007, the state Senate adopted a resolution calling for Congress to begin impeachment proceedings against Bush and Vice President Dick Cheney.
Last March, the towns of Brattleboro and Marlboro voted to seek indictments against Bush and Cheney over the war, and dozens of other towns voted at town meetings to call for his impeachment.
Sorrell, who is seeking a sixth term, said he doesn't believe a Vermont attorney general would have the authority to charge Bush.
"The reality is, in my view, that unless the crime takes place in Vermont, then I as the attorney general have no authority under Vermont law to be prosecuting the president," Sorrell said.
Vincent Bugliosi, left, speaks at a news conference in Burlington, Vt., Thursday, Sept. 18, 2008. Bugliosi, the author of the book, 'The Prosecution of George W. Bush for Murder.' was in Vermont to support the candidacy of Progressive candidate for attorney general of Vermont, Charlotte Dennett, right.(AP Photo/Toby Talbot)
Vermont candidate to prosecute Bush if she wins
By JOHN CURRAN, Associated Press Writer Fri Sep 19, 3:45 AM ET
BURLINGTON, Vt. - Lots of political candidates make campaign promises. But not like Charlotte Dennett's. Dennett, 61, the Progressive Party's candidate for Vermont Attorney General, said Thursday she will prosecute President Bush for murder if she's elected Nov. 4.
Dennett, an attorney and investigative journalist, says Bush must be held accountable for the deaths of thousands of people in Iraq — U.S. soldiers and Iraqi civilians. She believes the Vermont attorney general would have jurisdiction to do so.
She also said she would appoint a special prosecutor and already knows who that should be: former Los Angeles prosecutor Vincent Bugliosi, the author of "The Prosecution of George W. Bush for Murder," a new book.
"Someone has to step forward," said Dennett, flanked by Bugliosi at a news conference announcing her plan. "Someone has to say we cannot put up with this lack of accountability any more."
Dennett and two others are challenging incumbent Attorney General William Sorrell, a Democrat, in the Nov. 4 election.
Bugliosi, 74, who gained fame as the prosecutor of killer Charles Manson, said any state attorney general would have jurisdiction since Bush committed "overt acts" including the military's recruitment of soldiers in Vermont and allegedly lying about the threat posed by former Iraqi dictator Saddam Hussein in speeches that were aired in Vermont and elsewhere.
"No man, even the president of the United States, is above the law," said Bugliosi.
The White House press office didn't respond to a request for comment Thursday. But Republican National Committee spokesman Blair Latoff denounced Dennett.
"It's extremely disappointing that a candidate for state attorney general is more concerned with radical left-wing provocation than upholding the law of Vermont," Latoff said. "These incendiary suggestions may score points among the most fringe elements of American society, but can't be settling for anyone looking for an attorney general."
Anti-Bush sentiment runs deep in Vermont. It's the only state Bush hasn't visited as president, and one whose liberal tendencies make it unlikely he will.
In 2007, the state Senate adopted a resolution calling for Congress to begin impeachment proceedings against Bush and Vice President Dick Cheney.
Last March, the towns of Brattleboro and Marlboro voted to seek indictments against Bush and Cheney over the war, and dozens of other towns voted at town meetings to call for his impeachment.
Sorrell, who is seeking a sixth term, said he doesn't believe a Vermont attorney general would have the authority to charge Bush.
"The reality is, in my view, that unless the crime takes place in Vermont, then I as the attorney general have no authority under Vermont law to be prosecuting the president," Sorrell said.
Vincent Bugliosi, left, speaks at a news conference in Burlington, Vt., Thursday, Sept. 18, 2008. Bugliosi, the author of the book, 'The Prosecution of George W. Bush for Murder.' was in Vermont to support the candidacy of Progressive candidate for attorney general of Vermont, Charlotte Dennett, right.(AP Photo/Toby Talbot)
Did I just call the bottom of the market yesterday?
Maybe yesterday was the capitulation. Today the stock reversed the trend of early slide and ended up fast and fierce. Dow was up 410 points, going back up above the 11000 level, ending up 3.9%. Nasdaq was even giddier, up 100 points, or 4.9%. S&P 500 was up 50 points, or 4.3%. Wachovia Bank(WB), which was rumored to be in talk to buy Morgan Stanley, powered up a whopping 59%.
In the morning, news outlets reported that the central banks of various countries were working with the Fed in a coordinated way to provide sufficient liquidity for the banks around the world. Even that news failed to change the sour mood on the Wall Street. Dow erased an earlier gain of close to 200 points, and traded down more than 140 points in the middle of the day. Then there was a report that the Government is contemplating on setting up an entity to "absorb" the bad debt banks are carrying on their balance sheet. This entity would be modeled after the Resolution Trust Corp (RTC) set up in late 80s by the government during the savings and loan crisis. The idea is that the government entity would purchase bad mortgage debt from all the banks, and sell it to investors. The entire process may take several years. Saddled with the bad mortgage debt, banks currently are very cautious in lending to businesses and individuals. With out bank lending, economy may grind to a halt, the end result of which is unthinkable (multi-year depression). With the government taking over the bad debt, banks will be freed of these "toxic" assets and start to lend again, which will slowly lead to economic recovery.
I guess this may be the best option out of all the worst ones. This is what often referred to as "privatizing profit and socializing loss" of the US financial system. Tax payers are left to hold the bag when banks gambled with depositors' money. When banks are making billions of profit, tax payers don't get to share with it. But now when they are making huge losses, tax payers have to shoulder them. Is this "laissez faire" capitalism?
Yesterday I was questioning the wisdom of selling assets for cash by investor mass. Today it is becoming even clearer that cash is worthless. But people are just so frightened by risk that they are doing irrational things. That is why they have been selling all risky assets, including even money market, in exchange for safe cash, which is treasury bills. Annualized 3-month treasury yield went to almost ZERO! In some case, people are willing to buy treasury bills at negative yield. Talking about insanity! We are living in a fiat money society. Money is a piece of paper. Central banks can print as much as you want. Oh my Lord, what a bunch of blind!
Buy stocks (but be choosy), believe me. Stock is incoming producing asset, unlike commodities which yield no income. I don't want to buy fixed income in this situation when the Fed's printing press is running 24/7.
In the morning, news outlets reported that the central banks of various countries were working with the Fed in a coordinated way to provide sufficient liquidity for the banks around the world. Even that news failed to change the sour mood on the Wall Street. Dow erased an earlier gain of close to 200 points, and traded down more than 140 points in the middle of the day. Then there was a report that the Government is contemplating on setting up an entity to "absorb" the bad debt banks are carrying on their balance sheet. This entity would be modeled after the Resolution Trust Corp (RTC) set up in late 80s by the government during the savings and loan crisis. The idea is that the government entity would purchase bad mortgage debt from all the banks, and sell it to investors. The entire process may take several years. Saddled with the bad mortgage debt, banks currently are very cautious in lending to businesses and individuals. With out bank lending, economy may grind to a halt, the end result of which is unthinkable (multi-year depression). With the government taking over the bad debt, banks will be freed of these "toxic" assets and start to lend again, which will slowly lead to economic recovery.
I guess this may be the best option out of all the worst ones. This is what often referred to as "privatizing profit and socializing loss" of the US financial system. Tax payers are left to hold the bag when banks gambled with depositors' money. When banks are making billions of profit, tax payers don't get to share with it. But now when they are making huge losses, tax payers have to shoulder them. Is this "laissez faire" capitalism?
Yesterday I was questioning the wisdom of selling assets for cash by investor mass. Today it is becoming even clearer that cash is worthless. But people are just so frightened by risk that they are doing irrational things. That is why they have been selling all risky assets, including even money market, in exchange for safe cash, which is treasury bills. Annualized 3-month treasury yield went to almost ZERO! In some case, people are willing to buy treasury bills at negative yield. Talking about insanity! We are living in a fiat money society. Money is a piece of paper. Central banks can print as much as you want. Oh my Lord, what a bunch of blind!
Buy stocks (but be choosy), believe me. Stock is incoming producing asset, unlike commodities which yield no income. I don't want to buy fixed income in this situation when the Fed's printing press is running 24/7.
Wednesday, September 17, 2008
Is this capitulation?
Holy! We got a brief reprieve yesterday. But today is another brutal carnage on the Wall Street. Dow is down almost 450 points, or 4.1%, Nasdaq down 109 points, 4.94% (!), and S&P off by 57 point, 4.71%. This is breathtaking! Dow is now below 12000. Gold shot up almost 12% and silver up more than 14%. All these was precipitated by the Fed's $85B bailout of AIG. Fear! Is this the final capitulation? It certainly feels like. I have gone though the dot com bust. I thought that was brutal. Lord, Lord, Lord! Please save us!
In my yesterday's post, I analyzed that Corporate sector (Business Sector, outside of the financial) of the US economy is pretty healthy. It is the government sector and household sectors that are debt-ridden and under strain. Judging from retail sales and consumer spending, I think households are starting to de-leverage and repair the balance sheet by cutting spending. But the government sector has yet to show any sign of restrain in spending. That is because the twin wars are costing us dearly. We GOT TO STOP the senseless and wasteful wars! We may not be able to end it abruptly. But certainly we have to start the process of pulling out of Iraq! That is why it is so crucial to elect Obama, and pressure him to rein in defense spending.
I understand why people sell financial stocks. But I don't get it why people are selling shares of perfectly healthy and strong companies such as Intel and Cisco. We are living in fiat money society. Cash is worthless paper. Why sell the income-producing assets (common stock) in exchange to fast depreciating cash?
I guess fear is now the dominant force of the market. I think when everybody is selling assets and demanding cash, (the Fed will keep printing cash to meet the demand), the smart move would be to go against the herd. But you have to have the stomach to take it.
Confidence takes a long time to restore. We are still in the dark tunnel.
In my yesterday's post, I analyzed that Corporate sector (Business Sector, outside of the financial) of the US economy is pretty healthy. It is the government sector and household sectors that are debt-ridden and under strain. Judging from retail sales and consumer spending, I think households are starting to de-leverage and repair the balance sheet by cutting spending. But the government sector has yet to show any sign of restrain in spending. That is because the twin wars are costing us dearly. We GOT TO STOP the senseless and wasteful wars! We may not be able to end it abruptly. But certainly we have to start the process of pulling out of Iraq! That is why it is so crucial to elect Obama, and pressure him to rein in defense spending.
I understand why people sell financial stocks. But I don't get it why people are selling shares of perfectly healthy and strong companies such as Intel and Cisco. We are living in fiat money society. Cash is worthless paper. Why sell the income-producing assets (common stock) in exchange to fast depreciating cash?
I guess fear is now the dominant force of the market. I think when everybody is selling assets and demanding cash, (the Fed will keep printing cash to meet the demand), the smart move would be to go against the herd. But you have to have the stomach to take it.
Confidence takes a long time to restore. We are still in the dark tunnel.
Tuesday, September 16, 2008
Turmoil on the Wall Street
You've seen it yesterday: Lehman Brothers filed for bankruptcy protection after failing to reach a deal with potential buyers (Barclay and Citi were rumored to be the interested parties) over the weekend. Meanwhile, Merrill Lynch, one of the marquis investment banks on the Street, agreed to be bought by Bank of America in a deal valued at $50B. This deal was viewed as BoA bailing out Merrill. Furthermore, rumors about impending bankruptcy of AIG caused people to believe more bad news is yet to come. Stock sold off around the world, with Europe down more than 4% and Asia down close to 5% before US stock market opened. As you would expect, the Monday trading on Wall Street was bloody. Dow declined more than 500 points, or 4.4%, worst single day decline since the burst of dot com bubble seven to eight years ago. It was indeed a "black Monday".
To make things worse, pundits were all sounding doom and gloom. A NYU economist, Nouriel Roubini, even warned that American's deposits in the banks are at risk (I think he should shut up, or be locked up for inciting run on banks). Our old pal Allan Greenspan said this is the worst crisis in last hundred years. That means the 1929 depression was even better than current financial and economic crisis. I think all these pundits have their ulterior motives (not very noble often time) to try to scare people, and further weaken people's confidence.
I think the current crisis in a large part is a crisis in confidence: people don't know how to evaluate the risky assets after having burned by subprime mortgages. So they start to sell all the assets for cash. So if you take a look, ALL asset classes are under selling pressure, even the darlings just a few months ago (oil and commodities). It will take a long time to restore confidence.
I have been a critic of the Fed and US government for creating such crisis in the first place. But the action, or lack of action of the Fed and the Treasury department over the weekend, was a wise decision. I think history will prove that not bailing out Lehman was the right move. Collapse of Lehman is no big deal. The Fed should not even have bailed out Bear Stearns earlier this year. But Fannie and Freddie were entirely a different matter. Taking out Fannie and Freddie was necessary and a right move, in my opinion. Today, the Fed maintain the Fed Funds rate at 2%, which is a big sigh of relief. I was really worried about that Fed would cave in to the pressure from the Wall Street and lower the interest rate. At this point lowering interest has no positive effect at all. It in fact would be counter productive, causing further panic in the financial markets. Lowering interest rate would do nothing to reduce investors' risk premium, which is very high right now.
So what is my assessment of the situation? Should we sell stock and stay in cash, or this is a great opportunity to buy? Before I tell you my opinion, let me show you my thought process:
If one looks at the entire US economy in three segments: household sector, government sector and corporate sector, and then analyzes the health of each sector, he or she should be able to see more clearly where problems lie and what are the solutions.
1) US household is under stress, there is no doubt about that. Consumer spending has been outpacing consumption for a long time, financed by cheap credit provided by foreign investors. Since 2000, medium household income actually shrunk in real term by $1000, according to some reports. Wealth gap has widened significantly. The ultra rich have seen their wealth grow fastest in decades, while middle to lower class people are suffering. When the US consumer cannot borrow against their future income, they started to borrow against their assets, their houses. Due to the artificial low interest rate engineered by Allan Greenspan and the Fed, Americans were able to extract tremendous amount of cash from home equities, and spend the cash as on home remodeling, vacation, or buying bigger nicer cars. Then the house prices start to decline, that is when many people begin to see equities in their houses evaporated. Mortgage default rate start to rise rapidly, creating a chain reaction in the world financial institutions who willing lent to these overstretched homeowners.
Now US household is deleveraging, trying to repair the balance sheet. That is a good thing. But expect consumer spending to decline in the next few years, and financial service industry will have to de-leverage, too, to shrink their balance sheets as well. So the demise of a few financial institutions is just the normal course of the consumer adjustment we are witnessing now. That is good in long run, painful in near term.
2) The government sector is also under stress. Tax revenue has not grown, due to the big tax cut Bush enacted back in 2002. In the meanwhile spending has rocketed, largely due to twin wars we are fighting in Iraq and Afghanistan. The government cannot continue to rely on printing money to finance the deficit spending. So we either have to raise the tax or cut spending, or both. You can't raise tax on middle class in this economic environment. I support Obama's tax plan to raise taxes on the wealthy, who have disproportionally benefited under the Bush tax plan. In the meanwhile, we have to cut spending. That is difficult: you cannot cut social security or medicare. Healthcare for the uninsured will be extra money the government has to spend. And the national infrastructure is also in dire need of repair (bridge collapse in Minneapolis was an indication). We also have to invest in alternative energy (wind mills) to wean our dependence on fossil fuel. So where the cut can come from? The only place is Iraq and Afghanistan war spending. The whole war on terror is a self inflicted pain. As you know, the US government had all the tools to prevent 9/11 from happening. If you don't believe they made 9/11 happen, you should at least believe they LET 9/11 happen. So the whole war-on-terror spending is just waste of money and resources. We can save that for more productive use, such as building the national energy and transportation infrastructure and investing in healthcare. That is why it is so important to elect Obama as President coming November.
3) US corporate sector, apart from the financial institutions or auto industry, is very healthy. Profit margins are at all time high. Earnings have been strong. Corporations are awash with cash, balance sheet is pristine. US companies are very competitive compared with companies of other nations. So the US corporate sector is very strong. We have to encourage corporations to invest in the US to create jobs and grow household income. I think Obama has detailed plan for that.
So what is my opinion?
If Obama wins, I will buy stocks with all the money I have. If McCain wins, and he continues the Bush policy, then I will have to cash out to invest in gold and swiss franc.
We got to elect Obama!
To make things worse, pundits were all sounding doom and gloom. A NYU economist, Nouriel Roubini, even warned that American's deposits in the banks are at risk (I think he should shut up, or be locked up for inciting run on banks). Our old pal Allan Greenspan said this is the worst crisis in last hundred years. That means the 1929 depression was even better than current financial and economic crisis. I think all these pundits have their ulterior motives (not very noble often time) to try to scare people, and further weaken people's confidence.
I think the current crisis in a large part is a crisis in confidence: people don't know how to evaluate the risky assets after having burned by subprime mortgages. So they start to sell all the assets for cash. So if you take a look, ALL asset classes are under selling pressure, even the darlings just a few months ago (oil and commodities). It will take a long time to restore confidence.
I have been a critic of the Fed and US government for creating such crisis in the first place. But the action, or lack of action of the Fed and the Treasury department over the weekend, was a wise decision. I think history will prove that not bailing out Lehman was the right move. Collapse of Lehman is no big deal. The Fed should not even have bailed out Bear Stearns earlier this year. But Fannie and Freddie were entirely a different matter. Taking out Fannie and Freddie was necessary and a right move, in my opinion. Today, the Fed maintain the Fed Funds rate at 2%, which is a big sigh of relief. I was really worried about that Fed would cave in to the pressure from the Wall Street and lower the interest rate. At this point lowering interest has no positive effect at all. It in fact would be counter productive, causing further panic in the financial markets. Lowering interest rate would do nothing to reduce investors' risk premium, which is very high right now.
So what is my assessment of the situation? Should we sell stock and stay in cash, or this is a great opportunity to buy? Before I tell you my opinion, let me show you my thought process:
If one looks at the entire US economy in three segments: household sector, government sector and corporate sector, and then analyzes the health of each sector, he or she should be able to see more clearly where problems lie and what are the solutions.
1) US household is under stress, there is no doubt about that. Consumer spending has been outpacing consumption for a long time, financed by cheap credit provided by foreign investors. Since 2000, medium household income actually shrunk in real term by $1000, according to some reports. Wealth gap has widened significantly. The ultra rich have seen their wealth grow fastest in decades, while middle to lower class people are suffering. When the US consumer cannot borrow against their future income, they started to borrow against their assets, their houses. Due to the artificial low interest rate engineered by Allan Greenspan and the Fed, Americans were able to extract tremendous amount of cash from home equities, and spend the cash as on home remodeling, vacation, or buying bigger nicer cars. Then the house prices start to decline, that is when many people begin to see equities in their houses evaporated. Mortgage default rate start to rise rapidly, creating a chain reaction in the world financial institutions who willing lent to these overstretched homeowners.
Now US household is deleveraging, trying to repair the balance sheet. That is a good thing. But expect consumer spending to decline in the next few years, and financial service industry will have to de-leverage, too, to shrink their balance sheets as well. So the demise of a few financial institutions is just the normal course of the consumer adjustment we are witnessing now. That is good in long run, painful in near term.
2) The government sector is also under stress. Tax revenue has not grown, due to the big tax cut Bush enacted back in 2002. In the meanwhile spending has rocketed, largely due to twin wars we are fighting in Iraq and Afghanistan. The government cannot continue to rely on printing money to finance the deficit spending. So we either have to raise the tax or cut spending, or both. You can't raise tax on middle class in this economic environment. I support Obama's tax plan to raise taxes on the wealthy, who have disproportionally benefited under the Bush tax plan. In the meanwhile, we have to cut spending. That is difficult: you cannot cut social security or medicare. Healthcare for the uninsured will be extra money the government has to spend. And the national infrastructure is also in dire need of repair (bridge collapse in Minneapolis was an indication). We also have to invest in alternative energy (wind mills) to wean our dependence on fossil fuel. So where the cut can come from? The only place is Iraq and Afghanistan war spending. The whole war on terror is a self inflicted pain. As you know, the US government had all the tools to prevent 9/11 from happening. If you don't believe they made 9/11 happen, you should at least believe they LET 9/11 happen. So the whole war-on-terror spending is just waste of money and resources. We can save that for more productive use, such as building the national energy and transportation infrastructure and investing in healthcare. That is why it is so important to elect Obama as President coming November.
3) US corporate sector, apart from the financial institutions or auto industry, is very healthy. Profit margins are at all time high. Earnings have been strong. Corporations are awash with cash, balance sheet is pristine. US companies are very competitive compared with companies of other nations. So the US corporate sector is very strong. We have to encourage corporations to invest in the US to create jobs and grow household income. I think Obama has detailed plan for that.
So what is my opinion?
If Obama wins, I will buy stocks with all the money I have. If McCain wins, and he continues the Bush policy, then I will have to cash out to invest in gold and swiss franc.
We got to elect Obama!
Subscribe to:
Posts (Atom)
Posts
