Wednesday, January 23, 2008

Does Any of This Really Matter?

My back is fully restored today. I guess I need an extremely firm mattress! I hate the two week break before the Superbowl. The waiting seems like an eternity. After football season ends, it is hard to find meaning in the weekend. Luckily the Daytona 500 is not too far away.

Monoline Insurers - Government Intervention?
One major reason cited for the killer rally today in stocks was word that some closed door meetings were being held to craft some kind of bailout for dying bond insurers, from The Street.Com:
Bond Insurer Plan Lifts Stocks
By Nat Staff Reporter1/23/2008 6:21 PM EST
The Federal Reserve couldn't help Wall Street, but government bailouts could.
That's the message from investors when the stock market on Tuesday greeted a surprise three-quarter point rate-cut from the Fed with a major selloff, only to rebound Wednesday and crank out the biggest rally of the year on news that a lifeline may be in the works for the troubled bond insurance industry.
Forget the highly touted "stimulus package" for consumers that's in the works in Washington, D.C. Talk of a bailout for MBIA and Ambac that's being orchestrated by Eric Dinallo, the top New York state insurance regulator, appears to be what finally lit a fire under stocks in a volatile session Wednesday.
"No private investor in their right mind would touch this stuff, but someone has to step up and deal with it if we want to prevent a systemic event in the financial system," says T.J. Marta, fixed income strategist with RBC Capital Markets.

The markets can be a funny thing sometimes. Banks losing more money than ever? Find foreign capital to replace the losses. Foreclosures skyrocketing? Freeze them. Bond insurers with hopeless business plans and no capital may collapse the fake financial system? Have the government take all the risk. It is easy to fix any problem don't you see?

This possible bailout starts as a 15 Billion bank cash infusion to help the insurers. What is really being proposed is some kind of government backing to keep the access of capital open for municipalities across the US. The US government is the perfect buyer here, as Mr. Marta is kind enough to tell us "No private investor in their right mind would touch this stuff" but Uncle Sam sure will!

Whether or not this possible plan has any legs (the markets sure think it does!) is almost secondary. At a time when the US government is about to start passing out hefty rebate checks, is running a crazy deficit, is already on the hook for home losses through FNM and FRE, should the next step be to wade into a possible trillion dollar market that has no clear direction? What has happened to capitalism when as soon as things go south, all ownership is passed to a central government? I guess what happened is major losses, and you know how well people do with getting less!

Last thought on this topic; Does Warren Buffet feel like a total fool right now? Compared with totally under capitalized insurers like MBI and ABK, his new outfit was a sure winner in this arena. If the bond insurers get US backing, the Buffet outfit is now second fiddle, an afterthought. I admit I am not as sharp on this topic as many others, but I can promise this topic is a major theme for 2008. Keep an eye out!

Does Any of This Really Matter?
I have been thinking about a theme for a while now. Grand theoretical ideas can be hard to put into concise words, but I will give it a try.
In light of the following situation facing the US:
  • MASSIVE Deficit spending
  • IMPOSSIBLE to fund social security
  • Consumer reliance on ULTRA LOW interest rates
  • Federal GUARANTEES in the housing, banking, and possible insurance sectors
  • Stimulus Plans that are getting bigger in possible size EVERY DAY

In short, the USA cannot seriously be expected to EVER pay any of this money out, or back. The Trillions in treasury bonds held worldwide are monopoly money. It has been repeated a million times all of this information. How come nothing ever happens?

I submit for review that the answer is both simple and silly. Everyone knows this. Not in the same way a terrible earnings report can be "priced in" to a stock, but the fact is accepted by all world players. If this idea is correct the only explanation left is that the scam that is the US economy has been leveraged all over the world in so many ways that a realistic pricing of the situation is no longer wanted, and is in fact opposed, by every financial player in the game. Why stop a good thing? How hard would it be to unravel the mess and start over? We have seen the desperation of banks to hide actual prices for the CDO's they hold. "Mark to Myth" versus "Mark to Market" shows how hard holding onto a pipe dream is ingrained.

I think this cuts to the very core of many of the things we are seeing right now. Realistically, there is no way the FED can cut rates to 1% without effectively finishing the dollar. They will cut that hard though, and I fully expect the dollar to RALLY the whole way. The US owes more money than could reasonably ever be paid back right now, yet foreign countries gobble up our debt offerings like the food rewards on the show "Survivor". In this way it is both simple and actually desirable to have the US take on the home price collapse shock (through FNM, FRE, and FED bank backing), monoline bond insurers losses, and pumping money into the economy through stimulus. NONE of that money will ever need to be paid back anyway, so it is a convenient outlet.

Some may argue that things will change. I find that very funny. At this point if no major event has occurred with respect to US debt downgrades, defaults and the like, they will not occur in my lifetime. The US is a nonperforming asset right now, and it is in every one's best interest to keep pretending otherwise.

Please use the comments section to savage my theorem, or add details. Like I said, this kind of big picture writing has its difficulties! I greatly appreciate ALL feedback.

Have a good night.


Anonymous said...

"Everyone knows this."

As Casandra put it.

This is very fitting: Everybody knows.


Anonymous said...

Congratulations. You figured it out, and 100 percent correct.

As I previously posted, what might happen is what should have happened in the seventies and a dozen times thereafter, but didn't.
As Buffet said a lot of people have lost a lot of money betting against the US economy.

Thanks Kevin. Everybody knows just about sums it up. I haven't heard a Leonard Cohen song in years, and he's still right on.

When investors sense that things are becoming unglued (loss of confidence that we will be able to keep the game going) markets sell off. This continues until the Knights in Shining Armour (Bernake or the President) come to the rescue with soothing words. Nothing changed really, except confidence is restored. The con continues.

The only problem in this society is you must have assets to play.

But every one knows the stooges don't know what the hell they are doing, but the reality is just too hard to face. So we go on pretending, and periodically have fits of reality.

Look what happened after Katrina. The emporer has no clothes. Its been a down hill slide since then for this administration.

The status quo will continue because too many vested interests have too much to lose. There will be no change, just lying politicians. However, this can change from some extraneous event, such as another 9/11.

But don't kid yourself. Fundamental economics still has a play in this insanity.

We are becoming poorer. Like the frog in the pot of water, he just doesn't realize what is slowing happening.

Sure some will argue that we have the highest standard of living of all time. My counter is when we pay it off, only then are we richer. Until then, any one can live like a king, as long as there is some one to lend him the money to do so.

Anonymous said...


PS: The interview went well & will know if I have a new job by Friday!

Anonymous said...

Adding to my post above:

The economic reality is so bad, that we now start stimulating the economy, monitarily and fiscally, PRIOR to an offical recession.

The powers to be are frantically trying to prevent the reality coming to the fore, because every one knows the our dept cannot be repaid.

Economic fundamentals cannot be ignored but they can be mitigated. Strings will be pulled to manage a controlled decline to prevent reality from taking over and causing a panic.

This is why periodically conditions defy reality. Smoke and mirrors have conned (or should I say reassured) investors to continue to have faith in the system.

Eventually, this distortion can become so great that some even thought Greenspan could walk on water.

We do not have a free market. Capitalism when profits are up; socialism when profits go down. Change the rules as we go along. Any thing to keep the confidence in the system going.

Just play the game along with everyone else. When things become too hairy, just sit on the sidelines and wait until the problems are papered over.

Anonymous said...


See my post on PFE in Tuesday's comment section.