Learn By Listening
The immediate temper tantrum thrown by Wall Street after the bailout bill was defeated tells you quite a bi by itself. Without a tangible "Do Over" handed to them by the Government, the markets sold off violently. While one should be mindful about assigning too much to wild market gyrations, I had two thoughts in mind during today's rout:
1. Wall Street Holds Assets as Hostages: Make no mistake, this is a dangerous game being played by the financial folks. Sending stocks plummeting in a fit over a no bailout vote is a clear threat. Wall Street has to be careful here to cause enough carnage to scare, but not enough damage to disable. If their ability to succeed can only be judged by the great job they did with mortgages, we should all be scared.
2. Insolvency is Serious: The banking sector is so seriously compromised that investors are ready to run for the exits. While some kind of bailout may have calmed things down, this fundamental issue will not go away.
I love to comb through market commentary at times like today because you can learn tons about how someone thinks just by listening. Wondering what traders think about all this? Here is an AP story with some revealing insight:
Stocks tumble as bailout plan fails in House
Monday September 29, 6:03 pm ET
By Tim Paradis, AP Business Writer
Stocks plunge as financial bailout plan fails in House vote; Dow fall 777, biggest drop ever
WASHINGTON (MarketWatch) - With a firm rejection of Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke, the House Republicans have told the financial markets that they'll have to solve their problems on their own, without $700 billion of taxpayer money.
In a stunning vote on Monday, the House rejected the financial rescue package on a vote of 205 to 228. Republicans voted against the bill by a two-to-one ratio, and in the process rejected their own leadership, who had worked for nearly a week to craft a bill that could gain a majority. Nearly 100 Democrats also voted against the bill, spurning their leadership.
The plan's defeat came amid more reminders of how troubled the nation's financial system is -- before trading began came word that Wachovia Corp., one of the biggest banks to struggle due to rising mortgage losses, was being rescued in a buyout by Citigroup Inc. It followed the recent forced sale of Merrill Lynch & Co. and the failure of three other huge banking companies -- Bear Stearns Cos., Washington Mutual Inc. and Lehman Brothers Holdings Inc.; all of them were felled by bad mortgage investments.
And it raised the question: Which banks are next, and how many? The Federal Deposit Insurance Corp. has a list of over 110 banks that were in trouble in the second quarter, and that number surely has grown in the third.
Traders on the floor were stunned by the House vote.
"How could this have happened? Is there such a disconnect on Capitol Hill? This becomes a problem because Wall Street is very uncomfortable with uncertainty," said Gordon Charlop, managing director with Rosenblatt Securities. "The bailout not going through sends a signal that Congress isn't willing to do their part."
So there you have it. Congress is not willing to "do their part"? What part is that? Use taxpayer money to save reckless institutions? Prop up asset values that do not reflect any reality? Ok. That quote is an important one as it captures the mindset of Wall Street.
Marketwatch: House to Wall Street: Drop dead
Best headline of the day goes to Marketwatch:
House to Wall Street: Drop deadCommentary: Uneasy Republicans couldn't stomach massive bailout
Last update: 2:40 p.m. EDT Sept. 29, 2008
WASHINGTON (MarketWatch) -
With a firm rejection of Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke, the House Republicans have told the financial markets that they'll have to solve their problems on their own, without $700 billion of taxpayer money.
Too funny! I love the symbolism and feel of the headline.
So what happened today? I really am as confused as the next guy. The house republicans seemingly turned their votes late, but also plenty of Democrats flipped their vote. Could it be the unrelenting negative reaction the congress has been getting from the public? If the election was 8 months away, I think the bill passes no problem as the politicians would have thought voters would forget about this before the polls. With the election so close, this vote was likely to be issue number one for most voters and I think plenty in the congress just plain got scared. Good enough for me.
All the emails, faxes, and phone calls made a difference. Thanks go to Mike "Mish" Shedlock and Karl "Mad Dog" Denninger for all their work in coordinating the campaign against this bill. This is really quite an accomplishment, and we should all feel relieved.
For about 5 minutes.
We are facing dire consequences from our debt induced buying binge of the last 5 years (or 10, or whatever). The impaired credit markets are a real bomb waiting to explode. Banks are insolvent, and pretend time has been cancelled for the foreseeable future. The world's economies are getting worse, and Spain is looking particularly bad. Something must be done to find a path out of this mess. And no, it will not be a fast turnaround and no I do not know what that path is.
One central premise that I think is being glossed over by many, but has long been a central theme here at Economic Disconnect, is this:
The Era of Cheap Money is Over
No plan I have seen has addressed this simple fact. Since 2001 credit and money has been available at all time historical low rates. Risk was poorly priced, if it was priced at all. You have heard that the credit markets are closed and that banks are not lending. This is indeed true to some degree, but what really is the problem is that it is not feasible for business and borrowers to take loans unless those loans are offered at all time low rates.
How many US business models have an allowance for higher borrowing costs? Not many I would bet. While the obvious bubble in housing and auto loans was easy to pinpoint as credit excesses, take a look at all kinds of banks, retailer, auto manufactures, etc and their business model is predicated in easy, cheap money. Here lies the real issue.
Any plan to get the country back on the right track has to attack what I will term "The Cheap Money Conundrum". Cheap capital is the only way for many to survive due to poor judgement and planning, but cheap money has gone the way of the dinosaur. This basic disconnect MUST be resolved before anything is going to get better.
As always, I try to inform and get you thinking. This is what I was thinking about today. What about you? Use the comments section to open discussions. I will be watching CNBC and the NFL game tonight so I should be able to read comments and be interactive.
Have a good night.