The Bigger Picture

I had a cool treat this morning as I brought up The Reformed Broker site and yours truly made the Hotlinks list for the day!

In kitchen news, the counter tops should be installed Monday and my contractor is firm that by Thursday all will be complete! I have lost about 6 pounds over the past weeks due to not eating dinner much. I hate microwave food and getting a cook set up is really a hassle. When all is normal I think it will be a Big Steel Keg marathon.

A couple of financial thoughts tonight.

Rough Day for Markets
I am used to the futures being down big, it actually happens plenty. What the norm is a big gap down on heavy volume followed by a merciless melt up on about 5 shares traded to close the day either even or a little positive. Today was ugly going in and a late day high volume selloff closed the show (yes Mr Pisani, plenty of volume!). Ugly all around.

Culprits? Always a few:
-Markets throwing a hissy fit at Bernanke's "pittance" of help announced yesterday
-A memo somehow made the rounds that the on track recovery was perhaps more of a pipe dream and smoke and mirrors that anything substantial
-In a game ,understood by many that play, is built on confidence the rush to the door is always going to get a little crowded

In the end I of course have no idea exactly why the big drop today. I think a combination of the first and third reasons are most applicable. It is likely the markets want more action out of the FED, but what if the FED wants more action from Washington (as I wrote a few posts ago)? If a hack like me can see low volume ramp ups and headline euphoria trading then you can be sure the big boys (ha ha, I am inserting SMART MONEY tag here!) know sentiment can change in a hurry. Either way, this could be the start of a moderate sell off in an effort to pressure policy makers to do more "stuff" whatever shape that takes. I would not get too worried until S&P 1040 if you are playing in this sandbox, but that is quite a drop from here.

Can You make Do with Less?
Everything I see and everything I think can be summed up in the following question, the answer to which will dictate your wants for things going forward:

Can you make do with less?

Poor investment has created a supersized financial sector of the US economy that generally benefits very few. Poor investment turned homes, once a long term saving plan for those unable to save otherwise, into scratch tickets and ATMS. The acceptance of absolute maximum consumption has resulted in a service sector filled with lower paying jobs geared mainly at food and entertainment. Government salaries and pensions are massive pits for future capital that will have to be filled or renegotiated on. These are all structural issues that cannot be resolved quickly or easily.

The policy thus far has been to prop things up and hope all returns to "normal" but this expected recovery is running slow and running late (hat tip to "Ending" by Gavin Ewart). Wow, here at Economic Disconnect you even get poetry!

One of the reasons I have had the long term belief that we will see some kind of insane actions out of someone (D.C, FED, Treasury; take your pick) is the recognition of this fact. The bond market has been happy to go along with things so far, and I have my questions (and ideas) as to why this is so. This adds to the probability that something dangerous will be attempted as it has worked so far.

This post got a little big on the macro type view, but that is what I am putting together right now. The key idea to take home is time is an important factor here. The acknowledgement by the FED that things have slowed down after a year of saying how good things were is a punch in the face to the millions that never saw any recovery at all. Summer is almost over.

Have a good night.

There is No Going Back to a Free Market

I really liked last night's post, and there were quite a few comments on it. One of my rewards for writing this blog is an active comment section and I thank all that participate. I am off from work until next Monday, so it is like a mini vacation for me.

Obama Overload
I congratulate president elect Obama on a good campaign and I thank him for beating a liberal dressed like a conservative in John McCain. Obama won pretty big, and that is what it is. I understand all the glowing news stories and all the excitement. But I am starting to get worried.

Two days and two press conferences into this week I am getting a feeling that Mr. Obama may be much like a Bill Clinton and feel he needs to communicate with the masses on a regular basis. I mean, how many times is Obama going to come out and say "balance the budget after a recovery, etc"? I know one of the gripes about Bush was that he was not in touch with the people, but I do not think I need daily pep talks from our president either.

Another Obama question that I have is why does he not request that Hank Paulson and Ben Bernanke stop shoveling out cash at a record pace? Why not ask that no other monies be handed out until Obama's new team can review programs and see if it is in line with their goals? That would be the first thing I would do. Either Mr. Obama does not want to rock the economic boat, or his team would be doing the same thing. Either way, not inspiring.

Gold Watch
Do not forget that this coming Friday November 28th begins the gold settlements of COMEX that reflect the huge physical vs. spot price differences. This dynamic will be in play through December and bears watching. I found this crazy picture of a gold deposit along a quartz vein on Wikipedia, and I cannot imagine stumbling onto that baby!:


There is No Going Back to a Free Market
I am not going to go into detail with the new bailout programs announced today. More of the same with a focus on the Government buying toxic mortgage debt as well as packaged credit card and student loan securities. Please take particular notice that Hank Paulson did not even attempt the pretend that "The US taxpayer may make money on these purchases" as he left that nugget out. I think it says alot that this line was not used today.

So with the myriad of alphabet lending facilities and other credit programs, the US Government has now become the lender of only resort. While I would have loved a debate about whether this should have happened at all, that ship has sailed a while ago. I want to take a look at the future problems all this intervention will cause.

To me the biggest issue going forward is that there will not be any way for the government to get out of the loan racket. Guaranteed cash and government backed debt is going to be both preferred and demanded going forward. Nobody will go into the private sector for funding when cheap money can be had at the FED. Is there any way the FED/Treasury cannot understand this?

Reinforcing my theorem that the US financial sector and many businesses cannot function unless they are in an ultra low borrowing rate environment, the Government will have to do gymnastics to keep rates at all time lows for the foreseeable future.

What is going on right now is the elimination of the free market and its replacement by a centralized government mega bank. The repercussions of this will not be fully understood for some time. The true power in America will not reside at the White House and Congress, but at the FED and Treasury. The obscene power grab by those institutions did not require a shot to be fired, only a mere threat of "systemic collapse". I can only offer that it is lucky for America that a resurgent Russia or a nuclear armed rogue state has not seen fit to challenge America, because our too easily spooked leaders may have just handed over the country by now.

I feel frustrated because nobody seems to be motivated to yell "STOP RIGHT THERE" to the FED and Treasury. There is no debate, no discussion as to whether any of the actions taken are prudent or for the best. Look they may very well be, but without any intelligent discussion we can never know.

It is not enough that our elected leaders have taken a hands off approach. I understand that economics can be confusing. I do not expect any member of Congress to be a Nobel prize winning economist (it would be better if they were not!) but it is not acceptable for them to just give the FED/Treasury authority to do whatever the hell they want without bounds.

There is a sense that the lead guys, Paulson and Bernanke, have no idea what they are doing and are making things up daily. That is simply not good enough.

Have a good night.

ZIRP is Not Just a State of Mind

I am real short on time this evening, so just a few quick words.

Only 1% Left Until ZIRP is Reached
Boom Boom Bernanke and pals delivered the goods and cut rate by 50bps to 1%. This matches the cryptic 1% that ignited the credit bubble that is now the credit bust. Will doing what caused the problem fix the problem? Only time will tell but I think that is a stacked deck against!

With only 1% left to before we are in the Japanesque Zero Interest Rate Policy stage, what other tricks can the FED/Treasury pull out? Already there is some baloney plan of guaranteeing 3 million mortgages providing the "owners" can pay any amount at all on a mortgage. Great stuff.

New Addition to Blogroll
There are simply so many blogs out there nobody has the time to pour over all the material out there. In the blogroll to the left I try to list the sites that I check every single day on multiple occasions to get the best and most thorough analysis. All the sites listed offer the very best in thought and value for your time spent. Tonight I am adding another.

I have been stopping by the site called "Jesse's Café Américain" quite a bit, and now it has become a daily read. No nonsense, by the numbers insight along with macro forecasting that I feel has been very good. Website is at:
http://jessescrossroadscafe.blogspot.com/

Or use the blogroll. One recent post hit upon something related to my recent rants about the Treasury issuing massive amounts of debt as if there is no upper limit. Jesse takes this on in the following post:
http://jessescrossroadscafe.blogspot.com/2008/10/in-2009-us-may-be-forced-to-selectively.html

Key Excerpt:

"We have seen estimates that next year the US will have to finance a $2 Trillion annual deficit. They may be able to push it further into the next Administration than that by the forbearance of the world, but not by much. We'd expect a significant drop in Treasuries by 2011 at the latest.

It should be obvious to anyone that we are approaching the apogee of the Treasury bubble, with the credit bubble having broken already.

When the Treasury says they are facing unprecedented challenges in financing the US public debt next year that is an understatement.

Once the deleveraging of the markets subsides, the dollar and Treasuries will drop, perhaps with some momentum, as the rest of the world realizes that the US has no choice but to default. This can be resolved in several ways, including continued subsidies from foreign sources in the form of virtual debt forgiveness, devaluation of the dollar, raising of taxes, and higher interest rates on debt.

The problem now is that the US has breached the point where it can service its debt out of real cash flows, and turning this around will require a severe devaluation of the US dollar.

Devaluation and selective default are the only foreseeable systemic alternatives. There are other exogenous paths of a more political nature such as consolidation and war that may color the default a slightly different color, but a selective default it remains.

This is the fundamental situation. Everything else is speculation and commentary."

Great Stuff!

Have a good night.

Maintenance of Illusion is Not a Sound Economic Policy

Hello all! Still amazed at what happens every day? I know I am. This blog was given special treat last post as Michael Panzer himself, the writer of the blog http://www.financialarmageddon.com/ stopped by and left a comment. I always stop by Mr. Panzer's site and his listing of this blog on his blogroll gives me a bunch of traffic! Thanks again for stopping by! That is exciting stuff.

Participation is Voluntary for Wall Street
There was a ton of coverage done on Hank Paulson and Ben Bernanke's testimony today in front of the Senate. There is so much to hash over, I can in no way cover all the details. I want to focus on a couple of particularly annoying points that stuck with me.

The first point is the desire by some in the Senate to attach CEO and other top executive pay restrictions during this time of Federal giveaways. It seems only correct to me to insist that the same boardroom members that brewed up this debacle should only get a minimum pay package on the taxpayer's bill. I mean, if indeed we are on the verge of total systemic collapse, multi-million dollar bonuses should be low on the CEO priority list as opposed to keeping a firm open.

Of course, this is not the case! When pressed about the pay cap inclusion, Mr. Paulson shows us that the inmates are running the asylum and that the same fellows that caused this mess still expect to make a killing. His quote (loosely; I cannot pour over all the transcripts right now):

"It may be difficult to get firms to participate if pay restrictions are enacted."

Did you get that? Insolvent banks looking to pocket big money from the taxpayers will not participate if their pay structures are messed with. No problem, none at all. These guys can opt out and please sign a form so I know who to short to ZERO if the ban is ever lifted! The sheer nerve of such a statement shpws you all you need to know about this mess.

Maintenance of Illusion is Not a Sound Economic Policy
The whopper of the day belonged to Benny Bernanke. Confused senators questioned how in the world the treasury purchase of toxic paper would make any difference, as there are plenty of buyers for that paper right now. Bernanke lowered the boom on us wall as he explained that the purchase price of the bad paper will be close to FULL WRITTEN VALUE! Of course! I myself had serious doubts about how this plan would help banks with capital, and here is the answer:

The FED and Treasury Plan on Paying Mythical Prices for the Trash paper

Reread that sentence again. There is no potential benefit here. This is a cash grab plain and simple. Even some senators that were pretty sure to rubber stamp this bill visually winced at this detail.

I can really appreciate the effort here. The main problem is that too much debt was created and extended with no reasonable expectation that is would ever be made good on. The reality has now sunk in. These instruments (Mortgage paper, school loans, Second mortgages, car loans) have a value, but that value effectively renders most firms insolvent. The solution presented by the FED and Treasury is to pretend. Seriously, the plan is to play make believe that these securities have close to their written value.

I am sorry to inform the powers that be of this simple fact:

Maintenance of Illusion is Not a Sound Economic Policy

I know, it's rough. I know this stinks. Is it really the best plan put forward by our "best and brightest" economic minds to play make believe? I guess it seems like a good idea right now, but can this kind of kicking the can really provide for a real recovery?

The root cause of all this is that our economy is now prefaced on runaway consumer spending. The years of 2002-2007 were 5 years of credit binge gone wild. Even if banks were helped out, even if we dodge a big bullet, lending cannot go on at a rate anywhere near where it was those 5 years. Everyone that wanted money got it. The only good borrowers left do not need any money. There is no way to make lending the driver of our economy unless we pursue the same wild lending practices that got us here.

I think Hank and Ben should take this weekend and do something more useful with their time. Your homework assignment boys is to flesh out a system where the velocity of credit and debt runs at about 1/3 of what it did during 2002-2007. Extra credit will be given for charts or funny cartoons. Have at it.

Have a good night.

Hello Out There!

It certainly has been a while! Sorry for the LONG delay, but I finally dove into the den/library room construction and as with most things it was a bit more involved than I would have wanted. The room is looking totally awesome right now, and I should be wrapping up the finish work over the next week. Good Stuff.

Are you enjoying the wild markets and things economic? I must admit being away has been tough with all that is going on that I would like to discuss, but I cannot match the fine writing and up to the minute coverage the blogs in the blogroll supply. Us them. Often. I have a few macro points to make to get some ideas out there. Thanks to all that keep checking in, hardcore fans are the best and Kevin, G, and Watchtower are some of the best readers a writer can ask for.

Who's Brilliant Idea Was This?
A while back a truly amazing mind came up with the following theorem:

"Right now the major banks/brokerages are in fact insolvent, and their stocks are zeroes. The possibility of a FED/Treasury led bailout puts some kind of value on these firms and the market action is torn between a price of zero and some other small sum."

I know, it was me of course! After a long month it has become apparent that many firms are now basically zeroes (LEH, MER, FNM, FRE) but the possibility of missing a wild 50% move up on a bailout set price is too much for many to pass up. Sad stuff which leads me to.......

Fundamentally Strong Stocks Do Not Gyrate 30% on an Almost Daily Basis
Newly formed or newly "discovered" markets in merging counties tend to have crazy volatility due to there being so little information about there particulars. Market gyrations of 30% are common as momentum players and speculators rush in and out. This is expected. The US financial system should not be one of these markets. When a stock as widely held (and I empathizes WIDELY HELD) as Fannie Mae can move 30% down one day, 25% up another, and move 80% in 6 months something is seriously wrong. The US financial stocks right now resemble a banana republic market. I do not care about the money making possibilities here (there are many) but instead want to focus on the fact that there is no tether to any reality right now for these entities. Penny stocks behave this way, not cornerstones of a financial system. This is ugly indeed.

Lowe's and Home Depot Throw in the Towel
To me the stunning drop in business at HD and Lowe's shows that finally the consumer is giving up. Drops of 25% on a yearly basis is big time stuff here. Turnaround clowns are still pinning the tail on the early 2009 donkey recovery, but secular changes do not change direction so fast. Again, an important data point.

Fall is Upon Us
As predicted here and elsewhere this has been a LONG summer. The data is deteriorating for the US economy. The housing story is getting worse. The banks are out of cash and out of time. There are things in motion that cannot be stopped (Alt-A meltdown, Bond refinancing at terrible terms, overseas funds saying "No Mas" to debt offerings). The FED and the Treasury have been exposed ass clueless and powerless. While the overall market has been ok so far, it is still vacation really. The fall is going to be wild, and volatility is going to be bad. I will have more to say in a future post, but my basic premise is that by the end of October we are going to know if we are just screwed (which stinks but can be overcome) or totally f#cked (game over). Care to place a bet?

Good Video
This is a great ultra slow motion video of a lightning strike, check it out:


Have a good night.

Does the FED and Treasury Have a Plan B? Do You?

Hello to one and all. I am sorry for the very light blogging, but I have been playing tennis, setting up contractors for various projects, busy at work, and just trying to enjoy the last month of summer. I know there are no hard feelings. I do miss writing material almost every day though. Times are very exciting indeed!

Honestly, there is so much good stuff out there I could not even offer much anyway. Things are developing so fast that by the time I get home issues have been covered 10 times till Tuesday and better than I could have. I still try though!

Brett Favre Drama
I know, sports are usually left out here, but I just do not get all the ruckus over Brett Favre wanting to continue playing. Aaron Rodgers has been groomed to be Green Bay's next quarterback for like 5 years. The Packers pay him well, and the assumption was that Favre would be done at some soon point. He kept playing, and playing, and playing well I might add. After a brutal cold game in the NFC title game that he lost, Favre "retired". He later felt that was a bit quick and wants to play.

So whats the problem? If the Packers want to go with Rodgers, release Favre outright. It is fair to Rodgers and Favre that way. All the baloney about training camps and the like was dumb and hurt both Favre and the Packers organization. Favre is now set for the Jets, and I wish him well. Ask Chad Pennington how good that offensive line of New York is though, and I think Favre will want to retire somewhere around week 10!

Does the FED and Treasury Have a Plan B? Do You?
The basic plan of the FED and treasury has been fairly well fleshed out through analysis, statements by officials, and old fashioned guessing. The basic plan the geniuses came up with was:
-Manipulate stock prices of selected financial companies to bolster those stock prices so that those firms could then sell tons of stock (diluting hopelessly current shareholders) in order to raise capital (not that they need it mind you, ask them and they will tell ya!) to shore up the bottom lines in the face of more loan losses.
-Crush oil prices to at least $100, hopefully more (are they targeting ruthless oil shorts I wonder??) to assuage the public about energy prices.
-Make statements about inflation fighting and try not to laugh out loud while doing it.
-Extend until forever total access to the FED lending windows (too many to name) to any bank still open (sorry BSC and IMB, our bad!) so money still flows.
-Pray for a miracle.

So far the oil price trick seems to be going well, but the other points are failing. Bank stocks, while sometimes rallying strong, are still in firm downtrends. Window lending is problematic as Citigroup has already had to take back some toxic stuff they stashed there. I have advice for the FED, MOST of the stuff you get is the worst of what is out there, hahahaha! The miracle may come, but time is running out.

So in the face of accelerating Alt-A loan losses, higher unemployment, bla bla bla. I don't think I need to hash out the data in bit by bit fashion. Numbers only matter at this point as trading points, the trend is now firmly in place. Deflation is at hand and the particulars of a jobs report, home sales, or gas inventories makes no difference.

So from where I sit, I ask does the FED and Treasury have a plan B? I mean are we going to be treated like adults at some point and have the real deal laid out along with a responsible plan of action? One can dream. With an election at hand I fully expect more government intervention gymnastics and even outright data manipulation. Call me a lunatic, but if I told you last year that some short trading would be outlawed and the Treasury would be authorized to buy UNLIMITED stocks of certain companies you would have called me much worse. Of course you would have looked stupid and foolish now, but time is a harsh mistress, ya know?

So what is the plan B? I am sure they do not have one. So now I ask, do you? Now may be a good time to review options and strategies for severe disruptions in money matters. I am not calling for the end of the world, but a little prudence now may make you able to sleep later.

It is getting ugly, and under the surface you can feel a new palpable fear amongst the upper echelon of leadership. Stay smart!

Have a good night.

Socialism is Close at Hand

Judging from the lack of comments as of late I must be putting together crappy posts. Sorry if the material has not been interesting. I am really fond of the post Tuesday night where I put the idea:
"..there seems to be a real struggle right now trying to value insolvent banks. As their true value is of course ZERO, their value as a FED backstopped institution is unknown."
Watching the wild gyrations of the financial stocks seems to back up that line of reasoning. Anyways, hope the material is still entertaining and value adding.

Budweiser- Say It Will Not Happen!
The Belgian super sized brewer InBev submitted an unsolicited take over offer to Anheuser-Busch Co Inc. I am not going to comment on the deal, as I have zero interest in the details. I just want to go on record with the statement DO NOT CHANGE BUD PLEASE!. Yes, I am a Budweiser drinker. Yes, I know it is trendy to make fun of Bud and say it is piss and all that. I like it. I like the crisp taste. I love how consistent the beer is from package to package. I like UFO Heffenwizen, but every 3rd or 4th six pack tastes so bad I cannot drink it again for a while. Never happens with Bud. If InBev gets BUD, please do not change a thing.
Note: Late tonight the Mexican firm Modelo has said they have been approached by BUD as a possible blocking move to the InBev deal. I will keep an eye on this one!

Socialism Making a Deep Push Into the Collective Mindset
The key to making people as a group do something that you want, you nee to do two things:
1.) Make the desired outcome seem preferred to the group
2.) Limit or close off alternate options
This is how communism and socialism get a toehold. No sane person thinking rationally would ever choose socialism (or communism for that matter), yet Europe is dominated by socialists, and even modern day communists are just over eager socialists.

In America the whole capitalism thing is under attack right now because the rising prices of some items that people do not want to be more expensive is causing some irrational thought. The whole Bear Stearns bailout will be seen as THE inflection point where something got broken. The next step will be the housing price attempted floor setting.

Not to be outdone, why not just control, well, everything? Take a look at this headline and see how bad things have become:

Oil is too important to leave to market forces
A six-point plan is needed to see off the latest threat to the economic stability of the world
Anatole Kaletsky
Full Article: http://www.timesonline.co.uk/tol/comment/columnists/anatole_kaletsky/article4116318.ece

I will not even excerpt this terrible piece which basically says oil and gas are too important to let free markets decide the prices. Home prices were ok to let the markets set them as long as they were rising, but now not so much. Oil is an important world need, so more regulation is needed. You know the drill.

I am shocked daily at the kind of pure socialism thought that is rampant right now in the US. While I am a firm believer that you get exactly what you pay for as well as exactly what you deserve, I realize this was probably inevitable. It is still as sad process to watch though.

Raise Interest Rates
Today saw more talk about inflation and raising the FED rate in August, or September at the latest. Longtime readers know what I think of that line of thought, but just for new readers I will tell you what I think about the idea that the FED will be raising rates anytime this year:
NO WAY! and NO HOW!
Got that? The markets keep wriggling around as if some comments form some FED officials make policy. Actions speak louder than words and August will be here soon enough. We shall see who is right, and who is gullible.

Writing Interlude
I had recently come across a few poems that I remember from High School English written by the great Edwin Arlington Robinson. He wrote two that I remember clearly, "Richard Cory" and "Miniver Cheevy". This remembrance also put me in the mind of the Edgar Lee Masters work "Spoon River Anthology" which I also loved, and am now in the market for a good copy of (preferably old and valuable). Here is "Richard Cory" for review:

Richard Cory
Whenever Richard Cory went down town,
We people on the pavement looked at him:
He was a gentleman from sole to crown,
Clean favored, and imperially slim.

And he was always quietly arrayed,
And he was always human when he talked;
But still he fluttered pulses when he said,
"Good-morning," and he glittered when he walked.

And he was rich, richer than a king—
And admirably schooled in every grace:
In fine, we thought that he was everything
To make us wish that we were in his place.

So on we worked, and waited for the light,
And went without the meat, and cursed the bread;
And Richard Cory, one calm summer night,
Went home and put a bullet through his head.

As always, I am open to Friday night entertainment ideas for the blog, so leave a comment.

Have a good night.