B.A.R.F Bagged

Thanks to reader GawainsGhost for his comment on last nights post that was chock full of interesting information. The best part of writing this blog is the great feedback from my wonderful readers. Thanks ladies and gentlemen.

Mish vs. Schiff Battle Royal
I had wanted to stay as far away from this ruckus as possible, but the amount of bad feelings from both sides is a too much to leave without comment.

In case you do not know, Mish Shedlock runs the great site Global Economic Analysis and is one of the sharpest minds in the business. Peter Schiff is a well regarded and TV popular analyst that runs the Euro Pacific Capital fund. He too is a sharp mind in a world of dull blades. Over the past week there has been bad feelings by fans of both men over a post that Mish ran which looked at Mr. Schiff's investment strategy as a whole, as well as some returns that the Euro Pacific Capital fund has had as of late. Mr. Schiff's response is here.

All I want to say about this is that I have no problem with Mish taking on Macro views held by Schiff. Certainly there were some areas that Schiff was way off on (decoupling was a bad oversight) and others like a stronger dollar may or may not last. Not all of Mish's ideas have come to pass either. Nobody's ever do. What I think was a bit overboard was Mish attacking the returns of Euro Capital based on a few samples he was able to see. I am sure 2008 went very bad if you bet on a weaker dollar and strong overseas markets. In the longer term these may not be bad bets at all.

I love debate and analysis. I love heated debate most of all. But pointing fingers at a short term return rate of any fund seems too far to go. Leave the "look at these terrible numbers" to the readers to find out based upon good analysis. Mr. Schiff is an honorable man that never tried to hide any information. He is also much better than Bill Gross who continues to be obscene with his call for the government to buy all the crap he holds at the taxpayer expense. Let's keep it clean all and keep illuminating what is important. Nuff said.

Gold and Silver Looking Shiny and Pretty
Gold and his little brother Silver really had a nice day today. While the metals are going up strong against the Euro and other currencies, they are still moving a bit slower against a puzzling stronger dollar. All in all today was the consolidation of strength I was looking for last week. I like both metals very much going forward.

On the treasure front, the Odyssey Marine Exploration (OMEX) show continues to be very intriguing. More and more potential targets have popped up. The stock itself now sits at $4, up a buck from where I bought in. Hopefully they will start pulling up some yellow metal and things will go from there. I still like this company very much, and I can even see another profitable side of the business other than just gold treasure hunting: Finding old relics like one of a kind cannons with tons of history attached to them.
Full Disclosure: I own gold miners GG, KGC and I own OMEX stock.

B.A.R.F Bagged
I am still surprised that the same act of the same bad play keeps being performed at the Globe Theater (Shakespeare reference) we call Washington DC. The whole "Bad Bank" idea is just another retread of the Hank Paulson "Super SIV" plan from a while back. Have some entity buy up the bad assets from the banks and presto! The banks are happy again! The same problem keeps coming up: The banks will not sell the assets unless they get a huge premium on their market value, and the entity (thats you and me the taxpayer) cannot be seen as taking too much of a hit by overpaying by too much. A little overpaying is good, a ton is not so great.

The new plan I have seen referred to as the Bad Asset Relief Fund or B.A.R.F. What could be more fitting. It seems these sticking points have caused the B.A.R.F to be bagged because no compromise could be reached. Clusterstock had this Charlie Gasparino CNBC transcript (sorry for the ALL CAPS):

I CAN'T REMEMBER THE TREASURY DEPARTMENT BAILING OUT STEVEN COHEN AND ART SANDBERG. THEY'RE BAILING OUT CITIGROUP AND BANK OF AMERICA AND THE BAILOUT PLAN THEY HAVE ON THE TABLE RIGHT THE NOW, AT LEAST ONE THAT'S BEEN RECENTLY TEED UP IN THE PRESS WHICH IS ESSENTIALLY THIS AGGREGATOR BAD BANK WHERE YOU BUY ALL THE BAD ASSETS BETWEEN $1 and 2 TRILLION. IT'S BEEN LEAKED OUT THEY'RE LOOKING TO DO THIS.
THIS THING, ACCORDING TO SOURCES, TELLING CNBC, THIS THING IS NOW OFFICIALLY BEEN PUT ON HOLD. IT'S HIT A MAJOR SNAG. THEY CAN'T FIGURE OUT EXACTLY HOW TO MAKE IT WORK. IT WAS THE SAME PROBLEM BACK IN SEPTEMBER WHEN WE BROKE THE STORY ABOUT THE T.A.R.P. WHEN THE MARKET WENT UP 500 POINTS BECAUSE IT MAKES GREAT CONCEPTUAL SENSE. IF THE GOVERNMENT CAN COME IN AND BUY UP ALL THE BAD STUFF OFF THE BALANCE SHEETS OF ALL THE BIG BANKS. IF THIS STUFF CAN TRADE UP IT'S WORTH 50 CENTS ON A DOLLAR AND NOT 22 CENTS ON THE DOLLAR, EVERYBODY'S HAPPY.
MAKING THAT THING WORK HAS BEEN PROVEN VERY DIFFICULT.

No doubt everyone would be happy if the 22 cents on the dollar items could fetch 50 cents or more. Everyone except the idiot that bought them that is. More:

THE TREASURY DEPARTMENT, THE FDIC AND THE FEDS RECENTLY, THE LAST COUPLE OF DAYS, HAS BEEN HAVING MEETINGS WITH SENIOR CEOs AT THE MAJOR WALL STREET FIRMS TO PRICE THE STUFF SOLD TO THIS AGGREGATOR BANK. YOU KNOW, THEY'RE MORE CONFUSED NOW THAN EVER BEFORE. THE FEELING I GET, AT LEAST THESE TALKS ARE ONGOING. THERE WAS TALK ABOUT A MEETING THIS WEEKEND WITH ALL THE CEOs TO TRY TO DO THIS THING. I HEARD THAT. THAT IS NOT HAPPENING, AT LEAST AS OF 10 MINUTES AGO. NO MEETING CALLED. NO WAY WALL STREET EXPECTS THAT MEETING TO BE CALLED.THEY CAN'T FIGURE OUT TO MAKE THIS WORK. THE PRICING IS AT ISSUE.IF YOU HOLD THE STUFF, WALL STREET HOLDS IT ON THE BALANCE SHEET, THEY CAN MARK IT TO THEIR MODEL 50 CENTS ON THE DOLLAR. OF THEY SELL IT, THE MARKETS SAYS IT’S 22 CENTS ON THE DOLLAR.
IF THE GOVERNMENT BUYS IT AT 22 CENTS, MOST OF THE BANKS WOULD TAKE MAJOR LOSSES. WE’LL BE BACK TO WHERE WE WERE A COUPLE OF WEEKS AGO. IF THE GOVERNMENT BUYS IT AT 50 CENTS ON THE DOLLAR, THE TAXPAYER COULD BE TAKING IT ON THE CHIN. THAT'S THE PROBLEM WE HAVE HERE. WHILE THEY MAY SHELF THIS AGGREGATOR BANK, THEY MAY COME UP IN WITH SOME OTHER ALTERNATIVE LIKE INSURANCE OR SOME SORT OF GUARANTEES ON THIS STUFF BLANKET ACROSS THE BOARD.

Let me just add that if the banks cannot sell at 22 cents on the dollar without going bust, 50 cents will not do the trick either. My bet is that the hold up on this plan is that the banks want about 70-75 cents on the dollar for assets that can only fetch 20 cents on the open market. If the difference was just 20 vs. 50 cents I think the Treasury would have sealed this deal up in 1 hour. Mark my words, when and if details come out the banks will have been asking for well over 3 times the market price.

At the end of the transcript Mr. Gasparino notes that due to the intractable differences of buying the junk, an insurance plan is being worked on instead. So the Treasury does not want to pay 70 cents for a 20 cent asset as the loss of 50 cents would be too much, but they will consider insuring the assets to 70 cents so that when they are sold they will have to pay the same 50 cents difference? This is what passes as thinking in Washington. This is a distinction without a difference. Those in the negotiations should remember one immutable fact of life: You Can't Polish a Turd.

Friday Night Entertainment
A little fun, a little music, and all will be well.

Say Hello to My Little Friend
Say hi (spelled hai in LOL speak) to this little fellow:

more animals

1969 502cid Chevrolet Camaro
There is nothing like the sound of a nasty old fashioned big block muscle engine. Take a listen to this monster; the camshaft is obviously dialed in for a higher RPM band as it is really rasping at idle. Sounds SWEEEEEEETTTTTT!!!:


Songs for the Weekend
A little music to end the week, as always.

I used to love this video when I was younger! Take a look at Duran Duran and "Rio":


With lyrics perfectly in step with our times, listen to Iron Maiden with "Be Quick or be Dead". Especially great "See what's ruling all our lives, see who's pulling strings":


I have always liked this song. Listen and remember Janis Joplin with "Bobby McGee":


Have a good night.

Bigger, Badder, Better!

It was fun chopping ice for an hour this evening after some of the ice from yesterdays storm had melted during the day and made my walkway an Olympic ice rink. Did you know that all of the gold ever mined in history would only just barely fill two Olympic sized swimming pools? crazy stuff.

Is There Anything the Credit Bubble Cannot be Blamed For?
The debt and/or credit bubble has had ramifications all across the financial spectrum. The most visual culprit we have was the housing bubble. As I work in Biotechnology, many of my coworkers ask me what is the difference between the Nasdaq tech bust of 2000 (which nailed biotech badly) and the current bust as they see all the bailouts and such.

The answer is both simple and nasty. Here are the differences:
Technology Bust of 2000
Who was hurt: Mainly retail investors that bought Abbie Cohen's tech stocks and the general public who held the worst stocks at all time highs.
Policy Action: Tough break. The free market can be rough. Hang in there!

Credit Bust of 2008 (ongoing)
Who was hurt: Big banks and large investment firms that are stuck with worthless mortgage assets and other toxic credit derivatives.
Policy Action: Holy sh#t! This free market is dangerous! Start up the bailout machine and keep that baby running! Save the financial system!

Remember these key differences when the powers that be tell you they are trying to get credit to you to help the economy.

This bust is also different because regular people were able to get access to obscene leverage to buy homes, leverage never available to buy stocks or options. Hence the bigger bust.

But I digress. Another little tidbit came by the way of Bespoke Investment Group and their chart showing the money that Mexican workers send back to Mexico. These payments back to their country are called remittances. With all the houses built in California, New Mexico and Arizona during the credit boom, there was also a boom in money flowing back to Mexico. I think you can guess how that is going now;

you do not need a sharp eye to see the blow off top coinciding with the housing bust. I am not certain, but I am pretty sure that this does not include illegal immigrant workers, so imagine those numbers!

See, there is nothing we cannot blame on the credit bust! Soon we will have to bail out Mexico which will certainly face budget issues if this keeps up.

Bigger, Badder, Better
It seems nothing can stop the runaway train of bailout proposals. Each one gets bigger and more insane as the days move on. There seems to be no way to make the government stop and think about what they are doing, only a race to "do something" no matter what. I saw this headline on Calculated Risk (from CNBC) tonight and did not feel surprise or even a mild shock:

Bank Bailout Could Cost Up to $4 Trillion: Economists
The cost of restoring confidence in U.S. financial firms may reach $4 trillion if President Barack Obama moves ahead with a "bad bank" that buys up souring assets.
The figure far exceeds even the most pessimistic estimates of how great the loan losses might be because there is so much uncertainty about default rates, which means the government may need to take on a bigger chunk of bank debt to ease concerns.
Goldman Sachs economists said ideally the public sector would step in to remove the hardest-to-value assets, which would alleviate nagging worries about future losses and hopefully help get lending going again.
"Unfortunately, with an unprecedented meltdown in mortgage credit and a deep recession in the broader economy, there is a great deal of uncertainty about the value of almost every asset," they wrote in a note to clients.

I have a memo for Goldman Sucks, I mean Sachs: The PUBLIC IS BUYING THE BAD ASSETS ALREADY! Who do you think the "government" is Goldman? I can assure you the only money the government has is taxpayer money, also known as PUBLIC MONEY. With minds like these no wonder Paulson and Geithner are so smart. More article:

Goldman Sachs estimated that it would take on the order of $4 trillion to buy troubled mortgage and consumer debt. That number could shrink if the program were limited to only certain loans or banks, but it could also grow if other asset classes such as commercial real estate loans were included.
New York Sen. Charles Schumer has said that a number of experts thought that up to $4 trillion may be needed to buy the bad assets, an estimate that a Senate aide said was based on informal conversations with people in the industry.
Stephen Stanley, chief economist at RBS Greenwich Capital, said although that sounds similar to the sort of financial engineering that spawned the credit crisis in the first place, it would be structured so that the central bank or whichever agency oversees the program is last in line to take losses.
"If things turn out so bad that the Fed ends up on the hook for $1 trillion in losses, then the financial sector, the economy, and everything else will be dead anyway," he said.

NEWSFLASH Mr. Stanley! One Trillion is hopelessly optimistic on the loss front. I guess everything is dead!

I have covered my thoughts on all this very clearly before. Not to rehash old posts, but I feel the following ones are very meaningful in the current environment. If you are bored or just think my writing is the greatest thing since the Sham-Wow then take another look at these posts:

25 Billion Here, 300 Billion There, Another Trillion Here and Pretty Soon You Are No Longer Talking About Real Money
Discussion on why the numbers are no longer causing concern as they are just too big to wrap one's mind around.

Does the United States Have a Debt Chandrasekhar Limit?
Is there a theoretical limit to US debt issuance? We should really find out. Fast.

There is No Going Back to a Free Market
The government will NEVER get out of the loan business. They should have thought about this a little harder.

Have a good night.

FED to Buy Long Dated Treasuries with Cash from the Treasury

About 8 inches of snow then some icing, and then rain. The winter trifecta! I should have bet it. I spent the day off shoveling, reading, and writing down some ideas. Should make for an interesting post.

Things Are Either Not So Bad or Nobody Has Any Clue How Bad Things Are
I read well over a hundred posts/articles from the mainstream media and bloggers during the day. I would put about 80% of everything I read as themed "NOW might be the bottom; the government will fix everything, and play this upside rally". About 20% of things were either cautionary, negative, or insightful. That is a bunch of reading for a 20% return!

My main take home point here is that there are too many shortsighted players out there trying to play a 20% pop in Bank of America of Citigroup to have any clue what is going on on a macro level. Sadly it seems many more sites that I frequent are getting into the "daytrading" kind of information that is useless to any normal person. This means to me that we are either nowhere near something like a "Great Depression 2.0" or many are whistling past the graveyard unaware how bad things are.

On a related note, check out this section from Clusterstock on the Bank of America plan to defer bonuses until 2010:

Bank Of America Postpones Bonuses, Employees Seethe
Henry Blodget | Jan 28, 09 12:36 PM
Bank of America (BAC) has decided to defer all bonuses bigger than $50,000 until 2010 and beyond, says Greg Farrell of the FT. Employees are reportedly furious, especially as this news comes less than a month after Merrrill Lynch staff ran off with $4 billion.

When we get to a point where upon learning that a banking employee, whose very firm was instrumental in causing the crisis in place, is not only fine with their bonus being deferred but just happy they still have a job then I would agree we are in a tough spot. If you are more pissed about no bonus than relieved you have a job you are not really worried at all. Another case of "are things really that bad?". It's hard to be sure.

F.I.G.G.S
If Bernanke and crew fail, it may be time to prepare for the worst. I had an acronym in mind today for what I would need to have;
Food: Obviously. Dry goods, canned goods, and water. Powdered water is great if you have the water to add to it.
Information: Printed information on all kinds of needs like shelter, medicine, maps, etc.
Guns: Sadly if things go to hell in a hand basket you are going to need something more than harsh language to repel thugs.
Gold: The ultimate store of value. Money will always be money if it's gold.
Silver: Gold is great, but laying your hands on any in quantity could prove hard financially. Get some good old money stand by number two.

I know there are probably a million acronyms like this out there, but I came up with this one.

Banks Thought Nationalization Was Out of the Question
The saga of Long Term Capital Management can best be summed up as this: A huge hedge fund used insane leverage to make money. It did not work out but the fund was so big it posed a "systemic risk" and thus was quietly bailed out behind closed doors. That was 1998.

Fast forward to today and we see that all the big banks went much the same way using lending as their vehicle to riches. That has not worked out so well either. The banks are in serious trouble and pose a "systemic risk" on a magnitude many orders above LTCM. The banks were fully expecting a bailout, and even were openly asking for it. The banks figured the government would never, ever nationalize them. That is purely Unamerican! A free market cannot be relegated to history. The banks bet that public abhorrence of such socialism would keep them from being taken over.

They are wrong again.

Today Ben Bernanke gave his usual "I am going to buy longer dated treasuries...bla bla bla.." statement. It was nothing of interest. The FED is out of ponies and assorted tricks. The "bad bank" idea also got plenty of press, but that will do nothing for the structural issues going forward for the "good banks." The massive overhang of debt combined with a public a bit more ready to default results in banks that are too impaired to go it alone. The only answer is nationalization.

As is common to all bad bets, when you assume something is absolute that is not, it will bite you in the end. The FED and Treasury have "chucked aside their free market principles" in order to save the free markets. I think they will settle for centrally planned and politically controlled banking instead of the wild west free markets we have had. Should be wonderful.

FED to Buy Long Dated Treasuries with Cash from the Treasury
In the next step taken directly from the playbook of Japan, Bernanke signalled today that the FED is going to buy longer dated treasuries in an effort to depress longer term interest rates. This action is supposedly going to make banks and investors scurry into risky assets to make a return. It worked out well for the Japanese.

In a shell game played with your future on the line, the FED will get cash from the Treasury (which came from selling debt) and use that cash to buy more debt, though this debt will be of the longer dated sort. I did not mistype that last sentence. In a textbook this will cause banks and business to say "Wow, our risk models going forward are now overly cautious because the FED rates came down a whopping 0.3% over 10 years and a huge 0.8% over 30 years! We need to lend for mortgages and credit cards and auto loans! Shovel out that money boys!"

Of course this assumes that 1.)banks and businesses had NO IDEA THE FED MIGHT TRY THIS and are surprised; and 2.) It will make ONE BIT OF DIFFERENCE. With rates of all kinds at all time historic lows one has to wonder just how effective any of this is going to be.

I keep coming back to the same question that nobody in authority can answer. To whom and for what is all this lending going to be for? The only bubble I see getting big is the bailout bubble.

On a day like today when I had a good long time to read and think I figured I would have some great insight to offer. Things are such a mess I cannot offer much, other than thoughts posted tonight. I still am of the position that all the bad debt will have to be exposed and defaulted on. Banks that are insolvent will have to ride into the sunset. The FDIC and other government agencies will have to manage the best they can. Americans will have to get by on a lot less and pay more for everything. Things are going to suck. The longer we put off the final stage of what MUST happen, the longer we will have to wait for things to improve. When I say "things will improve" my timeline (if the above was done) must be measured in years (like more than 5; maybe 10 or more) and not in quarters or "second half recovery" type crap the FED is still pushing even in today's statement!.

Sound off in the comments. Let me know what you are all thinking about.

Have a good night.

Stimulus Plan: Making Sure Your TV Works So You Do Not Riot

I am very excited for the 12 inches of snow, ice and rain that is coming tomorrow. NOT! I have already taken the day off, so I will have tons of fun shoveling tomorrow.

"Bad Bank" Transfer of Losses to Taxpayer Almost Complete
In case TARP 2.0 and the President's stimulus plan are not enough, the "bad bank" holding company idea seems to be on deck as well. We could debate the finer details of such a plan, but this is all you need to know: The Government will give banks basically whatever they want for bad assets and the government will sit on those assets forever. The banks get "mark to myth" cash to use as they see fit and the taxpayer gets to hold debts and paper that will guarantee huge losses for the foreseeable future. Sounds like a sure winner.

From CNBC:

Plan for Banks' Toxic Debt May Be Unveiled Next Week
By: Steve Liesman | 27 Jan 2009 | 05:04 PM ET
The Obama administration is close to deciding on a plan to purchase bad—or non-performing and illiquid—assets from banks, according to industry sources. The plan could be announced early next week.
The so-called "bad bank" plan, would address the key problem of how to price the assets by using a model-pricing mechanism.
The model would take account of the government's ability to hold onto assets, even to maturity, and pay for the them with cheap funding. Result: the government might end up paying more than current market prices for the securities.

"Might" end up paying more than current market prices? That is a silly statement from the usually reliable Liesman. the whole point of the exercise is to pay much more than market prices, otherwise what's the point? Some more:

In the developing bad bank plan, it's unclear how the government would pay for assets. There has been discussion of a "certificate of net worth" in which the government gives the banks a piece of paper that essentially can be applied to capital levels. But sources could not confirm that funding mechanism for the plan or what role existing TARP money or the Fed would play in funding the so-called bad bank.

This is rich! The government will issue monopoly paper certificates that banks can then use as "cash equivalents" for their capital base. Why print dollars when it is both cheaper and uses less paper to make "certificates of net worth". Maybe some day in the future your company will pay you using such paper. Won't that be nice.

All kidding aside, this is the next logical step in the illusion game. The FED and Treasury do not want to print too much money, it may seem like the US is behaving irresponsibly. Issuing phantom certificates that will never be backed by anything is yet another trick deployed by the smartest men the country has to offer.

Stimulus Plan: Making Sure Your TV Works So You Do Not Riot
The two best ways to grow control over a population are to 1.) keep them stupid and 2.) keep them occupied. Most Americans have done #1 themselves by giving up on real education and free thought. #2 is the job of the government. What better way to hold people's attention than to use the good old television? I mean now with DVR technology, some people spend entire weekends catching up on TV shows they missed during the week. Must see TV indeed.

In the current desperate atmosphere of economic calamity, we have been told that swift action is needed or there will be tanks in the street. If American Idol is interrupted, they may be right. Along these lines the stimulus plan covers the bases by offering 650 Million dollars for digital TV upgrade coupons.

Yes folks, some people out there still have old TV's that are going to be made obsolete in February! The horror! The upgrade costs from $40-70$. What if cash strapped consumers cannot pay up? That is what this 650 Million is for. By my back of the envelope math 650 Million dollars divided by $60 per conversion comes out to around 11 million TV's that will be upgraded. 11 Million TV's. Are there even that many old sets out there? When you are the government, you do not bother to ask.

Some stimulus plan excerpts:

Mr. Boehner cited numbers to counter Mr. Obama’s, saying the House Democratic plan included $600 million for the federal government to buy new cars, $650 million for digital television coupons and $50 million for the National Endowment for the Arts

Shiny new cars for the government that they will buy from American car makers that have received bailout money to survive. You cannot make up material like this. 50 Million for Art? That will create how many jobs? I mean starving artists are only good if they are starving right?

Between the TARP 2.0, "Bad Bank" plan, and now the stimulus bill we see a huge looting of the US treasury. The taxpayer ultimately will be on the hook. Massive giveaways and bank bailouts add up. Sooner or later that is going to matter.

Have a good night.

When Playing Make Believe Stops Working

Another 12 inches of snow is on the way for an all day storm Wednesday. Looks like I have the day off! Plenty of shoveling to do, not that there is anywhere to put it.

Can We Sell the FED and Treasury to Bail Out the Banks?
How much do you think we could get if we sold the FED and the Treasury? Enough for a TARP 2.0? Who knows. I saw this funny sign today and wanted to put it up:


When Playing Make Believe Stops Working
It has long been a central tenet of Economic Disconnect that the US banking system is insolvent. This is factually true. Years of massive leverage and the use of wild credit instruments means that there is simply more "money" out in the world than can be accounted for by assets or production. If, as stated here, this is the case then how is it that things continue on? Surely if the situation was that dire something would happen? An outright banking collapse, an imploded government, riots by the people and social acrimony would be expected.

My answer the the awesome power of playing "Make Believe". The banks pretend that the bad assets they have are not really that bad. The FED pretends that they can print money at will, but that it is all "sterilized" with no structural implications for the dollar. China pretends that the US will ever pay them back and uses that facade for their own domestic game of healthy economy make believe. The new president pretend that an almost 1 trillion dollar stimulus plan is so important that 2/3 of it will be deployed more closely to the next election. It goes on an on.

What might things look like should the game of make believe ever run out of gas? I think we may have an answer this summer for the US. As an early indicator you may want to review two countries that are having trouble getting anyone to play make believe with them.

Iceland was the first casualty of the banking buts, and thus it has progressed the farthest in falling apart. Some excerpts from the full article:

Iceland is Burning-Day 2
The extensive protests that shook Iceland Tuesday have continued into Wednesday and are beginning to have an effect on one of the two political parties making up Iceland's coalition government.
Late Wednesday night, as thousands of protesters re-lit a large bonfire in front of the Parliament, the Reykjavik chapter of the Progressive Party voted to recommend to the party's national representatives that they withdraw from the ruling coalition, and called for new elections in May 2009. As the night wore on, though, matters descended into violence. Around 1:30 am, police dispersed the crowd with tear gas, the first time tear gas had been used against Icelanders in 60 years. The crowd soon reformed and pelted riot police with stones. One officer was severely injured by a cobblestone, the newspaper Morgunbladid said.
The protests have been sparked by Iceland's catastrophic economic collapse over the past three months, and the failure of the government to call for immediate elections or to investigate the rumored widespread malfeasance by the country's leading bankers, businessmen, and politicians. "It should be clear to everyone that a government that has failed as utterly as the Icelandic government has can neither investigate, nor clear up the past, nor forge a new path into the future," said retired professor Njörður P. Njarðvík.

I have never been to Iceland, but many of my friends have visited. The small country is not exactly populated by wild and crazy maniacs set upon chaos. The stunning collapse of the Icelandic currency and the entire banking system will have that effect on social mood.

Not to be outdone, our friends across the Atlantic seem to be very close to a major catastrophe. Some excerpts from this United Kingdom article:

Revealed: Day the banks were just three hours from collapse
By Glen Owen
Last updated at 11:21 PM on 24th January 2009
Britain was just three hours away from going bust last year after a secret run on the banks, one of Gordon Brown's Ministers has revealed.
City Minister Paul Myners disclosed that on Friday, October 10, the country was 'very close' to a complete banking collapse after 'major depositors' attempted to withdraw their money en masse.
The Mail on Sunday has been told that the Treasury was preparing for the banks to shut their doors to all customers, terminate electronic transfers and even block hole-in-the-wall cash withdrawals.
Only frantic behind-the-scenes efforts averted financial meltdown.

The article has no details on what those efforts were to stop the run on the banks, but I would like to know so Ben Bernanke has a play book. More article:

If the moves had failed, Mr Brown would have been forced to announce that the Government was nationalising the entire financial system and guaranteeing all deposits.
But 60-year-old Lord Myners was accused last night of being 'completely irresponsible' for admitting the scale of the crisis while the recession was still deepening and major institutions such as Barclays remain under intense pressure.
The build-up to 'Black Friday' started on Monday, October 6, when the FTSE 100 dropped by nearly eight per cent as bad news on the economy started to multiply.
The following day, Chancellor Alistair Darling began all-night talks ahead of an announcement on the Wednesday that billions of pounds of taxpayers' money would be used to pour liquidity into the system.

In the game of pretend one cannot allow anything truthful or real to be seen or heard as this breaks the spell. One should not be angry at a banking system that is busted, but instead direct that anger towards anyone that points out this fact.

The Iceland and UK examples above really have me uneasy. When everything you have is built on illusion, you are one wake up away from having things go wrong. It is ok to feel a bit powerless and a bit angry that things have come to this.

Have a good night.

Friday Night Fun

Home a bit late this evening, so some quick hits and of course some entertainment.

From the Department of "No Kidding"
Answer the following question truthfully:
Q: Are you shocked to learn that members of Congress exert influence as to which banks receive TARP funds? Bonus question: Would the total inability to show where TARP funds went be related to question number one?

Todd Harrison over at Minyanville like to write that the opposite of love is not hate, it is apathy. Only when the masses have ceased to have any love or interest in their country (apathy means to have no feelings at all) can the kind of nasty outright criminal actions performed by our government occur without anything done about it. If you truly hate your government you may take up arms against it. If you are so jaded by the abuses that go on that you just do not even care anymore, well I guess it looks like now.

Please read the full article that needs no additional commentary.

Gold and Silver
This week was a good one for the metals. Gold and Silver both had break out days today. Mining stocks took off on great volume (my favorite indicator). If the metals and the miners can hold most of the gains through next week I think a nice run up is in the works. Gold and Silver have disappointed before, so next week will be telling.

I would suggest to all the readers that having at least some physical metals in your possession would be prudent. When banks can close overnight or the government could enact some kind of wacky "bank holiday" to stave off a bank run, it may pay to have hard assets. I would also suggest a small stash of cash. While cash may one day be worth much less, it will be in use in the beginning of any problems.
Full Disclosure: I own gold miners GG and KGC.

Friday Night Fun
After a volatile week as well as a long week of work I am going to do an extended entertainment section because I want to have some fun. See what you can do when you have your own blog? I am the boss here, at least until my wife comes in the room.

Comedic Cloning Poster
While I do not clone animals in my line of work, manipulation of DNA has long been called "cloning" in the biotech field. This LOL post is extremely funny:

more animals

The TARP Song
You simply must pass this hilarious song along to anyone and everyone you know:


Rock Blogging
Oh yes, it is time!

Yet another Ipod find is this great song by the band Bush. Take a listen to "Cold Contagious":


It seems whenever I like a new band they either break up or do not have an album in forever. Think Audioslave. Another example is the band Evanescence. I love this lady's vocals and the great music behind her rocks as well. Try out "Bring Me to Life":


A little old school Kenny Rogers and "Coward of the County":


I have no idea why I have had the Blondie song "Heart of Glass" stuck in my head, but here it is regardless:


Have a good night.

If There is Always a Fire, You Can Never Look for the Arsonists

It is going to be a balmy 40 degrees tomorrow! I am actually excited about that. My new fishing license came in today. That is not going help my fish catching withdrawals at all.

If There is Always a Fire, You Can Never Look for the Arsonists
Warren Buffet is pretty much accepted by all as a great investor. His firm, Berkshire Hathaway, has always been a chart topper compared to the market. For that he must be admired and respected. With that in mind I must offer that I was a bit disappointed by Mr. Buffet's remarks making the rounds today from a Susie Gharib Nightly Business Report that airs on PBS. See local listings here.

The interview is quite extended, and perhaps it is a bit nit picky to take out a couple of selected parts, but these passages really caught my attention and I think they bear some thought.

Excerpts from a partial transcript provided by Calculated Risk where Susie Gharib is noted as SB and Warren Buffet is WB:

SG: But when you look at the economy, what do you think is the most important thing he (Obama) needs to fix in the economy?

WB: Well we’ve had to get the credit system partially fixed in order for the economy to have a chance of starting to turn around. But there’s no magic bullet on this. They’re going to throw everything from the government they can in. As I said, the Treasury is going all in, the Fed and they have to and that isn’t necessarily going to produce anything dramatic in the short term at all. Over time the American economy is going to work fine.

At least Mr. Buffet is honest. He acknowledges that there is nothing that can really be done to stop what is happening. But then here is my first point of confusion; Mr. Buffet surely is a "free market" type and yet he is calling on the government to go "all in" with everything they have. In addition he says this will not do anything in the near term. Why Mr. Buffet thinks doing nothing would have a worse or better effect he does not explain. Also he offers no commentary along the lines of moral hazard or taxpayer exposure. He sees things only through the lens of market dynamics.

The next segment is truly where we see some insight into the Wall Street type of thinking. Continuing:

SG: There is considerable debate as you know about whether President Obama is taking the right steps so we don’t get in this kind of economic mess again, where do you stand on that debate?

WB: Well I don’t think the worry right now should be about the next one, the worry should be about the present one. Let’s get this fire out and then we’ll figure out fire prevention for the future. But really the important thing to do now is to figure out how we get the American economy restarted and that’s not going to be easy and its not going to be soon, but its going to get done.

SG: But there is debate about whether there should be fiscal stimulus, whether tax cuts work or not. There is all of this academic debate among economists. What do you think? Is that the right way to go with stimulus and tax cuts?

WB: The answer is nobody knows. The economists don’t know. All you know is you throw everything at it and whether it’s more effective if you’re fighting a fire to be concentrating the water flow on this part or that part. You’re going to use every weapon you have in fighting it. And people, they do not know exactly what the effects are. Economists like to talk about it, but in the end they’ve been very, very wrong and most of them in recent years on this. We don’t know the perfect answers on it. What we do know is to stand by and do nothing is a terrible mistake or to follow Hoover-like policies would be a mistake and we don’t know how effective in the short run we don’t know how effective this will be and how quickly things will right themselves. We do know over time the American machine works wonderfully and it will work wonderfully again.

SG: But are we creating new problems?

WB: Always

I think this segment sums up where we are right now. The first take home point is that nobody has any clue as to what to do. The strategy is to throw the kitchen sink at a problem and hope something happens so that "the American machine works wonderfully". Now that is what I call a plan! Simple and elegant is how I like my plans of action and you cannot get much more simple than to spend and borrow as much as you can and then hope. Only 3 actions involved: SPEND,BORROW, and HOPE. Sounds like a winner.

The second take home point is far more sinister. Mr. Buffet when asked about what steps are being taken to stop future abuses of lending and easy money from the FED plays the "tanks in the streets" scare card instead of offering any insight or ideas. The line "Let’s get this fire out and then we’ll figure out fire prevention for the future" is pure bullshit. If this fire gets put out all those that were behind the fire will be giving each other high fives and telling each other how smart they are. Nobody will have to answer for the many mistakes made. Witness former Merrill CEO John Thain getting the boot from Bank of America after he almost surely:
-Hid mounting losses from BAC before the merger was complete
-Paid out bonuses to MER employees on an accelerated basis to avoid missing out when BAC found out the truth

John Thain is a criminal. An arsonist of the banking and money system. Alan Greenspan is an arsonist of monetary policy. Hank Paulson is an arsonist of taxpayer funds. Ben Bernanke is an arsonist of the free market. There are many others.

Luckily for them we are too concerned with "throwing everything there is" at the problem in a panic over the fire that was set and there is no time (or interest?) to find the criminal arsonists responsible for the conflagration. As long as a 5 alarm fire is raging, the fire inspector will not have time to find the culprits.

This is pure arrogance. The same collection of minds that brought the financial system to it's knees now say "Let us handle this and ask no questions" as if they had nothing to do with the whole thing. By spreading panic and forcing fast decisions without debate the arsonists hide their own tracks by covering them with public worry. This is craven and empty.

Things are bad on a macro level. The larger issue is that this country is bankrupt of responsibility and integrity. At some point things will either calm down or break. Neither of those two outcomes are good for the arsonists. Do you think they might start more fires at that point?

Have a good night.

Everything I Wrote Last Night Was Wrong

The comments section last night was a great place to learn about knives and tolls you may need if the end of the world ever comes. As for myself I favor swords, nothing quite like a real folded steel clay treated samurai katana to use for personal protection.

The Government Should (and will) Be in the Telling You What to Buy Business
I have to hand it to homebuilders. They constructed millions of homes that were not needed all over the country and helped to cause the biggest mortgage bust in history and yet they still have the balls to scream for help. I am sure they will get it. I mean, the government should be able to MAKE YOU BUY THINGS THAT ARE NEEDED TO HELP THE ECONOMY, right? What could make more sense? From Housing Wire:

Builder Confidence Hits New Low; NAHB Urges Buyer Stimulus
By DIANA GOLOBAY
January 21, 2009
Home builder confidence across the U.S. slumped to a new record low of 8, according to a monthly survey released Wednesday by the National Association of Home Builders. The housing market index, measuring builder perceptions of current single-family home sales and sales expectations for the next six months, is based on a scale of 100 where any number over 50 indicates more home builders perceive sales conditions as good than poor. An all-time low of 8 — a downward slip of a single point from December’s survey — indicates sales conditions are worse than they have been in more than 20 years, since the NAHB began the survey.
“Clearly, conditions in the nation’s housing market aren’t getting any better, and they aren’t going to get any better until the federal government takes substantial action to encourage qualified buyers to get back in the market,” said NAHB chairman Sandy Dunn, a W. Va.-based home builder. “The Obama Administration and the new Congress have a tremendous opportunity and responsibility to enact legislation that can spur home buyer demand and jump-start the national economy.”

The government should force people into the housing market. It is so American I cannot think there will be much opposition. Now if Washington could just force banks to buy up all those mortgage backed securities that are marked for the taxpayers instead, we might get someplace.

TARP Funds Used for Bonuses Now Buy Bank Stocks
All the hot news was that the bankiing CEO's of BAc and JPM were buying the company stock with their own money. In an era when the incoming treasury secretary cannot even pay his own taxes due to funny games of paperwork, how sure a thing is it that Dimon and Lewis are using their own money? Why not commit some of the TARP bonus money from 2008 to the cause? We may never know.

If the banks are such great buys, why do Dimon and Lewis not commit 100% of their net worth to the stocks? Whatever. This was a flashy confidence boosting trick and wall street went nuts over it. One word of caution for those two gentlemen. From a chronological recounting of the Great Depression:

March 1931Over 50% of the industrial companies on the NYSE were using excess cash to buy their own stock at low 1930 and 1931 prices. Some retired it and some kept it as treasury stock for future use in mergers or for other purposes. This reduction in the number of floating shares, similar in an opposite direction to the flood of new issues floated during the 1929 boom, makes the decline in share prices even more glaring. It also demonstrates that even many business insiders still did not understand the nature of this Great Depression.

What is Old is New Again
My favorite economist Paul Krugman had a strange departure from his normal Keynesian clowning and lefty bias writing to make a great comparison of the three major presidential keynote speeches. It seems the same old lines make the rounds no matter who is president. From Krugman's blog:
January 21, 2009, 8:58 am

Shared responsibility
Barack Obama, 2009:
What is required of us now is a new era of responsibility - a recognition, on the part of every American, that we have duties to ourselves, our nation, and the world, duties that we do not grudgingly accept but rather seize gladly, firm in the knowledge that there is nothing so satisfying to the spirit, so defining of our character, than giving our all to a difficult task.

George W. Bush, 2000:
A hundred years from now, this must not be remembered as an age rich in possessions and poor in ideals.
Instead, we must usher in an era of responsibility.

Bill Clinton, 1993:
We must do what America does best: offer more opportunity to all and demand responsibility from all.
It is time to break the bad habit of expecting something for nothing, from our government or from each other. Let us all take more responsibility, not only for ourselves and our families but for our communities and our country.

Priceless!

Everything I Wrote Last Night Was Wrong
What a difference one 12 hour span can make. I now take back everything I wrote last night. The banks are just fine, even better than fine. They will not need any more dilutive help nor will require nationalization. The bulk of the losses are now over and things are looking up.

The dollar is a rocket ship built on solid fundamentals and should recapture its old highs withing 2 weeks. The British pound is unfairly targeted and will stage a rebound the likes of which the world has never seen.

Russia and the Arab states have fully planned for oil at $20 a barrel, so this $35 a barrel price is all gravy. There should be no problems with those economies. At all.

The consumer spending numbers were obviously wrong, and business spending will take up the slack anyways, just look at the IBM and Apple earnings. Retail should be strong going forward.

I guess I was wrong about everything. If you get caught up in the daily silly moves of the markets you would feel that way anyway. As long as these stupid "everything is over" rallies happen we push out the real process of bottoming out even further. What a sick waste of time to trade the same 8% of the indexes over and over again with no direction.

As I have written that fundamentally sound markets that have good underpinnings do not pinwheel to the tune of 4% on a daily basis. Banking stocks themselves have moved over 20% for two days in a row. Nobody knows anything (myself included) and everything you see from the government interventions to the wild swings in the indices is proof positive a guessing game is going on. And I thought the markets hated "uncertainty"?

Have a good night.

Bank Endgame Finally in Sight

I went to put out my mail this morning and it was then I realized that I forgot to clear out the area of all the snow! I could just barely get the mail into the box. I apologise to my mail carrier, and I cleared the area before dinner so he will have a clear shot from now on. That is how much snow there is; 4-5 feet of it piled up near the mailbox!

Inauguration Day
Congratulations to Barrack Obama for his gracious assumption of the presidency. Kudos to former president Bush for the same. This was about as smooth a transition as you could have wanted, and given how trying the economic issues are there was no need for any drama.

Whatever your political stance it will be fun to see how the news gets reported now with a new president. Where the probable nationalization of banks like BAC and C would have a header like "Failure of Bush Administration to foresee bank crisis leads to bank nationalization" will instead have an Obama themed header like "Acting with insight and purpose, the Obama administration guarantees banking stability." Whether more upbeat coverage can do anything to help the markets remains to be seen.

Bank Endgame Finally in Sight
You know things are serious for the banking industry when even the most optimistic of CNBC speakers makes the analogy of the financial sector to the telecom sector of 1999-2000! Common wisdom has gone from the idea that banks needed some help before they resumed highly profitable businesses to the idea that the banks are insolvent and can no longer function as private entities. Welcome aboard the train they call the city of Insolvent, we have been waiting for you!

The terrible numbers coming out of the European banks (Royal Bank of Scotland, Barclays) are not unique to that continent. This truth set off a "run on the banks" in the US, at least in terms of their common stocks. Bank of America (BAC) and Citigroup (C) were especially hard hit. At the current stock price levels BAC and C will not be able to access any funding privately. The money needed to prop up these banks, and others, is now out of reach of even the most aggressive TARP 2.0 plans and the like.

A few nights back I stated that there was no reason at all to own banking shares as they are all candidates for zero on the low end and only treading water on the high end. The only option left now is complete nationalization of the banks. The confusion and desperation is running high, as this Yahoo Finance article shows:

AP
Stocks tumble on fresh worries about banks
Tuesday January 20, 6:09 pm ET
By Tim Paradis, AP Business Writer
Wall Street tumbles on concerns about banking sector; bank shares plunge; Dow falls 332
NEW YORK (AP) -- The dawn of the Obama presidency could not shake the stock market from its dejection over the rapidly deteriorating state of the banking industry.
Financial stocks, many of them falling by double digit percentages, led a huge drop on Wall Street Tuesday that left the major indexes down more than 4 percent and the Dow Jones industrials down 332 points. Although traders on the floor of the New York Stock Exchange paused to watch the inauguration ceremony and Obama's remarks, the transition of power didn't erase investors' intensifying concerns about struggling banks and their impact on the overall economy.
The market's angst, which began with multibillion dollar losses reported last week by Bank of America Corp. and Citigroup Inc., intensified after the Royal Bank of Scotland's forecast that its losses for 2008 could top $41.3 billion.
The collapse in bank stocks was swift: State Street Corp. plunged 59 percent, Citigroup fell 20 percent and Bank of America lost 29 percent. Royal Bank of Scotland fell 69 percent in New York trading.
"The reason we're having a panic drop is the fact that Europe is catching our cold, and we could have deeper and deeper problems that could require more and more money. And eventually the government is going to have to stop spending," said Keith Springer, president of Capital Financial Advisory Services. "It's a pretty dangerous situation to be in."

Mr. Springer seems to think insolvency is some kind of flu that is passed through sneezing, but terrible loans and bad debts are no act of nature, unless you count greed and poor decision making as a virus. Mr. Springer also is afraid governments may have to stop spending on banks and that is indeed scary. More article:

Investors are expecting Washington will be a central part of the economic recovery. But the first hours of the new administration did little to ease their concerns.
"At this stage, markets in general and bank investors specifically are really looking to government as the way out," said Jack Ablin, chief investment officer at Harris Private Bank. "Certainly, of just about all of inaugurations that I can recall today's event probably has the not only the symbolic importance but really tangible importance to the stock market."
Richard E. Cripps, chief market strategist for Stifel Nicolaus, said the market's decline was interrupted by Obama's inauguration speech but that the markets then continued to trade on the problems in the financial sector.
"There's just tremendous fear and uncertainty in the banking sector," Cripps said. "Even those closest to the issue, like executives and analysts, there's a feeling of tremendous uncertainty. They're not giving any positive guidance because they just don't know. Lacking that (certainty) we're left to our worst fears, and that's what you're looking at with bank stocks."

The fear is palpable. Bank management cannot even trot out the old "things will improve" line anymore. If the government is the only way out for the banks, we are in for a rough time.

Nationalization will probably wipe out any and all equity in the banks. Without a concrete plan in place it is impossible to know what a plan may look like. The rapid deterioration in the banking sector will demand a resolution before Valentine's Day in February. By then we should have a good idea at how ripped off the US taxpayer will become as a rescue plan will unload all the bad debt onto the public and save anything of worth for banking management and bond holders.

What a mess. While it is easy to blame bankers (they deserve it), the outgoing administration (no clue what was going on), and the FED and Treasury (no clue and ineffective to date) the real blame lies with the countless millions of people the world over that went crazy with credit and have bankrupted our country for the gain of granite countertops and Hummer SUV's. We can argue that credit never should have been as aggressively extended to the greater public, and certainly that is true, but keep in mind it was demand for credit that allowed for all the bad lending to happen. Banks cannot lend to nobody, and greedy "have it all now" borrower's need to shoulder the bulk of the blame. If there was a way to make those responsible for the debt crash to pay for the banks, it should be done. All of those that had nothing to do with it should be left alone.

One can dream.

Have a good night.

Personal "Good Consumer; Bad Consumer" Bailout Plan

Even more snow all day and all night yesterday. There is really no place to put it anymore! All this shoveling is not too good for my back. At least the rest of the week looks to be snow free.

NFL Conference Championships
After a great post season run, the Baltimore Raven's rookie quarterback finally had a rookie like game. Joe Flacco looked lost at times and the Pittsburgh Steeler defense was almost airtight for the whole game. Congratulations to the Steelers on another Superbowl trip.

What can one say about the Arizona Cardinals? The Cards started fast and dominated to halftime. In the second half things went bad for them as the Philadelphia Eagles got hot. Facing a one point deficit in the late stages of the 4th quarter, I thought the Cards were done. They instead went on a sustained touchdown drive led by the ageless Kurt Warner that showed grit, resolve, and real poise. The Eagles never recovered from that drive. Huge congratulations to the Arizona Cardinals on their first trip to the Superbowl.

Asian Bird Flu
Loyal reader Watchtower inquired about if I had thoughts on the Asian Bird Flu (Influenza A virus subtype H5N1). My thoughts are that the virus that causes it scares the heck out of me!

Two things cause me to have some concern about it:
1.) The large base of primary producers (all those chickens!) means the sheer biomass of virus is huge. Because chicken is a major food base, that rich target population will always be available to some degree.
2.) This virus had shown a terrible ability to mutate very quickly. The virus seems to be a hyper gene shuffler which allows it to constantly change properties. The virus has even been shown to mutate to be able to infect more than one type of cell receptor in humans. That is not good.

Overall, the response has been pretty good, but it can be hard to know full details when dealing with a country like China. A global pandemic is unlikely, though that sentiment comes from the good old "it's never happened before" camp. Sadly, there is not a whole lot you can do personally except to avoid countries with infections being reported.

Banks Cannot Let Go of the Gambling Mindset
One would think that after bets on mortgage paper went about as wrong as they could have the banks would be more risk averse and try and repair some core business that was less volatile. Perhaps if the banks had to go it alone that would be the case. When you are stuffed to the gills with bailout cash though, you have to try and make some money! Consider this Bloomberg item:

Goldman Sees ‘Swift, Violent’ Oil Rally Later in Year
By Grant Smith
Jan. 19 (Bloomberg) -- Goldman Sachs Group Inc. commodity analyst Jeffrey Currie said he expects a “swift and violent rebound” in energy prices in the second half of the year.
Oil prices may have reached their lowest point already, after falling to $32.40 in mid-December, and are expected to rise to $65 by the end of this year, the analyst said. There is scope for a “new bull market” in oil, Currie said.
A recent tactic of using supertankers to store crude oil to take advantage of higher prices later this year is “difficult” to profit from and is “near the end of this process” anyway, the Goldman analyst said.
New York crude futures for delivery in December, trading near $56 a barrel, currently cost some $15 a barrel more than March futures, a market situation known as contango, where prices are higher for later delivery.
Morgan Stanley hired an oil tanker to store crude oil in the Gulf of Mexico, joining Citigroup Inc. and Royal Dutch Shell Plc in trying to profit from the contango, two shipbrokers said in reports earlier today.

The process of filling a supertanker with oil and planning on selling it later at a higher profit sounds great as long as those "higher prices" manifest themselves. Was it not the banks like Morgan Stanley and Citigroup that were so sure "higher prices" in real estate were such a sure thing? Good to see taxpayer funds going to work on a commodity bet. I am sure this will work out well.

Personal "Good Consumer; Bad Consumer" Bailout Plan
Between the English/Scotish/Irish banks pulling a flatline today and the continued talk of creating "Good Banks" and "Bad Banks" here in the US one cannot help but be confused. If banks can just state that the poor assets do not impair them anymore, then why all the fuss? If all that notional money can be ignored, then did it really exist in the first place? If a subprime mortgage default falls in the forest and nobody noticed, did it happen?

Here at Economic Disconnect I would point you toward setting up your very own "Good Consumer; Bad Consumer" divestment plan to repair your balance sheet and promote the "stability and well being" of your own finances. If the banks can do it with your tax money, surely you can do it with the little money you have left.

So how to do it? Transfer all of your credit card balances to one card; pick the one you think has the worst artwork or the worst color. Charge up any outstanding debts you can fit on that card. Try to get all you can onto it. Car loans, school loans, home equity loans, anything at all that can be charged. Set up a post office box and have the address listed as:
Bad Consumer Holdings for John Smith
PO Box 1234
Fantasy Land, Massachusetts

Now stop any payment when the bills come due. After a while you should get some notices in the mail about your non payment. Send the credit company a letter with your "Bad Consumer" letter head and state the following:

"To whom it may concern,
I, John Smith, have recently divested my debt into two groups: Bad Consumer Debt and Good Consumer Debt. I regret to inform you that your credit extension to me has been deemed to be "Bad Consumer Debt" and thus will be ignored. I suggest you reflect the disappearance of that debt on your balance sheet, as I have on mine. May I also suggest your company get in line early as the TARP money is going fast and would be terrible for you to miss out. Thank you."

The next issue will no doubt be an angry phone call from the attack dogs at the credit company. You will need to navigate that call and here is a sample to follow:

Credit Card Company (CCC)
Yourself (YOU)
Phone rings.....
CCC: Hello mr Smith, this is the credit card company. We received your letter and while we appreciate a good joke you must start paying your bill immediately, tacking on fees and late charges of course.
YOU: This is no joke. Your credit debt has been deemed "Bad" and must be ignored. I am sorry but there is no other way for me to meet minimum balance sheet requirements.
CCC: OK, ok. Enough jokes. You entered into an agreement in good faith to pay that money back sir, and now are legally bound to that contract.
YOU: When I took out that credit I had a model that I would win the lottery and be able to pay it back this year. As I have yet to hit the jackpot, we will have to ignore the debt until my model is proven correct.
CCC: Sir, thinking you are going to win the lottery is crazy and a poor financial decision.
YOU: Maybe, but my model said otherwise.
CCC: We will have to start collections sir, and that will ruin your credit rating.
YOU: Not so, Moody's and Fitch just reiterated my "AAA" rating and it was insured by AIG so you have no recourse there.
CCC: We will start collection process and your assets will be targeted to repay your debt sir.
YOU: You seem to still be a bit confused. The assets I have are all notional and their current market price is low due to "risk mispricing" and thus I choose to not sell into this environment. You will have to wait until the right price is offered to me on my car, my home, and my collectible Disney plates.
CCC: Sir, this is serious. Are you refusing to pay what you owe to this company?
YOU: Try not to think of it like that. Have you ever heard of "Systemic Risk"?
CCC: Is that the top number on a blood pressure reading?
YOU: No! "Systemic Risk" is when an institution is "too big to fail" and thus cannot be allowed to go under because it could hurt everyone. As a consumer I am responsible for 70% of the US GDP, well not personally, but as a whole. Therefore I must not be allowed to fail as it would pose great risk to the economy. Ben Bernanke and Hank Paulson have said as much.
CCC: Sir, really this is your last chance to try and make arrangements.
YOU: You have my "Bad Consumer" information, I suggest you try that avenue.
CCC: Click of hang up.

See, now even you can hide behind the veil of systemic risk! Imagine if we all made our own "Good vs Bad" asset pools! That would be fun.

Note: OBVIOUSLY A JOKE; This is not personal financial advice,
unless you are C, BAC, JPM and the like then it is ok.

Have a good night.

Billions in Bailouts Mean Nothing, But Your Missing Tax Rebate Just Might

It was as advertised a big fat ZERO degrees this morning. Kind of takes your motivation away when it is that cold. At least I have Monday off as a Holiday so I get a three day weekend!

Odyssey Marine Exploration (OMEX) Update
Last night was the premier episode of the Discovery Channels program titled "Treasure Quest". I liked the opening episode. As I have read a great deal about the process that OMEX uses, I knew a bit about it. It was great to get a visual on all the action and equipment.

One scene stood out strongly: While searching for the ship "Merchant Royal" the searchers were combing an area that is a high traffic zone for shipping freighters. It seemed wild that maybe 500 Million in gold may lie on the ocean bed with tons of cargo going by day and day out. There will be 14 more episodes.

So how is the stock doing? Today OMEX closed at 3.51, up 16% from the 3.00 I have it at. Not quite the pop I am expecting, but it is still early on. I like the show and the stock for the pure excitement of treasure hunting.
Full Disclosure: I own shares in OMEX.

Gold and Silver Show Some Muscle
Gold and Silver took it on the chin along with the greater market over the last week and a half. The two metals have shown great resilience as of late and had a good day today. I like it when any asset exhibits real resistance to getting pounded in a bad market.

Of course you know I am extremely bullish on the metals. With all the money being created and the rush for currencies the world over to devalue I expect gold (and to a lesser degree silver) to remain solid. Probably not spectacular, but solid. That is more than you can say for many things at this point.
Full Disclosure: I own gold miners GG and KGC.

Great Blog Comment
One of the great features of any blog is the comment section. With access to all kinds of people and all kinds of lines of thinking you can really get a ton of information. Over at The Big Picture Blog today there was a thread about all the money being poured into the banks to backstop losses. One reader left a comment that I saved to put up tonight.

As it relates to bank earnings and giving never ending cash infusions to help balance sheets:

wally Says:
January 16th, 2009 at 8:37 am
There is no reason to believe that quarterly losses will not continue for the next several quarters - or longer- at the same rate. No profitability for banks can be expected for any reason other than uninformed hope.
This is just taking future money and pouring it into the past.

A great insight that crystallizes the problem.


Billions in Bailouts Mean Nothing, But Your Missing Tax Rebate Just Might
A new CNN poll out today showed that the sampled people were against any more TARP money bailouts by the rate of 61% against. While one cannot expect Congress to do anything that their constituents want, they passed the TARP anyway, you have to wonder why people are not more angry or loudly protesting the disgusting use of taxpayer money for rescues the world over.

I have a theory that the huge numbers involved simply mean nothing to most people. I mean what does a 20 Billion dollar gift to BAC and a backstop of over 100 Billion more really mean? Nothing tangible to anybody that is for sure. The long term effects certainly will be noticed, but only slowly and over time so as not to panic anyone. As long as the TV works, McDonalds is open, and the credit cards work when swiped most people do not even care how much money is being spent.

Mismanagement on many levels is being rewarded right now. From the executives at AIG, to the bosses of BAC, to the auto manufacturers, and even dead beat home mortgage holders money is being deluged on the problems with no repercussions for those that caused all the problems. Well there is a news story tonight that might just change how readily people accept non performance and failure.

From the LA Times:

California controller to suspend tax refunds, welfare checksJohn Chiang announces that his office will suspend $3.7 billion in payments owed to Californians starting Feb. 1, as a result of the state's cash crisis. Student grants are also affected.
By Evan Halper
11:24 AM PST, January 16, 2009
Reporting from Sacramento -- State Controller John Chiang announced today that his office would suspend tax refunds, welfare checks, student grants and other payments owed to Californians starting Feb. 1, as a result of the state's cash crisis.
Chiang said he had no choice but to stop making some $3.7 billion in payments in the absence of action by the governor and lawmakers to close the state's nearly $42-billion budget deficit. More than half of those payments are tax refunds.
The controller said the suspended payments could be rolled into IOUs if California still lacked sufficient cash to pay its bills come March or April.
"I take this action with great reluctance," Chiang said at a news conference in his office. But he said that without action to close the deficit, "there is no way to make it through February unscathed."
The payments to be frozen include nearly $2 billion in tax refunds; $300 million in cash grants for needy families and the aged, blind and disabled; and $13 million in grants for college students.

First off let me open by stating that this WILL NEVR HAPPEN. There is no way that California will not issue tax rebates to those that have them coming. No Way. I believe that this move is a threat being sent to two entities:
1.) The California Legislature; the threat will scare them into passing any budget with any bond issuance that is needed
2.) The US Government; the threat clearly will invoke the "systemic risk" qualifier and California will be first in a long line of state bailouts

With that out of the way, let's return to the idea of a government refusing to deliver tax rebates. For my family when I was young tax rebate season was the time of year the whole financial well being depended on. Car repairs, home repairs, and sometimes even christmas gifts were all put on hold until late February to early March awaiting the state and Federal rebates. Note: Times were tough, this is not a debate about my or any families' financial savy that they need their tax rebates, just the principal.

Now what if the state and/or the federal government said "Sorry, we need the money to avert systemic risk, so you are out of luck"? Do you think people would be as docile as they are now while trillions are being wasted bailing out failed banks and other firms? The bailout cash means nothing to most because it does not affect them personally or immediately. The lack of an expected rebate check will get their attention. I guarantee it.

One of my major issues is how fools like Ben Bernanke, Hank Paulson, Bill Gross and Paul Krugman throw money spending ideas around like it does not matter. I have written that it is easy to take billions from the "taxpayers" but near impossible to take any money away from one person. I have even challenged Bill Gross to a steel cage match so that he may learn just how hard it is to take money from someone directly. If a tax rebate freeze ever occurs there is going to be riots and violence.

I think this threat is dangerous and ill thought out. If Californians think their tax money will not be returned they may take extra exemptions to make sure they pay only at years end. This would hurt tax receipts all year and cause even more problems. The California controller John Chiang should be immediately fired for making such an irresponsible and dangerous statement. I am sure he can get a new job here in Massachusetts.

This is a big story. Huge. While I do not think it is for real (real meaning going to happen, the story is certainly true) it does open a line of thinking that needs to be addressed. What if a state refused tax rebates? What if the federal government, in the interest of "maintaining economic stability" stopped rebates as well? While they have no legal authority to do so, they have no reservations to this point about doing whatever they want anyway. The first half of TARP was viciously opposed, and it passed anyway. Not one Senator lost his/her seat due to their "yes" vote on that bill. Not one. Do you think thy will care that their voters are not going to get tax rebates? They won't if people are quiet about it. If tax rebates are ever withheld I imagine most people are not going to be quiet about it. Not quiet at all.

Friday Night Entertainment
A little mirth to get your mind on things more fun than thinking about the end of the world!

Hilarious Chart
This flowchart shows the difference what clothes a man wears and what outfit a woman wears may have on their drink selection:


Rock Blogging
Music can soothe the soul, or it can get you all riled up. Let's see what we can do!

Another great Ipod find was a song I had not heard in over 5 years. Haunting vocals and wonderful guitar rhythm. Try out Iron Maiden and "Wasting Love". Great opening verse: "Maybe one day, I'll be an honest man. Up to now, I'm doing the best I can. Long roads, Long days of sunrise to sunset. Sunrise to sunset.":


Along the lines of great hair band ballads, I have always liked the White Lion song "When the Children Cry":


Maybe I am in a slow music mood, but had this song stuck in my head. listen to Def Leppard and "Bringing on the Heartbreak":


I loved the remake of the Bob Segar classic "Turn the Page" by Metallica:


Have a good night.

If You Start Me Up, If You Start Me Up I'll Never Stop

First off, hats off to the amazing pilots and airline crew that saved the ENTIRE plane full of passengers with an incredible crash landing on the Hudson river this evening. I cannot imagine the strength of mind and nerve required to keep one's head clear and thinking when faced with such a calamity. The crew and the passengers are truly amazing.

About 10 degrees here today with a goose egg (zero) set for all day tomorrow. I keep waiting for this global warming thing to get it in gear! I had a request for the board. If anyone uses a canoe, could they recommend one for me? I would like to get a small canoe to fish some small ponds and small rivers here in the spring and summer. I want one 14 feet or shorter. If you know a good manufacturer or a good place to get a good price, drop a comment and let me know. Thanks in advance!

No Reason to Own bank Stocks As You Own Them Already
Full Disclosure: I am a Bank of America customer. I first used Bank Boston, which then became Fleet Bank, which was finally gobbled up by BAC. I am just too lazy to change banks!

Today was another bloodbath for Citigroup (C) and Bank of America (BAC). It seems that after the Countrywide Financial grab that did not go as well as thought, BAC had the notion that eating Merrill Lynch would work out so much better. It seems that MER maybe, might have been less than totally upfront about their balance sheet issues. It amazes me why people still trot out that line about "why do banks not trust each other?" The answer should be clear by now. As for C, they seem destined for breaking up into pieces, none of which will be strong money making units.

So this brings us to the latest round of government intervention. Without guarantees to the tune of 100-200 Billion dollars BAC has indicated the MER deal will not go through. This would bring out the good old "systemic risk" play that must be avoided at all costs. BAC may be pushing the FED/Treasury around using the very criteria set forth by previous bailouts. I have written about how the FED and Treasury had no idea how dirty the dogs were that they are climbing into bed with by allowing banks to access their balance sheets. Maybe now they will learn.

This brings me to my main point (yes, there is one!). There is no reason to be in stocks like BAC or C, or any bank really. They all are on life support and will end up being indebted to the government for the foreseeable future (think 10-15 years). As a taxpayer you already are the proud owner of plenty of banking stocks, so you should diversify and not buy any more on the open market. I have yet to hear a solid argument why any banking stock is a buy. If they were they would not need government funding as they could secure it on their own. Enough said.
Full Disclosure: I do not own BAC or C stock or any banking stock. Do you? If yes, why?

If You Start Me Up, If You Start Me Up I'll Never Stop

"If you start me up
If you start me up I'll never stop" - Rolling Stones "Start Me Up"

When you are about to do something wrong or stupid, there is a point when you feel apprehensive and scared. You know it may be wrong or dangerous but for whatever reason you continue with an action regardless. Then a funny thing happens. the next time the same situation comes up, it gets much easier! And every time after that even easier still. Shop-o-holics are known for this.

It seems that what was at first a difficult thing for the US congress to do, in this case spend even more wildly than any other time in history, it has become not only easy but a game of outdoing everyone else. Where the trillion dollar mark used to be taboo, it is now at the small end of most spending ideas. Congress used to pretend that the US was serious about being fiscally responsible, but now after nobody has called their bluff, they are ready to let it rip.

Take a look over some excerpts from this Yahoo Finance article:

AP
Bank troubles raise fears of growing bailout
Thursday January 15, 6:13 pm ET
By Stevenson Jacobs and Daniel Wagner, AP Business Writer
New aid for Bank of America raises fears that more bailout money is needed
NEW YORK (AP) -- The banks may need a bigger bailout.
The government is mulling another multibillion-dollar aid package for Bank of America Corp., raising the possibility that much more taxpayer money will be needed to keep the banking industry from edging back toward the abyss.

Back towards the abyss? You mean the banks left the abyss?

But the sense of panic that has hovered over Wall Street in recent days does not seem to have breached Capitol Hill. Lawmakers, wary of pushback from constituents, reluctantly released the second $350 billion in the Treasury's financial rescue fund Thursday after assurances that $50 billion to $100 billion would be spent to try to reduce foreclosures. Many lawmakers have resisted giving banks more money.

Panic had not reached Capital hill? That is why with no real debate the second half of TARP is approved? How much resistance was there really?

Such a move would support the growing consensus among financial experts that Treasury's bailout program so far won't be enough to stabilize banks reeling from bad mortgage loans and falling home prices. As the recession deepens, consumers and businesses are increasingly defaulting on other loans, such as those involving credit cards and commercial real estate, analysts say.
"It was getting better for a while, but now it's just going to hell," Bert Ely, an independent banking consultant said. "The worse it gets, the more the government is going to have to do -- and the problem is, we just don't know.
"There may have to be additional TARP money put on the table.... There's nothing magic about the $700 billion number. That could be increased to a trillion, a trillion and a half in a flash."

And now we come to it. At first 700 Billion was plenty to get the job done. Maybe even just half of that. Now 700 Billion is not set in stone. Why not a Trillion? Trillion and a half? Do I hear 2 trillion?

The prospect of pumping more taxpayer money into Bank of America raised troubling questions about whether other banks may need more capital infusions.
"Will we need TARP 2.0?" asked Vincent R. Reinhart, former director of the Federal Reserve's monetary affairs division. "The first half wasn't used effectively, so we're certainly going to need the second half. But it probably won't be enough."
He said the fact that some of the money will be used for mortgage relief will mean there will be less money "to deal with the banking problem."
House Financial Services Committee Chair Barney Frank, D-Mass., said the problems in the financial sector could mean "we have to do more."
"Things have been worse than anticipated, there's no question," he said in an interview Thursday on C-SPAN. He compared the financial system to a patient under emergency care, saying, "You don't say, 'Well, that didn't work, I'm cutting it off.'"

TARP 2.0 used to be an inside joke many of us financial bloggers used to make fun of another round of bailouts. Now TARP 2.0 is the mainstream term for it! You cannot make this stuff up anymore, I dare you to even try!

While Goerge Bush was lampooned constantly for his poor vocabulary and word enunciation, Barney Frank may be the most impossible to understand politician in America. Watch a YouTube clip of this buffoon speaking and you will think Mr. Bush was Cicero of the old roman republic! Luckily this article just had a transcript, so I can read what Mr. Frank had to say.

I have news for Mr. Frank. There are indeed many cutoff points in emergency treatment. One of the easiest is when an accident victim is brought in with minimal vital functions and a head wound so severe that gray matter of the brain is hemorrhaging out. That patient is made "comfortable" until they expire. While I would not want to make the analogy that C and BAC ever had any brains, certainly the disaster each has become qualifies them to "be made comfortable" until expiration. Instead it seems our government is determined to try a brain transplant. Why not? It has worked many times before, right? Oh.

Have a good night.

Fascinating, Shocking, and Totally Expected

Brutal cold here for the next three days. This is going to be a long winter indeed. Tonight's post will cover three different reactions I had to some information I came across. I hope you find all the topics worthwhile.

Fascinating
Today over at Jesse's Cafe Americain there was a truly fascinating post that covers the time period when the US government seized privately held gold in 1933 and then revalued gold (and thus devalued the dollar) in 1934. There are tons of great charts and analysis and I point you to the entire post here.

The entire post is a great read, but I took home the final summation as a great point:

"It would have been much more equitable to devalue the dollar and to change the basis for dollar/gold first, before requiring private citizens to surrender their holdings. But of course, this would have lessened the liquidity available for direct infusion into the Federal Reserve banks."

It is clear from the article that the government took away gold and revalued the dollar in a slight of hand way of providing phantom capital to banks. While such manipulations are far easier today due to the lack of a gold standard and available printing presses, it strikes one with how powerful a government can be. I would surmise the serious times of the Great Depression rendered much of the populace pretty willing to allow anything.

And today, faced with almost the same kind of impaired banks, how far is the government willing to go? If you read Ben Bernanke's speech from yesterday (Mish has a great wrap up) then I would say as far as they think they have to. Just how far that is is any one's guess at this point. Including the FED and Treasury.

Shocking
I came across this news item over at Housing Doom today (via CNBC) and I instantly was both shocked and angry. In the above section I wondered just how far the government would go to try and "fix" things. It seems almost anything is on the table as the National Community Reinvestment Coalition (NCRC) has a great idea about abusing the eminent domain law:

"Taylor and the NCRC are proposing a new government program, using TARP money, whereby the government would “use its power of eminent domain to take troubled properties/loans from mortgage servicers and lenders, so large numbers of loans could be modified, writing down principal and interest rates. The loans would then be re-sold to the private market.”

That second half of TARP had better come soon as the plans for that money continue to grow like pondweed.

The Housing Doom author has 4 major concerns that I would also have:

My concerns are as follows:
1.)That rather than re-establishing a secondary market, this would kill it. Would investors really believe "Hey, we know that former purchasers of mortgages were turned into fish bait, but now it’s safe to go back in the water?" As long as the government keeps changing the rules and putting investors at a disadvantage, there will be no stability in mortgage markets.
2.)The moral hazard issue is huge here. Why buy a house you can afford when you can buy a home beyond your means and have the price adjusted to your budget? This punishes those who were more conservative in their purchases or chose to rent. This rewards the wrong people.
3.)Investors as well as homeowners would benefit from this plan on the pretext that this helps renters. Should flippers and speculators be bailed out in the name of "helping" their renters? Just how much irresponsible behavior should be financed at the expense of the responsible?
4.)Lastly, I am concerned about the fact that this would be seizing mortgages, not real property, and that this is stretching the definition of "public use".

It should serve a reminder how far and how fast the US has lost it's collective soul in the face of an economic downturn that this kind of plan has even seen the light of day. Further, that this plan has not garnered howls of opposition is further proof that things may be too far gone to be worth saving.

Totally Expected
The last 6 days have been a rough time for the markets. Mounting job losses, poor retail sales, and even more trouble at the banks have taken about half of the rally points away from December. Again if you read Ben Bernanke's speech, you know that the FED and the Treasury are ready, willing and will pretend to be able to come to the rescue.

From the department of "totally expected" we get this report from CNBC that details the Treasury promising more TARP money that has not been approved yet to Bank of America so they can take over Merrill Lynch. You see, Merrill's balance sheet is getting so bad that not even bank of America after cash infusions from TARP I can cover the losses without going bust. From CNBC:

US Close to Giving BofA Billions More in Aid
The U.S. government is close to pledging billions of dollars of additional aid to Bank of America, the Wall Street Journal reported on Wednesday, making the bank the second to require a second round of emergency government assistance.
Bank of America is struggling to digest its January 1 acquisition of Merrill Lynch, the newspaper said, citing people familiar with the situation. The bank's shares dropped more than 5 percent after hours, reaching their lowest level since 1991.
Merrill Lynch's losses in the fourth quarter were larger than expected, which spurred Bank of America to start talking to the U.S. Treasury in mid-December, the newspaper said. The terms of the government aid are still being finalized, and details are expected to be announced with Bank of America's fourth-quarter earnings, due out January 20.
A possible deal would involve protecting Bank of America from Merrill's bad assets by capping the bank's potential losses from them.
The talks were driven by Treasury Secretary Hank Paulson, who was concerned that Bank of America would be unable to close the deal, possibly leaving Merrill Lynch without a partner.

If you need a translation of the phrase "capping losses" it means that the taxpayer will eat almost 95% of any losses that BAC may incur from this deal.

It warms the heart to see the Treasury in constant contact with banks about their inner workings. TARP II now looms large as it has already been promised all over the place. Will 350 Billion get it done? Who knows, and that is the problem.

Instead of playing this game of lending facilities, TARP cash infusions, "Bad Bank" creation, etc we need to get all the dirt out on the table and get a fair idea just how far don the rabbit hole this all goes.

What the FED and Treasury need to do is require all banks to compile a list of ALL their illiquid and troubled assets. Then the banks must submit a description of where they would stand if their holdings were valued at
1. 90% on the dollar
2. 70% on the dollar
3. 50% on the dollar
4. Worse than 30% on the dollar
At these levels we may be able to flesh out a final infusion number instead of making crap up as we go.

The FED/Treasury? and the banks are under the illusion that all of the seriously impaired assets they hold are just victims of some kind of mispricing by the markets. they think that if enough time can be bought, things will recapture some semblance of their former values. They are hoping for a miracle. Hope is a poor investment philosophy.

The US public has a right to a ballpark estimate of just how much money will have to be created to paper over this mess. I am sure that foreign creditors would like to know as well. The Wall Street types are great at making financial models so they should have no problem creating an excel spreadsheet with the breakdowns I have listed above.

The time is coming when we are going to have to get some brutal honesty out of the crooks and shysters on Wall Street and their enablers in government. I think that the money numbers that are going to be required will be astonishing. Good thing those treasury bills are selling like hotcakes, we are going to need the money!

Have a good night.