-----Original Message-----
From: Thomas
To: Patrick
Sent: Tue, 28 Oct 2008 3:19 pm
Subject: impatient White House
Pat, here a headline from recent article that is kind of shocking:
"AP - An impatient White House served notice Tuesday on banks and other
financial companies receiving billions of dollars in federal help to quit hoarding the money and start making more loans."
What the hell is that all about? Telling banks to make loans? Americans are bankrupt, are they not? They, republican/neo-cons, already ran the middle and lower class to the hilt with sub-prime, so who can actually afford credit right now? Wouldn't the banks loan it if they saw any chance of getting some interest on it, plus their money back? I also read that there's trouble on the horizon because of credit card debt. How is that gonna play out in the coming months?
t
Hi Tom,
Yes this is the cry from the White House and their cronies. As it happens, the big bad bail out of $700 billion was originally to buy worthless derivative paper based on just about everything. Then the UK had this bright idea of just parking the money in the bank's coffers to shore up their balance sheets (of course by buying some kind of newly created "preferred shares" in the US). The idea was if banks have healthy balance sheets they would be willing to lend again right?
Thing is, the banks don't have healthy balance sheets. They are looking at a really tough economy and as you reference in the second part of your email, increasing delinquencies in their consumer credit divisions. These delinquencies are already approaching 7% or more at some institutions. This is astronomical when you consider the costs and need for extra reserves to cover these losses on top of recently delinquent home equity loans (the borrowed cash that gave Bush his debt financed "growth" for the past 5 years).
Yes the banks and credit card companies like Amex and Cap One are looking at shrinking margins on their cards, increasing delinquencies and an almost evaporated credit market where they normally sell the credit card "receivables" as debt to the credit markets (mainly purchased by money market funds, an area I think should disappear as I believe money market funds have fueled the extraordinary expansion of short term debt from the consumer side of the equation over the past 20, yes 20 years, as I bitched about this with my professors back in 1990 at UM when consumer debt was approaching $800 billion, a small number in hindsight).
Anyway, with the banks bleeding money from write downs on their bad "investments" over the past few years and vastly expanded "assets" of garbage loans to consumers who are all tapped out and loosing their jobs, once they got their hands on the Fed money they just want to sit on it or start scheming up ways to gobble up their competition and gain deposits on the cheap. Well, wouldn't you? With bank shares down 70% or more why not take advantage of that and just buy your way out of your troubles using "cheap" government handouts?
But the government in all its brilliant ideas just doesn’t understand all this. They look at some economic model and say "Hey, if the banks have capital they will want to lend it and expand their assets and make more money right?" Well Tom, you are right this time. Hell no! They have no interest in lending to a tapped out consumer who may loose their job and there are few businesses with enough cash to lend to (remember, in tough times banks only lend to those who don't need it).
Patrick
Wednesday, October 29, 2008
Monday, October 20, 2008
Letters to Tom (5)
From: Thomas
To: Patrick
Sent: Sun, 19 Oct 2008 4:02 pm
Subject: Re: Cheer up???
Pat,
As usual I can't hold on to the economic ship you describe since I'm not an economist (as you obviously are). But... I refuse to let go and drawn. With that in mind, let me give this economy stuff a go.
Inflation? Are you saying as in "inflation" of national economies? I think what you might be referring to is deflation. I don't know, Pat. I don't think inflation is what it used to be.
Aren't you forgetting about the drastic decrease in the price of oil recently? Russia and China - both economies almost wholly dependent on (fictional?) petro-dollars - are right now tittering on the edge. And why is that? You're right that the dollar is weak but what is also clear is that no matter what happens too many countries are dependent on that dollar - no matter what form that dollar has. A bit ironic, perhaps, that all the G8 leaders are going to meet to discuss how to deal with this problem (notice they don't use the term G8 anymore - since Russia isn’t invited.) What do you think they're going to talk
about? How Russia and China are going to burn (real) cash to fuel their winters?
What "real" cash, Pat? There is no such thing as cash in this crisis. It is truly about trust - as in: whom do you trust? (The west or...?)
What is so interesting about this crisis (to me) is the fact that it has never been more obvious that the money being put into the system right now ($700b in the US) is truly monopoly money - as in Monopoly the game! It is not even referred to as "cash". Well, I guess some refer to it as that but... The dippy Bush referred to it the other day as "capital" - it is clearly not that. Isn't it really liquidity? No? Wait. Isn't it really anything more than a Bookie guaranteeing his store?
To me the real question is how much more production can America afford to lose through this crisis? Will GM buy Chrysler? Can America really sustain itself by having a majority service economy? And on top of that afford all this wacky Wall Street krapp?
I recently thought about an old econ101 term that I haven't heard in years. What ever happened to M3? The crisis is really stirring up 200 or so years of capitalism - that part the hedge fund guy got right. But couldn't this crisis also be changing economics as well?
Ah, what do I know?
t
Funny you mention M3. All the monetary numbers M1-M3 used to be published regularly. They were removed from being published a few short years ago. They are simply mind-boggling and I guess the Fed did not see the point. Lets just say over 85% of the "currency" in dollars is outside of the US.
Anyway, remember the later 90's? We had something they were talking about there called the "Goldie lox economy" where unemployment dropped into the 4% range (where previously the Fed used to think under 6% would start to cause inflation to rise) but inflation was stagnant or non existent. I mean there was just no noticeable inflation until after 2001. And yes, typical inflation assumes rising prices, commodities usually start the rise then prices go up and people demand higher wages etc.
Strange thing is during the housing boom / bubble, housing prices skyrocketed and I kept saying, where is the rise in income to sustain the rise in prices? Well it was not there and never appeared, hence the housing bubble burst. We had a very strange time. There was my attitude during the bubble where I asked my friends who talked about their rising house prices and posed this question: Did you house price go up or does it simply take more dollars to buy your house?
Understand the difference? I believed it was the latter and house prices were foretelling a collapse of the dollar. If you remember, during the 70's inflation time, house prices went up with inflation. Those were old and traditional and reliable economic models we all learned from. Today we are in different times. The "Goldie lox economy" followed by the "housing bubble" without underlying income to support it and the current melt down in the credit markets as a separate event from the industrial production etc parts of the economy are all putting traditional models out to rest.
My fear of inflation is a simple one. It assumes the lack in faith of the value of the dollar. I feel by pumping more and more dollars into the banking and credit system we are taking the assumption that there is some kind of intrinsic value of the dollar, which allows us to recklessly print more. I mean, what other country can get away with the kind of national debt and trade deficits we have? None! There is the rub. The globe accepts our trade deficits, budget deficits, consumer debt and other reckless numbers. But with every possible number going bad, what is not to say pumping dollars into the financial system at this point does not have the ability to create the "prefect storm" where no matter how many dollars are put out there, credit remains tight, people horde dollars and nothing moves. Then just like any "asset class" that is horded, at some point people will want to unload. That is the problem, are they going to unload dollars into a dead economy? If we lower interest rates to 1% or .75% or whatever, and the US economy sinks further, who will want to hold dollars?
Anyway, I am just thinking out loud here. I don't have all the technical knowledge to determine the viability of what I am saying. I just feel it in my gut. I feel it in the panic in Washington, the panic in the Fed the panic in the Treasury, the panic on Wall Street, the Panic in London the Panic everywhere you look... I just feel it.
Patrick
To: Patrick
Sent: Sun, 19 Oct 2008 4:02 pm
Subject: Re: Cheer up???
Pat,
As usual I can't hold on to the economic ship you describe since I'm not an economist (as you obviously are). But... I refuse to let go and drawn. With that in mind, let me give this economy stuff a go.
Inflation? Are you saying as in "inflation" of national economies? I think what you might be referring to is deflation. I don't know, Pat. I don't think inflation is what it used to be.
Aren't you forgetting about the drastic decrease in the price of oil recently? Russia and China - both economies almost wholly dependent on (fictional?) petro-dollars - are right now tittering on the edge. And why is that? You're right that the dollar is weak but what is also clear is that no matter what happens too many countries are dependent on that dollar - no matter what form that dollar has. A bit ironic, perhaps, that all the G8 leaders are going to meet to discuss how to deal with this problem (notice they don't use the term G8 anymore - since Russia isn’t invited.) What do you think they're going to talk
about? How Russia and China are going to burn (real) cash to fuel their winters?
What "real" cash, Pat? There is no such thing as cash in this crisis. It is truly about trust - as in: whom do you trust? (The west or...?)
What is so interesting about this crisis (to me) is the fact that it has never been more obvious that the money being put into the system right now ($700b in the US) is truly monopoly money - as in Monopoly the game! It is not even referred to as "cash". Well, I guess some refer to it as that but... The dippy Bush referred to it the other day as "capital" - it is clearly not that. Isn't it really liquidity? No? Wait. Isn't it really anything more than a Bookie guaranteeing his store?
To me the real question is how much more production can America afford to lose through this crisis? Will GM buy Chrysler? Can America really sustain itself by having a majority service economy? And on top of that afford all this wacky Wall Street krapp?
I recently thought about an old econ101 term that I haven't heard in years. What ever happened to M3? The crisis is really stirring up 200 or so years of capitalism - that part the hedge fund guy got right. But couldn't this crisis also be changing economics as well?
Ah, what do I know?
t
Funny you mention M3. All the monetary numbers M1-M3 used to be published regularly. They were removed from being published a few short years ago. They are simply mind-boggling and I guess the Fed did not see the point. Lets just say over 85% of the "currency" in dollars is outside of the US.
Anyway, remember the later 90's? We had something they were talking about there called the "Goldie lox economy" where unemployment dropped into the 4% range (where previously the Fed used to think under 6% would start to cause inflation to rise) but inflation was stagnant or non existent. I mean there was just no noticeable inflation until after 2001. And yes, typical inflation assumes rising prices, commodities usually start the rise then prices go up and people demand higher wages etc.
Strange thing is during the housing boom / bubble, housing prices skyrocketed and I kept saying, where is the rise in income to sustain the rise in prices? Well it was not there and never appeared, hence the housing bubble burst. We had a very strange time. There was my attitude during the bubble where I asked my friends who talked about their rising house prices and posed this question: Did you house price go up or does it simply take more dollars to buy your house?
Understand the difference? I believed it was the latter and house prices were foretelling a collapse of the dollar. If you remember, during the 70's inflation time, house prices went up with inflation. Those were old and traditional and reliable economic models we all learned from. Today we are in different times. The "Goldie lox economy" followed by the "housing bubble" without underlying income to support it and the current melt down in the credit markets as a separate event from the industrial production etc parts of the economy are all putting traditional models out to rest.
My fear of inflation is a simple one. It assumes the lack in faith of the value of the dollar. I feel by pumping more and more dollars into the banking and credit system we are taking the assumption that there is some kind of intrinsic value of the dollar, which allows us to recklessly print more. I mean, what other country can get away with the kind of national debt and trade deficits we have? None! There is the rub. The globe accepts our trade deficits, budget deficits, consumer debt and other reckless numbers. But with every possible number going bad, what is not to say pumping dollars into the financial system at this point does not have the ability to create the "prefect storm" where no matter how many dollars are put out there, credit remains tight, people horde dollars and nothing moves. Then just like any "asset class" that is horded, at some point people will want to unload. That is the problem, are they going to unload dollars into a dead economy? If we lower interest rates to 1% or .75% or whatever, and the US economy sinks further, who will want to hold dollars?
Anyway, I am just thinking out loud here. I don't have all the technical knowledge to determine the viability of what I am saying. I just feel it in my gut. I feel it in the panic in Washington, the panic in the Fed the panic in the Treasury, the panic on Wall Street, the Panic in London the Panic everywhere you look... I just feel it.
Patrick
Sunday, October 19, 2008
Letters to Tom (4)
Tom,
I am increasingly convincing myself our economy (including Europe's but to a lesser extent) is about to hit an unprecedented bout of inflation. My prior comments over the past few years about allowing China to take some of their hundreds of billions of dollars and buy US assets before they end up burning them for heating fuel in the winter is starting to take real shape (like the hedge fund guy Andrew Lahde's comment about the legislation that never passed because industry bought off the government, those industries also bought off the government by convincing them to not allow China to purchase several American companies which is the best thing that could happen to all those dollars they have collected).
This will not be the kind of inflation economist’s talk about, rising asset prices, wages etc. but a simple collapse in the faith of the US currency combined with the government's current bias towards literally flooding the banks and financial markets with "unlimited" dollars to improve liquidity. I am not kidding. We went from 10's of billions in dollars of support to hundreds of billions to now quoted everywhere, "unlimited" of financial support from the fed.
I seriously think China may in fact be using those dollars as fuel this winter, they will become that worthless as the US current reckless attempts to bail out a financial system that is larger then their capacity to deal with it results in a complete loss in confidence in the value of the dollar. I cannot say it will all happen by this winter, in fact it may take closer to 8-10 months to happen but I feel strongly it IS going to happen. It is in my gut for all I know as a measly undergrad economics degree holder.
The question is how to "profit" from this reality. The only asset class traditionally to migrate to is Gold. I hate Gold. I hate the thought that the idiots running our country and economy for the past 8 years or so still think like it is the 19th century, before central banks, when currencies went bust regularly, precious metals where the only stable value and vast amounts of resources were spent scouring the globe for mineral riches. I would much rather invest in the foundation of our technological advances over the past 30 years or so where some of the smartest people spend their lives creating more amazing products and devices that have ways of "improving" human life. Things like semi-conductors, real medical advances, energy saving technologies, better and more efficient products and art. Instead, my option to hedge what I fear is an impending loss of confidence in the dollar is to buy the very thing I despise the most, a damn base metal extracted from the earth.
I am really pissed off. I feel like the French during the French Revolution. I strongly believe our government (an expression that I have had for about 25 years now) had become so impotent and bought that they have put our entire system in jeopardy. It is unfortunate. I can remember back when I was in my early 20's and talked about entering politics sometime after I was 35 saying I felt by the early 21st Century the US would be in such a mess that it would be easy to run for president. I mean, who would want the job? To see what is going on now makes me feel for the next person to enter that house on Pennsylvania Avenue. I am willing to bet that within 2 years the house will become nothing but a ceremonious museum. The citizens of the United States will become so disenfranchised by what has happened to our economy that they will create a situation that causes smart people to conclude there is no way the leader of the US can govern from such an accessible location. It will simply be too dangerous. The entire seat of government around the capital will become sealed for blocks around and the 1/2 a billion dollars that has been spent making the Capital visitable again will be wasted cash.
Mark these words.
Now, how to profit from a complete loss of value in the dollar...
Patrick
I am increasingly convincing myself our economy (including Europe's but to a lesser extent) is about to hit an unprecedented bout of inflation. My prior comments over the past few years about allowing China to take some of their hundreds of billions of dollars and buy US assets before they end up burning them for heating fuel in the winter is starting to take real shape (like the hedge fund guy Andrew Lahde's comment about the legislation that never passed because industry bought off the government, those industries also bought off the government by convincing them to not allow China to purchase several American companies which is the best thing that could happen to all those dollars they have collected).
This will not be the kind of inflation economist’s talk about, rising asset prices, wages etc. but a simple collapse in the faith of the US currency combined with the government's current bias towards literally flooding the banks and financial markets with "unlimited" dollars to improve liquidity. I am not kidding. We went from 10's of billions in dollars of support to hundreds of billions to now quoted everywhere, "unlimited" of financial support from the fed.
I seriously think China may in fact be using those dollars as fuel this winter, they will become that worthless as the US current reckless attempts to bail out a financial system that is larger then their capacity to deal with it results in a complete loss in confidence in the value of the dollar. I cannot say it will all happen by this winter, in fact it may take closer to 8-10 months to happen but I feel strongly it IS going to happen. It is in my gut for all I know as a measly undergrad economics degree holder.
The question is how to "profit" from this reality. The only asset class traditionally to migrate to is Gold. I hate Gold. I hate the thought that the idiots running our country and economy for the past 8 years or so still think like it is the 19th century, before central banks, when currencies went bust regularly, precious metals where the only stable value and vast amounts of resources were spent scouring the globe for mineral riches. I would much rather invest in the foundation of our technological advances over the past 30 years or so where some of the smartest people spend their lives creating more amazing products and devices that have ways of "improving" human life. Things like semi-conductors, real medical advances, energy saving technologies, better and more efficient products and art. Instead, my option to hedge what I fear is an impending loss of confidence in the dollar is to buy the very thing I despise the most, a damn base metal extracted from the earth.
I am really pissed off. I feel like the French during the French Revolution. I strongly believe our government (an expression that I have had for about 25 years now) had become so impotent and bought that they have put our entire system in jeopardy. It is unfortunate. I can remember back when I was in my early 20's and talked about entering politics sometime after I was 35 saying I felt by the early 21st Century the US would be in such a mess that it would be easy to run for president. I mean, who would want the job? To see what is going on now makes me feel for the next person to enter that house on Pennsylvania Avenue. I am willing to bet that within 2 years the house will become nothing but a ceremonious museum. The citizens of the United States will become so disenfranchised by what has happened to our economy that they will create a situation that causes smart people to conclude there is no way the leader of the US can govern from such an accessible location. It will simply be too dangerous. The entire seat of government around the capital will become sealed for blocks around and the 1/2 a billion dollars that has been spent making the Capital visitable again will be wasted cash.
Mark these words.
Now, how to profit from a complete loss of value in the dollar...
Patrick
Saturday, October 18, 2008
Letters to Tom (3)
-----Original Message-----
From: Thomas
To: Patrick
Sent: Wed, 15 Oct 2008 4:02 pm
Subject: This is the end?
Oh my god, Pat. Are you worth, like, negative money now?
(Sorry. Hope you don't mind the weak attempt at a bad joke.)
Just heard the market is way down again.
How are you doing?
T
Hi Tom,
Let's just say about a year and 1/2 ago I could have bought a decent boat and had another 5 years where I would not have to work. Now, I could buy a dingy and take a few months off. Ha Ha.
http://www.ft.com/cms/s/0/19153990-9615-11dd-9dce-000077b07658.html
This is a great site to review recent financial history offered by the FT.
I have become the dreaded "day trader" that I never really liked. It is difficult for me to see value in a stock and buy it just to unload it when it moved up a dollar (or in the case when I short it buy it back when it falls a dollar) but this is what I am doing. On some days I can make a few grand. On others I lick my wounds. The market swings are heaven for day traders and I am trying to make it work. I actually look forward to 400 point swings and last week was full of them. I mean from Tuesday am open 9800 at to Thursday about 11 am at 8200 the market moved an entire years worth: nearly 20%
So if anyone sold into the early Tuesday rally they could have cashed out by Thursday morning and I can tell you I was one lucky person with one position I took on Monday which when the market was up I had shorted. I thought I would loose my shirt that day but by Thursday AM was making silly money as the market plunged (well on that position anyway). My only mistakes are not seeing how far the market can move. My strategy is move in 250-500 shares at a time then exit 250-500 shares at a time. Unfortunately this drastically lowers profit in really big swings but the key word here is to make a profit even though there are "make a killing" opportunities I give up with this more conservative strategy.
The news is finally starting to speak about hedge funds. There are by some estimates 8000 hedge funds and anywhere from $1.9 to $2.4 trillion they hold. From ALL the government speak and bailout speak and every thing damn else, you would think hedge funds did not exist. You know my take on the bastard industry. Well now they are making their way into the financial news at least and it is only the big names and their losses and redemptions over the last 60 days. Like we are supposed to cry for these pigs. Yea, even some of those assholes did not predict a crash and they did not get to cash early enough. Anyway, I have been predicting some of them will crash and it will be uglier than today. They are unregulated and some of them hold or held as much debt as Lehman. 1998 saw the bail out of LTCM, which was a hedge fund, but NOT with government money. Greenspan brokered a deal for a dozen or so banks to pony up enough cash to keep the fund from collapsing on Monday morning that year but no Fed money went in the pot. To this day, I have been pissed to no end at the Fed's opening up cash to non regulated Wall Street funds with tacit understanding they were going to support the unregulated hedge fund market with their access to cash. Lehman was $400 Billion in leverage (and this was DOWN to 23% or so when they went under). At their peak they had about $600 Billion in debt outstanding, a ration of over $30 invested for each $1 in capital. They were essentially one big hedge fund who operated right on Wall Street and took real money from real people. That is no joke. Well hedge funds run $7-10 for each $1 in capital if they are conservative. Others go $20-30 to $1 and they are out there now.
When we hear of debt markets freezing up, it is like "hello". Any idiot, including me, saw this thing happening years ago. With that many firms leveraged at such ratios it is like going to implode. I am surprised inflation did not really bite, I mean they chased oil and commodities to unheard of prices and somehow real businesses swallowed the costs and kept making money, albeit less.
It is the financial businesses that have imploded. I wondered at amazement for years what in the hell banks like Bank of America who was taking in after tax profit margins of 30% ($3 Billion on profit on $9 Billion in quarterly revenue back in 2006!) and other Wall Street firms where doing with all this money. Also, corporate America, with National Retailers and food producers who had bought up all the competition and commanded 40% of their respective markets, what were they doing with all the profits? Well as the quarterly reports come out and the exposure to Lehman Brothers and other financial firms are reported, it is becoming obvious that Wall Street was not only taking money from dumb suckers. They were taking money from corporate America, pension funds, university endowments, utility companies, all the way down to local governments and community banks.
In the US, unlike the 1980’s S&L scandals with Milkman (I mean Milken who was a genius at milking cash from anyone and everyone to play his buyout game), where junk bonds at the end of the debt boom where being sold to pensioners and old ladies through their local S&L, this current mess was not sold directly to individual private investors (with the exception of the "auction rate bond products" where banks are having to return capital to individual investors who bought these products and were stuck not able to sell them when the auctions "seized up", polite for Wall Street firms did not have any money left to support the artificial and non transparent market they “created” and for any person for 1/2 a brain, this was a canary of things getting worse as this market collapsed early in the crises).
In Hong Kong there have been near riots by individual investors because they were actually sold Lehman structured debt products directly. Can you imagine the hell they are going through? This paper is worthless. I am only glad the impotent and incompetent and largely on the sidelines SEC had rules on the books that unregulated paper could not be sold to Joe the Investor. All this crap created was basically unregulated insurance on debt. Strange stuff. There was a chart in the WSJ of the CDS market that went from an insignificant amount in 2000 to over $60 Trillion of the paper by 2007. The crazy thing is there came a point where debt could not be issued without the blessing of a CDS price (the cost to insure the debt). The ratings agencies still rated the stuff but the sellers of insurance on the debt were really making a killing (obviously or the product would not have grown so fast). Then of course this insurance product became a weapon and indirect way of destroying the ability of a company or municipality to issue debt. The issuers of unregulated insurance products suddenly had the power to decide who would get access to capital. The exceptional thing about this is that 99% of the people selling and writing this stuff (after the mathematicians and lawyers had written the novel long contracts) did not know a damn thing about insurance and had no capital to back losses if the underlying debt their "products" were created for actually went sour.
Along with the creation of this market which shows a curve going straight up from 2000 - 2007 before coming down for the first time in 2008 is the graph showing consumer price inflation doing the exact same thing along with Oil and commodity prices and I have seen graphs showing the private equity buyout craze (which started a bit later, say 2003) which had escalated to a point where a continued growth rate would have had private equity swallowing all of Wall Street.
Actually come to mention it, this week’s buzz about GM buying Chrysler is really a desperate attempt by Cerberus Capital Management and the syndicate of banks who backed this ludicrous buyout to avoid complete collapse when the private Chrysler declares bankruptcy. Yes, they will be bankrupt or bailed out by GM within 10 days of this posting. You know why? The Government bailed out Chrysler the first time but no person, even amongst Paulson’s cronies, has the stomach to bail out Chrysler while they are in the hands of “private equity”. I mean those guys are the cream of pigs. They buy companies with little to no money down, steal all the cash, strip the assets, pay themselves billions, then re-float highly indebted companies back on the street and cash in again. Who wants to lend these guys a hand? At the same time the complete collaps of this important Private Equity firm and or Chrysler will have real repercussions in the US economy. That is my take. Look at their company description:
Anyway, the paper economy of the first decade of 21st Century has collapsed. The problem I see is the Reagan boom was built on debt and ended with the collapse of the savings and loan and real estate markets and nearly took the banks with it, while the Bush II economy was built on debt and has ended with the collapse of the banking industry, investment banking industry, real estate market and is so severe it will cut into the "productive" side of our economy as well potentially destroying what actual productive industries we have left in the US. The Clinton boom also ended with a big bust of the artificial internet bubble economy and to some extent the financial world with the collapse of the tech oriented NASDAQ, but no matter how you slice this boom / bust, technology never accounted for more than 6% of so of the economy so the collapse did not have such a great an overall impact. Industries remained intact, banking remained intact and successful technology companies remained intact.
Anyway, without more on this, things are moving along.
Patrick
From: Thomas
To: Patrick
Sent: Wed, 15 Oct 2008 4:02 pm
Subject: This is the end?
Oh my god, Pat. Are you worth, like, negative money now?
(Sorry. Hope you don't mind the weak attempt at a bad joke.)
Just heard the market is way down again.
How are you doing?
T
Hi Tom,
Let's just say about a year and 1/2 ago I could have bought a decent boat and had another 5 years where I would not have to work. Now, I could buy a dingy and take a few months off. Ha Ha.
http://www.ft.com/cms/s/0/19153990-9615-11dd-9dce-000077b07658.html
This is a great site to review recent financial history offered by the FT.
I have become the dreaded "day trader" that I never really liked. It is difficult for me to see value in a stock and buy it just to unload it when it moved up a dollar (or in the case when I short it buy it back when it falls a dollar) but this is what I am doing. On some days I can make a few grand. On others I lick my wounds. The market swings are heaven for day traders and I am trying to make it work. I actually look forward to 400 point swings and last week was full of them. I mean from Tuesday am open 9800 at to Thursday about 11 am at 8200 the market moved an entire years worth: nearly 20%
So if anyone sold into the early Tuesday rally they could have cashed out by Thursday morning and I can tell you I was one lucky person with one position I took on Monday which when the market was up I had shorted. I thought I would loose my shirt that day but by Thursday AM was making silly money as the market plunged (well on that position anyway). My only mistakes are not seeing how far the market can move. My strategy is move in 250-500 shares at a time then exit 250-500 shares at a time. Unfortunately this drastically lowers profit in really big swings but the key word here is to make a profit even though there are "make a killing" opportunities I give up with this more conservative strategy.
The news is finally starting to speak about hedge funds. There are by some estimates 8000 hedge funds and anywhere from $1.9 to $2.4 trillion they hold. From ALL the government speak and bailout speak and every thing damn else, you would think hedge funds did not exist. You know my take on the bastard industry. Well now they are making their way into the financial news at least and it is only the big names and their losses and redemptions over the last 60 days. Like we are supposed to cry for these pigs. Yea, even some of those assholes did not predict a crash and they did not get to cash early enough. Anyway, I have been predicting some of them will crash and it will be uglier than today. They are unregulated and some of them hold or held as much debt as Lehman. 1998 saw the bail out of LTCM, which was a hedge fund, but NOT with government money. Greenspan brokered a deal for a dozen or so banks to pony up enough cash to keep the fund from collapsing on Monday morning that year but no Fed money went in the pot. To this day, I have been pissed to no end at the Fed's opening up cash to non regulated Wall Street funds with tacit understanding they were going to support the unregulated hedge fund market with their access to cash. Lehman was $400 Billion in leverage (and this was DOWN to 23% or so when they went under). At their peak they had about $600 Billion in debt outstanding, a ration of over $30 invested for each $1 in capital. They were essentially one big hedge fund who operated right on Wall Street and took real money from real people. That is no joke. Well hedge funds run $7-10 for each $1 in capital if they are conservative. Others go $20-30 to $1 and they are out there now.
When we hear of debt markets freezing up, it is like "hello". Any idiot, including me, saw this thing happening years ago. With that many firms leveraged at such ratios it is like going to implode. I am surprised inflation did not really bite, I mean they chased oil and commodities to unheard of prices and somehow real businesses swallowed the costs and kept making money, albeit less.
It is the financial businesses that have imploded. I wondered at amazement for years what in the hell banks like Bank of America who was taking in after tax profit margins of 30% ($3 Billion on profit on $9 Billion in quarterly revenue back in 2006!) and other Wall Street firms where doing with all this money. Also, corporate America, with National Retailers and food producers who had bought up all the competition and commanded 40% of their respective markets, what were they doing with all the profits? Well as the quarterly reports come out and the exposure to Lehman Brothers and other financial firms are reported, it is becoming obvious that Wall Street was not only taking money from dumb suckers. They were taking money from corporate America, pension funds, university endowments, utility companies, all the way down to local governments and community banks.
In the US, unlike the 1980’s S&L scandals with Milkman (I mean Milken who was a genius at milking cash from anyone and everyone to play his buyout game), where junk bonds at the end of the debt boom where being sold to pensioners and old ladies through their local S&L, this current mess was not sold directly to individual private investors (with the exception of the "auction rate bond products" where banks are having to return capital to individual investors who bought these products and were stuck not able to sell them when the auctions "seized up", polite for Wall Street firms did not have any money left to support the artificial and non transparent market they “created” and for any person for 1/2 a brain, this was a canary of things getting worse as this market collapsed early in the crises).
In Hong Kong there have been near riots by individual investors because they were actually sold Lehman structured debt products directly. Can you imagine the hell they are going through? This paper is worthless. I am only glad the impotent and incompetent and largely on the sidelines SEC had rules on the books that unregulated paper could not be sold to Joe the Investor. All this crap created was basically unregulated insurance on debt. Strange stuff. There was a chart in the WSJ of the CDS market that went from an insignificant amount in 2000 to over $60 Trillion of the paper by 2007. The crazy thing is there came a point where debt could not be issued without the blessing of a CDS price (the cost to insure the debt). The ratings agencies still rated the stuff but the sellers of insurance on the debt were really making a killing (obviously or the product would not have grown so fast). Then of course this insurance product became a weapon and indirect way of destroying the ability of a company or municipality to issue debt. The issuers of unregulated insurance products suddenly had the power to decide who would get access to capital. The exceptional thing about this is that 99% of the people selling and writing this stuff (after the mathematicians and lawyers had written the novel long contracts) did not know a damn thing about insurance and had no capital to back losses if the underlying debt their "products" were created for actually went sour.
Along with the creation of this market which shows a curve going straight up from 2000 - 2007 before coming down for the first time in 2008 is the graph showing consumer price inflation doing the exact same thing along with Oil and commodity prices and I have seen graphs showing the private equity buyout craze (which started a bit later, say 2003) which had escalated to a point where a continued growth rate would have had private equity swallowing all of Wall Street.
Actually come to mention it, this week’s buzz about GM buying Chrysler is really a desperate attempt by Cerberus Capital Management and the syndicate of banks who backed this ludicrous buyout to avoid complete collapse when the private Chrysler declares bankruptcy. Yes, they will be bankrupt or bailed out by GM within 10 days of this posting. You know why? The Government bailed out Chrysler the first time but no person, even amongst Paulson’s cronies, has the stomach to bail out Chrysler while they are in the hands of “private equity”. I mean those guys are the cream of pigs. They buy companies with little to no money down, steal all the cash, strip the assets, pay themselves billions, then re-float highly indebted companies back on the street and cash in again. Who wants to lend these guys a hand? At the same time the complete collaps of this important Private Equity firm and or Chrysler will have real repercussions in the US economy. That is my take. Look at their company description:
Company Overview
Cerberus Capital Management, L.P. is a principal investment firm specializing in investments in undervalued companies. The firm seeks to invest in aerospace and defense, apparel, automotive and industrial, building products, commercial services, consumer and retail, financial services, healthcare, manufacturing and distribution, paper, packaging, and printing, real estate, food service, logistics, media, hospitality, technology and telecommunications, transportation, and travel and leisure sectors. It holds controlling or significant minority interests in its investee companies. Cerberus Capital Management, L.P. is headquartered in New York, New York…
Anyway, the paper economy of the first decade of 21st Century has collapsed. The problem I see is the Reagan boom was built on debt and ended with the collapse of the savings and loan and real estate markets and nearly took the banks with it, while the Bush II economy was built on debt and has ended with the collapse of the banking industry, investment banking industry, real estate market and is so severe it will cut into the "productive" side of our economy as well potentially destroying what actual productive industries we have left in the US. The Clinton boom also ended with a big bust of the artificial internet bubble economy and to some extent the financial world with the collapse of the tech oriented NASDAQ, but no matter how you slice this boom / bust, technology never accounted for more than 6% of so of the economy so the collapse did not have such a great an overall impact. Industries remained intact, banking remained intact and successful technology companies remained intact.
Anyway, without more on this, things are moving along.
Patrick
Friday, October 10, 2008
Letters to Tom (2)
Today another reply to in inquiry from Tom about hedge funds I thought worth posting...
Tom,
Hedge funds traditionally got cash from wealthy individuals and institutions (corporations and the like). The basic rules were something like one had to have a net cash worth of about $1.5 million or total assets of like $5 million or some other arbitrary number. In addition, since they are unregulated, brokerages could not sell or recommend directly to their clients so they would have to arrange social events or other such things to introduce their hedge fund friends to wealthy clients.
In the past few years, some hedge funds tried to become more transparent by listing on stock exchanges. Fortune Group in the US along with Blackstone and Man Group in the UK were the first. This has stopped.
The SEC put out a report about 2002 or so suggesting they tighten rules and researched whether it would be wise to regulate them. They did require "registration" of hedge funds with a certain size and some other criteria around 2004 but the hedge funds sued the SEC and won so all that got turned back. (my dates are from memory here as are the stats but the info is correct)
They have plenty of cash, there are hundreds of hedge funds, they hold over $2 trillion and leverage themselves anywhere from 7 to 20 to one. They engage in every scheme imaginable to make money and were involved in much of the success of esoteric products based on debt. I suspect they are responsible for the margin calls against brokerages, insurance companies and the like who sold the CDS insurance products without enough cash to back losses when things turned sour. Thus they have enough knowledge of the extent of the crises to know the sellers would not be able to cover their obligations and went heavy into shorting their stock, putting them out of business while making money on the fall. They got their cash anyway I guess one could suspect.
Wall Street has not changed.
I suggested a couple years ago that Wall Street had become dwarfed by the pools of money outside of the regulated system. I was right. The regulated system is for suckers and the Government will not win against the unregulated pools of money. They cannot print enough to keep up. Secondly, the money they are printing to cover the insurance calls against companies like AIG is going directly into the pockets of those who bought the unregulated insurance products and are now being paid big time cash to keep the hedge funds from bringing more companies to their knees.
So, the unregulated money industry, with hedge funds in the center along with private equity, and the esoteric products created and sold which were also unregulated insurance products, are bringing down the regulated markets.
No one in Washington will say this and I just don't get it. However as I said, this is the biggest wholesale transfer of wealth the history of capitalism has ever seen.
Said.
Patrick
Tom,
Hedge funds traditionally got cash from wealthy individuals and institutions (corporations and the like). The basic rules were something like one had to have a net cash worth of about $1.5 million or total assets of like $5 million or some other arbitrary number. In addition, since they are unregulated, brokerages could not sell or recommend directly to their clients so they would have to arrange social events or other such things to introduce their hedge fund friends to wealthy clients.
In the past few years, some hedge funds tried to become more transparent by listing on stock exchanges. Fortune Group in the US along with Blackstone and Man Group in the UK were the first. This has stopped.
The SEC put out a report about 2002 or so suggesting they tighten rules and researched whether it would be wise to regulate them. They did require "registration" of hedge funds with a certain size and some other criteria around 2004 but the hedge funds sued the SEC and won so all that got turned back. (my dates are from memory here as are the stats but the info is correct)
They have plenty of cash, there are hundreds of hedge funds, they hold over $2 trillion and leverage themselves anywhere from 7 to 20 to one. They engage in every scheme imaginable to make money and were involved in much of the success of esoteric products based on debt. I suspect they are responsible for the margin calls against brokerages, insurance companies and the like who sold the CDS insurance products without enough cash to back losses when things turned sour. Thus they have enough knowledge of the extent of the crises to know the sellers would not be able to cover their obligations and went heavy into shorting their stock, putting them out of business while making money on the fall. They got their cash anyway I guess one could suspect.
Wall Street has not changed.
I suggested a couple years ago that Wall Street had become dwarfed by the pools of money outside of the regulated system. I was right. The regulated system is for suckers and the Government will not win against the unregulated pools of money. They cannot print enough to keep up. Secondly, the money they are printing to cover the insurance calls against companies like AIG is going directly into the pockets of those who bought the unregulated insurance products and are now being paid big time cash to keep the hedge funds from bringing more companies to their knees.
So, the unregulated money industry, with hedge funds in the center along with private equity, and the esoteric products created and sold which were also unregulated insurance products, are bringing down the regulated markets.
No one in Washington will say this and I just don't get it. However as I said, this is the biggest wholesale transfer of wealth the history of capitalism has ever seen.
Said.
Patrick
Letters to Tom (1)
This letter originally sent to Tom was also sent to Danny Roman in response to a very insensitive email from him through the economic forum on Barack Obama's web site although I do not think he has any official role there.
His email was sent as follows:
My reply was a reprint of a just sent email to my friend Tom, creator of worstwriter.wordpress.com with a bit of language editing.
His email was sent as follows:
It0s Not That Bad
Lately, over 300 emails hit my Inbox daily and a disproportionate amount are from citizens afraid and apprehensive over what is happening to the American financial services industry. So many, who ordinarily would bend over backwards to preserve civility and respect toward other views and opinions, are now bucketing out rancor, condescension and insolence; contemptuously voicing inflammatory speech that frankly…should not be verbalized or heard.
Yesterday, the Dow had its biggest loss in history, and today it rebounded by almost 500 points; proof positive that the American economic engine is unmatched in the world.
So, everybody…take a deep lungful of air…slowly exhale…again…one more time…smile…okay, now isn’t that much better?
=0 A
My reply was a reprint of a just sent email to my friend Tom, creator of worstwriter.wordpress.com with a bit of language editing.
Well Danny,
This was one of the worst and most insensitive comments I have seen from anyone in a long time. Below is a reply to an email from a very long time and good friend of mine that starts off commenting about his blog post and follows with some take on the current state of affairs in America. Perhaps a short read would be in order. You can start with the blog post here:
http://www.peter-hacks.de/phpBB2/viewtopic.php?t=1265&sid=fd00180b815ccc6e4ce6544bea169727
and follow up with my letter back...
Hi Tom,
I got around to reading this. Did your publisher really give up on the site? Were you a last ditch effort to save it or something?
Anyway, fun reading. I don't completely get the chip on your shoulder analogy but liked reading the history of the idea anyway. I think applying that idea to the suckers who sit on their asses and watch TV until the world collapses around them and they sort of wake up and try to find someone to blame, now that is a person / people with a chip on their shoulder. Only they need to look in the mirror to find out why they have such an attitude / chip on their shoulder.
On to better things. Well Tom, we are living the evolution of a depression begun by the promulgation of over $60 trillion in worthless unregulated paper traded in regulated and unregulated markets in a completely un transparent way and proved successful by 1) greed and the realization that since there is / was no transparency (you notice in all the shit the government is doing no body has proposed that these "instruments" be quoted in a public way) you could quote whatever you wanted for the paper, based on mathematical formulas only a bunch of Chinese mathematicians could figure out, and sell it at a profit if you could match it with another piece of worthless paper which guaranteed the first piece of worthless paper in case of default and 2) these were unregulated insurance products sold under the name of something else which allowed money to flow like water because anyone who issued or bought debt could also buy insurance that the debt would not default.
Now I saw this for what it was a long time ago, a house of cards that when it collapsed, there was no institution in the world who could ultimately pay the insurance claims. But that is me. See my rants at http://econ4beginners.blogspot.com/ for those of you who are not familiar with my BS.
So what do suckers like me and you do when there is, to this day, no person in Washington willing to say the words "hedge funds"? What the hell? It is hedge funds that account for 40% + of the daily volume of the NYSE. It is Hedge funds that are making a killing shorting the market and playing any other games that will make them a profit on their unregulated capital. It is hedge funds that have over $2.5 trillion dollars in cash they can bet against or for or sideways or whatever they want to do with the market and have no government or regulator or person or nation or group of people or international institution or anyone else to answer to. You mention conspiracies, do you think there are Russian "hedge funds" fighting US "hedge funds" in the race to crash each other's stock markets? I don't know, but with no one in Washington willing or capable of even mentioning the words "hedge funds" when they are the golden cow in the room, what in the hell is anyone to do? If you have enough money to be invested in hedge funds you will understand they are the avenue for the largest theft and movement of wealth into the hands of a very few people that the history of capitalism has ever seen.
You will also begin to understand why about 2 years ago I started asking people if there should not be a way to "identify" the elite rich in the world. I complained that unlike a couple centuries ago, where the average man owned one or two sets of clothing and a few basic physical artifacts verses the nobles etc who traveled with several people and material possessions and displayed immediately an obvious outward show of wealth, why we have / had not established a comparable way to identify the "nobles" amongst us so we could all bow down and pay homage when the moved down the street and thus understand our proper place in the world we were taught somehow sees us as "equal". Perhaps there are some people who heard my rant who understand now what I was talking about. Soon, the average man, who throughout the process of going from industrial to information to post information ages and is left barely able to tie his shoes as a product of the "paper economy" will begin to see not only has he nothing to offer a collapsed post information age economy where nothing physical is produced any longer, but there is no longer any basis for his known world of economy at all.
Where does this take us? Big Brother it seems. Government takeovers of the entire market. I guess it is time for an Orsen Wells for the 21st century to translate what we are experiencing to where we are going...
Cheers,
Patrick
Thursday, October 02, 2008
Real Demand vs Hedge Fund Demand
I have had it with the constant jabbering that commodities prices were / are / have been determined by "real demand" by emerging economies etc. It is and has been clear that the bubble in commodities prices was created by artificial demand by hedge fund buying and indirectly by the suckers managing pension funds who were pulled into investing in hedge funds and commodity funds as an "asset class" creating additional "investor" demand for various commodities.
It is finally becoming clear to those who were propagating the idea there was "real demand" in the sector that they were wrong. The demand was artificial and this artificial demand inflated the sector and is now rapidly unraveling. This quote from a Dow Jones News Wire report today highlights this reality.
This statement solidifies the reality that demand for commodities was artificial, driven by hedge fund buying and is now imploding.
Sorry for the farmers who stockpiled grains anticipating further gains as they have watched the value of their stocks decline by 50% in recent months.
Perhaps some of this is coming to light with this part of the report exposing the suspicions of some in government all along that prices were being manipulated:
Need I say more?
It is finally becoming clear to those who were propagating the idea there was "real demand" in the sector that they were wrong. The demand was artificial and this artificial demand inflated the sector and is now rapidly unraveling. This quote from a Dow Jones News Wire report today highlights this reality.
The economic slowdown is far from the only worry for agriculture stocks: hedge funds are facing requests from clients for redemptions and are forced to sell their holdings. That's affecting commodity prices and the prices of commodity stocks that hedge funds rode up to their peaks in the summer.
This statement solidifies the reality that demand for commodities was artificial, driven by hedge fund buying and is now imploding.
Sorry for the farmers who stockpiled grains anticipating further gains as they have watched the value of their stocks decline by 50% in recent months.
Perhaps some of this is coming to light with this part of the report exposing the suspicions of some in government all along that prices were being manipulated:
The run-up in fertilizer prices earlier this year also drew scrutiny on Capitol Hill. Sen. Byron Dorgan, a Democrat from North Dakota, asked the Federal Trade Commission to investigate pricing practices in the industry. Dorgan had met with farmers in his state concerned about the increases.
Need I say more?
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