Jun

25

Market rife with complacency, deceit

Filed Under Economics | 1 Comment

The market rallied in the face of some awful news today and my level of discomfort has never been higher.

A plethora of disturbing news:

In a nauseating display of government worship and corporate welfare, CNBC anchors act positively indignant that Bernanke could be fired over his handling of the Merrill Lynch/Bank of America (cough) merger.  Fast forward to 3:20 to hear the insanity.  Have they forgotten Bernanke’s record?

More auto fallout – Lear will soon file for bankruptcy protection.

California, eigth largest economy in the world, days away from bankruptcy is downgraded by Fitch, I have CNBC on all day at work and this was not mentioned even once.  I guess we are supposed to believe it wasn’t as important as the manipulated 7-year note auction (see below).

From Karl Denninger:  (paraphrased)  The sudden increase in demand by foreign buyers for Treasurys, hailed as proof that the world’s central banks are still willing to help absorb the avalanche of supply, mightn’t be all that it seems.  Iin a little-noticed switch on June 1, the Treasury changed the way it accounts for indirect bids, putting more buyers under that umbrella and boosting the portion of recent Treasury sales that the market perceived were being bought by foreigners…..  The change involves buyers who place orders through primary dealers. Those had been counted as direct buyers, but as of June 1 they were classified as indirect buyers, making that group larger than before.  Because investors view that group as being dominated by foreign buyers, they assumed foreign demand was higher.

My eyes and ears – The amount of people reliant on government aid is staggering.  I am all for helping the poor and underprivileged, but is free breakfast and lunch year round (courtesy of the Federal Gov’t, last paragraph) lifting people out of poverty or creating a serious dependency?

Valuations are through the roof with a puffy P/E ratio of 60, yet no one seems to care.

This sense of complacency, level of deceit and crumbling fundamentals are setting the stage for another crash.  I hope and pray that this dislocation in the market unwinds in an orderly fashion, rather than a painful drop which would lead to mass irrationality.

The only reason I am hopeful that Barack Obama is President is because he seems to be the only human on Earth eloquent enough and seemingly genuine enough to talk people through a crisis and deliver the truth to people, even if they don’t want to hear it.

So far, he’s shown no interest in changing things up from Bush, but maybe a crash will force his hand in the right direction.

May

13

Mark to Market Your Own Life

Filed Under Economics | 1 Comment

Marking to market involves assigning an accurate, reliable value to a certain security on a daily basis.  As evidenced below, this is being avoided at all costs by our leaders.

It is disconcerting that this incredibly important and relevant information is disseminated from a blogger, rather than a major “news” outlet, or even a financial news outlet.

Tragic.  There are no free lunches and accounting tricks cannot fix a country that is reliant on cheap energy, endless credit, deficit spending and perpetually rising asset prices.

Takeaway:  Mark to market your own life and confront your weaknesses head-on.  This introspection can yield insights on behavioral changes you need to make to avoid a painful crash.

Hat Tip:  Karl Denninger has done an outstanding job diligently reporting on the financial markets and sharing his knowledge on his blog.  If you want honest reporting, please check out his site.

May

10

Lessons to be learned from the Stress Test

Filed Under Economics | Leave a Comment

The Stress Test results were revealed last Friday after much anticipation.  The test and broadcast of the results were quite telling and there are several things we can learn from this.

My initial reaction of skepticism was confirmed when many reputable bloggers (with their own capital on the line) expressed similar qualms over the weakness of government’s test.  The two short articles I have quoted are well worth the read.

A former FX trader, “Dude”, suggests that the test is direly lacking real-world stress. He cites much more dire scenarios, which the government has not tested:

1) China didn’t show up at a Treasury Auction and bond rates jumped 3-5%
2) China started dumping US$s on the open market and our exchange rate dropped 10%
3) The Fed, under such conditions, had to raise the Fed Funds rate by 5% quickly
4) An act of war or natural disaster struck one of the big coastal cities, putting it entirely out of commission thus pushing GDP down 6-10% quickly

Admittedly, the Treasury is more interested in a longer view than I was, although given the highly leveraged derivatives positions, they might be well served to also inquire about substantial, discontinuous price changes.

I’m troubled that they don’t test for what the past suggests is possible.

What if Unemployment goes to 30% as it did in the 30s?

What if Inflation falls to -5% or rises to 12%?

What if Fed Funds goes to 17% as it did in the early 80s?

What if we can’t roll-over our foreign held debt, as has happened to most nations which have run up as large an external debt position as ours?

Karl Denninger at Market Ticker mentions:

According to The Fed’s “More Adverse” scenario prime delinquencies will reach 3-4%. Note that the PRESENT serious delinquency rate on Fannie’s credit book for single family homes is at 3.15%.  Nowhere in the “mainstream media” (e.g. CNBC, etc) has this been mentioned but it is literally right in your face while reading the Fannie quarterly report.

If we accept the above as true, we must logically draw one of two conclusions.

  1. The government knows that the stress the system could endure could be much worse.  They have decided to deliberately ignore or discount this data to assuage our fears and not report the full truth to us.  In other words, they are knowingly lying to us.  If this is in fact the case and if the government is trying to deceive us, Geithner, Bernanke and Obama should be held responsible for the misdeeds, regardless of political party.
  2. The government is ignorant of these facts that other individuals have adroitly discovered.  This would mean they are not the most intelligent or conscientious leaders to be running our financial system.  They are not fit to be in charge and should be removed as soon as possible, regardless of political party.

Takeaway:  There is a simple theme we can learn from the stress test and it comes from Buddha.  He says:

“Believe nothing, no matter where you read it or who has said it, not even if I have said it, unless it agrees with your own reason and your own common sense.”

Ben Bernanke has made statements such as:

“It is not the responsibility of the Federal Reserve – nor would it be appropriate – to protect lenders and investors from the consequences of their financial decisions.”

(Freddie and Fannie) “…will make it through the storm”, “… in no danger of failing.”,”…adequately capitalized”

We’ve had a $700 billion bailout and numerous corporate-welfare financial programs (CPFF, TLGP, PPIP, CPFF, TARP, etc.).  Fannie and Freddie have been nationalized.

Karl Denninger has published his remarkably accurate predictions publicly (2008, 2009) and stood by them.  People might think you’re a fool for believing a blogger, rather than an MIT-educated expert.  Look at the evidence and track-record and decide for yourself. Just because someone is a popular leader (religious, business, political) or has a popular title doesn’t mean they are any more thoughtful, intelligent or honest than someone without popularity.

For more on the crisis, read here.

Apr

15

Cramer declares Depression over

Filed Under Economics | Leave a Comment

You would think after getting humbled by Jon Stewart on the Daily Show, Cramer would scale back predictions and prognostications…

Cramer has declared that The Depression Is Over.  While I admire his optimism, I find many important questions unanswered:

  • Is an inevitable bankruptcy of GM, Ford or Chrysler fixed?
  • Has the US stopped throwing money at wars?
  • Have Social Security, Medicare, Medicaid and municipal pension plans all been adequately funded?
  • Do you think any of these issues will slap consumer spending in the face?
  • Isn’t there a chance that people will liquidate their portfolios as savings draw down?
  • Isn’t it very possible things will get worse if our expectations about perpetually rising asset values are erroneous?

Tocqueville Asset Management did a great piece on this a while back.  Head fakes of 45, 54, and 67 percent happened in Japan, and they could likely happen here.  Likewise, we could have three bear market rallies and still end up lower 10 years from now.

The stock market is not the economy and the economy is not the stock market.  A stock market rally does not portend an improvement in the economy if the underlying fundamentals (entitlements, unfavorable business climate, corporate welfare, all-time low interest rates, proliferation of the FIRE economy) are not solved.

Takeaway:  It is important to have the most accurate model of reality as possible.  No matter which way the stock market goes, if the fundamentals haven’t changed, our economic behaviors (saving habits, spending habits) should not change either.

For my take on Cramer’s Daily Show appearance, click here.

Mar

18

CNBC and Intellectual Honesty

Filed Under Intellectual Honesty | Leave a Comment

Before the confrontation gets swept down the memory hole, I have a few comments on the Jon Stewart/Jim Cramer dustup.

For those that witnessed the confrontation between Jon Stewart and Jim Cramer, it was obvious who emerged victorious:  Jon Stewart.

While Stewart did not champion a cause or idea and could not clearly articulate why things are going haywire, he was definitely conscious enough to recognize that someone like Jim Cramer is a complete moron who doesn’t know what he’s talking about: specifically, his claim of “liking” Bear Stearns when it was trading the $60′s.  Stewart was smart enough to have hard video evidence proving this, which won him credibility early in the interview.

The video evidence was devastating.  In it, Cramer talked about ways to engage in market manipulation and ways to deceive regulators.  His attempts to be “part of the solution” seemed laughable and so completely fabricated that it’s amazing he stuck with that line until the end.


The Daily Show With Jon StewartM – Th 11p / 10c
Jim Cramer Unedited Interview Pt. 1

The most important point about the interview was the underlying message that it carried.  The message is:  Don’t rely on others to tell you what is important.

Another way of saying that is:  Don’t rely on the “experts” to tell you what is important.  Have the courage to acknowledge your own ignorance, form your own opinions and cultivate your own mindset.  If the people that were watching Cramer spent equal time reading Mish or Charles Hugh Smith, they would likely have a different set of beliefs than those of the talking heads at CNBC.

As the interview progressed, Stewart seemed agitated that CNBC is “trusted” to provide people with news and it let the common man down.  He seemed upset that the anchors on CNBC didn’t do their job to shed light on ongoing scams and problems like excessive leverage, excessive compensation and enormous conflicts of interest.

While I agree that is disappointing, is that really a surprise to anyone?  Are there really people who rely on TV personalities to make important decisions for them?  He who pays the piper calls the tune.  CNBC’s advertisers are the ones that ultimately control what programming gets aired and what types of shows are the most profitable.

If you follow the money, it’s easy to see that the audience needs to be entertained, have their worldviews validated and brought back for more.  Bogging viewers down with “complicated” or negative pieces about an eventual meltdown would turn viewers off, or worse, force them to consult other sources of information to generate a more accurate model of reality.  This would be terrible for ratings and advertising.  CNBC wants to be the one-stop shop for financial news.

Fluff reporting and bogus “journalism” aren’t limited to CNBC.  CNN, MSNBC, ABC, NBC, CBS, FoxNews and others all follow suit.  It’s simply the business model.  The truth is rarely scooped in a 22 minute show + commercials.  The truth can be ascertained by reading the best arguments from both sides of the equation.  This involves reading what you disagree with and then thinking about it.  That process is definitely not “made for tv” material.

The Daily Show with Jon Stewart does a great job of pointing out glaring hypocrisies and using the magic of the web and internet to generate classic “gotcha” moments.  The show is truly close to my heart.  Watching it lets me know there are other people out there who don’t take politicians or experts too seriously.

Takeaway:  The world is filled with salesman and opacity.  This is unavoidable.  Getting blindsided by reality isn’t.  Expose yourself to the most articulate and thoughtful people you can find on both sides of an argument and you can gain a better understanding of the truth.

Boo-yah!

For more on financial chicanery, read here

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