Sep

29

Observations and Market Sentiment

Teresa Lo @ 4:15 PM | | 10 Comments 

Oh boy, the 10 o’clock news will be something tonight!

The populace got what it wanted today: no “Wall Street bailout”, TARPedoing $1.4 trillion of market cap in the process.

Ron Paul got what he really wanted today too: a shot at Maverick Economics (scroll down to read text). Check out the video of Rep. John Culberson discussing the “free market alternative.”

During the vote, CNBC interviewed someone on the floor named Steve, who said, “Perception is reality. . . Wall street is Main street.” But apparently, Main Street does not believe it…yet.

That’s exactly why I wrote to our members last Wednesday night and provided each one with my analysis along with a plan to protect the hard-earned money in their portfolios. I told every single member that there was a real possibility the proposal would not pass and the market would likely go nuclear subsequent to defeat.

Meeting Financial Armageddon Head On

Every single member was ready. They had time to think, reflect and prepare. There was not even one panic email in my inbox today.

Everyone is in good shape: members that went to cash are fine while others are enjoying diversification at its finest. And after working something like 15 days in a row (yes, two entire weekends non-stop) I will leave the office ASAP after the close today. I should check in on the kids. ;-)

Armageddon is here. The financial world as we know it will never be the same. What do we know right now? We know:

  • U.S. cash is still good. Treasury Bonds are way up. That is probably a sign that the credit of the U.S. remains intact (for the moment).
  • Central banks around the world are working overtime, even in Russia, Canada, and Australia.
  • Short sellers are not the problem. The companies that levered themselves up 900:1 deserved to go out of business. And they are gone, at least from Wall Street. The dominoes are falling in Europe at the moment, in case you didn’t notice.
  • The proposal would have been a voluntary program that would have taken weeks or months to roll out. Even if the bill had been passed, it would have done little to unfreeze the credit markets. Wall Street firms that were once considered “too big to fail” are no longer in existence. Superbanks have emerged, and the world will go on.
  • The market is still open. This is not Pakistan. This is not Russia. This is pure panic. When Betty Ford told the world about her alcoholism, there was shock. A few decades on, rehab is viewed as a two-week holiday for movie stars. Do not confuse financial services with the auto industry.
  • $700 billion is just a number. The mortgage market is $14 trillion. 5% of mortgages are bad. It’s not the bad loans: leverage killed Wall Street.
  • People are moving money from banks into matresses like there is no tomorrow. Hey, at least we know plenty of people still have money!
  • Credit markets are frozen, but Walmart, McDonalds and Costco will have access to working capital. It’s the small town general store or small business that is in trouble, and perhaps that is what it takes for Main Street to grasp the magnitude of the problem. Or maybe retail spending goes off the cliff and reduces demand for credit anyway.

Still, this whole thing is going down like an episode of The X-Files. Substitute FEMA with Federal Reserve and virus with the housing crisis, subprime, Wall Street or what have you:

Mulder appears at the end of the narrow walkway, finding Kurtzweil tucked a few yards in.

KURTZWEIL
See this bullshit…? Somebody knows I’m talking to you.

MULDER
Not according to the men in blue.

KURTZWEIL
What is it? Kiddie porn again? Sexual battery of a patient? I’ve had my license taken away in three states.

MULDER
They want to discredit you — for what?

KURTZWEIL
For what? Because I’m a dangerous man. Because I know too much about the truth.

MULDER
You mean that apocalyptic trash you write? I knew your name was familiar. I just didn’t know why.

KURTZWEIL
You know my work?

MULDER
(pointedly)
Dr. Kurtzweil, I’m not interested in bigoted ideas about race or genocide. I don’t believe in the Elders of Zion, the Knights Templar, the Bilderburg Group or in a oneworld Jew run government –

KURTZWEIL
I don’t either, but it sure sells books.

He says it with an ironic smile. Causing Mulder to turn and start off. But Kurtzweil hurries to grab him, to prevent this.

KURTZWEIL
I was right about Dallas. Wasn’t I, Agent Mulder?

MULDER
How?

KURTZWEIL
I picked up the historical document of the venality and hypocrisy of the American government. The daily newspaper.

MULDER
You said the firemen and the boy were found in the temporary offices of the Federal Emergency Management Agency. Why?

KURTZWEIL
According to the newspaper, FEMA had been called out to manage an outbreak of the Hanta virus. Are you familiar with the Hanta virus, Agent Mulder?

MULDER
It was a deadly virus spread by field mice in the Southwest U.S. several years ago.

KURTZWEIL
And are you familiar with FEMA? What the Federal Emergency Management Agency’s real power is? FEMA allows the White House to suspend constitutional government upon declaration of a national emergency. To create a non-elected government. Think about that.
(beat)
What is an agency with such broad sweeping power doing managing a small viral outbreak in suburban Texas?

MULDER
Are you saying it wasn’t such a small outbreak?

Kurtzweil is getting intense now.

KURTZWEIL
I’m saying it wasn’t the Hanta virus.

They are both given a start when a POLICE CRUISER rolls by on the street, giving a burp of its siren. It rolls past as the two men tuck in tighter.

MULDER
What was it?

KURTZWEIL
When we were young men in the military, your father and I were recruited for a project. They told us it was biological warfare. A virus. There were rumors about its origins.

MULDER
What killed those men?

KURTZWEIL
What killed them I won’t even write about. I tell you, they’d do more than just harass me. They have the future to protect.

MULDER
I’ll know soon enough.

KURTZWEIL
(worked up)
What killed those men can’t be identified in simple medical terms. My god, we can’t even wrap our minds around something as obvious as HIV. We have no context for what killed those men, or any appreciation of the scale in which it will be unleashed in the future. Of how it will be transmitted; of the environmental factors involved.

MULDER
A plague?

KURTZWEIL
The plague to end all plagues, Agent Mulder. A silent weapon for a quiet war. The systematic release of an indiscriminate organism for which the men who will bring it on still have no cure. They’ve been working on this for fifty years. While the rest of the world was fighting gooks and commies these men have been secretly negotiating a planned Armageddon.

MULDER
Negotiating with whom?

KURTZWEIL
I think you know. The timetable has been set. It will happen on a holiday, when people are away from their homes. When our elected officials are at their resorts or out of the country. The President will declare a state of emergency, at which time all federal agencies, all government will come under the power of the Federal Emergency Management Agency. FEMA, Agent Mulder. The secret government.

MULDER
And they tell me I’m paranoid.

KURTZWEIL
Something’s gone wrong — something unanticipated. Go back to Dallas and dig. Or you’re only going to find out like the rest of the country, Agent Mulder. When it’s too late.

Kurtzweil turns, starts off. Mulder stares after him.

From The Desk of Ron Paul

The house.gov website is jammed, so I am taking the liberty of reprinting Ron Paul’s weekly column, posted this morning prior to the vote:

Lipstick on a Bailout
This time last week, the biggest bailout in the history of the world seemed to be a fait accompli. Last weekend, the Fed Chairman and the Secretary of the Treasury had harsh words of doom and gloom for Congressional leaders, with the rest of the administration parroting along, and by last Monday it seemed both parties were about to fall in line and vote our Republic away by socializing the banking industry through this bailout.

Foolish business behavior was about to be rewarded, and propped up a little longer, the bubble blown a little bigger, and our coming Depression made that much greater, but then something happened on the way to the House floor.

Citizens made their voices heard.

The real story behind the story in Congress this week was the thousands of calls and emails sent to Representatives, clogging up inboxes and even slowing down the House internet system. Slowly, like the Titanic turning around, sentiments on the Hill shifted, and we heard Congressmen capitulating and changing their tune a little, desperately trying to find ways to salvage the bailout without completely enraging their constituencies.

Now we hear about taxpayer protections, about golden parachutes, and about other nuances that hardly cover up the fact that we would be creating more money out of thin air and further devaluing the dollar! The problem is not HOW the government is spending this money; it’s the fact that the government is spending this money. We don’t have it. We are already nearly $10 trillion in debt, not including unfunded liabilities. We already spend about $1 trillion a year we don’t have on our overseas empire. Now nearly $1 trillion more is somehow supposed to magically appear and solve all our problems! No – creating more money might delay the inevitable for some well-connected banks on Wall Street, but in a few weeks we will find ourselves right back in this same position, but much poorer.

The unfortunate thing is that we’ve already spent at least $700 billion on other bailouts that did not solve the problem. And while all this negotiation was taking place, the auto industry was quietly bailed out, with no controversy, no discussion, to the tune of $25 billion.

Inevitably, it appears Congress will call their constituents’ bluff and the bailout will pass, because that is the habit Wall Street and Washington have fallen into. People are right to be concerned about our financial future. I’ve been talking for 30 some years about reasons we need to be concerned and change our ways. We find ourselves now in a position of no good options, and no silver bullets. But the worst thing we can do is to compound our problems by intensifying the mistakes of the past. We do have tough economic times ahead, no doubt, no matter what we do, even if we do nothing. The question, is will we have the courage to take our medicine now and get it over with, or will we prolong the misery for many years to come? I’m less and less optimistic about the answer to that question.

Posted by Ron Paul (09-29-2008, 11:38 AM) filed under Monetary Policy

Blah, blah, blah. The sun will rise tomorrow, I’m sure. The freak show must go on.

Questions and Comments

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  1. Daniel on September 29th, 2008 5:29 PM

    You were sooo right!

    I am glad I did listen to you, but I am also glad that I made a conscious decision.

    Being not so young (as opposed to being old), and having seen politicians, I am glad they did put an end to the barrel and stopped printing money, so therefore they will be able to start cleaning the house.

    It will come with suffering, but usually things like this are.

    Unfortunately they did not do the cleaning, long time ago, and they knew!

    But getting to our metier, the risk was too high, for so little probably (of the same) so the decition seemed (to me) pretty easy.

    In my country, we have been through similar times, and that helps understand.

    Hope the best to everyone, specially to all the people that got caught in. Who pays (sooner or latter) is the people, not the bankers!

    Daniel

  2. Teresa on September 29th, 2008 7:00 PM

    I know I shouldn’t bring this up, but let’s face it: anyone who leased a car, refinanced their house, got a student loan — ANYONE who used credit during the past 15 years — was a beneficiary from the insane lowering of risk premia during the great “race to the bottom” of interest rates.

    But no politician will speak of it because they remember voters showing Jimmy Carter the door for pointing that out. ;-)

  3. Robert on September 29th, 2008 8:31 PM

    I am really enjoying seeing all the class warfare rhetoric come back to kill the Democrats. Too bad some Republicans are joining in. There is a golden opportunity for them to blame this on government engineering…..distorting decisions….leading to bad decisions, including insane leverage. Main street sees the DJIA…not the credit markets. Therefore they think this is for equity holders etc. I think something has to be done to ease the credit issue, but does it make sense for the treasury to buy up assets from banks BEFORE they are bankrupt? The legitimate role of the Fed is to be the lender of last resort. Congress should authorize loans, not buyouts. They should tie any loans to these institutions with a requirement to make all these bad assets known and listed on an exchange like the CME.

  4. Teresa on September 29th, 2008 8:56 PM

    Robert: IMHO, the big hurdle is the actual assets themselves. I don’t think my quant friend will mind if give you a snippet of his thoughts on valuation: “Most of the securities we’re talking about are both complex and, even at the best of times, pretty illiquid (right now they’re a lot worse than that!). So you mark them relative to observable market prices. But what you have to keep in mind is that these instruments are anything but homogeneous - there can be huge differences in the underlying collateral, credit enhancement levels, how the cashflows waterfall, triggers, etc. - so just because a particular product trades at thirty five cents to the buck, doesn’t mean that it’s correct for another shop to mark a similar asset relative to that specific product.”

    So if anything, they will have to be dumped into one gigantic pool and be traded as some sort of “mystery meat” debt instrument. LOL. In the end, it might be easier (not to mention cheaper) to restore the “value” of the toxic assets by having the government pay off mortgages under $XXX and collect rent from homeowners that get bailed out.

  5. Ben on September 29th, 2008 10:53 PM

    T, you are so prescient that it is frightening.

  6. Teresa on September 29th, 2008 11:12 PM

    You know Ben, my father survived more than 30 years in the field and in the jungles as a career soldier and military officer. When I was a kid, he would hammer me over and over, telling me that I didn’t know how to read people. He told me that I didn’t have the skills to keep the troops alive, that if I kept it up, I’d “get everyone killed.” LOL

    One day, after a particularly heated exchange at the age of 14, I bought Desmond Morris’ opus: Manwatching. I memorized every word and picture in that book. That led to an interest in studying other disciplines connected with human behavior: neurolinguistic programming, abnormal psychology, body language, etc.

    As they say in the song:

    He said, son, Ive made a life out of readin’ people’s faces,
    And knowin’ what their cards were by the way they held their eyes.
    So if you don’t mind my sayin’, I can see you’re out of aces.
    For a taste of your whiskey I’ll give you some advice.

    So I handed him my bottle and he drank down my last swallow.
    Then he bummed a cigarette and asked me for a light.
    And the night got deathly quiet, and his face lost all expression.
    Said, if you’re gonna play the game, boy, ya gotta learn to play it right.

  7. Ben on September 30th, 2008 1:06 AM

    Hahaha… what strange serendipity. I also owned and read Desmond Morris’ “Manwatching” and it was very influential in my understanding of human behavior. But I don’t quite have your synthesis with warfare and markets. Looking forward to more of your insights, as always.

  8. Robert on September 30th, 2008 1:14 AM

    I kinda liked Mark Cuban’s idea as well.

  9. Jill on September 30th, 2008 9:04 AM

    T, you are one cool dudette! I’m in cash anyway but it’s always fun reading your sharp, ironic, brilliant analysis. Spot on.

  10. Rick F (via email) on September 30th, 2008 9:16 AM

    Hi Teresa - thought I’d pass along a financial yukk to brighten your day. In talking with a friend last evening, I came up with this brilliant (tongue-n-cheek) stream-of-consciousness gem to sum up yesterday’s market panic based in no small part on the topic du jour yesterday. Figured I’d pass it along to others and spread the love:

    “Hi, I’m Rick, Vice President of Investments at Jose Jimenez Capital Advisors. Based on your investment goals and the current market climate, may I recommend most of your savings go inside the First Bank of Sealy and that you invest the rest in the internationally-diversified Heckler & Koch High Velocity Double-Tap Fund? That way you’ll have ample and easy liquidity to meet current expenses while hedging and ensuring your ability to obtain greater liquidity in the future should the markets deteriorate further.”

    I mean, without humour, even dark humor, we’d all go nuts(ier), right?

    Keep on smiling…