How to Profit from Market Manipulation [View article]
In the long-term, fundametals win.
If the hedge funds are cooperating with the PPT to buy stocks, do you expect them to end up in a year owning vast amounts of shares priced at 40x earnings and yielding 0.5%? I doubt it.
In the short term, they can act as a damper to slow down a plunge, or as a rocket to power up a spike, but eventually, fundamentals will rule. So private investors just have to consider probable PPT actions as one more facet adding complexity to short-term price movements.
Preserving Wealth During the Global Banking Crisis [View article]
Thank you for an excellent article. I do have a couple of comments, though.
First, you ask "Would holders of US money market funds agree to buy long-dated Treasuries in order to finance the deficit at historically low interest rates?". I am not sure this would work because:
(a) No one in his right mind will buy long-dated treasuries at interest rates that are likely to be dwarfed by the eventual inflation now being contemplated by the fed.
(b) TIPS supposedly yield above inflation, but official inflation is widely believed to be lower than actual inflation. Additionally, there is a tax on interest.
(c) If all cash went from money market funds into treasuries, where will the current commercial paper borrowers of money market funds get their short-term finance?
My second comment is in regards to your statement taking exception with Paulson's statement:
"The banks need to lend. They can’t hoard capital. But I do not believe it is proper or right for politicians or the government to tell banks whom to loan to and how to lend,” highlighting Paulson’s collusion with the banking elite. "
I am no fan of Paulson, but cannot fault this particular statement. I believe the banks would like to lend, because that is how they earn money.
However, banks cannot simply continue to throw money at uncreditworthy borrowers, because that is how they got us into trouble in the first place. Unfortunately, there are very few creditworthy companies or individuals who wish to borrow today. Individuals who have managed their affairs prudently are making their mortgage and credit card payments, and have far less interest in borrowing against their home equity to go on vacation or to again remodel their kitchen. Well-run companies that did not engage in leveraged buyouts of competitors at silly prices have lots of cash on their balance sheets, and no desire to borrow as they don't wish to expand or splurge in this environment.
Thus, the reality is that after the borrowing binge of the last decade, those who have good credit have little interest in borrowing, and those who wish to borrow are likley in trouble and are poor credit risks.
The Great American Ponzi Scheme (Part II) [View article]
I think the notion that we cannot afford to have this or that bank, or company, or developer, fail is highly dubious.
When companies fail, their assets and industry do not spontaneously vanish into thin air, their ownership is just transferred to others. The investors and management of the failed companies lose out, and those who purchase the assets have a chance to correct the problems brought about by the mismanagement of the previous owners.
Bailing out failed enterprises of any sort requires money and resources. These must come from another productive sector of the economy. It thus penalizes productive companies and individuals to prop up, even reward, mismanaged enterprises. This misallocation of resources cannot be good for the economy as a whole.
The Great American Ponzi Scheme (Part I) [View article]
An excellent summary. Amazing that the FDIC, comptroller of the currency, and congressional banking committee did not stop this absurdity sooner. Even more amazing that treasury and congress are now rewarding the bankers who got us into this with taxpayers' money.
The crisis de jour is housing, but the more important and broader issue is whether we want an economy based on productive labor or one based on asset bubbles.
Since the early-90's, the Greenspan fed started to favor assets over labor by using artificially low interest rates to inflate asset bubbles. First to be inflated were stocks in traditional economic sectors. When those reached untenable P/E's, the creative folks on Wall Street came up with the notion of a "new economy" to justify absurd valuations for internet stocks to continue the bubble. When that became untenable, creative financing schemes were invented to create the real estate and derivatives bubbles.
Each of those bubble resulted in enormous wealth for those who created them or participated and exited at the right time. Since all members of the economy compete for goods and services, this has devalued the output of all productive labor, relative to the gains of these bubbles.
What we need is a national discussion on what sort of economy is healthy, sustainable, and fair. My own view is that an economy based on productive labor is healthy and sustainable, whereas one based on assets is not. As we increase the expenditures to the extremes that have now become necessary to try to maintain the asset bubbles, we risk irreversible damage to the economy.
Good analysis, but you state the solution as: "Then, it should require its wards on Wall Street to buy loans from regional banks and bundle those loans into bonds for sale to fixed-income investors."
The problem is that any rational fixed-income investor will demand an interest rate high enough to cover (a) the expected high inflation + (b) the tax he pays on interest + (c) the probability of default.
If the government insured these bonds, (c) goes away.
If the government makes them tax-free income, (b) goes away.
This leaves (a), and with the current expectation of high inflation from the massive stimuli, (a) is probably 6-8%.
If such bonds are taxable, then (b) will add another 3-4%.
If such bonds are not government-guaranteed, (c) will add another 6-8%.
Thus, a normal market with rational fixed-investors is unlikely to purchase such bonds at a rate that a home buyer can afford.
How to Profit from Market Manipulation [View article]
If the hedge funds are cooperating with the PPT to buy stocks, do you expect them to end up in a year owning vast amounts of shares priced at 40x earnings and yielding 0.5%? I doubt it.
In the short term, they can act as a damper to slow down a plunge, or as a rocket to power up a spike, but eventually, fundamentals will rule. So private investors just have to consider probable PPT actions as one more facet adding complexity to short-term price movements.
Preserving Wealth During the Global Banking Crisis [View article]
First, you ask "Would holders of US money market funds agree to buy long-dated Treasuries in order to finance the deficit at historically low interest rates?". I am not sure this would work because:
(a) No one in his right mind will buy long-dated treasuries at interest rates that are likely to be dwarfed by the eventual inflation now being contemplated by the fed.
(b) TIPS supposedly yield above inflation, but official inflation is widely believed to be lower than actual inflation. Additionally, there is a tax on interest.
(c) If all cash went from money market funds into treasuries, where will the current commercial paper borrowers of money market funds get their short-term finance?
My second comment is in regards to your statement taking exception with Paulson's statement:
"The banks need to lend. They can’t hoard capital. But I do not believe it is proper or right for politicians or the government to tell banks whom to loan to and how to lend,” highlighting Paulson’s collusion with the banking elite. "
I am no fan of Paulson, but cannot fault this particular statement. I believe the banks would like to lend, because that is how they earn money.
However, banks cannot simply continue to throw money at uncreditworthy borrowers, because that is how they got us into trouble in the first place. Unfortunately, there are very few creditworthy companies or individuals who wish to borrow today. Individuals who have managed their affairs prudently are making their mortgage and credit card payments, and have far less interest in borrowing against their home equity to go on vacation or to again remodel their kitchen. Well-run companies that did not engage in leveraged buyouts of competitors at silly prices have lots of cash on their balance sheets, and no desire to borrow as they don't wish to expand or splurge in this environment.
Thus, the reality is that after the borrowing binge of the last decade, those who have good credit have little interest in borrowing, and those who wish to borrow are likley in trouble and are poor credit risks.
The Great American Ponzi Scheme (Part II) [View article]
When companies fail, their assets and industry do not spontaneously vanish into thin air, their ownership is just transferred to others. The investors and management of the failed companies lose out, and those who purchase the assets have a chance to correct the problems brought about by the mismanagement of the previous owners.
Bailing out failed enterprises of any sort requires money and resources. These must come from another productive sector of the economy. It thus penalizes productive companies and individuals to prop up, even reward, mismanaged enterprises. This misallocation of resources cannot be good for the economy as a whole.
The Great American Ponzi Scheme (Part I) [View article]
The Housing Blame Game, Redux [View article]
Since the early-90's, the Greenspan fed started to favor assets over labor by using artificially low interest rates to inflate asset bubbles. First to be inflated were stocks in traditional economic sectors. When those reached untenable P/E's, the creative folks on Wall Street came up with the notion of a "new economy" to justify absurd valuations for internet stocks to continue the bubble. When that became untenable, creative financing schemes were invented to create the real estate and derivatives bubbles.
Each of those bubble resulted in enormous wealth for those who created them or participated and exited at the right time. Since all members of the economy compete for goods and services, this has devalued the output of all productive labor, relative to the gains of these bubbles.
What we need is a national discussion on what sort of economy is healthy, sustainable, and fair. My own view is that an economy based on productive labor is healthy and sustainable, whereas one based on assets is not. As we increase the expenditures to the extremes that have now become necessary to try to maintain the asset bubbles, we risk irreversible damage to the economy.
The Fed is Running Out of Options [View article]
The problem is that any rational fixed-income investor will demand an interest rate high enough to cover (a) the expected high inflation + (b) the tax he pays on interest + (c) the probability of default.
If the government insured these bonds, (c) goes away.
If the government makes them tax-free income, (b) goes away.
This leaves (a), and with the current expectation of high inflation from the massive stimuli, (a) is probably 6-8%.
If such bonds are taxable, then (b) will add another 3-4%.
If such bonds are not government-guaranteed, (c) will add another 6-8%.
Thus, a normal market with rational fixed-investors is unlikely to purchase such bonds at a rate that a home buyer can afford.