Friday, August 31, 2007
1. Bernanke and Bush attempt to calm the markets with their "plan to help homeowners" and the broader economy. Bush and Paulson stress that their is focused on homeowners in trouble, not a bailout of lenders.
Funny, because this whole mess reminds me of the early 1990s S&L blowup more with each passing day. More on this from Bear Mountain Bull and The Big Picture.
2. "Mozilo Cashed Out at Top of Market". Brett Arends on the hefty insider selling of Countrywide Financial shares.
3. Cleaning up on the meltdown. BusinessWeek reports on market participants who took the other side of some popular trades during the recent credit market turmoil.
4. A tribute to Dr. Kurt Richebacher, patriarch of the "anti-bubble" economists.
5. Jeffrey Tucker and Mark Thornton discuss the Mises Institute's Bastiat Collection.
6. What's at the heart of happiness? A brief overview from WSJ.com (Hat tip to The Kirk Report).
7. Ah...it's all starting to make sense now. Damien Hirst is now mentioned as being part of the previously "unnamed" investor group that is planning to buy his $100 million skull.
Classic. Anonymous Dealbreaker commenter, you were right!
8. Here's a strange story: "Gold Fields Bidder Takes Twisted Path From Shelter to Argentina".
9. Commodities. Wheat hits all time high, while the bloggers at Commodity Trader ponder a corn futures trade.
10. Gary Dorsch wonders if the "Commodity Super Cycle" has stalled out.
11. Anonymous blogger and hedge fund manager, Fintag gives us his inside view of the markets and a review of the day's interesting stories.
12. The Big Picture tips us to a historical perspective of recent bear markets.
13. Buyout funds face higher costs, elusive returns in the future, says Bloomberg.
14. "A Political Theory of Geeks and Wonks". Mises Institute's Jeffrey Tucker.
15. The Financial Philosopher reminds investors to focus on what is certain, rather than the distraction of uncertainties.
Thanks for reading Finance Trends Matter. Enjoy your weekend, everyone.
Thursday, August 30, 2007
"Financial Markets on Crack" takes a retrospective look at the Fed's tactical eases over a 9 year period (1998-2007), and finds a marketplace convinced of the Federal Reserve's duty to keep the markets and the economy pumped full of (credit) drugs.
An excerpt from Duffy's article:
This is now the third time in 9 years the Fed has acted as "fireman" as many believe is part of its job description:
Duffy goes on to review the timing and effect of these past three rescue missions, and questions whether this latest Fed stimulus will work. One thing is certain; Duffy does not find these actions to be indicative of a healthy market or economy.
You can't just say 'we told you so' and turn your back. The Fed is the fireman of our economy, and there's a fire and they're gonna put it out. That's their job. Their job is not to sit around and scold people for making bad loans [and] for other people for buying those bad loans. The Fed's job is to put out the fire.
"Our monetary addiction is a progressive disease now in an advanced state."
As I wrote in Tuesday's post, "Fed bailouts = capitalism?", these actions and interventions do not reflect well on our system of "free markets" either.
Tuesday, August 28, 2007
Should the Federal Reserve and other leading central banks help bailout the investment funds, banks, investors, and homeowners that have been caught in the fallout of the recent credit crunch? That is the question at hand. But first, a summary of Fed actions and stimulations carried out thus far.
IHT.com carries a useful and brief summary of the Fed's bailout actions to date. As the article details, the Fed reacted to the credit squeeze with a series of "liquidity injections", followed by a 50 basis point cut in the discount rate (the rate at which member banks borrow from the Fed), before removing certain regulatory caps on loans to the brokerage affiliates of large banks.
Excerpt from, "What looks like a bailout?":
The cap on loans to an affiliate is a tenet of prudent banking. So waiving it, even temporarily, is a significant escalation of the Fed's rescue efforts. Under normal circumstances, a bank is limited to lending any one affiliate an amount equal to 10 percent of the bank's regulatory capital. Fed documents released last Friday disclosed that the banks would be allowed to lend up to $25 billion apiece, or about 30 percent of their capital.
Compromising the cap to that extent attests to the Fed's belief that a bailout is necessary to avert greater harm to the financial system and the broader economy.
So, as you can see, the Fed is clearly concerned about the effect that the credit market fallout will have on the economy. Which is interesting, because so many of these leading lights now calling for, and enacting, the bailouts were prominent among those who suggested that the subprime/CDO mess was well "contained".
And since so many have been inundated with the hypocritical rescue cries from Jim Cramer and the like, we offer you some opposing viewpoints on the issues of Fed bailouts, and how the credit market bubble got started in the first place.
1. "There's no such thing as a free bailout", by Paul Kasriel.
2. "How regulators fed the credit mess", by Bill Fleckenstein.
3. "The Fed's Subprime Solution", by James Grant.
4. "Deflating the credit bubble", a Financial Sense interview with Doug Noland.
Consider these arguments carefully, as they are the ones which reveal the truth.
Monday, August 27, 2007
These are some of the questions and issues explored in a recent article, "The 2007 Liquidity Crisis - Q&A".
According to authors Andy Sutton and Atash Hagmahani, the recent turmoil in the markets has resulted in an ongoing liquidity crisis, one the media would like most people to ignore. The authors explain their view of what's currently happening in the equity and credit markets, and give an overview of why the current liquidity has occurred.
You'll also find some historical reference to past liquidity crises, especially the Panic of 1907.
Comparisons between 2007 and 1907 have gained traction lately, as some observers find seem to find striking similarities between the two periods of financial fallout (no doubt they are also attracted to the analogy because of the 100-year anniversary between them).
Reactions to the Federal Reserve's response to the crisis are also found here. The authors are plain-spoken in their explanation of the Fed's chicanery and the likely outcome of their interventions: the creation of moral hazard. Certainly not the view you'll find from your local media outlet.
So give this piece a read, and forward it on to any friends and acquaintances who might need or want an alternative explanation of recent financial events. You'll find that the article provides a good overview of central bank responses to these events, and the authors definitely do not mince words.
Saturday, August 25, 2007
If you haven't seen it yet, MSN Video is showing a great series of of photos and clips from the Pebble Beach Concours d' Elegance.
The video tour of this great automobile exhibition is hosted by antique collectors and appraisers, Leigh and Leslie Keno, of Antiques Roadshow and Find! fame.
There are some beautiful cars on display here, and the Keno brothers (who I absolutely love) are practically bouncing off the walls with their enthusiasm for this event, like two kids in a candy shop.
Check out the clips, view some great cars, listen to the interviews with the car owners, and enjoy!
Friday, August 24, 2007
1. Matthew Simmons presents his view of current and future energy realities in this recent interview with Financial Sense Newshour.
2. The Russian government prepares to take control of its gold mining industry, as resource nationalism continues.
3. Central banks are stealing from the average citizen, says Bill Fleckenstein.
4. Finance Trends Matter is featured on "Financial Blog Watch".
5. "Ron Paul, the Mogambo Guru and Me". M.A. Nystrom.
6. Bill Alpert takes a look at "Jim Cramer's bad bets".
7. Is a hedge-fund hit man behind attacks on Fairfax Financial?
8. Bill Gross thinks the debt of financial companies such as Merill and Goldman offer attractive yields, and that the asset-backed commercial paper market is finished.
9. Investing in Africa may not be as easy or as profitable as some would claim.
10. Time-machine design made simpler. Personally, I hope we never get our hands on this kind of technology. Picture an American Idol obsessed society with nuclear weapons and time-travel capabilities...now breathe.
11. "We have broken speed of light". Damn. Back to my breathing exercises...
12. Behold, telepresence. The Economist on a new step up in conferencing technology that could reduce our reliance on business travel.
13. The Economist on "Putin's people: the spies who run Russia", and "The making of a neo-KGB state". Do check these out.
14. F.A. Harper on, "Liberty Defined".
15. Brooke Astor and Leona Helmsley, a study in contrasts.
16. Billionaire Eli Broad is warning about a potential fall in art prices, as noted in last week's features. This week, Bloomberg has added a spiffy video clip to accompany the story.
17. CDO Insiders: "We knew we were buying time bombs".
18. "Top Republican says bring troops home". FT.com.
That's it gang, thanks for reading and enjoy your weekend.
Thursday, August 23, 2007
I was interviewed by the show's host, Dennis Olson, and the conversation centered around the issues we cover here at Finance Trends, highlighting important trends in the markets and the economy, and listing some other worthwhile blogs and internet sites that I like to check out.
Anyone who would like to hear the program interview can do so by clicking on the Financial Blog Watch site and listening to the podcast in the site's own media player, or by clicking on the "Download" option for Episode 17 and opening the MP3 clip in your own media player.
If you only have a few minutes to spare today, please do take the opportunity to check out some of the blogs featured in our sidebar's blogroll. As I mentioned in the interview, there are a number of very worthwhile finance and investment blogs on the web, and I've tried to compile a few of those sites in our blogs and links sections.
While I was able to name a few of those sites in the broadcast, there were many more that I wish I could have highlighted specifically. Some of these blogs have directly influenced my writing here and the topics I chose to discuss in the "Blog Watch" interview. I'm sure you'll get as much out of these sites as I have, so take a look!
Also be sure to check out some of the other interesting interviews found on the Financial Blog Watch program. There are some great blogs and bloggers featured here, and you might find a few new sites worth checking out. Enjoy, and we'll see you tomorrow.
Wednesday, August 22, 2007
The article's subtitle: "Barron's tracks the 'Mad Money' host's stock picks and comes to one conclusion: Steer Clear". Ouch.
Well, I've never been much of a Jim Cramer watcher, but I am aware of the ongoing debates concerning his show, his antics, and his investment recommendations. So naturally, I was rather interested to check out this article. I think you will find it interesting as well, whether you are a fan of the "J-Man" or not.
The piece takes a very sensible, and skeptical, look at the value of Jim Cramer's on-air stock recommendations. On further examination of the available metrics for Cramer's stock-touting performance, Alpert finds that the overall performance of these picks offers little to shout about.
He also calls on CNBC to provide a more thorough database of the show's on-air picks, having found the available records to be rather selective, at best.
Kudos are given to Cramer for his accomplishments as a financial "renaissance man"; his triumphs as an on-the-field financial reporter, author, hedge-fund manager, and web innovator are noted.
You won't find an unfair character assassination of Cramer here, but you will be left with the thought of "more disclosure, please" when it comes to judging his on-air investment picks.
Give the article a look, and make a special note of its emphasis on tracking an investor's stated (or hypothetical) performance record. When it comes to judging the acumen of any investment guru, similar lessons may apply.
Tuesday, August 21, 2007
Fortune surveyed some of the most respected investors around for their opinions on the recent subprime "meltdown" and the resulting market turmoil. Will the recent crisis send markets into free fall mode?
Read on for reactions from Warren Buffett, Wilbur Ross, Jim Chanos, Jim Rogers, and Jeremy Grantham, to name a few.
Monday, August 20, 2007
Marc feels that recent interventions into the market and liquidity injections by the Fed are unjustified, and will only lead to greater problems in the economy at a later time.
He also points out that many of the problems we are currently witnessing arose out of the easy monetary policies of 2001-2007; therefore "solving" these problems with yet another dose of liquidity amounts to pure folly.
Faber also elaborates on his earlier calls for a deleveraging in the markets and resulting lower asset prices in the short-intermediate term.
He notes that a capital outflow from emerging markets into the U.S. and the Yen will probably keep the dollar aloft for the time being, and allow U.S. markets to outperform most emerging markets for the next few months. Of course, we're talking relative outperformance here, as most asset classes will head down in this "deleveraging" environment, rather than make new highs.
Check it out.
In, "Nope, That's Not Money", Rubino recounts Doug Noland's ideas on the ever-expanding definition of money and finds that recent turmoil in financial markets has shown certain money substitutes to be suspect.
Here's an excerpt:
With a few months of hindsight, it’s now clear that debt-as-money was not one of humanity’s better ideas. When the U.S. housing market—the source of all that mortgage-backed pseudo money—began to tank, hedge funds found out that an asset-backed bond wasn’t exactly the same thing as a stack of hundred dollar bills. The global economy then started taking inventory of what it was using as money. And it began crossing things off the list. Subprime ABS? Nope, that’s not money. BBB corporate bonds? Nope. High-grade corporates? Alas, no. Credit default swaps? Are you kidding me?
No longer able to function as money, these instruments are being “repriced” (a slick little euphemism for “dumped for whatever anyone will pay”), which is causing a cascade failure of the many business models that depend on infinite liquidity. The effective global money supply is contracting at a double-digit rate, reversing out much of the past decade’s growth.
Rubino goes on to add that while the central banks are attempting to add liquidity to the banking system by lending money in exchange for plumetting bonds, "the process of debt reclassification has a momentum that a few hundred billion new dollars won’t stop."
There you have it. The deleveraging is underway and the resulting drop in asset prices may not be as short-lived or as well-contained as many would have hoped.
Friday, August 17, 2007
As we finish out the week this Friday, the Federal Reserve has lowered the discount rate by 50 basis points to 5.75% in an effort to ease liquidity and shore up the financial markets. So far, markets in Europe and the U.S. are rallying higher on the move.
Meanwhile, disaster has hardly limited itself to the world's financial markets. A bridge collapse in China, a Utah mining accident, deadly bombings in Iraq, and a powerful earthquake in Peru have left many dead and suffering in their wake.
Please take a moment to consider these tragedies and their effect on the victims' friends and families. If you are in a position to help someone far away or nearer to you, please do.
Having said all that, let's get started with our "Features of the week". There are many interesting articles and interview features ahead, so kick back and enjoy.
1. Fed cuts discount rate to 5.75%. A cut in the discount rate rather than the federal funds rate signals the Fed's belief that problems are mainly confined to the financial system, and have not yet hit the broader economy.
2. Exchange fever continues as Borse Dubai makes a rival bid for OMX. FT notes that the move will spark a "full takeover battle" with Nasdaq, which has offered $3.7 billion for the Nordic stock exchange operator.
3. Ratings agencies lose credibility after assigning AAA ratings to subprime-backed CDOs and other structured finance products, such as CPDOs.
4. Why can't hedge fund managers say they're sorry? WSJ's Gregory Zuckerman explains.
5. Hedge fund guy atones for subprime sins: Bloomberg's Mark Gilbert.
6. The U.S. should learn from the fall of Rome, warns David Walker, comptroller general of the U.S.
7. "10 Questions to Mohnish Pabrai". Value investor answers questions from GuruFocus readers.
8. Investor Marc Faber speaks with Howestreet.com about the current state of the markets and booms and bust cycles.
9. "Hitler's Handouts: Inside the Nazi's welfare state" - Reason Magazine.
10. Cartoonist Peter Bagge on, "The Right to Own a Bazooka".
11. Billionaire Eli Broad says recent hedge fund losses will affect art prices.
12. Could you live without China? Profile of a family's one year experiment in China-free living.
13. Structured finance discredited? CLSA's Christopher Wood on the unwinding of the credit bubble.
14. Do finance professors believe in market efficiency? CXO Advisory reviews a recent paper that examines this question and whether or not academics invest according to their beliefs.
15. Odd One Out. One of these economic forecasts does not belong - guess which one.
Fin! Thanks for reading Finance Trends Matter.
Thursday, August 16, 2007
For those of you who don't know Rick Rule, he is the founder and chairman of Global Resource Investments, a natural resource broker, and is considered to be one of the most informative speakers around on investing and speculating in mining and natural resource shares.
In "The Golden Rule", Rick talks with Victor Adair and shares his philosophy of resource investing and speculation. Rick describes himself as a contrarian investor who is focused more on the "micro" work of analyzing individual companies, than the "macro" big picture view that often dominates the attention of other investors.
If you liked this interview, be sure to check out Rick's "Three Rules for Buying Resource Stocks" and keep an eye out for more of Rick's resource sector insights in the future.
Wednesday, August 15, 2007
Here is an abstract of the August 2007 paper in question, entitled, "Performance Persistence of Individual Investors".
This paper investigates the stock market performance persistence of individual investors. The study is based on unique data that allows us to observe month-end stock market portfolios of all individual investors over an eleven year period.
We find that a substantial number of investors exhibit economically and statistically significant performance persistence. This is robust to how we measure past performance, how often investors trade and whether investors are small or large. Unlike the evidence from mutual and pension funds, the persistence in performance we uncover is not concentrated in investors with poor prior performance. We also show that forming a portfolio that is long in stocks previously favored by top performing investors earns a substantial risk adjusted return in the future.
You can download the paper in PDF format at the SSRN site link above, or check out the CXO Advisory blog's post for a brief rundown of their findings.
If you find their review interesting, you might also want to check out the CXO blog's other posts on this topic, which you'll find linked at the bottom of their post.
You can also check out the CXO Advisory blog for more interesting posts by clicking on the link in our sidebar blogroll.
Monday, August 13, 2007
From there, we went on to question how investment markets are impacted by the liquidity created by central banks.
Today we look at how market participants are reacting to recent "liquidity injections" by the world's leading central banks.
As you may have read, the Federal Reserve and the European Central Bank (ECB) have been supplying liquidity to the banking system in the form of loans and repurchase agreements. This action on the part of the central banks began last Thursday and has continued through today.
The only problem is that the markets are now starting to wonder if these liquidity injections are enough to keep a financial crisis or an economic downturn at bay. Traders are now betting that central banks will have to reverse their stances on maintaining or raising key interest rates.
Excerpts from Bloomberg's article regarding "Rates U-Turn".
Days after reaffirming their interest-rate stance against inflation, central bankers may be forced to do an about-face. Traders are paring bets on imminent rate increases in Europe and Japan, and some even speculate the Federal Reserve may execute an emergency cut.
Behind the changed outlook is concern that the steps central banks have already taken -- pumping cash into markets over three days to avert a credit collapse -- won't be enough to keep global growth from stalling. In the days before, Fed Chairman Bernanke, 53, and European Central Bank President Trichet, 64, were saying inflation, not financial instability, was the biggest risk.
Just before last week's turmoil, Trichet signaled the ECB would lift its benchmark rate in September, and Bernanke indicated the Fed had no plans to cut rates. On Aug. 8, Bank of England Governor Mervyn King, 59, said he didn't see ``an international financial crisis;'' investors were merely reappraising risk
So, there is presently some debate about whether or not the Fed and other central banks will be moved to cut rates at some point in the not-too-distant future. You can read on at the article link above for more discussion on this topic.
Also interesting to see this article, "Panic on Wall Street spreads fears", from The Australian over the weekend. As the article details, the extent to which the subprime/CDO fallout has spread throughout the world's financial markets has been a shock to many in the markets, possibly even to those who were preaching "containment" only days and weeks beforehand.
A few interesting quotes and passages from that article:
"There's been real distress selling. Whether it's hedge funds facing redemptions or people trying to cover their margins, I don't know. It's the first time we have seen selling like this since the start of the current bull run in 2003."
"It's a complete bloodbath," one trader said. "I can't tell you how bad it is. This boom hasn't really been caused by India or China or anything substantial; it's a massive amount of money and debt and deals that have grown out of nowhere. In 2002, you couldn't borrow a penny, but recently no amount has been too big. Now we're worried that, since the money appeared as if by magic, it can disappear like magic too."
There were also fears expressed over the possible collapse of a major investment bank.
Meanwhile, concerns were mounting over other German banks. The focus, however, may switch back to the US. Rumours abound of "another Drexel", recalling the 1990 collapse of Drexel Burnham Lambert, Wall Street's biggest ever bankruptcy.
The rumours point to a leading investment bank sitting on tens of billions of dollars of losses as a result of the sub-prime crisis and the shake-out in credit markets.
This is precisely the type of situation we wondered about in our June 13 post, "Asset backs, subprime: shades of 1990?".
As it is plainly obvious to anyone now, fears over subprime and credit market fallout have not subsided since June; they have only intensified as the problems reverberate throughout the world's financial markets.
Still, there is some debate over whether or not these events will affect the stock markets and the global economy in the near future. We have plenty of debate on these topics courtesy of Bloomberg.com audio/video reports. You can view them here now.
1. Noted value investor David Dremen speaks with Bloomberg TV. He says that while there are serious problems with the subprime/CDO fallout, the recent stock market sell-off has been due to the financial problems in the credit market and that U.S. stocks are not overvalued.
2. A medley of opinions on last week's credit crunch and the outlook for markets.
3. An audio interview with Marc Faber, who sees a "colossal recession" coming to the U.S. He also warns that a deleveraging effect in the markets will be a negative for asset prices.
Pick and choose among them, and enjoy. As always, feel free to add your views and insights to our comments section or by email.
Friday, August 10, 2007
1. "Why is catching a baseball taxable income?", asks Justin Ptak at the Mises blog.
2. Marc Faber says U.S. stocks are in the beginnings of a bear market.
3. The Wall Street Journal explains, "How Credit Got So Easy and Why It's Tightening".
4. "Can Greed Be Contained?". The Financial Philosopher on the continuing cycle of greed.
5. "How the Credit Bubble Came to Be". Hat tip to The Financial Philosopher for this link.
6. Stock market corrections progressively shorter in duration, notes Martin Goldberg in his latest FSO market wrap up. Also, a technical bright spot in shares of Berkshire Hathaway?
7. FT Lex on defining liquidity. A tough job, as you can tell from our posts this week.
8. Barry Ritholtz has some advice for rich uncles and investors.
9. Art dealer Daniella Luxemburg urges buyers to be wary of 'uber-marketing'.
10. The Economist on "The rise of the 'Boligarchs'", a new class of politically connected bourgeoisie who have profited on the back of Venezuela's "Bolivarian Revolution".
11. FT.com has put together an interactive map highlighting the winners and losers of the ongoing subprime and credit market turmoil.
12. Charlie Munger's wisdom. Three speeches from investor, philosopher, and Berkshire Hathaway Vice-Chairman, Charlie Munger.
Enjoy the articles and your weekend, everyone!
Thursday, August 09, 2007
Today, as we look at the relationship between money liquidity and asset and investment prices, both sides of the liquidity coin are in the news.
Market liquidity has come into focus with credit markets witnessing an "evaporation of liquidity" as the subprime fallout goes global.
Meanwhile, money liquidity has entered the story as investors debate the responses taken by leading central banks in their approach to recent market turmoil.
Here's the latest from CNN Money, "U.S. Stocks Slide As Subprime Woes Go Global":
French banking group BNP Paribas said Thursday that it has suspended three funds with exposure to the U.S. credit markets as it has become impossible to accurately value them after "the complete evaporation of liquidity."
Following the news, the European Central Bank said it allocated
As part of its weekly open-market action, the Federal Reserve added another
The ECB and Fed moves came two days after the Federal Open Market Committee opted to sit tight on interest rates and retain its focus on inflation, while acknowledging there were risks from the recent turmoil in financial markets.
There is, of course, a full range of debate over what the central banks should or should not have done in response to this spreading panic. These arguments are not relevant for our purposes here. What is important is the idea that liquidity, in the form of money and credit created by the banking system, is needed to drive investment markets higher or help prop them up in times of panic.
But will an infusion of liquidity work to send investment markets higher or, in the midst of a panic, soften their decline? This is a question I find interesting, so I did a little reading on this and here's some of what I've found. You won't have to rely on my opinion on these matters, which is good news for all of us!
In the May 2005 article, "Is There a 'New Economy'?", Marc Faber pointed out that excessive money supply growth can lead to inflation in asset prices. He also mentioned an indicator called FRODOR (which stands for "Foreign official dollar reserves of central banks"), which was developed by Ed Yardeni and referred to by Marc as, "probably the best available measure of world liquidity".
I have not tested FRODOR's reliability as a forecasting tool, nor I am very familiar with this particular measure of liquidity. Still, it was an interesting item to come across, and I mention it in the hopes that a few readers will find some use for it. Plus, we now see that some investors are using this liquidity measure to help time their involvement in certain commodities and investments.
As for the relationship between money-supply growth and the direction of investment markets, Steve Saville points out that growth of money supply does not always translate into higher investment prices or market liquidity.
Here's how Saville put it back in March 2007.
The way we define the terms, there's a big difference between liquidity and money. This difference revolves around the fact that once money is borrowed into existence it remains in existence until/unless the debt is repaid*, whereas liquidity can disappear in an instant with no change in money supply.
For example, the rate of US money supply growth hit a multi-decade high in late-2001 and remained at a well-above-average level throughout 2002, but by the second half of 2002 the financial markets were suffering from a massive loss of liquidity. The rapid growth of the US money supply during 2001-2002 and the rapid growth of the global money supply during 2003-2006 ultimately led to substantial liquidity within the financial markets, but the point is that high money-supply growth can co-exist with low market liquidity for an inconveniently long period (inconveniently long, that is, for those who hope that surging money-supply growth will bail them out of the leveraged speculations they entered during the preceding boom times).
So far, it seems we've learned that an increase or decrease in the supply of money and credit can help drive certain investments and asset prices higher or lower over time. What remains uncertain is the timing of these relationships and the consistency with which they play out.
As if this was not enough to mull over, I should also point out that there are many recent discussions about the changing nature of "liquidity" and how it's created and defined.
As Axel Merk has pointed out, central banks may no longer be the dominant source of liquidity creation, in the sense of money and credit supply. According to Merk, leverage created through the financial markets now plays an important role in defining liquidity.
Doug Noland has also stated that "it is today a major mistake to associate 'money supply' with liquidity". As he wrote in his 2003 article, "Liquidity, Money, and Credit", "Liquidity and money have become distinct and are definitely not interchangeable".
I am also making my way through some similar arguments and discussion topics in the August 2007 edition of Marc Faber's Gloom Boom & Doom Report. I can only hope that I will be able to successfully digest some of this very interesting material.
For anyone who is still awake at this point, I hope this post and the two that preceded it have offered some small bit of insight into these topics. The nature of liquidity is still rather hard for many of us to define and pin down, but I hope you will find some illuminating thoughts in the articles I have linked here.
Hopefully, by examining some of these arguments, we will come a little bit closer to understanding the varying sides of the liquidity coin, as well as the effects liquidity has on investment and asset prices.
Wednesday, August 08, 2007
When we talk about market liquidity, we generally refer to the ease with which assets and investments can be sold for cash. How liquid is the market for "x" - when we ask this question we are basically talking about how quickly we can turn item "x" (be it real estate, stocks, or bonds) into cash.
If we can readily exchange our investment for money and suffer no significant downward price movement in the process, then the asset or investment is liquid. If the market for an asset or investment is shallow, or inactive, with high bid/ask spreads and volatility, that market is said to be illiquid.
Illiquid assets and investments are often hard to sell, and oftentimes their sale can have a significant effect on prices in the market. This is one of the main issues in the ongoing credit-market panic. Fear has produced a surplus of sellers and a shortage of buyers for subprime backed CDOs and other exotic instruments.
Illiquid investments, such as CDOs and asset-backed securities, were widely held by hedge funds, banks, and investment funds. Now that their value has been called into question, panic has spread to much of the credit markets, affecting prices for junk bonds and other forms of corporate debt. This, in turn, has affected the LBO/private-equity deal market. As appetite for debt dried up, "deals galore" became "deals no more".
Recently, that fear spread to the equity markets, triggering a $2.65 trillion sell-off in equities worldwide. Although stock markets have been rebounding a bit in recent days, cheering themselves with visions of continued global growth and the Fed's assurances that the subprime fallout will not wreak havoc on the U.S. economy, one has to wonder what the future holds in store.
With that in mind, let us examine the effects that an expanding global money supply have had on the financial markets in recent years, as well as the likely future effects that any tightening (or further easing) of money and bank credit will have on investment markets.
Jeremy Grantham spoke earlier in the year of a "truly global bubble", one which encompassed all manner of assets in a number of locales. This global bubble was driven by the generous global supply of money and credit, the availability of which helped fuel widespread optimism and excessive risk-taking in financial markets.
Now we see that a reversal of the bubble's high-risk appetites and "animal spirits" is taking place, and so far it is very much in line with the script laid out by Mr. Grantham earlier in the spring. So does this spell the end for the "great bubble" of the early 21st century, or is it just a pause in the madness?
In order to get a better understanding of what will happen in the markets and the economy, we need to look at global money and credit conditions going forward.
Will liquidity, in the form of money and credit created by the banking system, increase or will it dry up? Will an abundant supply of money and credit continue to wash over the globe, taking asset prices higher, or will a money and credit contraction knock investment markets and asset prices down from their recent lofty heights?
In asking these questions, not only are we trying to divine the future of money conditions, we're also trying to find out what effect these conditions will have on our investments and on investment markets as a whole.
Is the relationship between money liquidity and investment/asset prices so straightforward? We'll try and examine that question in "Market liquidity and money liquidity, Part II". Stay tuned.
Monday, August 06, 2007
We've been hearing a lot about a credit crunch as deals dry up or get withdrawn in the LBO space. Investors lately have cut way back on the riskier forms of debt that tended to fund these deals.
Many have become very disillusioned by the recent fallout in the subprime mortgage bond and CDO markets. As Bloomberg puts it, "concerns over mortgage-backed securities have sapped investor appetite for other debt". You said it.
But some people don't think it's all that bad. Over at The Aleph Blog, editor David Merkel is of the opinion that the larger and higher quality sections of the bond market are well intact and functioning.
While he recognizes the crisis in the market, he feels that a crisis-style situation is mainly limited to "the exotic stuff", namely, subprime backed ABS, LBO debt and high-yield deal loans, and derivatives on subprime or "instruments like LCDX and CMBX".
Liquidity in the credit markets may have dried up, but we don't know for how long. As Merkel writes in his dissenting post, it may come back, slowly but surely, as it has in the past.
This is not an opinion shared by Doug Noland, who recently wrote of a "Credit Market Dislocation" that has accompanied the piercing of "The Great Credit Bubble".
Here's an excerpt of Doug's views:
I mostly downplayed the marketplace liquidity and economic impact of the housing downturn last fall and the subprime implosion this past February. My view of current developments is markedly different.
I cannot this evening overstate the dire ramifications for the unfolding Credit System Dislocation. There is today serious risk of U.S. financial markets "seizing up." A system so highly leveraged is acutely vulnerable to speculative de-leveraging and a catastrophic "run" from risk markets.
At the same time, the Bubble Economy and inflated asset markets - by their nature - require uninterrupted abundant liquidity. The backdrop could not be more conducive to a historic crisis, yet most maintain unwavering confidence that underlying fundamentals are sound.
Meanwhile, FT Alphaville has highlighted a Lombard Street Research report which notes the potential for "major stress" in US banking due to the subprime/CDO debacle.
Here's the summary of their findings:
The sub-prime/CDO debacle has a real potential to create major stress within the US banking system. It could well turn out that after frantic reassessment of the risk positions across financial institutions globally and further ructions, market players regain confidence of what the true size of the problem is. However, this is likely to take a while. In the meantime, it is reasonable to expect that the liquidity crunch will intensify as both supply and demand for credit suffer. Contagion across asset classes seems likely. Increased liquidity preference will cause the sale of assets, unlikely to be confined to one asset class.
But there's still the matter of "liquidity" in the sense of money and credit supply in the larger financial system and economy. Will recent events in the markets cause worldwide money conditions to tighten?
We'll take a look at this question and revisit the growth of global money supply in our next post. See you then.
Friday, August 03, 2007
1. "Making Money the Warren Buffett Way". A US News & World Report feature.
2. "Credit market turmoil may last years", according to a Societe General report.
3. "Easy Credit, Spoiled Dreams". Reuters' report on the "Subprime Mortgage Fallout".
4. Quick meltdown - American Home Mortgage, which specialized in "Alt-A" mortgages and adjustable-rate loans, is widely expected to file for bankruptcy as 7,000 employees are fired.
5. A secret World War II nuclear city is now open to tourists.
6. "Greenspan has left more than a wall of worry to overcome".
7. So far, so good for commodities. The asset class has so far been immune to the turmoil in the credit and equity markets.
8. Tragic bridge collapse highlights America's aging infrastructure.
9. Mises blog on, "The Coming Second Life Business Cycle".
10. Jim Rogers on China, commodities, housing, subprime, and the great credit bubble.
11. Jim Rogers makes a second Bloomberg appearance, sharing his views on Asian business, emerging-market investments, housing, water, commodities, and oil on the "Taking Stock" program.
12. "Flying Solo: The Aviator and Libertarian Philosophy".
Thanks for reading Finance Trends Matter. Enjoy your weekend!
Thursday, August 02, 2007
"Take dead aim on the rich boys." - Herman Blume, in a speech made to the students of Rushmore Academy, 1998.
Time to take a little time out from the endless coverage of the recent credit market debacle and focus a bit on personal wealth. Roll 'em...
In a recent WSJ Wealth Report post, writer Robert Frank wonders if rich kids really do have it all.
After profiling the attitudes of the nouveaux riches' young heirs at a Financial Skills Retreat camp, Frank is left with the impression that few of the youth surveyed will go on to grow their wealth or join the ranks of the next generation's business and investment moguls.
Overall, he is left unimpressed by their knowledge and skills (which he finds lacking), and finds their "bubble of privilege" lifestyle a likely drag on their future competitiveness.
From Robert Franks' "Wealth Report" post, "Why Rich Kids Don't Stay Rich".
My conclusion is that despite all their supposed advantages, today’s rich kids have grown up in such bubbles of privilege that they’re not prepared for today’s increasingly competitive job market. They don’t make good investors, they don’t compete well for the top jobs, and they’re not hungry for success like kids who grow up in middle-class homes can be.
Eventually, I argue, their money will run out. And much of the inherited wealth in America will flow back to people who actually earn it — as it has throughout history. This is what makes wealth in America dynamic, rather than dynastic.
There are a few interesting comments sprinkled throughout in the reactions to Frank's post. I think the one line that it sums up (in a "what did you expect?" sort of way) is, "shirtsleeves to shirtsleeves in three generations".
If family money and social position are to be smoothly handed down to the next generation, it seems that they must be accompanied by a simultaneous and successful transmission of core values; among them, modesty and discretion.
This is easier said than done. After all, the Paris Hiltons of the world are far more visible (and influential?) than the more low-key and unostentatious young heirs.
There are very few families as long-lived as the Medicis and the Pamphilis. Most will probably break up or squander their wealth within a few generations, long-lived family foundations aside. Taking the great sweep of history, this seems part of the natural order.
In the meantime, "take dead aim on the rich boys".
Wednesday, August 01, 2007
In fact, it's not even just exposure to the subprime mortgages that's worrying people now. It seems investors are now wondering whether debt instruments that are higher up the ladder carry an unacceptable level of risk. Just ask the the investors who are trying to pull their money out of Bear Stearns Asset-Backed Securities Fund.
Mortgage bonds and asset-backed securities are suddenly suspect in the wake of of recent fund blow-ups and bank losses. It's not just a subprime problem anymore.
"Bear Stearns Blocks Withdrawals From Third Hedge Fund":
Bear Stearns Cos., the manager of two hedge funds that collapsed last month, blocked investors from pulling money out of a third fund as losses in the credit markets expand beyond securities related to subprime mortgages.
The Bear Stearns Asset-Backed Securities Fund had less than 0.5 percent of its $900 million of assets in securities linked to subprime loans, spokesman Russell Sherman said in an interview yesterday. Even so, investors concerned about losses sought to withdraw their money, he said.
Shares of New York-based Bear Stearns had their biggest drop in almost three months, pushing brokerage stocks lower on concern about shrinking profits from debt underwriting and trading. Bear Stearns triggered a decline in credit markets in June, when funds it managed faltered after defaults on home- loans to people with poor credit rose to a 10-year high.
``There will be more pain,'' said Felix Stephen, a strategist who helps oversee the equivalent of $7.5 billion at Advance Asset Management Ltd. in Sydney. ``I'm giving it a couple of months at least. It's not the subprime issue that really matters, it is the first card to fall in the tower of cards in this situation.''
It seems everyone is ready to wake up to reality and shake off the party line...you know, the one about "containment".
The latest developments signal that the slump in the subprime mortgage market may not be ``contained,'' as officials including Treasury Secretary Henry Paulson have said.
``You don't necessarily have to be a subprime fund now to be having problems,'' said Bryan Whalen, a money manager in Los Angeles at Metropolitan West Asset Management, which oversees more than $21 billion in fixed-income assets.
Yep. Here's Fintag's assessment of the growing fund troubles. So far the list of banks and funds said to be seriously affected by the problems in the credit market includes Bear Stearns, Macquarie's Fortress Funds, Sowood Capital, Caxton, Basis Capital, and French asset manager Oddo & Cie.
Not to mention the negative sentiment towards the debt of major Wall St. banks, as reflected in the credit-default swap market.
On Wall Street, Bear Stearns Cos., Lehman Brothers Holdings Inc., Merrill Lynch & Co. and Goldman Sachs Group Inc., are as good as junk.
Bonds of U.S. investment banks lost about $1.5 billion of their face value this month as the risk of owning the securities increased the most since at least October 2004, according to Merrill indexes. Prices of credit-default swaps based on the debt imply that their credit ratings are below investment grade, data compiled by Moody's Investors Service show.
The highest level of defaults in 10 years on subprime mortgages and a $33 billion pileup of unsold bonds and loans for funding acquisitions are driving investors away from debt of the New York-based securities firms. Concerns about credit quality may get worse because banks promised to provide $300 billion in debt for leveraged buyouts announced this year.
This story seems to be coming back with a bit of a vengeance; I remember seeing these headlines back in March after the first leg of subprime worry got underway.
Anyway, someone's got to be making money from the other side of this mess, as the FT Alphaville gang points out in, "Subprime- where are the winners?". Alphaville mentions a few specific funds that probably benefitted from taking the other side of the trade, and also points to probable success for many event-driven funds.
And as the NY Times points out, Ken Griffin's Citadel fund has increasingly been making its reputation as a buyer of distressed fund assets and positions in times like these.
The latest move for Citadel as a buyer of a distressed portfolio came earlier this week, when the group bought out the troubled portfolio of Boston-based Sowood Capital. Sowood had been caught on the wrong side of a fallout in the credit markets and was unable to prop up its eroding investments. The fund found a ready buyer and much-needed source of liquidity for its remaining investment positions in Citadel.
The Times story also went on to note that Silver Point Capital, of Greenwich, CT, was among those looking to establish "opportunistic funds" that would take advantage of recent blow-ups in the markets.
As always, stay tuned.
Update: See FT.com for an interactive map which highlights the winners and losers in the ongoing credit market turmoil.