Tuesday, September 30, 2008

Postscript to the bailout madness

As we noted in an update to yesterday's post, the US House rejected a Treasury-sponsored $700 billion bailout bill that would have would have given Treasury Secretary Hank Paulson "broad authority" to purchase mortgage-backed junk paper from financial companies.

Part of the reason the bill failed in the House was the overwhelming response from Americans incensed at the proposed deal. Voters flooded their congressmen with mail, faxes, and phone calls, with many voicing their strong disapproval of the proposed bailout.

As a result, the tide surprisingly turned against congressional planners and unelected officials who had pushed for the bailout, some of whom shamelessly paraded the plan as a "rescue of Main Street", when in fact it is anything but that, especially when one examines the longer-term costs of such a rescue.

Unfortunately, the bailout proposal will not die so easily. The stock market is enjoying a rebound today, as news of a hoped-for salvaging of the bank bailout/"rescue plan" emerges.

That's why I'd like to point out Mish's recent posts, "Courageous Vote in the House", and, "The Bailout Failed. What's Next?", in which he urges readers to continue voicing their disapproval for any related bailout package.

If you are so inclined, please take a look at the information Mish has provided for contacting your elected officials about these soon to be voted on bailout measures. You can also pass this information along very easily to your friends and contacts in the media. The choice is yours!

Related posts and articles:

1. "Jim Rogers says let banks fail, clean out system" - Bloomberg.

2. "Stocks tumble, bonds rally on bailouts" - Finance Trends Matter.

3. "Comments on the bailout bill" - Finance Trends Matter.

4. "The Bailout Reader" - Mises.org.

Thanks to MoneyScience Blogs

Just wanted to say thanks to the MoneyScience Finance Blogs page for adding Finance Trends Matter to their fine finance and investment blog directory. We are happy to be included!

Readers of econ/finance/investing blogs might want to head on over to the MoneyScience Finance Blogs page and take a look around. There is a great list of blogs, and everything is neatly categorized and attractively laid out (love the individual blog banners, nice touch).

As a blog editor and a blog reader, I found a few important features that made this directory stand out from some of the rest.

These are: ease of navigation (everything you want is one click away), attractive design, links that direct readers straight to their blog or blog feed of choice, and updated individual post title feeds that take readers right to each post.

Head on over to the MoneyScience blog directory and have a look. Blog readers and blog editors alike are sure to find a worthwhile resource here.

Monday, September 29, 2008

Stocks tumble, bonds rally on bailouts

Stock markets are falling worldwide Monday, as market participants react nervously to the US Treasury's proposed bailout bill and fears of global bank failures.

Bloomberg has more in, "Stocks worldwide tumble most since 1997, bonds rise on bailouts":

"Stocks around the world fell the most since October 1997, the euro and the pound sank and bonds rose as governments raced to prop up banks infected by growing U.S. mortgage losses.

The Standard & Poor's 500 Index fell 3.8 percent after Wachovia Corp. required a takeover by Citigroup Inc. and lawmakers predicted a close vote on the Bush administration's $700 billion bank bailout. The British pound dropped the most against the dollar in 15 years after European governments stepped in to save Bradford & Bingley Plc, Fortis and Hypo Real Estate Holding AG. Commodities fell. The cost of borrowing in euros for three months soared to a record as banks hoarded cash.

``People are wondering if $700 billion will be enough,'' said Diane Garnick, who helps oversee $500 billion as an investment strategist at Invesco Plc in New York. ``If you're not comfortable being in this type of market, then you shouldn't be making investment decisions now.''

The MSCI All-Country World Index of 48 nations lost as much as 4.5 percent, the steepest plunge since the Asian financial crisis 11 years ago. The S&P 500 retreated 46.58 points to 1,166.43 at 12:35 p.m. in New York. Europe's Dow Jones Stoxx 600 Index sank 5.5 percent to 251.43, the lowest since January 2005. The MSCI Asia Pacific Index fell 2.1 percent."

If you read on at the article above, you'll see just how bad the picture is for global share markets.

For example, the FTSE 100 is down 15 percent this September. Canada's S&P/TSX Composite Index is down 16 percent for the year, and that is the best performance among 23 developed markets tracked by MSCI. The Irish Overall Index is down 13 percent. That's not the figure for this month or this year; that's the figure for today's trading session alone.

So, as we noted back in July, the global bear market continues. That, of course, includes US stocks which are down considerably from their late 2007 highs.

In fact, the global bear market in shares seems to have spread due, in part, to problems in the US stock market and economy, a situation we noted back in January of this year.

Meanwhile, the bond market is rallying on many of these same economic concerns. In fact, investors are still fleeing to US government debt as a temporary safe haven, despite our current economic problems. Reuters reports:

"U.S. Treasury debt prices tore higher on Monday in one of the biggest rallies of the year as fears of spreading bank failures overshadowed moves by central banks to pump hundreds of billions of dollars to thaw markets.

While the U.S. government's $700 billion bank bailout plan looked closer to being passed by lawmakers, it did little to lift investors fears about the stability of global financial system. Many major stock indexes fell more than 4 percent, firing safe harbor bids for government bonds."

Bloomberg reports similarly, noting that government Treasuries now represent "dead money with yields below inflation":

"``The only reason to like Treasuries at this point is as a place to hide,'' said Stewart Taylor, a senior trader who helps oversee $6 billion in investment-grade debt at Boston-based Eaton Vance Management. ``The story of the Treasury market is you're willing to accept less than the inflation rate, meaning you're locking in losses, essentially.''...

...Investors were so risk-averse in the past two weeks that they were willing to accept almost nothing in exchange for the assurance they'd get their principal back."

That covers the bond and stock markets. If you're looking for more commentary on the US' $700 billion bailout bill and the continued efforts to pump "liquidity" into our financial system, see the related posts and articles below.

Related posts and articles:

1. "Roubini says US bank rescue plan is 'very flawed'" - Bloomberg.

2. "Paulson plan is a pig, even with lipstick" - Caroline Baum.

3. "Government intervention fuels the crisis" - Finance Trends Matter.

4. "House rejects $700 billion financial rescue plan" - Bloomberg.

Sunday, September 28, 2008

Comments on the bailout bill

Treasury Secretary Paulson's $700 billion bailout bill heads to the House on Monday. Details from Marketwatch:

"Democratic congressional leaders announced their agreement Sunday on details of a massive financial rescue plan proposed by the Bush administration, releasing a draft text trumpeting taxpayer guarantees and caps on executive compensation.

The draft bill, titled the "Emergency Economic Stabilization Act of 2008," follows days of legislative wrangling over a $700 billion plan proposed by Treasury Secretary Henry Paulson as U.S. financial markets teetered on the edge of a collapse triggered by the U.S. mortgage crisis.

The bill will be introduced in the House of Representatives Monday morning and then head to the Senate, said Senate Majority Leader Harry Reid, D-Nev."

Despite overwhelming disapproval from the American public, this bill may be voted on by the Senate as early as Wednesday.

Commentary on the bailout proposal has been pouring forth from all corners in recent days. It seems that John Mauldin, whose weekly E-letter I receive (and sometimes read), is once again writing in favor of these latest and greatest in government bailout proposals.

Here's what Mauldin had to say in his latest piece, "Who's Afraid of a Big, Bad Bailout?":

"Why do we need this Stabilization Plan? Why can't the regular capital markets handle it? The reason is that the problem is simply too big for the market to deal with. It requires massive amounts of patient, long-term money to solve the problem. And the only source for that would be the US government.

There is no reason for the taxpayer to lose money. Warren Buffett, Bill Gross of PIMCO, and my friend Andy Kessler have all said this could be done without the taxpayer losing money, and perhaps could even make a profit. As noted above, these bonds could be bought at market prices that would actually make a long-term buyer a profit. Put someone like Bill Gross in charge and let him make sure the taxpayers are buying value. This would re-liquefy the banks and help get their capital ratios back in line."

So put John in the, "we really need this, and we might make money off it", camp. Interesting to note that he was also in favor of the Bear Stearns backstop/bailout, a move that he saw as "not a bailout" and indicative of the notion that "the Fed gets it".

Now on the other side of this debate, Nouriel Roubini finds the proposed Treasury bailout to be "a disgrace":

"Specifically, the Treasury plan does not formally provide senior preferred shares for the government in exchange for the government purchase of the toxic/illiquid assets of the financial institutions; so this rescue plan is a huge and massive bailout of the shareholders and the unsecured creditors of the firms; with $700 billion of taxpayer money the pockets of reckless bankers and investors have been made fatter under the fake argument that bailing out Wall Street was necessary to rescue Main Street from a severe recession.

The Treasury plan is a disgrace: a bailout of reckless bankers, lenders and investors that provides little direct debt relief to borrowers and financially stressed households and that will come at a very high cost to the US taxpayer. And the plan does nothing to resolve the severe stress in money markets and interbank markets that are now close to a systemic meltdown."

We'll just put Roubini in the "against" camp.

And that's not all we've got lined up for you on this issue. Some of the best commentary I've seen on the bailout is just ahead in our related posts and articles section.

Where will the country get the money to fund this bailout, and will the plan actually make money for the US government and its taxpayers? Read on to find out.

Related posts and articles:

1. "Latest bailout spin: It's a money maker!" - Big Picture.

2. "What a fine mess you have gotten us into" - Aleph Blog.

3. "Where is Paulson going to get $700 billion?" - CIJ.

4. "Making a deal with the devil" - Peter Schiff via FSO.

Friday, September 26, 2008

Features of the week

All aboard for our, "Features of the week".

1. Bush, Democrats expect $700 billion bailout deal to pass.

2. Putting dodgy assets in deep freeze will not remove the rot.

See also: "How bad is this bad debt?", "Will the Paulson Plan make money?" and, "The real reason for the rush?".

3. Washington Mutual is seized and sold off to JP Morgan in largest failure in US banking history.

4. Hedge fund chief Jim Chanos says company failures could be exposed.

5. Did anyone notice the "Big 3" US automakers bailout?

6. For Greenwich, 'This is our Katrina'. Oh please. - Ed.

7. What would Hayek say about recent interventions in the economy?

8. John Paulson is listed as the biggest short seller of British banks.

9. Jeff Greene is richer after emulating John Paulson's subprime bets.

10. Ratings agencies' "race to the bottom" secured subprime's boom, bust.

11. T. Boone Pickens' funds lose $1 billion in recent energy bets.

12. Warren Buffett tells CNBC all about his swell Goldman deal.

See also: Jeff Matthews' take on Berkshire's Goldman deal.

13. US taxpayers are being enrolled in an economic chain gang.

14. US Dollar: nothing left to believe in?

15. Marc Faber says US credit losses may total $5 trillion (Bloomberg).

16. What would the greatest thinkers think of the financial crisis?

17. Howard Lindzon on, "Surviving the new financial frontier".

If you've enjoyed this week's posts, why not take a moment to email your favorite post on to a few friends and associates? You can do so with the click of a button; see the "email post" icon (small letter envelope) in our post footers.

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Thanks for reading Finance Trends Matter. Enjoy your weekend.

Wednesday, September 24, 2008

Government intervention fuels the crisis

Many of us in present day America have been taught to look for a government solution to any crisis (including those brought about because of earlier government interventions).

Today we explan why government "solutions" may only serve to deepen the problems or prolong these crises, with the hope that this post may serve as a useful antidote to the "save us" mindset.

I recently began reading Thomas E. Woods' recent book, 33 Questions About American History You're Not Supposed to Ask, which details and rebuts many of the popularly held notions concerning our country's political and economic development (see our post featuring author Woods' interview with the Mises Institute's Jeffrey Tucker, in which the two discuss some of the book's main ideas).

Yesterday, while reading Thomas E. Woods' explanation of how government intervention in the economy actually prolonged and deepened the Great Depression, it struck me how much of what was written in that short chapter could apply to our situation today.

Here's a sample passage from that chapter (page 178):

"The recession or depression is the necessary if unfortunate correction process by which the malinvestments of the boom period, having at last been brought to light, are liquidiated. The central bank's cheap credit policy encouraged the initiation of countless investment projects that could not be sustained in the long run. The diversion of resources into unsustainable investments that do not conform with consumer desires and resource availability swiftly ceases as businesses fail and investment projects are abandoned."

Now, as in the 1930s, instead of letting those market forces work to purge the system of those excesses built up during the boom, politicians and unelected officials (Bernanke and Paulson) are attempting to hold back the reality of market prices by purchasing "troubled assets" from banks at government-determined prices.

So when I saw this editorial from Congressman Ron Paul today, it made me glad to know someone was addressing these very issues in real time.

"Many Americans today are asking themselves how the economy got to be in such a bad spot.

For years they thought the economy was booming, growth was up, job numbers and productivity were increasing. Yet now we find ourselves in what is shaping up to be one of the most severe economic downturns since the Great Depression.

Unfortunately, the government's preferred solution to the crisis is the very thing that got us into this mess in the first place: government intervention."

Please read the whole thing, and pass it on to all who might be interested. You will not be getting the truth on these matters from most media sources. And for more, see our related posts and articles.

Related posts and articles:

1. "The Origins of the Crisis" - Mises Blog.

2. "Ron saw it all" - Mises Blog.

3. "Ron Paul Q&A w/ Ben Bernanke" (Video) - CNBC.

4. "Thomas E. Woods: 33 Questions" - Finance Trends Matter.

5. "Faber: Fed acted like a liquidity drug dealer" (CNBC) - Big Picture.

6. "Jim Rogers and Marc Faber on Paulson's Plan" (Bloomberg) - BMB.

Tuesday, September 23, 2008

Felix Zulauf - Barron's interview.

Swiss investor and frequent Barron's Roundtable participant Felix Zulauf was featured in the lastest Barron's interview, a piece entitled, "The Pain of Deleveraging Will Be Deep and Wide".

Here's an excerpt in case you missed it:

"Barron's: It's been an unprecedented time in the financial markets, with Lehman filing for bankruptcy protection, Merrill Lynch being bought by Bank of America and AIG getting rescued by the U.S. government. What's the fallout going to be?

Zulauf: The leveraging-up in this cycle is reversing, and we are now deleveraging. When a huge system -- that is, the global credit system dominated by the investment-bank giants that have been the major creators of credit in the last cycle -- turns down, the fallout is going to be terrible.

Deleveraging is a very painful process, and will run longer and deeper than anybody can imagine. I've been fearful of this.

So far, what we're seeing is the pain in the financial system. Later on, we'll see the echo effect of the pain in the real economy. I can't understand economists talking about no recession or mild recession. This is the worst financial crisis since the 1930s. It's different than the '30s, but is the worst since then, and the consequences will be very, very painful for virtually everybody in our economies."

What I found surprising about this piece is that Zulauf (who always seems very on the mark in his usual Barron's appearances) spoke in favor of the recent US government bailouts and the latest plans by the Treasury to purchase mortgage-backed assets from the banks.

In fact, Zulauf added that in order for the plan to work, the Treasury purchase plan should be "at least $1 trillion in size" and accompanied by Fed rate cuts.

He seems to be taking the so-called pragmatist's view of a need for government intervention in the market, in order to avoid the much-feared and widely-trumpeted global financial meltdown that may result in its absence (as the backers claim).

Anyway, have a look for yourself and see what Zulauf has to say about the bailouts, the financial deleveraging process, the global economy, government debt and long-term interest rates, and more.

Bernanke's magical price-fixing solution

Central Planning chairman Ben Bernanke has discovered an efficient new way to set prices in the securities market: by government edict.

Quote from, "Avoiding fire sale price is key to Paulson plan: Bernanke":

"Federal Reserve Board chairman Ben Bernanke said that criticism of the $700 billion plan proposed by Treasury Secretary Henry Paulson overlooked a key ingredient: it is designed to avoid forcing banks to sell or value their mortgage assets at a "fire-sale" price.

In a harsher tone than he has ever used in testimony, Bernanke spelled out the benefits that would accrue when the government can buy these mortgage assets at close to "hold to maturity" prices instead of the fire-sale price. Banks would have a basis for valuing the assets and won't have to use fire-sale prices and their capital won't be unreasonably marked down, he said."

No, we get it, Ben. The point you think we've "overlooked", this plan's attempt to insulate banks from the reality of market prices, is in fact, what we've focused so intently on.

Why? Because the market is supposed to set prices, even if you and your banker friends don't happen to like the bid currently offered for those supposedly wonderful mortgage-backed assets.

Sorry to have to tell you this, but sometimes your assets are not worth as much as you might hope. I know it's hard to imagine, but that's how it works.

The banks already have "a basis for valuing the assets". It's called market price. Jerk.

Monday, September 22, 2008

Goldman, Morgan, & Paulson's big plan

Last night's surprise announcement that investment banks Goldman Sachs and Morgan Stanley were changing their status to bank holding companies marks the end of an era for big Wall Street investment banks.

As mentioned last week in, "The end of the broker-dealers?", Goldman and Morgan were, at that time, the last two survivors of the "big five" independent Wall Street investment banks.

Even before Lehman Brothers had filed for bankruptcy and Merrill Lynch was swooped up by Bank of America, some, like Nouriel Roubini, had said that the broker/dealer business model was flawed and doomed to failure.

Now that the last two major independent investment banks have restructured themselves as Fed-regulated banks, it seems that the end of the independent broker dealers has come about quicker than many of us might have imagined.

More on this from Bloomberg:

"The Wall Street that shaped the financial world for two decades ended last night, when Goldman Sachs Group Inc. and Morgan Stanley concluded there is no future in remaining investment banks now that investors have determined the model is broken.

The Federal Reserve's approval of their bid to become banks ends the ascendancy of the securities firms, 75 years after Congress separated them from deposit-taking lenders, and caps weeks of chaos that sent Lehman Brothers Holdings Inc. into bankruptcy and led to the rushed sale of Merrill Lynch & Co. to Bank of America Corp.

``The decision marks the end of Wall Street as we have known it,'' said William Isaac, a former chairman of the Federal Deposit Insurance Corp. ``It's too bad.'' "

But here's the really interesting feature of this development: it not only helps Goldman and Morgan to stay afloat (by extendeding access to the Fed's discount lending window), it also puts the two banks in a position to buy up other failing banks in a "roll-up strategy".

Quotes from the NY Times Dealbook blog:

"By becoming bank holding companies, Goldman Sachs and Morgan Stanley gained some breathing room in the immediate term. But the change also may lay the groundwork for additional deal making. Given the number of bank failures expected this year, it is possible that Goldman and Morgan Stanley could seek to buy those banks cheaply in a “roll-up” strategy.

Before the move to make the two investment banks into holding banks, federal regulations prohibited them from pursuing such deals. Indeed, Morgan Stanley’s recent talks with Wachovia revolved around Wachovia buying Morgan Stanley."

We know that more bank failures are coming down the pike. Now Goldman and Morgan, having been thrown a lifeline by the Federal Reserve, are also in a position to bulk up from the acquisition of banks that won't be saved from failure. Interesting...

Also, reading through some of the comments at the Dealbook blog, it's apparent that many are wondering how Hank Paulson's connections to Goldman Sachs have influenced this latest "save" of troubled financial institutions.

For the more cynical among us, here's one trader's take on how Hank Paulson has personally benefited from taking on the position of US Treasury secretary (it involves his Goldman stock holdings).

Speaking of the Treasury secretary, we should also mention that despite all the latest news and rumination on Paulson's big plan to have the Treasury take on $700 billion or so in "troubled assets" from financial institutions' balance sheets, no one knows exactly how much all this will cost taxpayers in the end.

But as the FT reports, It will help push us towards our first trillion-dollar deficit:

"On top of a string of unprecedented events stemming from the credit crunch, the US Treasury’s $700bn rescue plan for distressed mortgage assets seems likely to give us another: the trillion-dollar deficit.

The long-term cost – or even profit – of the operations being launched in Washington depends on a number of known unknowns and possibly some unknown unknowns as well. But whatever the final cost to American taxpayers will be, they are now directly or indirectly providing a backstop for assets worth a great deal more than the federal government’s current $5,400bn (£2,950bn, €3,750bn) in debt."

For now, let me just say that I agree with others who have noted the likely indirect costs we will all suffer due to heightened inflation risk and increased moral hazard resulting from these bailouts and intervention schemes.

And if you don't like it, you can do as Mish suggests and notify your Senator today to register your displeasure with bailout actions and the proposed "dictatorial powers" for Paulson and Bernanke.

Friday, September 19, 2008

Features of the week

A looney, volatile week in the markets fueled by government intervention and artificial supports for financial firms and stock prices.

We scan the globe for signs of intelligent life in our, "Features of the week".

1. US drafts sweeping plan to fight crisis. Treasury announces plan to buy worthless mortgage paper.

2. SEC issues temporary ban on short-selling of 799 financial stocks.

Just following the FSA's lead, I guess.

Note: Once again, we bring you Doug Kass' comments on the short-seller blame game. Plus, BMB's comments on "Kill Shorty".

3. Buffett's derivatives "time bomb" goes off on Wall Street.

4. Strong push for an RTC-type solution to the credit crisis.

Note: Jim Puplava and others at Financial Sense Online saw this type of Resolution Trust solution to the mortgage debt crisis coming.

5. Stocks soar worldwide following bank bailouts, short-sale restrictions.

6. "Is Capitalism Dead?", asks Minyanville's Todd Harrison.

7. Nouriel Roubini on, "The transformation of the USA into the USSRA".

8. Hedgie Fintag has some thoughts on the US and the markets.

9. Warren Buffett may find bargains in the AIG rummage sale.

10. Assets linked to emerging markets will become "toxic waste".

11. Sue them, jail them, make them pay for meltdown: Ann Woolner.

12. Gold coins & bullion sales up as investors seek shelter from crisis.

13. Wall Street's ills seep into everyday lives.

14. Charles Kirk knows that bailouts are band-aids.

Thanks for reading Finance Trends Matter.

If you enjoyed this week's posts, and would like to see more, you can bookmark us for future reference or subscribe to our free RSS feed to keep up with all our latest updates. Have a nice weekend.

Thursday, September 18, 2008

Stocks rally, Wall Street in "fantasyland"

What a manic-depressive market we have.

Stocks soared today in US trading, erasing most of yesterday's losses in the Dow Industrials and S&P 500 index. What was the inspiration for this turnaround? Increased corporate profits? Surprising news of economic strength? Heavy fund buying of bargain shares?

No. It was a government plan to make things "all better".

Bloomberg has the story:

"U.S. stocks rallied the most in six years on prospects the government will formulate a ``permanent'' plan to shore up financial markets, while regulators and pension funds took steps to curb bets against banks and brokerages.

Traders erupted into cheers on the floor of the New York Stock Exchange as the Dow Jones Industrial Average jumped 617 points from its low of the day after Senator Charles Schumer proposed a new agency to pump capital into financial companies. The Standard & Poor's 500 Index climbed 4.3 percent as 68 companies in the gauge rose more than 10 percent. "

It seems we've now had our Karachi moment, and we didn't even have to tear down the stock exchange to get those artificial market supports in!

Marc Faber spoke to Bloomberg today, responding to questions about the recent market declines and a supposed need for more government actions to "calm the markets".

He said that the markets may rally off an oversold condition, but if investors are looking for a new high and a resumption of the bull market, they are in "fantasyland".

Marc also noted that the AIG bailout is a nice deal for the Treasury, who can borrow money at "essentially no cost" by issuing Treasury bills, while lending that money to AIG at a ten percent interest rate. So the government can make a nice spread, while having first call on AIG's assets.

Despite the favorable terms of the AIG bailout, Faber feels that government interventions in the financial markets are interfering with the market's ability to wash out the excesses and frauds of the previous boom.

He notes that the best course of action is to accept the pain and allow a financial crisis to burn its way through the system, so that market readjustments can come about quickly and soundly.

Having no bank directorship or company stock options to protect, I'm in agreement with Marc Faber on this issue.

How about you? Do you feel that government plans to support the markets and failing companies inspire confidence and promote sound financial health? Let's hear it.

Jim Rogers, Marc Faber on CNBC-TV18

We bring you two recent video clips from the CNBC-TV18 channel in India, featuring investors Jim Rogers and Marc Faber.

In the first clip, Jim Rogers tells CNBC-TV18 that he is still bullish on gold and agricultural commodities, despite the recent sharp correction in most commodity markets.

Jim thinks commodity prices will be higher in the next decade. For now, he says we are in a recession and will likely see lower commodity prices for the near-term.

Rogers is still bearish on the dollar's long-term prospects, and he hopes to use the recent rally as an opportunity to sell the dollar in the near future. He is bullish on the yen, renminbi, and Swiss francs, which he has been buying.

Marc Faber also spoke with CNBC-TV18 last week. He offered the view that contracting liquidity worldwide had a varied effect on the timing of asset price declines, with all major asset classes (stocks, commodities, currencies) eventually tumbling in a domino effect.

While he sees the possibility for countertrend rallies in commodities, Marc says "forget about new highs in commodities, it won't happen anytime soon". He feels the contraction in global liquidity will continue, and it may be a year or so before we see a recovery in asset markets.

Faber notes that a variety of asset classes (art, stocks, bonds, commodities, real estate) had moved up in concert since 2002, thanks to the great "Bernanke Bubble". The consequences of this unprecedented bubble will be felt for some time, because credit growth has decelerated sharply, which leads to falling asset prices and recession.

Marc agrees with Jim Rogers that commodities may generally be higher in the next decade, largely due to money printing by central banks. Competitive devaluations of currencies by the world's central banks will lead to near-zero interest rates and a highly inflationary global environment.

Marc also reiterates his view that most countries are experiencing slowing economic growth or negative growth rates, and he notes that many emerging share markets have already discounted slowing growth to some extent.

Still, he wonders if these stock markets have declined enough to reflect falling profits that are likely to come over the next several years. He feels that India's Sensex has likely seen its highs around the 20,000 mark, and will not eclipse that mark for years to come.

Interestingly, noted Indian stock bull Rakesh Jhunjhunwala differs on this last point, telling CNBC-TV18 that the long-term Indian bull market is still alive, albeit in "interruption mode".

Though I am not a close follower of the Indian stock market, I seem to remember reading an account of Marc and Rakesh debating this very point last year, and at other times in the past.

Related articles and posts:

1. More interviews and posts with Jim Rogers and Marc Faber.

2. Stocks rally, Wall Street in "fantasyland".

3. Marc Faber shares insights on the economy and asset markets.

4. Rogers and Buffett disagree on bailouts.

Wednesday, September 17, 2008

Nothin' but an AIG thing

Not a good day for US shares. As we head into the close of Wednesday's US trading session, the Dow Industrials are down around 400 points (-3.7 percent), and the S&P 500 index is down around 50 points, or -4.2 percent.

North American stocks suffered today, while gold rallied sharply, despite the government's $85 billion bailout loan to troubled insurer and financial-engineering firm AIG.

Meanwhile, Bloomberg reports that bank lending has seized up, treasury bill yields plunged to a 54-year low on a rush to perceived safety, and global shares have lost about $2.8 trillion in market value this week. Major share indexes in Russia, Hong Kong, and the US have fallen to new multi-year lows.

But the main focus of the markets has been on AIG, which leads a basket of 13 "unlucky" US stocks that have lost $1 trillion in market value this year.

The Wall Street Journal reported today that the US will take over AIG in an $85 billion bailout. In a quick turnaround of the anti-bailout sentiment that allowed investment bank Lehman Brothers to file for bankruptcy earlier in the week, the government has stepped in to loan money to AIG, claiming the company was too big to fail.

Terms of the bailout package from the Journal:

"The U.S. negotiators drove a hard bargain. Under terms hammered out Tuesday night, the Fed will lend up to $85 billion to AIG, and the U.S. government will effectively get a 79.9% equity stake in the insurer in the form of warrants called equity participation notes. The two-year loan will carry an interest rate of Libor plus 8.5 percentage points. (Libor, the London interbank offered rate, is a common short-term lending benchmark.)

The loan is secured by AIG's assets, including its profitable insurance businesses, giving the Fed some protection even if markets continue to sink. And if AIG rebounds, taxpayers could reap a big profit through the government's equity stake.

"This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy," the Fed said in a statement. "

Note that the Journal sees AIG's profitable insurance business as protection for the Fed and US taxpayers. FT Lex has some contrasting opinions on that point:

"A patched-up AIG could stagger on, with the Fed’s assistance. Institutions could be strong-armed into providing the huge infusions of capital needed to tide it over.

However, its brand – motto: ”the strength to be there” – may already be damaged beyond repair. Buyers of insurance tend to accept that a provider generally knows what its assets are worth but can make only an educated guess as to its liabilities (the direct opposite of a bank). AIG clearly does not have a good handle on either. The group’s murky book of CDS on collateralised debt obligations has contributed to losses of about $13bn this year, and is probably deteriorating daily."

Reading the details of the crisis at AIG, it's interesting to find that the root of the company's failure (and the impending damage to its counterparties) can be found in its decision to branch out from its main insurance business and into the derivatives and swaps business.

"As American International Group fights for survival, the question on everyone’s lips is how could what was once the world’s biggest insurer get itself into such a mess?

The answer has its roots in a decision in the late 1980s to hire a group of derivatives specialists from Drexel Burnham Lambert.

These formed the basis of AIG Financial Products, which wrote billions of dollars of derivatives, which are now at the heart of AIG’s woes and are a long way from the mainstream insurance business that continues to lie at AIG’s core."

Is AIG too big to fail? Are its numerous counterparties too big and important to suffer write-downs or losses? Read through the following related articles for more details and decide for yourself.

Related articles and posts:

1. "US to take over AIG in $85 billion bailout" - Wall Street Journal.

2. "Non-core blows to AIG's heart" - Financial Times.

3. "The boring is biting with a vengeance" - Financial Times.

4. "Say goodbye to the old America..." - Fabius Maximus.

Monday, September 15, 2008

The end of the broker-dealers?

First it was Bear Stearns that went under, sold at the last moment in a fire-sale deal to JPMorgan Chase back in March.

Then it was Lehman Brothers, who filed for bankruptcy early Monday after unsuccessfully attempting to strike a quick takeover/rescue deal this past weekend.

Now Merrill Lynch has announced it will be taken over by Bank of America in an all stock deal valuing Merrill at $50 billion. The deal was arranged quickly over the weekend, as fears of a possible Lehman failure were starting to spread to other major investment banks.

Bloomberg reports on the "'Tectonic' shift on Wall Street as Lehman Fails, Merrill Sold":

"In the biggest reshaping of the financial industry since the Great Depression, two of Wall Street's most storied firms, Merrill Lynch & Co. and Lehman Brothers Holdings Inc., headed toward extinction.

New York-based Lehman, founded 158 years ago, said early today that it plans to file for Chapter 11 bankruptcy protection after failing to find a buyer. Merrill Lynch, 94 years old and also based in New York, agreed to sell itself to Bank of America Corp. for $50 billion in an emergency deal hashed out yesterday...

...The five New York-based securities firms that dominated Wall Street have been reduced to two: Goldman Sachs Group Inc. and Morgan Stanley. While both firms are scheduled to report a drop in third-quarter earnings this year, their business has remained profitable throughout 2008 -- unlike Lehman and Merrill. "

Interesting to see that Merrill Lynch is being acquired at a nice premium ($29 a share) to its closing price of $17.05 on Friday. Especially when you consider that this deal was quickly cobbled together in what had to be a desperate attempt by Merrill to avoid Lehman's fate.

Marc Faber had a few things to say about that, and other aspects of the Lehman and Merrill news, in this latest Bloomberg interview.

So now that Bear, Lehman, and Merrill have been swallowed up or gone bust, what will become of the remaining "big five" broker-dealers? Is their business model fatally flawed? Will a similar fate befall Goldman Sachs and Morgan Stanley?

Here's what Nouriel Roubini had to say back in July:

"The broker/dealer business model is "inherently unstable" and the four remaining major firms will not be independent in a few years, says Nouriel Roubini, economics professor at NYU's Stern School and chairman of RGE Monitor.Embattled Lehman Brothers is likely to seek a buyer "within months," Roubini says.

Lehman Brothers ceasing to be independent is not such a shocking outcome, but Roubini ultimately sees a similar outcome for Goldman, Merrill Lynch, and Morgan Stanley.The problem, he says, is that broker/dealers use the same model as banks -- borrow short and lend long -- only they borrow on even shorter timeframes, use more leverage, and don't have the kind of government backstop banks enjoy."

We are not rooting for the failure of any of these firms, but it seems this weekend's developments have really shined a light on the remaining independent US investment banks.

As the financial crisis rolls on, and losses from the credit crisis steadily rise, some venerable US financial institutions are now having to face the music as sentiment regarding government-backed bailouts has turned.

Friday, September 12, 2008

Features of the week

"The whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups." - Henry Hazlitt. Economics in One Lesson.

We bring you our, "Features of the week".

1. Troubled Lehman Brothers races to find a buyer.

See also: "A Bailout for Lehman? Not Likely"; and a "bad bank" for Lehman's toxic assets.

2. US crude oil futures dip below $100, despite Hurricane Ike threat.

3. Fannie Mae and Freddie Mac accounting created a "house of cards".

4. Fannie/Freddie bailout wins Pimco $1.7 billion.

5. Government bailouts are likely to prolong economic downturns.

See also: Jim Rogers on America's "lost decade"; FT, "Cost of US loans bailout emerging"; Mark Thornton on, "How to avoid another Depression"; Roger Lowenstein, "Long-Term Capital: It's a short-term memory"; David Weidner, "The birth of Wall Street's bailout culture".

6. Alt-A mortgages next risk for housing markets as defaults surge.

7. Hedge fund glory days fading fast, says New York Times.

8. New hedge fund strategy - lower fees.

9. Red Kite Metals fund takes a hit, while BlueGold Capital shines.

10. Michael Masters is in the news again.

11. Index Fund bets did not push oil prices up, CFTC report says.

12. Charles Maxwell talks to Barron's about $300-a-barrel oil.

13. The new commodity play: short gold, long mining equities.

14. Sotheby's falls on concern over client spending and upcoming sales.

15. Henry Ford's Detroit neighborhood tries to keep up appearances.

16. US move on Fannie and Freddie triggers CDS default.

See also: "CDS Systemic risk: a primer about settlement risk".

17. Marc Faber shares some insights on the economy and asset prices (US dollar, commodities, shares).

18. Nouriel Roubini says the banking crisis and the recession is just beginning (Bloomberg).

Thanks for reading Finance Trends Matter.

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Enjoy your weekend, and drop in anytime.

Wednesday, September 10, 2008

Rogers and Buffett disagree on bailouts

On the bailouts of Fannie Mae and Freddie Mac, investors Jim Rogers and Warren Buffett cannot agree.

Rogers feels the US government takeover of Fannie and Freddie is a disaster that signals the US' shift to socialism, while Buffett has called it a "sensible deal" and the best option available at the time.

Excerpts from the Money Morning piece, "Jim Rogers and Warren Buffett at odds on Fannie/Freddie bailout":

" Few analysts have abstained from voicing an opinion about the U.S. government’s plan to seize control of Fannie Mae (FNM) and Freddie Mac (FRE), the nation’s embattled mortgage behemoths, and that include such eminent investors as Jim Rogers and Warren Buffett. Of course, two of the world’s greatest financial analysts have very two very different perspectives.

"It is socialism for the rich," Rogers said yesterday (Monday) during an interview with CNBC Europe, "It’s just bailing out financial institutions."...

...Of course, the Oracle of Omaha sees things differently. He praised the plan as a wise move for Treasury Secretary Paulson, who Buffett said "did exactly the right thing."

"I wouldn’t change anything in the plan myself," Buffett said in his own interview with CNBC. "It’s the best deal and the most sensible deal available now." "

Warren Buffett told CNBC that Secretary Paulson did "exactly the right thing" in structuring this bailout deal, and that he basically agreed with the deal terms which gave the Treasury an 80 percent warrant on Fannie and Freddie's common shares.

At the same time, he noted that the Treasury was on the hook for losses that would arise from the preferred and common shares being wiped out. Still, he stressed that the Treasury's takeover was the best option to avoid "greater losses down the road".

Jim Rogers told CNBC Europe that the bailout was an outrage that showed America to be "more communist than China is right now". Unfortunately, this seems to be the way the US is leaning now, and the politicians we have voted in generally support these kind of policies.

Rogers responded to the CNBC anchor's ridiculous assertion that bank failures and crises have always ended in nationalization or state takeover by reminding him that this was not the case historically, as most financial panics and bank failures were solved through bankruptcy in the private markets, rather than taxpayer-funded bailouts and nationalization schemes.

He also noted that the nationalization is likely to fail, and that Hank Paulson knows this to be true, as they have merely "papered over" the problem until the next administration inherits it.

Bottom line: While I have great respect for Jim Rogers and Warren Buffett as investors, on this matter I am in full agreement with Jim Rogers.

In fact, I've come to realize that Rogers usually trumps most commentators and famous investors when it comes to spelling out reality and understanding the ethical questions that arise from these situations.

I believe this is due to his blunt personality, his critical thinking skills, and his knowledge of history and sound economic principles.

Monday, September 08, 2008

Monday is all about the financials

The US stock market was pretty green across the board, as most major market averages (with the exception of the Nasdaq 100) enjoyed gains Monday.

The positive action in the markets was spurred on by the weekend's news of a US government takeover of failed mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE). Both Fannie and Freddie closed down over 80 percent on the day, as investors reacted to news of the dilution looming over common shareholders as a result of the Treasury's nationalization of the GSEs.

In contrast to Fannie and Freddie's plunging share prices, many of the other financial shares enjoyed a rally today, as did the US home builders.

More on that from Bloomberg:

"U.S. stocks climbed, adding to a rally across Europe and Asia, on speculation the government takeover of Fannie Mae and Freddie Mac will stabilize the global financial system battered by $507 billion in credit losses.

Citigroup Inc., Wachovia Corp. and Bank of America Corp. added at least 6.6 percent after Treasury Secretary Henry Paulson said the government will provide short-term funding to mortgage lenders Fannie and Freddie. KB Home and D.R. Horton Inc. jumped more than 12 percent, sending a gauge of homebuilders to a four- month high. An advance in banks from Germany to Japan sent the MSCI World Index up 2.1 percent, the most since April."

The rest of the world's stock markets didn't fare too badly either, as Asian bank shares rallied early in global trading today, followed by positive performances by many European shares.

However, banks owning preferred shares in Fannie and Freddie did not fare so well, due to the likely elimination of preferred share dividends resulting from the government's takeover. Regional banks such as Sovereign Bancorp (SOV), Gateway Financial (GBTS), and Midwest Banc Holdings (MBHI) were among those hardest hit.

Meanwhile, Schaeffer's market blog notes that JPMorgan Chase (JPM) is likely to be affected by junk ratings on Fannie and Freddie preferreds, along with European banks who hold about $5 billion worth of the agencies' preferred shares.

But to me, the most interesting financial news item of the day concerns investor John Paulson and his newfound willingness to start sifting through the wreckage of the financial industry in search of new investments, a shift he hinted at earlier in the summer.

As the FT explains in, "Paulson ready to move into recovery mode":

"Paulson & Co, last year's most successful hedge fund, has told investment bankers it is ready to consider backing rescue recapitalisations of troubled financial institutions - signalling a switch from betting against the sector to buying into it.

John Paulson, founder of the $35bn New York hedge fund, told clients on a conference call last week that he remained extremely bearish, according to two investors who took part in the call. But he is prepared to take long positions across mortgage securities, banks and finance houses as prices fall to his target levels."

I'm sure many will be watching Paulson & Co.'s moves in this sector closely. We'll be sure to keep you posted.