Wednesday, March 31, 2010

Interview: Russell Napier on global debt crisis

Financial Sense Newshour recently spoke to Ron Greiss of the Chart Store and Russell Napier of CLSA about the US and global debt pictures. You can hear what they have to say in this March 27 interview broadcast.

Soundbites from Alan Greenspan conceding that rising yields on US bonds are the proverbial canary in the coalmine for higher interest rates ahead lead off the broadcast. Jim Puplava and guest Ron Greiss have more to share on the state of the US' finances and its debt picture (which are rather grim).

Russell Napier chats with Jim later in this segment, sharing some key thoughts on the "structurally mispriced" US bond market. Anyone watching the Treasury market and the long-term direction of interest rates should check these interviews out.

Related articles and posts:


1. Russell Napier: The Next Crash - Finance Trends.

2. Anatomy of the Bear: Russell Napier interview - Financial Sense.

Monday, March 29, 2010

Astonishing idea: let home prices fall

Even when everyone around seems to have totally lost the plot, you can count on Caroline Baum to step in with some sorely-needed logic and truth. This week's edition: home prices and foreclosures.

Caroline reminds us, "Lower home prices can fix what government can't":

"
New home sales, which lead the complex of housing indicators, fell to an all-time low of 308,000 in February, the fourth consecutive monthly decline. For existing home sales, it was the third consecutive drop after last year’s tax-credit- driven bounce.

Homebuilder sentiment has rolled over. Housing starts are bumping along the bottom, with new construction too low to accommodate normal growth in households, according to Michael Carliner, a Potomac, Maryland, economic consultant specializing in housing.

Alas, all the Fed’s purchases and all the government’s men can’t put the residential real estate market together again.

Between them, the federal government and central bank can lower mortgage rates, modify mortgages, use their power to get private lenders to modify mortgages, and create incentives to move inventory, such as the first-time homebuyer’s tax credit.

What they can’t do is manufacture enough artificial demand for an asset that was artificially inflated to begin with. Prices will have to fall, which is how supply is allocated in a market economy. (An occasional reminder is in order given the current spend-money-to-save-money mindset.)"

Go read the whole thing, and check out Barry Ritholtz's post, "More Foreclosures Please" as well.

Time-saver for those forwarding this post on to government officials: you can't alter the basic rules of supply and demand. Or as the Stones sang, "You can't always get what you want".

Friday, March 26, 2010

Economist on Greece bailout, er, "rescue"

The bailout structure you've all been waiting for is here, now that 16 nations of the European Union (EU) have agreed to supply Greece with a backstop for its debt financing problems.

The Economist has the details:

"“THIS was the case that was never supposed to happen,” said Angela Merkel on Friday March 26th, at the end of a short but tense European Union summit in Brussels. Germany’s chancellor did not need to elaborate. To her visible distaste, Europe’s leaders had just agreed a mechanism for rescuing Greece from a sovereign credit crunch...

...The mechanism agreed late on March 25th by the 16 countries that share the euro was harsh. At the insistence of Mrs Merkel, Greece will be able to tap into emergency help only if available market financing has been deemed “insufficient” by experts from the European Commission and European Central Bank..."

I'll be perfectly honest here and admit that I do not fully understand the ins and outs of this agreement, or how and when the rescue terms will exactly kick in (should Greece need to tap into the "emergency help").

Luckily for all of us, we get a simple background on Greece's problems and the EU-IMF rescue agreement from the Economist. It just might take more careful reading on your editor's part to get it through his addled brain.

You may also want to check out Peter Cohan's take on the Greek rescue plan and the EU debt contagion that's hitting Greece, Portugal, and Spain. I know I will want to avail myself of that knowledge before the weekend is through. Cheers!

Wednesday, March 24, 2010

Jim Rogers on life, travel, & investing

   

I mentioned Jim Rogers' most recent Bloomberg TV appearance in yesterday's post; today I'd like to link to that full interview and share some wonderful insights from Jim on life, travels, and lessons for the younger generations.

Of course, you'll also hear Jim's thoughts on the Dollar, the Euro, and the Greek debt crisis. Still, I wanted to highlight the more timeless wisdom imparted by Jim on his life and personal experiences. Hope you find the discussion worthwhile.

You can find more from Jim Rogers in our related posts section, or by using the Google search bar in our sidebar. Enjoy the clips!

Related articles and posts:

1. Jim Rogers: The Calculating Cowboy - Finance Trends.

2. Jim Rogers interview with Channel 4 - Finance Trends.

Tuesday, March 23, 2010

Statesmen vs. politicians

Jim Rogers offered up a great quote on the Greek debt crisis and the nature of politicians in his latest Bloomberg interview.

When asked
about the effects of credit default swaps (CDS) and speculators on Greece's debt problems, Rogers replied that speculators were simply reacting to what the Greeks have done to their own finances and that, "Politicians don't normally understand how the world works; that's why they're politicians".

As we've discussed before, it is always expedient for politicians to lie and point fingers at others to distract from problems and crises of their own making. Which brings me to this line of thought: what type of behavior and leadership can we expect from true statesmen, as opposed to their more opportunistic colleague, the politician?

I turned to Google for a quick survey of opinion on this topic and found this quote at Wikipedia:


"A politician thinks about the next elections — the statesman thinks about the next generations." - James Freeman Clarke


What would our country be like if we demanded and rewarded statesmanship from our political representatives, rather than pandering and opportunism? If you'd like to consider this issue, please see the posts included below or share your thoughts with us here.

Related articles and posts:

1. Difference Between Politicians and Statesmen - Laughing Wolf.

2. Comparison: Statesman and Politician - Daily Paul.

Friday, March 19, 2010

Michael Lewis on Charlie Rose: The Big Short


Michael Lewis, well-known storyteller and author of The Big Short, joins Charlie Rose for a discussion of the financial crisis and the real-life characters in his new book, who saw the collapse coming and profited by shorting the subprime housing market.

There are many remarkable aspects to this story, but perhaps one of the most interesting themes to emerge from this discussion is Lewis' realization that the events chronicled so memorably in Liar's Poker were not, as he thought at the time, the end of an era, but rather the beginning of one that only seems to be ending now in 2010.

Enjoy the interview, and click over to our related posts for more insight on hedge fund managers Michael Burry, Andrew Lahde, and John Paulson, who profited from the subprime short trade and were profiled in Lewis' and Greg Zuckerman's latest books.

Wednesday, March 17, 2010

Seth Klarman: Lessons from 2008

Widely followed value investor and (Baupost Group) hedge fund manager, Seth Klarman shares his lessons from the recent financial crisis (Hat tip to Derek Hernquist for recently highlighting this piece).

Here's an excerpt from Klarman's, "Forgotten Lessons of 2008":

"One might have expected that the near-death experience of most investors in 2008 would generate valuable lessons for the future. We all know about the “depression mentality” of our parents and grandparents who lived through the Great Depression.


Memories of tough times colored their behavior for more than a generation, leading to limited risk taking and a sustainable base for healthy growth. Yet one year after the 2008 collapse, investors have returned to shockingly speculative behavior...
Below, we highlight the lessons that we believe could and should have been learned from the turmoil of 2008. Some of them are unique to the 2008 melt- down; others, which could have been drawn from general market observation over the past several decades, were certainly reinforced last year.

Shockingly, virtually all of these lessons were either never learned or else were immediately forgotten by most market participants...
"

As you'll read, Klarman not only goes over the (largely forgotten or overlooked) "20 investment lessons" of 2008, he also reviews many of the "false lessons" that have been learned by investors and speculators during the 2009 recovery period.

There are some very worthwhile points to absorb from Seth's piece, so you might want to bookmark his essay for future reference. You can also find a scan of Klarman's essay here.

Related articles and posts:

1.
Seth Klarman: Margin of Safety - Finance Trends

2. Thomas Woods interview: Meltdown - Finance Trends. 


3. Lessons from Charlie Munger - Finance Trends.

Friday, March 12, 2010

Marc Faber: FT.com interview


Marc Faber was recently interviewed by the Financial Times for their video series, "View From the Markets". Here's a quick overview of some of the topics and themes covered in this 4 part discussion:
  • Marc warns of a partial US debt default, in which the government denies payment to foreign bond holders due to the overwhelming burden of future interest payments on the debt. Usually, governments faced with this situation will "monetize" the debt and print money to inflate away the real debt burden.
  • Irrational monetary policies and artificially low interest rates have fueled recent asset bubbles and laid the foundation of the global financial crisis. We continue to see these artificially low rates globally, which leads to misallocation of capital, as in the case of China currently.
  • Faber does not agree with targeted "excess profit" taxes on industries such as banks or oil companies. Instead, he points out that simply having high real interest rates would encourage savings and discourage speculation and the formation of bubbles.
  • Stocks (particularly US shares) may continue to go up in terms of local currencies, but are unlikely to make new highs in terms of gold over the longer term. Marc is far more optimistic about the outlook for Asian shares and emerging markets. He feels that returns from emerging markets will outpace those of Western developed markets over the coming years.
Tune into the full video interview linked above for more. Enjoy your weekend, and thanks for reading!

Thursday, March 11, 2010

Readings: derivatives, Greece, & a triple whammy

Here's what I'm reading this afternoon:

1. Triple whammy of trading costs, taxes, and inflation drags down returns on US stocks (with Bloomberg chart graphic).

2. Greece lifts a page from Citigroup's playbook - Jonathan Weil.

3. Barry Ritholtz' take on derivatives regulation.

4. Gregor Macdonald looks at oil consumption in the developing world and California.

5. Research models forecast peak oil at 79 mbpd in 2014 (HT: Chris Nelder).

6. 10 years after the dot com bubble and Nasdaq 5,000, Henry Blodget reflects.

7. Stock markets celebrate year of gains, but only Chile is above its 2007 peak.

8. Joe Fahmy feels the market wants to go higher from here.

Hope you find the articles worthwhile, we'll see you on Friday for more financial news and insight.

Tuesday, March 09, 2010

Hedgeye: The Principled One

There is so much good material waiting in the cue on the subjects of Greece, sovereign debt, and currency speculation, but here's the piece I want to share with you today.

It comes from Keith McCullough at Hedgeye and his post takes on the idea that, once again, "evil speculators" are somehow to blame for the fundamental economic problems of a country's own making.

An excerpt from, "The Principled One":

"The other George (Papandreou) is the Prime Minister of Greece. Since the Chinese told him to go fly his levered-up bureaucratic kite, Papandreou has been on a PR tour since Friday when he visited Germany.

Along the way, somehow he convinced France’s Nicholas Sarkozy that “speculators are creating malicious rumors” about his country. With some political wind from the left at his back, he took it up a notch ahead of meeting with Geithner today in Washington and called whoever he can’t see “unprincipled speculators.” George, you have to be kidding me. You have no idea what you don’t know.

First of all, hearing politicians talk about markets is like watching a southern belle try to ice fish. So I won’t waste time on ripping this poor guy a new one for using the word “speculator.” That would be too easy.

It is this concept of “principles” that really has my arthritic hockey knuckles hammering on the keyboard this morning. What, almighty Principled One, in God’s good name is “principled” about levering-up your country’s balance sheet to 100% debt to GDP and a 12.4% deficit to GDP ratio?..."

Go read the whole thing.

And let's not hold our breath waiting for lying politicians to make these false accusations and verbal attacks in the presence of such "unprincipled speculators". In an honest society, you might get a sock to the face or a challenge from your opponent for soiling their honor in such an underhanded way.

Related articles and posts:

1. Jim Rogers: Greece bankruptcy good for Euro - Finance Trends.

2. Greece presses US to crack down on "speculators" - Bloomberg.

3. Sorry, Greece, your crisis not caused by speculators - Clusterstock.

Monday, March 08, 2010

Jim Rogers: Greece bankruptcy good for Euro



Jim Rogers tells Bloomberg TV that Greece should go bankrupt, and that this would be good for the euro and for Europe in the longer term.

As Jim points out, a Greek bankruptcy would show everyone that the euro is a serious and sound currency based on the strength of its financial commitments. Of course, he does not expect this level of discipline to prevail.

He also has some sharp words for those in the political sphere who have tried (as always) to blame speculators for "attacking" the currency and Greece's debt. Some much needed common sense and basic education on the nature of markets and economic fundamentals here (that you might want to share with others).

Check out the full interview and stop in tomorrow for more on the state of Greek and European finances. We've got a lot to talk about on this subject this week, so stay tuned.

Saturday, March 06, 2010

Bloomberg profiles SAC's Steve Cohen

Bloomberg has published a lengthy profile of trader and SAC Capital founder, Steve Cohen. If you're not already familiar with the now-legendary hedge fund manager, you will be by the time you finish reading it.

Here's an excerpt from, "Steve Cohen's Trade Secrets".

"...Though Cohen attends more golf and other outings than he once did, most days the balding, blue-eyed, stocky investment manager does what he knows best: He trades. He has a perch in the middle of the Stamford floor, and his bets account for about 10 percent of profits -- down from more than 50 percent 10 years ago.
He doesn’t like noise, so the phones on the floor don’t ring; they light up. He prefers jeans and sweaters to suits and looks more like a tax accountant on casual Friday than a trading titan running a $12 billion hedge fund firm.
Near the trading floor hang pieces from Cohen’s extensive art collection, which includes works by Vincent Van Gogh, Pablo Picasso and Andy Warhol.
Cohen maintains the temperature on the trading floor at 69 degrees Fahrenheit (21 degrees Celsius) to make sure no one dozes. If a portfolio manager or analyst can’t answer a question about a stock, Cohen is likely to lash out. “Do you even know how to do this f---ing job?” is a standard barb, current and former employees say.
Portfolio managers make money, or they’re fired. They usually last about four years..."
Aside from this overview, I found the first half of the article to be largely weighted towards scandal (or hints of it) and an account of how SAC weathered the rough seas of 2006-2008. 

I have to say that I was interested in hearing more about Cohen's background and his methods of stock trading, which the latter part of the article tries to address (a difficult task as Cohen would not comment for this piece).

If you want to get a fuller, more personal view (though possibly dated) of Cohen's trading style, check out his interview in Schwager's Stock Market Wizards and check out the related article links below.

Related articles and posts:

1. Steve Cohen opens up to Paul Tudor Jones - Finance Trends.

2. Steve Cohen interview w/ Jack Schwager (preview) - Google Books.

Thursday, March 04, 2010

Michael Burry: Betting the Blind Side

Michael Lewis has a new book coming out called, The Big Short. It's supposed to be an account of the financial crisis and how the "US economy was driven off a cliff", thanks to the drive for cheap housing and the toxic investments Wall Street packaged around this goal.

Vanity Fair has published an excerpt from Lewis' book called, "Betting on the Blind Side", which highlights the subprime-housing short trade of California hedge fund manager, Dr. Michael Burry.

"
In early 2004 a 32-year-old stock-market investor and hedge-fund manager, Michael Burry, immersed himself for the first time in the bond market. He learned all he could about how money got borrowed and lent in America. He didn’t talk to anyone about what became his new obsession; he just sat alone in his office, in San Jose, California, and read books and articles and financial filings.

He wanted to know, especially, how subprime-mortgage bonds worked. A giant number of individual loans got piled up into a tower. The top floors got their money back first and so got the highest ratings from Moody’s and S&P, and the lowest interest rate. The low floors got their money back last, suffered the first losses, and got the lowest ratings from Moody’s and S&P.

Because they were taking on more risk, the investors in the bottom floors received a higher rate of interest than investors in the top floors. Investors who bought mortgage bonds had to decide in which floor of the tower they wanted to invest, but Michael Burry wasn’t thinking about buying mortgage bonds. He was wondering how he might short, or bet against, subprime-mortgage bonds."

We mentioned Burry in yesterday's post, highlighting a passage from Greg Zuckerman's book, The Greatest Trade Ever, which pinpoints the moment that Michael Burry and John Paulson's subprime short aspirations were realized in the creation of credit-default swaps (CDS) tied to mortgage bonds.

I'm halfway through Greatest Trade Ever now, and Lewis' account of Burry's subprime trade should prove to be an engrossing companion piece to Zuckerman's book. You may even want to print the VF article out, as it's a lengthy excerpt from Lewis' book.

Wednesday, March 03, 2010

John Carney: how AIG destroyed itself

I am checking out John Carney's recent Business Insider piece on the collapse of insurer AIG.

Here's an excerpt from Carney's description of "AIG as a buyer of risk" from, "The Untold Story of How AIG Destroyed Itself":

"AIG’s financial products division became what is known on Wall Street as a “synthetic buyer” of a variety of asset backed securities, including mortgages and infrastructure linked bonds. AIGFP would sell credit default swaps that performed for the company much like an ordinary bond would for a bond investor.

As long as the insured bonds were performing, AIG would receive a regular revenue stream from the buyer that mirrored the regular payments of interest and principle that a bond holder would receive. AIG was able investing in the bonds without actually having to buy them.
.."

Carney goes on to note that AIG had, in effect, taken a synthetic long position in these mortgage bonds by insuring the asset backed securities and writing CDS (credit-default swaps) against them. This gave AIG a regular stream of profits from CDS buyers, though it exposed the firm to huge financial risk (and we all know how that played out).

To further illustrate this point, here's a passage from Greg Zuckerman's new book on the short subprime trade, The Greatest Trade Ever (page 87):

"...Credit-default swaps were tied to actual mortgages - but the number of insurance bets on the subprime loans now were essentially unlimited.

Finally, Burry and other housing skeptics had a way to short the market, while those who were bullish, such as insurance giant AIG, could make extra money by selling the insurance, confident they would never have to pay out. Their acutaries produced sophisticated models that showed the chances of a housing meltdown were minimal".

Ever notice how often references to such "sophisticated models" spring up in the past decade-plus' chronicle of hubris and folly?

Monday, March 01, 2010

Beware the fabulous money machine

Spencer Jakab penned an interesting commentary for FT Weekend on the Federal Reserve's $52 billion profit (unaudited) for 2009. Here's an excerpt from that piece, "Beware the fabulous federal money machine":

"Unlike its New York brethren though, the Federal Reserve has a literal licence to print money, minting some $52bn in profit last year and paying $46bn in dividends to its shareholder, Uncle Sam...

“The man on the street doesn’t understand the $46bn earned by the Fed and given to the Treasury,” laments David Kotok, chairman of Cumberland Advisors.

Financial markets do, and it is making them increasingly skittish. The Fed’s profits stem largely from its purchase of mortgage securities, a programme that is slated to end in about a month at some $1,250bn. The first hurdle is weaning the market off this money-printing exercise. That alone could lead to an unwelcome rise in mortgage costs. More daunting will be soaking up the excess cash created before it sparks inflation in the real economy.

The most straightforward and obvious method, selling the securities, would be likely to crush the mortgage market while wiping out its “profits” from the operation to date. Instead, it will be likely to soak up the excess funding in the banking system – a delicate task that could lower inflationary expectations and cement a recovery if done right or spark deflation if botched..."

Jakab goes on to discuss the problems of the likely losing positions on the US Treasury's bailout portfolio, and the fear over what will happen when these artificial props to the economy are removed.

In a housing & lending market now dominated by Fannie Mae and Freddie Mac, what happens when you can no longer maintain that taxpayer-funded level of support?

Related articles and posts:

1. Fed profits: $52 billion in 2009 - Fortune.

2. How the Federal Reserve earned its profit - Econbrowser.