Troubled Times

[RobbieG]

In my little crew there are emails that go back and forth discussing some of the major economic and market issues everyday. Here are two of the items from one such email today...

Hold on to your hats for this one: Treasuries have just dipped negative for the first time since the 20's, and yet the masses still fly to "quality" and poor their money in effectively creating a bubble that will burst and kill the only safe haven there is left. Why would anyone do that for NO RETURN - A NEGATIVE RETURN against core inflation. Are you kidding me? Bill Gross who is the best bod trader that ever lived has said that Treasury Bills at zero percent are overvalued. Anyone who thinks this isn't true relative to the RISK involved needs their head examined. Remember how I keep saying that when the currencies, specifically the dollar breaks dooms day is here. WELL THIS BUBBLE COULD BE THE ONE THAT DOES IT! You don't fly to "quality" if there is no quality just because it says T on it. The numbers don't lie. A negative return is a negative return and that ISN'T EVEN RISK ADJUSTED

On to other news Goldman has just drawn a lot of heat on themselves by advising that people buy credit default swap instruments on states. You know, like they would advise doing to a stock of a failing company. What default swaps do is bet that something or somone will fail - like mortage debt as they are commonly benchmarked. In this case it means is betting that states will fail to meet debt obligations. How can this happen? Easy, the whole country would be on that list ifthe Fed didn't have the printing press. States don't have it. So who is on the list? New Jersey is at the top and they are going under soon. They are $60 BILLION IN THE HOLE in the pension fund and the Gov has said he plans on skipping payments until 2012. They just don't have the money. It is hard to believe that these times involve listing states like stock symbols on a page. A list of symbols the top investment bank is telling everyone to short sell. Are you on the list? I am...

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[Dexter]

Just stick your head in the sand like everyone else. Ignorance is bliss.

I knew this was coming more than a year ago. This is just the start.

[RobbieG]

Unfortunately I can't as I do this for a living. Ignorance isn't bliss. Ignorance is stupid. Moreover, that attitude in high places is what stops problems like these from getting solved. Nobody wants to think it through and build a model that works for these times. That is sort of the point of the whole OP. People just go on the assumption that Treasuries are safe and in doing so they create a self generating prophecy that kills the instrument. Meanwhile, money hemmorages out of equities yet half the companies have cash positions greater that the entire market cap of the outstanding shares - not to mention equity. If everyone keeps sticking the proverbial head in the sand you and the rest of us are going to be hunting squirrels with rocks within five years. Sticking heads in sand is no only what got us here, but what continuies to keep us here...

Just stick your head in the sand like everyone else. Ignorance is bliss.

I knew this was coming more than a year ago. This is just the start.

[Dexter]

My comment was sarcastic. Relax...

People in high places know what is happening. The real problem is that there is nothing anyone can do about it. It is way to late. Just brace for the storm. Perhaps if people like us survive we can help rebuild.

[baglc1]

Not sure what that means, but moving right along...

The thread is over now dude. You all got messed with. It isn't real. This is the internet. Get it?

QUOTE (baglc1 @ Nov 28 2008, 07:47 AM)

Now i'm just going to sit back and watch you fall .

As some panick set in now, or isn't real. It sounds like it. Could be just the internet. Get it.

What a differance 2 weeks make.

[bvc]

Revelation 18:1-5.

The answers come to your door on a regular basis. Just listen....

[simmons3d]

What if the way to solve the current financial problems is to do nothing? Perhaps the cure during the great depression was the right one? 3 or 4 years of real tough times vs. decades of Japanese style deflation? The people in charge, Bernake and Paulson, seem to be the most clueless of all. You can't lend your way out of a debt problem!

[ryyannon]

If everyone keeps sticking the proverbial head in the sand you and the rest of us are going to be hunting squirrels Black Swans with rocks within five years.

[Corgi]

I'm going to hide under a table.. someone call me when it's safe to come out again.

[HauteHippie]

What if the way to solve the current financial problems is to do nothing? Perhaps the cure during the great depression was the right one? 3 or 4 years of real tough times vs. decades of Japanese style deflation? The people in charge, Bernake and Paulson, seem to be the most clueless of all. You can't lend your way out of a debt problem!

Well, yes and no....

Yes, the cure is indeed to do nothing. (And government intervention prolonged the great depression, BTW). But right now, realistically, it's probably more like a decade or two of some real pain vs. hyper INflation and a collapse of the dollar. We need a major recession/depression in which the service sector sees massive layoffs and a movement in to new jobs that are then created in production. The bottom line is that we need to start producing again.... and saving. That's what our GDP should be based on; not consumption.

But, instead, the government is trying to create inflation... desperately. They think the economy is some sort of old car that can be jump started with stimulus packages, etc. Stimulus can be beneficial to get a sound but sluggish economy moving... Stimulus is worthless though when you don't have a sound economy in the first place, which we don't, and only serves to delay the inevitable. So right now, we need stimulus like we need a hole in the head. On the other hand, doing nothing and allowing the market to function will bring prices down. The market, for example, is trying to bring home prices down. That is its answer to home affordability. But the government is resisting fiercely. They have trained us to believe that deflation is bad. And, what we're seeing right now is a normal deflationary bust after the bursting of a major financial bubble. So of course they won't allow deflation because they created the speculative imbalances in the first place, and now must act in order to "cure" us of their aftermath. And so what lies ahead, if we stay on course, is nothing of the deflationary sort....

[red]

I work for an internet company and am pretty clueless when it comes to the economy (although I have a BA in economics), please keep the comments coming.

[spooky driver]

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[milsub5517]

robbie, when is gold going to take off and brake a 1000 ??? its about time...

[HauteHippie]

I work for an internet company and am pretty clueless when it comes to the economy (although I have a BA in economics), please keep the comments coming.

Here are a few IMO major stories that have largely gone unreported....

1. http://www.safehaven.com/article-12012.htm - For the first time in history, last week the gold basis went negative. In English: anyone holding physical metal could make free money by selling the metal and buying the futures. And, interestingly, they are sufficiently nervous about getting delivery on the futures that they are choosing to stay put!

2. http://www.bloomberg.com/apps/news?pid=206...sI&refer=us - The Federal Reserve is toying with the idea of issuing its own bonds. This, of course, has never been the case as it is the Treasury's job and really makes no sense to me at all. Any ideas??? They don't seem to say why or what for and I certainly can't think of a good reason. The Fed has been talking about buying up Treasuries. So what the heck?

Lots of strange stuff out there.

[HauteHippie]

robbie, when is gold going to take off and brake a 1000 ??? its about time...

Get a solid answer from the Chinese as to when they will sell of their Treasuries.

[RobbieG]

Huh?

Not sure what that means, but moving right along...

The thread is over now dude. You all got messed with. It isn't real. This is the internet. Get it?

QUOTE (baglc1 @ Nov 28 2008, 07:47 AM)

Now i'm just going to sit back and watch you fall .

As some panick set in now, or isn't real. It sounds like it. Could be just the internet. Get it.

What a differance 2 weeks make.

[Nightstroker]

I work for an internet company and am pretty clueless when it comes to the economy (although I have a BA in economics), please keep the comments coming.

You should get into politics; you are over qualified!

Did any of you guys catch wind of what Steve Forbes said the other day about how the economy could be turned around? Get a load of this....

Steve Forbes thinks that eliminating mark to market, reducing the interest rates down to 4.5%, and "Tweaking" some of the ways that the stock market is conducted will solve our nations problems.

If thats not backwards thinking then it does not exist.

The relationship between the economy and the stock market is like the relationship between a cold and a cough. When you catch a cold, you get a cough. You can take some cough syrup to ease the cough, but guess what, YOU STILL HAVE THE COLD. If you want to fix the problem, you deal with the cold, and the cough will go away. Works the same way with the stock market. You cant tweak how the stock market is ran and figure that somehow its going to trickle down onto the economy and fix things. BACKWARDS THINKING. You have to deal with the economy first, and the stock market will reflect those changes.

And how is eliminating mark to market supposed to improve things? What good could possibly come from piling billions of dollars in imaginary debt onto the balance sheets of the financial institutions? Oh....I get it....reduce the interest rates down to 4.5% and then people can get back on their feet again. WRONG! People dont have money now, and they wont have money after the bailout or if interest rates go down. Get it? People dont have any [censored] cash, and bailing out citizens wont help either....it will cripple the dollar.

So what do you do? Let the natural course of events take place. Bailout plans will keep things afloat for awhile, but the truth will rear its ugly head all over again....and by then it will be a 3 or 4 headed monster.

[RobbieG]

Yeah, they fly North for the winter nowadays...

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[RobbieG]

There is nothing wrong with mark to market. We're flat and the end of the day everyday, carry no positions overnight, and "mark" as much as $20M at the end of every day when the trades settle. And if we carry overnight, trust me, the value we marked yesterday is going to be spot on the next morning.

The issue is marking to market ILLIQUID instruments that nobody trades except the guys who invented the product and as such there is no REAL estimation of value. When I mark to market the end value of an S&P 500 futures contract and the current value of the index is say 850, its 850 - period. There is no debate about that so therefore, what we made is what we made (or lost). Mark to market only becomes dangerous when somebody trades some "super cross hybrid CDO merged with a swap that values to yen against the square root of his a*s" with some other guy at the same bank in a different country and then they get together and SAY something is valued at X, when in fact nobody knows what the H*LL it is, let alone what it is worth. So once again, the pikers uptown have started all these sort of wrongs about MTM without qualifying that there is a difference depending on what is being traded.

You should get into politics; you are over qualified!

Did any of you guys catch wind of what Steve Forbes said the other day about how the economy could be turned around? Get a load of this....

Steve Forbes thinks that by eliminating mark to market, reducing the interest rates down to 4.5%, and "Tweaking" some of the ways that the stock market is conducted will solve our nations problems.

If thats not backwards thinking then it does not exist.

The relationship between the economy and the stock market is like the relationship between a cold and a cough. When you catch a cold, you get a cough. You can take some cough syrup to ease the cough, but guess what, YOU STILL HAVE THE COLD. If you want to fix the problem, you deal with the cold, and the cough will go away. Works the same way with the stock market. You cant tweak how the stock market is ran and figure that somehow its going to trickle down onto the economy and fix things. BACKWARDS THINKING. You have to deal with the economy first, and the stock market will reflect those changes.

And how is eliminating mark to market supposed to improve things? What good could possibly come from piling billions of dollars in imaginary debt onto the balance sheets of the financial institutions? Oh....I get it....reduce the interest rates down to 4.5% and then people can get back on their feet again. WRONG! People dont have money now, and they wont have money after the bailout or if interest rates go down. Get it? People dont have any [censored]ing cash, and bailing out citizens wont help either....it will cripple the dollar.

So what do you do? Let the natural course of events take place. Bailout plans will keep things afloat for awhile, but the truth will rear its ugly head all over again....but by then it will be a 3 or 4 headed monster.

[RobbieG]

And my lead programmer did just that at my direction with his own money and did quite well. He scalped though so there was never a delivery issue. I have to say though - good catch Chief. I start these threads and I always enjoy reading how robust your understanding of all this stuff is. You should become a part of our think tank for fun and profit. Want a job?

Here are a few IMO major stories that have largely gone unreported....

1. http://www.safehaven.com/article-12012.htm - For the first time in history, last week the gold basis went negative. In English: anyone holding physical metal could make free money by selling the metal and buying the futures. And, interestingly, they are sufficiently nervous about getting delivery on the futures that they are choosing to stay put!

[milsub5517]

yeah, "IF" is not a question anymore, "When" is the question.

Get a solid answer from the Chinese as to when they will sell of their Treasuries.

[HauteHippie]

Mark to market was suspended already. That came with the bailout. So... been there done that. It "had" to be done, otherwise the bailout of the banks would have bankrupted them. Of course, it's totally ludicrous because mark to market is essential for the financial firms to be able to forsee shortfalls in order to raise capital in advance and remain solvent. The suspension of mark to market indefinitely is only setting them up for future failures and is really solving nothing.

WHEN (not if) this whole thing blows up, Bernanke and Paulson need to be led away in cuffs.

[ryyannon]

WHEN (not if) this whole thing blows up, Bernanke and Paulson need to be led away in cuffs.

When pigs fly.

[milsub5517]

+ alan greenspan

WHEN (not if) this whole thing blows up, Bernanke and Paulson need to be led away in cuffs.

[Genrep]

The private sector (financial institutions i.e.) began this by using smoke and mirrors* to deceive investors - and by flagrantly breaking the first law of capital deployment which is "never use short term funds (callable loans) to buy long term assets (illiquid mortgages)". (*Structured products consisting bundled portfolios blessed/branded by AAA or AA+ institutions - but which hid exceedingly dodgy assets, particularly high-risk mortgages that noone had the ability to examine/evaluate on a one-by-one basis.)

Bureaucrats who had (and still have) no clue about what was going on (particularly post Enron), then decided to create a whole phalanx of regulations (Sarbox, Higgs, Solvency I & II and Basel I & II) perhaps not fully appreciating the fact that advisors and institutions make their living by being clever by succeeding in circumnavigating regulations. The reality is you can never create enough rules and regulations to eliminate a lack of integrity. If someone is wholly intent on evil, they will succeed. The whole remuneration system in large corporates has been all about rewarding short term gain - screw the future, for as JM Keynes opined "in the long run, we shall all be dead".

To add fuel to the raging fire, politicians have now decided that it is time to go back to almost pure Keynesian economics - bring the multiplier and accelerator models back into play - but not in the way or to the extent that Keynes could ever have envisaged. From Gordon Brown to Obama, the mantra is lets create more jobs (in public sector - in the old days we used to refer to this as "disguised unemployment") and hopefully these good folk will splash their pay cheques, creating demand for goods and services, which will in turn kick start the economy. But who will pay for all these excesses? Ultimately it will be the wealth creators and businesses. With a global economy and with capital and talent being so mobile, the wealthy and talented will easily go where they are not robbed blind by the government. So increasingly (particularly in the UK), you have an bloated public sector with a declining entrepreneurial economy. Thus, more money will chase fewer real goods and services. The combined effect of declining economic production and spiralling inflation = stagflation. But who cares? The politicians that make the rules have (at least in the UK) their pensions protected like noone else and by the time the reality dawns, they would have left office, be on a speaking circuit and on numerous boards. So why worry?

This is not about economics. It is about short-termism, self serving greed and, of course, corruption.....

I agree with Chief - the government which has consistently proven its utter incompetence at adding value in business - should do nothing to squander what we do not have and which will have to be paid for sometime, somehow. The best thing it can do is unravel the bureaucracies and politically correct measures (welfare state, unions...) that strangle enterprise. Subsidies and protectionism merely weaken the organisms being 'protected'. No pain, no gain.