Michael B. Krause

Paulson's Plan Fails to Understand the Problem; Madoff Is a Perfect Example

The baby boomers leave the young generation no choice but to (hyper)inflate. By reducing the boomers' debts in real terms, problem solved, banks suddenly are solvent. Unfortunately, the poor retirees who weren't in on the ponzi scheme will be kicking and screaming as their buying power goes to nothing. How sad.

The Paragraph That Changed the World: Will Treasuries Crash?

Many good points here. Furthermore, I've been doing some reading that suggests the proposed MBS purchase plan is only applicable for new auctions. That isn't nearly as scary.

No mean to fearmonger - just evaluate reality.

Time To Abandon Stocks?

The future of the stock market is entirely dependent on expansionary monetary policy and political stability. When you buy stocks, you are betting on an expanding economy and innovation to occur over whatever time frame you suggest.

All of the evaluation of statistics and precedent will give you false justification for your investment behavior.

Simply put, if the managers of this country do a good job in the next 20 years, stocks will do great. If they goof it all up, you'll lose your money. Its that simple, and thats what you are betting on.

What's With This Volatility?

Here. Here's the exact same data on S&P since 1950. Its good data.

krausecomputer.com/per... (its in Excel zipped up)

Don't Buy (Sell) The Bear

Nice call on the F# minor. Finally someone gets it.

Here is a response I made on my blog to Reinko:

But whats happening here is a transfer of wealth from mismanaged corporate balance sheets and investors (holders of subprime bonds) to borrowers (many of whom will file bankruptcy). Running up consumer debt, the borrow still gets to enjoy the benefits of the purchasing power he was given, at the expense of the foolish lender.

The fed & US govt knows this, and knows the only solution is to devalue the dollar and inflate future earnings quantities to prevent an excessive slowdown and bankruptcy level. This excessive level of debt (ie 30T) however needs to be compared to cash and equity reserves (401Ks, pensions, cash savings, money markets, total home equity base properly discounted to correction in correspondence with total money supply and inflation, etc.) to have a fair evaluation. If the money supply doubled the past 10 years, then its less meaningful a number. The ratio of debt to money supply is more important.

The fed knows all this and will continue its current policy at the expense of the dollar. This is a weakness of all fiat currencies though, and since this is true, a global economic contraction on the same scale in Europe will hurt the euro just as much. It'll become a question of who hurts more.

Arguing that we're screwed because total debts have doubled in 10 years sounds wonderful to the bear, but it does not present a true picture when considering cash reserves and total money supply has increased as well.

So further conclusions: the dollar will ultimately suffer at the expense of the S&P and housing boom. That is, unless other country recessions follow (which is likely, considering the housing price boom is not something unique to the US).

And if any of you are truly this bearish on equities, I recommend you have a look at this

scriabinop23.blogspot....

and this:

scriabinop23.blogspot....

Why Is This Market Holding Up?

Let me contribute one more thing.

scriabinop23.blogspot....

S&P doesn't look so 'bullish' here.. Rising price levels haven't boded well for the S&P.

Why Is This Market Holding Up?

This chart is an attempt to manipulate viewers with distorted scales. While you have good fundamental points, a log scale on the equities side would help show a truer picture of y/y appreciation.

Furthermore, as evidenced by the dotcom bubble pop, previous to it the russian debt crisis, LTCM, and the asian financial crisis, credit spreads bottomed with the S&P simultaneously, but they started falling 2.5 yrs before the S&P peaked in 2000. This says expect a lag - if history repeats itself, a 3 yr lag to bottom, which should coincide well with a housing bottom and stagflationary environment.

Although I wouldn't expect the S&P to fall as hard -- earnings are gigantic compared to 2000, and there is quite a base of value that has generated since then. In *real* terms, the GDP is much bigger than 7 years ago. And that means something to corporate valuations.

Why Treasuries Are the Way to Go in This Market

Leo: This is a search for appreciation trade, not a yield hunting one. Preferred stock purchases (or corporate bonds) have considerably higher downside in the event a recession occurs (as they take corporate risk). If recession happens (and inevitable increase of defaults associated with that), corporate debt credit spreads will rise and offset some of the gains in the underlying treasury position. (recall corporate debt = treasury of equiv duration + credit spread)

Furthermore, a yield curve inversion with a recession will enable the longer duration note and bond to fall past fed targets. So even if the fed stops at 3.5%, a flight to quality could enable the long yield to hit 2.5-3.2% just as easily.

Obviously its hard to imagine 2.5% 10 yr notes with the PPI and CPI #s we are seeing right now, but a global slowdown could turn this commodity based inflation move an opposing direction. Expect some volatility of PPI/CPI #s. I wouldn't be surprised to see negative CPI/PPI y/y (12 mos from now) if the consumer and world growth continue to slow. Then 2.5% yields are more palatable, aren't they?

The Fed Put $41 Billion into the Market -- Are We in a Crisis?

Your data is erroneous. Money was also coming out of the system. You have to look at past repos to see what was coming due. Many of these repos are rollovers.

www.newyorkfed.org/mar...

For example, today (nov 2) had an injection of 6.25bil.
But look at past maturities for Nov 2, and you'll see the 1 day repo yesterday for 12bil expired.

For repos expiring Nov1, there was 12 bil on Oct30, 5.5bil on Oct 31, Oct 25th had 19bil maturing, and Oct 18th had 6 bil.

So thats 12+5.5+19+6. Thats 42.5 billion coming out of the system. The 41 bil repo was merely a rollover, and a net reduction of liquidity in the system.