mathgeek2

The Ultimate Game Changer: Why 2009 Will Be Worse Than 2008 (Part 1)

> . . . to me, the "big question" is: "When does the weight of dollar
> creation hit the markets?" "Helicopter Ben" long ago pointed out
> that the Federal Reserve has a printing press. At some point, if
> you're holding cash or Treasuries, the mountains of supplemental
> dollars lead you to want to trade those dollars for assets . . .
> and equities have earnings, but they also have assets.
>
> Take a Weyerhauser, owning zillions of acres of timberland. They
> could be analyzed as a company exposed to construction-- in which
> case, earnings will be lousy, and performance will be lousy. Or they
> can be considered as an owner of land and timber. At what price and
> at what point do you say "I'd rather trade my dollars for an ownership
> stake in land and timber, because I think land and timber will be
> more valuable in dollars in the future?"
>
> That's not an earnings call, that's an asset value/currency value
> call.

Excellent point, on a good article

It's a Mad, Mad, Mad Madoff World

To me, the most revolting aspect of this is captured by Blodget's reference... supposedly many suspected something illegal was going on and saw it as an opportunity to ride along.

If true, this allegation is shocking.

When the already wealthy and powerful have such disregard for fair play, everything... the legitimacy of the entire system is put at risk.

GM: The Bailout vs. Bankruptcy Meme

Another great post, and right on the mark.

Some combination of a pre-packaged bankruptcy with federal assistance (whether in the form of DIP financing or something else) is the only way out that makes sense.

Federal dollars without restructuring only buys time, and probably not a whole lot of time at that. Bankruptcy without explict support risks a death spiral and liqudation, with fairly dire consequences.

Hope someone in Washington is listening...

Should We Really Bail Out the Big Three Automakers with $73.20 Per Hour Labor?

Oh really?

Let's look at the track record. Automakers, Steel Producers, Airlines, LTL trucking... take your pick.

Virtually every heavily unionized industry in this country has eventually collapsed. The only ones that haven't have monopolies that allow them to pass the execess costs to consumers. (Think utilities, railroads)

CEO pay is an easy dodge, but the question then is, can you point to a company that has become wildly sucesfful because of low executive pay? I can certainly point to many extremely sucessfull companies that pay their executives a lot.

Jobs are skills, and skills are priced by supply and demand. You may not like it or think it is fair, but executives have skills that are in far more demand than the supply that is available... and have to compete in a wide open market for those very few executive jobs available... companies can and have replaced union employees quite easily with people with the same skills at half the cost.

You are free to have your own opinion... but not your own facts. The typical CEO makes far less than an investment banker, class action lawyer, or private equity partner... jobs for which many CEOs would be well qualified. They also make less than many baseball players and actors, but that is another story altogether.

The US Auto industry cannot sustain above market wages, and yes, the massive legacy retirement and health care costs they are saddled with. I am in favor of government intervention, but only if it comes with a restructuring that makes the industry viable and competitive in the long run.








On Nov 10 10:30 AM Tomas04 wrote:

> Shadrach
>
> It does matter that those numbers are wrong. You can't start a debate
> with bogus facts. The reason the non-union auto makers are gaining
> market share has nothing to do with unions.

Defining a Depression

Interesting analysis, but I have to take issue with some of the specifics.

Your first quote references new industries as the source of bubbles. I don't think this is an essential component. I do strongly agree that bubbles are often a credit phenomenon, but I think you miss some key aspects of the self-reinforcing mechanisms.

At least in theory, any asset could be subject to a bubble, so long as there is some plausible way to belive in a very high future value of the asset. New industries have historically fit the bill, but so have assets which are belived to be functionally finite. What this allows is plausible speculation of very high future values. "The amount of land in California is fixed, demand will continue to grow, so prices will always go up."

I agree that a loose monetary environment often is a crucial trigger for the bubble. It is easy to obtain credit to invest in the bubble asset.

But this is where the truly pernicious aspects of an asset bubble kick in.

- The price appreciates rapidly. So much so that a wider and wider pool of potential investors begins to belive that any inherent economic value is irrelevant, and they buy on the simple anticipation of the asset rising in value. In other words, people start to buy the asset for no reason other than the expectation it will continue to go up in value. This drives the price up, which reinforces their viewpoint.

- Crucially, the asset also absorbs liquidity. An actively investable asset that is rising rapidly can readily absorb liquidity. What this literally means is that, as money supply expands, that excess money is sunk into purchases of the bubble asset. From the point of view of the central bank, all is well, because the economy is humming along, but yet there is not execessive inflation in the economy at large... all of the "inflation" is taking place in the bubble asset.

- Finally, the growth of the asset bubble reduces apparent risk. Loans made using the bubble asset for collateral are rarely or never incurr losses. Institutions or persons under financial stress can readily paper over their challenges either by selling any of the bubble asset they hold or by borrowing against it. This reduction in apparent risk leads to further increases in leverage.

This is an asset bubble, and we have yet to develop a method for dealing with them effectively in our economy. Nonetheless, this is an old problem.

Eventually of course, often triggered by an exogenous shock or a decrease in available credit / money supply / liquidity, there are no more buyers to sustain the ponzi scheme of ever-increasing prices, and the asset value goes into free-fall. This leads to removal of credit, demand for (non-bubble!) collatoral, and eventually forced liquidation, driving prices down further.

Depending on the amount of leverage involved, the net effect can be a severe contraction of the money supply, deflation, and a credit freeze. The intensity of the housing bubble collapse compared to the internet bubble is a direct correlate to the size of the asset and the degree of leverage employed.

Depending on what specific actions David Merkel is referring to, it can be argued that Herber Hoover certainly and FDR probably made the Depression much worse.

Specifically, allowing runs on banks is disasterous. Cutting government spending and raising taxes (as Hoover did, and FDR did in 34-35) is a huge mistake. And of course onerous trade restrictions made things much worse.

If, on the other hand Merkel is suggesting, as Herbert Hoover's economic advisors did, that the answer is "liquidate, liquidate, liquidate" then I must beg to differ. While that is part of the answer, government actions to counteract the contraction of credit and the money supply, and in extreme cases, directly support aggregate demand, are the appropriate responses to the threat of a major deflation-led depression in the wake of a major bubble.

How Stocks Work: Four Viewpoints

I think the essential thinking is all here;

If markets are correctly anticipating future cash flows and the appropriate forward discount rate, then the TSR (total shareholder return, including dividends and appreciation) should be exactly equal to the risk free rate plus a market equity premium.

Of course, this is impossible in practice, and so share prices go up and down all the time (in some cases dramatically) as the market shifts its perceptions of likely future cash flows and the future path of discount rates. This can create different levels of returns for shareholders, depending on the period of time in which they held their shares.

Again, what matters is not the changes in any of these factors, but any changes relative to the expectations currently priced in the market. When I am thinking about an investmet option, one of the things I like to do is to understand the expectations (future earnings, discount rate, etc.) that appear to be implicitly priced into the stock. If I belive these expectations to be overly pessimistic, this is a buying opportunity. If the expectations are overly optimistic, this is a selling opportunity.

In fairness, there is one big problem with this methodology; While I do think it works in the longer run, in some circumstances (recent times are a great example) Market participants stop making decisions on the value of the asset and start making decision primarily on market momentum.... in other words, a version of the greater fool theory. Is my internet stock circa 1998 really worth $20? Maybe not, but I;m willing to bet someone else will buy it in a year at $40 regardless. Is my bank stock circa 2008 really worth less than the cash on the bank's books? Maybe not, but I bet I can short it today and buy it back tomorrow for half the price regardless.

When a substantial portion of the market becomes driven by players who are basically making "greater fools" bets, it is extremely difficult to know where things will go; Prices will keep going in one direction until not enough people think that there are enough greater fools left, and then they will tend to severely correct.

Only in the longer run can you expect economic reality to overwhelm these kind of issues; At some point the economcs can't be defered any longer (e.g. it becomes patently obvious to everyone that shares are over or undervalued relative to basic economics) and so the market will adjust back to a more fundamental driven prices. Of course, you can go broke waiting for that to happen...