bearfund

IBGYBG - "I'll be gone. You'll be gone." From a great interview of economist James Galbraith, a little known mortgage-industry acronym that exemplifies the 'make a quick buck tomorrow be damned' attitude of the bubble years.

Yes, it's broken. So to fix it we rewind the clock to 1917 and put on the garb of Lenin? "Because people forget". Indeed they do.

McClatchy's Greg Gordon goes to great lengths to document how Goldman Sachs (GS) peddled over $40B in new mortgage-backed securities even as it secretly placed bets on a collapse.

So what? Caveat emptor.

Why Apple Is Worth $80

Can we please use realistic values for long-term growth and discount rates? You're talking 3-6% for the former and 8% for the latter. How about 1% for the former and 15% for the latter? We are in an era of zero or slow growth and rapid unbridled monetary expansion. The estimates people are using for these values are way too optimistic. For example, your DDM figures use 3.39% for the 10-year note rate. Oops; it's already 3.55% and is headed to 10% over the next few years as inflationary policies devalue the dollar. GDP growth? WHAT GDP growth?! There hasn't been any for the last 10 years if you acknowledge the true rate of price growth over that time, and even if you use the government's figures there's been very little.

Time to get hard-headed. Most stocks are 5x overvalued, and AAPL is no exception.

Strong Recovery Signal from Chicago Fed

"Real GDP" suggests a proper adjustment for the declining value of the dollar. You're not going to get that from these guys. GDP growth is much overstated and will continue to be so.

The Arithmetic of Gold: Why Its Price Has No Ceiling

Dollar hasn't yet found a floor in 96 years. I see no reason to think it will find one now.


On Oct 07 03:27 PM mb2 wrote:

> I'd say it was the "bugs" that got sucked in. I, too, like gold.
> However, the panic buying that is taking place above $1,000 will
> turn into panic selling when the dollar finds its floor (and it surely
> will). Talk about the mother of all short squeezes - the dollar snap
> back is going to be violent. All it takes is one geopolitical event
> to trigger a flight to the greenback.
>
> Remember Warren Buffet's adage; "...buy when everyone else is selling
> and sell when everyone else is buying..."

The Dogma of Low Interest Rates Is Wrong

chap08, the money that went into JGBs was something of a remnant. I don't think the author meant to suggest that ALL the borrowed cheap money leaves the country, only that most of it does and that most of what remains does little or nothing to generate real growth. The Treasury and JGB markets feature tremendous leverage. The value of the currency - relative to other currencies, to gold, or in purchasing power terms - does not affect the directional outcome of a highly leveraged government bond position. Since there is also no credit risk, the only variable that affects the directional outcome is the change in interest rates over time. If you own JGBs purchased with free short-term yen, the only way you can lose money is if overnight yen interest rates rise above your yield on cost. The same is true of Treasuries purchased with the flood of cheap dollars.

That is why we have lately been seeing Treasuries, US stocks, and commodities moving together in dollar terms. Normally we would expect Treasuries to fall in value during a real recovery as investors looked for better returns elsewhere. The reality is that there are no returns of any kind anywhere; there is no yield. It is all speculation fueled by free dollars and leverage. Under those circumstances, it doesn't much matter what you buy; anything is better than holding those declining dollars. Many will indeed look to higher-yielding currencies and foreign assets. Others seek value in commodities. And some - those whose privileged position allows them to do so - will gear up big time and purchase Treasuries. These trades are all likely to be winners as long as overnight rates never rise. Which happens to be exactly what the Fed keeps telling everyone each time the FOMC issues a statement.

The behaviour of these markets right now is an extreme danger signal for the FOMC. There is no possible way that any unleveraged participant can increase or even maintain his purchasing power over the lifetime of a 30-year Treasury bond he purchases at a yield of 4%. Not when the dollar is losing several percent of its value each month. That fact that anyone is willing to pay so much for that bond is a clear signal about the kind of participant that does so, and therefore about the amount of dollar liquidity in the system. And when you see that coupled with universally-rising dollar asset prices, you should be terrified. This is not a recovery trade, it's a dollar debasement trade. When you price these assets in anything else you see the truth. No one who sees these charts should feel anything but cold, naked fear.

When Morgan Stanley Almost Died

I have no love for any of these guys but anyone who tells Geithner to get fucked can't be a completely terrible human being.

In 2009, roughly 47% of households (71M) will not owe any federal income tax - up from an earlier estimate of 38%.

Once you're past 50% getting representation without taxation, there will be no further restraint (even in name only) on voting yourselves payments from the public treasury. Expect the number of people subject to taxes to continue to decline at an accelerating rate, while payments to those not subject to taxes will rise ever more rapidly. We're entering the endgame now.

FDIC's Creative Financing Ideas Are a Red Flag

Let's just get the whole thing over with quickly. Tell the FDIC it's on its own with no help from the Treasury (spin it off into a private corporation and cancel its government charter). Let the bad banks suffer runs and fail immediately; the new PDIC can cover what it can and then go under. A few very bad months would be far better than 20 or 50 years spent slowly bleeding away our productive capital, which is how this is shaping up. The size of the bad banks and the amount of leverage they employ ensures that they will need decades to "earn their way out" (read: have the Fed force savers to subsidise their yield curve out) of trouble. It's not worth it. Let them die.

It's them or us.

SPDR, Wells Fargo Team Up to Launch New Preferred Stock ETF

If risk is lower, it's not because of government policies. It's been made very clear that while megabanks' bondholders will be protected from catastrophic loss, shareholders enjoy no such protection. Banks are so highly leveraged that the liquidation preference in these issues is worthless; if one of these issuers gets into real trouble you should expect to recover nothing, even if a government takes it over and guarantees its debt.

Remember, preferred is the new common. You should think of the risks and rewards of these shares similarly to how you would think of the common stock of a non-financial company. That anyone owns bank common is something of a mystery; the reason to own common instead of preferred is to take advantage of share appreciation as earnings and dividends grow. But with most financial common yielding less than 1% with high payout ratios and rich valuations relative to book, where's the upside there? Those shares are already priced to reflect years of improving balance sheets and dividend increases, neither of which is a certainty. The preferreds are priced in a way that reflects most of the risks. The wild card? Interest rate risk. When interest rates start rising, watch out. That 8.4% yield is only about 500bp cheap to the 10-year T-note. While that will tighten considerably if a real recovery does ever get underway, it would be very surprising not to see the 10-year note yield 8% at some point in the next 5 years (this is near historical norms). When that happens the prices of these preferreds will fall, no matter how healthy their issuers.

The global downturn is over, OECD says (.pdf). "Clear signals of recovery are now visible in all major seven economies."

If by recovery they mean fewer jobs, lower pay, and higher costs for basic life essentials, then yes, there are clear signs of recovery. Most people would think of an opposite definition but to each his own.

Tuesday FX View: Dollar Kicks Around in the Dust

That's exactly right. Equities aren't rising; they're barely hanging on. Price them in gold to see the real story. This is all about the massive, unending supply of dollars.

On Sep 08 04:24 PM Dirtnap wrote:

> The fact that equities and gold are climbing ever higher appears
> to be due to an intense polarization in the views about the future
> of our economy. There are those who believe the recovery is already
> here, and those who believe we have 20 years of pain ahead. You
> don't see too many people in the middle (though they do exist.)<br/>
>
> Of course, it could also just be that investors see value in both
> equities and precious metals in a dollar debasement scenario.

In his September Outlook, Bill Gross discusses the investment implications of the 'New Normal,' which will be characterized by slower growth and a redefined public/private partnership. Key, Gross says, is to "anticipate and, if necessary, shake hands with government policies."

That pretty well describes the capricious nature of politically unstable economies. Where the rule of law is in firm control, multiples expand and interest rates fall. One makes money through sound analysis and a willingness to take on good risks. Where one must anticipate what politicians will do, multiples contract and interest rates rise, and one makes money by being close to those in power.

It's called a banana republic.

What's Plausible for the Fiscal Outlook?

For many years the United States government ran a surplus. Therefore if your statement were true, no savings could have been possible. In fact people had plenty of savings, far moreso than they do today. Your statement would also suggest that people in other countries such as Norway and Saudi Arabia that have run surpluses for a long period of time must not have savings; this is also patently false.

Your entire argument seems to be based on the idea that the only thing central banks can hold is debt of the government under which the bank operates. This is a relatively recent development in central banking (still not true or even substantially true of any central bank, by the way), which itself is a relatively recent development in finance. This is complete nonsense so I didn't bother reading the rest.


On Aug 31 08:31 AM Warren B. Mosler wrote:

> Too bad no one seems to understand that the govt deficit = (to the
> penny) 'non govt' accumulation of net of financial assets (aka 'nominal
> savings')
>
> This is an accounting identity, not a theory.
>
> And the federal govt. neither 'has' or 'doesn't have' 'money.' It
> spends by changing numbers in bank accounts upward (as Bernanke stated
> in May), and it taxes by changing numbers downward.
>
> The Federal govt doesn't 'get anything' when it taxes or 'lose anything'
> when it spends.
>
> And if you pay your taxes in cash to the govt it gives you a receipt
> for payment and then tosses the cash in a shredder.
>
> Spending and taxing is a tool to adjust the outcomes of the real
> economy.
>
> A tsy security is nothing more than a 'savings account' at the fed.
>
>
> when china sells us t shirts, the fed transfers funds from someone
> else's account at the fed to china's account at the fed for payment.
>
>
> then china decides to spend those funds or save them, usually buying
> a tsy sec, which means the fed transfers their balances from china's
> transaction account at the fed (called a reserve account) to its
> savings account at the fed (called tsy secs).
>
> And when the tsy secs mature china's securities account is debited
> and china's transaction account is credited.
>
> That's all. For the federal govt there is no dependence on funding
>
> in dollars from anyone. they just move balances on their own spread
> sheet. any constraints are necessarily self imposed.
>
> and interest rates are set by the fed which has full control over
> the entire term structure of rates whether it knows it or not.<br/>
>
> so keep you eye on the real economy, excess capacity, unemployment,
> the output gap, inflation, etc. etc. and let the deficit fall where
> it may. it's a residual that doesn't even need to be published for
> purposes of fiscal and monetary policy.

What's Plausible for the Fiscal Outlook?

Why should we rule out defaulting on the debt? Debt service accounts for almost 20% of the budget. If we got spending under control we wouldn't need to borrow any more, and if we can't then our notional credit rating won't matter anyway. With spending under control, that 20% would allow breathing room to reduce taxes or at least avert the need to raise them.

The time for ordinary prudence was indeed 10 years ago (or 50). Now we need something more, a little outside the box thinking. Defaulting should absolutely be part of the public discourse around this issue.