Ransome

Where the Big Money Is Betting Big

Big money is dumb money. A market is made by smart money. It is projected that this new and rising market will hit $200 a barrel by the end of the year. Dumb money moves in. Near the plateau, smart money moves out while momentum defies gravity for a while longer.

Small molecule development is vastly different than large molecule development which has approximately four or more major hurdles to conquer not found in small molecule development.

Mergers are a sign of weakness, especially in the pharmaceutical sector. Guarantees 5 years of internal turmoil.

Gold is an inflation hedge. Did we add to the money supply or did we replace bad securities with good money, a zero sum game. Any chance the debt encumbered consumer will increase demand?

Real estate: Buying five houses and managing the rentals is a way for seniors to survive. The price of admission is still dropping and they are still making people that need a place to live. Fewer will qualify for a mortgage.

Coming Soon: Banking Crisis of Historic Proportions

I was pondering the collapse of the housing bubble. Poor quality lending created securities that were not money good. But the lax lenders were not the only to suffer, homeowners, even those that sat on the sidelines castigating their imprudent credit leveraged neighbors, all suffered tremendous wealth destruction. Far more than the bubble wealth.

The chaos theory seemed to explain this phenomenon. A butterfly beat it's wings and decided that no doc loans and other types were profitable and the entire lending and borrowing enterprise adapted, throwing us over the edge into a death spiral that continues to uncontrollably expand as the chaos theory predicts. The Fed's attempt to correct the death spiral was too late, too focused and too weak, much like fighting a forest fire that has spread into discrete child fires. As chaos continues to spread, we will experience the uncertainty and the fallout until the children fires are contained. Predictions will simply be guesses.

Some are looking at regulation to prevent a repeat. Some endorse self-regulation. Some endorse watching the fires burn. Certainly if enough participants raised the alarm, it might have allowed the retreat from the cusp of chaos. If a majority of the transactions were win-win and market discipline maintained, lending would have been self-limiting when the supply of truly qualified borrowers was depleted.

Rescuing the too-big-to fail affects chaos direction but does not contain it nor is the selective approach necessarily positive. It may in fact create new chaos. A comprehensive approach is necessary if intervention is to be successful, and the government is the only entity large enough to intervene. Without discipline, we may be in a permanent state of chaos. It is apparent that the consumer is already attempting to restore discipline.

Mortgage Fraud - The Root of America's Economic Malaise

Excellent article. I have just been reading about a wealthy business man that grew his empire on his first principle of not cheating customers, his name was A.T. Stewart. He became one of the richest men in America. He was very innovative at satisfying customer's unmet needs, such as creating the first mail order business, fixed value pricing and the first department store. He stands out as an exception to a century of swindlers, the robber barons. Time passes and history repeats.

A person we have not heard from lately is Countrywide's Angelo Mozilo. I remember a video or an article where he pointed out all the various unsafe mortgage products and said his organization would be the last one standing after all the rest went out of business. Then he jumped right in with both feet. He never explained why.

We know Goldman intentionally accepted fraudulent mortgages, bundled them and bet against them. Goldman's response was that they had buyers for these bundles and they were Big Boys perfectly capable of determining risk. All this swindling was going on in plain sight with the assumptions that a good CEO maintained profits for elite managers and to support the quarterly stock price. He would follow the pack because everyone was doing it. Risk was passed on to some other company, and there was total lack of accountability for the effects on society and the national economy. Milton Friedman made that perfectly clear and it has been accepted for 40 years. The fact that people expected not to be swindled was their own misunderstanding. That's what a confidence man does, builds confidence and then swindles; the easiest to swindle are the swindlers. It only took two dozen confidence men to bring down the economy. They say it is animal spirit capitalism, creative destruction. American as apple pie. Buyer beware. In the case of the rating agencies, free speech.

For some reason it is acceptable for a banker to build a bridge with faulty concrete because it is insured, where it would be wrong if a contractor did it.

Is Dubai's Default a Black Swan Event?

Most likely the banks have off-loaded the debt and protection on unsuspecting investors. Won't they be surprised. It is more like Russian Roulette. It is why casino capitalism and opaque risk sharing are destabilizing. The Black Swans are yet to come, which is the real source of panic when it hits the market..

Volcker's Wake Up Call: Spread the Word

A problem with innovative products is they replaced money. They were treated like gold. No one looked past the AAA rating. 99% of salesmen of these products could not explain them. They were intentionally complex and opaque.

There are two issues, one involves what went wrong and the other what have we discovered. These issues are different. What went wrong was a sliver of what we have discovered. When one cluster bomb goes off, you don't leave the rest hanging around because they have not harmed anyone.

Once the issues were identified, massive amounts of money were applied, applied in a way that have aggravated many people. Then everyone sat back and waited for the economy to correct itself. It has been a long wait. The export of manufacturing and trade imbalances were sitting in plain sight. The Asian excess savings and galloping economies were well known. Over the top US consumer debt was well known and encouraged. Now we are going to learn about a jobless recovery that supply-side economics can not fix. We have learned that wealthy people do not create jobs and trickle down is a fable. We are going to learn that only taxation can tame the wild animal spirits and focus money back toward Main Street investment. Give a millionaire another million and he will gamble, not invest. He will create no jobs. We have 600 Trillion notional value derivatives. How many jobs are being created with the money protecting them and at risk?

Hank Paulson told everyone that TARP was going to allow banks to lend and credit flow. Others said the banks were insolvent. An insolvent bank has a hard time lending. Once the cash infusions took place, the banks needed to re-capitalize and they took the route where short term money could be used, trading. The economic climate is too unstable for long term lending.

I would be spending a lot of time examining trade imbalances and trying to understand them. We require a wide range of jobs and they need to be widely distributed as people are not that mobile. Every city should have a business and tech incubator campus that can be placed outside of town. We should consider producing more food locally and have year round farmers markets. We should be beefing up the education system with more volunteers that have knowledge to share with an emphasis on technical training for all ages. We need more community health clinics because health care via the private sector will be unaffordable.


On Dec 16 01:10 PM Cambrian Capitalist wrote:

> The premise that financial innovation has not improved global productivity
> or economic growth is wrong.
>
> The simplest example of financial innovation facilitating economic
> growth involves the following: If I was a large corporation that
> wanted to construct a new office building in Manhattan with an initial
> budget of $2 billion, who is going to give me a construction loan?
> When can I transform that loan into a commercial mortgage? What will
> the costs of this financing be? The point is there are only a few
> financial institutions that can comfortably assume the risk of such
> an enterprise on a standalone basis. Because of the specific risk
> of such activity and the lack of potential competition at this level,
> it is highly likely that the financing costs associated with this
> venture will be very high. Without securitization, which allows banks
> to spread the specific risk of these activities around to a broad
> pool of investors, these activities would never get off the ground.
>
>
> Further illustration of this point is when the CEO's of money center
> banks were called in front of Congress. Congressmen would ask them
> why they were pulling back their lending activity to which the CEO's
> would respond that their individual companies had expanded their
> lending activity. They were not lying. The answer to why aggregate
> lending activity had declined was because the securitization markets
> (i.e. mortgage pass-throughs, CDO's, RMBS, CMBS) was frozen and were
> liquidating. At their peak in 2007 the securitization markets were
> almost as large as the aggregate level of conventional credit assets.
> The point is that credit can no longer flow into the economy in the
> absence of functioning securitization markets. These markets are
> essential to the optimal allocation of financial resources in the
> United States and the world. Glass-Steagall is and was irrelevant
> to the hazards involved in the freezing of securitization markets.
> The central issues that drove the credit meltdown were derived from
> agency conflicts, and the improper incentives created by government
> involvement in subsidizing the overproduction of housing stock.<br/>
>
> Recreating Glass-Steagall is tilting at windmills thinking.

Why Did Housing Go into a Bubble?

The government forced nothing, it is a fable. The whole scenario was developed on the credit card model. It was why credit scores became the most important credential for a mortgage. The loans were asset backed and most importantly risk was transferred via securitization. Wall Street has a junk bond dream left over from the asset stripping 80's.

Greenspan put the gas pedal down with low interest rates to promote growth to pay for a war. He had is eye on inflation, which never happened. Unnoticed were the dollars and jobs moving overseas. We did not experience inflation because the supply of goods coming into the States was infinite and cheap. It was Asia that experienced the growth.

No bank has ever sent someone knocking on your door begging you to re-finance or obtain a home equity loan to pay off your credit card debt. Remember the credit card come-ons, 0% for 6 months, the same come-on as toxic ARMS. Like credit cards, asset backed lending generated fees with no risk, risk was securitized in bundles and off-loaded. Servicing the loans was immensely profitable, with a penalty fee structure like credit cards, which stayed with the servicer.

Greenspan continued to have low rates and money went looking for other AAA securities. Once the fee fever hit, they could not turn off the machine. Greenspan tried to raise rates but money, offshore "savings", was buying the bundled securities keeping long term rates low, the "conundrum". The savings were the profits from us buying all the imported stuff. The growth Greenspan was waiting for was taking place in Asia and coming back as "savings". Inflation was localized to real estate as supply dwindled and investment banks swindled. Increasingly lax lending to unqualified borrowers allowed commission fueled sales reps wallets to bulge stuffing more lending down people's throats. The inflating housing prices created it's own wind.

Local banks were out of the picture around 2004 unless they did commercial lending for new construction or exceedingly overpriced rental units that were destined to become condos for snow birds. Idiots in town government were floating gimmick securities to build local infrastructure for new construction. People were lining up in the streets to put down payments on condos yet to be built and that were sold three times over before the ground was broken. Any idiot could become a real estate broker, and they did. The old hands were complaining about all the competition. Ultimately, very few were making money because of the insane competition, so they lied as much as they could to make a sale.

It was the best example of out of control capitalism because everyone was making money. No one wanted it to stop, so it didn't. Builders could not build houses fast enough. Rates and terms had never before been seen this favorable (but low rates did not force anyone to buy. Rates are low now, and people are not acting foolishly.) Real estate brokers were touting low rates, gimmick loans and the "better buy now or you will never afford a house in your life time. If terms seem unaffordable, you can sell the house at a profit. If you have bad credit, make payments on an exploding mortgage and re-finance before it blows up."

Fannie and Freddie were out of the picture by 2005, there were no more qualified borrowers. Raines was out for accounting fraud. Mudd had his arm gently twisted by Frank and investors wanting better returns. Frank wanted the poor not to miss out on the housing appreciation "miracle" (but he didn't say make bad loans). Bush wanted everyone in a house so they would buy stuff and keep the economy afloat. Fannie and Freddie bought AAA ABS of loans they would never be allowed to make, even before Mudd. Every bank in the US did likewise. Mozilo offered Mudd conventional loans but he had to take ALT-A and twisted ARMS as well. Mudd was in competition with the investment banks with the exception that he would hold on to the loans or guarantee them.

Then the defaults came, first slowly as HELOCs were used to make payments. Investment banks lost buyers so they turned attention to oil and made that market, drawing in dumb money from pensions and retirement accounts. Remember? Gas at $5 a gallon by the end of the year?. Bear Sterns lost some funds and then Lehman went down and a big freeze settled in.

Solar's Dead Cat Bounce May Be Over

You also need to reconsidered the average American Dream House. First, your water can easily be heated by a non-electric panel. My father puts a blanket over his because it super heats. You can purchase holding plate freezers and refrigerators that need power one hour a day. You can install spot electric heaters to supplement on cloudy days. Early adopters of solar need to compromise, but the more you use it, the cheaper it will get.

It is possible to rethink the massive Russian Stove with circulating solar hot water. Germany has homes that almost heat themselves with heat exchanger technology and super insulation. This is not Star Wars. It is all here today.

I pass an Amish farm and it has a wind turbine on the roof of the main house and it is always spinning. People living on boats have no trouble at all meeting their energy needs. A gas/diesel generator is supplemental. We need better batteries and we are home free. Someone will get a wrecked Prius and drive a boat with the parts.

The Coming Consequences of Banking Fraud

I will take a contrary opinion. I don't think they know what they are doing. It is simply crisis management. My views have changed since reading the recent articles at Bloomberg about the Lehman collapse.

In other words, if you call GS and ask for a crisis solution, they will give a GS solution. They are not geared towards saving the economy, they are geared toward succeeding at financial capitalism. If Paulson called a distressed homeowner, he would have been given different advice. The main thrust of the crisis solution was focused on the middlemen. The middlemen have little effect on the economy. The faulty or toxic products they created had an enormous effect on the national and global economy but that was not the focus, it was propping up, writing down securities, moving securities, a bookkeeping exercise with respect to the real economy. All the "secret" movement of money and securities are bookkeeping exercises to manage the colossal leverage and interconnectedness that would burn down the house if rules were followed and activities transparent.

It's the millions of people being displaced or losing jobs that is wrecking the economy. It is the investors and borrowers that got creamed and ignored. The fact that GS can now make money algo trading has not helped the economy one bit.

This is simply crisis management with attendant information control. Folks are nervous that a AAA plan will go bankrupt tomorrow mostly because the "problem" has spread in so many directions and into so many sectors that can not be controlled as simply as giving a bunch of money to AIG. The complexity and interconnectedness has been stunning. Every player has been fined tuned in the art of financial capitalism and not remotely geared to undo or fix problems. In financial capitalism you never look back, you look for new opportunities, whereas forest firemen are always looking back. These crises are not planned, it is the result of recklessness and a gross lack of foresight while living in the moment. Once you and the herd are swept up and can hear the roaring of the falls around the bend, it is too late.

Besides, gold gave us a lot of problems during the Long Depression. Stability comes from a Real Bills Doctrine but folks at SA don't want stability. Financial capitalism withers away and Industrial capitalism requires folks to make money the hard way, where value is exchanged for value and those adding the most value are rewarded. Financial capitalism appears to be adding value but moving money from pocket to pocket for a fee is not.

What I really think is going on is the monetarists, and there are plenty, are trying to salvage their relevancy while in crisis management mode. It turns out that if folks have the freedom to make the best choice, it is often results in following the herd over the falls.

Mortgage Resets: One Shoe Dropping

I believe you are right, this was a credit card model, because the banks get the fees, not the investors. The securitizers asked the CC department for a pivotal measure of credit-worthiness and it was not the ability to pay, it was the credit score. Regardless that the borrower was already paying the minimum on a $20k debt at 30%, a most un-creditworthy person for a long term loan.

A former bartender could look up the credit score, hand over $500,000, and staple the paperwork together destined for a AAA rated security. The good old days.

The Secret Paulson-Goldman Meeting

I've handled sensitive info before and agree that Paulson broke so many obvious rules that he must have been on an amateur dis-information assignment that the Russians would never take seriously because everyone follows the same rules. Paulson may have been there to help Goldman penetrate. Who knows. This is not the way sensitive info is handled by crooks or saints, it must have been a performance.


On Oct 20 02:02 PM Warm_Paw wrote:

> And if Paulson telling Goldman at a meeting in Moscow which would
> surely be disinformation, that all will be wonderful in America and
> that it should be fixed within a year, the Russian's now know it's
> worse than they thought and that the US is vulnerable.
> How do we put such dim witted people into such positions of authority?!

Colonial Bank Failure Highlights the Problem

I realize that this is Seeking Alpha, I get a chuckle from people that want to make money on the collapse of the economy.

The problem was the securitizing banks created bad paper. The Fed bailed them out for a specific purpose, they were systemic and too interconnected. The mistake was not recalling the toxic loans. They continue to fester and get passed around hoping to get government backing. The solution is not goofy accounting or closing banks. A government bad bank needs to get the loans off the market. Buying the loans capitalizes the banks, this is how it should have been done from the beginning. Restructure the loans to reflect the current economy. The government does not need to lose in the long run.

No new security should be allowed that can not be recalled and unwound, even if bundled. These loans, which now include commercial loans are no different than toxic pet food. They were made under distorted and sometime fraudulent conditions, get rid of them. The entire effect is systemic and it is preventing a recovery. Closing banks has no effect on anything and it is just throwing money away. All the moral hazard people will squeal like a stuck pig but it needs to be done. The government allowed this stuff on the market and they are the only ones big enough and motivated to fix the problem. Bailed out solvent banks could care less, they are making millions trading, it is someone else's problem

Bernanke Is Not the Problem

If you want to read about the Fed and jobs and globalization, go to the annual reports of the Dallas Fed starting at about 2000. Hint, they never addressed what Joe six-pack and his wife were supposed to do to earn a living in a globalized economy.

The Fed mandate of price stabilization and maximum employment is quite complex. It means inflation control while having workers produce what they consume, with a little left over. It also implies a balance of trade. Capitalism is about production and consumption, and the great cycle of money.

Inflation is inefficiency and cost shifting. Our system has been supporting monetary parasites and inefficiency and part of the inefficiency was government spending without cost controls. The concept of maximizing profits in the private sector does not play well with the goal of a balanced national economy. There is clearly a social component that was purposely ignored. businesses don't operate in their own little vacuum. Like it or not, if you reduce wages, you reduce consumption. That is why the balance is so important. Now toss in the globalization of production where the great cycle of money takes a detour out of the US and creates growth somewhere else while maximizing profits within the US. then add the concept of keeping score quarterly. This exposes the fallacy of capitalism. It must be managed. Unions can not keep asking for more wages and benefits without increasing productivity. Companies can not pay management ungodly sums nor can they increase prices based on their monopoly power. Companies can't export labor without considering the impact on consumption.

Look at health care, no matter how money is channeled, the consumer pays. We now know that the system costs are growing like cancer because of inefficiency and profit taking. We also know consumers spend money proportionally. If we spend more and more on health care, we spend less and less on something else. Our standard of living becomes distorted as well as the economy. There plenty of examples outside of the US to observe and measure against.

The Fed has used very blunt tools, varying the interest rates and the overall supply of dollars to control the great cycle of money. The great cycle of money needs better tools to direct the flow; the volume, velocity and target/direction of money. Taxes have been a traditional tool of choice. If it is jobs you want, jobs must come at all levels, not just knowledge workers. If it is social stability that is desired, then the workers need locational stability and job function diversity. This requires a national economic strategic plan just as any business would have in place, including tracking metrics. No more invisible hand, creative destruction is not necessary, it is an excuse for a lack of a national plan. Any talk of government planning is dismissed but we have no experience in national planning so results would be poor as we learn. Take California for example, its economy is out of balance along with its balance of trade with other States.

Replace Ben Bernanke with Paul Volcker

I'm thinking the deposit banks are not up for paying more interest on deposits. This may be a poor reason to hold rates down but it could push them over the edge. The flow of money is chasing short term returns instead of long term investment. Goldman is going gangbusters because they can borrow short and invest short. Deposit banks can not do that. If interest rates climb and the deposit banks don't respond, money will flow like a river out of the banks. This is a big experiment in financial capitalism where moving money for short term gains becomes 40% of GDP, replacing industrial capitalism which is now less than 10% and agriculture which is 1%. The Fed is captured.

Look at the stock market, we no longer value companies, we play the pricing spread, the asymmetric information spread, not the value spread. Everyone is a crook because there is so much money to be made the fast way. It is almost beyond regulation. Besides, this money generated by financial capitalism is kept from the so called "productive forces" that make a society and a national economy strong. People seeking Alpha don't want to hear this, but the productive forces are so weak, you can't even give money away. Without productive forces, money becomes valueless, hence the move into gold. You don't need burning inflation to destroy the value of money. I'm sure we will muddle through until the next collapse because financial capitalism is not sustainable by itself.

We fueled the productive forces in Asia, weakened the productive forces at home, while fueling the speculators at home. The bailout further damaged the weakened productive forces at home and bailed out the speculators. This is why we need Volcker, Bair and Warren. I think they understand.

The monetarists and the Chicago School must be banned from the economy and take Harvard while you are at it as they are a big promoter of financial capitalism, the economic Nosferatu that drains energy from the productive forces. Warren must have been considered an Alien from Outer Space at Harvard as she did not support borrow and spend nor debt till you drop.

Austrian School of Economics: Not Tough Enough

What do the Austrians think about China? The communist country that manufactures all our goods and we borrow from? When we focus on America, do we see the big picture? What do the Austrians think about Walmart? Are not they both socialistic and capitalistic when you can buy a pepper for 83 cents in every store, regardless of location? What about $4 medications? Same as McDonalds, same hamburger, same price, anywhere. If hamburgers were a necessity, the government could provide them at a cost of 30 cents. The same arms would be twisted for bulk discounts, the profit aspect would be missing as would much of the overhead. When the government does it, it is socialism, when McDonalds does it, it is capitalism. I fail to see much of a difference. The war between capitalism and socialism is overblown. Socialism is actually standardization for effectiveness and efficiency. Workers at McDonalds know about standardization.

The military works because it is standardized. When the Sargent says jump, everyone jumps. There is a reason for that kind of discipline. There is a reason it is called a fighting machine.

It all comes down to profit, is the army with the mercenary Sargent earning $150,000 three times better than the army with the Sargent earning $50,000?

When money changes hands during a transaction, is it a vital component of capitalism that a third party make a profit? If we regulate that profit, is it socialism?

Is Criticism of the Bernanke Fed Justified?

There is only one reason to have interest rates at 0% and that is to help the banks recapitalize. Main Street banks are not lending because of the lack of qualified borrowers and fear of adding to their current default rates both commercial and residential since they are barely solvent. They don't have a source of income and an increase deposit payments would be a cost. Deposits are increasing and adding to their costs. Until the economy stabilizes, they will not lend. If Bernanke puts pressure on them to lend by raising rates, they will engage in risky behavior. Bank foreclosures are going to continue. Citi will be the first too big to fail that will be deconstructed.

We had low rates for a very long time during the subprime and little inflation other than housing and commodities. Our supply channels are infinitely full. If we begin spending, 600,000 out of work Chinese will go back to earning 70 cents an hour and China's GDP will hit double digits. We will see no inflation. Keep commodities off limits to speculators otherwise the recession will be prolonged for no good reason.

All the money the Fed has been "printing" is tied up in the bad securities produced by the banks and will never see Main Street. Eventually those securities will need to be resolved and the Fed will get it's money back.

Supply can only satisfy demand so producers must noticeably lower prices while America goes on sale, creating demand like a worm on a hook. Any found stimulus money will be banked. A decided tax decrease for the middle class would help sort out household budgets.

People spend when they move into a new house so housing needs to be stabilized. Jobs need to be created to sustain demand which will happen very slowly as we adjust to the new normal. Most of the demand benefits will be felt in Asia.

We should terminate all health care, food stamps and unemployment benefits so the small government folks can get a good taste of life without government safety nets. We can decrease the deficit with their entitlements.

Interest rates will rise rapidly, not because of inflation. People will borrow if they need the money for value creating business investment at 6%. Below 6% encourages the wrong kind of borrowing and the banks need the lending income. In the 1850's, farmers needed low interest loans (4.5%) over long intervals because their land was minimally productive. Even back then, 6% was considered a good loan for the capitalists. A loan at 3% has the lender wondering if it is worth the risk of not getting the principal back. Housing will be so under valued because of supply, people will take a 5-6% fixed mortgage. Savings rates will go up and reward savers.