prudentinvestor

Real Cause of This Financial Crisis? Global Hunger for Savings Instruments

Your opening sentence is great, ".. Every sort of idiotic expanation is offered by academic economists for the financial crisis ...", but I would also extend it to the vast majority of MSM commentators.

It is obvious to anyone with any intelligence that artificially low interest rates promote bubbles and mis-allocate capital and resources, and this is indeed the single root cause of this crisis. Every other explanation has this simple, obvious fact as its underlying root.

It is unbelieveable that "educated" policymakers and professors should be oblivious of such a basic fact, so perhaps they are aware of it, but choose to pretend otherwise since the politicians, the vocal elements of the MSM, and the underproducing but overconsuming sections of the populace all loves bubbles.

Cramer's Stop Trading! One of the Best-Run Banks in the World (8/20/09)

I had owned WHR for its dividend for many years, selling it all when it got to the mid-80's a couple of years ago, which I thought was too rich a valuation, even with the then thriving house-ATM bubble.

Earlier this year, I again loaded up on it in the low-30's to low 20's, expecting to hold it for many years. However, the unexpected generosity of those who wished to pay mid-50's to low-60's for it overcame my desire to hold it long-term, and I confess that I had to let them have it. I hope I can buy it back at a lower price, but, if not, I am grateful for such an unexpected, quick and tidy profit.

Insiders Continue to Sell, Sell, Sell

This is an unusual and unpredictable economic environment, with market dynamics driven by HF computer trades and by forces beyond my own experience and comprehension, despite my 30+ years of investment experience.

This rally may falter next week, or add another 20% before it inevitably runs out of steam. When it does run out of steam, the range of outcomes is very broad, from a full retracement to the March lows in a few weeks to a brief drop followed by yet another moonshot.

I've found it prudent to cash in a portion of this rally's gains, but am doing it slowly and steadily as the tradeoff between missing a significant part of the rally or getting caught in a rapid plunge is a moving target.

I hope that all "Mom & Pop" individual investors are exercising due caution and not being suckered in by the enormous forces beyond their comprehension.

Preview from Europe: Markets Dismiss Stress Tests and Crack 900

"On the latter, the aggregate sum looks easily within the bounds of the deep pockets of Uncle Sam, and thankfully so ...". Apparently, the uncle has very deep pockets for banks and pork, but not for honoring obligations to creditors.

When socialist countries nationalise companies, they usually assume their debt, and in some cases even compensate their equity holders (to some extent). Venezuela just did that with their national phone company. Egypt did that when they nationalised their canal in 1956 (but was attacked anyway). And the list goes on.

Here, on the other hand, Uncle Sam is in the process of nationalising the auto companies for the benefit of the UAW, and without assuming their debt, let alone compensating their equity holders.

I can already hear dissenters saying "... but the auto companies are only being nationalised because they're bankrupt ...". So, how come the banks are not being nationalised? Indeed, if Uncle Sam were to "invest" in the auto companies one quarter of what he has poured down AIG's conduit to the "sound banks", the auto industry would survive until the next upturn.

However, it appears that rather than "wasting a good crisis", the auto industry is being nationalised for political reasons, and without honoring its creditors. This is an ominous precedent for the bond markets.

CEOs Must Bring Investors Along for the Ride (WSJ)

The collapse in corporate governance is another reason to be sceptical about long-term exposure to US equities. It is one of the main factors that have motivated me to cash-in gains in the recent rally, rather than hold more stocks for their long-term dividend income.

I believe any board of directors that considers the interest of its long-term shareholders would not permit any raises, bonuses, or options to executives when dividends to shareholders are cut; and only to restore executive raises, bonuses, or option grants when dividends are restored to prior levels.

Any board of directors that considers the interest of its long-term shareholders would fire executives who bring about great damage to their shareholders' investment by poor management decisions (witness what happened to shareholders of DOW, GE, PFE, MRK, just to name a few, and not to even mention the banks).

However, the reality is that our entitled class of managements and their crony boards govern our public corporations as though they, and not the shareholders, are the owners; and this should be considered as a discounting factor when evaluating US equities as an asset class.

Preview from Europe: Swine Flu, Stress Tests and Green Shoots

The video of the new model homes being destroyed is shocking. This should be illegal, as it is a true destruction of real value, not just virtual value represented by numbers on a bank's balance sheet. There is a law against "malicious destruction of property", and it should be enforced even if the malicious destroyer owns it.

Would be far better to sell it at pennies on the dollar than to destroy real wealth, which historically only happens in wars.

Preview from Europe: Pigs Scare the Market Bulls

"..... there does appear to be some underlying resilience to the recent rally, presumably helped by the positive earnings surprises ...."

et tu Mole ? I cannot fathom the notion that when revenues are down 20-40%, and earnings down by 40-80%, we should rejoice because of the "positive surprise" that they are "higher than expected". I imagine that those who did the "expecting" were being clever, hoping all will celebrate and drink the kool-aid.

Why It's Better to Bail Out Borrowers than Banks

mathgeek,

I am not sure what makes you think the world would have ended if other mismanaged banks had failed and been taken over by the government, just like the successful resolution of failed banks in the 1980's. It would have ended up costing the public treasury less than the cost of all the tortured programs now underway, and would have kept the system fundamentally fair and transparent.

WaMu and Wachovia went under, their investors lost out (myself included). Yet the world did not end, and would not have ended had Citi, or others, also gone under. I made a bad choice when I bought WB stock and WaMu bonds, and took my losses as the natural consequence of making poor investment decisions. I blame no one but myself, and will be more judicious about speculative investments in mismanaged, over-leveraged banks that engage in irresponsible lending within a clearly unsustainable bubble.

This is how capitalism and free markets foster the wise allocation of capital: You make a good decision, you win, you make a bad one, you lose. Unfortunately, when government distorts the free market in non-transparent and unpredictable ways, the problem of capital misallocation grows, instead of diminishing.



On Apr 11 04:57 PM mathgeek wrote:

> Felix, while I prefer to keep the details private, I was living fairly
> close to the fire in this chain of events... and it was all about
> psychology. Everyone, from market participants to the media was playing
> the game of "whose next?"
>
> While Leman was alive, the focus was there. The moment Leman fell,
> the focus shifted to WaMu and Wachovia... and please remember...
> WaMu was wiped out in less than two weeks not by losses... but by
> panic deposit withdrawls. As soon as WaMu went under, the pressure
> shifted almost instantly to Wachovia and Morgan Stanley.
>
> What the regulators realized they needed to do was to draw a line
> underneath the financial system and say, this far, and no further.
> That is why TARP funds were crammed down all of the largest banks...
> the government needed to make it clear that the government would
> not allow either speculative attacks nor a deposit runs to close
> any more major institutions.... Period.
>
> And, for better or worse, it worked. Almost overnight, speculation
> about who would be the next to go ended and that phase of the crisis
> ended. Now, its not at all clear that WaMu or Lehman share or bondholders
> were treated fairly... why let them hang while protecting Citigroup,
> for example? But the decisions were not made on principle, they were
> made in response to a chain of events, and by the time WaMu and Wachovia
> were gone, the Fed realized that they had to stop what had basically
> become a rolling bank run, and consistancy of policy was far less
> important than changing the psychology... and at the point, the train
> had already left the station on bailing out borrowers. The Fed needed
> to credibly back the remaining financial institutions, and they did.
>
>
>
>
>

Preview from Europe: Market Back on the Defensive

Regarding AIG's use as a router of taxpayers' money to the banks, you state: "..... however these profits were: one-time in nature ....".

I'd suggest that this sort of operation will continue on a massive scale in various ways, some transparent and others concealed.

Another AIG Scandal?

The economy will continue to "recover" as the banks will continue to state more "profits" emanating from more taxpayer-funded subsidies, obvious and hidden.

Exclusive: Big Banks' Recent Profitability Due to AIG Scam?

The government had to make a choice: (a) nationalise the large banks and reboot, or (b) prop them up and save their powerful managers.

They chose (b), which requires shovelling hundreds of billions, if not trillions, into private for-profit companies, at the expense of taxpayers. Since the required amounts are much larger than can be announced in a transparent way without excessive public opprobrium, it follows that hidden or disguised bailouts on a massive scale have to be implemented, so this "news" is no surprise, and likely just the tip of the iceberg.

As to your statement "...... If the administration is truly aware of all these events (and if Zero Hedge knows about it, it is safe to say Tim Geithner also got the memo), then the potential fallout would be staggering once this information makes the light of day ......."; I personally doubt that the general public will have any interest in the arcane details of what is going on, and the potential fallout will be limited to academic discussions on sites such as this.

How to Profit from Market Manipulation

In the long-term, fundametals win.

If the hedge funds are cooperating with the PPT to buy stocks, do you expect them to end up in a year owning vast amounts of shares priced at 40x earnings and yielding 0.5%? I doubt it.

In the short term, they can act as a damper to slow down a plunge, or as a rocket to power up a spike, but eventually, fundamentals will rule. So private investors just have to consider probable PPT actions as one more facet adding complexity to short-term price movements.

Are Investors Buying the Administration's Banking Story?

It is unfortunate that the government has already exposed the taxpayers to enormous losses, while trying to protect certain, but not all, banks' stockholders and bondholders. More disturbing is the lack of consistency or transparency. WaMu's bondholders were thrown under the bus, and there seems to be a consensus that GM's bondholders should suffer a similar fate. What is so special about Citi's bondholders? Why are they being treated differently from WaMu's or GM's?

How About Adjustable Principal Mortgages Instead?

Your idea appears to be an extension of the the cramdown laws just passed by congress, except that you would dispense with the formalities of a bankruptcy court ordering the principal write-down.

The same vexing question comes up, who is supposed to pay for the loss? By custom, in orderly civilised society, profits are retained (after tax) by those who generate them, and losses are borne by those who incur them.

These notions lead one to wonder whether civilised society, based on a sound and fair legal foundation of contract law, may be getting closer to its end. This would be too high a price to pay for temporary expediency.

The Road to Economic Hell

Simon, as ususal, you bring up many excellent points. Although the party in control has changed, it is the same policy of using public funds in opaque ways to subsidise the financial industry's gambling titans.

The AIG situation is astonishing, as they seem to have a bottomless cesspool of CDS's, and it now appears that the government wants to pass endless, meaningless casino-gambling liabilities to the taxpayers. Is it not better to let AIG's counter parties swallow the loss of having placed their bets with a hollow counter party?