Al Capital

Cat Fight at the Fed

The under-capitalization in the financial sector alone requires a $3 trillion backstop in order to facilitate a mild stabilization in 2010. If you factor in the Federal Reserve's other mandate to minimize unemployment, another $1 trillion is needed before 2010. In other words, the most conservative actions, ie excluding any effective economic stimulus, will cost about $4 trillion over the period 2008-2010. The effect to the economy had the Fed not acted is not easily quantifiable, but probably would include the permanent crippling of the U.S. financial sector and chaos in international exchange rates and trade.

Economists: They're Just Modelers

Economists attempt to explain the system. Those that publish models are putting their ideas to the test, to be validated or invalidated. With either result, we learn something. Improving on economic models, or pointing out that despite the existence of a mature academic discipling there is no functional model of capitalism, has some value. Indeed, being critical of economic models is a vital part of the process of learning about them and improving our understanding of what those models are trying to simulate. But bashing economists, well that is simply pointless.

Citigroup Sees Gold Reaching $2000

When currency was backed by gold, the response of trading imbalances or monetary policy was easier to predict. Now the "gold inflation play" is more opaque. Certainly if enough money chases gold, then the price of gold will rise. But the fundamental coupling between the economy and any commodity, including gold, is nearly opaque given global deflation that is expected to rage through global economies like a wildfire prior to an inflation phase.

Planned, Cautious Buying Amidst This Panicked Selling

That was a thoughtful post. The element that was missing however is the plan under worst case scenarios, or what I would call "survive to fight another day" scenario. Although I have suggested all cash positions since February, I recognize that "traders" are looking for "deals".

Look, it might be unbelievable, but the market reaction to the current crisis is painfully obvious. First it will discount all growth since the housing bubble, basically assigning 5-10 cents on the dollar to mortgage backed securities of that vintage and bringing the Dow and S&P down to 2002 levels. From that point it could get even worse, much worse, so in making choices in this market, realize that the risks are enormous. The VIX alone documents an extraordinary risk level.

That brings me back to your point about "a plan". That plan should also account for the risk and costs of being wrong, meaning that if you are just hoping for a stabilization, or hoping for a bounce, then the plan should be to avoid risk.

Regarding the comment about "buy low and sell high", that works great in retrospect, but today's price might seem low now, but in fact turn out to be very high in a month from now. Don't invest using aphorisms, as you know "a fool and his money are quickly parted".

What Happens When Banks Are Nationalized

Simple reasoning indicates that DJI headed to 7500 (based on removing the gains since the housing bubble) but can go below 4000 when you factor in the positive (self-enhancing) feedback of the continued loss of capital and credit (unless the Feds can stop that from happening). The only floor is found near 2000 under a global meltdown scenario. Recovery under the worst case scenario is greater than 10 years. Be careful with your funds and your clients funds.

CPFF, TAF, TARP, Bailouts and All That Jazz

Note that when credit contracts r becomes negative.

CPFF, TAF, TARP, Bailouts and All That Jazz

Back of the envelope calculation (the basis of capitalism) assume that: economic growth = M + rG where M is available liquid capital for investment, G is inherent economic demand for goods and services, and r is a coefficient determined empirically (but is inversely related to the cost of credit). A the cost of credit increases r gets smaller (it is certainly less than 1 now). The most important factor in this equation is r. So, as simply as one can express this situation, it means we are deflating rapidly, and will continue until credit EFFECTIVELY cheapens considerably.

Asset Securitization Crisis: The Butterfly Effect

Strictly speaking, the "Butterfly Effect" describes predictable non-linear systems, albeit ones that can be catastrophically affected by very small changes in some factor (the effect was discovered by noting results from roundoff errors in computer modeling of weather, and explains why weather cannot be forecast more than a few days in advance).

What is happing in the economy is quite the opposite, it is the result of a catastrophically large change in credit markets and resulting capital deflation (deflation creates further positive feedback causing credit to shrink further). That being said, an optimistic projection for the general market bottom would be 7500 for the Dow, or roughly 2002 levels. However, if things go badly, we could see a bottom at 4000-4500. There is a small chance that the national banks can avert this disaster, however, the risks remain extraordinarily high.

Remember this, if you are using the word "hope" in your description of investments (e.g. "I hope the market improves"), then you are not investing, you are gambling. An investor factors in the risk.

The Cramer Crash?

I guess you geniuses all figured out that Cramer's comments TODAY caused the global market free fall LAST WEEK.... what is wrong with you people, can't you do simple arithmetic. The financial sector is potentially $6 trillion dollars in the hole, a hole that can't be filled with hope, so let these investors protect themselves and if they think it is in their best interest, to exit the market. And if you know something that Cramer doesn't, by all means share that INFORMATION , but don't fault the man for his market-experience based advice just because it makes you feel bad. Too, I am really surprised by this Bespoke Investment Group Cramer voodoo story... you don't really believe in that do you? Or were you among the ones who thought Meredith Whitney caused the financial crisis by exposing Citigroup's weakness? Hey, y'all should use that energy to help investors figure a way out of this crisis without cutting off a limb. But looking at Cramer as a scapegoat, well that is just pathetic: don't you recall that Paulson, Bernanke, Immelt, Congress etc, have been saying we are in difficult times for weeks, if not months.

LDK Solar: Revenues Way Up, Margins Way Down

The shutdown of the Florida nuclear plant today (Feb 26, 2008) is the buy signal for solar:

mnrtrading.blogspot.co...

Google Advances in Latest Search Data

Google results demonstrate a level of execution rarely seen. When you couple the tremendous database buildup with their web applications, the "sapper" strategy is nearly flawless. The Yahoo development is exactly what Google was planning as it ties up MSFT cash and resources.

mnrtrading.blogspot.co...

Microsoft Wants to Play Nice With Open Source

Microsoft saw gOS and they realized that they actually NEED open source or risk becoming superfluous to a significant portion of the market.

mnrtrading.blogspot.co...

The Difference Between Bernanke and Greenspan

Reinko, the Soviet Union went bankrupt trying to keep up with an arms race, a chess match that Ronald Reagan started and used Star Wars as his checkmate move.

Beware Ben Stein's Twisted Math

Roger, you raise very important points. But I don't think "lying with statistics" is what Ben Stein is doing. After all, 10 financial analysts can review the same statisical data and come up with very different recommendations, so to avert the same trap that Ben Stein falls into, we should avoid too much inference regarding his intentions.

Once can explain Ben Stein's "data" in many ways, including simple modeling of the stock market (in the context of stocks and flows using MIT systems model paradigms, which is what we use). Certainly Ben Stein's "intelligent design" world outlook spills over to how he looks at the stock market, but like nearly everyone who has been financially hurt, he is reacting emotionally in his own voice.

However, in reacting to Ben Stein's personal and faulty logic, one can easily create the exact opposite, which is another personal and faulty logic. In order to avoid "The Moral Hazard" the market system needs more self-correcting mechanisms (or self-regulating feedback loops) that kick in before the large financial excursions happen.

mnrtrading.blogspot.co.../

Rogue Traders and Economic Capital

Chris, I strongly agree with your general argument, and I have been making the same argument since August. Also refer to Part III of "High Noon at the Wall Street Corral"

mnrtrading.blogspot.co...

However, I disagree with you regarding the Feds further easing. They have no real choice at this point in time. They need to stabilize the financial markets long enough to unwind things. Then let's get down to talking serious reform.

By the way, I cite your work in that August post.

mnrtrading.blogspot.co...