Financial mayhem

[Brant Gaede]

If the general public gets scared and cashing in, Paulson will learn shorts aren't needed to crash markets. You'd a thought the former head of Goldman Sacs would know that.

All Paulson cares about are his friends and himself. He certainly doesn't care if his interventions wipe out anyone else. He's a corporate-welfare statist.

It might be more accurate to say he's a carpenter and all he sees are nails.

--Brant

[BaalChatzaf]

If the general public gets scared and cashing in, Paulson will learn shorts aren't needed to crash markets. You'd a thought the former head of Goldman Sacs would know that.

All Paulson cares about are his friends and himself. He certainly doesn't care if his interventions wipe out anyone else. He's a corporate-welfare statist.

It might be more accurate to say he's a carpenter and all he sees are nails.

--Brant

Which is more dangerous? Malice or blindness?

Ba'al Chatzaf

[Brant Gaede]

Why equity prices will generally continue to decline:

--We are entering a recession because of the real estate fiasco which is going to get worse as the sub-prime problem is overtaken by Home Equity Lines of Credit and the like forcing ever more people out of their homes into rentals. Innumerable mortgages will reset to much higher levels too boot. If one has 400,000 in debt against a home worth 300,000 and one's payments drastically escalate one tends to stop paying them altogether.

--The normal housing market freezing up means less labor mobility and the essential end of move-up buying, that market's backbone.

--People in financial difficulty turn assets into cash, including stocks.

--Massive government bailouts are being absorbed by financials, not equities. It used to be equity prices were among the first beneficiaries of this sort of thing, not now.

--Investors now in he stock market are getting depressed and discouraged. Many were badly hurt by the ban on short-selling which queered equity pricing. Hedge funds have been liquidating.

--Overall money is moving out of the market and will continue to do so for the next year.

--Government bailouts tend to deepen and prolong problems. The Feds will be taking over assets that will continue to decline in price and value.

--To pay for all these busy busy interventions the Feds will have to eventually significantly raise interest rates to sell its bonds further deepening the recession both in real estate and generally.

--People with ruined credit can't get more, natch, so they are and will be in no place to contribute to economic recovery for a long time except by working, if they can find work. They will have to earn before they spend, both by choice and necessity.

--While there is a lot of negativism in the equity markets, it is still a long way from extreme. The trick is not to invest at the bottom--which is next to impossible to know--but to wait a year from now and re-evaluate. This is in deference to the tremendous inertia in real estate depression with prices going down. The more the government succeeds in helping homeowners the longer real estate will be pretty much frozen and the longer the recession and the longer serious problems in equities--worldwide. The people who need the most help need to be helped out of their homes. Keeping them in homes they never should have been in in the first place is a fundamental mistake.

--What's going on now is war between the monetarists (central banking) and the business cycle (Austrians). The business cycle will eventually win, if we retain general economic freedom, finally! In the meantime, we are in a war zone. The same thing happened during the Great Depression. The depression itself was the triumph of the business cycle and the failure of interventionism. The later prevented the former from acting positively, but failed to help the economy.

--Brant

Edited September 23, 2008 by Brant Gaede

[algernonsidney]

http://www.lewrockwell.com/blog/lewrw/archives/023023.html

REQUEST FOR URGENT BUSINESS RELATIONSHIP

Posted by Lew Rockwell at September 23, 2008 02:59 PM

DEAR AMERICAN:

I NEED TO ASK YOU TO SUPPORT AN URGENT SECRET BUSINESS RELATIONSHIP WITH A TRANSFER OF FUNDS OF GREAT MAGNITUDE.

I AM MINISTRY OF THE TREASURY OF THE REPUBLIC OF AMERICA. MY COUNTRY HAS HAD CRISIS THAT HAS CAUSED THE NEED FOR LARGE TRANSFER OF FUNDS OF 800 BILLION DOLLARS US. IF YOU WOULD ASSIST ME IN THIS TRANSFER, IT WOULD BE MOST PROFITABLE TO YOU.

I AM WORKING WITH MR. PHIL GRAMM, LOBBYIST FOR UBS, WHO WILL BE MY REPLACEMENT AS MINISTRY OF THE TREASURY IN JANUARY. AS A SENATOR, YOU MAY KNOW HIM AS THE LEADER OF THE AMERICAN BANKING DEREGULATION MOVEMENT IN THE 1990S. THIS TRANSACTION IS 100% SAFE.

THIS IS A MATTER OF GREAT URGENCY. WE NEED A BLANK CHECK. WE NEED THE FUNDS AS QUICKLY AS POSSIBLE. WE CANNOT DIRECTLY TRANSFER THESE FUNDS IN THE NAMES OF OUR CLOSE FRIENDS BECAUSE WE ARE CONSTANTLY UNDER SURVEILLANCE. MY FAMILY LAWYER ADVISED ME THAT I SHOULD LOOK FOR A RELIABLE AND TRUSTWORTHY PERSON WHO WILL ACT AS A NEXT OF KIN SO THE FUNDS CAN BE TRANSFERRED.

PLEASE REPLY WITH ALL OF YOUR BANK ACCOUNT, IRA AND COLLEGE FUND ACCOUNT NUMBERS AND THOSE OF YOUR CHILDREN AND GRANDCHILDREN TO WALLSTREETBAILOUT@TREASURY.GOV SO THAT WE MAY TRANSFER YOUR COMMISSION FOR THIS TRANSACTION. AFTER I RECEIVE THAT INFORMATION, I WILL RESPOND WITH DETAILED INFORMATION ABOUT SAFEGUARDS THAT WILL BE USED TO PROTECT THE FUNDS.

YOURS FAITHFULLY MINISTER OF TREASURY PAULSON

(Thanks to Mike Holmes)

[Brant Gaede]

Very funny.

--Brant

[BaalChatzaf]

If it weren't so tragic it would be funny. Here are all these over the hill, way passed middle age white guys with erectile dysfunction setting out to fix the economy and they do not have the faintest idea how to do it. So they will wreck it instead, but with the best of intentions (of course). The secret is that the economy will fix itself if it is allowed to, but you can't tell that to these folk. They will not believe you.

The ship of state is more like a ship of fools.

Ba'al Chatzaf

[Michael Stuart Kelly]

I am no financial expert, but I do know what I will be doing.

Any extra money I get will not be going into the money market. Not even gold. It will be going into produced goods and services. When this means stocks of well established companies, part of my criteria is that a company not have too many loans and not have too much inventory out on consignment. The less money-market involvement right now, the better—and the less risk such a company represents.

That's about the only relatively safe thing I can see for investments, and that is medium-to-long-term. I see nothing safe for investments (that is legal) guaranteeing short-term profits.

Michael

[algernonsidney]

way passed middle age white guys with erectile dysfunction

That's why McCain wants to have Sarah Palin around.

[Brant Gaede]

I am no financial expert, but I do know what I will be doing.

Any extra money I get will not be going into the money market. Not even gold. It will be going into produced goods and services. When this means stocks of well established companies, part of my criteria is that a company not have too many loans and not have too much inventory out on consignment. The less money-market involvement right now, the better—and the less risk such a company represents.

That's about the only relatively safe thing I can see for investments, and that is medium-to-long-term. I see nothing safe for investments (that is legal) guaranteeing short-term profits.

Michael

Investigate Roth IRAs, low cost Vanguard broadly based mutual funds, dollar-cost averaging of stock purchases and the technique The Dogs of the Dow (but do not use before January 2011).

--Brant

Edited September 24, 2008 by Brant Gaede

[Brant Gaede]

Right now as Congress wrestles with what to do there is no bounce to equity markets. For the rest of the year the potential from here is 700 up on the Dow to 3-4000 down. If the bailout gets through Congress, as it probably will, then I expect 1-2000 down fairly soon. If it doesn't get passed the Dow may immediately collapse to up to 4000 down from the current 10,800. That would be a panic to buy into. I expect the DOW to reach my target goal of 7-8000 in 13 months. After January or January 1 even, there may be nothing but the big grind-down. In fact I think it's already started and that's me being optimistic. Markets are holding their present levels out of ignorance and hope and not enough objectively deserved fear. Lacking the last means markets have not yet bottomed.

--Brant

[Brant Gaede]

The dollar is being set up for its own destruction. Continue to invest in gold and consider foreign currencies from countries dependent on natural resources like Canada and Australia. The long bond is a short. I'll probably do the last.

--Brant

[Brant Gaede]

Just one more reason to retreat from U.S. equities: Smart money fleeing to gold, foreign currencies, markets and their equities weakening the U.S. monetary base. Deflation in equities, credit. Inflation in the currency.

--Brant

Edited September 25, 2008 by Brant Gaede

[Brant Gaede]

Warren Buffett has deployed a lot of capital this year, most recently in Goldman Sacs. Any of these deals look well done, but in the aggregate they are a mistake.

In the late 60s Buffett closed his partnership as he couldn't find the investments that met his standards of due diligence. His partners could cash out or take stock in Berkshire Hathaway. The smart and/or lucky took the stock. Buffett didn't start to massively deploy capital until early 1973 when he saw bargains everywhere. It didn't unduly bother him that some stocks of companies he was buying continued to decline as much as 50% from his initial buy in, he simply kept buying.

Today Buffett is not buying a lot of stock in a lot of companies though he owns a lot of companies and companies' stock. He is making a few big deals, tying up capital. This may have something to do with his age. 40 years ago he probably had few intimations of his personal mortality and the little sense that he had relatively little time to do things. Today he is well into his 70s. His wife died. He has gone to a fair number of funerals of his contemporaries.

In the next few years there will be great opportunities to buy many great companies at bargain prices, but Bershire Hsthaway won't be able to buy as many of them as it might because of premature capital deployment. I do think Berkshire will do all right, eventully, and that if you go away and come back in 20 years it will have a stock price of half a million in today's dollars, but the man has just moved too soon.

--Brant

[merjet]

In the next few years there will be great opportunities to buy many great companies at bargain prices, but Bershire Hsthaway won't be able to buy as many of them as it might because of premature capital deployment. I do think Berkshire will do all right, eventully, and that if you go away and come back in 20 years it will have a stock price of half a million in today's dollars, but the man has just moved too soon.

Mr. Sage, did you mean BRK-A or BRK-B? If BRK-A, it's about 6.8% growth. If BRK-B, it's about 26.7% growth.

[Brant Gaede]

Financial stocks were especially hit hard this year. Stability in these stocks, if soon achieved--it's possible but unlikely--doesn't mean that other stocks in the aggregate won't now suffer even more than they have since peaking almost a year ago. They will be hurt even more, overall, because of the cost of credit and the looming recession negatively impacting earnings. The Fed's focusing on financials and already low interest rates (interbank lending) means it can do little or nothing to supply money to benefit equities as has happened in the past. A lot of money goes into the banks, but little flows out to investors. The banks keep shoring up their balance sheets which continually deteriorate. The big hope is that the bailout bill will stop and reverse this. If it does it won't last very long. The recession has to happen just as the falling piano has to hit the ground.

When I say cost of credit I mean the cost of borrowing above Feds' funds rate. It is hard to make enough money to justify an 11% loan. You have to make that 11% and more before money goes into your pocket as profit. The spread is getting worse, credit availability and deployment is contracting. Equity prices still have a long way to go down.

--Brant

Edited September 25, 2008 by Brant Gaede

[Brant Gaede]

In the next few years there will be great opportunities to buy many great companies at bargain prices, but Bershire Hsthaway won't be able to buy as many of them as it might because of premature capital deployment. I do think Berkshire will do all right, eventully, and that if you go away and come back in 20 years it will have a stock price of half a million in today's dollars, but the man has just moved too soon.

Mr. Sage, did you mean BRK-A or BRK-B? If BRK-A, it's about 6.8% growth. If BRK-B, it's about 26.7% growth.

A.

--Brant

[Brant Gaede]

A possible exception to my musings on Buffett: When he bought stocks right and left over 30 years ago he even borrowed money to do so. He could do that again. In that case you may see A shares at a million each in 20 years. The basic criticism stands.

--Brant

Edited September 25, 2008 by Brant Gaede

[Brant Gaede]

For people who want to invest now: use dollar-cost averaging. The fully invested should get a cash cushion for emergencies and bargains.

--Brant

Edited September 25, 2008 by Brant Gaede

[algernonsidney]

Warren Buffett has deployed a lot of capital this year, most recently in Goldman Sachs.

When Buffett talks, I listen. You know it takes a great mind to play Bridge as much as he does.

Edited September 25, 2008 by Chris Baker

[Brant Gaede]

Warren Buffett has deployed a lot of capital this year, most recently in Goldman Sachs.

When Buffett talks, I listen. You know it takes a great mind to play Bridge as much as he does.

Buffett says if there is no bailout bill all his investments are screwed. I think he's exaggerating to make his point. He wants the bill passed. He thinks it's for the best. Short-term it is for the best. I think it's worth 700 points up on the Dow and we just got 200 of those today. If we don't get that uptick I'm going to be really scared because I secretly hope the sun will come up tomorrow and the birds will sing. I don't like being heavily in cash or shorting stocks. I want to buy long and stay long. I hate shit city. I think stocks will go up then down, down, down--almost all next year long. If they don't, it's probable I don't know what I am talking about, which will be disorientating after a lifetime of knowing what I am talking about, which has been chronically depressing since I understood I really did understand.

--Brant

[Michael Stuart Kelly]

Brant,

I have had a little experience with foreign government bonds and what I saw up close not only confused me, it scared me. I finally understood the whole thing after I understood that money is created by creating debt. The new money is backed with debt for collateral.

People are blaming the present collapse on bad home mortgages because of mortgage backed securities. They are blaming greedy banks and greedy homeowners. But this misses the 800 pound gorilla sitting over there in the corner eating up all the bananas. What were these securities used for? Interest from subprime loans is a laughable drop in the bucket. I believe most all the banks (the big ones at least) could easily write them off and not even feel it. Fannie Mae and Freddie Mac were never intended to make money. And their actual debt is tiny by comparison to the real problem, since most of the mortgages they hold will be paid off, not written off. In fact, at the end of the day, there is probably no debt loss whatsoever that is not offset with profits in these companies.

Here is the game as I learned it:

1. Get a piece of crap, any old crap will do so long as it has a nice sounding jargon name, and put it on deposit at a bank or security house. Get a loan on it while you're at it. It's nice to have the extra money, but that's not essential. That's only for amateurs. The real players get a piece of the action.

2. That bank will issue a new piece of toilet paper with a nice sounding jargon name guaranteeing the original piece of crap. This guarantee isn't a guarantee like we all understand it, which normally means you have to pledge something and if you default on payment and do not want to fork over the pledge, big nasty people with guns will come and legally take it from you. They might even shoot you while taking it. For big financial institutions, a guarantee essentially means that the institution stakes its reputation on the toilet paper. That's it. That's the guarantee. The better the reputation, the more valuable the toilet paper.

As for actual money goes, the fine print usually takes care of that. In a pinch, the institution uses insurance (under a variety of jargon names) from an insurance company. But the insurance company is just for show. It's a joke because it in no way can honor a 1% default, much less 100%. (If everything in the whole game goes south one day, the man at the end of the line, usually the insurance company, will simply say, "Oops," before fading off into the sunset. And that is the true value of the initial piece of crap + security issued on it backed by reputation.)

3. This new piece of toilet paper is offered to other individuals and banks/financial institutions for the sole purpose of guaranteeing another loan. At this stage the jargon is as thick as the muck in an outhouse hole in the ground.

4. Some really heavy games start being played. For instance, there is one called high yield investment programs where a "trader" sets up a domino series of deals, nesting one piece of toilet paper at one financial institution, then taking its new toilet paper and nesting that at another, and so on, all the while getting a fraction of a percent each trade. By the end of the day, that adds up to a lot of change when the toilet paper is issued for millions of dollars or euros. All this comes out of thin air (and the people the trader knows—and they all LOVE the Internet for obvious reasons). This is just one game. In this particular one, fraud and front men abound, but the game is actually played by some very heavy hitters.

5. There are other games. They include setting up mutual funds, insurance companies, etc., and backing them with these "securities backed" loans while the administrators have a field day playing with funds (and dipping in them) that actually originated from produced goods and services—like people with paychecks for wages or companies with sales revenues.

It goes on and on. "Mortgage backed securities" is just one variation on the initial piece of crap on deposit stage. In this case, the original piece of crap is a house, which in reality is not a piece of crap, but a physically built value. The piece of crap is the deed. What the hell is a bank going to do with a bunch of houses? But it knows what to do with deeds. Now here's the rub. Houses are not deeds. The banks are so accustomed to trading pieces of toilet paper based on crap where they can play word games that they thought physical houses were the same thing and simply ignored the fact house loans were the facade, not the toilet paper. The facade cannot fall, so it needs different rules. If the facade falls, the house of cards falls.

Notice that houses do not changed in value. Not really. All the bank has to do is foreclose and it gets the deed to the house, which means it gets the house in the end. So it does not lose real value from the loan itself. A house is a house. But once again, what the hell is a bank going to do with a bunch of houses? It literally doesn't know what to do with them. The banks lose their shirts from the obscene amount of money they create out of thin air by jockeying artificial securities backed by loans into further loans. What failed in the present situation is not poor loans for houses. It is what the banks did with the pieces of toilet paper they issued on those loans. They sold toilet paper for gazillions of dollars (and other currency) using house loans for guarantee.

The buyers wanted more toilet paper they could horse around with, not a house for God's sake. To keep the facade up, people had to keep paying their mortgage payments. Otherwise, the banks either had to lie and doctor their books, or admit that the initial piece of crap was really a physical house with a value that you can't manipulate too much.

You can't take a house and make it instantly worth 100 times more than its face value by playing games. People will look and say, "Hey, that's just a house and it's not worth a 100 times more just because you say you have tradition and issue a piece of paper calling it a stationary stand-alone advanced primate shelter abode." But you can do that crap with bank-backed toilet paper.

I actually know of some banks in Brazil who specialize in being the starting point of the whole game. You should see the crap they have on deposit, too. (Worthless historical bonds that sound great are a favorite.) I even know of one—a successful one at that—that is the equivalent of a simple LLC without any authorization whatsoever from the Central Bank. It is illegal for that company to receive funds on deposit. But it can hold worthless historical paper and sell that for any price it wants. It essentially sells jargon with expert opinions.

And don't think Brazilian banks are the ones eating this up. It is the European and Asian banks who do that. Then they bring that crap into the USA through correspondent accounts while they take our own home-grown "mortgage backed security" crap out through the same channel.

It's a mess. From what I have seen and learned, and from the people I know (and God knows I know some heavies down south), I should be filthy-stinking rich. Instead, I'm a goddam Objectivist with a conscious.

Michael

[Brant Gaede]

House in California is foreclosed and vacant. Thieves come in strip out copper wiring and anything else they can get their hands on. This is a 250,000 dollar house. An investor buys the house for $25,000 to flip or fix up. This is not a made up story. The value of the house is not immutable for that reason alone. And there is a difference between price and value. A house may sell for 1,000,000 dollars but the value is 500,000 if said could be expressed in dollars. Buy for 1, sell for half. The seller for 1 realized a price, the seller for half realized the value.

--Brant

[merjet]

I have had a little experience with foreign government bonds and what I saw up close not only confused me, it scared me. I finally understood the whole thing after I understood that money is created by creating debt. The new money is backed with debt for collateral.

The collateral for the debt is the power to tax and print money.

People are blaming the present collapse on bad home mortgages because of mortgage backed securities. They are blaming greedy banks and greedy homeowners.

Are you trying to say MBS are not really a part of the cause? I say they are, but a preceding cause is government policies that encouraged poor-credit risks to get credit and lax underwriting.

Notice that houses do not changed in value. Not really. All the bank has to do is foreclose and it gets the deed to the house, which means it gets the house in the end. So it does not lose real value from the loan itself. A house is a house.

Not always true. Suppose a bank loans $470,000 on a house a borrower buys for $500,000. Then the market value of the house falls to $400,000 and the borrower walks away. The bank sells it for $400,000 but nets $375,000 after expenses. The bank loses $95,000.

[Brant Gaede]

Michael,

Your money as debt reference made me think of fractional reserve banking and how it generates increases in money through debt. If the contrary happens we can get severe short-term deflation. Even the price of gold can be badly impacted which is why I keep saying using dollar-cost averaging. It's important to keep buying whether the price goes up or down.

--Brant

[Michael Stuart Kelly]

All you guys are doing is proving that banks don't know what to do with houses. If you build something, you have to protect it and take care of it for it to not lose value. That goes for most anything that is produced.

Why should a bank get a free pass on this law of nature?

It accepted a house as collateral, not just a piece of crap like a deed.

(For the record, a deed is a piece of crap when it is treated as having a different nature than simply being a receipt for a house.)

Michael