Should You Bet Against Real Estate in 2009?

http://www.fool.com/investing/mutual-funds/2008/12/30/should-you-bet-against-real-estate-in-2009.aspx

Is Commercial Real Estate the Next to Decline? - Seeking Alpha

http://seekingalpha.com/article/112600-is-commercial-real-estate-the-next-to-decline

Uh Oh..... Monetary Flat Spin - The Market Ticker

http://market-ticker.denninger.net/archives/703-Uh-Oh.....-Monetary-Flat-Spin.html

Calculated Risk: NY Times on Possible CRE Bailout

http://www.calculatedriskblog.com/2008/12/ny-times-on-possible-cre-bailout.html

The full scope of the fraud revealed

http://www.nytimes.com/2008/12/28/business/28wamu.html?_r=1

Why You Need to Be Careful With Leveraged ETFs: Financial News - Yahoo! Finance

http://biz.yahoo.com/seekingalpha/081224/112167_id.html?.v=1

Why SRS is down today

Voltron says: SRS, SDS etc are down because they are paying big dividends today. $5.56 for SRS and 11.46 for SDS. Why does a leveraged short ETF pay dividends? I have no idea.

http://biz.yahoo.com/bw/081222/20081222005889.html

Calculated Risk: REIS: Commercial Real Estate Loan Defaults May Triple

http://www.calculatedriskblog.com/2008/12/reis-commercial-real-estate-loan.html

Developers say 'me too' to bailout - Dallas Business Journal:

http://dallas.bizjournals.com/dallas/stories/2008/12/22/daily10.html?ana=yfcpc

Fannie/Freddie loan modification program is a bad deal

http://mrmortgage.ml-implode.com/2008/12/17/fanniefreddie-come-get-your-loan-mod-pay-for-life/

Inflation is the only way out

http://www.project-syndicate.org/commentary/rogoff51

NYT: Debt Watchdogs - Tamed or Caught Napping?

http://www.nytimes.com/2008/12/07/business/07rating.html?_r=1

Commercial real estate heading South

Voltron says: and yet SRS is below 86. This is why Joe Schmuckatelli
doesn't go short.

http://optionarmageddon.ml-implode.com/2008/12/08/cre-heading-south/#comment-2039

Ouch! Borrowers Keep Defaulting After Mortgage Modification

http://clusterstock.alleyinsider.com/2008/12/ouch-borrowers-keep-defaulting-after-mortgage-modification

Voltron says: No duh. Economists like to pretend that they don't know
why this is happening. Yet there is a term for it, "ruthless default",
if you have a non-recourse loan you effectively have a put option. If
the house is worth less than the motgage, it is irrational not to
default.

Hard Assets Conference

Voltron says:

I went to the Hard Assets Conference in San Francisco on Sunday with my college roommate Nate.

The trade show booths were mostly mines and metal dealers. Surprisingly Futures contracts and ETFs were completely absent. Europacific Capital had a booth manned by the Los Angles office staff. Monex and Kitco had booths. I'm interested in a Kitco Royal Canadian Mint account as slightly more liquid complement to Europacific's Perth Mint account.

Peter Schiff gave the Keynote address as well as a standing room only client workshop. I'm sure they will show up on YouTube in a few days.

Peter Schiff gave his usual spiel and acknowledged that his more conservative buy strategies have not worked lately, but his aggressive short strategies have. He expressed confidence that this situation would change as soon as all the de-leveraging stopped and the dollar inevitably collapses. After Peter was asked several questions about timing the market, my guest, Nate cracked me up, saying "So, we're already lying on the tracks, we just don't know the train schedule"

More importantly I was able to ask Peter Schiff a few questions at his booth. I asked him about shorting bonds as a way to hedge against inflation and he as unequivocally in favor of it, which surprised me. He said that he was short bonds, which in the short term has been losing money but was very confident that this would change when the dollar collapses. I also asked him about what type of margin foreign investors are allowed to hold when the short U.S. stocks and he didn't really know the answer, but I hope he'll look into the idea and his company will offer ways to short U.S. assets without having to hold dollars and other U.S. assets as margin.

The answers to your questions emerged during his talks. He's bullish on China and Europe, he is a big fan of Jim Rogers and had a large poster of him in his booth. Oil will definitely hit $150 a barrel again.

As a side note, If you're ever in the city by the bay, stay at the Marine Memorial Club. It's a $299 room for $80 if you're active duty. There is a free brunch buffet and happy hour for guests everyday on the 12th floor with skyline views.

Nate twisted my arm into staying for some of the other speakers, which turned out to be interesting.

The first guy, James Dines, writes a commodities investment newsletter. He must be in his late seventies and takes his cue from his contemporary, Hugh Heffner, by surrounding himself with five impossibly beautiful hired mannequins - Dines' Angels, if you will. He also likes to tell off-color jokes. Anyhow he's bullish on Uranium because the Chinese are building nuclear power plants.

Adrian Day gave a speech echoing Peter Schiff and repeatedly garnering unwanted applause when he was critical of the government's bail-out plans. The audience, which in San Francisco, I imagine would be about as liberal as you will get at an investor's conference, had zero confidence in the government.

Anyhow, it was well worth it. If you're in Chinatown visit House of Nanking for a tasty soup-Nazi chinese food experience and "Kennedy's Irish Pub & Curry House" for an all-in-one evening for great pan-indian food and irish pub-house fun.

The unthinkable is happening!

Despite the trillions spent by the government, the "Goldilocks" economy has turned into what Peter Schiff calls the "Humpty Humpty" Economy and the unthinkable nightmare that Henry Paulson warned congress about may happen soon: Goldman Sachs might actually lose a little money . . . . My . . . . God . . . . . .

http://clusterstock.alleyinsider.com/2008/12/world-really-is-ending-goldman-to-post-2b-loss-gs-

Meredith Whitney: Yes, We're Still Screwed--And So Is Wells Fargo

From Clusterstock.com:

CNBC's Maria Bartiromo spoke with Oppenheimer analyst Meredith Whitney this afternoon. Meredith has a new report out arguing that banks are about to start yanking consumer credit lines and that this will further smash consumer spending.

We'll provide some excerpts from Meredith's report tomorrow. For now, here's are some bullet points the excellent interview, followed by the transcript (courtesy CNBC):

• Banks are beginning to pull consumer credit card lines. This will hammer consumer spending deep into 2009.
• Bank earnings estimates are still way too high, and banks will soon guide analysts down.
• Banks are still hoarding cash and they'd be idiots not to
• The bottom will come when liquidity starts to flow back into the system. We're not there yet.
• Citi (C) stock has not seen its lows.
• All the banks need more capital, and they'll be back for more.
• Wells Fargo (WFC) is the biggest short in the sector

Transcript:

MARIA BARTIROMO: I'M JOINED BY MEREDITH WHITNEY. SHE IS EXECUTIVE DIRECTOR OF EQUITY RESEARCH AT OPPENHEIMER. NICE TO SEE YOU AGAIN, MEREDITH. SO WE JUST HEARD HANK PAULSON TELL US WHERE HE THINKS WE ARE. LET ME GET YOUR TAKE ON THAT. WHERE ARE WE IN THE DOWN CYCLE? YOU HAVE BEEN AMONG THE FEW AND FIRST REALLY TO PREDICT HOW TOUGH THINGS WOULD GET.

MEREDITH WHITNEY: WELL, HANK PAULSON COULD CHANGE HIS MIND, RIGHT, LIKE HE'S DONE SO MANY TIMES. BUT WITH ALL DUE RESPECT TO HANK PAULSON, IT'S BEEN AN INCREDIBLY FLUID SITUATION. ONE THING'S CLEAR. AND I FOCUS A LOT ON THIS TODAY -- YOU HAVE HAD A MARKET THAT'S BEEN SO SHUT DOWN BY THE SHUTDOWN OF THE SECURITIZATION MARKET. SO THAT'S IMPACTED THE HOUSING MARKET. WHAT YOU HAVEN'T SEEN YET, DIGESTED BY THE MARKET, IS BANKS PULLING LINES FROM CONSUMERS. AND ACROSS THE BOARD YOU SAW THE BIG BANKS THAT COMMAND SO MUCH OF THE MARKET SHARE OF KEY PRODUCTS LIKE MORTGAGES AND CREDIT CARDS, START TO PULL LINES IN THE THIRD QUARTER. AND THAT'S GOING TO CONTINUE INTO THE FOURTH QUARTER AND THAT'S GOING TO CONTINUE INTO 2009. SO YOU'RE GOING TO START TO SEE THE CONSUMER REALLY GET STRAINED ON THEIR CREDIT CARD LINES.

PEOPLE THINK THE NEXT SHOE TO DROP IS THE CREDIT CARD, CREDIT COSTS. MEANING THE CHARGES GOING UP. NO IT'S THE CREDIT CARD LINES BEING PULLED BY BANK LENDERS IN ANTICIPATION OF WORSENING CREDIT, FUNDING PROBLEMS AND THEN REGULATORY CHANGES ON THE HORIZON. SO JUST WHEN A CONSUMER'S LOSING THEIR JOB, THAT'S THEIR FIRST SOURCE OF CASH, THEIR FIRST SOURCE OF LIQUIDITY, THEN THEY LOSE THEIR SECOND BIG SOURCE OF LIQUIDITY WHICH IS THEIR CREDIT CARD LINE. 90% OF CREDIT CARD USERS REVOLVE ONE TIME A YEAR. 45% REVOLVE MANY TIMES A YEAR. YOU CUT THAT BACK AND YOU REALLY DO DAMAGE TO U.S. CONSUMER SPENDING.

BARTIROMO: THAT'S SOMETHING THAT MENTIONED IN YOUR OP ED TODAY IN THE FINANCIAL TIMES. LET ME ASK YOU, YOU THINK THEN, THIS GETS WORSE, NUMBER ONE, IS THAT SORT OF ANTICIPATION PRICED INTO THE MARKET?

WHITNEY: NO WAY. I THINK, FIRST OF ALL, FROM MY GROUP ESTIMATES ARE SO -- MY ESTIMATES ARE 30 TO 50% LOWER THAN STREET ESTIMATES. GOLDMAN SACHS IS HAVING A CONFERENCE THIS WEEK. I WOULD EXPECT PEOPLE TO PRE-ANNOUNCE INTO THAT CONFERENCE -- YOU KNOW LOOK, YOU'RE WORKING OFF OF LOWER ASSET BASES, COMPRESSED MARGINS, AND HIGHER CREDIT CALLS, OF COURSE EARNINGS ARE GOING TO BE LOWER. I'LL TAKE AS EXAMPLE, LIKE J.P. MORGAN'S JAMIE DIMON. WHEN HE SPOKE AT THE MERRILL CONFERENCE, I THOUGHT HE SHOUTED FROM THE TOP OF THE MOUNTAIN THAT 2009 WAS GOING TO BE A TOUGH YEAR YET ESTIMATES REALLY DIDN'T COME DOWN. THEY HAVE TO COME DOWN FOR THE GROUP. ON THAT BASIS, THE STOCKS ARE VERY, VERY EXPENSIVE.

BARTIROMO: I WANT TO ASK YOU ABOUT THE OP ED THAT YOU WROTE. BEFORE WE GET INTO THAT, YOU SAID ESTIMATES HAVE TO COME DOWN. GOLDMAN SACHS TODAY, THE ESTIMATES CAME DOWN. THAT STOCK IS REALLLY TAKING A HIT TODAY, AMONG OTHERS. GOING INTO THIS CONFERENCE NEXT WEEK, WHO'S GOING TO PREANNOUNCE IN YOUR VIEW? WHO ARE THE EASY ONES, THE LOW HANGING FRUIT THAT PREANNOUNCE?

WHITNEY: WELL, I DON'T KNOW IF THEY'LL NECESSARILY PREANNOUNCE, BUT THEY'RE GOING TO GUIDE A LOT LOWER. AND THAT COULD BE EVERYONE. I THINK J.P. MORGAN'S GOING TO SAY MORE OF THE SAME. I WOULD SAY EVERYTHING SINGLE FINANCIAL IS GOING TO COME OUT AND SAY WE'RE GOING TO KITCHEN
SINK. WELLS FARGO, AS AN EXAMPLE, THEY'VE GOT ELEVEN CHARGES IN THE FOURTH QUARTER ASSOCIATED WITH THEIR WACHOVIA PORTFOLIO. BUT THEY'RE GOING TO PROBABLY KITCHEN SINK THE FOURTH QUARTER AS WELL TO TRY TO BOLSTER RESERVES. THE BANKS HAVE STOOD VERY UNDER RESERVED FROM A HISTORIC BASIS.

BARTIROMO: YOU WROTE THE OP-ED IN THE FINANCIAL TIMES TODAY AND YOU WENT THROUGH FOUR IDEAS FOR SOLUTIONS. YOU'VE BEEN LOOKING AT THIS FOR A LONG TIME. LET'S GO THROUGH SOME OF THOSE SOLUTIONS THAT NEED TO HAPPEN IN ORDER TO ACTUALLY PERHAPS SEE SOME KIND OF A TURN IN THE BOTTOM. NUMBER ONE, YOU SAY RE-REGIONALIZE BANKS. WHAT DOES THAT MEAN?

WHITNEY: WELL IT MEANS THAT OVER THE PAST 20 YEARS, AS THE FINANCIAL SYSTEM HAS MODERNIZED, SO MUCH OF THE BANKING SYSTEM, BIG PRODUCTS LIKE CREDIT CARDS AND MORTGAGES, HAVE CONSOLIDATED NATIONALLY. SO FIVE LENDERS CONTROL TWO-THIRDS OF THE MARKET AND MORTGAGES. FIVE LENDERS CONTROL TWO-THIRDS OF THE MARKET AND CREDIT CARDS. SO WHEN THOSE LENDERS DECIDE TO PULL BACK, EVERYONE FEELS THE PAIN.

BARTIROMO: TOO MUCH CONCENTRATION?

WHITNEY: TOO MUCH CONCENTRATION. IT USED TO BE YOUR LOCAL LENDER KNEW YOU. YOU KNEW YOUR CUSTOMER. AND SO YOU HAD LOCAL LENDING. YOU KNOW THE REGIONAL BANKS, THE SMALL REGIONAL BANKS HAVE CLEAN BALANCE SHEETS. ARE NOT IN THIS TROUBLE BUT THEY'VE LOST THIS SKILL SET EXPERTISE. THE
PROCESSING/SERVICING OF UNDERRATING CREDIT CARDS. AND SO THEY'VE THE CAPITAL TO LEND OUT, THEY DON'T HAVE THE SKILL SET. WE'VE GOT TO GET MORE OF THE REGIONAL BANKS LENDING.

BARTIROMO: NUMBER TWO, YOU SAY IS EXPAND FDIC GUARANTEE FOR BANK DEBT?

WHITNEY: SO MANY OF THE BANKS ISSUED FDIC GUARANTEED BANK DEBT LAST WEEK. SOLD LIKE HOTCAKES. IT WAS A GREAT FUNDING VEHICLE FOR THE BANKS BUT IT EXPIRES IN JUNE. SO, BANKS NEED TO KNOW THEY HAVE A LONGER RUNWAY OF ACCESSING CHEAP CAPITAL.

BARTIROMO: SO THAT THEY DON'T HOARD THEIR CASH?

WHITNEY: BECAUSE RIGHT NOW THEY ARE HOARDING -- ANY SEMI-CONCIOUS BANK MANAGER IS HOARDING THEIR CASH AND LIQUIDITY.

BARTIROMO: NUMBER THREE IS DELAY ACCOUNTING RULE IMPLEMENTATION. THE ACCOUNTING RULE CHANGE.

WHITNEY: YEAH. I THINK FAS 140 IS A HUGE MIRAGE. IT HAD GOOD INTENTIONS, WHICH IS BRING OFF-BALANCE SHEET ASSETS ON BALANCE SHEETS SO FOR GREATER TRANSPARENCY. BUT ONE OF THE BIG ASSETS, THE EASIEST ASSET THAT COMES BACK ON BALANCE SHEET IS CREDIT CARD ASSETS. IT'S MORE EXPENSIVE FOR BANKS TO RESERVE AGAINST THIS. BANKS CAN'T AFFORD IT AND PLUS THERE'S BETTER GRANULARITY OF TRANSPARENCY OFF-BALANCE SHEET AND WHAT'S CALLED MASTER TRUST CREDIT REPORTS.

BARTIROMO: INTERESTING, BETTER CLARITY OFF BALANCE SHEET. AMEND PROPOSAL TO UNFAIR AND DECEPTIVE LENDING PRACTICES.

WHITNEY: THIS IS A VERY NERDY, CREDIT CARD SPECIFIC BILL WHICH HAS A LOT OF GOOD INTENTIONS LIKE, GIVE A CUSTOMER A LONGER PERIOD OF TIME TO PAY THEIR CREDIT CARD BILL. DON'T DO ABUSIVE PRACTICES LIKE TEASER RATES WHERE I LURE YOU IN WITH ONE RATE AND THEN CHARGE YOU ANOTHER FOR YOUR BALANCE. BUT THERE'S ONE BUT VERY VERY DANGEROUS CHANGE IN HERE, WHICH IS BY THE WAY ALREADY BEEN ACCEPTED BY THE THREE REGULATORY BODIES THAT COVER THE CREDIT CARDS. SO THIS IS GOING TO GO INTO EFFECT AS IS AND BE DANGEROUS, WHICH IS, IT ELIMINATES, DRAMATICALLY REDUCES, A LENDER'S ABILITY TO REPRICE AN UNSECURED CREDIT CARD LOAN. ALL THE BANKS THAT I SPEAK TO, ALL THE BANKS WHO SAID THIS WILL END IN UNINTENDED CONSEQUENCES, AND I THINK THE BANKS PULLING $2 TRILLION AT LEAST OF CREDIT CARD LIQUIDITY FROM THE SYSTEM IS VERY DANGEROUS FOR THE U.S. ECONOMY.

BARTIROMO: LET ME SWITCH GEARS AND GET YOUR TAKE ON WHAT HAS HAPPENED OVER THE PAST TWO WEEKS. WE SAW THE GOVERNMENT COME IN, SUPPORT CITIGROUP, THAT SACKED RALLIES OFF THE LOW OF $3 AND CHANGE. NOW BACK UP TO CLOSE TO 7 OR UNDER 7, REALLY. WHAT DO YOU THINK ABOUT THE CITIGROUP PLAN AND DO YOU THINK THAT THAT STOCK HAS SEEN THE WORST?

WHITNEY: I DON'T THINK THE STOCK HAS SEEN THE WORST. I THINK THAT THE PLAN FOR EQUITY SHAREHOLDERS WAS SO GENEROUS AND THEN THE CONVERSE OF THAT IS-- WAS SUCH AN AFFRONT TO U.S. TAXPAYERS, THAT I DIDN'T WANT TO COMPLAIN ABOUT THINGS ANY MORE. I JUST REALLY WANTED THE MAIN MOTIVATIONS OF WHY I WROTE THIS OP-ED PIECE TO TRY TO PROVIDE SOLUTIONS BECAUSE BEING NEGATIVE ONLY GETS YOU SO FAR. CLEARLY THE GOVERNMENT APPRECIATES THAT THESE BANKS NEED MORE CAPITAL. AND THEY CAN'T RE-CAPITALIZE ALL THESE BANKS THEMSELVES. SO THEY LEFT THE WINDOW OPEN FOR EQUITY BECAUSE THEY KNOW THAT THE PRIVATE INVESTOR, YOU AND ME, HAVE TO BUY SHARES OF THESE COMPANIES TO ULTIMATELY RECAPITALIZE THIS SYSTEM. SO BANKS LIKE CITI AND OTHER -- THE BIG BANKS, CAN'T FAIL BECAUSE LOOK, YOU'D WIPE OUT MOST OF THE INSURANCE DEPOSIT THAT COVERS THEIR DEPOSITS. IT WOULD BE A DISASTER FOR THE SYSTEM. CERTAINLY FOR CONFIDENCE. SO YOU KEEP THEM ON WHAT I WOULD DESCRIBE AS A METHODONE CLINIC TYPE OF REHABILITATION. BUT I STILL THE GOVERNMENT SHOULD HAVE GOTTEN MUCH MORE FOR ITS MONEY. I UNDERSTAND WHY THEY DID IT THIS WAY, BUT THERE'S NO GUARANTEE THAT INVESTORS ARE GOING TO COME BACK AND RECAPITALIZE CITI WITH THEIR OWN SHAREHOLDERS.

BARTIROMO: DO YOU THINK THE FIRM IS GOING TO EVENTUALLY NEED MORE CAPITAL AND AS A RESULT THE STOCK TRADES DOWN BECAUSE OF THIS ACKNOWLEDGEMENT BY THE MARKET THAT WE'RE NOT DONE HERE?

WHITNEY: EVERY SINGLE BANK THAT I COVER, PARTICULARLY ALL THE LARGE BANKS, WILL NEED MORE CAPITAL BECAUSE THIS STILL IS JUST PLUGGING HOLES. ANY OF THE EQUITY CAPITALS NOT GOING TO CREATE NEW GROWTH OR -- ALL OF THE BANKS ARE CONTRACTING THEIR BALANCE SHEET. SO THERE'S NOT A DOUBT IN MY MIND THAT ALL OF THESE BANKS ARE GOING TO NEED MORE CAPITAL.

BARTIROMO: FINAL QUESTION, AS WE APPROACH THE CLOSE AND THE MARKET IS DOWN 600 POINTS. IS THAT WHAT'S BEHIND THIS CONTINUATION OF A SELLOFF IN EQUITIES? WHEN WE FIRST TALKED LAST WEEK, WHEN WE WERE DECIDING WHEN YOU WERE AVAILABLE TO COME ON THE PROGRAM, I THOUGHT, MAYBE AT SOME POINT SHE'S GOING TO MAKE AN AGGRESSIVE CALL AND TURN POSITIVE HERE. WHAT IS IT GOING TO TAKE FOR TO YOU TURN POSITIVE?

WHITNEY: IT'S EASY. WHEN YOU SEE LIQUIDITY COME BACK IN THE SYSTEM AND THE DENOMINATOR EXPAND, MEANING BANKS START TO LEND AGAIN, MONEY GOING TOWARDS GROWTH, YOU SEE THAT THE SYSTEM IS SHRINKING, MORE MONEY COMING OUT OF THE SYSTEM. IT'S LIKE IF YOU TAKE OIL AND GAS OUT OF AN ENGINE IT STOPS. LIQUIDITY IS COMING OUT OF THE ENGINE, AS AND A RESULT, THESE BANKS HAVE TO SHRINK TO GROW. SO YOU'RE GOING TO HAVE TO SEE -- AN EXAMPLE WOULD BE IN 1998 WHEN INVESTORS CAME BACK TO THE SECURITIZATION MARKET, AND THE BOND MARKET IN 2002, 2003, THE SYSTE REALLY GOT GLOBALIZED AND PETRO DOLLAR MONEY GREW HAND OVER FIST. SO YOU SAW LIQUIDITY CAME BACK INTO THE SYSTEM. I DON'T KNOW WHAT IT'S GOING TO BE BUT THE SYSTEM IS SHRINKING NOW AND ONCE IT TURNS THE CORNER-- THAT WILL PRECEDE NUMBERS IN THE COMPANIES WILL PARTICIPATE. I HAVEN'T MISSED A BOTTOM YET. SO I THINK THAT THERE'S TIME HERE. I CAN'T WAIT UNTIL WE GET THERE.

BARTIROMO: PETRO DOLLARS ARE ALSO SHRINKING. YOUR SELL RIGHT NOW, THE
BIGGEST SELL IN THE FINANCIAL SERVICES GROUP WOULD BE?

WHITNEY: WELLS FARGO.

BARTIROMO: WELLS FARGO. MEREDITH GREAT TO HAVE YOU ON THE PROGRAM.

Voltron says: a link to Meredith Whitney's op-ed piece is here. I agree with her investment advice but not her proposed government solutions to the crisis.

Moody's under the gun

Voltron says: will the SEC do anything this time?

http://online.barrons.com/article/SB122792676800266213.html

SRS flow

http://online.wsj.com/article/SB122773513381860923.html?mod=yahoo_hs&ru=yahoo

Questions for Peter Schiff

I will be attending Peter Schiff's client-only conference in San Francisco on Sunday. I plan on asking him about shorting bonds. If you have any other questions you want me to ask, post them in the comment section of this message.

Meredith Whitney Says Citi is a Goner

Voltron says: breaking news is that citibank is getting another 20
billion and 300 billion in guarantees.

Here's why

http://www.nakedcapitalism.com/2008/11/meredith-whitney-says-citi-is-goner-bbc.html

Is the Price of Gold Being Supressed? - Seeking Alpha

http://seekingalpha.com/article/107423-is-the-price-of-gold-being-supressed

SEC does nothing about ratings agencies

Voltron says: The do nothing Securities and Exchange Commission does nothing about fraudulant ratings agencies. And chief offender, Moody's (MCO), whose stock is plummeting is officially smoking crack.

Run on Gold Coins overwhelms mints

Voltron says: another article on gold and gold coins:

http://www.nypost.com/php/pfriendly/print.php?url=http://www.nypost.com/seven/11182008/business/governments_cant_handle_global_run_on_go_139306.htm

rumor: Gold will be money again

Voltron says: word on the street is that China, Saudi Arabia and Iran are moving into gold. There is serious discussion of a new gold based international monetary system (a la Bretton Woods)

http://irishliberty.wordpress.com/2008/11/16/china-to-pull-the-plug-on-the-usd-switch-to-gold/
http://ml-implode.com/staticnews/2008-11-16_AreturntotheBrettonWoodsinternationalgoldstandardisinevitable.html
http://seekingalpha.com/article/106181-what-does-the-recent-saudi-gold-rush-mean

For those of you just tuning in . . .

The US Dollar has to go

It is clear that the United States has relied on a continuous cycle of debt growth to fuel its economy. The engine of the US economy has been the US consumer, and consumer debt had to expand at a rate that far outpaced negligible consumer income growth in order for the US economy to continue to "grow."

Expanding the amount of money and credit is easy under a fiat system when your currency is the world's reserve currency. The US has, for years, been able to create new money out of thin air at will, with no meaningful monetary penalty extracted by its trading partners.

by Christopher Galakoutis, CMI Ventures LLC

Easy money at home gave rise to inflationary pressures in homegrown industries and services. Understanding full well there can be no economic growth where the purchasing power gained from expanding consumer credit is all but nullified by rising inflation, modern day economists, along with an all too eager public support seeking war-time government and profit thirsty CEO's, came up with a plan in 2001. It was full throttle ahead for the outsourcing movement.

With the prices of their big screen TV's and other imported goods falling, the American people were fooled into believing there was no inflation, as the rising costs of life's necessities back home had been camouflaged, as it were, by the falling costs for everything else. The average consumer was left par for the course after all was said and done, and feeling pretty good about things, as the easy flowing credit initially provided all the good, such as rising home values, and none of the bad.

More outsourcing meant more Americans losing their jobs, and joining their neighbors in the unemployment line, instead of the shopping mall checkout line. Jobs that used to support income growth, as well as a solid tax base for the cities, states and federal government, had been moved offshore, in the short-sighted search for votes and higher stock prices. There would soon be fewer American consumer dollars filling foreign coffers.

As more people struggled and were unable to make their mortgage payments, the economic realities of millions of Americans finally began to dawn on even the most optimistic. Housing prices would soon collapse, as fewer and fewer Americans could afford to pay sky-high prices. Greater fools are always milling around, but the jig was up on lending vast sums of cash to greater fools with no jobs.

Like the cheating student relying on the kindness of those sitting beside him during exam time for a passing grade, so too the US has relied on the kindness of foreigners for the maintenance of the American standard of living. But such fantasies can only last for so long. Like the parents of our little swindler, the American people, as well as America's foreign creditors, would soon learn that all was not what it was cranked up to be.

That is where we are today. The trillions borrowed by the US government and US consumer cannot be paid back with dollars of equal value. A country with no domestic savings from which to draw, angry foreign creditors and with a collapsing tax base has few options. US debts will have to be paid back with printed money. Money printing will cause a severe inflationary depression in the US, meaning it is time for Americans to hunker down. Americans need to reduce spending, buy some gold, and get rid of the gas-guzzlers and vacation homes -- downsizing is survival in the years ahead.

The worldwide crash in equity markets is the rest of the world coming to terms with this reality. A decoupling from the US, both financially and economically, would save the rest of the world -- home to well over 90% of the world's consumers -- but only if they move quickly. Akin to a drowning man holding on to the legs of a would-be survivor, the rest of the world, our would-be survivor in this case, has been trying to figure out how to be a hero. When the would-be hero realizes he too is at death's door, one swift kick jarring himself loose will be the only option.

It is time to extract a penalty and exercise that option. The US dollar has got to be replaced as the world's reserve currency.

 

Things to worry about

Voltron says: I’m not concerned about today’s technical rally (In fact, I bought more SRS at 135)  Here are some things that do concern me.

 

The following article raises the possibility that China will sell US Treasuries to finance it’s stimulus at the same time the US is trying to issue new Treasuries to finance it’s stimulus.

http://www.reuters.com/articlePrint?articleId=USTRE4AA7ZY20081111

 

This article gives a fair description some real risks to investing in gold

http://seekingalpha.com/article/105825-gold-bugs-beware

 

Finally, this article outlines some of the possible warning signs of the move towards inflation

http://seekingalpha.com/article/105828-lower-prices-now-massive-inflation-later

Today's Rally

Voltron says: Well, it looks like 8,000 is solid technical support for now.  I don’t believe for a minute it was bargain hunters buying that initiated it.  It was likely short sellers taking profit.  If the market falls again quickly, the short sellers won’t be there this time to catch it.  More importantly the dollar did not show weakness, so I don’t think we’ve turned the corner to inflation yet.

Cracks forming in commercial real estate

Voltron says: General Growth Properties (GGP) may be bankrupt and is removed from the S&P 500 index. ProLogis (PLD) cuts it's dividend, CEO resigns. Both stocks are included in SRS. When the subprime lenders went down, they went one by one because Wall Street refused to acknowledge that THEY WERE ALL THE SAME. Same thing is happening here. GGP and PLD go down in isolation, is if they are messed up oddballs, when in fact they are representative of the industry and the only reason they are going down first is that they are in the wrong place at the wrong time.

links:

http://seekingalpha.com/article/105690-reits-are-gold-mines-on-the-short-side
http://biz.yahoo.com/ap/081112/general_growth_properties_mover.html?.v=2

Still deflation

http://biz.yahoo.com/ap/081112/credit_markets.html?.v=4

Scary Charts

Voltron says: This chart from the Fed depicts the solvency of Banks. Click for a larger view.



more scary charts here

Peter Schiff on gov't mortgage plan

Voltron says: Below is Peter Schiff's take on the government's new mortgage modification plan.

By offering to reduce mortgage payments to 38% of household income for homeowners who are 90 days delinquent, the mortgage program announced today will spark a new wave of delinquencies. In a classic case of unintended consequences, the plan will encourage homeowners to rearrange their finances to qualify for the benefit. Those who could conceivably economize to meet their existing obligations will now have a strong reason to forgo such sacrifices.

The intentional reduction of income is also a possibility. In many cases dual-income families may decide to eliminate one job altogether as reduced mortgage payments combined with lower child care and other work-related expenses will likely exceed the after-tax value of the lost paycheck.

It may also be tempting for some homeowners to temporarily quit high-paying jobs, or delay job searches, and accept low-paying jobs while the creditors consider their fate. Once their mortgage payments have been modified to fit their diminished incomes, these homeowners would then be free to pursue better-paying jobs. With mortgage payments reduced to a fraction of their prior payments, these workers will have much more employment flexibility than those foolishly struggling to meet non-modified mortgages.

Liar's Texas Hold 'em

Voltron says: Great article by Michael Lewis, author of "Liar's Poker", about how guys from Queens could predict the subprime collapse.

Excerpt:

He couldn’t figure out exactly how the rating agencies justified turning BBB loans into AAA-rated bonds. “I didn’t understand how they were turning all this garbage into gold,” he says. He brought some of the bond people from Goldman Sachs, Lehman Brothers, and UBS over for a visit. “We always asked the same question,” says Eisman. “Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.” He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S&P couldn’t say; its model for home prices had no ability to accept a negative number. “They were just assuming home prices would keep going up,” Eisman says.

As an investor, Eisman was allowed on the quarterly conference calls held by Moody’s but not allowed to ask questions. The people at Moody’s were polite about their brush-off, however. The C.E.O. even invited Eisman and his team to his office for a visit in June 2007. By then, Eisman was so certain that the world had been turned upside down that he just assumed this guy must know it too. “But we’re sitting there,” Daniel recalls, “and he says to us, like he actually means it, ‘I truly believe that our rating will prove accurate.’ And Steve shoots up in his chair and asks, ‘What did you just say?’ as if the guy had just uttered the most preposterous statement in the history of finance. He repeated it. And Eisman just laughed at him.”

“With all due respect, sir,” Daniel told the C.E.O. deferentially as they left the meeting, “you’re delusional.”

This wasn’t Fitch or even S&P. This was Moody’s, the aristocrats of the rating business, 20 percent owned by Warren Buffett. And the company’s C.E.O. was being told he was either a fool or a crook by one Vincent Daniel, from Queens.

Full Article: http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom?print=true

Use your financial losses to your benefit

By DAN SERRA - McClatchy-Tribune News Service

No one likes to see their investment portfolio tumble as it did in October, but the downfall is not all bad news for taxpayers. The lower stock prices provide an opportunity for saving on income taxes come April 15 and beyond.

Usually we think of strategies to prevent us from paying taxes on higher incomes when the markets are doing well or our job is paying well. It actually works both ways. So if you're depressed over losing money, cheer up. Here's ways you can use those losses to your benefit.

1. Convert to a Roth IRA: With portfolio values lower, traditional Individual Retirement Accounts can be converted to Roth IRAs. Why now? When you convert, tax is due on the amount converted. If your IRA is down to $100,000, for example, from $125,000, you'll pay tax on $100,000 instead of $125,000. And when the value recovers over the years and it comes time to take it out in retirement, withdrawals will be tax free. Since conversion values are considered ordinary income, watch that it doesn't push you into a higher tax bracket. You may want to convert only a portion up to the limit of your current tax bracket.

2. Reverse a Roth conversion: If you converted earlier this year (when it was $125,000 in our example above), you could reverse it now and take your chance the value will still be lower next year and do another conversion after Jan. 1, unless it's in December, in which case the next conversion has to be at least 30 days later. Conversions can be done only once a year.

3. Write off losses: Selling stocks at a loss gives you a tax deduction for the amount you lost in the sale. If your $10,000 stock, ETF, bond or mutual investment is now worth $8,000, you'll get a $2,000 deduction, called a capital loss. You can deduct up to $3,000 in losses a year, with anything more carried over to the following year's taxes. If you still believe in the investment, you can buy it back after 30 days. The IRS does not allow a sale and buyback within 30 days in order to claim a tax loss.

So cheer up, you may have lost money in investments but you can get a lower tax bill.

Fed has lost control

Voltron says: interesting article about how the Federal Reserve has lost control and is running out of tools.

 

http://ftalphaville.ft.com/blog/2008/11/06/17903/fed-capitulates-the-central-bank-is-broken/

 

MEREDITH WHITNEY CNBC INTERVIEW

Below is the loosely translated interview. - Click HERE for video.

Maria: What changes with an Obama Presidency for the banks?

Whitney: Financials and the economy are so far off the tracks its hard to see anything helping right now. One thing they talked about was mortgage modifications - trying to get money to consumer.

None of this makes banks have a higher appetite for risk so you don’t see a lot of money coming into system aside from govt subsidies. So the banks will make less if they modify your loan. They will be siting on sludgier assets. That doesn’t create new capital to get back into the system.

Higher taxes are assoc with Dem’s but there it less to tax…one good thing about all of this.

Maria: You were the first to point out the upset in financial industry - please tell us where we are in cycle?

Whitney: We are in a new part of cycle. We have digested the fact that the securitization is not coming back. Securitization made up 85% of mortgages and 50% of credit cards. Market is not coming back. Contraction of capital is one thing. But what happens going forward is contraction of the overall mortgage market - this has never happened before.

Banks are not lending. Originations are down big in q3. Loan balances getting smaller. Credit cards make up over $2 trillion in available credit lines being pulled out of system. Credit is being taken away form those that got credit in the past 15 years. Never in America had we seen this before. This is a more destructive market for consumer. This is not factored into market.

An economy that has already been impacted by market and unemployment going to double digit levels is another wild card for banks.

Banks just will not make a lot of money and the street is still expecting them to make a lot more money. My estimates are 30-70% below the street and i think I am too high.

Maria: 70% below the street - oh my. Its going to be tough to make those up - the street still expects them to make lot?

Whitney: Banks asset base gets smaller so revenue gets smaller. They can’t cut costs fast enough to keep up with declining revenue. Credit costs increase and you are running faster to collect on loans. So you just have a protracted period of negative operating leverage.

Many of the banks, especially the two brokers, expense structure grew so fast over the past several years that their expense structure is built for a 06-07 revenue environment and their revenue will be like 01-02 revenue environment.

Maria: How much of this is priced in how much will this be a surprise? stocks are down so significantly.

Whitney: Citi, UBS, Wells Fargo, JP Morgan and BofA at all these levels est are coming down dramatically. Nobody is immune. believe it or not, analysts think losses will be more milder than they really will be.

One difference between my est and the rest of the street has been a higher loss curve estimates for losses than others. But my loss estimates are actually lower than the reported numbers. I think we are in for a rude awakening. That may result in a slow grind down in these stocks.

I don’t think you will see massive capital destruction like we saw with huge write downs but I will bet a lot of money banks will come back for a lot more money on the next 9-months again so you will be diluted further. Now, from Obama you will see more regulation. They are a highly regulated utility with less dividend. Y should expect Citi and others to cut dividend.

Citi already cut but nobody is allowed to raise under TARP. But earns will be so much lower alot of companies will not be able to support dividends so yes they will cut again.

Maria: How significant of a fall will be see in these stocks?

Whitney: I think Citi goes to the single digits.

Maria: Who is best position and will go higher?

Whitney: There are many I like and I hope they can hold onto being independent, but stock prices are far too high.

I think you know JPM and BAC survives. There are alot of attractive companies.

Wells Fargo at $20 is attractive. They have a $20 billion offering in the works and that stock is still hovering near $30! That stock still has a ways down to go.

Wells Fargo is gonna be a great company and will be a survivor but consensus estiates are on Pluto. They will have a (equity) supply jam in terms of extra capital into the market and you will see a great chance to buy a great stock you want and much lower prices.

Dow back above 9000

Voltron says:

First of all, to those of you who sold SRS at 200, I salute you! If you want to know why the market was up today, just look in the mirror. It was short covering. You could press your advantage and get back into SRS at 133! Best of luck.

The consumer confidence index fell to an all time low of 38, well below economists expectations of 51. It was also announced that house prices in August fell by a record 16% year-over-year. So what followed . . . the 2nd biggest rally ever in the DJIA (pointwise). The biggest ever was about two weeks ago on Oct 13th which brought the DJIA to about 9,400. Despite those two rallies, we are still below 9,400 now, so don't get too bullish yet.

Also, trading volume was only average, making it unlikely that the rally will stick.

So what happened . . .

According to a Bloomberg article, the Fed began making commercial paper loans today in an attempt to unfreeze the credit market.

The "VIX" Volatility Index (chart) which usually oscillates between 10 and 40 and has lately been as high as 90, is now back down to 66, so stock options are cheaper.

The market thinks that the Fed will lower the target rate by 1/2 percent to 1%

It all comes back to the inflation vice deflation debate. Did today's rally mark the end of deflation? Clearly what the Fed and Treasury are doing is inflationary. Bonds and the dollar moved lower but not more than I would expect on a day stocks went up so much. I don't think we are done with deflation yet . . . I'm staying short the market.

If the market continues to rally tomorrow due to expectations of a Fed rate cut, I may get out of DKA, DBU and DBN and try to get back in lower.

Cracks forming in commercial realestate

Voltron Says: General Growth is a component of SRS

 

http://www.reuters.com/articlePrint?articleId=INN2750460520081027

Treasury department is twisting in the wind

http://biz.yahoo.com/ap/081025/meltdown_evolving_bailout.html

Interview with Nassim Taleb

Voltron says: Time magazine has an excellent interview with fellow former FX options trader and author of The Black Swan, Nassim Taleb.

 

http://www.time.com/time/business/article/0,8599,1853531,00.html

Credit-Rating Firms Grilled Over Conflicts

Voltron says: Yesterday was the credit agency’s turn to be tongue lashed by legislators.

 

http://www.washingtonpost.com/wp-dyn/content/article/2008/10/22/AR2008102202311_pf.html

Forbes: How wall street robbed you

Voltron says: Lehman sold “principal protected notes” but investors has no protection at all, in fact, Lehman basically just took their money.

 

http://www.forbes.com/2008/10/22/Intelligent-investing-wallst-robbery-lehman-UBS-panel_print.html

Pepper: The concept of a Principal Protected Note--the reality of one is different than the name implies. A lot are principal protected only in certain situations. A lot of times, it takes quite awhile to get your principal back. If you don't hit a certain index level, you have to double up to get your principal back. Investors see it as, "I get all my capital if the market goes down," but it's not necessarily like that. Many wealthy investors do not understand the conditions of each note.

Lipner: The biggest seller of PPNs was Lehman. So I don't care what happens to the index, the people who bought these have lost all their money.

Pepper: Right.

Lipner: These are what I've come to see as code words. Notes are always principal protected. That's the whole point! Here's the Lehman notes sold in 2008. If the index goes up, you get the index return. If it goes down, your principal is protected. That was the promise. But you know what they're doing with the money they raise? You know what Lehman was doing with that money? They were funding their operations. They weren't buying securities and protecting it with some kind of hedge. They're borrowing money from their clients. Actually from UBS clients because UBS sold the Lehman notes.

Ervolini: They were just general obligation bonds.

Lipner: General balance sheet debts. Unsecured. But they make it sound like they're buying a basket of stocks, and you'll benefit from the upside, and they'll insure the downside for some modest premium. That's not what was going on. They're funding operations. And on the confirmations [the paperwork clients get to confirm they want the notes], all it says is for risk disclosure see prospectus at sec.gov.

 

Fighting the last war

Voltron says: In this Wall Street Journal interview,  Fed Chairman Ben Bernanke's mentor, 92 year old Anna Schwartz, says that the Fed is fighting the last war.

http://online.wsj.com/article/SB122428279231046053.html

Today, the banks have a problem on the asset side of their ledgers -- "all these exotic securities that the market does not know how to value."

"Why are they 'toxic'?" Ms. Schwartz asks. "They're toxic because you cannot sell them, you don't know what they're worth, your balance sheet is not credible and the whole market freezes up. We don't know whom to lend to because we don't know who is sound. So if you could get rid of them, that would be an improvement." The only way to "get rid of them" is to sell them, which is why Ms. Schwartz thought that Treasury Secretary Hank Paulson's original proposal to buy these assets from the banks was "a step in the right direction."

The problem with that idea was, and is, how to price "toxic" assets that nobody wants. And lurking beneath that problem is another, stickier problem: If they are priced at current market levels, selling them would be a recipe for instant insolvency at many institutions. The fears that are locking up the credit markets would be realized, and a number of banks would probably fail.

Ms. Schwartz won't say so, but this is the dirty little secret that led Secretary Paulson to shift from buying bank assets to recapitalizing them directly, as the Treasury did this week. But in doing so, he's shifted from trying to save the banking system to trying to save banks. These are not, Ms. Schwartz argues, the same thing. In fact, by keeping otherwise insolvent banks afloat, the Federal Reserve and the Treasury have actually prolonged the crisis. "They should not be recapitalizing firms that should be shut down."

Rather, "firms that made wrong decisions should fail," she says bluntly. "You shouldn't rescue them. And once that's established as a principle, I think the market recognizes that it makes sense. Everything works much better when wrong decisions are punished and good decisions make you rich." The trouble is, "that's not the way the world has been going in recent years."

NY Post: Wells Fargo are pretenders

Voltron says: New York post article about how Wells Fargo reduced it's loan loss reserves to boost reported profits despite accelerating losses.  It'll get even worse now that they are buying Wachovia.

http://www.nypost.com/seven/10192008/business/the_pretenders_134253.htm

Amusing article about Neel Kashkari

http://www.clusterstock.com/2008/10/neel-kashkari-hated-by-his-snobby-leftist-teachers

Reuters: U.S. REIT investors to focus on balance sheet

Voltron says: I'm not taking profit in SRS yet. The misery in the economy is only starting.

http://www.reuters.com/articlePrint?articleId=CAN1541296220081015

IBD: Worries Grow Over Commercial Real Estate

http://www.investors.com/editorial/IBDArticles.asp?artsec=16&artnum=1&issue=20081013

Confidence is restored . . .

Commercial Real Estate

Voltron says: here's why I think commercial real estate (SRS) has not gone down yet.

Suppose a REIT borrows 10 million dollars to buy a building. They know they won't fill it up right away so they borrow the first two year's of interest on the loan, effectively making it no payments for the first two years. After the first year, they show the building as a $10 million asset on their books even though they have few if any tenants and if they sold the building today, they would only get $8 million for it. The next year, they show the building as a $10 million dollar asset on their books even though they have few if any tenants and if they sold the building today, they would only get $6 million for it. The third year, they have to start making interest payments and they cannot because they have no tenants and they suddenly go bankrupt.

REITs don't need to show losses right away like banks do. Their collapse will be sudden and "unexpected"

From the NY Post Gossip Column

From the NY Post Gossip Column: We hear that the CIA is closely following an Arab-Russian plan to replace the dollar as the dominant international currency - with either the ruble backed by gold, or the free-floating dinar.

Voltron says: interesting, I'd always heard it would be the Euro or a Chinese renminbi backed by silver. Anyway, it's a case of - the source is more interesting than the story.

Peter Schiff book review

I've read the new book. Mostly the same info. He gets into specific foreign sectors to invest in, when they finally decouple from the U.S. economy. He also talks less about how things will be relatively cheap in the US after the crash and more about emigrating elsewhere.

Peter Schiff's new book is out

Reading it now.

Here's what's next

Voltron says: Folks,

The next shoe to drop is the dollar and bond collapse and inflation. Were closer to the bottom than the top of the stock market at this point. As I rotate out of my short positions between dow 8000 and 6000, I will be rotating into gold, merkx hard currency etf and tbt,pst ultra short bond etf to hedge against inflation and keep my powder dry for Asia's renaissance.

This guy, predicted the stock market collapse, the "herd mentality" US bond rally/head-fake that would result and the bond collapse that will follow. He posted it back in JUNE!

US Government bonds will be destroyed going forward.

Reasons
1.Unwise fiscal policy has resulted in unprecedented money supply growth.This was the root cause for the massive bull market in all assets.But now the cycle has turned and we are going to see unwinding of the bubble in all asset classes.Increase in money supply has resulted in inflation which will continue to increase growing forward since nothing meaningful has been done so far.The central banks have been adding fuel to the fire by pouring in more liquidity when increased money supply was the cause of the malaise.At some point inflation will be difficult to ignore and interest rates will have to be increased.Rising interest rates will cause bonds to tank.

2.At some point there will be dumping of US treasuries by foreign governments and that will be disastrous for bonds.

It is to be noted that there is a chance of pain when there is the herd like "flight to safety" when equities collapse and fund managers automatically shift to US Treasuries and the dollar.Do not panic.Hold or ideally accumulate at lower levels.Why not wait till then?I am lousy at timing market timing and have difficulty counting beyond my fingers so technical analysis is beyond me.I think I am good at strategy so I am sticking to that.

Why SRS went down

Voltron says: According to the Wall Street Journal, ProShares UltraShort Real Estate (SRS) topped the list for Selling on Strength, which tracks stocks that rose in price but had the largest outflow of money.  Based on the volume of trades, it looks to me like someone had made a lot of money in SRS and suddenly sold it all to take profit, but there were not enough buyers because people were too freaked out on Friday to do anything.  There was certainly no positive news about commercial real estate on Friday.  Don’t look at the price.  Look at the headlines.  When you start seeing REITs declaring bankruptcy, then it’s time to get out of SRS.  If I start seeing verifiable news that REITs are somehow immune to the coming downturn, I’ll admit I was wrong and bail on SRS.

The Party is Over

By. Peter Schiff / President of Euro-Pacific Capital

 

More than just a mere liquidity or credit crisis, the current financial storm represents the death throes of the old global economic order, and perhaps the birth pains of a new one. The sun is setting on the borrow and spend culture that has all but defined us for a generation. Our long ride on the global gravy train is finally coming to an end, and once it does nothing will be the same. The sooner we come to grips with this the better.

 

Despite the myriad of proposals that are coming from Washington and other world capitals, we must understand that this crisis cannot be cured by governments. In the United States, credit is gone because savings are gone. Our shallow pool of savings has been depleted through bad loans, and we can no longer entice foreigners into lending us their available savings. Given that we are already too loaded up on existing debt that we cannot realistically repay, who can blame them for not wanting to lend us more?

 

As a result, the free market is trying to put an end to our spending spree. Without savings or home equity to fall back on, Americans struggling with rising prices are finally being forced to curtail their spending. This has terrified our leaders and is causing them to dismantle the remaining structure of our free enterprise-based economic system.

 

The intention of all these daily federal interventions is to keep the credit spigots open so Americans can go even deeper into debt to buy more stuff they can’t actually afford. This should be clear enough to anyone who listens to what our leaders are actually saying. When speaking about the need for an even larger fiscal stimulus package, Barney Frank, chairman of the House Financial Services Committee, said, “We have to prop up consumption.” He has it backwards. The government has been propping up consumption for far too long, and the best thing they can do now is remove the props so spending can be replaced by savings.

 

The sad reality is that we borrowed and spent our way into this crisis, and we are not going to borrow and spend our way out of it. Legitimate credit can only be supplied if there are genuine savings to finance it. Savings can’t be magically concocted into existence by a printing press, but can only be created by consumers who spend less than they earn. Efforts to fool the market will not work and will ultimately lead to a monetary disaster and runaway inflation.

 

Were the government to allow market forces to work, Americans would now have to pay cash for their consumption. That would mean no instant credit for new cars, plasma TVs, appliances, consumer electronics, clothing, furniture, etc. Unless buyers actually had the cash in their checking accounts these purchases would have to be deferred. From an economic perspective this is precisely what the doctor ordered. But for an economy based 72 percent on consumer spending, the medicine will go down hard.

 

Ultimately, a serious reduction in consumer and mortgage credit, combined with an increase in personal savings, would again provide a pool of needed capital for businesses to produce products and provide employment opportunities. However, the danger is that this potential credit could be completely crowded out by massive borrowing by the Federal Government. In addition, prices for such things as houses and college tuition will fall sharply, as the credit artificially propping them up disappears. People would still be able to buy houses and send their kids to college only they would pay much lower prices when they do.

 

However, if the government keeps creating inflation to artificially sustain consumer borrowing and spending, there will be no savings left to fund anything and prices will be so high that despite massive consumer spending there will be few goods that Americans could actually afford to buy.

World Markets May Close!

Voltron says: I first heard this rumor yesterday, it seems to have gained credence.  I think they want to devalue the dollar, but under the current Bretton Woods regime, this is not possible.  The G7 is thinking about closing the markets and implementing a new currency system, presumably one where the dollar can be devalued.  GET OUT OF THE DOLLAR TODAY!

 

Berlusconi Says Leaders May Close World's Markets (Update1)

By Steve Scherer

Oct. 10 (Bloomberg) -- Italian Prime Minister Silvio Berlusconi said political leaders are discussing the idea of closing the world's financial markets while they ``rewrite the rules of international finance.''

``The idea of suspending the markets for the time it takes to rewrite the rules is being discussed,'' Berlusconi said today after a Cabinet meeting in Naples, Italy. A solution to the financial crisis ``can't just be for one country, or even just for Europe, but global.''

The Dow Jones Industrial Average fell as much 8.1 percent in early trading and pared most of those losses after Berlusconi's remarks. The Dow was down 0.5 percent to 8540.52 at 10:10 in New York.

Group of Seven finance ministers and central bankers are meeting in Washington today, and will stay in town for the International Monetary Fund and World Bank meetings this weekend. European Union leaders may gather in Paris on Oct. 12, three days before a scheduled summit in Brussels, Berlusconi said today, while Group of Eight leaders may hold a meeting on the crisis ``in coming days,'' he said.

Berlusconi didn't give any details about what kind of rules leaders were looking to change, except to say that leaders are ``talking about a new Bretton Woods.''

The Bretton Woods Agreements were adopted to rebuild the international economic system after World War II in a hotel in Bretton Woods, New Hampshire. The aim of the agreements was to establish a monetary management system, initially by pegging currencies to gold. The IMF was set up later to help manage the international financial system.

 

No confidence in SEC chairman

You’re doin’ a great job Coxie:

 

http://www.nypost.com/seven/10102008/business/cox_comes_up_short_with_other_members_133023.htm

 

excerpts:

 

Securities and Exchange Commission Chairman Chris Cox - already in the doghouse with institutional investors over a series of seemingly ineffective bans on short selling - is suffering a loss of confidence among his fellow commissioners.

Sources say Cox's recent pitches to his fellow commissioners - who are responsible for implementing the laws that govern the securities industry - to continue shoring up short-selling protections, have fallen on deaf ears.

also the first person to comment on the article wrote the following:

 

Imagine a world in which anyone can buy any amount of fire insurance on any building, regardless of its value or ownership. Imagine that anyone can buy any amount of life insurance on any unrelated individual, without their knowledge or consent.

The economic incentives in such a world guarantee that many buildings will burn, and many will die, to the financial benefit of those buying the insurance policies where they have no risk of actual loss.

Wall Street and the SEC have created such a world. Credit default swaps allow a party to reap a financial reward when a company fails. Shorting the ABX index allows a party to reap a financial reward when asset values of certain financial instruments decline in value. Unlimited shorting of stocks, without restraint as price declines, magnifies both the speed and magnitude of the price decline. Purchase of puts sends a stock price lower as the option market makers sell unlimited, unregistered, un-issued shares into the market.

Where the capital markets once functioned as a source of financing for new business ventures, Wall Street and the SEC have turned the capital markets into an unregulated, rigged casino where gambling and asset destruction are the main attractions. Economic incentives now heavily favor the destruction of investment capital, rather than the creation of additional capital.

What can we expect to be the logical result of the past 8 years of SEC and Wall Street corruption of our capital markets?

 

 

No Shame

From the LA Times: full article here

 

As ailing Wachovia Corp. waits to see whether it will be acquired by Wells Fargo & Co. or Citigroup Inc. -- possibly with taxpayers paying the tab for hundreds of billions of dollars in bad loans -- some of the company's top brokers are preparing to depart Saturday for an all-expenses-paid cruise of the Greek Isles.

The weeklong trip for up to 75 employees of brokerage A.G. Edwards, which Wachovia acquired last year for nearly $7 billion, will also include spouses and significant others, said Teresa Dougherty, a Wachovia spokeswoman.

"This is one way that we recognize our top financial advisors," she said.

Word of the Wachovia junket follows reports that senior executives of troubled insurance giant AIG attended a $440,000 company retreat last month at Southern California's swanky St. Regis Resort in Monarch Beach just days after being bailed out with $85 billion in taxpayer funds.

A White House spokeswoman Wednesday called the AIG outing "despicable." Yet even as the Bush administration was wagging its finger at AIG, the Federal Reserve was announcing $37.8 billion in additional loans for the company.

Moreover, a spokesman for American International Group said the company was going ahead with plans to host a three-day confab for about 150 insurance brokers at the Ritz-Carlton Resort in Half Moon Bay next week. About 50 AIG employees also will attend.

The Chosen One

Voltron says: The Treasury Secretary has chosen, as the savior of western capitalism, fellow Goldman Sachs alumnus and aptly named wunderkind Neel Kashkari.  He’s thirty-five years old with FOUR YEARS of experience on wall street, doing investment banking for technology companies after the internet bubble had already burst.  His job had ABSOLUTELY NOTHING to do with mortgages, real estate, trading, pricing, securities, bonds, swaps, credit or derivatives.  I hope he’s a quick learner.  Maybe nobody more qualified wanted the job . . .  Neel, If you look around the room and you can’t figure out who the patsy is . . . IT’S YOU.

Lehman CEO Dick Fuld knocked out by angry employee

While former Lehman CEO Richard Fuld was testifying before the House Oversight Committee Oct. 6, CNBC reported he had been punched in the face at the Lehman Brothers gym after it was announced the firm was going bankrupt. CNBC and Vanity Fair contributor Vicki Ward said Fuld was attacked at the gym on a Sunday following the bankruptcy..

“From two very senior sources – one incredibly senior source – that he went to the gym after … Lehman was announced as going under. He was on a treadmill with a heart monitor on. Someone was in the corner, pumping iron and he walked over and he knocked him out cold. And frankly after having watched this, I’d have done the same too.”

Stock Exchange Circuit Breakers

For Your Guide

Now Wall Street may shun $700bn bail-out

Voltron says:  Treasury Secretary Paulson’s previous idea for Wall Street to bail itself out called the Master Liquidity Enhancement Conduit (MLEC) was abandoned last December by everyone except Orange County, who are not renowned for being great bond traders.  It looks like the current plan may be similarly rejected by Wall Street, because of the punitive provisions, the uncertainty and the stigma of needing a bailout.

By James Doran (The U.K. Observer)

Fears are mounting that many Wall Street banks and financial firms will refuse to participate in the US government's $700bn bail-out package, leaving global markets and world economies in a perilous state for months to come.

'There is a growing feeling that banks ... might instead decide to tough it out,' said Thomas Caldwell, chairman and CEO of Caldwell Financial, a $1bn-plus fund manager.

For the past two weeks all eyes in the market have been focused on US Congress and its attempts to pass Treasury Secretary Henry Paulson's bail-out package - a bill to allow the US government to buy up to $700bn of toxic mortgage-related assets from American banks, which would in theory free the credit markets and set the gears of global commerce spinning once more.

Last Monday, after the bill was thrown out by the House of Representatives, more than $1 trillion was wiped off the value of US stocks as the market was gripped by panic. The bill was passed on Friday afternoon, however, after the inclusion of $149bn of tax breaks and strict rules for participating banks.

But Wall Street analysts believe the addition of so many terms to the bill might deter potential participants.

One of the least attractive elements is a section designed to curb executive pay at banks that participate in the bail-out package. These include limiting stock-related pay and banning 'golden parachutes' for executives.

'I think this hodge-podge of regulations and rules will be enough to put many [chief executives] off participating,' Caldwell said.

Sources close to Goldman Sachs and Merrill Lynch indicated the banks might choose not to participate in the bail-out as there is a growing view on Wall Street that the market may be bottoming out.

Analysts also believe that the mere presence of the government as buyer of last resort will be enough to get credit markets moving again, and that a large number of banks would not need to take part for the legislation to succeed.

Wall Street ended its worst week in seven years with another tumble on Friday. The Dow Jones Industrial Average closed down more than 157 points on Friday at 10,325.38.

 

Economic Pearl Harbor

What is this "economic pearl harbor" that Warren Buffett is talking about?

Could it be that China and the oil rich countries are threatening to finally pull the plug and stop financing our trade deficit, personal savings deficit and government budget deficit?

Why not? China is playing to win. Despite popular belief, they don't need us to consume their products. They can consume the fruits of their production themselves. They've rope-a-doped us long enough and they are going to surprise us with a knockout punch.

Wachovia spurns Citibank for Wells Fargo

Citibank had an exclusive deal to buy parts of Wachovia, with government assistance. Wells Fargo jumped in today and sealed a deal to buy the whole thing for $16 Billion, which is a 79% premium. As a result of the deal, Wells Fargo may lose it's prized "triple-A" credit rating.

Reliable sources have told me that Wells Fargo had stayed away from the most toxic types of FIRST mortgages, so why they would want to buy $100-300 Billion in toxic mortgages is a mystery. Maybe they plan on selling them to the government under the $700 Billion bailout (+$150 Billion of pork, by the way).

As I've blogged exhaustively in the past, Wells Fargo has $85 billion on toxic SECOND mortgages, which are behind toxic first mortgages. These are worthless.

According to this article from Mr. Mortgage, some of Wells Fargo's "prime" mortgages were actually subprime and Alt-A.

Senate passes bailout

Voltron says:

This version is even worse than the house version. It adds about $140 billion in pork .

It's amazing how quickly the media has turned around and all coverage begins with the premise that the bailout should pass. Why? Because the stock market was a little turbulent? Big deal. Stocks go up and they go down. U.S. stocks trade at a 50% premium to other developed world stocks. Well guess what . . . the pixie dust is gone now and U.S. stocks will probably need to go down by 1/3.

Folks, the crisis is bad, but the "cure" is worse. It stems from a complete unwillingness to endure any pain whatsoever.

Remember, the government does not have any money to bail out anybody. They are borrowing it from future taxes or printing it and causing inflation.

I mean, if this was such a good idea, why didn't we do it before the crisis, just out of the blue - "hey, let's borrow money give it to the treasury department so they can start a hedge fund!" It doesn't make any sense.

Most importantly, NO ONE, even the authors of this travesty, NO ONE is saying that this bailout will actually work. Only that it "must pass" and "we must stabilize the market". When asked how they came up with the number $700 billion, they treasury officials said “It’s not based on any particular data point,” translation - "we pulled the number out of our @$$"

For every $50 billion the government has spent on bailouts, it has calmed the market for about 1 day, so I figure $700 billion will smooth things over for about 2 weeks. After that the government will double down to 1.4 trillion. There will be outrage and the dollar will start to buckle, but that will probably pass too. A month later, when they ask for 2.8 trillion, they dollar will collapse before it can even be voted on. The Dow will be at 6000 and gold will be 6000 an ounce.

Don't get excited about speculation opportunities, because it will be too late. There will be capital controls passed into law so that you cannot short stocks, export money, buy gold or other commodities. Expect price controls and rationing.

The bailout is a stalling tactic, so that the big shots can get out of their stock positions and out of the dollar before they clamp down and force you to go down with the ship.

Reality abandoned

Voltron says: the SEC is proposing to eliminate mark-to-market accounting and officially replace it with mark-to-fantasy

"Suspending mark-to-market accounting, in essence, suspends reality."
Beth Brooke, global vice chair at Ernst & Young LLP, WSJ, Sept 30, 2008

"Blaming fair-value accounting for the credit crisis is a lot like going to a doctor for a diagnosis and then blaming him for telling you that you are sick."
analyst Dane Mott, JPMorgan Chase & Co., Bloomberg

"Suspending the mark-to-market prices is the most irresponsible thing to do. Accounting does not make corporate earnings or balance sheets more volatile. Accounting just increases the transparency of volatility in earnings."
Diane Garnick, Invesco Ltd., Bloomberg

videos: Peter Schiff and Ron Paul

voltron says: for your viewing pleasure.





(ignore the bit with the President at the end, it's obviously a joke and out of context)

NYT: Citigroup and Wells Fargo Said to Be Bidding for Wachovia

Voltron says: It seems to be another shotgun marriage.


http://www.nytimes.com/2008/09/29/business/29bank.html

No change

Voltron says: Everything is unfolding according to my forecast. The government is nationalizing the banking system. The Democrats are demanding dilutive senior equity in "some" of the bailed out companies that would wipe out the shareholders (by "some" they mean all except Goldman Sachs). Many bond investors are upset about the FDIC's rough handling of WaMu, saying that they were unfairly wiped out. This has been termed "reverse moral hazard" because the government is capriciously wiping out good investments. Shareholders of AIG feel the same way . . . in fact the New York Times claims that the bailout of AIG was actually a bailout of Goldman Sachs.

The government is doubling down. One blogger claimed that the $700 billion dollar bailout will actually be used to recapitalize the Federal Reserve Bank which has already swapped 3/4 of it's $900 billion balance sheet for junk mortgages. The proponents of the plan claim that "it won't cost the taxpayer anything". Continued refusal to accept any economic pain leaves them no alternative than doubling down.

Peter Schiff said on his radio show that the government's ill conceived, hasty and unlimited guarantee of $3 trillion in money market accounts may have the largest unintended consequences of all. If all money markets a guaranteed by the government, then people will funnel money to the banks offering the most interest, regardless of the safety of the investments. More moral hazard.

Finally, I think the euphoric upward movements in the stock market are either manipulation or simply "buy the rumor, sell the news" When people figure out that this bailout is merely a band-aid on a arterial wound, look out below.

China may pull the plug

Voltron says: Here's how the global economy worked for the last 20 years. China sends us poison baby formula and lead toys. We send China dollars. China uses the dollars to buy fraudulent mortgages and treasurys. For some reason, this might not be sustainable.

From bloomberg:

Japan, China and other holders of U.S. government debt must quickly reach an agreement to prevent panic sales leading to a global financial collapse, said Yu Yongding....

``We are in the same boat, we must cooperate,'' Yu said in an interview in Beijing on Sept. 23. ``If there's no selling in a panicked way, then China willingly can continue to provide our financial support by continuing to hold U.S. assets.''

An agreement is needed so that no nation rushes to sell, ``causing a collapse,'' Yu said. Japan is the biggest owner of U.S. Treasury bills, holding $593 billion, and China is second with $519 billion. Asian countries together hold half of the $2.67 trillion total held by foreign nations....

``Whether some kind of agreement between them to continue to hold Treasury bills is viable, I'm not sure,'' said James McCormack, head of sovereign ratings at Fitch Ratings Ltd in Hong Kong. ``It would be unusual. If it became apparent that sovereigns in Asia were selling Treasuries the market would take that quite badly, it's something to be avoided.''...

China's huge holdings of U.S. debt means it must bear a large proportion of the ``burden of sorting things out'' in the U.S., Yu said. China is not in a hurry to dump its U.S. holdings and communication between the two nations every ``couple of days'' is keeping Chinese leaders informed and helping to avoid a potential panic, he added.

``China is very worried about the safety of its assets,'' he said. ``If you want China to keep calm, you must ensure China that its assets are safe.''

Yu said China is helping the U.S. ``in a very big way'' and added that it should get something in return. The U.S. should avoid labeling it an unfair trader and a currency manipulator and not politicize other issues, he said.

``It is not fair that we are doing this in good faith and are prepared to bear serious consequences and you are still labeling China this and that, accusing China of this and that,'' he said. ``China knows what to do. We don't need your intervention.''

The U.S. financial crisis had taught China a lesson and that was: ``Why are we piling up these IOUs if they may default?'' China's economic expansion strategy, which emphasizes export growth that has led to trade surpluses and the accumulation of $1.81 trillion in foreign-exchange reserves, is the main problem, said Yu.

``Our export-growth strategy has run its natural course,'' he said. ``We should change course.''