The Fed is worried about hyperinflation

Voltron says: interesting article about how the Fed is already concerned about the political pressure it will face when it tries to combat inflation that will be caused by all the money they are printing.

http://www.bloomberg.com/apps/news?pid=20670001&refer=&sid=abuPwlNJSeis

The power of positive thinking

Voltron says: Top story on drudge report right now is GOVERNMENT WEBSITE TO WARN OF SADNESS/CRYING OVER ECONOMY. I was sure this was a hoax . . . but it's not. The government's advice is to engage is positive thinking. Voltron's advice is to short Treasurys.

The importance of saving money (video)

Long article, but a good read

From "The Atlantic": The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

Full article: http://www.theatlantic.com/doc/print/200905/imf-advice

Big Banks Pull off the Ultimate Bait & Switch

From Nakedcapitalism.com:

We're not quite as healthy as we thought we were. Oops. (WSJ)

J.P. Morgan Chase Chief Executive James Dimon said...that March was a little
tougher than the first two months of the year....Bank of America...CEO Kenneth
Lewis also said that March had been a tougher month for his bank. [Convenient
that they decided to dump this information on Friday afternoon, and at the
close of a very good week].

Readers may recall that a few weeks ago, those two CEOs---along with Citi's
Vikram Pandit---said the first two months of the year had been very good:

Pandit, March 10th: "We are profitable through the first two months of 2009
and are having our best quarter-to-date performance since the third quarter of
2007."

Dimon, March 11th: "Jamie Dimon, the chief executive of JPMorgan Chase, said
Wednesday that the bank was profitable in January and February..."

Lewis, March 12th: "We have been profitable for the first two months of the
year," Lewis told reporters after a speech in Boston today.
This was possibly the most nakedly self-serving bullshit the big bank CEOs
have offered to date. ("bullshit" being a technical term of course, see Harry
Frankfurt)

By February, it was understood that the big banks are all insolvent, certainly
Citi and BofA. To deal with them, consensus among the cognoscenti was finally
tending to a proper recapitalization: wiping out shareholders and forcing
losses onto creditors via debt-for-equity swaps. Call it nationalization, call
it preprivatization, call it FDIC receivership, it was clear that losses had
to be recognized and by those to whom they properly belong: investors across
the capital structure.

But no one really wanted to do this, not in Congress and certainly not in the
Obama administration, where Timmy Geithner has made clear that his priority
isn't a cleansed banking sector, it's a privately-owned one. For obvious
reasons the banks don't like this solution either. So they offered up their
self-serving b.s. regarding January and February, buying just enough time for
Congress/Bernanke to badger FASB into changing mark-to-market rules and for
Geithner to roll out his private-public partnership plan.

Voltron says: Wait until hedge funds figure out that they can hedge their
meager 6% downside for pure "heads we win, tails taxpayer loses." The
government doesn't care, it's a shell game to intentionally obfuscate the
bank's losses.

Full article here:
http://www.nakedcapitalism.com/2009/03/guest-post-big-banks-pull-off-ultimate.html

South Park explains how Treasury Dept makes decisions (video)

Voltron says: The kazoo is a nice touch

US Treasury auction weak

"I used to think if there was reincarnation, I'd come back as the President or the Pope, but now I want to come back as the bond market. You can intimidate everybody." - James Carville, Political Consultant

Voltron says: The wheels are coming off the cart quickly!

From WSJ:

NEW YORK -- A weak five-year note auction Wednesday afternoon fueled broad-based selling in Treasurys, casting a shadow on the Federal Reserve's actions to tame the rise in bond yields.

Bonds were already down before the $34 billion auction, with selling pressure coming from a failed 40-year U.K. government bond sale, the first failed auction of conventional U.K. government bonds since 1995.

Following the auction at 1 p.m. EDT, prices of Treasurys hit session lows across the curve, with the intermediate and long end of the curve bearing the brunt of the selling.

British Prime Minister slammed in European Parliament

Partial Transcript:

Daniel Hannan: The truth, Prime Minister, is that you have run out of our money. The country as a whole is now in negative equity. Every British child is born owing around £20,000. Servicing the interest on that debt is going to cost more than educating the child.
...We are now running a deficit that touches 10% of GDP, an almost unbelievable figure. More than Pakistan, more than Hungary; countries where the IMF have already been called in. Now, it’s not that you’re not apologising; like everyone else I have long accepted that you’re pathologically incapable of accepting responsibility for these things. It’s that you’re carrying on, wilfully worsening our situation, wantonly spending what little we have left. Last year - in the last twelve months – a hundred thousand private sector jobs have been lost and yet you created thirty thousand public sector jobs.

Full Transcript:
http://www.usnews.com/blogs/capital-commerce/2009/03/25/british-mep-daniel-hannen-transcript-of-his-attack-on-gordon-brown.html

Video:

Geithner "open" to China proposal for global currency

Voltron says: Treasury Secretary jams his foot in his mouth again

http://www.politico.com/blogs/bensmith/0309/Geithner_open_to_China_proposal.
html

Citi, BofA are shameless

Voltron says: They are buying more toxic assets so they can re-sell them at
a higher price to buyers who are using government aid. This is classic
"unjust enrichment". The point is supposed to be to get the toxic assets
off of their books, not encourage them to buy more; but like most government
programs this one will have the exact opposite effect.

http://www.nypost.com/seven/03252009/business/double_dippers_161157.htm

EU President slams US economic policies

http://finance.yahoo.com/news/EU-presidency-US-economic-apf-14737788.html

U.K. bond auction fails due to lack of interest . . . inflation worries

Voltron says: first time since '95. Treasury auctions are less likely to fail because the Fed is going to be printing money and buying treasurys, but on a fixed schedule. If the Fed does not buy enough and a Treasury auction fails, TLT will drop thorough the floor.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aQGG.mWeZ4eU

Rolling Stone "Gets It"

http://www.rollingstone.com/politics/story/26793903/the_big_takeover/print

Details on the bailout

Voltron says: Associated Press story on the bailout:

WASHINGTON (AP) - The Obama administration aimed squarely at the crisis clogging the nation's credit system Monday with a plan to take over up to $1 trillion in sour mortgage securities with the help of private investors. For once, Wall Street cheered. The announcement, closely stage-managed throughout the day, filled in crucial blanks in the administration's financial rescue package and formed what President Barack Obama called "one more critical element in our recovery.

Voltron says: "Wall Street cheered" Really?!? Who? Other than stock prices going up, I haven't heard much positive commentary other than from hedge fund managers awaiting the handout (although admittedly, I did not watch CNBC today). If the the announcement was "closely stage-managed" was the stock market also managed? Why take chances. I'm not bitter at all, I don't have any short positions, and I'm expecting stock prices to rise due to inflation, it's just the timing seems . . . convenient . . . and has not been been accompanied by enthusiastic comments from market participants.

The coordinated effort by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. relies on a mix of government and private money - mostly from institutional investors such as hedge funds - to help banks rid their balance sheets of real-estate related securities that are now extremely difficult to value.

The goal, said Obama, is to get banks lending again, so "families can get basic consumer loans, auto loans, student loans, (and so) that small businesses are able to finance themselves, and we can start getting this economy moving again."

Voltron says: same misguided "credit is the lifeblood of the economy" mantra.

It was a huge gambit and one that came like a tonic to Wall Street, which had panned an earlier outline of the program that lacked detail.

Stocks soared, the Dow Jones industrial average shooting up nearly 500 points, thanks to the bank-assets plan and a report showing an unexpected jump in home sales.

The introduction of the plan was closely choreographed so that the president - rather than Geithner - would be the first administration official to appear on camera at midday to discuss it. Geithner met earlier in the day, before markets opened, with a group of reporters at the Treasury Department to go over specifics. But cameras and broadcast-quality audio recorders were barred.

It was the reverse of what happened Feb. 10. Then, after Obama had helped raise expectations toward Geithner and the plan, the treasury secretary went before cameras and bombed. The Dow plunged about 300 points amid investor confusion about details.

Voltron says: hmmmm, not suspicious at all . . .

The fleshed-out plan is designed to help fix a value on damaged mortgage loans and other toxic securities.

If the value of the securities goes up, the private investors and taxpayers would share in the gains. If the values go down, the government and private investors would incur losses.

"This will help banks clean up their balance sheets and make it easier for them to raise capital," Geithner said.

The plan will take $75 billion to $100 billion from the government's existing $700 billion Troubled Asset Relief Program. The government will pair this with private investments and loans from the FDIC and the Fed to generate $500 billion in purchasing power.

Geithner said purchases eventually could grow to $1 trillion - roughly half of the estimated $2 trillion of toxic assets on bank books now.

Voltron says: good because we wouldn't want anymore half measures Why exactly are people enthusiastic about this?

On the hot seat, Geithner has a lot personally tied to the success of the new program. His performance in the Cabinet, including his slowness in learning about multimillion dollar executive bonuses paid by insurance giant AIG after taking bailout money, has been severely criticized by some in Congress.

Geithner testifies on Tuesday before the House Financial Services Committee.

Under a typical transaction, for every $100 in soured mortgages being purchased from banks, the private sector would put up $7 and that would be matched by $7 from the government. The remaining $86 would be covered by a government loan.

The plan was introduced ahead of a summit next week in London of 20 major and developing economies struggling with the global recession.

Obama is trying to get other wealthy countries to do more to stimulate their economies with government spending, as the United States has done. However, other countries, particularly ones in Europe, are resisting U.S. calls for more stimulus and would prefer to see more internationally coordinated bank regulation.

The administration was expected to outline its plan for financial regulation overhaul later this week.

Federal Deposit Insurance Corp. Chairman Sheila Bair said she expects her agency will finance as much as $500 billion in purchases of residential and commercial real estate loans.

Bair said the program should help banks clean up their balance sheets and raise fresh capital, though she added that "there may be some banks beyond help." The agency has said before it expects more bank failures, she said.

Voltron says: . . . but not really big banks, or banks that make large campaign contributions.

A joint statement by the Federal Reserve and Treasury Department said the Fed should play a "central role" in preventing future financial crises. That implied a wish that Congress expand the Fed's authority in regulating all financial institutions, not just banks.

Geithner said taxpayers still could lose money on the deal to soak up bad assets but there was no fixing the system without risk.

Voltron says: again . . . why "risk"? Why not "there is no fixing the system without cost" or "without effort" or "without sacrifice"? "Risk" implies that we can get out of this without cost or even profit. In reality it's a doubling down that will end in tears. What happed to LEADERSHIP: "I have nothing to offer but blood, toil, tears, and sweat. We have before us an ordeal of the most grievous kind. We have before us many, many months of struggle and suffering." -Winston Churchill. I don't mean to get all "soap boxy". I'm just trying to point out patterns, so that we can better predict the future. Specifically, lack of leadership, lack of political will, lack of transparency, and a fundamental misunderstanding of the crisis.

Other options, such as having the government purchase the securities outright or letting them languish on bank balance sheets, would pose even greater vulnerabilities, he said, and it was important to find the right blend of risk versus reward.

"I am very confident this scheme dominates all the alternatives for trying to find that balance," he said.

The sentiment was echoed by congressional Democrats, who said risk seemed inevitable with any plan big enough to work.

But House Republican Whip Eric Cantor of Virginia called Obama's plan a "shell game" that hid the true cost.

He said he hoped the administration would consider instead an earlier Republican proposal to set up a government-sponsored insurance program for mortgage-related securities.

The administration plan "seems to offer little incentive for private investors to participate unless the subsidy is made so rich that it comes at the expense of the taxpayer," Cantor said in a statement.

The new program marks a return by the government to a strategy of acquiring toxic securities. Henry Paulson, who was treasury secretary in the final days of the Bush administration, abandoned plans to purchase these securities, largely because they were impossible to price.

Voltron says: They aren't impossible to price. Just assume mortgages are only worth the rental income they could produce. The problem is that if you value all mortgages using that reasonable method, all of the major banks are insolvent. The government wants desperately for there to be a different answer.

The plan builds on earlier programs to pump money into banks, help some homeowners repay their mortgages and stimulate college, small business and other forms of lending.

"There's still great fragility in the financial systems, but we think that we are moving in the right direction," Obama said after meeting Geithner and Fed Chairman Ben Bernanke.

Obama said the plan will allow taxpayers to "share in the upside as well as the downside."

Voltron says: bullshit

Treasury officials had no firm forecast on when the government would begin making the asset purchases although market expectations were that the process could begin within weeks.

Voltron says: original story here: http://apnews.myway.com/article/20090323/D97420DG0.html

Why no inflation (yet)

Voltron says: As I mentioned back in September, the banks have a $4 Trillion dollar hole to fill. All the Trillions the Fed a printing are currently filling that hole. When it overflows, that's when the symptoms of inflation will become evident. Given the lack of political backbone shown so far, they won't have the willpower to turn off the spigot "just as things are starting to look up." I'm not ruling out the possibility that the stock market may crash again if the market is unable or unwilling to deploy the Fed's money quickly enough; however, I'm preparing to ride out the volatility until the dollar inevitable collapses.

UPDATE: BEIJING TO PITCH NEW GLOBAL CURRENCY; DUMP DOLLAR

Voltron says: Top story on drudereport.com right now: http://www.ft.com/cms/s/0/7851925a-17a2-11de-8c9d-0000779fd2ac.html

China wants the new currency to be "based on" a basket of commodities: http://www.pbc.gov.cn/english/detail.asp?col=6500&id=168

Another Trillion down the drain

Voltron says: Treasury Secretary's new plan is a waste of another Trillion and a waste of time. Heck if Obama can't get Paul Krugman to cheerlead for him . . . who will? The only beneficiaries seem to be hedge funds that get a put option at taxpayer expense with 33 times leverage and 3% maximum downside risk that they can probably hedge. Sign me up! Won't fix anything though.

http://www.nakedcapitalism.com/2009/03/private-public-partnership-details.html
http://krugman.blogs.nytimes.com/2009/03/21/despair-over-financial-policy/

Updated Forecast

My thesis has been that prices would decline due to deleveraging but the government's inflationary policies would eventually cause nominal prices to rise. It's difficult to time a zig zag of prices going down then up, but it looks like we're turning the corner. The Fed's announcement that they are going to print a Trillion dollars and use it to buy debt is the proverbial "crossing of the Rubicon" The US Dollar is toast. I think the trigger will be some of the smaller holders of Treasurys (Singapore, for example) trying to dump their holdings before China does. This will cause a panic stampede out of Treasurys which will destroy the dollar.

Do not abuse leverage. The Fed is going to spend limitless amounts of money to pound interest rates and Gold prices into appearing "normal" when in fact they are on the verge of exploding. The tremendous volatility will shake out leveraged players.

I'm out of SRS

Voltron says: Well, the FED pulled the trigger. They announced they are buying treasuries which will be inflationary.

http://finance.yahoo.com/news/Fed-to-buy-up-to-300B-apf-14679757.html

I'm reversing my position, getting out of all short positions including SRS, deleveraging and shorting treasuries.

Voltron rants

Voltron says:  The furor over AIG bonuses masks the true crime.  The bonuses represent 1/10th of 1% of the $150 billion (and counting) of government "loans" that AIG has no chance of paying back.  All of the money going to AIG is going straight out the door to pay off bad Credit Default Swap bets made with Goldman Sachs, hedge fund speculators, and foreign banks such as Barclay's, UBS (Swiss Bank) and Societe General.  The administration keeps saying that "credit is the life blood of the economy" but China's philosophy is "production is the life blood of the economy".  Who do you think is going to win that debate?  If you borrow money to invest in production, you can pay it back with interest and perhaps turn a profit.  If you squander the money of flat screen TVs, vacations, and overpriced houses, there is no way you can pay it back.  Since T-Bills are just claims of future taxes, by extension, there is no way that will get paid back either.  Sure the government will pay back the notional amounts due, but the dollars will be practically worthless.  It sounds nuts, but we've had a new currency regime every thirty years or so since the country was founded.  Why would you think the current paper money regime with no collateral backing it would be the final regime for the ages.  It's absurd to think that.  The correct play is to short stocks and buy gold for now and be prepared to short treasuries in earnest.  The Fed is not going to make this easy, they are going to try to shake out the short sellers, depress the price of gold and prop up Treasuries.  Don't be afraid to "fight the Fed" and don't feel foolish when they move the market against you.  Take advantage of these moves to accumulate more BUT DO NOT USE LEVERAGE OR YOU WILL BE SQUEEZED OUT.

Competitive Devaluation

Voltron says: From the Financial Times:

If the world is really following the script of the 1930s, then we are due for competitive devaluations, as nations attempt to make [exports] more competitive at the expense of everyone else.

So the Swiss National Bank’s announcement that it is intervening to push down the Swiss franc sounds alarming. The speed with which the franc responded, dropping 3 per cent against the euro in a matter of minutes, also shows that if a central bank wants its currency to fall, it can deliver.

The problem is that not everyone can devalue at once . . .

Full article: http://www.ft.com/cms/s/0/f0b9ae7e-0f2a-11de-ba10-0000779fd2ac.html

Hedge fund investors turn to gold

http://www.ft.com/cms/s/0/37fcba70-0c0a-11de-b87d-0000779fd2ac.html?nclick_check=1

Buffett says U.S. Treasury bubble one for the ages

Voltron says: I've done well shorting Warren Buffett stocks such as Wells Fargo and Moody's; however, I think he has the right idea about Treasuries.

NEW YORK (Reuters) - Warren Buffett, whose Berkshire Hathaway Inc sits on $25.54 billion of cash, said worried investors are making a costly mistake by buying up U.S. Treasuries that yield almost nothing.

In his widely read annual letter to Berkshire shareholders, the man many consider the world's most revered investor said investors are engulfed by a "paralyzing fear" stemming from the credit crisis and falling housing and stock prices. Treasury prices have benefited as investors flocked to the perceived safety of the "triple-A" rated debt.

But Buffett said that with the U.S. Federal Reserve and Treasury Department going "all in" to jump-start an economy shrinking at the fastest pace since 1982, "once-unthinkable dosages" of stimulus will likely spur an "onslaught" of inflation, an enemy of fixed-income investors.

"The investment world has gone from underpricing risk to overpricing it," Buffett wrote. "Cash is earning close to nothing and will surely find its purchasing power eroded over time."

"When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s," he went on. "But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary."

....

He also cautioned Treasury investors not to feel "smug" when they see commentators endorsing their investments.

"Beware the investment activity that produces applause," Buffett wrote, "the great moves are usually greeted by yawns."

Full article: http://www.reuters.com/article/newsOne/idUSTRE51R1PU20090228

Good News and Bad News for SRS

It should be good news for commercial real estate.

The Federal Reserve and the Treasury announced Tuesday the launch of the long-anticipated Term Asset-Backed Securities Loan Facility. Eventually, it is expected to cover securitized loans tied to commercial properties such as buildings, hotels and apartments.

But some are worried the TALF program may not be enough to attract investors to the commercial-property sector in its current form.

There is a mismatch between the terms of the TALF funds -- which are three years -- and most commercial mortgages that are packaged into bonds, which typically run for seven or 10 years, with balloon payments at the end.

An investor using TALF funds to buy commercial mortgage-backed securities would have to line up alternative funding sources or plan to sell the assets to repay the TALF loan when it expires after three years.

"Purchasing long-term assets with shorter-term financing is a recipe for disaster," says Andy Solomon, a managing director in charge of commercial property debt investments at Angelo Gordon & Co.