I have nothing but sympathy for people who have lost money through mismanagement of their portfolio. But I can't help but breathe a sigh of relief and internally smile for my personalised portfolio clients.
It ain't easy being in cash and mistakes were made in December last year. But today we were proven right.
Unlike many, we can sleep easy at night...
Tuesday 30 September 2008
Monday 29 September 2008
The Bail-Out: A Perspective On Cost
6 Billion people in the world.
The bail out will cost $700 billion.
The cost of the bailout is therefore $116 for every human being on earth.
The bail out will cost $700 billion.
The cost of the bailout is therefore $116 for every human being on earth.
Sunday 28 September 2008
Simon Jenkins: A tribunal must tell us what to fix. And whom to punish
The state shirked its role while City stupidity and greed slid into thieving. When the crisis subsides, an inquiry is needed.
Who are they? Where are they now? They said it could not happen again. They said they were masters of the universe. They had conquered history itself and had that wily monster quivering at their feet. There would be no more crashes, no more recessions, no more booms and busts, just moonbeams and rainbows and jam for tea.
If the mistakes that have collapsed the world's financial markets had been made by statesmen and had led to war, there would be corpses swinging from lampposts. If they had been made by generals, they would be falling on their swords. If they had been made by judges or surgeons or scholars, some framework of professional retribution would be rolling into action. But those responsible for our finances can apparently vanish into the forest like Cheshire cats, leaving only gold-plated grins. Not for them a Hague tribunal or a Hutton inquiry. They are not just good at shedding risk - they shed blame.
We are seeing what historians of ideas call a paradigm shift. In the last century, the necessities of war and the rise of socialism thrust government intervention to the fore. When that failed in the 60s and 70s, the "Reagan-Thatcher revolution" turned the emphasis back to private enterprise and deregulation. That era has ended with astonishing abruptness. Governments in Britain and the US have been nationalising and spending public money with a will that would have made Attlee or Roosevelt blush.
Those of us who learned economics in the old days were taught that banks had to be regulated oligopolies because their role in a capitalist economy was crucial. It relied on the sustenance of public trust which only government, backed by the citizen as taxpayer, could dispense. In Britain, retail banks, merchant banks and building societies were legally distinct, separated by barriers to prevent cross-pollution of the sort that caused the 1929 crash.
JK Galbraith's book on that crash is the Dr Strangelove of financial holocaust. If it offers one lesson, it is that crashes are not acts of God; they are caused by the interaction of corporate behaviour and state regulation. Nor does the market supply its own discipline. Understanding that, wrote Galbraith, "remains our best safeguard against recurrence".
Such lessons learned in youth tend to stick. Hence I remember feeling queasy when Thatcher's "big bang" of 1986 demolished the firewalls and permitted the trading of risk and reward across the entire financial sector. It was a reform repeated in the US with the repeal of the post-depression Glass-Steagall law. The same nervousness greeted each subsequent shock to the system - the 1991 housing crash, Lloyd's of London, Barings, Enron, Northern Rock. Each time we were assured that new lessons had been learned. Light-touch regulation was working fine, even if sometimes boys will be boys.
The naivety of all this is now exposed. Politicians encouraged the public to treat home ownership as a "right"; property became the citizen's gilt-edged stock. Bankers encouraged staff to speculate with depositors' money by awarding them huge bonuses to maintain turnover. Those charged with the guardianship of other people's savings behaved, in effect, like thieves. Sheer greed drove young men and women mad. Nobody in authority batted an eyelid.
At the same time Gordon Brown "set free" the Bank of England to fix interest rates. I recall one commentator telling me that I should be "overjoyed your children and grandchildren will now never have to experience inflation". No, they are just unemployed. It was a charade. On the back of low inflation, the Bank fuelled a credit boom that was clearly vulnerable if prices rose and/or credit collapsed. Both have occurred.
There is no such thing as a "non-political" official rate of interest. The Bank is now under pressure both to cut rates to beat recession, and yet raise them to beat inflation. It cannot do both. Since it would be 1929-style lunacy to increase rates just now, Brown must in effect tell the Bank to reduce them by shifting his inflation target. It is a blatant and properly political decision.
There is no perfect market. Markets need regulation, just as communities need law. Yet as Galbraith again wrote, regulators may start life "vigorous, aggressive, evangelical, even intolerant", but mellow with age and become "an arm of the industry they are regulating - or senile".
To ignore the danger in 125% mortgages or the City bonus culture showed both industry capture and senility. The first was loan-sharkery, and the second was obscene. So distorting to sound finance are year-end bonuses that they should simply be banned. Those with the responsibility of gambling with other people's savings should do so on salary.
While naive Thatcherism may have taken a pasting, there is no reason why capitalism should protest the presence of big government in what is its proper realm. We do not curb state power when the security of the state is at risk. Nor should we do so when the security of the economy is equally jeopardised.
The strangest phenomenon these past few days has been the eagerness to enforce "moral hazard", a concept regarded by the governor of the Bank of England as a deterrent to risk-taking. This is absurd. The collapse of Enron was no deterrent to Lehman derivative traders. The psychology of money does not work that way. The victims of the credit crunch are not just a few wild traders. They are all participants in the UK economy. I cannot see the sense in letting Northern Rock or Lehman or any other deposit-holding institution go bust just so regulators who have failed in their jobs can seem macho after the event.
This is not a question of blowing taxpayers' money on fat cat financiers. I would happily arrest and try all those whose stupidity and greed are about to cause untold hardship to millions - if I could find a law they had broken. Dr Johnson was quite wrong to say a man is "never more innocently employed than in getting money". But when a building collapses, you do not kill the architect. You try to get him to build it again.
Underpinning financial credit is an absolute function of government and one that has not changed since the birth of capital. It clearly needs constant redefinition. When this saga is through there should be a tribunal of inquiry. Then we can be told what needs mending, and whom to take out and shoot.
Who are they? Where are they now? They said it could not happen again. They said they were masters of the universe. They had conquered history itself and had that wily monster quivering at their feet. There would be no more crashes, no more recessions, no more booms and busts, just moonbeams and rainbows and jam for tea.
If the mistakes that have collapsed the world's financial markets had been made by statesmen and had led to war, there would be corpses swinging from lampposts. If they had been made by generals, they would be falling on their swords. If they had been made by judges or surgeons or scholars, some framework of professional retribution would be rolling into action. But those responsible for our finances can apparently vanish into the forest like Cheshire cats, leaving only gold-plated grins. Not for them a Hague tribunal or a Hutton inquiry. They are not just good at shedding risk - they shed blame.
We are seeing what historians of ideas call a paradigm shift. In the last century, the necessities of war and the rise of socialism thrust government intervention to the fore. When that failed in the 60s and 70s, the "Reagan-Thatcher revolution" turned the emphasis back to private enterprise and deregulation. That era has ended with astonishing abruptness. Governments in Britain and the US have been nationalising and spending public money with a will that would have made Attlee or Roosevelt blush.
Those of us who learned economics in the old days were taught that banks had to be regulated oligopolies because their role in a capitalist economy was crucial. It relied on the sustenance of public trust which only government, backed by the citizen as taxpayer, could dispense. In Britain, retail banks, merchant banks and building societies were legally distinct, separated by barriers to prevent cross-pollution of the sort that caused the 1929 crash.
JK Galbraith's book on that crash is the Dr Strangelove of financial holocaust. If it offers one lesson, it is that crashes are not acts of God; they are caused by the interaction of corporate behaviour and state regulation. Nor does the market supply its own discipline. Understanding that, wrote Galbraith, "remains our best safeguard against recurrence".
Such lessons learned in youth tend to stick. Hence I remember feeling queasy when Thatcher's "big bang" of 1986 demolished the firewalls and permitted the trading of risk and reward across the entire financial sector. It was a reform repeated in the US with the repeal of the post-depression Glass-Steagall law. The same nervousness greeted each subsequent shock to the system - the 1991 housing crash, Lloyd's of London, Barings, Enron, Northern Rock. Each time we were assured that new lessons had been learned. Light-touch regulation was working fine, even if sometimes boys will be boys.
The naivety of all this is now exposed. Politicians encouraged the public to treat home ownership as a "right"; property became the citizen's gilt-edged stock. Bankers encouraged staff to speculate with depositors' money by awarding them huge bonuses to maintain turnover. Those charged with the guardianship of other people's savings behaved, in effect, like thieves. Sheer greed drove young men and women mad. Nobody in authority batted an eyelid.
At the same time Gordon Brown "set free" the Bank of England to fix interest rates. I recall one commentator telling me that I should be "overjoyed your children and grandchildren will now never have to experience inflation". No, they are just unemployed. It was a charade. On the back of low inflation, the Bank fuelled a credit boom that was clearly vulnerable if prices rose and/or credit collapsed. Both have occurred.
There is no such thing as a "non-political" official rate of interest. The Bank is now under pressure both to cut rates to beat recession, and yet raise them to beat inflation. It cannot do both. Since it would be 1929-style lunacy to increase rates just now, Brown must in effect tell the Bank to reduce them by shifting his inflation target. It is a blatant and properly political decision.
There is no perfect market. Markets need regulation, just as communities need law. Yet as Galbraith again wrote, regulators may start life "vigorous, aggressive, evangelical, even intolerant", but mellow with age and become "an arm of the industry they are regulating - or senile".
To ignore the danger in 125% mortgages or the City bonus culture showed both industry capture and senility. The first was loan-sharkery, and the second was obscene. So distorting to sound finance are year-end bonuses that they should simply be banned. Those with the responsibility of gambling with other people's savings should do so on salary.
While naive Thatcherism may have taken a pasting, there is no reason why capitalism should protest the presence of big government in what is its proper realm. We do not curb state power when the security of the state is at risk. Nor should we do so when the security of the economy is equally jeopardised.
The strangest phenomenon these past few days has been the eagerness to enforce "moral hazard", a concept regarded by the governor of the Bank of England as a deterrent to risk-taking. This is absurd. The collapse of Enron was no deterrent to Lehman derivative traders. The psychology of money does not work that way. The victims of the credit crunch are not just a few wild traders. They are all participants in the UK economy. I cannot see the sense in letting Northern Rock or Lehman or any other deposit-holding institution go bust just so regulators who have failed in their jobs can seem macho after the event.
This is not a question of blowing taxpayers' money on fat cat financiers. I would happily arrest and try all those whose stupidity and greed are about to cause untold hardship to millions - if I could find a law they had broken. Dr Johnson was quite wrong to say a man is "never more innocently employed than in getting money". But when a building collapses, you do not kill the architect. You try to get him to build it again.
Underpinning financial credit is an absolute function of government and one that has not changed since the birth of capital. It clearly needs constant redefinition. When this saga is through there should be a tribunal of inquiry. Then we can be told what needs mending, and whom to take out and shoot.
Economics: A Bail Out Constructed By Lawyers
It seems to matter not to the politicians who are constructing a bail-out not primarily for the folks on Main Street but designed to get them re-elected to Congress or elected to the White House.
Who cares what the professionals at the Federal Reserve and the Treasury Department believe is the best solution to the greatest threat in nearly 80 years to the world economy.
There will be a bail-out and it will pass the House. But it will be a pale version of what could have been on Thursday.
Lets just hope (in vain?)that common sense will prevail...
Who cares what the professionals at the Federal Reserve and the Treasury Department believe is the best solution to the greatest threat in nearly 80 years to the world economy.
There will be a bail-out and it will pass the House. But it will be a pale version of what could have been on Thursday.
Lets just hope (in vain?)that common sense will prevail...
Thursday 25 September 2008
The Bail-Out: The Complete Text
Quite possibly the most important text of the 21st century thus far:
Text of Draft Proposal for Bailout Plan
LEGISLATIVE PROPOSAL FOR TREASURY AUTHORITY
TO PURCHASE MORTGAGE-RELATED ASSETS
Section 1. Short Title.
This Act may be cited as ____________________.
Sec. 2. Purchases of Mortgage-Related Assets.
(a) Authority to Purchase.--The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.
(b) Necessary Actions.--The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:
(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;
(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;
(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;
(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and
(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.
Sec. 3. Considerations.
In exercising the authorities granted in this Act, the Secretary shall take into consideration means for--
(1) providing stability or preventing disruption to the financial markets or banking system; and
(2) protecting the taxpayer.
Sec. 4. Reports to Congress.
Within three months of the first exercise of the authority granted in section 2(a), and semiannually thereafter, the Secretary shall report to the Committees on the Budget, Financial Services, and Ways and Means of the House of Representatives and the Committees on the Budget, Finance, and Banking, Housing, and Urban Affairs of the Senate with respect to the authorities exercised under this Act and the considerations required by section 3.
Sec. 5. Rights; Management; Sale of Mortgage-Related Assets.
(a) Exercise of Rights.--The Secretary may, at any time, exercise any rights received in connection with mortgage-related assets purchased under this Act.
(b) Management of Mortgage-Related Assets.--The Secretary shall have authority to manage mortgage-related assets purchased under this Act, including revenues and portfolio risks therefrom.
(c) Sale of Mortgage-Related Assets.--The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act.
(d) Application of Sunset to Mortgage-Related Assets.--The authority of the Secretary to hold any mortgage-related asset purchased under this Act before the termination date in section 9, or to purchase or fund the purchase of a mortgage-related asset under a commitment entered into before the termination date in section 9, is not subject to the provisions of section 9.
Sec. 6. Maximum Amount of Authorized Purchases.
The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time
Sec. 7. Funding.
For the purpose of the authorities granted in this Act, and for the costs of administering those authorities, the Secretary may use the proceeds of the sale of any securities issued under chapter 31 of title 31, United States Code, and the purposes for which securities may be issued under chapter 31 of title 31, United States Code, are extended to include actions authorized by this Act, including the payment of administrative expenses. Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure.
Sec. 8. Review.
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
Sec. 9. Termination of Authority.
The authorities under this Act, with the exception of authorities granted in sections 2(b)(5), 5 and 7, shall terminate two years from the date of enactment of this Act.
Sec. 10. Increase in Statutory Limit on the Public Debt.
Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000.
Sec. 11. Credit Reform.
The costs of purchases of mortgage-related assets made under section 2(a) of this Act shall be determined as provided under the Federal Credit Reform Act of 1990, as applicable.
Sec. 12. Definitions.
For purposes of this section, the following definitions shall apply:
(1) Mortgage-Related Assets.--The term “mortgage-related assets” means residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before September 17, 2008.
(2) Secretary.--The term “Secretary” means the Secretary of the Treasury.
(3) United States.--The term “United States” means the States, territories, and possessions of the United States and the District of Columbia.
Text of Draft Proposal for Bailout Plan
LEGISLATIVE PROPOSAL FOR TREASURY AUTHORITY
TO PURCHASE MORTGAGE-RELATED ASSETS
Section 1. Short Title.
This Act may be cited as ____________________.
Sec. 2. Purchases of Mortgage-Related Assets.
(a) Authority to Purchase.--The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.
(b) Necessary Actions.--The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:
(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;
(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;
(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;
(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and
(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.
Sec. 3. Considerations.
In exercising the authorities granted in this Act, the Secretary shall take into consideration means for--
(1) providing stability or preventing disruption to the financial markets or banking system; and
(2) protecting the taxpayer.
Sec. 4. Reports to Congress.
Within three months of the first exercise of the authority granted in section 2(a), and semiannually thereafter, the Secretary shall report to the Committees on the Budget, Financial Services, and Ways and Means of the House of Representatives and the Committees on the Budget, Finance, and Banking, Housing, and Urban Affairs of the Senate with respect to the authorities exercised under this Act and the considerations required by section 3.
Sec. 5. Rights; Management; Sale of Mortgage-Related Assets.
(a) Exercise of Rights.--The Secretary may, at any time, exercise any rights received in connection with mortgage-related assets purchased under this Act.
(b) Management of Mortgage-Related Assets.--The Secretary shall have authority to manage mortgage-related assets purchased under this Act, including revenues and portfolio risks therefrom.
(c) Sale of Mortgage-Related Assets.--The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act.
(d) Application of Sunset to Mortgage-Related Assets.--The authority of the Secretary to hold any mortgage-related asset purchased under this Act before the termination date in section 9, or to purchase or fund the purchase of a mortgage-related asset under a commitment entered into before the termination date in section 9, is not subject to the provisions of section 9.
Sec. 6. Maximum Amount of Authorized Purchases.
The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time
Sec. 7. Funding.
For the purpose of the authorities granted in this Act, and for the costs of administering those authorities, the Secretary may use the proceeds of the sale of any securities issued under chapter 31 of title 31, United States Code, and the purposes for which securities may be issued under chapter 31 of title 31, United States Code, are extended to include actions authorized by this Act, including the payment of administrative expenses. Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure.
Sec. 8. Review.
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
Sec. 9. Termination of Authority.
The authorities under this Act, with the exception of authorities granted in sections 2(b)(5), 5 and 7, shall terminate two years from the date of enactment of this Act.
Sec. 10. Increase in Statutory Limit on the Public Debt.
Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000.
Sec. 11. Credit Reform.
The costs of purchases of mortgage-related assets made under section 2(a) of this Act shall be determined as provided under the Federal Credit Reform Act of 1990, as applicable.
Sec. 12. Definitions.
For purposes of this section, the following definitions shall apply:
(1) Mortgage-Related Assets.--The term “mortgage-related assets” means residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before September 17, 2008.
(2) Secretary.--The term “Secretary” means the Secretary of the Treasury.
(3) United States.--The term “United States” means the States, territories, and possessions of the United States and the District of Columbia.
Wednesday 24 September 2008
The Markets-Conspiracy?
This post will be deleted as soon as it looks TOO ridiculous, but is it not strange that Warren Buffet buys into Goldman Sachs, before a deal to rescue the banks is done? $5,000,000,000 invested in one tranche at a very high price for that stock, before we (or he) know the terms of the deal.
It seems out of character. What if there is no agreement? What then?
It seems out of character. What if there is no agreement? What then?
Monday 22 September 2008
The Markets: Henry Paulsen Interview with Tom Brokaw
Henry Paulsen was interviewed for Meet The Press. Because of who he is and where we are in history, this interview is important. Additionally Michael Bloomberg and the guys of CNBC give their two penneth worth.
Sunday 21 September 2008
Investment: Keynes Lives
"Only a crisis, real or perceived, produces real change. When that crisis occurs, the change depends on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable".
Milton Friedman
This last week has been the most economically historic since 1929. We have witnessed a paradigm shift not just in global banking but in western style capitalism itself. Financial darwinism appears to be dead. The New Deal has been revitalised by the Neo-Conservative Bush Administration with a $50 billion insurance for money market mutual funds. This is after guaranteeing $85 billion for AIG, nationalising Fanny Mae and Freddie Mac and creating a $700 billion line of credit in order to buy worthless mortgages off the books of near bankrupt financial institutions.
The rescue package document that has been sent today to Congress is just 2 1/2 pages long. The lack of detail means that the powers given to the Treasury Secretary will probably be sweeping and wide ranging.
It is not though, the first time that the US government has intervened with the 'free markets'. In 1932, Herbert Hoover chartered the Reconstruction Finance Corporation (RFC). But it only became an effective force a year later when Roosevelt merged it with the Federal Insurance Deposit Corporation (FDIC) as part of the New Deal. It took 25 years and World War Two before it was finally abolished.
All this from the people who believe that any regulation is bad regulation and that the government should not intervene in peoples lives.
Until this week, Keynesian theory was discredited and had been largely abandoned in western Europe and the United States until the collapse of Northern Rock. Whilst initially criticised by many in the UK, its nationalisation did pave the way for the US bail outs.
So my questions are these:
1. Who will benefit from all this governmental largesse? Will it be extended beyond Wall Street and the Federal banks to local lenders. America has 7,200 banks beyond the likes of Goldman Sachs and JP Morgan. If Lehmans was allowed to fail, why should Comerica and Nations Bank survive?
2. How will they define 'at risk'? At what height will the bar be set?
3. AIG was pricing assets up to 2.7 times higher than its counterparty, Lehman Brothers. If such a pricing disparagy is common practice, then how will the government calculate true value?
4. How transparent will the process be and who will run it?
5. Is this the end of the credit crisis?
Nobody can answer the first four of these questions with any certainty. My worry is that the markets will shrug off these massive injections of cash and concentrate on the potential negative effects such as higher inflation and a possible dollar collapse due to the printing of new money.
So who will pay for it? Initially, China and Japan via T-Bills. But ultimately it is the American tax payer who will be footing the bill when the creditor nations look for their return on yield.
This isn't over. Not by a long way. My worry is that the White House is not throwing enough good money after bad. That the $700 billion is an optimistic under estimate of a situation that is far worse than presently appears. We still have to deal with the so-called 'synthetic' CDO's such as credit default swaps that have potential writedowns of up to $1700 billion and the Alt-A mortgages that Barclays Capital warned us about last week have a potential downside of another $1,000 billion.
Let's assume that the rules of real world economic's still exist. Just printing this much money to support the financial infrastructure is in itself inflationary. It will lead to a reduction in the value of the dollar which in turn could push up the cost of oil per barrel. This will lead to higher food prices as the cost of processing and transportation increases.
I may be wrong and I hope that I am.
So how to invest money in a market such as this?
Regular Premium:
Existing clients with large capital should look to hold either cash (US$) or for an asset that has long term growth prospects such as JPMF Natural resources. This fund invests in gold, mining and oil. The commodity market is oversold, Opec has reduced output and there will be a global recovery fueled by the assets that this fund invests in.
New plans and new money from existing investments should look to take advantage of the market volatility by dollar cost averaging with emerging funds from the BRIC nations and South East Asian Tigers. These economies whilst hit hard by the downturn in western markets do not have the structural issues that beset the 'developed' world. Buying them now on a regular basis with a 3 year view will prove highly profitable.
Personal Portfolios
Simple. Hold lots of cash and some bullion. Accumulate slowly. Ignore short term movements and look for trends. Watch the oil price. Remember that it is better to be a little late than to be too early.
Look for what powers an economy rather than the economy itself. By the time that equities gets back to profitability, the commodity market will have retraced back to its all time highs.
In an earlier blog I said that the first 20 years of the last 19th and 20th centuries dictated how those era's played out. We are at the epoch of the 21st century, which has seen 9-11, Katrina, the rise of China as a world power and the fall (temporary or otherwise) of the western banking system.
It is a magnificent opportunity.
Investment is changing.
Milton Friedman
This last week has been the most economically historic since 1929. We have witnessed a paradigm shift not just in global banking but in western style capitalism itself. Financial darwinism appears to be dead. The New Deal has been revitalised by the Neo-Conservative Bush Administration with a $50 billion insurance for money market mutual funds. This is after guaranteeing $85 billion for AIG, nationalising Fanny Mae and Freddie Mac and creating a $700 billion line of credit in order to buy worthless mortgages off the books of near bankrupt financial institutions.
The rescue package document that has been sent today to Congress is just 2 1/2 pages long. The lack of detail means that the powers given to the Treasury Secretary will probably be sweeping and wide ranging.
It is not though, the first time that the US government has intervened with the 'free markets'. In 1932, Herbert Hoover chartered the Reconstruction Finance Corporation (RFC). But it only became an effective force a year later when Roosevelt merged it with the Federal Insurance Deposit Corporation (FDIC) as part of the New Deal. It took 25 years and World War Two before it was finally abolished.
All this from the people who believe that any regulation is bad regulation and that the government should not intervene in peoples lives.
Until this week, Keynesian theory was discredited and had been largely abandoned in western Europe and the United States until the collapse of Northern Rock. Whilst initially criticised by many in the UK, its nationalisation did pave the way for the US bail outs.
So my questions are these:
1. Who will benefit from all this governmental largesse? Will it be extended beyond Wall Street and the Federal banks to local lenders. America has 7,200 banks beyond the likes of Goldman Sachs and JP Morgan. If Lehmans was allowed to fail, why should Comerica and Nations Bank survive?
2. How will they define 'at risk'? At what height will the bar be set?
3. AIG was pricing assets up to 2.7 times higher than its counterparty, Lehman Brothers. If such a pricing disparagy is common practice, then how will the government calculate true value?
4. How transparent will the process be and who will run it?
5. Is this the end of the credit crisis?
Nobody can answer the first four of these questions with any certainty. My worry is that the markets will shrug off these massive injections of cash and concentrate on the potential negative effects such as higher inflation and a possible dollar collapse due to the printing of new money.
So who will pay for it? Initially, China and Japan via T-Bills. But ultimately it is the American tax payer who will be footing the bill when the creditor nations look for their return on yield.
This isn't over. Not by a long way. My worry is that the White House is not throwing enough good money after bad. That the $700 billion is an optimistic under estimate of a situation that is far worse than presently appears. We still have to deal with the so-called 'synthetic' CDO's such as credit default swaps that have potential writedowns of up to $1700 billion and the Alt-A mortgages that Barclays Capital warned us about last week have a potential downside of another $1,000 billion.
Let's assume that the rules of real world economic's still exist. Just printing this much money to support the financial infrastructure is in itself inflationary. It will lead to a reduction in the value of the dollar which in turn could push up the cost of oil per barrel. This will lead to higher food prices as the cost of processing and transportation increases.
I may be wrong and I hope that I am.
So how to invest money in a market such as this?
Regular Premium:
Existing clients with large capital should look to hold either cash (US$) or for an asset that has long term growth prospects such as JPMF Natural resources. This fund invests in gold, mining and oil. The commodity market is oversold, Opec has reduced output and there will be a global recovery fueled by the assets that this fund invests in.
New plans and new money from existing investments should look to take advantage of the market volatility by dollar cost averaging with emerging funds from the BRIC nations and South East Asian Tigers. These economies whilst hit hard by the downturn in western markets do not have the structural issues that beset the 'developed' world. Buying them now on a regular basis with a 3 year view will prove highly profitable.
Personal Portfolios
Simple. Hold lots of cash and some bullion. Accumulate slowly. Ignore short term movements and look for trends. Watch the oil price. Remember that it is better to be a little late than to be too early.
Look for what powers an economy rather than the economy itself. By the time that equities gets back to profitability, the commodity market will have retraced back to its all time highs.
In an earlier blog I said that the first 20 years of the last 19th and 20th centuries dictated how those era's played out. We are at the epoch of the 21st century, which has seen 9-11, Katrina, the rise of China as a world power and the fall (temporary or otherwise) of the western banking system.
It is a magnificent opportunity.
Investment is changing.
Thursday 18 September 2008
The Markets:The Aliens Are Fleeing
 | September 17, 2008 |
Foreign buyers exited the market for U.S. dollar-denominated debt and securities when the credit crisis surfaced in August of 2007. And their return since is proving to be somewhat tentative, as revealed in the latest U.S. Treasury report on capital flows. In July 2008, foreigners once again fled the scene, and were net sellers in U.S. capital markets to the tune of $25.6 billion.
The stability of U.S. credit markets relies on foreigners recycling their trade surpluses back into the U.S. economy by purchasing dollar-denominated IOUs. As large financial institutions continue to tumble, and the Fed turns on the printing press in an attempt to limit the damage, the flight to safety will mean a flight from the dollar and further trouble for U.S. markets.
Wednesday 17 September 2008
The Markets: Lehman, AIG etc etc
"First of all, let's recognize that this is a once-in-a-half-century, probably once-in-a-century type of event," Alan Greenspan, ABC News, September 2008.
My God I hope so. In Tokyo today, Lehman staff have free access to telephones and printers in order to be able to phone around for jobs and to prepare their CV's. HR departments and headhunters are buckling under a deluge of applications and senior staff at other banks are suffering from righteous paranoia as some of Lehman's top people get cherry picked for plum jobs.
Lehman are a little like the ordinary victims of the sub-prime crisis, asset rich, cash poor and going broke. Like us ordinary people, Lehman have to cover their losses and debts, but the losses made thus far this year are so massive that the cash flow dried up.
Last weekend there was much talk of Bank of America putting together a merger package to help rescue Lehman. But to no avail. A prettier girl came to the dance called Merrill Lynch and she was willing to bend over backwards for BoA. Lehman was ignored, like a soon to be bankrupt wallflower.
BoA believe that the merger can bring them back to profitability by 2010. We'll see.
"This is a crisis. A large crisis. In fact, if you've got a moment, it's a twelve-story crisis with a magnificent entrance hall, carpeting throughout, 24-hour porterage and an enormous sign on the roof saying 'This Is a Large Crisis!" Edmund Blackadder, 16th century wit and coward.
The felling of Lehman led inevitably to AIG. Earlier in September, AIG had announced $13bn in losses for the first half of 2008. As Lehman Brothers suffered a major decline in value and share price, potential investors began to compare the types of securities held by AIG to those held by Lehman, and found that AIG had valued their ALT-A and sub-prime mortgage-backed securities at rates 1.7 to 2.0 times those Lehman had used for what Lehman officials called similar securities.
On September 14, 2008, AIG announced it was considering selling its aircraft leasing division, International Lease Finance Corporation in an effort to raise necessary capital for the company.
The Federal Reserve hired Morgan Stanley to determine if there were systemic risks to a failing AIG, and has asked private entities to supply short-term "bridge" loans to the company. In the meantime, New York regulators approved AIG for $20 billion in borrowing from its subsidiaries. On September 16th, AIG's stock dropped 60 percent at the market's opening. The Federal Reserve continued to meet that day with major Wall Street investment firms to broker a deal to create a $75 billion line of credit to the company. Rating agencies Moody's and Standard and Poors, meanwhile, downgraded their ratings on AIG's credit on concerns over continuing losses to mortgage-backed securities, forcing the company to deliver collateral of over $10 billion to certain creditors. The New York Times later reported that talks on Wall Street had broken down and AIG may file for bankruptcy protection on Wednesday, September 17th.
Conversely, sources in the U.S. Federal Reserve told The New York Times that the bank intended to loan the insurer US$85 billion in exchange for an 80% stake. This would be a similar deal to that given to Fannie Mae and Freddie Mac and would be based upon a federal conservatorship.
However, unlike Fannie and Freddie there is no Federal element to AIG, however the commitment is for two years. Unfortunately some of the positions will not mature until after then. But I think that the government may pull out before two years if the market becomes more stable and Moody's and S&P see fit to raise their credit rating. I also think that former AIG CEO and Wall Street Legend, Hank Greenberg could be in the mix as a safe pair of hands.
This is not gloating. But back in June this year, I quoted a Daily Telegraph article about an RBOS report:
"A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.
A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets.
I commented:
"Hopefully, you have already rigged for the financial typhoon that RBS and Morgan Stanley are now joining us in predicting. Don’t forget to warn your friends".
Since then despite being tempted by boredom and percieved inaction to 'do' something, I have held my lump sum portfolio clients investments in cash with an underweight position in the GLD etf.
Nobody knows what is happening in these markets from minute to minute. There is talk of a serious drop in the price of oil and gold; massive capital outflows in the emerging markets and further eruptions and aftershocks within the global financial infrastructure.
All of these may or may not be true. But what I do know is that once the dust has begun to settle, opportunities will begin to avail themselves to us. We just have to know where to look.
My God I hope so. In Tokyo today, Lehman staff have free access to telephones and printers in order to be able to phone around for jobs and to prepare their CV's. HR departments and headhunters are buckling under a deluge of applications and senior staff at other banks are suffering from righteous paranoia as some of Lehman's top people get cherry picked for plum jobs.
Lehman are a little like the ordinary victims of the sub-prime crisis, asset rich, cash poor and going broke. Like us ordinary people, Lehman have to cover their losses and debts, but the losses made thus far this year are so massive that the cash flow dried up.
Last weekend there was much talk of Bank of America putting together a merger package to help rescue Lehman. But to no avail. A prettier girl came to the dance called Merrill Lynch and she was willing to bend over backwards for BoA. Lehman was ignored, like a soon to be bankrupt wallflower.
BoA believe that the merger can bring them back to profitability by 2010. We'll see.
"This is a crisis. A large crisis. In fact, if you've got a moment, it's a twelve-story crisis with a magnificent entrance hall, carpeting throughout, 24-hour porterage and an enormous sign on the roof saying 'This Is a Large Crisis!" Edmund Blackadder, 16th century wit and coward.
The felling of Lehman led inevitably to AIG. Earlier in September, AIG had announced $13bn in losses for the first half of 2008. As Lehman Brothers suffered a major decline in value and share price, potential investors began to compare the types of securities held by AIG to those held by Lehman, and found that AIG had valued their ALT-A and sub-prime mortgage-backed securities at rates 1.7 to 2.0 times those Lehman had used for what Lehman officials called similar securities.
On September 14, 2008, AIG announced it was considering selling its aircraft leasing division, International Lease Finance Corporation in an effort to raise necessary capital for the company.
The Federal Reserve hired Morgan Stanley to determine if there were systemic risks to a failing AIG, and has asked private entities to supply short-term "bridge" loans to the company. In the meantime, New York regulators approved AIG for $20 billion in borrowing from its subsidiaries. On September 16th, AIG's stock dropped 60 percent at the market's opening. The Federal Reserve continued to meet that day with major Wall Street investment firms to broker a deal to create a $75 billion line of credit to the company. Rating agencies Moody's and Standard and Poors, meanwhile, downgraded their ratings on AIG's credit on concerns over continuing losses to mortgage-backed securities, forcing the company to deliver collateral of over $10 billion to certain creditors. The New York Times later reported that talks on Wall Street had broken down and AIG may file for bankruptcy protection on Wednesday, September 17th.
Conversely, sources in the U.S. Federal Reserve told The New York Times that the bank intended to loan the insurer US$85 billion in exchange for an 80% stake. This would be a similar deal to that given to Fannie Mae and Freddie Mac and would be based upon a federal conservatorship.
However, unlike Fannie and Freddie there is no Federal element to AIG, however the commitment is for two years. Unfortunately some of the positions will not mature until after then. But I think that the government may pull out before two years if the market becomes more stable and Moody's and S&P see fit to raise their credit rating. I also think that former AIG CEO and Wall Street Legend, Hank Greenberg could be in the mix as a safe pair of hands.
This is not gloating. But back in June this year, I quoted a Daily Telegraph article about an RBOS report:
"A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.
A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets.
 | |
Such a slide on world bourses would amount to one of the worst bear markets over the last century".
I commented:
"Hopefully, you have already rigged for the financial typhoon that RBS and Morgan Stanley are now joining us in predicting. Don’t forget to warn your friends".
Since then despite being tempted by boredom and percieved inaction to 'do' something, I have held my lump sum portfolio clients investments in cash with an underweight position in the GLD etf.
Nobody knows what is happening in these markets from minute to minute. There is talk of a serious drop in the price of oil and gold; massive capital outflows in the emerging markets and further eruptions and aftershocks within the global financial infrastructure.
All of these may or may not be true. But what I do know is that once the dust has begun to settle, opportunities will begin to avail themselves to us. We just have to know where to look.
Monday 8 September 2008
Opinion: Darwinian Economics
We constantly hear the adage that we must "trust the markets". That "market forces" will wield massive Darwinian power and separate the wheat from the chaff.
Well it seems that in the case of Fannie Mae and Freddie Mac, that the bankrupt chaff has been kept in with the previously untainted wheat as the American government embarks on a $200 billion dollar rescue that does not resolve the housing crisis but will only shore up the cracks shown thus far in the mortgage backed securities (MBS) market. The reaction was predictable, with the equity markets seeing an opportunity for an easy profit in a difficult year went through the roof for a day. They are now beginning a sober retracement with both Nasdaq, S&P and the Dow back in bear territory.
Both companies have now been de-listed and shareholders common stock (like those of Bear Stearns)is junk. But it needed to be done. In retrospect, it really needed to be done a year ago. But when do governments (particularly the Bush administration) ever proactively intervene to prevent damage?
Regardless of the bail-out, the housing crisis continues to worsen. According to Barclays Capital there are:
$1.2 trillion in MBS mortgages that are approaching payment recast.
Projected payment shock for interest only and pay option arms is between 40-80% of all loans.
In Alt-A (Not sub-prime but still high risk) : 15% have loan to value of 100% or more.
In Prime Jumbo (similar to Alt-A but with larger loan size) : 25% have loan to value of 100% or more.
These are what are known as underwater loans and sadly, too many people are in way over their head.
The housing and sub-prime crisis obviously have a long way to go.
What may prove to be a tipping point is a recession. An official recession is where GDP displays negative growth for two quarters. Below is a chart which plots industrial production against every recession since 1962. US industrial production is declining fast. The strengthening of the dollar, whilst reducing commodity prices will make the US less competitive in export markets. With a stricken domestic market and declines overseas, I would be very surprised if industrial production recovers in the short term to positive territory.
The effect of this could be further lay offs and redundancies in unemployment black spots and key swing states such as Michigan, Pennsylvania and Ohio.
So what happens to the repossessed property? To quote Bill Gross MD of Pimco from the 8th September 2008:
Banks are repossessing homes and then dumping them on a failing market so driving the prices down even further. US assets – stocks, bonds and housing –are falling faster at a rate of 10% per annum than any time in the past 20 years – faster than in the crashes of 1990, 1994 and 2001/02. Housing alone in the US has fallen over 15% in the past year.
(Slick Willie: Willy Sutton, a famous depression-era bank robber, who, when asked why he robbed banks said “because that’s where the money is!”)
Bill Gross is one of the smartest and most respected fund managers in the world but at what point does the US government say "no more!" and turn the tap off to these corporate spongers. Maybe only in a non election year.
So what is the upshot of all this good news? The second stage of the sub prime crisis has always been about possible mass repossessions which could lead to a further massive drop in housing values not only in the US but globally.
If industrial output continues to fall and if inflation continues to rise due to a weakening dollar via a rising oil price, then the west could be in trouble. The most likely source of a rising oil price will be China, which is retooling post-Olympics for Q4. Whilst slowing, the Chinese economy is not in recession with Q2 growth reported at 10.1% and a planned minimum GDP (due to the slowdown) above 9% for 2009. For this reason amongst others, Goldman Sachs reiterated their August 19th note on September 3rd forecasting $149 per barrel for oil.
So we have stagnant or negative growth in the west with low levels of output and higher inflation and unemployment. We have falling personal asset values with tighter lending criteria for borrowing. We have a fundamental increase in the worldwide demand for commodities which can only enlarge further in the medium term should there be a global recovery.
We have OPEC tightening the oil tap. Will they increase the flow again? I think that its doubtful. We are deep into a global slowdown created by the western economies. It is at this point that we need assistance from the cartel to help get our economies back on course. If the western bloc had any sway with the OPEC nations at all, they would have increased the flow of oil now. Instead, they didn't even maintain present volumes, they reduced them. But then again, why should we expect sympathy from Iran, Iraq, Saudi Arabia, Libya, Algeria and Venezuela. Even if we look outside of OPEC for relief, the biggest producer is Russia. Oh dear indeed.
I have been a gold bug for a while now. With this environment, I think I'll stay one just a little longer.
Well it seems that in the case of Fannie Mae and Freddie Mac, that the bankrupt chaff has been kept in with the previously untainted wheat as the American government embarks on a $200 billion dollar rescue that does not resolve the housing crisis but will only shore up the cracks shown thus far in the mortgage backed securities (MBS) market. The reaction was predictable, with the equity markets seeing an opportunity for an easy profit in a difficult year went through the roof for a day. They are now beginning a sober retracement with both Nasdaq, S&P and the Dow back in bear territory.
Both companies have now been de-listed and shareholders common stock (like those of Bear Stearns)is junk. But it needed to be done. In retrospect, it really needed to be done a year ago. But when do governments (particularly the Bush administration) ever proactively intervene to prevent damage?
Regardless of the bail-out, the housing crisis continues to worsen. According to Barclays Capital there are:
$1.2 trillion in MBS mortgages that are approaching payment recast.
Projected payment shock for interest only and pay option arms is between 40-80% of all loans.
In Alt-A (Not sub-prime but still high risk) : 15% have loan to value of 100% or more.
In Prime Jumbo (similar to Alt-A but with larger loan size) : 25% have loan to value of 100% or more.
These are what are known as underwater loans and sadly, too many people are in way over their head.
The housing and sub-prime crisis obviously have a long way to go.
What may prove to be a tipping point is a recession. An official recession is where GDP displays negative growth for two quarters. Below is a chart which plots industrial production against every recession since 1962. US industrial production is declining fast. The strengthening of the dollar, whilst reducing commodity prices will make the US less competitive in export markets. With a stricken domestic market and declines overseas, I would be very surprised if industrial production recovers in the short term to positive territory.
The effect of this could be further lay offs and redundancies in unemployment black spots and key swing states such as Michigan, Pennsylvania and Ohio.
So what happens to the repossessed property? To quote Bill Gross MD of Pimco from the 8th September 2008:
Banks are repossessing homes and then dumping them on a failing market so driving the prices down even further. US assets – stocks, bonds and housing –are falling faster at a rate of 10% per annum than any time in the past 20 years – faster than in the crashes of 1990, 1994 and 2001/02. Housing alone in the US has fallen over 15% in the past year.
“This rarely observed systematic debt liquidation is what confronts the U.S. and perhaps even the global financial system at the current time” said Gross, “unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami.”
Central banks are doing their bit and $400 billion has been raised by financial institutions, but this still leaves a lot of unwanted assets. If the government does not step in and mop up some of these, liquidity will dry up. With institutional investors’ risk appetite to acquire more assets “anorexic”, and with no other investors, there will be a continued downward spiral in prices.
Gross concluded his commentary by saying “While some will compare current government bailouts to Slick Willie*, citing moral hazard, near criminal regulatory neglect, and further bailouts for Wall Street and the rich, common sense can lead to no other conclusion: if we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the US Treasury – not only to Freddie and Fannie but to Mom and Pop on Main Street USA, via subsidized home loans issued by the FHA and other government institutions.”(Slick Willie: Willy Sutton, a famous depression-era bank robber, who, when asked why he robbed banks said “because that’s where the money is!”)
Bill Gross is one of the smartest and most respected fund managers in the world but at what point does the US government say "no more!" and turn the tap off to these corporate spongers. Maybe only in a non election year.
So what is the upshot of all this good news? The second stage of the sub prime crisis has always been about possible mass repossessions which could lead to a further massive drop in housing values not only in the US but globally.
If industrial output continues to fall and if inflation continues to rise due to a weakening dollar via a rising oil price, then the west could be in trouble. The most likely source of a rising oil price will be China, which is retooling post-Olympics for Q4. Whilst slowing, the Chinese economy is not in recession with Q2 growth reported at 10.1% and a planned minimum GDP (due to the slowdown) above 9% for 2009. For this reason amongst others, Goldman Sachs reiterated their August 19th note on September 3rd forecasting $149 per barrel for oil.
So we have stagnant or negative growth in the west with low levels of output and higher inflation and unemployment. We have falling personal asset values with tighter lending criteria for borrowing. We have a fundamental increase in the worldwide demand for commodities which can only enlarge further in the medium term should there be a global recovery.
We have OPEC tightening the oil tap. Will they increase the flow again? I think that its doubtful. We are deep into a global slowdown created by the western economies. It is at this point that we need assistance from the cartel to help get our economies back on course. If the western bloc had any sway with the OPEC nations at all, they would have increased the flow of oil now. Instead, they didn't even maintain present volumes, they reduced them. But then again, why should we expect sympathy from Iran, Iraq, Saudi Arabia, Libya, Algeria and Venezuela. Even if we look outside of OPEC for relief, the biggest producer is Russia. Oh dear indeed.
I have been a gold bug for a while now. With this environment, I think I'll stay one just a little longer.
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