It looks like the futures point to a flat open in the market. If your looking to play long, another disappointment. As mentioned yesterday after the bell Intel released just a horrific forecast. Market after crumbling yesterday during regular trading hours and crumbled some more after hours. My thought was if you had a truly horrific open you buy through either explicit buys or through implicit short covering. Now we have climbed all the way back to looking at a flat open even after jobless claims climbed up to 516,000. Shows a lack of fear and lack of panic. I think you sell at the open now.
To add a little humor to this morning:
How do you get a graduate from Texas Tech off your front porch?
Pay for your pizza.
Thursday, November 13, 2008
Wednesday, November 12, 2008
Another Dreadful Day
Just another dreadful day. Nothing can go right. Best Buy issuing just horrendous guidance, Paulson playing pick a plan showing no confidence and receiving none in his press conference, and then Intel after the bell also releasing horrific guidance setting up for a massive move lower at the open tomorrow which if it occurs will slice through the October lows. There are signs of capitulation (really for maybe the first time this whole thing started) with quotes of some of the Titan's of finance finally looking gloomy. These same guys 6 and even 3 months ago still thought the world was rosy.
You had Dimon saying the economy was going to be worse than the credit crises.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a5NNkx582T90
JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said the U.S. recession ``could be worse'' than the credit-market crisis that brought lending to a standstill.
Unfortunately he added this:
Still, Dimon said there is reason for optimism about prospects for the economy. ``We're not running this company like we have a Great Depression,''
The CEO of Merrill Lynch, John Thain, filled the gap.
http://www.ft.com/cms/s/834ebf5e-aff9-11dd-a795-0000779fd18c,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F834ebf5e-aff9-11dd-a795-0000779fd18c.html&_i_referer=http%3A%2F%2Fcalculatedrisk.blogspot.com%2F
The global economy is entering a slowdown of epic proportions comparable with the period after the 1929 crash, John Thain, chairman and chief executive of Merrill Lynch, warned on Tuesday.
But former Goldman Sachs Chairman John Whitehead outdid them all.
http://www.reuters.com/article/Finance08/idUSTRE4AB7HT20081112
The economy faces a slump deeper than the Great Depression and a growing deficit threatens the credit of the United States itself, former Goldman Sachs chairman John Whitehead, said at the Reuters Global Finance Summit on Wednesday.
Whitehead, 86, said the prospect of worsening consumer credit woes combined with an overtaxed federal government make him fear that the current slump is far from over.
"I think it would be worse than the depression," Whitehead said. "We're talking about reducing the credit of the United States of America, which is the backbone of the economic system." Whitehead encountered plenty of crises during his 38 years at the investment banking firm and was a young boy during the 1930s.
First the bad news. All these guys are probably right and saying things I have been saying for a long time. Now the good news. You need this race to the bottom of who can be the most bearish, the most cataclysmic, the most depressing for the buying opportunity to finally develop. This is the first time I have seen it at all in those whole debacle by what I call main street wall street. Not the smart money that manages money but just the normal Wall St types. I have not seen this level of pessimism through this whole thing but rather continued cheerleading. I noted on this blog on the October lows (the Monday after the intraday low on Friday), I was dismayed at how many bottom callers you had. At some point we are going to stop setting news lows every one to three months and will establish a low that will hold for many months. I thought October may have been it. Not looking like it but if you get Wall St in a game of who can be the biggest bear, in the short term, the bear may be headed into winter hibernation after this next drop. We could very easily be 10 to 20% lower than we are currently for that to happen.
You had Dimon saying the economy was going to be worse than the credit crises.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a5NNkx582T90
JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said the U.S. recession ``could be worse'' than the credit-market crisis that brought lending to a standstill.
Unfortunately he added this:
Still, Dimon said there is reason for optimism about prospects for the economy. ``We're not running this company like we have a Great Depression,''
The CEO of Merrill Lynch, John Thain, filled the gap.
http://www.ft.com/cms/s/834ebf5e-aff9-11dd-a795-0000779fd18c,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F834ebf5e-aff9-11dd-a795-0000779fd18c.html&_i_referer=http%3A%2F%2Fcalculatedrisk.blogspot.com%2F
The global economy is entering a slowdown of epic proportions comparable with the period after the 1929 crash, John Thain, chairman and chief executive of Merrill Lynch, warned on Tuesday.
But former Goldman Sachs Chairman John Whitehead outdid them all.
http://www.reuters.com/article/Finance08/idUSTRE4AB7HT20081112
The economy faces a slump deeper than the Great Depression and a growing deficit threatens the credit of the United States itself, former Goldman Sachs chairman John Whitehead, said at the Reuters Global Finance Summit on Wednesday.
Whitehead, 86, said the prospect of worsening consumer credit woes combined with an overtaxed federal government make him fear that the current slump is far from over.
"I think it would be worse than the depression," Whitehead said. "We're talking about reducing the credit of the United States of America, which is the backbone of the economic system." Whitehead encountered plenty of crises during his 38 years at the investment banking firm and was a young boy during the 1930s.
First the bad news. All these guys are probably right and saying things I have been saying for a long time. Now the good news. You need this race to the bottom of who can be the most bearish, the most cataclysmic, the most depressing for the buying opportunity to finally develop. This is the first time I have seen it at all in those whole debacle by what I call main street wall street. Not the smart money that manages money but just the normal Wall St types. I have not seen this level of pessimism through this whole thing but rather continued cheerleading. I noted on this blog on the October lows (the Monday after the intraday low on Friday), I was dismayed at how many bottom callers you had. At some point we are going to stop setting news lows every one to three months and will establish a low that will hold for many months. I thought October may have been it. Not looking like it but if you get Wall St in a game of who can be the biggest bear, in the short term, the bear may be headed into winter hibernation after this next drop. We could very easily be 10 to 20% lower than we are currently for that to happen.
Tuesday, November 11, 2008
Market Action
Dismal, that is how you describe the market action today. It was bad across the board. Breaking 900 doesn't mean we are headed to new lows. What I do think it means is that either we are in a trading range or we will be testing the lows shortly. In my mind it took off the table my expect ion of visiting 1100 on the S&P in the next month or two. It was the first true lower low since the rebound started. What was even more interesting was that at 1:00 Freddie, Fannie, and the FHFA talked about this "new" loan modification program. The market rallied 270 points back to break even. I was working out and was like short that rally. We rolled over and went down 250 points before a slight bounce at the close. A couple of things. If the market was still in rally mode it would have latched onto that news. Instead it saw it for what it was, a selling opportunity. Loan modification program? Please, has been tried, doesn't have great success, and doesn't really change anything. Either way the market in rally mode tends to latch onto this things as something to buy. Didn't happen today besides the initial short covering. So with the break of 900 I don't really know where we are headed, my guess would be lower though not necessarily breaking new lows in the short term, but I do think you can wave goodbye to a truly big Santa Clause rally.
Gun Run?
Maybe another investment idea? Probably not, unless your doing it for a trade but was talking to an investor about Sturm, Ruger & Company (RGR) today.
http://onenewsnow.com/Culture/Default.aspx?id=315260
Numerous reports around the U.S. indicate that citizens have been racing to purchase both guns and ammunition before Obama takes office next year. On Election Day, a Cheyenne, Wyoming, gun store set a one-day sales record -- then broke that record the next day. The Franklin Gun Shop outside Nashville sold more than 70 guns on Election Day. It was the biggest sales day since opening its doors eight years ago.
The day after Obama was elected, the owner of a shop outside Salt Lake City sold nine assault weapons -- and another gun store owner in Fort Worth reported sales of $101,000 in merchandise, shattering its single-day sales record.
NRA spokewoman Rachel Parsons has a theory on the gun run. It is quite apparent, she says, that people are concerned that Obama truly has had a radical record of opposition to the Second Amendment.
http://onenewsnow.com/Culture/Default.aspx?id=315260
Numerous reports around the U.S. indicate that citizens have been racing to purchase both guns and ammunition before Obama takes office next year. On Election Day, a Cheyenne, Wyoming, gun store set a one-day sales record -- then broke that record the next day. The Franklin Gun Shop outside Nashville sold more than 70 guns on Election Day. It was the biggest sales day since opening its doors eight years ago.
The day after Obama was elected, the owner of a shop outside Salt Lake City sold nine assault weapons -- and another gun store owner in Fort Worth reported sales of $101,000 in merchandise, shattering its single-day sales record.
NRA spokewoman Rachel Parsons has a theory on the gun run. It is quite apparent, she says, that people are concerned that Obama truly has had a radical record of opposition to the Second Amendment.
Big Day
Huge day in the markets today!! Below 900 on the S&P is the first lower low since the first week in October. That is not an absolute low but we have been setting higher lows after every major drop. Last week's major drop went from 1000 to 900. Friday and Monday we bounced to 950. If we break through 900 we could be visiting the October lows very quickly and the idea of a continued bounce may be distant memory. Yesterday I came outright depressed looking at what was going with AIG. Things are getting uglier out there.
Monday, November 10, 2008
Federal Reserve's Dirty Little Secrets
I was asked what my thoughts were on this story so I decided to blog on it. First the highlights of the story.
http://www.bloomberg.com/apps/news?pid=20601087&sid=ahdVHk_Ccoeg&refer=home
The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.
and
The Fed made the loans under terms of 11 programs, eight of them created in the past 15 months, in the midst of the biggest financial crisis since the Great Depression.
``It's your money; it's not the Fed's money,'' said billionaire Ted Forstmann, senior partner of Forstmann Little & Co. in New York. ``Of course there should be transparency.''
First, what a mess. We are in so much trouble. I go from being pessimistic to super pessimistic and today I am in the super pessimistic camp. It stems from talking to a debt investor over the weekend about the massive corporate defaults that are coming then compounded by the AIG news this morning. The AIG "bailout" is a total scam in the sense that it is something new and you start extrapolating to what it means for other financials and we are in major trouble. I haven't been this depressed about the state of our economy since late September.
Anyway back to the article. I can't blame the FED. If I was in the FED's shoes I would be doing the same thing. I am not saying it is right but you can't blame the FED. You have to blame Congress for not requiring such disclosure. If that information is released (I would argue we do have a right to know it) then alot of people will get wiser alot quicker with how bad things are. If your the FED at this point you don't want that. It needs to happen but their are ramifications attached to it so if your the FED you almost have a responsibility to focus on the ramifications. If your Congress or the court systems at this point you have a responsibility for justice and rule of law to prevail. I think everyone is acting correctly in a capitalistic way though I think the end outcome should be disclosure.
Either way know there will be no upside surprises to whatever the FED is holding.
http://www.bloomberg.com/apps/news?pid=20601087&sid=ahdVHk_Ccoeg&refer=home
The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.
and
The Fed made the loans under terms of 11 programs, eight of them created in the past 15 months, in the midst of the biggest financial crisis since the Great Depression.
``It's your money; it's not the Fed's money,'' said billionaire Ted Forstmann, senior partner of Forstmann Little & Co. in New York. ``Of course there should be transparency.''
First, what a mess. We are in so much trouble. I go from being pessimistic to super pessimistic and today I am in the super pessimistic camp. It stems from talking to a debt investor over the weekend about the massive corporate defaults that are coming then compounded by the AIG news this morning. The AIG "bailout" is a total scam in the sense that it is something new and you start extrapolating to what it means for other financials and we are in major trouble. I haven't been this depressed about the state of our economy since late September.
Anyway back to the article. I can't blame the FED. If I was in the FED's shoes I would be doing the same thing. I am not saying it is right but you can't blame the FED. You have to blame Congress for not requiring such disclosure. If that information is released (I would argue we do have a right to know it) then alot of people will get wiser alot quicker with how bad things are. If your the FED at this point you don't want that. It needs to happen but their are ramifications attached to it so if your the FED you almost have a responsibility to focus on the ramifications. If your Congress or the court systems at this point you have a responsibility for justice and rule of law to prevail. I think everyone is acting correctly in a capitalistic way though I think the end outcome should be disclosure.
Either way know there will be no upside surprises to whatever the FED is holding.
Sunday, November 9, 2008
More on Ideas from Anywhere
Now this is interesting. The link shows graphs of asphalt inventories, prices, demand, imports, and production. The reason I am not just ignoring this with prices are going to fall because the economy is going to stink is because of the very real possibility of increased government spending in the infrastructure arena, specifically roads, bridges, etc. This creates a demand curve that may not track the economy.
http://media.corporate-ir.net/media_files/irol/12/123440/Asphalt_Fundamental_Charts_10_31_08.pdf
http://media.corporate-ir.net/media_files/irol/12/123440/Asphalt_Fundamental_Charts_10_31_08.pdf
Ideas From Anywhere
It is amazing where investment ideas can come from. I was just messing around browsing news sources and saw this is on foxnews.com I had no idea this was going on. I am not that all familiar with liquid asphalt though I have spent time and invested in the actual aggregates.
http://www.foxnews.com/story/0,2933,449172,00.html
Expect a bumpier drive. An asphalt shortage is delaying road maintenance projects in communities nationwide. Asphalt is becoming scarce as U.S. refiners overhaul their equipment to maximize output of highly profitable fuels such as diesel and gasoline, using inexpensive — and hard to process — crude oil.
To make things worse, refiners are also cutting back on the production of a petrochemical that many states mix into asphalt to make roads more durable.
Dozens of road repairs were delayed last summer and municipalities around the country may face another shortfall next summer. Road-maintenance projects that have gone forward cost significantly more as the price of asphalt nearly tripled over the past year.
why?
In the past, about 40 percent of an oil barrel would be turned into asphalt products and now it's around 10 percent, McMinimee said.
The reason for the decrease
The shift in refinery technology that led to the decline in asphalt production was spurred by increased oil prices.
Oil refineries around the country are installing billion-dollar machines called "cokers" that are able to refine the chunkiest, low-grade and least expensive crude oil into highly profitable fuels, such as gasoline and diesel.
Which has resulted in:
The U.S. is currently undersupplied by about 24,000 barrels of asphalt a day, or 5 percent of daily demand, and that number is expected to jump to 257,000 barrels a day by 2012, according to San Antonio-based NuStar Energy L.P., a producer of asphalt.
Other impact because of substitution:
The skyrocketing price of asphalt has had at least one positive effect — on the concrete industry, as its product becomes more attractive to city engineers.
So I started digging around and went to NuStar's website and saw this on the front page of the website:
http://www.nustarenergy.com/Pages/default.aspx
NuStar Energy L.P. (NYSE: NS) today announced that it has successfully completed its acquisition of CITGO Asphalt Refining Company’s asphalt operations and assets for $450 million, plus inventory of approximately $360 million subject to post-closing adjustment.
So then I went to go look at some of the fundamentals of the company and found out it is paying a 9.44% dividend yield. Now I am a long way from making an investment. It is just amazing where ideas / work comes from.
http://www.foxnews.com/story/0,2933,449172,00.html
Expect a bumpier drive. An asphalt shortage is delaying road maintenance projects in communities nationwide. Asphalt is becoming scarce as U.S. refiners overhaul their equipment to maximize output of highly profitable fuels such as diesel and gasoline, using inexpensive — and hard to process — crude oil.
To make things worse, refiners are also cutting back on the production of a petrochemical that many states mix into asphalt to make roads more durable.
Dozens of road repairs were delayed last summer and municipalities around the country may face another shortfall next summer. Road-maintenance projects that have gone forward cost significantly more as the price of asphalt nearly tripled over the past year.
why?
In the past, about 40 percent of an oil barrel would be turned into asphalt products and now it's around 10 percent, McMinimee said.
The reason for the decrease
The shift in refinery technology that led to the decline in asphalt production was spurred by increased oil prices.
Oil refineries around the country are installing billion-dollar machines called "cokers" that are able to refine the chunkiest, low-grade and least expensive crude oil into highly profitable fuels, such as gasoline and diesel.
Which has resulted in:
The U.S. is currently undersupplied by about 24,000 barrels of asphalt a day, or 5 percent of daily demand, and that number is expected to jump to 257,000 barrels a day by 2012, according to San Antonio-based NuStar Energy L.P., a producer of asphalt.
Other impact because of substitution:
The skyrocketing price of asphalt has had at least one positive effect — on the concrete industry, as its product becomes more attractive to city engineers.
So I started digging around and went to NuStar's website and saw this on the front page of the website:
http://www.nustarenergy.com/Pages/default.aspx
NuStar Energy L.P. (NYSE: NS) today announced that it has successfully completed its acquisition of CITGO Asphalt Refining Company’s asphalt operations and assets for $450 million, plus inventory of approximately $360 million subject to post-closing adjustment.
So then I went to go look at some of the fundamentals of the company and found out it is paying a 9.44% dividend yield. Now I am a long way from making an investment. It is just amazing where ideas / work comes from.
Friday, November 7, 2008
Younger Bears and Older Bulls
I have noticed this phenonomenon also. Older individuals tend to be more bullish. I don't know if it is wisdom or conditioning. This is a good write up talking about various older and younger investors.
http://lloydsinvestment.blogspot.com/2008/10/older-bulls-wiser-than-younger-bears.html
Old bulls versus younger bears. This could be entirely coincidental. Has anyone noticed that bullish sentiment seems correlated with age?
The most prominent U.S. stock market bull to surface in recent days is highly respected Mr. Buffett, who was born in 1930 and grew up during the Great Depression years.
If the younger bears are wrong, this is the reason.
One interpretation is that the older generation, having closer first-hand experience with the crash of 1929 and economic hard times during the 1930s, have a deeper appreciation for today's unprecedented government efforts to stem the current financial crisis before it reaches depression-era proportions.
http://lloydsinvestment.blogspot.com/2008/10/older-bulls-wiser-than-younger-bears.html
Old bulls versus younger bears. This could be entirely coincidental. Has anyone noticed that bullish sentiment seems correlated with age?
The most prominent U.S. stock market bull to surface in recent days is highly respected Mr. Buffett, who was born in 1930 and grew up during the Great Depression years.
If the younger bears are wrong, this is the reason.
One interpretation is that the older generation, having closer first-hand experience with the crash of 1929 and economic hard times during the 1930s, have a deeper appreciation for today's unprecedented government efforts to stem the current financial crisis before it reaches depression-era proportions.
Thursday, November 6, 2008
Transition Economic Advisory Board
I was asked to give my ideas to Obama's new Transition Economic Advisory Board. That sounds way more presitgious than it really is because I am no way directly involved. Below is the email I sent for those who would be interested:
Unfortunately that group seems way to big to actually get something accomplished but we can always hope. Feel free to cherry pick or plagiarise anything below. In my mind the financial crises is over. The government has taken on all systemic U.S. financial risk out of the private sector and put it onto the government balance sheet. This was massively mishandled. Now you have an unfolding economic crises that is much more difficult to deal with than a financial crises.
I asked a buddy what he thought and his three word response was "buy a bunker." Unfortunately that may be the best answer but lets pretend for a second like somebody can do something to help.
I am going to split up this email into two parts. I believe Charlie Munger got it right when he said "invert, always invert." So I will invert the problem in the first part and then offer ideas in the second part. The reason inverting is so powerful (though unfortunately rarely done) is it forces you to think about collateral damage of various actions and you often see things working backwards you would not otherwise see. All of this in an email response is simplistic and all ideas can be vetted out much further.
First Part (Inversion)
What is at the basic core of capitalism? It is a system that fundamentally relies on 1) trust and 2) supply and demand. One is soft, kind of airy, and can't be measured. One is hard, factual, and data driven. Trust is capitalism greatest strength and greatest weakness. It is the greatest strength because it means the product over time will maximize utility for the purchaser. I won't do business with you unless I trust you. You screw me or sell me a faulty product, you won't last long in whatever product you are selling. I will go somewhere else. Compare this to U.S.S.R. communism where I have to buy a tire from the government sanctioned tire maker. A system that relies on trust creates accountability. It is capitalism greatest weakness because trust can leave in a heartbeat for the entire system (and does throughout history) causing other trustworthy institutions to become untrustworthy (i.e. banks) because of the domino affect. You don't have trust and you don't have an economy. Supply and demand is self explanatory but is also uniquely capitalistic. Communism mandates prices or the number of cars produced. In a capitalistic system the market mandates what is produced. The weakness in capitalism is you can way overshoot. Right now we have a rare moment in history where we have massive imbalances in both. Trust and supply and demand. Both of these feed off of each other. To much trust leads to to much supply and vice versa creating huge overshoots in economic activity So every government decision needs to be with the goal of restoring trust and working towards a balance of supply and demand. This is very important because so many government policy decisions in the last six months have been panic responses that ultimately hurt trust and policies trying to manipulate supply and demand versus restoring supply and demand.
So lets work down to the next level. What do you want to avoid. In my mind you work down from this list.
1) Massive inflation - arbitrary what this means but probably 20% plus type of numbers
2) Depression (many would argue this is a worst outcome than hyper inflation. I would argue, that though extreme, depressions are natural. US has experienced several. Britain has as well. Countries emerge from a depression often times stronger than before. Show me one example in history where hyper inflation was ever controlled and the country emerged stronger or the same as it was before through natural economic correction? Maybe you can think of one, I can't. I think the reason is that extreme inflation is the ultimate trust buster. Inflation means trust in currency and hence the government backing that currency is essentially gone. 10% inflation is probably better than depression. Much beyond that and I think you created a worse problem.) 3) 1980 UK recession
4) 1982 US recession
5) 1991 US recession
6) Economic expansion.
Why is this important? Two reasons. You can't start with 6. If you start with 6, economic expansion, it means in my mind you haven't accepted intellectually the problem. This was the problem with the stimulus checks back in June. Regardless of what we do we are going to feel economic pain. What you don't want to do is create something that will be worse than it would otherwise would be. The government has already been good at this. The second reason this is important is it forces you to think through a policy decision to work down from the lesser evils. First avoid massive inflation, then do what you need to do to avoid depression, than a 80 UK recession, etc. working all the way down to policies that will generate economic expansion.
So lets work down to the next level while still inverting. Ideas floating around out there.
1) Foreclosure freeze - In my mind a very very bad idea. It continues to destroy trust and does nothing to restore supply and demand but instead manipulates it. It destroys trust because if bank x wants to borrow from bank y, the bank y will know that like itself, bank x no longer has control of its assets while asset value is deteriorating knowing that at some point bank x will experience that pain so the stated book is overvalued and won't make that loan to bank x. It also creates an incentive (also destroying trust) for rational (though maybe unethical) homeowners to stop paying their monthly payments because I can't be foreclosed on. Rationally, I don't pay for six months, put that money I would have paid in the bank, earn interest, and then pay it six months later when the threat of foreclosure is on me again. It distorts supply and demand manipulating supply of homes downwards and masking performing loans upwards. This cycles back to trust deterioration of investors who are unwilling to make an investment because I can't judge what the true supply / demand and value equation really is.
2) Second stimulus package - In my mind a bad idea (not very very bad idea). If you don't have trust, consumer will not spend a check. This does nothing to restore trust. It is also like providing a cocaine addict with another shot of cocaine. It is not going to hurt but it probably won't help either. There is much more you can do to get bang for your buck than with a 100 billion odd consumer stimulus package writing a check to individual Americans.
3) Bail out automakers - there is way to much excess supply in the auto industry. The auto industry would be much better off today if Chrysler would never have gotten bailed out. You are sending money into a sink hole. I could go on with other policy ideas but lets move onto the second part.
Ideas
So with all that in mind above what policies can be done to help restore trust, work towards a natural supply and demand base while decreasing the chance of hyperinflation, than depression all the way towards economic expansion? The trust and supply and demand is all interrelated so while one idea may address more specifically one or the other, it ultimately addresses both.
There are two paths. Sweden which addressed the problem, didn't try to hide the problem, and took painful medicine, and the Japanese route who did the exact opposite. Right now we are on the Japan path. The Swedish path means America has the stomach to take pain now for gain later, I am dubious that spoiled Americans can do that.
1) My favorite idea (this is 100% original) that gets to the heart of the problem and I have mentioned this to you before, is for the government to buy and bulldoze houses. This is 100% from inverting. If the problem is housing lets address housing instead of running around addressing everything but housing. I have talked about this with alot of people and nobody has told me why it is a bad idea. To my knowledge it has never been tried and to me it is very capitalistic at its core. Total existing housing inventory is about 4.8 million and sales run rate is about 4.8 million so give our take you have about a 12 month supply. If you bought 1.6 million homes at an average price of 250k that would cost you 400 billion (that moves supply down to 8 months). What do you do? Instead of manipulating supply you are literally moving the supply curve. 8 months is still to high and so home prices will still drift down to more natural levels avoiding inflation but it will help prevent the overshoot which is what will kill us. Your injecting capital directly into main street and most importantly you are dramatically impacting the recovery rate for many of the CDO and CMO which dramatically impact the value of these securities which dramatically impact capital levels. Most of the bank losses are in the derivatives off the mortgages, not the mortgages themselves. This goes to the heart of impacting the mortgages. You take a dramatic overshoot off the table which increases the weighted average expected value of houses, which increases mortgage values, which has a huge impact on derivatives because of the leverage involved. You have some provision that mandates the government will sell this land back to the private sector 10 years from now over a 10 year period. Take the housing database, sort by delinquent mortgages, and by months of supply in various states, and buy the most strategic 1.6 million homes Maybe this is a bad idea. It hasn't been done but it addresses the core problem, it makes the government the buyer of last resort where it is really needed, and adds to the governments millions of acres that they already own that can easily be sold back in the future. Bulldozing the houses limits the problems you will have for squatters or litterally takes the supply out of the U.S. versus just freezing the supply.
2) If you don't this at least buy mortgages with the TARP money. It is the recovery rate that is key to hundreds of billions of dollars in losses. Buying boatloads of mortgages dramatically increases the recovery rate increasing the value of derivatives multiple times than if you would have just bought the derivative.
3) Force the banks to stop hiding losses. Ignoring the problem doesn't fix the problem. It damages trust and prolongs the problem. I know you and me differ on this but the accounting is so loose and so opaque that the banks can hide billions upon billions of losses. Investors know this and banks knows this. What is unknown is which bank is the worst off and to what extent. So it destroys trust because I don't trust any bank. I don't want to own any bank. I don't like any bank. Banks have the same feeling toward each other. This TARP plan encourages losses to stay hidden just like Japan. Lower the required regulatory capital ratios for a set period of time while forcing all banks to cleanse their balance sheets. Those banks that will fail because of this, let them fail. Wipe out the equity holders. Nationalize these banks. The pain will be large for a short period of time. What will also be large is the amount of trust that will flood back into the banking system.
4) Create supply where there is to much demand. Infrastructure stimulus plan. This is the one area in the U.S. we are under supplied. Probably the only area. Our infrastructure is old and in certain places not enough. Create large amounts of jobs while overhauling our infrastructure. The return on this investment will be huge. It will help unemployment and will directly put dollars in Main Street's hands.
5) I will throw a bone to Obama (don't let my dad know). Move the tax rate for the top 5% of Americans up. The top 5% of Americans greatly benefited from the system, it is our duty to help save the system. I would demand a 5 year limit on this but any increase in revenue inflow will help on the potential inflation front. It helps maintain trust in the government itself.
You can't save the world and the world is in trouble. This means that no matter what America does, the pain is going to bad moving forward. The best we can hope for is that you don't create a bigger problem and help minimize the pain through smart economic policy. If we are lucky we will get out of this with a price tag of 4% of GDP. It could be much bigger. As I said, in my mind the financial crises is over. I would say the banking system still needs to be cleansed instead of being propped up and if the government is going to backstop the entire system force a cleansing. The threat of financial collapse, unless the government collapses, has been taken off the table. Now you have an economic crises of massive proportions. Focusing on trust and supply and demand is the only thing that will minimize this pain.
Unfortunately that group seems way to big to actually get something accomplished but we can always hope. Feel free to cherry pick or plagiarise anything below. In my mind the financial crises is over. The government has taken on all systemic U.S. financial risk out of the private sector and put it onto the government balance sheet. This was massively mishandled. Now you have an unfolding economic crises that is much more difficult to deal with than a financial crises.
I asked a buddy what he thought and his three word response was "buy a bunker." Unfortunately that may be the best answer but lets pretend for a second like somebody can do something to help.
I am going to split up this email into two parts. I believe Charlie Munger got it right when he said "invert, always invert." So I will invert the problem in the first part and then offer ideas in the second part. The reason inverting is so powerful (though unfortunately rarely done) is it forces you to think about collateral damage of various actions and you often see things working backwards you would not otherwise see. All of this in an email response is simplistic and all ideas can be vetted out much further.
First Part (Inversion)
What is at the basic core of capitalism? It is a system that fundamentally relies on 1) trust and 2) supply and demand. One is soft, kind of airy, and can't be measured. One is hard, factual, and data driven. Trust is capitalism greatest strength and greatest weakness. It is the greatest strength because it means the product over time will maximize utility for the purchaser. I won't do business with you unless I trust you. You screw me or sell me a faulty product, you won't last long in whatever product you are selling. I will go somewhere else. Compare this to U.S.S.R. communism where I have to buy a tire from the government sanctioned tire maker. A system that relies on trust creates accountability. It is capitalism greatest weakness because trust can leave in a heartbeat for the entire system (and does throughout history) causing other trustworthy institutions to become untrustworthy (i.e. banks) because of the domino affect. You don't have trust and you don't have an economy. Supply and demand is self explanatory but is also uniquely capitalistic. Communism mandates prices or the number of cars produced. In a capitalistic system the market mandates what is produced. The weakness in capitalism is you can way overshoot. Right now we have a rare moment in history where we have massive imbalances in both. Trust and supply and demand. Both of these feed off of each other. To much trust leads to to much supply and vice versa creating huge overshoots in economic activity So every government decision needs to be with the goal of restoring trust and working towards a balance of supply and demand. This is very important because so many government policy decisions in the last six months have been panic responses that ultimately hurt trust and policies trying to manipulate supply and demand versus restoring supply and demand.
So lets work down to the next level. What do you want to avoid. In my mind you work down from this list.
1) Massive inflation - arbitrary what this means but probably 20% plus type of numbers
2) Depression (many would argue this is a worst outcome than hyper inflation. I would argue, that though extreme, depressions are natural. US has experienced several. Britain has as well. Countries emerge from a depression often times stronger than before. Show me one example in history where hyper inflation was ever controlled and the country emerged stronger or the same as it was before through natural economic correction? Maybe you can think of one, I can't. I think the reason is that extreme inflation is the ultimate trust buster. Inflation means trust in currency and hence the government backing that currency is essentially gone. 10% inflation is probably better than depression. Much beyond that and I think you created a worse problem.) 3) 1980 UK recession
4) 1982 US recession
5) 1991 US recession
6) Economic expansion.
Why is this important? Two reasons. You can't start with 6. If you start with 6, economic expansion, it means in my mind you haven't accepted intellectually the problem. This was the problem with the stimulus checks back in June. Regardless of what we do we are going to feel economic pain. What you don't want to do is create something that will be worse than it would otherwise would be. The government has already been good at this. The second reason this is important is it forces you to think through a policy decision to work down from the lesser evils. First avoid massive inflation, then do what you need to do to avoid depression, than a 80 UK recession, etc. working all the way down to policies that will generate economic expansion.
So lets work down to the next level while still inverting. Ideas floating around out there.
1) Foreclosure freeze - In my mind a very very bad idea. It continues to destroy trust and does nothing to restore supply and demand but instead manipulates it. It destroys trust because if bank x wants to borrow from bank y, the bank y will know that like itself, bank x no longer has control of its assets while asset value is deteriorating knowing that at some point bank x will experience that pain so the stated book is overvalued and won't make that loan to bank x. It also creates an incentive (also destroying trust) for rational (though maybe unethical) homeowners to stop paying their monthly payments because I can't be foreclosed on. Rationally, I don't pay for six months, put that money I would have paid in the bank, earn interest, and then pay it six months later when the threat of foreclosure is on me again. It distorts supply and demand manipulating supply of homes downwards and masking performing loans upwards. This cycles back to trust deterioration of investors who are unwilling to make an investment because I can't judge what the true supply / demand and value equation really is.
2) Second stimulus package - In my mind a bad idea (not very very bad idea). If you don't have trust, consumer will not spend a check. This does nothing to restore trust. It is also like providing a cocaine addict with another shot of cocaine. It is not going to hurt but it probably won't help either. There is much more you can do to get bang for your buck than with a 100 billion odd consumer stimulus package writing a check to individual Americans.
3) Bail out automakers - there is way to much excess supply in the auto industry. The auto industry would be much better off today if Chrysler would never have gotten bailed out. You are sending money into a sink hole. I could go on with other policy ideas but lets move onto the second part.
Ideas
So with all that in mind above what policies can be done to help restore trust, work towards a natural supply and demand base while decreasing the chance of hyperinflation, than depression all the way towards economic expansion? The trust and supply and demand is all interrelated so while one idea may address more specifically one or the other, it ultimately addresses both.
There are two paths. Sweden which addressed the problem, didn't try to hide the problem, and took painful medicine, and the Japanese route who did the exact opposite. Right now we are on the Japan path. The Swedish path means America has the stomach to take pain now for gain later, I am dubious that spoiled Americans can do that.
1) My favorite idea (this is 100% original) that gets to the heart of the problem and I have mentioned this to you before, is for the government to buy and bulldoze houses. This is 100% from inverting. If the problem is housing lets address housing instead of running around addressing everything but housing. I have talked about this with alot of people and nobody has told me why it is a bad idea. To my knowledge it has never been tried and to me it is very capitalistic at its core. Total existing housing inventory is about 4.8 million and sales run rate is about 4.8 million so give our take you have about a 12 month supply. If you bought 1.6 million homes at an average price of 250k that would cost you 400 billion (that moves supply down to 8 months). What do you do? Instead of manipulating supply you are literally moving the supply curve. 8 months is still to high and so home prices will still drift down to more natural levels avoiding inflation but it will help prevent the overshoot which is what will kill us. Your injecting capital directly into main street and most importantly you are dramatically impacting the recovery rate for many of the CDO and CMO which dramatically impact the value of these securities which dramatically impact capital levels. Most of the bank losses are in the derivatives off the mortgages, not the mortgages themselves. This goes to the heart of impacting the mortgages. You take a dramatic overshoot off the table which increases the weighted average expected value of houses, which increases mortgage values, which has a huge impact on derivatives because of the leverage involved. You have some provision that mandates the government will sell this land back to the private sector 10 years from now over a 10 year period. Take the housing database, sort by delinquent mortgages, and by months of supply in various states, and buy the most strategic 1.6 million homes Maybe this is a bad idea. It hasn't been done but it addresses the core problem, it makes the government the buyer of last resort where it is really needed, and adds to the governments millions of acres that they already own that can easily be sold back in the future. Bulldozing the houses limits the problems you will have for squatters or litterally takes the supply out of the U.S. versus just freezing the supply.
2) If you don't this at least buy mortgages with the TARP money. It is the recovery rate that is key to hundreds of billions of dollars in losses. Buying boatloads of mortgages dramatically increases the recovery rate increasing the value of derivatives multiple times than if you would have just bought the derivative.
3) Force the banks to stop hiding losses. Ignoring the problem doesn't fix the problem. It damages trust and prolongs the problem. I know you and me differ on this but the accounting is so loose and so opaque that the banks can hide billions upon billions of losses. Investors know this and banks knows this. What is unknown is which bank is the worst off and to what extent. So it destroys trust because I don't trust any bank. I don't want to own any bank. I don't like any bank. Banks have the same feeling toward each other. This TARP plan encourages losses to stay hidden just like Japan. Lower the required regulatory capital ratios for a set period of time while forcing all banks to cleanse their balance sheets. Those banks that will fail because of this, let them fail. Wipe out the equity holders. Nationalize these banks. The pain will be large for a short period of time. What will also be large is the amount of trust that will flood back into the banking system.
4) Create supply where there is to much demand. Infrastructure stimulus plan. This is the one area in the U.S. we are under supplied. Probably the only area. Our infrastructure is old and in certain places not enough. Create large amounts of jobs while overhauling our infrastructure. The return on this investment will be huge. It will help unemployment and will directly put dollars in Main Street's hands.
5) I will throw a bone to Obama (don't let my dad know). Move the tax rate for the top 5% of Americans up. The top 5% of Americans greatly benefited from the system, it is our duty to help save the system. I would demand a 5 year limit on this but any increase in revenue inflow will help on the potential inflation front. It helps maintain trust in the government itself.
You can't save the world and the world is in trouble. This means that no matter what America does, the pain is going to bad moving forward. The best we can hope for is that you don't create a bigger problem and help minimize the pain through smart economic policy. If we are lucky we will get out of this with a price tag of 4% of GDP. It could be much bigger. As I said, in my mind the financial crises is over. I would say the banking system still needs to be cleansed instead of being propped up and if the government is going to backstop the entire system force a cleansing. The threat of financial collapse, unless the government collapses, has been taken off the table. Now you have an economic crises of massive proportions. Focusing on trust and supply and demand is the only thing that will minimize this pain.
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