Archive - Oct 19, 2009

Nassim Taleb, author of The Black Swan and Fooled By Randomness, writes brilliantly on investment risk, but his proposed solution to the economic crisis, converting defaulting mortgages to equity by banks, will result in America catching the Japanese Disease. We can't keep debt lingering on the books of banks like they did in Japan. And you can't magically turn stone into bread. Read this and tell me what you think. Perhaps he is creating another black swan.

Are Fannie and Freddie dead or are they not? That is the question. Keefe, Bruyette & Woods says the stock is toast. As of today the Administration is putting them to work for a few more years. Is the outcome the same but the timing different? What is the "Trickle Up" theory? Will it work?

I believe monetary authorities are desperately trying to reflate the real economy by flooding the financial system with a tsunami of liquidity. Asset bubbles are being formed as we speak. Equity and commodity prices will head much higher but it remains to be seen whether higher asset prices will translate into higher real prices. Stay tuned, but in the meantime you might want to curb your enthusiasm and remain very alert as asset prices disconnect from fundamentals.

Janet Tavakol says:

"During World War II, we imposed an excess profits tax. We should impose a 95% excess profits tax—or windfall profits tax—on certain financial institutions (including Goldman Sachs) enriching themselves with ongoing low-cost Fed funding and debt guarantees."

What do you think?

Our stock markets are now well into 60% rally territory. Which begs the question: how does this rally stack up with previous ones based on such arcane concepts as economic fundamentals. We present some of the key criteria of how previous 60% rallies have looked like when analyzed across 10 different key economic dimensions (which are completely irrelevant now).

If after reading the two previous posts on the Federal Reserve as saviour of the western world and the Federal Reserve as responsible Central Bank willing to accept bankrupt equities as collateral in its discount window, left your with any unanswered questions, fear not for there is light at the end of the tunnel, and it is called Kay Hagan, Democratic Senator from North Carolina. Senator Hagan believes S 604/HR 1207 is unnecessary: you see the "immediate and broad disclosure that S. 604/HR 1207 would require, could disrupt the financial markets, and jeopardize our country's international finance relationships." Which presumably means that Senator Hagan grasps, comprehends and can explain in simple English such things as $600 billion worth of liquidity swap lines to foreign Central Banks, and the need for those. Additionally, she is aware that the Fed's discount window on occasion holds stocks of bankrupt companies as collateral. Not only that, but it is likely the case that professing a deep understanding of the functions of the Federal Reserve, Senator Hagan is willing to stake her political career and the well-being of her children in guaranteeing that the kind of systematic interference that the Fed has perpetrated via a $6.5 trillion dollar funding gap at foreign CBs is not only tolerable, but in fact beneficial for the US economy, and that a result of the dollar printer's constant and aggressive intervention in global and domestic monetary policy, the likelihood of major risk flaring episodes occurring in the future is zero.

"I have seen many people debate whether gold is a bet on inflation or deflation. As I see it, it is neither. Gold does well when monetary and fiscal policies are poor and does poorly when they appear sensible. Gold did very well during the Great Depression when FDR debased the currency. It did well again in the money printing 1970s, but collapsed in response to Paul Volcker’s austerity. It ultimately made a bottom around 2001 when the excitement about our future budget surpluses peaked." - David Einhorn

Russia shot itself in a foot last year when in dispute with Ukraine, it shut off natural gas supplies to Europe. That experienced was very unpleasant for Europe and underlined its dependence on a single nation.

It is only fitting that on the 22nd anniversary of Black Monday, the commentator is none other than the Chairman of the SEC at the time, David Ruder. While Ruder provides perspectives on what is presumed pervasive insider trading as it relates to Galleon and otherwise, such as the ability by the SEC to use wiretaps when doing an investigation in concert with the US Attorney's office, the real critical message from Ruder is the systemic risk associated with hedge fund groputhink, or a massive position held by numerous hedge funds that turns out to be wrong, best seen it in the basis trade blow up, the Volkswagen short squeeze and the Citigroup exchange offer.

Developing story, but, surprisingly, not a dollar negative for once.

House Financial Services Committee DOESN'T wimp out!

Big drop in SPY AH to below VWAP. Big blocks pushing lower. What is one missing here?

The topside resistance of the assumed-to-be bull flag pointed out this morning in EURUSD has held so far. A quick look at the dollar index over the last few days of trading indicates we are facing support here at least in the near term. Even if we cannot claim to have made a bottom in the medium to long term, it looks we should at least retest 75.80 before another wave of selling.

Still staring bug-eyed at the monitor, seeing all sorts of stocks breaking out to new highs as the bubble continues to sky to new heights. Gambling fever is still running amok, especially among hedge fund managers caught with their pants down sitting in money markets.

As the trading day rolls to a close, the trade once again is sell dollars, buy everything else. It is no surprise that stocks are trading where they are courtesy of an insane printing press operator and it being the third lowest volume day of the year, but now the buying spree has shifted into 10 Year US Treasuries as well. Nothing can stop the systemicannihilation of the dollar at this point absent a major exogenous event, or constipated European bureaucrats saying enough before one Euro can buy a few hundred million portraits of George Washington.