Archive - Apr 15, 2012 - Story

In 26 years on Wall Street, Nic Colas of ConvergEx, has worked for seven firms and reported to nine different people.  His insights make up a highlight reel of things those people have told him which have stuck in his memory over the years (for better or worse) and seemed worth sharing with a broader audience.  The most insightful: “Don’t make this game harder than it has to be.”  From the same boss, the most motivating: “Someone is getting the information before you.  Why don’t I fire you and hire them?”  On customer service: “What am I? A pimp?  Get me a black car.”  And possibly the most important for someone who makes their living serving the investment community on the sell-side: “Do you know what it means when a dog shows well?”

In a little under eight minutes, a plethora of today's more outspoken realists, economists, and journalists provide a simple yet clear path through the financial crisis to critically explain how the so-called equilibrium that so many mainstream analysts and economists trusted as fact has been proven as simple fiction. The hard-to-accept truth is that financial instability is in fact the natural state of our economic environments and that credit and banking lie at the very heart of that difference between Keynesian / Neo-classical dogma and the tough new reality that the world's major economies now face. The political and economic elite have "blind-sided themselves to the role of rising debt in funding what is really the biggest ponzi scheme in human history" and that the "blind-faith in institutions and mechanisms has cracked post-2007". From too-simple DSGE 'economic models' to 'representative agents' to the fact that financial systems are the cause of economic instability, a number of the new normal's best thinkers (including Stiglitz, Keen, Kinsella, and Bezemer), courtesy of INETeconomics, provide a very layman's guide to the (hopefully not so shocking to our readers) new reality of how critical credit and debt is in our brave new world and how entirely misrepresented it is in mainstream thinking. Must Watch, if for nothing else, the crushing conclusion for many neo-classicals that when you can't tweak your models any more, you need to move on to some next paradigm.

What a difference a month makes. About 4 weeks ago the European crisis was "over" - French President Sarkozy exclaimed that: “Today, the problem is solved!” Christine Lagarde, former French finance minister, and current IMF head following the framing of DSK, added that “Economic spring is in the air!”... Fast forward to today when following the inevitable end of the transitory favorable effects of the LTRO (remember: flow not stock, a/k/a the shark can not stop moving forward), the collapse of the Spanish stock market, the now daily halting of Italian financial stocks, the inevitable announcement that shorting of financials in Europe is again forbidden, and finally the record spike in Spanish CDS, Europe is broken all over again. Which brings us again the Sarkozy and Lagarde. The Frenchman who is about to lose the presidential race to socialist competitor Hollande (an event which will have major ramifications for Europe as UBS' George Magnus patiently explained two months ago), no longer sees anything as solved, and instead is openly begging for the ECB to inject more, more, more money into the system to pretend that "problems are solved" for a few more months. Incidentally, so is Lagarde, for whom in an odd change of seasons, economic spring is about to be followed by a depressionary winter. The problem is both will end up empty handed, as the well may just have run dry.

Geithner April 2011: Q: “Is there a risk that the United States could lose its AAA credit rating? Yes or no?” - Tim Geithner: “No risk of that.”

....

Geithner April 2012: Q: “If we don't deal with these debt problems we are going to be Greece in two years” - Tim Geithner: “No risk of that.”

Curious what the investing world will focus on next week? Here is a recap courtesy of Goldman Sachs, though for those who want the punchline now, just fast forward to Thursday when get Spain and French bond auctions. In the meantime just ignore all the intraday trading halts of Intesa, UniCredit And Banco Popolare. The rest is just the supporting cast.

LOLWUT

This one is actually quite funny, although we feel that the MMTers, the Neo-Keynesians, the Econ 101 textbook fanatics, and the government apparatchiks out there will fail to appreciate the humor. However, we are a little concerned how many of those in charge read into this a little too much, and decide to make this official policy...

When Bear Stearns hit the wall, there was no talk of a federal government bailout because of what Mr Paulson had stated in public. The other US banks refused to lend because Bear Stearns had refused to participate in the bailout of LTCM in 1998. Bear Stearns was left with two options. It could sell the “assets” in the hedge funds or it could bail them out with its own capital. For the one and only time in the GFC so far, a money centre bank tried to sell Collateralised Debt Obligations (CDOs) on an actual market. That attempt lasted hours. When the auction was closed, the bids were coming in at 30 percent of the face value of the paper. The jig was up, the valuation of the collateral underpinning the entire banking system was revealed as fictitious. Not much more than a year later, that collateral was transferred from the US banking SYSTEM to the Fed, which has maintained its fictitious “value” ever since. Europe dragged its feet, but at the end of 2011 it did the same thing in regard to its own banks.

The markets are wobbly, but there is a great deal of confidence in the Bernanke “put” or the ones offered by other central bankers. Without a doubt the central bankers watch the stock markets and are willing to do things to support it. Great in theory, but can they react fast enough in a decline? How many investors are “long” risk because of the Bernanke put? I think a lot are. The problem with the Bernanke Put, is that it isn’t a real put. It is policy that attempts to stimulate the market. How useful is that in a sell-off? How many managers will risk losing more money waiting for the put to kick in? This is particularly true as we near month end. Hedge funds, for better or worse, have in many cases been forced to focus on monthly returns. Being long on the hopes of a put is not the same as being long with a real actual put.