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Hussman: Average Americans Are Getting Scalped So That Bondholders Can Be Saved from Taking a Haircut
PhD economist John Hussman has some great quotes in his current market comment:
It
appears to be wishful thinking to believe that the credit crisis is
over. Most likely, what we've witnessed in recent months is little more
than the combination of a lull in the [mortgage] reset schedule coupled
with a wholly unsustainable burst of deficit spending amounting to over
7% of GDP.
My impression of the U.S. banking
system is that it is quietly going insolvent, in a manner that will
become evident only when the slack for “significant judgment” (provided
by the FASB earlier this year when it altered mark-to-market rules) is
taken up so tightly that the rope snaps. Presently, this slack has
allowed banks some time, but the question is, time for what? The rules
encourage banks to neither modify loans nor foreclose, both which would
trigger a restatement of value on the mortgage asset. Meanwhile, banks
are reluctant to allow “short sales” in lieu of foreclosure (where a
homeowner sells a home to avoid foreclosure, but at a price less than
the residual loan value, so the bank has to essentially eat the loss).
This again defers the restatement of asset values for a while, but
makes business sense only if home prices are expected to recover faster
than the foregone interest that could be earned on new loans.
So
if you talk to people who oversee these assets, including people who
work with the FDIC, you'll hear that there is an inventory of
unrecognized losses being built up, in hopes that the underlying
mortgages will turn around without the need for loss reporting. In view
of the CRL foreclosure projections, all we can think is – fat chance...
Our policy makers bailed out bank bondholders instead of focusing
on debt restructuring. The bad assets are still in the banking system,
millions of families will still lose their homes, the Treasury and Fed
have jointly issued trillions in new government obligations, but the
bondholders of Bear Stearns will still get 100% of their principal and
interest.Despite the current enthusiasm of Wall Street, this story has probably not ended, and the evidence suggests it will end badly.
For background, see this and this.
Technical note: Hussman thinks that stocks are extremely overbought.
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I believe it is time to take our destiny in our own hands and recover at least some of the losses in our portfolios through trading the markets.
Today, we had a big drop in the end of the day, as nvestors were probably looking for an excuse to sell.
Richard Bove had made some good calls in the past, and that may be why they sold today on his comments.
By the way, the Invetrics DJIA index timing signal switched to Short prior to market open today (unrelated to the analyst's comments), and warned web site visitors of today's potential drop in the market.
It is up a respectable 64.84% for the year (as of October 20, 2009) and it is free of charge for individual investors at:
http://invetrics.com
No good debt. You might see my blog for some stuff I have written recently. I don't edit, but just write so I hope it is readable. My contention is that the economy can only carry so much debt so any additional is all bad debt. It isn't necessarily that the new debt is all bad, but a sum equal to the new debt will go bad. Haircuts are mandatory and if the losers aren't getting their hair cut then someone else is paying the bill. May they all go to hell.
Zero chance banks recognize losses. Japan has hidden their losses since '89, why wouldn't Citi or WFC. "Nobody" gains from forcing banks to recognize losses. Pretend and extend. There will absolutely not be a tightening of accounting slack in our lifetime.
yeah they do. We put the crooks in jail. As long as they are allowed to maintain this smoke screen, criminals are being aided and abetted. Remember the real problem is banks have to pay each other. Also, there is some international financial stuff coming down the pike before we are done here. They aren't going to be allowed to pass bad checks around the world.
It would be feasible to implement income-progressive bond haircuts using the tax code to enable compensation for those under a given income level.
Quite feasible. Rather simple really. But then the vermin could no longer use us as human shields. So, no.
Under the circumstances it's best to isolate the insane criminal organizations through social ostracization and economic boycott, see Gene Sharp's classic "The Politics of Nonviolent Action" if you need a primer--just the table of contents is all the cookbook you really need.
http://www.peacemagazine.org/198.htm
I'm not being unfair, Yankee. I'm being charitable. I voted for Obama. And yeah, we're probably better off right now than if John McCain were in the White House (although Geithner would have his current post, regardless, without question).
I don't ever recall posting that Obama "did this alone." That's because I didn't. But he has exacerbated certain problems immeasurably. And we will pay the price, believe that.
I can't claim to understand credit cards and the current default rates for cardholders, but if I read correctly, (and I probably read it here) the default rate for JPM credit card holders was 10.3 percent during the last quarter (please correct me if I am mistaken).
That's a default rate the banks can't sustain for any extended period of time. Maybe it's just me, but all this paper shuffling is reminiscent of Charles Ponzi filling his pockets with money and then heading off to the gaming tables in one last effort to shore things up.
The problem is that the TARP/ Treasury/ Fed protected the shareholders and Management, not the bondholders. The losses should be recognized and the lot of them sent into reorganization where the bondholders take a chop but have a shot at running the entity after an appropriate restructuring including offing the management. In short why and the Hell do we give a flying flick about John Mack and what He thinks?
Not so much...combine those with the FDIC guarantee program and clearly bank senior debt holders have been well treated (on relative terms). Shareholders of Citigroup are looking at serious, serious dilutive effects in the coming year(s). AIG's equity value is only so high due to a reverse split.
The liquidation in chapter 11 of a bank or bank holdco just does not proceed in the same manner as any other non-bank corporation. LEH's been toast for > 12 months, and creditors are gonna wait awhile longer.
FYI http://www.nytimes.com/2009/10/21/business/global/21yen.html?ref=global-...
Both Krugman and Dean Baker stated this article is silly.
I'd imagine that breaking the banks by credit card nonpay might break your country - I've tried to get Chili's to take gold for lunch for two days now and they wouldn't, but if you guys break the banks I'll be eating armadillo until my bullets run out - hopefully that is before the vodka.
Yankee, please take your NY Times propaganda and your gold-bashing drivel and shove it up your ass.
It's true, Walmart doesn't take gold coins. If you cannot figure it out, you deserve to die with the rest of the clueless fuckers.
for the life of me, i cannot understand why we don't force the current profits of the banks to go towards capital vs distribution as compensation, at least as a way to start to write down the poor assets and get on the road to healing the balance sheets.
Definitely spot on. Distribution should not be an option, seriously, unless the institution is on extremely healthy terms.
A voice calls from the wilderness.
+1 DH
DH,
It may be because the same government willing to bail out every TBTF bank is either too weak or fearful of the "bank nationalization" stigma to do anything constructive or necessary. Or maybe it's resistance from all of those ABA lobbyists or ::insert bank name::'s political donations.
I agree totally with your perspective, but without pressure from FASB 157 and a public out-of-sight/mind mentality then it's probably damn near impossible currently.
right fuckin on
There is a psychological classification for being pathologically unwilling to accept reality. I appreciate the dilemma policy makers find themselves in. However, the construct is of their and by extension, industries design as are the results. Hence the fear. Since massive discontent is all but assured with the collapse that would follow all of those insurance and pension fund failures in waiting coupled with another leg down in housing and employment provide the stimuli to as Assetman suggests and kick the can for as long as they can.
Obama has been a massive disappointment, agreed.
And Hussman is His Dudeness. First site visit every Monday morning.
you're being unfair - he didn't do this alone
Unfair??? Are you an asshole or a dumb fuck?
No he's not being unfair, in fact he's being kind. Obama is a puppet, he reads the teleprompter and does what he's told.... that's the only kind of candidate that our two major parties have put in front of us for the last 45 years. We have a one party system with 2 heads, the red/blue battle is just a diversion for political junkies. The country is run by the big banks with the Squid boss as current CEO. On the board of directors are the healthcare and military industrial complexes. That's who calls the shots along with our friends at the IMF and World Bank. Obama was supported because was outstanding puppet material. His quote earlier this year regarding the bailout and financial meltdown was: "We want to move forward instead of looking back". I wonder who's idea that was????LOL Turbo Tim's? Larry's? Lloyd's?
Answer: All of the above except for BHO.
He's had a chance, BHO sucks, period, end of story.
haha, true about voting.
Is it incorrect that a one month spike in defaults would hurt them more than spreading it over 6-12 months?
Spike the rat bastards!
My vote is for mass, organized credit card defalults.
Does anyone know how much of a dent the cashflow of banks
would have to be impacted to really make them feel it?
What are we to do who have no credit card debt?
Don't suggest that I go out and buy a black 911 Turbo on the Amex Black card and default......on second thought...
I've got about $100,000 of debt I'm willing to contribute to your cause.
Radical default across the consumer debt spectrum would cause more damage than the fed could paper over. The ironical thing about it is if the process were widespread enough there would have to be a mass reset of credit scores or the whole world would descend into a numerically driven purgatory.
I don't think voting will be necessary to bring this about.
only some bondholders were saved by a grateful citizenry. chrysler and gm senior bonds got screwed. it isn't what you know, it's who you know, and how well you know them...
Isn't there some exagerations here(I am wishing here)?I mean wouldn't a 250 bil counterfit of tbs destroy that market?. Isit possible that Taibbi is leaning a bit toward sensassional journalism?. and at the same time one wonders if it took 8 years to uncover the fraud that was taking place in the mbs markets,who knows what new fraudelent instrument has been invented in the meantime?
It's too bad I only had a choice between the Banker Party and the Other Banker Party.
there's always willie nelson...or ron paul if you like.
You nailed it, Taibbi. At this point, I suspect nothing can be done about it short of a military coup or eventual annexation by China. BO has been a massive disappointment.
I hope Mr. Taibbi has a food taster.
In that big banker bonuses are based on “alleged profits,” gimmick accounting fraud will continue for these insolvents to keep their number of foreclosures low relative to their number of delinquencies. And, as Hussman says, fat chance of these mortgages turning around in view of CRL foreclosure projections without the need for loss reporting.
Matt Taibbi has another blockbuster article in Rolling Stone magazine that also gives a fat chance of anyone even trying to stop these burglars who are ruling this economy. Here are some excerpts that hopefully will tantalize a full read of the latest from this great investigative reporter.
Wall Street’s Naked Swindle
A scheme to flood the market with counterfeit stocks helped Bear Stearns and Lehman Brothers--and the feds have yet to bust the culprits.
MATT TAIBBI
… To the rest of the world, the brazenness of the theft — coupled with the conspicuousness of the government's inaction — clearly demonstrates that the American capital markets are a crime in progress. To those of us who actually live here, however, the news is even worse. We're in a place we haven't been since the Depression: Our economy is so completely @#$%*, the rich are running out of things to steal.
If you squint hard enough, you can see that the derivative-driven economy of the past decade has always, in a way, been about counterfeiting. At their most basic level, innovations like the ones that triggered the global collapse — credit-default swaps and collateralized debt obligations — were employed for the primary purpose of synthesizing out of thin air those revenue flows that our dying industrial economy was no longer pumping into the financial bloodstream. The basic concept in almost every case was the same: replacing hard assets with complex formulas that, once unwound, would prove to be backed by promises and IOUs instead of real stuff. Credit-default swaps enabled banks to lend more money without having the cash to cover potential defaults; one type of CDO let Wall Street issue mortgage-backed bonds that were backed not by actual monthly mortgage payments made by real human beings, but by the wild promises of other irresponsible lenders. They even called the thing a synthetic CDO — a derivative contract filled with derivative contracts — and nobody laughed. The whole economy was a fake.
… The same is true for mortgages. When lenders couldn't find enough dope addicts to lend mansions to, some simply went ahead and started selling the same mortgages over and over to different investors. There are now a growing number of cases of such double-selling of mortgages: "It makes Bernie Madoff seem like chump change," says April Charney, a legal-aid attorney based in Florida. Just like in the stock market, where short-sellers delivered IOUs instead of real shares, traders of mortgage-backed securities sometimes conclude deals by transferring "lost-note affidavits" — basically a "my dog ate the mortgage" note — instead of the actual mortgage. A paper presented at the American Bankruptcy Institute earlier this year reports that up to a third of all notes for mortgage-backed securities may have been "misplaced or lost" — meaning they're backed by IOUs instead of actual mortgages.
How about bonds? "Naked short-selling of stocks is nothing compared to what goes on in the bond market," says Trimbath, the former DTC staffer. Indeed, the practice of selling bonds without delivering them is so rampant it has even infected the market for U.S. Treasury notes. That's right — Wall Street has actually been brazen enough to counterfeit the debt of the United States government right under the eyes of regulators, in the middle of a historic series of government bailouts! In fact, the amount of failed trades in Treasury bonds — the equivalent of "phantom" stocks — has doubled since 2007. In a single week last July, some $250 billion worth of U.S. Treasury bonds were sold and not delivered.
The counterfeit nature of our economy is troubling enough, given that financial power is concentrated in the hands of a few key players — "300 white guys in Manhattan," as a former high-placed executive puts it. But over the course of the past year, that group of insiders has also proved itself brilliantly capable of enlisting the power of the state to help along the process of concentrating economic might — making it less and less likely that the financial markets will ever be policed, since the state is increasingly the captive of these interests.
The new president for whom we all had such high hopes went and hired Michael Froman, a Citigroup executive who accepted a $2.2 million bonus after he joined the White House, to serve on his economic transition team — at the same time the government was giving Citigroup a massive bailout. Then, after promising to curb the influence of lobbyists, Obama hired a former Goldman Sachs lobbyist, Mark Patterson, as chief of staff at the Treasury. He hired another Goldmanite, Gary Gensler, to police the commodities markets. He handed control of the Treasury and Federal Reserve over to Geithner and Bernanke, a pair of stooges who spent their whole careers being bellhops for New York bankers. And on the first anniversary of the collapse of Lehman Brothers, when he finally came to Wall Street to promote "serious financial reform," his plan proved to be so completely absent of balls that the share prices of the major banks soared at the news.
The nation's largest financial players are able to write the rules for own their businesses and brazenly steal billions under the noses of regulators, and nothing is done about it. A thing so fundamental to civilized society as the integrity of a stock, or a mortgage note, or even a U.S. Treasury bond, can no longer be protected (bold mine), not even in a crisis, and a crime as vulgar and conspicuous as counterfeiting can take place on a systematic level for years without being stopped, even after it begins to affect the modern-day equivalents of the Rockefellers and the Carnegies. What 10 years ago was a cheap stock-fraud scheme for second-rate grifters in Brooklyn has become a major profit center for Wall Street. Our burglar class now rules the national economy. And no one is trying to stop them.
http://www.rollingstone.com/politics/story/30481512/wall_streets_naked_s...
i have always been outraged by govts refusal to haircut the bondholders
but someone (from the Fed) pointed out to me that bondholders are very sensitve and absent a backstop would flee from any institution that was looking shaky--and who isnt. this is basically as damaging as a run by depositors.
i dunno maybe that is a lame argument...
"taken up so tightly that the rope snaps"
This is an awful thought indeed. Hopefully this event is triggered
soon. The suspense is killing me.
the only soon I've ever seen was Oct 19,1987, everthing else dribbles along
I've seen enough games between the Fed, Treasury, the FDIC ,the 'Agencies', the SEC, FASB, and others to believe that they can-- and will--- keep the charade going for as long as they can.
This is the essence of the situation from a political economy standpoint. No haircuts. Of course, this might actually make sense if you think about who has all these bonds...sure, some uberrich and furriners are in there, but we are talking about pension funds and insurance companies (you know, all those premiums you pay?). So really the Admin is avoiding a big big bang in those arenas. Problem is, they think the public can't handle the truth (and all the payola on the side).
This is why we're Japan on steroids. Get used to it.
It's a non-linear pattern; bondholders just needed the rule book prior to the commencing events...BSC is money good, but LEH not good (and not gonna see much for a few years anywho).
If not AIG, if not C, well then nothing fails.
No kidding.
We are in the eye of the storm.
Even the President said we are out of money.
When stocks fall and more bonds default, there may be a wild dash for cash, not gold.
http://www.jubileeprosperity.com/
and booze, go long vodka
im long whiskey and tobacco
tobacco stains your teeth, chippies are turned off
Not of you make your living outta the mobile estates...
Hussman is the only Mutual Fund Manager worth listening too. The rest are too busy accumulating assets on which they can charge fees, and therefore pay themselves. "Invest toward the long-term." they say. Yes, tell that to a Japanese citizen who's been in the market for 20 years. Tell it to the people who must tap into their 401k principal.
Hussman is The Man, and he's right. You've been warned -- proceed with caution.
Remember constant contribution investing (put in x currency every period) you guys know this, but I have to restate it, when the nip market passed back through some figure like 12,000 on the down side currency cost averaging went underwater in that market post WWII (and that 12 grand is probably wrong, I'm just too befuddled to remember exact number)