"The Fed Will Do Whatever It Wants" and RAISE CASH NOW!
.... so claim some people.
Oh really? Not so fast!
Duh.
And not everyone thinks this will pass muster either:
Now this will be interesting. Congress should do its damn job, but whether it will is another matter. Nonetheless, the politics of this are certain to get interesting, especially given the historical feckless lack of regulation coming from The Fed and elsewhere.
At minimum the likely outcome of this little mess is forcing Investment Banks under bank-style regulation by The Fed and/or OCC. That would be amusing, as it would shut down the "infinite leverage" games and force these IBs into the 7:1ish maximum gearing ratios that exist for commercial banks.
Now if we can just get those off-balance-sheet games to stop at the same time, we might actually accomplish something here and come out of this stronger as a nation and market.
Oh, the Conference Board reported leading economic indicators, with the 5th straight decline.
While we're on the subject of distortions and lies, many people say "The Fed doesn't care about the equity markets", or alternatively, "The Fed is trying to prop equity markets."
The truth is a bit more obscure and obtuse than that; one must look into how bank capital requirements are determined in order to get to the bottom of it.
Here's reality - Bank Tier Capital - the measure of whether you are "well capitalized" or "dead" as a bank - includes common stock equity.
Specifically, Tier 1 Capital, the most important type for a bank, includes what is known as "Shareholder Equity" as well as retained earnings.
So consider this folks - you can sink a bank if you sink its stock price.
How? Simple - "Shareholder Equity" is not so simple as "stock price." However, the stock price has a major impact on it, because precipitous declines hit both intangibles (good will) and financing costs (in the other direction, raising them) which shrink Shareholder Equity from both ends of the candle at once.
Now do you get it? The Fed and the rest of the fools on The Street want to pump bank stock prices because if they sink sufficiently the bank can actually be declared insolvent as a consequence!
This also, however, means that our banking system is in fact 100% based on confidence and it is the clearest indication you will ever find on why we must have transparency in our financial markets, including an absolute and irrevocable ban on off-balance-sheet and other hidden crap, and forced mark-to-market.
There are many people who have recoiled in horror at the idea that everything should be marked to the market. Well, I think it should be. I think it should be precisely because the only way a bank survives is if there is investor confidence in its position in the marketplace and you cannot obtain and keep that confidence unless you have full transparency.
If I can't read a balance sheet and know that the figures there present an accurate and complete picture of that firm's exposure, good and bad, then I have no reason to trust that presentation of the firm's financial condition and as a consequence I have no reason to buy and hold that firm's stock.
It is absolutely essential that everyone - domestic and foreign - have this trust in our financial system.
Without it we run the risk of dislocations whenever that confidence is shaken, and those "shakes" can come absolutely without warning. The "run" on Bear Stearns was able to be initiated and sustained precisely because of the opacity of Bear's balance sheet - but for that anyone could read their balance sheet and KNOW whether or not there was real risk to investors and customers or not.
We are now living in the dislocation. And despite the claims that "its all ok" and "we're at a bottom" (the calls of which are nauseating) the bond market says otherwise - check this out:
That is the IRX, or the interest rate on the 13 week T-bill in the open market, measured in 10s of basis points.
In other words the current trading price is 0.4% annual yield on the 13-week T-Bill, a level lower than that seen at any time in the last 50 years and in fact you can earn a positive carry borrowing those and buying JGBs - short term Japan bonds - which currently have a higher yield! Can you say "Carry Trade in Reverse"?
What does this mean? It means that people are willing to "park their money" with the government at a rate far less than price inflation and in fact for all intents and purposes ZERO because they do not believe that they will get it back from anyone else.
Now if you remember, I and others have commented that once we reach a "zero interest rate" policy The Fed is out of bullets in terms of policy actions. Well, we're at zero kids. 0.4% effective interest rate is for all intents and purposes zero.
No, the FFT doesn't matter - what matters is real interest rates, and for short-term cash it is now zero, as is confidence in anyone except The Federal Government.
Congratulations Ben; you've failed in restoring confidence because you have failed to force banking and other institutions to cut out the horsecrap and instead have continued to enable it. As a consequence irrespective of your meddling the market no longer trusts ANYBODY with their money EXCEPT for the folks with 6,000 nuclear weapons as backing - that would be the US Federal Government.
This is why I have continued to rant and rave about transparency - given our banking system and how it is capitalized, without transparency and trust the system and our economy will collapse.
I know, I know, the market was up big today with Options Expiration. Its all ok, and you should buy bank stocks. All of them. So says Dick Bove, and lots of people are today, with all of them up 5%, 10% or more.
You did not hear the truth about the Treasury complex on CNBC today, not even from Rick Santelli. Why not?
The Truth: The people with a working brain in their head know what's coming and that it is going to be extraordinarily ugly. They are prepared for it and have moved their billions of dollars into cash where they know they will get it back - the short end of the US Treasury Curve.
The Truth: In the last recession at the depths of it in the summer of 2003, just before the market turned, the lowest the 13-week bill yield reached was 0.774%. We are now trading at 30-50% below that level.
The Truth: People who know this for a fact including CNBC won't tell YOU because it is critically important to them that they get through the door before the fire starts burning the curtains, as the door is only so wide and there are a lot of people in the room. If you don't get your butt through the door your financial assets will be consumed in what's coming.
The Truth: CNBC should be SHUT DOWN as NOTHING MORE THAN A CONDUIT FOR INSIDER TRADING AND ILLEGAL MARKET MANIPULATION. Their "commentators" from various funds who are almost certainly trying to unload shares they are stuck with into YOUR HANDS should be locked up and/or sued into oblivion AS THEY ARE WELL AWARE OF WHAT IS GOING ON AND ARE USING CNBC AS NOTHING MORE THAN A WAY TO SCREW YOU WHILE THEY PROFIT. THERE IS NO BALANCE AND NO DISCLOSURE BY THESE COMMENTATORS OF THEIR POSITIONS, INCLUDING PIMCO, BOVE AND OTHERS. CRAMER IS THE WORST OF ALL OF THEM, telling people to leave money at Bear Stearns (if you believe that was about "deposits" when Bear isn't a Deposit Bank, you're dumber than a rock) and alternating between a "Caution" sign when we're down 300 and then "BUY EVERYTHING" when we're up 400 - only to see you lose 3/4 of the gains the next day! We do not have "financial TV" in this country. We have blatant market manipulation in the guise of "news" on a daily basis, 12 hours a day, AND THE SEC DOESN'T GIVE A DAMN.
The Truth: The "powers that be" (including the media, The Fed and The Banks) are absolutely beside themselves with the possibility that stocks, especially bank stocks, might decline in value. For "why" see the top of this blog entry. If you fall for this you will be wiped out. DICK BOVE PUT A MARKET PERFORM RATING ON BEAR STEARNS STOCK ON MARCH 11th - JUST THREE DAYS BEFORE IT BLEW UP AND (THE FOLLOWING MONDAY) WENT TO $2! You have NOT and you WILL NOT see CNBC or DICK BOVE take responsibility for the wipe out of SEVERAL BILLION DOLLARS IN SHAREHOLDER WEALTH - when he could have preserved YOUR MONEY if he had told you the truth about our financial institutions and that YOU SHOULD SELL ALL OF THEM AS THERE ARE AND WILL BE MORE EXPLOSIONS, ALTHOUGH NEITHER HE OR I HAVE NO WAY TO KNOW WHICH ONES AND NEITHER DO ANY OF THE ANALYSTS SINCE WE CAN'T SEE HONEST BALANCE SHEETS!
The Truth: All you hear on CNBC is "positioning for an early-cycle rebound", while in fact some $5 trillion in "value" expressed in the price of houses is permanently GONE, and that is assuming we use Freedie's and Fannie's estimates of home price decreases. If we use MY estimates the number is closer to $10 TRILLION dollars. To put this in perspective our Gross Domestic Product (GDP) is about $14 trillion annually. This will have a permanent effect on the standard of living of over 100 million households in the United States and thus our economy. It is unavoidable and as a consequence MUST have a similar impact on the earnings power of United States corporations when 70% of our economy is consumption by people just like you.
The Truth: At minimum your house is going to fall in value by 15% from 2005 numbers. In coastal and other high value areas the loss will be at least 50% from 2005 values, and may be more. It is absolutely not a time to buy real estate unless you can literally get it for at least 30% off the asking price - period. Why should you take the risk of being early? Let someone else have that risk - don't be a sucker!
The Truth: You must raise cash. NOW. Not commodities, not gold, not "solid stocks", not anything of the kind. CASH, defined as actual CASH or Short-Term United States Treasuries. Again - up to $100,000 in FDIC insured banks with the rest in short-term US Treasuries - either directly (Treasury Direct) or via a Treasury Money Market fund such as VMPXX (Vanguard).
If you don't, and what The Bond Market is saying is coming happens, don't say you weren't warned - because you were - by the only voice that matters - the market.
I am unlikely to warn you again about this in this sort of detail; I have been calling for exactly this sort of event in print since last April and now we have irrefutable proof in the form of the bond market telling you that if you don't pay attention you are going to get slaughtered in what is to come.
I may be wrong and so may the bond market.
I wouldn't take that bet if I were you.
Oh really? Not so fast!
"Congress is starting to probe the Federal Reserve-backed agreement to sell Bear Stearns to J.P. Morgan Chase, examining the deal to see if it complied with regulations and trying to determine taxpayer exposure, The Wall Street Journal reported Thursday."Gee, Congress giveth (The Federal Reserve Act) and Congress can taketh away.
Duh.
And not everyone thinks this will pass muster either:
"The Federal Reserve bypassed its own emergency-lending policies to let securities firms borrow at the same interest rate as commercial banks as the central bank sought last weekend to stave off a financial-market meltdown."Hmmmm.....
Now this will be interesting. Congress should do its damn job, but whether it will is another matter. Nonetheless, the politics of this are certain to get interesting, especially given the historical feckless lack of regulation coming from The Fed and elsewhere.
At minimum the likely outcome of this little mess is forcing Investment Banks under bank-style regulation by The Fed and/or OCC. That would be amusing, as it would shut down the "infinite leverage" games and force these IBs into the 7:1ish maximum gearing ratios that exist for commercial banks.
Now if we can just get those off-balance-sheet games to stop at the same time, we might actually accomplish something here and come out of this stronger as a nation and market.
Oh, the Conference Board reported leading economic indicators, with the 5th straight decline.
While we're on the subject of distortions and lies, many people say "The Fed doesn't care about the equity markets", or alternatively, "The Fed is trying to prop equity markets."
The truth is a bit more obscure and obtuse than that; one must look into how bank capital requirements are determined in order to get to the bottom of it.
Here's reality - Bank Tier Capital - the measure of whether you are "well capitalized" or "dead" as a bank - includes common stock equity.
Specifically, Tier 1 Capital, the most important type for a bank, includes what is known as "Shareholder Equity" as well as retained earnings.
So consider this folks - you can sink a bank if you sink its stock price.
How? Simple - "Shareholder Equity" is not so simple as "stock price." However, the stock price has a major impact on it, because precipitous declines hit both intangibles (good will) and financing costs (in the other direction, raising them) which shrink Shareholder Equity from both ends of the candle at once.
Now do you get it? The Fed and the rest of the fools on The Street want to pump bank stock prices because if they sink sufficiently the bank can actually be declared insolvent as a consequence!
This also, however, means that our banking system is in fact 100% based on confidence and it is the clearest indication you will ever find on why we must have transparency in our financial markets, including an absolute and irrevocable ban on off-balance-sheet and other hidden crap, and forced mark-to-market.
There are many people who have recoiled in horror at the idea that everything should be marked to the market. Well, I think it should be. I think it should be precisely because the only way a bank survives is if there is investor confidence in its position in the marketplace and you cannot obtain and keep that confidence unless you have full transparency.
If I can't read a balance sheet and know that the figures there present an accurate and complete picture of that firm's exposure, good and bad, then I have no reason to trust that presentation of the firm's financial condition and as a consequence I have no reason to buy and hold that firm's stock.
It is absolutely essential that everyone - domestic and foreign - have this trust in our financial system.
Without it we run the risk of dislocations whenever that confidence is shaken, and those "shakes" can come absolutely without warning. The "run" on Bear Stearns was able to be initiated and sustained precisely because of the opacity of Bear's balance sheet - but for that anyone could read their balance sheet and KNOW whether or not there was real risk to investors and customers or not.
We are now living in the dislocation. And despite the claims that "its all ok" and "we're at a bottom" (the calls of which are nauseating) the bond market says otherwise - check this out:
That is the IRX, or the interest rate on the 13 week T-bill in the open market, measured in 10s of basis points.
In other words the current trading price is 0.4% annual yield on the 13-week T-Bill, a level lower than that seen at any time in the last 50 years and in fact you can earn a positive carry borrowing those and buying JGBs - short term Japan bonds - which currently have a higher yield! Can you say "Carry Trade in Reverse"?
What does this mean? It means that people are willing to "park their money" with the government at a rate far less than price inflation and in fact for all intents and purposes ZERO because they do not believe that they will get it back from anyone else.
Now if you remember, I and others have commented that once we reach a "zero interest rate" policy The Fed is out of bullets in terms of policy actions. Well, we're at zero kids. 0.4% effective interest rate is for all intents and purposes zero.
No, the FFT doesn't matter - what matters is real interest rates, and for short-term cash it is now zero, as is confidence in anyone except The Federal Government.
Congratulations Ben; you've failed in restoring confidence because you have failed to force banking and other institutions to cut out the horsecrap and instead have continued to enable it. As a consequence irrespective of your meddling the market no longer trusts ANYBODY with their money EXCEPT for the folks with 6,000 nuclear weapons as backing - that would be the US Federal Government.
This is why I have continued to rant and rave about transparency - given our banking system and how it is capitalized, without transparency and trust the system and our economy will collapse.
I know, I know, the market was up big today with Options Expiration. Its all ok, and you should buy bank stocks. All of them. So says Dick Bove, and lots of people are today, with all of them up 5%, 10% or more.
You did not hear the truth about the Treasury complex on CNBC today, not even from Rick Santelli. Why not?
The Truth: The people with a working brain in their head know what's coming and that it is going to be extraordinarily ugly. They are prepared for it and have moved their billions of dollars into cash where they know they will get it back - the short end of the US Treasury Curve.
The Truth: In the last recession at the depths of it in the summer of 2003, just before the market turned, the lowest the 13-week bill yield reached was 0.774%. We are now trading at 30-50% below that level.
The Truth: People who know this for a fact including CNBC won't tell YOU because it is critically important to them that they get through the door before the fire starts burning the curtains, as the door is only so wide and there are a lot of people in the room. If you don't get your butt through the door your financial assets will be consumed in what's coming.
The Truth: CNBC should be SHUT DOWN as NOTHING MORE THAN A CONDUIT FOR INSIDER TRADING AND ILLEGAL MARKET MANIPULATION. Their "commentators" from various funds who are almost certainly trying to unload shares they are stuck with into YOUR HANDS should be locked up and/or sued into oblivion AS THEY ARE WELL AWARE OF WHAT IS GOING ON AND ARE USING CNBC AS NOTHING MORE THAN A WAY TO SCREW YOU WHILE THEY PROFIT. THERE IS NO BALANCE AND NO DISCLOSURE BY THESE COMMENTATORS OF THEIR POSITIONS, INCLUDING PIMCO, BOVE AND OTHERS. CRAMER IS THE WORST OF ALL OF THEM, telling people to leave money at Bear Stearns (if you believe that was about "deposits" when Bear isn't a Deposit Bank, you're dumber than a rock) and alternating between a "Caution" sign when we're down 300 and then "BUY EVERYTHING" when we're up 400 - only to see you lose 3/4 of the gains the next day! We do not have "financial TV" in this country. We have blatant market manipulation in the guise of "news" on a daily basis, 12 hours a day, AND THE SEC DOESN'T GIVE A DAMN.
The Truth: The "powers that be" (including the media, The Fed and The Banks) are absolutely beside themselves with the possibility that stocks, especially bank stocks, might decline in value. For "why" see the top of this blog entry. If you fall for this you will be wiped out. DICK BOVE PUT A MARKET PERFORM RATING ON BEAR STEARNS STOCK ON MARCH 11th - JUST THREE DAYS BEFORE IT BLEW UP AND (THE FOLLOWING MONDAY) WENT TO $2! You have NOT and you WILL NOT see CNBC or DICK BOVE take responsibility for the wipe out of SEVERAL BILLION DOLLARS IN SHAREHOLDER WEALTH - when he could have preserved YOUR MONEY if he had told you the truth about our financial institutions and that YOU SHOULD SELL ALL OF THEM AS THERE ARE AND WILL BE MORE EXPLOSIONS, ALTHOUGH NEITHER HE OR I HAVE NO WAY TO KNOW WHICH ONES AND NEITHER DO ANY OF THE ANALYSTS SINCE WE CAN'T SEE HONEST BALANCE SHEETS!
The Truth: All you hear on CNBC is "positioning for an early-cycle rebound", while in fact some $5 trillion in "value" expressed in the price of houses is permanently GONE, and that is assuming we use Freedie's and Fannie's estimates of home price decreases. If we use MY estimates the number is closer to $10 TRILLION dollars. To put this in perspective our Gross Domestic Product (GDP) is about $14 trillion annually. This will have a permanent effect on the standard of living of over 100 million households in the United States and thus our economy. It is unavoidable and as a consequence MUST have a similar impact on the earnings power of United States corporations when 70% of our economy is consumption by people just like you.
The Truth: At minimum your house is going to fall in value by 15% from 2005 numbers. In coastal and other high value areas the loss will be at least 50% from 2005 values, and may be more. It is absolutely not a time to buy real estate unless you can literally get it for at least 30% off the asking price - period. Why should you take the risk of being early? Let someone else have that risk - don't be a sucker!
The Truth: You must raise cash. NOW. Not commodities, not gold, not "solid stocks", not anything of the kind. CASH, defined as actual CASH or Short-Term United States Treasuries. Again - up to $100,000 in FDIC insured banks with the rest in short-term US Treasuries - either directly (Treasury Direct) or via a Treasury Money Market fund such as VMPXX (Vanguard).
If you don't, and what The Bond Market is saying is coming happens, don't say you weren't warned - because you were - by the only voice that matters - the market.
I am unlikely to warn you again about this in this sort of detail; I have been calling for exactly this sort of event in print since last April and now we have irrefutable proof in the form of the bond market telling you that if you don't pay attention you are going to get slaughtered in what is to come.
I may be wrong and so may the bond market.
I wouldn't take that bet if I were you.
posted by Genesis | 8:42 AM
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