Insanity In Our Capital Markets
There is a certain brand of insanity that is on display from time to time in the markets, and today is one of them.
Sunday night Bear Stearns was literally forced by The Fed and Treasury to accede to a buyout offer that was basically a zero ($2/share is, for all intents and purposes, nothing.)
Yesterday afternoon people started buying ahead of an allegedly-priced-in 100 bips FFR cut today. That is, they started bidding stocks ahead of something that allegedly was already represented in market prices!
This is not unusual, by the way - it happens all the time, and is always good for chuckles - after all, why only price something in once when you can lose the same money three, four, five or even ten times over?
PPI came in moderately hot - given that the CPI print said there was no price inflation at all, one has to wonder how you reconcile these two numbers. Answer: you don't.
The pumpers are out once again on CNBC saying that "valuations are reasonable." Really? They are? Perhaps you can tell me how earnings estimates are "reasonable" when on the S&P 500 current earnings estimates are actually above last year's, when we are now in a recession and weren't last year. Isn't the definition of "recession" a contraction in economic activity?
This morning's open was an all-out buying panic, with internals being monstrous - 20:1 up to down volume on the NYSE! Short covering? Probably to a large degree, but it doesn't matter for now, in that people believe "The Fed will save us."
Hint: Look at their balance sheet and the commitments they have made against it. The Fed is running out of bullets in their gun and what's worse, Treasury can't backstop them without going to Congress as they're up against their mandated debt ceiling!
To add even more foolishness there is not a hint of foreign interest in keeping this charade going. The last T-bill auction was horrifyingly bad in terms of foreign interest, as I've catalogued here. This is an all-on buyer's strike as foreign governments and interests have (correctly) come to the conclusion that our government and Fed has zero interest in discovering who has done imprudent things and forcing them to eat their bad loans, but rather is solely interested in seeing if they can engineer another bailout or six so they can keep up the deception.
Then we have CNBC. One guy with a clue talking about The Fed running out of balance sheet, and a whole host of pumpers claiming that "The Fed has a printing press."
Well yes they do. But as I have noted before, there are severe consequences should they choose to turn it on, and those consequences are entirely outside of their control, unless our government is prepared to literally force foreigners to buy our Ts at nuclear-missile-point.
Since I rate the probability of that happening as zero, I remain unconvinced by any claim that "The Fed has an unlimited balance sheet and can do whatever it wants."
Sir Isaac's laws are indeed laws, and the Third Law is particularly appropriate here.
Ben Bernanke is many things, but dumb isn't one of them. Naive, perhaps, but not stupid, and he has exactly one desire here - to maintain his "air of invincibility".
Oh, and before you go out and say "oh its all ok, The Dow was up nearly 300 points within an hour of the open", you might want to watch this..... yes, this is in America:
Betcha you don't see that on CNBC. While the BBC is often considered "far left" by some (and not undeservably either) facts are facts eh?
So let's see - pumping the housing bubble and then blowing up huge parts of our society - literally - so some guys can make $200 million or more a year is just fine, right?
Now look - I'm all for capitalism. After all, I ran a company for over a decade and made my money by being a capitalist.
But to make money in the way some of these people did was unethical at best and illegal at worst. And with our economy being 70% dependant on consumer spending, with S&P earnings estimates above last year's while any economist worth a nickel in salary agreeing we're in a recession now, the fact remains that earnings estimates are far too rosy for the reality going forward - and so are stock prices.
If you adjust back for that you find that the S&P is currently trading at well north of 20x earnings, which remains about 25% overvalued on a historical basis.
In addition anyone who argues that "there's lots of liquidity" has a little problem explaining volume. As in "where'd it go?" The answer is simple -all that "ample money" that was flying around last summer is now gone. It has been lost to the idiocy in the marketplace, and is no longer around - its not "on the sidelines", it has evaporated as the electrons representing it have extinguished in the implosion of our housing market and the credit mess that enabled it.
While the market cheered Bear's "bailout" and today traders are actually buying Bear's stock at over $7.50 a share, betting in effect that the price is too low by nearly three hundred percent, the fact remains that Bear is unlikely to be the last implosion in that sector.
Now some reality for Ben and company, not that I expect he'll listen.
There is exactly one way out of this mess.
Housing prices must come down to the point that an average person can afford an average housing using a 30 year fixed mortgage, 20% down, and a 36% DTI.
Period.
NOBODY - and I do mean nobody - is talking about this in the media. NOBODY is telling us that we must start being responsible. NOBODY is talking about anything but giving more booze to the drunk, yet there is a major trap-door ahead for the United States on the path we are following with "let's have more booze", in that once an effective zero interest rate is reached nothing further that The Fed does matters as there is no more ability to earn via the carry!
You need only look at JAPAN to see what ZIRP gets you. Zombified banks who are reduced to "loaning" money out that immediately leaves the country seeking a positive return somewhere else! That's all they have left, and 20 years later, they have failed to restart their financial and industrial engines of growth.
Investors and institutions have not been saved. They have in fact been screwed raw, with the worst of the screwing reserved for people dependant on fixed incomes - savers, those on Social Security and retirees in general who cannot afford to speculate in the stock and commodities markets with their money.
Even if you accept the "official" price inflation figures (I don't) this enormous portion of our population is getting repeatedly screwed by what amounts to our version of ZIRP.
There would be an argument for liquidity injections if there was a liquidity problem. But there isn't. There is a solvency and trust problem which can't be fixed by liquidity, as I have repeatedly noted.
Ben, the administration (including Paulson) and Congress (including the Demoncrats) are all conspiring to screw every senior citizen and prudent person in the nation, while rewarding those who speculated on ever-rising tulip prices, er, home prices, and now are losing their shirts.
Up and down the line, from "investment banks" to house flippers to mortgage executives to "hot money" that bought all those supposed-AAA bonds, The Fed and Congress' only concen is insuring that their flow of campaign contributions is maintained - its perfectly ok with them if Granny is literally reduced to eating catfood as her savings rate falls to a literal zero and her price-adjusted return is NEGATIVE ten percent a year!
Just remember folks - eventually, you will be Granny, and Japan's version of this little Hell has lasted 20 years and isn't over.
Oh, and while you're at it, don't forget that Japan had a very high personal savings rate when they started.
Our nation, and our people, are in debt instead, which means that we're going to get it far worse than they did in terms of real economic impact.
FOMC Cut the FFT 75 bips, but said quite a few things that ought to wake people up rather "smartly":
That's a very strong statement both on inflation AND risk to the downside on growth, and the actual projection on resource utilization is an outright recession call!
Well, no kidding.
Oh, they had two dissents too - Fischer and Plosser wanted a smaller cut in the FFT. Hmmmm.....
Equities? They liked it, finishing up over 400 on the Dow, with no small part of it, I suspect, being Pimco and others ranting that The Fed will buy Mortgage securities.
In a word - bull! That is explicitly ILLEGAL folks. Against the law. Barred by The Federal Reserve Act. For that to happen there would have to be a bill introduced into Congress, pass both House and Senate, and be signed by The President.
Until that happens just tell people talking about that to shut the hell up because they're lying!
Nonetheless, I suspect half of the pump today was on exactly that sort of nonsense out of Pimco and others. Yet not one of the crooners on CNBC pointed out that this is explicitly barred by law at the present time.
Nobody read the "money sentence" in the release - once again:
The Short Bus rides again, and if you buy into it, you deserve exactly what you get.
Short-term this bounce may have some legs. Intermediate and longer-term we are less than half way through the average equity price loss in a recession.
Invest accordingly.
Sunday night Bear Stearns was literally forced by The Fed and Treasury to accede to a buyout offer that was basically a zero ($2/share is, for all intents and purposes, nothing.)
Yesterday afternoon people started buying ahead of an allegedly-priced-in 100 bips FFR cut today. That is, they started bidding stocks ahead of something that allegedly was already represented in market prices!
This is not unusual, by the way - it happens all the time, and is always good for chuckles - after all, why only price something in once when you can lose the same money three, four, five or even ten times over?
PPI came in moderately hot - given that the CPI print said there was no price inflation at all, one has to wonder how you reconcile these two numbers. Answer: you don't.
The pumpers are out once again on CNBC saying that "valuations are reasonable." Really? They are? Perhaps you can tell me how earnings estimates are "reasonable" when on the S&P 500 current earnings estimates are actually above last year's, when we are now in a recession and weren't last year. Isn't the definition of "recession" a contraction in economic activity?
This morning's open was an all-out buying panic, with internals being monstrous - 20:1 up to down volume on the NYSE! Short covering? Probably to a large degree, but it doesn't matter for now, in that people believe "The Fed will save us."
Hint: Look at their balance sheet and the commitments they have made against it. The Fed is running out of bullets in their gun and what's worse, Treasury can't backstop them without going to Congress as they're up against their mandated debt ceiling!
To add even more foolishness there is not a hint of foreign interest in keeping this charade going. The last T-bill auction was horrifyingly bad in terms of foreign interest, as I've catalogued here. This is an all-on buyer's strike as foreign governments and interests have (correctly) come to the conclusion that our government and Fed has zero interest in discovering who has done imprudent things and forcing them to eat their bad loans, but rather is solely interested in seeing if they can engineer another bailout or six so they can keep up the deception.
Then we have CNBC. One guy with a clue talking about The Fed running out of balance sheet, and a whole host of pumpers claiming that "The Fed has a printing press."
Well yes they do. But as I have noted before, there are severe consequences should they choose to turn it on, and those consequences are entirely outside of their control, unless our government is prepared to literally force foreigners to buy our Ts at nuclear-missile-point.
Since I rate the probability of that happening as zero, I remain unconvinced by any claim that "The Fed has an unlimited balance sheet and can do whatever it wants."
Sir Isaac's laws are indeed laws, and the Third Law is particularly appropriate here.
Ben Bernanke is many things, but dumb isn't one of them. Naive, perhaps, but not stupid, and he has exactly one desire here - to maintain his "air of invincibility".
Oh, and before you go out and say "oh its all ok, The Dow was up nearly 300 points within an hour of the open", you might want to watch this..... yes, this is in America:
Betcha you don't see that on CNBC. While the BBC is often considered "far left" by some (and not undeservably either) facts are facts eh?
So let's see - pumping the housing bubble and then blowing up huge parts of our society - literally - so some guys can make $200 million or more a year is just fine, right?
Now look - I'm all for capitalism. After all, I ran a company for over a decade and made my money by being a capitalist.
But to make money in the way some of these people did was unethical at best and illegal at worst. And with our economy being 70% dependant on consumer spending, with S&P earnings estimates above last year's while any economist worth a nickel in salary agreeing we're in a recession now, the fact remains that earnings estimates are far too rosy for the reality going forward - and so are stock prices.
If you adjust back for that you find that the S&P is currently trading at well north of 20x earnings, which remains about 25% overvalued on a historical basis.
In addition anyone who argues that "there's lots of liquidity" has a little problem explaining volume. As in "where'd it go?" The answer is simple -all that "ample money" that was flying around last summer is now gone. It has been lost to the idiocy in the marketplace, and is no longer around - its not "on the sidelines", it has evaporated as the electrons representing it have extinguished in the implosion of our housing market and the credit mess that enabled it.
While the market cheered Bear's "bailout" and today traders are actually buying Bear's stock at over $7.50 a share, betting in effect that the price is too low by nearly three hundred percent, the fact remains that Bear is unlikely to be the last implosion in that sector.
Now some reality for Ben and company, not that I expect he'll listen.
There is exactly one way out of this mess.
Housing prices must come down to the point that an average person can afford an average housing using a 30 year fixed mortgage, 20% down, and a 36% DTI.
Period.
NOBODY - and I do mean nobody - is talking about this in the media. NOBODY is telling us that we must start being responsible. NOBODY is talking about anything but giving more booze to the drunk, yet there is a major trap-door ahead for the United States on the path we are following with "let's have more booze", in that once an effective zero interest rate is reached nothing further that The Fed does matters as there is no more ability to earn via the carry!
You need only look at JAPAN to see what ZIRP gets you. Zombified banks who are reduced to "loaning" money out that immediately leaves the country seeking a positive return somewhere else! That's all they have left, and 20 years later, they have failed to restart their financial and industrial engines of growth.
Investors and institutions have not been saved. They have in fact been screwed raw, with the worst of the screwing reserved for people dependant on fixed incomes - savers, those on Social Security and retirees in general who cannot afford to speculate in the stock and commodities markets with their money.
Even if you accept the "official" price inflation figures (I don't) this enormous portion of our population is getting repeatedly screwed by what amounts to our version of ZIRP.
There would be an argument for liquidity injections if there was a liquidity problem. But there isn't. There is a solvency and trust problem which can't be fixed by liquidity, as I have repeatedly noted.
Ben, the administration (including Paulson) and Congress (including the Demoncrats) are all conspiring to screw every senior citizen and prudent person in the nation, while rewarding those who speculated on ever-rising tulip prices, er, home prices, and now are losing their shirts.
Up and down the line, from "investment banks" to house flippers to mortgage executives to "hot money" that bought all those supposed-AAA bonds, The Fed and Congress' only concen is insuring that their flow of campaign contributions is maintained - its perfectly ok with them if Granny is literally reduced to eating catfood as her savings rate falls to a literal zero and her price-adjusted return is NEGATIVE ten percent a year!
Just remember folks - eventually, you will be Granny, and Japan's version of this little Hell has lasted 20 years and isn't over.
Oh, and while you're at it, don't forget that Japan had a very high personal savings rate when they started.
Our nation, and our people, are in debt instead, which means that we're going to get it far worse than they did in terms of real economic impact.
FOMC Cut the FFT 75 bips, but said quite a few things that ought to wake people up rather "smartly":
"Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.
Inflation has been elevated, and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully.
Today's policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability."
That's a very strong statement both on inflation AND risk to the downside on growth, and the actual projection on resource utilization is an outright recession call!
Well, no kidding.
Oh, they had two dissents too - Fischer and Plosser wanted a smaller cut in the FFT. Hmmmm.....
Equities? They liked it, finishing up over 400 on the Dow, with no small part of it, I suspect, being Pimco and others ranting that The Fed will buy Mortgage securities.
In a word - bull! That is explicitly ILLEGAL folks. Against the law. Barred by The Federal Reserve Act. For that to happen there would have to be a bill introduced into Congress, pass both House and Senate, and be signed by The President.
Until that happens just tell people talking about that to shut the hell up because they're lying!
Nonetheless, I suspect half of the pump today was on exactly that sort of nonsense out of Pimco and others. Yet not one of the crooners on CNBC pointed out that this is explicitly barred by law at the present time.
Nobody read the "money sentence" in the release - once again:
"The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization."
TRANSLATION FROM FEDSPEAK TO ENGLISH: The economy is in a recession, and as a consequence of demand destruction commensurate with a decrease in economic activity pressure on resources such as factory capacity and labor will decrease, as will energy and commodity prices as there will be fewer dollars spent on them due to the slowing economy.
The Short Bus rides again, and if you buy into it, you deserve exactly what you get.
Short-term this bounce may have some legs. Intermediate and longer-term we are less than half way through the average equity price loss in a recession.
Invest accordingly.
posted by Genesis | 8:35 AM
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