Feed Me Seymour!
Has the economy turned a corner? One big enough to justify the gross overuse of the term greens shoots? Doubtful. And despite pleas from the cliche-swamped masses, media continues to bombard us with this overly-optimistic (and early) catch-phrase.
Exhibit A: Just today Forbes published an article called The Street Eases, But Green Shoots Abound. Really? They abound? Call me skeptical.
I think this post at ZeroHedge provides a more realistic picture. It argues that those Green Shoots are more like Venus Fly Traps. I’ve expanded the metaphor further, to a nastier plant: Audrey II, the man-eating crooner from Little Shop of Horrors.
Why so skeptical?
Because there is only one thing propping this market up – government intervention. And the scale of it is awe-inspiring. Bailouts have been arranged (directly or otherwise) for banks, commercial real estate, homebuilders, automakers, and insurers. What would happen if the Gov withdrew their support? Zerohedge sums it up well:
The problem is that despite what Bernanke is saying right now, that he doesn’t view government stakes in banks as long-term propositions, there is really no way to extricate the government without suffering the kinds of economic tremors on par with the Lehman collapse.
Roubini: We Can’t Subsidize the Banks Forever
A new WSJ piece by Nouriel Roubini and Matthew Richardson shines more light on the issue. It’s an absolute must-read. Among other things, they out-gloom the IMF’s recently-doubled loss estimates with their own:
the International Monetary Fund has just released a study of estimated losses on U.S. loans and securities. It was very bleak — $2.7 trillion, double the estimated losses of six months ago. Our estimates at RGE Monitor are even higher, at $3.6 trillion, implying that the financial system is currently near insolvency in the aggregate.
But Roubini wasn’t featured by mainstream media outlets today, despite his solid track-record. CNBC and others were laser-focused on pumping Ben Appleseed’s message that “All will be better in Q4 (unless something bad happens), and gosh, look at all those Pretty Green Shoots!” Bernanke’s track record should give pause to anyone tempted to listen.
Messrs Roubini and Richardson also highlight the fallacy of these so-called Stress Tests:
For example, the first quarter’s unemployment rate of 8.1% is higher than the regulators’ “worst case” scenario of 7.9% for this same period. At the rate of job losses in the U.S. today, we will surpass a 10.3% unemployment rate this year — the stress test’s worst possible scenario for 2010.
Why is the Fed so wrong, so often?
By now it should be obvious that we can’t trust predictions made by the Fed or Government. It’s clear that Greenspan and his Reserve blazed the trail to bubbledom, and that Bernanke is following along wholeheartedly. But why? I see 3 possibilities:
But their intentions really don’t really matter, for now. We should focus on their actions, which only prolong and exacerbate the inevitable pain. Many amateur investors, who tend to buy high and sell low, are destroying their portfolios because of the extreme volatility we’ve experienced. This volatility is largely due to government intervention, and possible manipulation via proxies in equity markets.
What’s really sprouting up? Moral hazards, like weeds.
We’re creating a new financial system, one more dependent on the government than ever. Banks and others can start taking ridiculous risks again, assured that the ol’ reliable taxpayer will bail them out if anything goes wrong. Weaning the market off the taxpayer-teet will be extremely difficult.
My only advice is to stay flexible, and prepare yourself for various outcomes: inflation, deflation, stagflation. It all depends on the whims of the Federal Reserve and Government, and the politicians that (kind of) watch over them.
I see bigtime-inflation as the most likely outcome, by far. But who knows? My beliefs regarding inflation are largely based on the writings of Bill Fleckenstein, who is fond of saying, “In a Social Democracy with a Fiat Currency, All Roads Lead to Inflation.” His message has become more emphatic as the Fed has gotten more radical and increased quantitative easing. I’ve read the deflation arguments, and they don’t make sense to me, other than in the near-term. How to prepare for possibly nasty inflation? Precious metals and cheap stocks with good cashflow, among others. I’ll go into this more in upcoming posts. This one has already dragged on too long.
Disclaimer: None of this information is investment advice. I am not a financial advisor. Always consult with a Financial Professional when making investment decisions.
Geithner’s new plan to save the banks is a sham. It would convert the taxpayer’s stock in banks from preferred to common equity. This would do two things:
1. Screw over taxpayers by converting their safer and dividend-paying preferred stock into common equity. Less return and more risk for us. Banks have to pay out less dividends.
2. Artificially make banks balance sheets look healthier, because of the way preferred and common stock are treated on balance sheets.
More financial wizardly isn’t what we need right now, as Henry Blodget notes. And this deal screws the taxpayers even worse than Geither and the boys already have. If you’re thinking, “hey, wait! Geithner’s only been in office for 100 days”, keep reading. Geithner has been a key player in orchestrating these bailouts from the get-go.
Way too close to the banks
Dealbook’s piece last week blew the lid off Geithner’s extremely close ties to the financial industry. It also exposed some of his more embarrassing and ridiculous proposals, quotes, and philosophies. Here are some of quotes:
the government has to take risk, and we are going to be doing things which ultimately — in order to get the credit flowing again — are going to benefit the institutions that are at the core of the problem
That statement is unforgivable. He is simply not asking enough sacrifice from banks, and making taxpayers shoulder the entire burden. A lot more haircuts need to happen (or be wiped out if necessary): common equity, bondholders, and overpaid executives.
Forget the taxpayers, guarantee everything
As President of the NY Federal Reserve, Geithner “proposed asking Congress to give the president broad power to guarantee all the debt in the banking system“, according to the Dealbook article. The proposal was largely dismissed at the time as being too risky for taxpayers. But since then the taxpayer has guaranteed around $9 trillion risky assets. Geithner, either as NY Fed Pres, or Treasury Secretary, was instrumental in all of this. From the start, he has been one of the architechts of this transfer of wealth from taxpayers to banks. He is very much a part of the problem.
Time to seek employment elsewhere, Tim Geithner. William K. Black or Simon Johnson will make a fine replacement for you. If Lloyd Blankfein gets tapped to replace him, I may consider taking up residence in Antartica.
Pic by Drew Friedman
If you haven’t heard about White House Chief of Staff’ Rahm Emanuel’s proposed Mandatory Civil Service Plan, watch the video below. Some of the comments irritating. Especially when Emanuel says, “citizenship is not an entitlement program”. Wait, what? Someone should remind Mr. Emanuel that we’re plenty of taxes and his salary. American citizens already do plenty by funding bank bailouts and many other asinine government programs.
The last thing we need is more inefficient, government-managed “mandatory service programs” to drive taxes even higher. A program like this wouldn’t create a big pool of “free labor”, as Emanuel imagines. It will jam a cog in the workings of the free market. Nothing the government does is efficient. Anyway, on to the vid:
Even if you agree with the goals of this program, what happens when another George W. comes into power? The agenda could shift drmatically. Civil service might mean getting sent out to patrol the border, serve at a Church, or even fight overseas. A country with pre-approved access to a large pool of young recruits seems more likely to go to war. This may be a bit extreme, but we should never underestimate the destructive capability of legislation, no matter how well-intentioned it is.
I know I’ve been extremely critical of Obama lately. But what can I say? He deserves it for surrounding himself with guys like Emanuel, Summers, and Geithner. I voted for and donated to Obama. And I feel ripped off. I will welcome him back with open arms if, and when he starts rethinking his appointments. But when his chief of staff says, “citizenship is not an entitlement program”, I flip out a little bit.
