Archive for May 4th, 2010
Posted by Karl Denninger
Of course not.
In 1930 there were all sorts of statements about how it was “all under control” and “prosperity was returning.” Some examples of the 1929 and 1930 idiocy:
“Financial storm definitely passed.” – Bernard Baruch, cablegram to Winston Churchill, November 15, 1929
“I see nothing in the present situation that is either menacing or warrants pessimism… I have every confidence that there will be a revival of activity in the spring, and that during this coming year the country will make steady progress.” – Andrew W. Mellon, U.S. Secretary of the Treasury December 31, 1929
“I am convinced that through these measures we have reestablished confidence.” – Herbert Hoover, December 1929
“[1930 will be] a splendid employment year.” – U.S. Dept. of Labor, New Year’s Forecast, December 1929
“For the immediate future, at least, the outlook (stocks) is bright.” – Irving Fisher, Ph.D. in Economics, in early 1930
“…there are indications that the severest phase of the recession is over…” – Harvard Economic Society (HES) Jan 18, 1930
“There is nothing in the situation to be disturbed about.” – Secretary of the Treasury Andrew Mellon, Feb 1930
“The spring of 1930 marks the end of a period of grave concern…American business is steadily coming back to a normal level of prosperity.” – Julius Barnes, head of Hoover’s National Business Survey Conference, Mar 16, 1930
“… the outlook continues favorable…” – HES Mar 29, 1930
“… the outlook is favorable…” – HES Apr 19, 1930
“While the crash only took place six months ago, I am convinced we have now passed through the worst — and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us.” – Herbert Hoover, President of the United States, May 1, 1930
“…by May or June the spring recovery forecast in our letters of last December and November should clearly be apparent…” – HES May 17, 1930
“Gentleman, you have come sixty days too late. The depression is over.” – Herbert Hoover, responding to a delegation requesting a public works program to help speed the recovery, June 1930
“… irregular and conflicting movements of business should soon give way to a sustained recovery…” – HES June 28, 1930
“… the present depression has about spent its force…” – HES, Aug 30, 1930
“We are now near the end of the declining phase of the depression.” – HES Nov 15, 1930
Then there was this little “event” in 1931.
A bank in Austria. A big one, in fact.
It swallowed a debt-ridden rival during the depths of the original crash (sound familiar? Greece gets IMF money but there’s no realistic way they can pay anyway) and failed in the spring of 1931.
The panic spread to Germany, and bank runs began (sound familiar?- Greece gets a supposed bailout, but the CDS and bond markets for everyone else over there that are levered too highly continue to blow out?)
Bernanke claims to be a student of The Depression.
But like Hoover and our Fed of the day, during the original iteration of the credit collapse both The Fed and Administration refused to force de-leveraging and the recognition of losses; indeed, they did the opposite – they put in place programs to intentionally lie about asset quality and financial institution health.
Now the latent insolvency that was already present has come to the forefront in Europe, exactly as I expected it would – that the second wave would not start here, in The United States.
I have said this, in fact, for nearly two years – when there was plenty of time to not make this mistake.
But just like in 1930, protecting the rich and powerful who screwed the nation out of its wealth and jobs was more important to the politicians and policy-makers than serving the people of the country and holding those who caused the crisis to account.
Now we are on the edge of realization of the same risks and outcomes that we had in the 1930s.
Doing the same thing over and expecting to get a different result is one common definition of insanity.
Ben Bernanke and President Obama are insane, and time to alter course either has – or shortly will – run out.
Posted by Karl Denninger
I’ve had it with politicians trying to portray “Tea Partiers” as some sort of “radical” or “terrorist.”
The latest was Mayor Bloomberg, who was quoted as saying that the failed Times Square bomber “might be someone with a political agenda…. against the health care bill.”
We now know that the suspect is a Pakistani national headed to Dubai – indeed, on a plane about to take off - when he was taken into custody.
He is apparently a naturalized citizen, but this changes nothing.
More than a dozen people with American citizenship or residency, like Shahzad, have been accused in the past two years of supporting or carrying out terrorism attempts on U.S. soil, cases that illustrate the threat of violent extremism from within the U.S.
Among them are Army Maj. Nidal Hasan, a U.S.-born Army psychiatrist of Palestinian descent, charged with fatally shooting 13 people last year at Fort Hood, Texas; Najibullah Zazi, a Denver-area airport shuttle driver who pleaded guilty in February in a plot to bomb New York subways; and a Pennsylvania woman who authorities say became radicalized online as “Jihad Jane” and plotted to kill a Swedish artist whose work offended Muslims.
Where are the apologies and resignations of those politicians that have tried to spin these ACTS OF ISLAMIC TERRORISM as some sort of perverted and sick scheme of people who are in fact AMERICAN PATRIOTS that hold as their core beliefs the rule of law AND THE CONSTITUTION?
I have had it with politicians trying to spin their blatant and “in your face” support of theft, fraud and extortion committed by the “kingpins” of American Finance into whatever they can manage so they can continue to skim off their piece of that scamming and fraud, whether it by through tax receipts or campaign bribes, er, “donations.”
Some, in their desperate attempt to keep the grift and fraud machine going, have even stooped so far as to call those of us who have consistently and loudly called for the rule of law and prosecution to be used to bring these people to account “terrorists.”
You have it wrong Mayor, and your joining in this intentional and outrageous misdirection campaign marks you as a douchebag of the highest order.
The financial terrorists are the banksters on Wall Street and their cronies in Washington DC.
The violent terrorists are radical Muslims and I, along with others, are not going to stop hammering you and every other opportunistic politician with these facts until you have all lost your jobs.
Both groups must be either ejected from this nation or locked up in a Supermax prison, along with everyone who supports them.
“If we do nothing, we’re headed for a real crisis.” – Jack Bogle
Jack Bogle is 81 years old, but he still doesn’t pull any punches.
I visited him at his headquarters outside Philadelphia – and it didn’t take long before he expressed some strong opinions about Wall Street…
Jack Bogle’s Had “Enough” of Wall Street
For starters, Jack Bogle is madder than hell about the recent troubles on Wall Street. Specifically, that includes excessive compensation at Goldman Sachs (NYSE: GS : 149.32, -0.18) and speculation from the likes of John Paulson, who’s profited from contrived doom-and-gloom investments (for example, on the real estate collapse).
Citing Teddy Roosevelt, Bogle argues that “rank speculation” is bad. “If you’re adding value in society, the sky’s the limit. Bill Gates can earn all he wants, but when John Paulson makes $3 billion shorting the real estate markets, that’s enough.” (Bogle recently wrote a book called Enough.)
Bogle continues: “Wall Street doesn’t lose. Speculation on Wall Street subtracts value from our society. It’s a gamble, like Las Vegas, pitting one investor against another.”
As such, Bogle sees little value in trading or speculating by hedge funds or day-traders. He said the $6 trillion in trading by Wall Streeters every decade is a “real waste of the nation’s resources. It makes no useful contribution to society. When I came into this business in 1950, the turnover on the NYSE was 25%, now it’s 250%.”
And he was critical of Fidelity funds, a competitor, for hyping its returns and encouraging short-term trading.
I countered that speculators and traders offer a vital benefit to Main Street by raising much needed financial capital for new companies (IPOs). But Bogle, known as the “conscience of Wall Street,” would have none of it. His only hero is the long-term investor (Vanguard’s primary customer).
As founder of the Vanguard Group of funds, his investment company is famous for providing low-cost investing (the annual expense ratio of Vanguard funds is only 20 basis points). Established in 1975, the Vanguard S&P 500 Index Fund is also the largest mutual fund in the country, with a combined value of $150 billion. The Vanguard Group as a whole manages over $1.3 trillion.
But the fact that turnover has catapulted so much and the cost of doing business on Wall Street has fallen sharply is arguably something that Vanguard has contributed to. Because of the financial revolution, bid-ask spreads and commissions are at historic lows.
So how should you invest in this new era?
Jack Bogle Says to Keep it Simple… And Invest According to Your Age
Overall, Jack Bogle is optimistic about America. And while he likes President Obama, he’s worried about a looming financial crisis, due to excessive deficits and unfunded liabilities:
“He inherited most of this mess from Bush, but listen, if we do nothing, we’re headed for a real crisis.”
To solve the deficits, he urged “strong medicine” – for example, raising taxes, including a $1 gasoline tax, and reducing benefits.
From an investment standpoint, I asked Bogle about putting money into various asset classes, such as bonds, growth stocks, foreign investments, real estate and gold. Specifically, I mentioned David Swenson’s strategy and Alexander Green’s Gone Fishin’ Portfolio – both of which have proved very successful recently.
Bogle likes the idea of a simple mix of bonds and stocks. He suggested that the percentage of bond holdings should equal your age. For example:
- If you’re 30, then 30% should be in bonds, 70% stocks.
- If you’re 80, then 80% should be bonds, 20% in stocks.
But otherwise, he’s skeptical about adding real estate, gold and other exotic investments to one’s portfolio. “I don’t like the idea of complex investing, other than simple stocks and bonds.”
So if you’re looking for the cheapest way to buy a broad-based index fund, consider:
Finally, I asked Jack Bogle about his lasting legacy and lesson in life. He responded quickly: “Character counts. I think I’ve made the world a little bit better for investors.” Indeed, he has.
Posted by Karl Denninger
One or more of the PIIGS (Portugal, Ireland, Italy, Greece, Spain) either defaults technically or is forced into austerity by the ECB. Further, Eastern Europe becomes dangerously destabilized. There is a real possibility of outright hostilities in that part of the world next year. Let’s hope not. The ECB has a nasty problem on their hands; I have said for quite some time that the Euro is likely to trade at PAR down the road. This year is probably not the year for it, but the cracks in the dam that ultimately could destroy the European Union should become very apparent in 2010.
May have nailed that one eh? Recognition is starting to show up too:
May 4 (Bloomberg) — Greece’s bailout “might collapse” and the nation’s debt crisis makes it “hard to see” how the euro will survive in its current form, former Bank of England policy maker Charles Goodhart said.
“If this financing deal should collapse, and it might for one reason or another, then there would be a question of what the Greeks could possibly do,” Goodhart said in an interview with Bloomberg Television in London today. “Default would be totally disastrous for them and leaving the euro would equally be disastrous.”
Leave the Euro and default.
I’ll be happy to help the Greeks figure it out. That’s because anyone with a simple mathematical understanding of compound interest can tell them what has to happen, just as it has to happen in England, Spain, Portugal, Italy…… and The United States.
That is, “borrow and spend” has to end, and the adjustment that must be taken must occur, no matter how ugly it might be.
We have spent the last three years trying to avoid the pain that comes from idiotic and even criminal acts by the banking cartel, all in the name of “financial stability.” We have bought nothing of the sort; all we’ve done is deluded ourselves and delayed what has to happen.
Unfortunately the flood of liquidity from these “programs” has led to a whole host of otherwise-rational people crowing about “new bull markets” and “V-shaped recoveries.”
I’ll make this simple:
These people are your neighbors who extracted all their alleged “newfound wealth” via HELOCs and cash-out refinances and bought themselves a nice expensive new RV and boat, right up until the housing market blew up. These people’s “prognostications” are equivalent to that neighbor in 2005, who was living high on the hog and chortling at you when you drove by in your 2001 Accord, while they had a brand new Mercedes and BMW in the driveway molesting each other.
We all had one of those neighbors, and most of them are now flat on their ass broke with their boat, RV and cars repossessed and their house in foreclosure. Some haven’t been actually kicked out yet (thanks to the banks sitting on the defaulted paper) but they will be, their hopes, dreams, and high-life pretending over for a generation – if not permanently.
Such it will be at a larger, macro level folks, and if you’re not prepared for it, you’re likely to be “a little shocked”, because just as in 2008, reality will arrive without prior warning.
by Connie Hair
In February, the White House released its “Annual Report on the Middle Class” containing new regulations favored by Big Labor including a bailout of critically underfunded union pension plans through “retirement security” options.
The radical solution most favored by Big Labor is the seizure of private 401(k) plans for government disbursement — which lets them off the hook for their collapsing retirement scheme. And, of course, the Obama administration is eager to accommodate their buddies.
Vice President Joe Biden floated the idea, called “Guaranteed Retirement Accounts” (GRAs), in the February “Middle Class” report.
In conjunction with the report’s release, the Obama administration jointly issued through the Departments of Labor and Treasury a “Request for Information” regarding the “annuitization” of 401(k) plans through “Lifetime Income Options” in the form of a notice to the public of proposed issuance of rules and regulations. (pdf)
House Republican Leader John Boehner (Ohio) and a group of House Republicans are mounting an effort to fight back.
The American people have become painfully aware over the past year that elections sometimes have calamitous consequences. Republicans lack the votes (for now) to reign in the Obama administration’s myriad nationalization plans for everything from health care to the automobile industry.
Now the backdoor bulls-eye is on your 401(k) plan and the trillions of dollars the government would control through seizure, regulation and federal disbursement of mandatory retirement accounts.
Boehner and the group are sounding the alarm, warning bureaucrats to keep their hands off of America’s private retirement plans.
Just when you thought it was safe to come up for air after the government takeover of health care.
The entirety of the House GOP Savings Recovery Group letter outling the issue that was sent last night to the Labor and Treasury secretaries:
The Honorable Hilda L. Solis
U.S. Department of Labor
200 Constitution Avenue, NW
Washington, DC 20210
The Honorable Timothy Geithner
U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20210
Dear Secretaries Solis and Geithner:
As members of the Republican Savings Solutions Group, we write today to express our strong opposition to any proposal to eliminate or federalize private-sector defined contribution pension plans, such as 401(k)s, or impose burdensome new requirements upon the businesses, large and small, who choose to offer these plans to their employees.
In the Annual Report of the White House Task Force on the Middle Class, Vice President Biden discussed at length the creation of so-called “Guaranteed Retirement Accounts, (GRAs)” which would provide for protection from “inflation and market risk” and potentially “guarantee a specified real return above the rate of inflation” — presumably at taxpayer expense. In the Report, the Vice President recommended “further study of these issues.”
The Vice President’s comments are troubling, insofar as they come on the heels of testimony before Congress from supporters of GRAs proposing to eliminate the favorable tax treatment currently afforded to 401(k) plans, and instead use those dollars to fund government-invested GRAs into which all employees would be required to contribute a portion of their salary — again, with a government subsidy. These advocates would, essentially, dismantle the present private-sector 401(k) system, replacing it instead with a government-run investment plan, the size and scope of which remain to be seen. This despite data showing that 90 percent of households have a favorable opinion of the existing 401(k)/IRA system.
In light of these facts, we write today to express our opposition in the strongest terms to any effort to “nationalize” the private 401(k) system, or any proposal that would dismantle or disfavor the private 401(k) system in favor of a government-run retirement security regime.
Similarly, and more recently, the Departments of Labor and Treasury have jointly issued a “Request for Information” regarding the “annuitization” of 401(k) plans through “Lifetime Income Options.” While we appreciate the Departments’ seeking guidance and information from all parties and stakeholders in advance of regulatory activity, we strongly urge that the Departments not proceed with any regulation in this area before they have carefully and thoroughly considered all of the information received.
More specifically, we urge that the Departments take no action to mandate that plan sponsors — often, small businesses — include a “lifetime income” or “annuitization” option if they choose to offer a 401(k) plan to their employees, or that beneficiaries take some or all of their retirement savings in such an option. Data shows that 70 percent of Americans oppose the concept of a mandated annuity or government payout of their 401(k) plan. On a more fundamental level, Congress should not be in the business of choosing “winners” and “losers” among retirement security stakeholders. Instead, we urge the Departments to make it easier for employers to include retirement income solutions in their savings plans and to help workers learn more about the value of their retirement savings as a source of retirement income. Finally, to the extent new mandates and bureaucratic red tape from Washington push small employers out of the business of offering these plans to their employees, we would submit such an effort weakens, rather than strengthens retirement security.
We appreciate your consideration of our views in these important matters and stand ready to work with you and the Administration to promote secure and adequate retirement savings for all Americans.
House Republican Leader John Boehner (R-OH)
Rep. John Kline (R-MN)
Rep. Dave Camp (R-MI)
Rep. Sam Johnson (R-TX)
Rep. Dean Heller (R-NV)
Rep. Brett Guthrie (R-KY)
Rep. Michele Bachmann (R-MN)
Rep. Pat Tiberi (R-OH)
Rep. Bob Latta (R-OH)
Rep. Erik Paulsen (R-MN)
Rep. Lynn Jenkins (R-KS)
Rep. Ed Royce (R-CA)
Rep. Buck McKeon (R-CA)
Connie Hair is a freelance writer, a former speechwriter for Rep. Trent Franks (R-AZ) and a former media and coalitions advisor to the Senate Republican Conference.
Posted by Karl Denninger
Those are a bunch of shareholder derivative complaints, that is, lawsuits.
These are piling in, and it’s likely just the start.
The allegations vary but are generally along the line of dissipation (“waste” in the legal vernacular), breach of duty and unjust enrichment.
Derivative actions are nasty things. They’re essentially a shareholder suing a third party, which often is a director or officer of the company (but may not be) in the name of the corporation for some harm that the company has suffered when the firm has failed to bring the suit itself.
This may seem odd but when you think about it shouldn’t – the shareholders are the owners, and the board serves at their discretion. Since the shareholders are the ultimate owners of the company they have rights – including the right to protect the asset they own (the firm itself.)
In any event these sorts of suits are nasty, as they are effectively lawsuits against people that the company’s management, for whatever reason, doesn’t want to go after. Often these suits are dismissed but when they’re not they can be highly damaging because they are by definition actions that the corporation’s board does not want to pursue.
When the Goldman story first broke (the SEC complaint) I said that I believed that there was a roughly 20% chance that Goldman itself would fail as a consequence somewhere down the road. The most-obvious way would be if there was to be a criminal complaint that comes out of the investigations charging not just specific individuals but the firm itself. That sort of charge, if it occurs, is likely a kiss of death, just as it was for Anderson.
But this is another way that the firm can find itself in serious trouble. Remember, Goldman, like all investment banks that do not have a commercial banking “arm”, has no deposit base that it can use to hold itself together. That is, it does not survive based on its deposit base that it can loan out at interest, since it doesn’t have a deposit base. It survives or dies as a direct consequence of it’s ability to attract clients to perform various investment-banking functions, including the underwriting of stock and bond transactions. If the confidence of those clients is lost, no amount of “pump monkeying” by anyone will matter – the cash flow that the firm relies on will disappear instantly, and so will the company.
On Thursday last week I had a “stink bid” in for January 2011 $60 PUTs – a pure play on a business failure. They didn’t fill, and Friday, during the huge sell-off, their value nearly doubled. Today I don’t like the risk:reward on any of available strikes (the potential payoff was quite close to 100:1 on a “full strike” event Thursday and is about half that now) but that has a lot to do with the fact that my speculative philosophy on events that I see as relatively low-probability but high-impact (e.g. 10 or 20% chance of occurring) needs to have an extraordinary payout for them to be worth it. Others may see it differently for a play like this, but due to the escalation of premium in these (partly due to Goldman’s recent price dump, partly due to expansion of implied volatility) I won’t be taking this trade at the present time.
Nonetheless, the potential market risk on a macro level, should the load in the boat get too high and the gunwale go underwater, remains considerable and, in my opinion, bears close attention.