You may be standing too close to the trees... step back and take a look at the whole picture...
In the course of human history . . . there are seminal developments that can shift a society into a form of governance they abhor; or if managed well, turn-out survivable. (We have argued that some sort of 'National Financial Salvation' legislation is needed rather than the slow-moving albatross of a Bill that was passed. From the start is was not only flawed we contended, but inappropriate to meet growing emergency needs.)
The core of this current condition, where for two weeks we projected only a brief rally if the House passed the flawed 'bailout' (not rescue) Bill, is actually not Friday's fast reaction (forecast up then down) to the Bill, nor (thankfully) substantive 'trading gains' in both directions for those of us inclined to play it accordingly. The Friday core was a bit different than the media focus: it was 1) the jobs contraction represented by a rise in non-farm payrolls (expected, as more of the same lies ahead), and 2) credit market pressures, which were hardly ameliorated by a flawed Bill that doesn't do what they'd said (at best it's a building block for eventual recovery, but at a huge cost and with as we contended, a depletion of further borrowing power by virtue of its implementation) as also created unbelievable false hopes among the citizenry, using fear mongering.
(Again; when I forecast this 'great unwinding' as an 'epic debacle' from February '07 forecast, we urged investors to eliminate debt and patiently protect precious capital.)
The heart of that matter from a macro (course of human history) perspective is what we see as the socialization not only of the banking system, but maybe the economy; under the guise of freeing-up capital for the purpose of loaning to small businessmen (we hope that's what happens, and it may in the long-run, but don't hold your breath). Nobody focuses on the price to be extracted for this Governmental intervention (thus no wonder certain politicos embraced another bad Bill from this Administration), while levelheaded politicians responding to their constituents were told the people couldn't really understand what was at stake. Oh yeah? They get it; and they get it every day.
On Thursday I captioned discussion with a question: Heartbeat from Depression?
(Note for over a year we projected how the pressures would gradually migrate from real estate, to the banks, to pensions, to municipalities, and certain even to money markets, interbank markets, commercial paper markets and more; all of which have, are, or will at least temporarily seize-up in U.S. and also in Europe, where we rightly projected Europe and Asia could not decouple from debt-death-spiral deleveraging. Now regular corporations other than banks need to roll-over debt, but have no access to liquidity. As immediate funding strains don't expand, so too should default rates.)
Historically such allusions occur prior to rallies; but I know in this situation, investors and most professionals have doubted or chastised all our warnings, dating from the '2007 Outlook' posted in late 2006. An 'epic debacle' of deleveraging was projected starting in February of 2007 as "under-cover of a firm S&P" as well as Dow Industrial Average; with the 'distribution' (preceding the actual visible market crunch) expected to be roughly concluded by July of '07; paving the way for 'Chinese Water Torturous' declines. Unfortunately we were right; it was eminently projectable, and is ongoing to this day. Even (with all due respect) the esteemed Warren Buffet said nobody could 'have seen this coming' this past week; and then indicated housing was visible etc.
I beg to differ as our work in the Spring of 2007 indicated risks to pensions, municipal bonds, commodities, and eventually everything (including state and local budgets) as a result of what we thought was a developing 'great unwinding' that would last longer and be deeper than basically anyone was allowing for. Were we lucky, prescient or both? We won't say lucky, because we wish we had been wrong. Prescient? Any of a few approaches to traditional due diligence (rather than sound bite analysis of the era that prevails) showed a) the technical distribution; b) the reflation forecast from 2002 to 2006 being poorly handled and shoved into non-productive sectors mostly; c) huge incredulous global trading (no focus on current account deficits) based on consuming more than producing, which never in human history has helped a nation avoid some intervening catastrophe; d) allowing the Nation to become too beholden to unfriendly or opportunistic foreign powers, I thought; because we engaged in every stupid deal imaginable with common-sense instilled only it seemed after big mistakes already ran their course (with outcomes predictable as we often did during the course of this; and e) worst of all hearing smart people try to convince citizens nobody 'saw this coming'; when we had posted in the Spring and then August of 2007, that 'waiver' information, which proved the Fed was quietly authorizing the banks to violate 'Reg W', to provide funding across the firewalls to the brokerage sides of any of a number of big banks in our opinion thus technically insolvent (back then not simply more recently); physically read the one from the Fed to Citigroup again last night, just to be reminded it referred to Structured Investment Vehicles, that were illiquid at the time); which we thought as ingerletter.com members know, proved they were well aware of it all. Many analysts I recall did challenge our saying that was a liquidity crisis; with credit crunch following.
What does this mean practically?
It means that during the course of that, there were few surprises except to those who believed the spin doctors or toxic porridge supporting Goldilocks extremists (tried our best to warn America how they distorted or mischaracterized free market capitalism). Concurrently I poked around to contemplate a series of 'odd' determinations in 2007's Springtime, by the Federal Reserve (the waivers), as from my perspective saw it was anything but indicative of a strong financial situation, underlying stretched U.S. risks.
Rather there was a sort of collusion between (we argued) the various parties, which it turned-out included entities as would be visible in a bottoms-up or top-down audit, as I stated well over a year ago. The bad Bill passed just today seeks to repair profligacy in a sense with more debt. While it should buttress some areas; the wrong butts are buttressed in the opinion of the American people (with their smarts), if not politicians.
Fear the reality of this so-called 'rescue' being nothing more than longer-term workout scenarios, will in-itself contribute to the near-term risk (over-marketed to an electorate who presumes the Bill does what they said, rather than reading what it starkly says.) I think it affirms what the 'waivers' I wrote about last year suggest: non-bank financial entities were and are in trouble; as Government is essentially compelling commercial banks (after first allowing the cross-pollination of assets superseding the regulations) to absorb (we'll reserve this aspect of our analysis regarding the investment banks).
However, it underlies that had the 'waivers' never been initiated, or if Treasury were to be candid, that commercial banks were not (reserved) in real trouble at any time; provided they (as typical) did not hold toxic derivative assets on their books (which by the way was the purpose of offloading via secondary markets) during all this. The problem stemmed from allowing essentially comingling of funds or the 'superstore' banking arrangements, which are still increasing, rather than decreasing. So the 'Bill' essentially helps that side of the 'superstores' to be restocked with cash I simply say; but (as this part may be in a public rather than membership forum, I will redact this as unlike the Government, I'm disinclined to promote panic; just pragmatic reality). It's a reason why I suspect the thusly-protected banks will indeed survive, but why this will do essentially nothing for the beleaguered citizens, or foreclosures, or other issues at the margin; though ironically the Treasury can even buy securitized credit card debt.
This is the overview I took 2 weeks ago on the Bill, as an effort to cure debt with debt, and unfortunately once again the pop-and-flop forecast of the response, and what is likely to come next, will likely continue to be tracked as we at ingerletter.com outlined. I cannot overemphasize the full key events of Friday: 1) the non-farm payroll decline as well as forward implications; 2) the failure of a poor Bill, passed by encouraging fear, rather than optimism through deliberate measures, on the part of Government; 3) a diminution of the number of investment banks that seriously impairs the ability of an eventually-revived securities industry to underwrite and distribute offerings (that is a very big deal, even if average citizens don't readily comprehend that part; which is a reason we thought the Lehman abandonment ignorant, since they were a 'primary dealer'); 4) the implicit socialization of too many more aspects of our lives (low taxes, stimulus, incentives and deregulation isn't the sole problem; much relates to globalist fascist one-world-order insanity, which intended to compromise U.S. sovereignty as I argued throughout the past year and a half, and correctly so, I'm also sorry to say); 5) the difficulty in restarting the credit markets in a new dictatorial climate while more or less saying Friday that it's no longer (reserved for ingerletter.com members), or 6) the projected movement down which now has the S&P at lows unseen since it appears 2004 (more on technical projections when I view the charts in the weekend videos).
If you add to that the proximity of fiscal-year-ends, and a continued hedge liquidation pressure modality; the idea of an 'emergency rate cut' is irrelevant; while divergences between banks and brokers do not necessarily mean the former merged with a latter is a buy; though that is not out of the question (if) after we get an 'event'. Psychology is thus unprepared for the miserable earnings; the affirmation of no-decoupling (the debates on the issues are ridiculous; long-term (reserved); short-term (reserved for our ingerletter.com members), and the duration matters, in terms of recommitment to various asset classes (suspicion to where Averages go remains on-target and track)
'Crash Alert' conditions continue; in fact near-term risks are intensified as projected. Summary of key points about the waivers; you can judge implications (from 2007):
After coming to my attention just because of the negative distribution tone and what I thought made no sense (SIV's with investment grade ratings) this was very reinforced as 900 brokers got put on the Street, when the NASD forced an unusually broad fast liquidation of an Irvine-based brokerage (they had put a lot of CMO's in their house account; fell below net-capital requirements; couldn't raise money and got liquidated). (That) triggered realizing what happened if a brokerage kept SIV derivatives in house accounts against rules. As best I recall that was May of 2007; I got bearish on rallies.
So I kept a steady eye on much of this. I'm not sure about some other banks so won't mention the early ones specifically. But, at some point the Fed then approved similar exemptions from section 23A of the Federal Reserve Act and the Board's 'Regulation W' for JP Morgan, Citigroup, Bank of America, and Deustche Bank as best I can now recollect, so that increasingly got my attention before the breakdown. It set the stage.
In my mind such regulations were there for reasons, and intended restricting amounts of "covered transactions" to any one affiliate (ie: money from the banking side to the brokerage side, breaking the firewall limits, that I presume were post-Glass Steagall Act repeals under Clinton -the Act was established in 1933 and repealed in 1999- as were supposed to be protected by firewalls when it was repealed) to 10% of a bank's capital stock plus surplus, and (reserved). (FYI: Glass-Steagall had an impact on the securities markets by preventing banks dominating underwriting or capital raising functions. Instead, the Act enabled development of a strong securities industry with capital raising a core purpose. This strengthened US capital markets for generations. (Instead, due to dismantling we end up with a form of universal banking; which is not only more on -sorry, if you value our continuing analysis, we welcome your joining.)
As warned back then in 1999 without enforced separation securities markets became bank dominated and capital markets less virulent. Repeal of Glass Steagall, and easy money with respect to the early part of this decade, combined with political pressure (CRA [Community Reinvestment Act] from Jimmy Carter's era ramped-up, pressured by certain Congressmen) to issue mortgages to under-qualified applicants; the rest we discussed as related to secondary markets, GSE pressure; securitization abuses, which initially commenced as a way to 'offload risk' bankers were forced to take onto books, which weakened their loan portfolios (again, political pressure), and hampered margins. So, in the 'there's plenty of blame to go around area', its ironic this is hardly ever heard. (Even the admired Warren Buffet said 'nobody saw this coming'..wrong.)
All you hear is 'nobody knows', or resuscitate now and investigate later. Seems clear to us already and was years ago as lenders did get greedy; but they were pushed by the 'everyman entitlement' to home ownership; and wanted the stuff off their books. It isn't particularly (reserved for members). So next time you hear any politician say we need hearings to figure it out; tell them you already did; and knew the risks for years.
Why did all this turn us 'super-bearish' in 2007? Because anything with a 'rate-reset' provision built-in, was theoretically structured-to-fail in-advance; and so in the case of mortgage-backed securities, had no logic so worthy of obtaining an investment grade rating by rating services (sounds like old news now, but at the time was speculative even if it turned out, as it did, to be quite prescient). I had already called for an 'epic debacle' of deleveraging. (I should note, to new members, I am historically bullish about 70% of the time in my life, so this extraordinary degree of concern was truly uncharacteristic, even though I had called the 1969-'70 decline, the 1987 Crash and also (we thought important) the use by OPEC of the oil weapon before the 1973 hit along the way. Most new investors know we called the 1999-2000 top and the 2002 bottom.) Pragmatically flexible for decades; clearly we were this go-round as well.
My argument was that Government essentially was complicit in a (hate to say 'cover-up') rationale contrary to the public interest which they are supposed to represent, as this all unfolded. (At the time I simply said 'oh well, the Fed's primary constituents are the banks, not just we citizens). Still don't believe today's passed 'Bill' says otherwise.
In summary: 'mismarking assets' not only will not solve the problem; but returns it to what in some ways contributed to a façade masking the absence of assets last year. I suspect efforts to artificially put values on toxic properties (worst of the worst will be what is typically offered to a Government entity) will have little or nothing to do with foreclosures; it has nothing to do directly with homeowners; only indirectly anything to do with opening-up stressed interbank credit relationships in the short-term; and thus may be least-costly if one insists; but also a 'mechanism' that won't become operable overnight. Projected this macro problem, but need true emergency intervention now, as contrasted to legislation that empowers toxic holders, but not principled bankers or the citizens. That's why last week's bottom line was: 'Empower Americans'.
Daily action . . . noted the other night that confidence is easy to break and hard to restore; as one British money manager astutely remarked to me this past week. He concurs with my concerns as persist regardless of disposition of the controversial Bill. (My market expectation as relate have unfolded, with continuity addressed via video.)
We felt the market was suspended in a 'credit bubble' of immense risk building during 2005 and 2006; then anticipating it coming to a head with phony rallies in 2007. It's not impossible (withheld) that volatility risk is actually enhanced just a bit (extent is a projection shared to members-only in fairness) by restrictions on growth that socialist-style governance brings with it. It's a part of 'multiple compression' issues I've noted.
Bottom-line: illiquidity was so gargantuan; that for it not to triumph was delusional; at least in the short-term going. That's why bailout money is likely better channeled. So, once again; an amount equal to all of that was needed just to sustain overnight paper (further evidence that a toxic debt process evolved over many months; not just now).
Lest anyone misunderstand; we are not at the ultimate lows; we need (reserved too) and we need to create 'velocity' in ways that 'empower Americans' to revive a Nation.
decisionpoint.com
GZ |
