Saturday, June 28, 2008

Blog update on Breaking News

I have started a new section in The Housing Time Bomb Forum called "Hot Off The Press".

I will be posting any breaking news articles that may come up in between my posts. Any articles or stuff found on the net related to the markets is welcome here. The news don't have to be breaking. In fact, I just put up a Fleckenstein article up today that's not considered breaking.

If you catch somthing please feel free to start a thread and post it. Many of you(avl, Minton) have found some great articles.

The market is breaking down at lightning speed, and I think this will be helpful for all of us.

Its easy for me to miss things so please come and share any updates. The link is below and can be found at the top of the blog.

Peter Schiff on the Dollar

Very interesting theory from Peter Schiff on why the Fed didn't raise rates last week. He raises an interesting question. What if the Fed raised rates a measly quarter point and the dollar didn't strengthen? Perhaps the Fed feared a dollar crash?

Not sure this would have happened but its an interesting take on the Feds actions.

There is also some great stuff on currencies in here as well. I will post the whole article. Here is the link for anyone that would like to take a look.

June 27, 2008

Intervention Will Not Stop the Dollar’s Slide

This week the Federal Reserve took a step closer to acknowledging reality. Unfortunately it didn’t let that admission move it from a policy course firmly guided by fantasy. In its policy statement, Bernanke & Co. took the important step in noting that inflation expectations had taken hold in the country at large. However, in asserting that it expects inflation to moderate this year and next, the Fed gave no indications that these heightened expectations are gaining traction within the Open Market Committee itself. As a result, it signaled no likelihood that it was actually prepared to do something to fight a problem which it doesn’t really believe exists in the first place.

In fact, by indicating that they expect inflation to moderate, the Fed is saying that elevated expectations are unwarranted. In other words, Bernanke claims that despite the fact that so many people are carry umbrellas, he still believes it will be a sunny day. The takeaway from the statement is that no rate hike is forthcoming. The markets saw this position for what it is….capitulation to inflation and a weakening dollar. No surprise then that the gold responded with the biggest single day gain in more than 20 years!

With the ensuing carnage on Wall Street, many Thursday morning quarterbacks claimed the Fed missed an opportunity to reverse the dollar’s slide by either talking tougher or perhaps actually raising rates a quarter point. If the Fed really believed it could talk the dollar up, or that a small rate hike would do the trick, they would have given it a try. I believe they chose a dovish route because of a greater fear of having their hawkish stance casually disregarded. Imagine what would happen if the Fed raised rates and the dollar kept falling? It would be like one of those horror movies where someone holds a cross up to a vampire, and the Count tosses it aside with nary a cringe.

Others claim that now is the time for coordinated central bank intervention to reverse the dollar’s decline. Those who place their faith in such a plan, overlook the fact that Asian and Middle East central banks have been unsuccessfully intervening on the dollar’s behalf for years. Those nations maintaining dollar pegs must constantly intervene in the foreign exchange markets by buying dollars to keep their own currencies from rising in value. Over the past few years the scope of this intervention has been unprecedented, with foreign central banks accumulating trillions of excess dollar reserves. Yet despite these Herculean and misguided efforts, the dollar has fallen drastically.

Intervention advocates must believe that if the ECB and a few other central banks joined the fray, that a better outcome would be achieved. However any additional efforts to artificially prop up the ailing dollar will be equally ineffective. Even if ECB intervention could slow the dollar’s decent, what possible reason would they have for doing so? The ECB is already concerned about inflation and is preparing to raise rates as a result. Intervention to support the dollar will only worsen Europe’s inflation problem and run counter to these efforts. This is because to buy dollars the ECB must increase its own money supply. That is exactly what is happening in countries like China and Saudi Arabia, which is why inflation in those nations is already much higher than it is in Europe.

Further, since the ECB is asking Europeans to endure higher interest rates to fight their inflation battle, why should they have to make additional sacrifices to help Americans fight their own inflation? Especially when our own central bank has held interest rates at the ridiculously low level of 2%, and has effectively excused Americans from the conflict.

Since we can’t count on any help from our friends, the only option would be for the Treasury to intervene unilaterally. However, the U.S. government should think twice about bringing a knife to a gunfight. The Treasury only has about $75 billion in foreign currency reserves with which to intervene. The war chest is just a spit in the ocean. To put this number in perspective, Poland has $77 billion, Turkey has $78 billion, and Libya has $79 billion. On the other end of the spectrum, China has $1.7 trillion (not counting Honk Kong’s 150 billion) Japan has $1 trillion, Russia has $550 billion, India and Taiwan each have about $300 billion. Singapore, a nation with fewer than 5 million people, has $175 billion. In fact, the United States holds just about 1% of the world’s $7.6 trillion of foreign currency reserves, and our total position amounts to just 2.5% of the total daily volume of foreign exchange trading. Talk about Bambi vs. Godzilla! In other words, if the dollar is going to fall, the Treasury is completely powerless to do anything to stop it.

For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read my new book “Crash Proof: How to Profit from the Coming Economic Collapse.”

Friday, June 27, 2008

Barclays Warns of a Financial Storm

Good Morning!

Its another red morning on Wall St. I expect I fairly quiet day today. I was listening to Art Cashin from UBS who is one of the best traders on the street, and he had some interesting comments on yesterdays drop and how the markets usually react in a short term bottoming process.

He basically explained that when all of the DOW components are below their moving averages, you usually have a consolidation day on Friday followed by a period of capitulation the following week that sets the bottom for at least the short term. This is the historic pattern seen in similiar situations in history.

He also explained that oil is the wild card here, and if it rises sharply today things could get ugly.

I discussed the VIX in the forum last night predicting that the selling in this market won't be over until the VIX(fear level) rises sharply on strong selling volume. Bloomberg dicussed this today. Watching the VIX is the key to finding a bottom IMO. We still have some downside in this market folks.

Barclays warns of a financial storm

If you thought my commentary on the Fed yesterday was harsh, then you need to read this Barclays warning from the Telegraph.

Some highlights:

"Barclays Capital has advised clients to batten down the hatches for a worldwide financial storm, warning that the US Federal Reserve has allowed the inflation genie out of the bottle and let its credibility fall "below zero".

"We're in a nasty environment," said Tim Bond, the bank's chief equity strategist. "There is an inflation shock underway. This is going to be very negative for financial assets. We are going into tortoise mood and are retreating into our shell. Investors will do well if they can preserve their wealth."

Barclays Capital said in its closely-watched Global Outlook that US headline inflation would hit 5.5pc by August and the Fed will have to raise interest rates six times by the end of next year to prevent a wage-spiral. If it hesitates, the bond markets will take matters into their own hands. "This is the first test for central banks in 30 years and they have fluffed it. They have zero credibility, and the Fed is negative if that's possible. It has lost all credibility," said Mr Bond.

Mr Bond said the emerging world is now on the cusp of a serious crisis. "Inflation is out of control in Asia. Vietnam has already blown up. The policy response is to shoot the messenger, like the developed central banks in the late 1960s and 1970s," he said
"They will have to slam on the brakes. There is going to be a deep global recession over the next three years as policy-makers try to get inflation back in the box."

Quick Take:

Here I thought I was a little tough on the Fed yesterday. The Telegraph puts the Feds credibility at below zero! I expected this type of reaction from Europe. As the Telegraph explains, the Fed faced their first crisis and 30 years and totally dropped the ball and blew it.

Oil rose again today. The Fed is killing consumers all over the world via inflation with this weak interest rate policy. The only people benefiting from this policy is Wall St. I think this is disgusting as we all continue to suffer with soaring prices.

So how bad do we feel as consumers?

The consumer sentiment report was released today and uhhh we are feeling pretty crappy.

We hit a 28 year low today as reported on CNBC.

"U.S. consumer confidence fell more than expected in June, hitting another 28-year low as surging prices and mounting job losses sapped sentiment, according to a survey.

The Reuters/University of Michigan Surveys of Consumers also said five-year inflation expectations remained steady at the peak of 3.4 percent reached in May, which was the highest in 13 years.

The Surveys of Consumers said the final June reading for its index of confidence fell to 56.4 from May's 59.8. The June reading is the lowest since 51.7 in May 1980, which was also the lowest reading ever."

Quick Take:

As you can see consumer sentiment is close to hitting its all time lows in its history. This report has been compiled since 1952.

Hey remember though guys: The Fed tells us inflationary pressures should be declining in comings months!! Yeah right. Pigs will be flying by my window before inflationary pressures recede.


Losses, losses, and more losses. Merrill and AIG are the culprits today. Click on each company for the story. I find it funny how all of these analyst keep downgrading each other. As if any of them have any credibility anymore. Its like watching the blind leading the blind.

Give me Meredith Whitney on the financials and I will do just fine. I have no need for these other A** clown financial analysts.

Bottom Line:

The losses in the markets are accelerating as I write to you. The DOW is now down 75 points and the Nasdaq is minus 13.

If oil moves forward today could get ugly again. The markets have zero confidence and if a bomb drops sometime today we could easily see another selloff. A panic could be triggered at any second.

I wouldn't want to hold stocks heading into the weekend. There is a very good chance of heavy selling pressure early next week according to the pros. Invest at your own risk!

As I have said many times before, I want no part of this market on the long side.

Thursday, June 26, 2008

The Fed Got it Wrong/Market Meltdown

It never fails. I go on a business trip and all hell breaks loose in the markets! Oh my, where do I begin. Folks, we are in some serious trouble. The Fed really screwed up yesterday. The market is rapidly losing confidence that the Fed is acting in an appropriate manner. The way I see it, the Fed has officially lost what little control they had on the markets.

As a result, stocks got pummeled today. The DOW and Nasdaq were both down over 3%. Bloomberg reported that this has been the worst June on the DOW since the Great Depression.:

"June 26 (Bloomberg) -- U.S. stocks tumbled, sending the Dow Jones Industrial Average to its worst June since the Great Depression, as record oil prices, credit-market writedowns and a slowing economy threatened to extend a yearlong profit slump."

I want to highlight some of my biggest worries:

The Fed

So why the big selloff today? I blame a lot of it on the Fed's actions and their statement yesterday. The Fed held interest rates, and then came out with a wimpy wishy washy statement that was not nearly hawkish enough on inflation.

We should have raised rates yesterday guys. I realize this puts us into a serious recession but it HAS to be done. The bond market is going to do it for us if the Fed doesn't. They should have just pulled the trigger and taken the hit.

The way I see it, the Fed looked very weak in the eyes of the world as we held rates and basically ignored inflation. Our currency weakened as a result, and the speculators ran wild in the oil markets as oil hit $140 a barrel.

The world is starting to see how vulnerable we are right now. I think many countries would love to see us take a big bite of humble pie after so many years of prosperity and arrogance. We are needed by many countries because of our massive wealth as a consumer. However: Inflation, our declining rate of consumption, and globalization is starting to make us less of a player in the global market.

Because of this, I believe the world will start taking some shots at us. There are signs of it already happening.

The ECB is going to raise rates at their next meeting despite the fact that several EU countries are in bad shape economically. This is the proper move as inflation runs at near 4% in Europe. However, don't think for a second that Trichet and his crew aren't trying to show up the Fed right now. Raising rates and watching the Fed squirm puts a little smile on each of their faces.

The rest of the world isn't helping either. Libya announced they would be lowering their oil production today. OPEC has done nothing to really help us with our oil problem. Lets face it, we are not well liked in the world and these potshots will continue throughout this downturn.

The dollar

Where in the hell is the dollar going to be after the ECB hikes rates? If the dollar crashes, all sorts of frightening scenarios are on the table as far as I am concerned. Here is a good example of one although I am not a believer in Hyperinflation.

The way I see it, a depression is possible if the Fed doesn't take a U turn and raise rates. I don't agree with some of that article, but 15% interest rates are a distinct possibility IMO. If this happens, housing will be absolutely destroyed. However by doing so, it takes hyperinflation off the table because it will force a deflation of all assets.

Now you may ask why would rate increases prevent hyperinflation? Because it would drain the liquidity out of the economy and allow us to reset the value of assets back to affordable levels. The debt bubble would be deflated and we could start working on recovering from this tragedy.

Buffet fears Inflation

Warren Buffet is singing a similar tune on inflation.

"Buffett, the billionaire investor behind Berkshire Hathaway (BRKA, Fortune 500), fingered "exploding" inflation Wednesday as the biggest risk to the economy. "I think inflation is really picking up," Buffett said on CNBC. "It's huge right now, whether it's steel or oil," he continued. "We see it everywhere."

Indeed, the prices of gasoline and milk have shot past $4 a gallon, and Dow Chemical (DOW, Fortune 500) has announced twice in the past month that it's raising prices to offset soaring commodity costs.

Yet Bernanke's Fed signaled Wednesday that, after nine months of interest rate cuts and expansive lending to the financial sector, it isn't eager to reverse course and push rates higher to try to tamp down rising prices.

Why? Because the Fed remains skeptical that high commodity prices will ripple through the economy, leading to broad price hikes and big wage increases.

"The committee expects inflation to moderate later this year and next year," the Federal Open Market Committee said in holding the fed funds rate steady at 2%, though it did note that "uncertainty" remains high and suggested inflation concerns could rise."

Final take:

What in the hell is wrong at the Fed? How can they not see the exploding inflation that is flattening the consumer? Inflation will be moderating? How does inflation moderate with a weak dollar and wild speculators taking prices higher as a result? Recall one of my old posts where a friend told me steel prices had gone from from .28 a pound up to .64 a pound in 6 months.


This is not the time for the Fed to be making mistakes. One bad step and we could be heading right back to the 30's. I am extremely concerned about what I am seeing right now economically.

Bottom Line:

Today was ugly and no one wants to own stocks right now. Goldman really got things started today with this downgrade on a few banks. They also cut GM to a sell warning that they will need to raise capital as the automotive industry continues to take a beating. Gm hit a 53 year low today folks. A 53 year low!!! Unbelievable.

I am at red alert when it comes to where we are in the economy. The debt bubble is about to blow and its not going to be pretty.

I had been thinking that this wouldn't happen until after the election. After this week, I don't think we are going to make it through the summer.

Wednesday, June 25, 2008

Mortgage Applications Drop to 6-1/2 Year Low


Just a few things on the market today. Obviously, today is all about the Fed. I find this funny in some ways because as Rick Santelli reported today on CNBC, two days from now the Fed speak will be all be forgotten and we will go back to trading the market.

I had to laugh when Rick asked one of the veteran traders on the bond floor where he will be today at 2:15 today when the Fed announcement is released. His answer "on the 9th hole". The bond market realizes that the Fed is pretty irrelevant right now. Its obvious they are boxed into a corner right now between a weakening economy on one side and inflation on the other.

The Fed can do nothing but sit and wait for confirmation as to where the economy is heading. The durable goods orders for May was released today and showed zero growth which was in line with expectations. As a result, this didn't help the Fed much in terms of confirming we are heading.

Although it may not be confirmed, we all realize the economy is heading straight into the toilet. Its just a matter of time before the manipulated data shows that it is.

The reality of the situation is the financial tsunami that is about to hit us is so massive that the Fed realizes it has little power to stop it. These little rate cuts providing liquidity to the markets to fight deflation are comparable to using a BB gun to kill an elephant. They are worthless and do nothing but exacerbate the problem because it weakens the dollar which puts further pressure on inflation.

Mortgage Aplications Hit a 6-1/2 year Low for the week

CNBC reported this today. They also confirmed that refinancings are also plunging. I find this interesting because rates actually pulled back last week.

Here are the highlights:

U.S. mortgage applications fell for a second consecutive week, hitting their lowest level in nearly 6-1/2 years despite a sharp drop in interest rates, an industry group said Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications for the week ended June 20, which includes both purchase and refinance loans, dropped 9.3 percent to 461.3 -- the lowest level since the week ended Dec. 28, 2001.

The report offers additional evidence of a U.S. housing market that is suffering one of the worst downturns in its history.

Significantly tighter lending standards and an unwieldy supply of homes for sale are some of the factors preventing the U.S. housing market from rebounding out of its two-year-long slump.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.39 percent, down 0.18 percentage point from the previous week.

Refinancing Plunges
The group's seasonally adjusted index of refinancing applications plunged 12.1 percent to 1,212.2, down 30.0 percent from its year-ago level of 1,731.6."

Final Take:

We haven't seen drops in weekly mortgage applications like this since the last recession. Kinda pathetic when you see that that rates were down last week, and we are in the middle of the so called "peak buying season" for houses.

Consider this a prelude of things to come. Housing simply continues to do nothing but spiral downward. I see no change in this trend.

Bottom Line:

The Fed will be the market mover today. If we see a suprise raise in rates then the market corrects. If they hold rates and their statement is bland then we could see a little bounce today. We seem a little oversold for the short term.

Its a pretty quite morning from a news perspective. Countrywide got sued by Illinois today(what a shocker..Not!). For the life of me, I can't understand why Bank of America wants to close this deal. I still think they will end up walking away from this transaction unless something is going on behind close doors.

I have a busy day so I will have my thoughts on the Fed tomorrow. Feel free to discuss it amongst yourselves in the forum. Anyone is welcome to start threads. The link is to anyone who hasn't had a chance to stop by.

Until next time!

Tuesday, June 24, 2008

Financial Tsunami on the Way?

Good afternoon to all!!

Another round of losses hit Wall St. today as the bad news continues to pour in. The consumer sentiment number came in at 50 and was the fifth worst on record. This helped set the tone for the rest of the day. The street also reacted to another poor Case/Shiller housing report showing that home prices continued to freefall. Here is the link to the stories above.

I want to focus on some data from Bennet Sedacca. This was reported on Bloomberg. The "financial tsunami" he warns of is based on the frightening graph below showing the massive spikes in delinquenies rates on home loans:

Please click to enlarge. You may not want to click on this because this data may keep you up at night. This is a great historical perspective dating back the the late '70's in terms of delinquency rates on home loans.

As you can see we are seeing significantly higher deliquency rates versus the 1990/91 housing crisis. We are even way above what we saw in the early 80's when interest rates were in double digits! I almost fell off my chair when I looked at this!

A quote from Bennet in the article:

``Whether it is anecdotal or statistical evidence, I see inflation everywhere, and this is where the financial tsunami cometh,'' Sedacca wrote in a report published yesterday. ``A battered, over-indebted consumer, if forced to retrench, could create even more problems for the banking system as loan delinquencies would begin to rise even further. All sorts of delinquencies are rising. This is now a systemic issue.''

"Sedacca wrote that current financial-market conditions remind him of ``someone standing on a lonely beach, armed with only a small bucket, trying to stop a rare tsunami that hits the shores. It is how I feel about our markets and the tools being utilized by the Federal Reserve, the European Central Bank and other regulatory bodies. They are overmatched for what they are facing and, worse yet, they helped create the mess in the first place by being far too easy with money and debt creation.''

Final take:

Bennet is dead on here. Take away the inflation risk and these default rates would be alarming. Add inflation and they are flat out terrifying. We all know how bad inflation is getting. Dow Chemical just announced an additional 25% price increase today on top the 20% price increase they just announced a few weeks ago. Everything continues to rise in price

This whole thing is going to blow up people.

The Fed better address inflation tomorrow by at least making a hawkish statement that they will raise rates in order to quell inflation. If they continue to ignore rates then the Fed is going to blow up the whole economy.

I expect the bond market to start pushing up rates if the Fed continues to do nothing. The pressure is building and its about to blow like Mount St. Helens.

Get ready for the Financial Tsunami folks.

This is no longer "The Housing Time Bomb". I may have to rename my blog "The Economy Time Bomb"

Monday, June 23, 2008

Market Update/UPS Profit Warning

Helloooo Everybody!!!

After watching the markets today, I feel like a kid who just got off one of those amusement rides that goes around in circles. Lots of news that got things spinning with relatively nothing to show for it.

Trading will probably be fairly slow until the Fed speaks. The financials continue to get slaughtered. They dropped more today than Friday when the DOW dropped 200 points. To see the DOW hold up when the financials fall apart is very rare.

Energy stocks helped pick up the slack of the financials as oil rose. The Saudi announcement of increased production did squat from stopping the massive bull run in oil.

My best guess is oil goes way higher from here guys and gals. This bull move is multifaceted, and I believe oil has replaced gold as the new hedge against inflation.

The traders in the oil pits claimed the Saudi news didn't help things because they don't make much light sweet crude. This is the oil that's in highest demand. I don't believe that for a second. There are many reasons oil is heading higher. $200 is not out of the question as demand continues to be sky high.

If you can't afford gas at these levels, then you better go buy a smart car or a scooter.! If thats not an option, move closer to work. This is a long term trend folks.

UPS Warns

Lets get to the big after hours news. UPS was halted and then came out with a profit warning.

"June 23 (Bloomberg) -- United Parcel Service Inc., the world's largest package-delivery company, lowered its second- quarter profit forecast because of rising fuel costs and a slowing U.S. economy.

Earnings will be 83 cents to 88 cents a share, down from a forecast of 97 cents to $1.04, Atlanta-based UPS said today in a statement. The average estimate of 16 analysts surveyed by Bloomberg was 98 cents.

UPS said the ``anemic'' U.S. economy was causing customers to cut back on air shipments, its most profitable offering, and that international packages coming into the U.S. were also declining. The company didn't provide volume figures."

My Take:

What disturbed me with this warning was the reason for the earnings shortfall. You would have assumed that UPS would be warning because oil prices ate into their profits.

However when you read the warning from the company above, oil was not the reason they guided lower. They are blaming the "anemic" US economy for their earnings shortfall.

UPS, like Federal Express, is a bell weather to gauge how the economy is doing. The fact that they are blaming this on the consumer is a big red flag.

I was expecting many companies to blame oil over the next couple quarters for missing their earnings because its an easy way out when facing the heat from the analysts. Retailers are famous for blaming unusually warm or cold weather when they miss earnings.

I laugh whenever I hear retailers talk about the "unusually col" April/May that slowed down summer sales. Excuses are like ***holes. Everybody has one.

UPS flat out told you how the consumer is acting. I give UPS a lot of credit for being honest on why things are slow. Its tough to tell analysts that the reason you are hurting is because your core business isn't performing well. They could have easily blamed this on oil. Kudos for their honesty. Its rare on Wall St. these days.

Bottom Line

We are getting attacked on several fronts as this economy starts to dive into a deep recession. Gas is through the roof, inflation is out of control, interest rates are rising, defaults on all types of credit are rising at an alarming rate. The banks are crippled and cannot lend. Did I miss anything?

Hold on tight folks and protect your money. Get out of debt as fast as you can. Put your portfolio into treasuries and CD's if you can't sleep at night. Make sure you are at least diversified with your investments.

Things are deteriorating rapidly. UPS just told you so.

Investors Head for the Exits as the Banks come Knocking

Good Morning!

I saw this piece from the WSJ this morning and I had to chuckle. It was simply a matter of time before the so called "smart money" got tired of catching falling knives, and investing in banks that are up to their necks in bad loans.

Take a look below at the losses the smart money has taken after buying offerings that were at "discount" prices at the time of purchase.

Whoa! Talk about catching a falling knife. Many of these investments were several billion dollars. Imagine buying one of these stocks at a discount only to find yourself 44% in the hole a few months later.

Here are some highlights from the article:

"Once bitten, twice shy.

As banks rack up billions of dollars in losses from bad loans and blundered investments, large investors are becoming skittish about pumping more money into them.

In the past several weeks, bank executives have encountered unexpected resistance from investors, who have expressed reluctance to participate in the capital-raising transactions sweeping through the industry, according to people familiar with the situation. Already bruised by big losses and fearing that bank shares haven't yet hit bottom, some of these investors are choosing to tighten their purse strings.

"The window for capital-raising is closing," says Brad Evans, a portfolio manager for Heartland Advisors Inc., a money-management firm in Milwaukee that invests in small, regional banks. "Investing in a bank right now means investing in a large portfolio of loans that are essentially a black box."

"Investors are tired of trying to catch a falling knife," says one investment banker who specializes in the financial-services industry.

Growing queasiness could force some banks to downsize their capital-raising ambitions. That is how some analysts and investors interpreted the actions of Fifth Third Bancorp, which on Tuesday said it would raise $1 billion through an offering of convertible preferred stock and sell $1 billion in assets. The Cincinnati bank also cut its dividend for the first time in three decades.
"The decision we made speaks for itself," a Fifth Third spokesman said."

Final take:

I am not surprised that investors are running for the hills after the ass whooping they have repeatedly taken from these banks over the last few months. This does not bode well for the banks going forward.

This will especially hurt the smaller regional banks. They are slowly running out of options. The next step for these banks will be to eliminate their dividends. If this isn't sufficient then you could start seeing these financial institutions begin to fold like tents.

Anyone thinking of dipping their toes into the water and buying financials this week after the drop last week should not pull the trigger just yet IMO. If the capital raising comes to a standstill, there will be another shoe to drop and that shoe could be insolvency.

Sunday, June 22, 2008

Could the Sovereign Wealth Funds Cleanup Wall St.?

Its been a surprisingly quit weekend on the news front. I thought this was an interesting take on how we could possibly help fix the financial crisis.

Here is a commentary that ripped the Fed(and rightly so!) and also discusses an interesting idea on how to reign in the pigmen without government regulation. Its a short piece so here is the article in full.

Here is the link to the piece from the Telegraph:

"Federal Reserve's political masters will damage America
By Liam Halligan
Last Updated: 1:08am BST 22/06/2008

At the start of last week, I thought that the US Federal Reserve was starting to get to grips with the gravity of the current situation. I allowed myself to believe that the world's most important central bank had decided to bite the bullet and address the serious inflationary dangers we face. But I was wrong.

Since the sub-prime debacle began, the Fed has cut rates by 325 basis points - all the way down to 2 per cent. With US inflation running at more than 4 per cent, real borrowing costs are deep into negative territory, which can only provoke more inflation.

Taking the bull by the horns - finally! - Fed chairman Ben Bernanke has lately been cranking up the rhetoric. First, he indicated there would be no more rate cuts. Then he hinted the next move would be up.

By last weekend, the medicine was starting to work. Bond yields showed that Bernanke's word carried weight, with the markets pricing in several rate increases before the end of the year.
This autumn's presidential election means rates may not go down much. But even if they don't, the recent market-driven tightening is useful, as it helps rein in price pressures.
But it was too much - alas - for those who really run US monetary policy. Not content with stamping out any increase in rates, the Fed's political masters are now killing even the idea of a rise in rates. Madness.
Read more by Liam Halligan
Steady nerves for the credit crisis
Last week, I heard Lord “Eddie” George expound on the current financial turmoil. One thing he said really hit home. “The inconvenient truth,” he said, “is that the buck stops with management and shareholders. If we forget that, we’ll return to onerous direct controls, which would be in no one’s interest”.

Lord George is a fan of sovereign wealth funds. He thinks these government-run investment vehicles serve a useful purpose: channelling petro-dollars and other export revenues from East to West, so helping to correct global imbalances.

This enthusiasm should be combined with his correct observation that the answer to last summer’s meltdown lies within our big financial institutions.

Wall Street and the City are riddled with banks owned by lots of shareholders with very small stakes – often other investment banks. This lack of meaningful outside-control explains why the ego-pumped moneymen supposed to be running these outfits have, in fact, been running riot. This has put our financial system in danger. But by taking large stakes in our banks, the SWFs could usher in a new age of self-regulated discipline. And I hope “Steady Eddie” agrees.

• Liam Halligan is Chief Economist at Prosperity Capital Management"

My Take:

Many are starting to not believe the Fed's recent hawkish comments on raising rates. I think the economy is so bad they are starting to worry about the repercussions of doing so.

I still think it must be done because inflation will guarantee an economic flush.

Time will tell, but I thought the second part of this article might be a great solution in terms of stopping the pigmen from running Wall St. like the wild wild west. They done nothing but run wild since the mid nineties. These cowboys have put us on the verge of an economic collapse as a result.

So what are the answers? More regulation is the most obvious one. Now I am torn on this issue because I believe free market capitalism is the best way to prosper economically. However, more regulation is definitely necessary when obvious conflicts of interests are seen.

A good example of this is the ratings agencies being paid by Wall St. versus the buyer of these rated securities.

However, the idea floating in this article about having the SWF's buying large stakes in these banks sounds intriguing to me. Wall St. is now owned by small investors who have no say in what the banks do, as well as the pigmen themselves.

As a result, they don't have anyone to answer to as they start these ponzi games ie(tech,housing) that always end up blowing up. If the SWF's were to buy a large stake in these companies, the pigmen would have shareholders that they would actually have to listen to.

It would be a way of self regulation without getting the government involved. As a capitalist, its something that I think is worth exploring.