Monday, May 11, 2009

Bailing Out On The Bailout

"Never in the history of the world has there been a situation so bad that the government can't make it worse."

Wall Street's rally hits a wall
NEW YORK ( -- Stocks stumbled Monday as investors took a step back after propelling the major stock gauges by more than 30% each in just two months.

Treasury prices rallied, lowering the corresponding yields, as investors pulled money out of stocks and put it into the safer-haven bonds.

Geezo-beezo, what a surprise! Nothing's shocking... Interesting to note today that as the equity markets were making new lows late this afternoon, the Gold Stocks represented by the HUI and XAU Indexes rocketed off their lows in the last 20 minutes of trading. Could we perhaps be seeing the beginning of a move to the real "safe-haven" of Gold as traders eye the bond markets with suspicion? The DOW closed off 1.82%, and the S&P closed off 2.15%. The HUI Index closed off only 0.48%. Bullion Gold closed down today just 0.32%. This bears close observation as only a tiny amount of money shifting from the bond markets into the Precious Metals could not only protect the metals on the downside, but send them much, much higher from here. Time will tell...

It is also worth noting that new public stock offerings announced by the banks, and this afternoon by the Ford Motor Company, have historically signaled the end of Bear Market Rallies before. The bank stock offerings in particular are highly dilutive, and were sold at a discount to prevailing market prices. I can't image why anybody would be buying this wall paper. The markets never cease to amaze...

The following essays are superb, and should all be read in their is all becoming so clear now.

By Thomas E.Woods, Jr., a senior fellow at the Ludwig von Mises Institute
Once in office, the candidate who had run on “hope” began speaking in apocalyptic terms of what might happen to Americans if vigorous government intervention were not undertaken. At the very least, we might experience an extended slump rivaling the Great Depression.

Shortly after taking office, President Obama urged the Congress to approve a “stimulus” package amounting to $787 billion in order to (he said) restore the economy to health. In his first news conference as president,Obama warned that a failure to pass this bill “could turn a crisis into a catastrophe.” “I can tell you with complete confidence,” he continued, “that a failure to act will only deepen this crisis as well as the pain felt by millions of Americans.”

But, fashionable superstitions notwithstanding, government spending – that is, draining resources from the productive sector and devoting them to arbitrary projects – cannot improve the economy. It can only make things worse.

Postponing Judgement Day
By Puru Saxena
Now, I’m painfully aware that America’s economic woes are far from over and that it will be several months before the world’s strongest nation gets back on its feet. However, unlike some other analysts, I don’t foresee a total collapse in the near-future. In my view, what is more likely is that the US economy will muddle through for another year and we’ll probably see a short-lived recovery thereafter. Already, certain leading economic indicators are showing signs of bottoming out and it seems that the worst may be over.

Make no mistake, America’s establishment has elected to postpone judgement day by using taxpayers’ money. Rather than letting the system clear itself out now, Mr. Obama has intervened in the free-market system by nationalising the banks’ losses. Furthermore, Mr. Bernanke has used various tools in order to bail-out the banking system. First, he dropped the Fed Funds Rate to almost zero and when that wasn’t enough, Mr. Bernanke injected huge amounts of money into America’s banking system. It is shocking to note that over the past year, America’s monetary base has more than doubled from US$800 billion to roughly US$1.6 trillion (Figure 1)! Finally, Mr. Bernanke recently announced the Federal Reserve’s intention of monetising debt by buying US Treasuries from newly created money.

All of these measures may have averted short-term disaster, but all that has happened is that the underlying problems have been postponed into the future. By following the above short-sighted and misguided policies, American leaders have decided to burden their children and grandchildren with even greater quantities of debt.

It is my observation that the American establishment’s prime motive is to prop-up asset markets; never mind that such an objective will incur a massive cost to the American society. Let there be no doubt that by printing money, running massive deficits and increasing the national debt, American leaders are debasing their currency and setting the stage whereby foreigners will end up owning a large chunk of corporate America.

There is no doubt in my mind that over the following years, we will witness a massive shift of wealth and power from the West to the East. Over the past few decades, American companies were at the top of their game and they infiltrated the whole world. Now, it is probable that over the coming decade or two, we will see more and more foreign companies and governments increasing their stakes in American corporations.

In summary, the recent policy measures (monetary and fiscal easing accompanied by the nationalisation of private losses) adopted by the US government may have succeeded in stabilising the economy and supporting asset prices in the near-term, but the end result will be a significantly weaker US Dollar and very high inflation.

Don't Be Fooled by Inflation
By Peter Schiff
Recently released short-term economic data, including unemployment claims, non-farm payrolls, home sales, and business spending, which had been so unambiguously horrific in February and March, are now just garden-variety awful. With the Wicked Witch of Depression now apparently crushed under the house of Obamanomics, the Munchkins of Wall Street have sounded the all clear, pushing the Dow Jones up 25% from its lows. But the premature conclusion of their Lollipop Guild economists, that the crash of 2008/2009 is now a fading memory, is just as delusional as their failure to see it coming in the first place.

Once again, the facts do not support the euphoria. Over the past few months, the government has literally blasted the economy with trillions of new dollars conjured from the ether. The fact that this "stimulus" has blown some air back into our deflating consumer-based bubble economy, and given a boost to an oversold stock market, is hardly evidence that the problems have been solved. It is simply an illusion, and not a very good one at that. By throwing money at the problem, all the government is creating is inflation. Although this can often look like growth, it is no more capable of creating wealth than a hall of mirrors is capable of creating people.

We are currently suffering from an overdose of past stimulus. A larger dose now will only worsen the condition. The Greenspan/Bush stimulus of 2001 prevented a much needed recession and bought us seven years of artificial growth. The multi-trillion dollar tab for that episode of federally-engineered economic bullet-dodging came due in 2008. The 2001 stimulus had kicked off a debt-fueled consumption binge that resulted in economic weakness, not strength. So now, even though the recent stimulus administered a much larger dose, we will likely experience a much smaller bounce. One can only speculate as to how much time this stimulus will buy and what it will cost when the bill arrives.

A Bull Market That Few Are Buying
By Tim Price
It's not just what you know, it's who you know. And it's not just who you know, it's who you pay off. As the Center for Public Integrity reports (as cited in last week's Financial Times), the largest US originators of subprime mortgages spent roughly $370 million on lobbying and campaign donations in Washington during the past decade in attempts to stave off tighter regulation of their industry. The study “shows that most of the top 25 originators, most of which are now bankrupt, were either owned or heavily financed by the nation's largest banks, including Citigroup (C), Goldman Sachs (GS), Wells Fargo (WFC), JP Morgan (JPM) and Bank of America (BAC),” who collectively originated $1 trillion in subprime mortgages (almost three quarters of the total) between 2005-2007. That $370 million was money well spent though, given that it was followed, in turn, as the mortgage market imploded, by $700 billion – so far – in troubled asset relief funds – otherwise known as taxpayers' money. Who said crime doesn't pay? That's a return on capital some 1,891 times bigger than the original “investment”. Now that’s leverage. Strangely enough, US politicians have been largely silent about their own complicity in the theft of the century.

In any event it is the sudden and somewhat mystifying recovery back to health by the equity markets that is leaving more than a few market-watchers and putatively professional investors scratching their heads. How can a still deteriorating macro economy, an ongoing dearth of banking credit and a dreadful global trade outlook be consistent with a sharp recovery by stocks? There are several answers. One is that the heroic diversion of taxpayers' money toward the banking system has temporarily goosed a capital-sensitive and sentiment-sensitive stock market – this, essentially, is Grantham's view. Another is that professional investors have been sitting on the sidelines for a sufficient length of time that they are scared at the prospect of missing a suddenly fast-moving train, irrespective of where it is headed. Another is that short-covering managers have voted with their feet. Another still is that the financial crisis is nearly over and the global economy is headed for recovery. Anybody who truly believes this last scenario should be sectioned.

A rally built on sand? Relative performance by FTSE sectors, year to date: A glance at the best and worst performing index sectors within the FTSE this year shows that the rally has explicitly favoured the most cyclical and recession-vulnerable stocks: industrial metals; retailers; automobiles and parts; industrial engineers.. But the rising tide has not lifted all boats – defensives like food producers; utilities; tobacco; pharmaceuticals and telecoms stocks have all suffered negative returns. That admittedly reflects just how bombed-out and oversold many cyclical businesses became during the first quarter, but it strongly suggests a relief rally as opposed to a sustainable one. Because as the IMF recently indicated in its World Economic Outlook, recessions triggered by financial crisis are inevitably more severe than regular business cycle recessions, and recoveries are typically slower, impeded by weak private demand and credit and a steady rise in household savings.

There is another reason to fear that the rally's foundations are less than secure, and they come in the form of the dead hand of (inconsistent) government intervention, specifically but not exclusively in the Anglo-Saxon economies. For breathtaking hypocrisy, note for example the scolding issued by President Obama to bond fund managers within the hedge fund community for opposing a government rescue that compromised their duty to their investors:

"While many stakeholders made sacrifices and worked constructively, I have to tell you some did not. In particular, a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout. They were hoping that everyone else would make sacrifices, and they would have to make none. Some demanded twice the return that other lenders were getting. I don't stand with them. I stand with Chrysler's employees and their families and communities. I don't stand with those who held out when everybody else is making sacrifices."

Evidently those hedge funds didn’t spend enough on lobbying. As hedge fund manager Cliff Asness of AQR responded:

"Managers have a fiduciary obligation to look after their clients' money as best they can, not to support the President, nor to oppose him, nor otherwise advance their political views. Let's be clear, it is the job and obligation of all investment managers, including hedge fund managers, to get their clients the most return they can. If they give away their clients' money to share the "sacrifice", they are stealing."

And as Bill Gross of Pimco pointedly observed, as Adam Smith's invisible hand comes to resemble more and more the public fist of government, asset values will be negatively affected:

"First comes the haircutting and burden sharing, most recently evidenced by Chrysler and soon to be played out via the stress testing and equity dilution of government ownership of ailing banks. In those footsteps, however, will follow a slower rate of economic growth, not just in the US, but worldwide as heretofore libertarian capitalism is bridled, saddled and taught to trot instead of gallop over the investment plains... the Obama cannon shot will have financial consequences. Do not be deceived by the euphoric sightings of “green shoots” and the claims for new bull markets in a multitude of asset classes. Stable and secure income is still the order of the day."

So a war on terror is followed by a war on free markets, wherein those special interest groups (namely bankers) who bribe politicians most heavily get the greatest protection, while other financiers whose businesses don't involve millions of voters and who never required a penny of taxpayer support get publicly flayed.

The gold monetization scheme is ending
By Murray Pollitt
The G8 appears finished but their policymakers continue to try to bend the G20, and the world, to their will. The establishment, the Fed, the Bank of England, the Bank for International Settlements, the same gang that has been setting policy for decades, is still at it. They appear to remain in charge (with nary a whimper of criticism about the trillions of dollars' worth of damage their policies have caused) but, when it comes to gold, they are slowly losing their grip.

Besides setting the stage decades ago for sub-prime paper, CDSs, and so on, it appears policymakers embarked on a scheme, at more or less the same time, to monetize the hundreds of billions of dollars' worth of gold lying sterile in central bank vaults. The temptation was too much. One-percent income on gold for a central bank was better than nothing, so the argument ran, and for the Lehman types borrowing gold (and selling it) provided lots of money (capital) to play games with.

It was so easy. Besides, the gold carry trade involved selling lots of gold into the market and this helped keep the price down (and hopefully the dollar up), a subject near and dear to policymakers.

One would have to be barking mad not to see the benefits a higher gold price would have on vast chunks of the global economy. Even long-suffering Zimbabwe would be a huge beneficiary, and more wealth in Africa and Latin America would mean more exports of Fords and Cats from the United States. The establishment may not care, but that won't stop G20 members (and others) from connecting the dots and following China's lead in increasing gold weighting in monetary reserves.

Gold is again becoming a preferred central bank asset and the great monetization scheme is coming to an end. Western policymakers and banks have pushed their game too far for too long and the combination of the shift of power from G8 to G20, plus the reduced availability of gold, will turn the tide. You can sell gold only once, although, in the new wondrous world of derivatives, maybe somebody has actually sold it twice.

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