"Create jobs" idiocy

If I see another politician claiming that they'll "create jobs" I'll probably cry. How did the electorate become so mentally decrepit that such a line doesn't get tossed back in their face every single time they utter it? *sigh* Businesses create jobs. Small businesses do a better job of it than large. Individuals start small businesses. Individuals with capital. Capital comes from savings.

You want to destroy job creation, then destroy savings. Here's a good recipe for doing just that, steadily drive down interest rates. Even better, inflate the cost of necessary goods (food, energy, housing) at the same time so that even the frugal have a harder time saving money.

Make a person have to be foolish in order to accumulate the 6 to 12 months worth of necessary savings in order to be able to take the risks inherent to starting a new business. After all, what sane person will scrimp and save for the prerequisite 3 to 5 years when the real return on saving their money is essentially zero to negative? In that environment, the incentives are towards spending, buying cars, houses, dinner out, bigger and better TVs, vacations on the coast, new clothes that are "in style", etc. Or, if they actually want some return on their investment, it makes them have to chase risky assets like stocks or high yield bonds.

Even better, keep inflation going while driving interest rates down. That makes the value of their savings worth even less.

In that environment, the only practical way for most entrepreneurs to have the capital to start a small business is to borrow it. Now, instead of having to earn just enough to get by on their savings, they have to earn enough to service their debt. Oh, and since they're a small business, in order to get that loan they've had to pledge whatever equity they have in their house or autos or whatever. Now, when their small business tanks (and 9 out of 10 do in the first couple of years), they lose everything instead of just losing their savings.

What semi-rational person would start a business when this is the fiscal environment? Not many. Which is sort of unfortunate since the actual unemployment rate (if you measure it the way it was measure up until around 1994) is right around 22%. We sure could use those small businesses starting up.... Unfortunately, we've spent 20 some years absolutely killing the necessary pre-conditions for small business creation and therefore job creation.

At some point, we just might see candidates that actually understand this. I lost hope years ago of the Democrats ever fielding such a candidate, unless they're in a state like Wyoming, Colorado, Montana, or Idaho. It's taken me a few decades to conclude that the Republican party doesn't really get this either.

Economically, the real difference between the two parties really does seem to boil down to who their economic corruption favors. For Republicans, this has been the ultra-large businesses. For Democrats, it has been the labor unions. Neither approach does anything but buy votes and campaign dollars from the favored constituency. Hmm... that's actually not quite true. Both approaches also align nicely to destroy the fundamental incentives for small businesses -- because handing out cash that the Federal government doesn't have to ANYBODY both drives down interest rates (as a matter of necessity otherwise the US Treasury couldn't afford the interest payments on the growing debt) and increases inflation by pumping more dollars into the economy.

So, economically, they're both worse than useless. I'm not sure which approach will kill the nation's economy faster. :(

So, off to vote. :)

What would be a good investment in the near term?

Right now is generally a bad time to play in the stock market. The enormous levels of Federal Reserve interference in the markets (as well as either rampant stupidity or malfeasance by most every single financial regulatory body) has resulted in a market where the performance of individual stocks has become highly correlated. On days when the "market" goes up, all stocks tend to go up, largely independent of the fundamentals of the individual companies. For most of last year, the stocks that went up the most were the ones with the worst fundamentals... go figure.

Fortunately, there have been good ways to tell if the market would go up on any particular day. The best strategy was to only buy on days when the Federal Reserve conducted Permanent Open Market Operations (POMO days). That's when the NY Fed creates new money to buy US Treasury bonds back from the Primary Dealers (who are required by law to bid at U.S. Treasury debt auctions). Each POMO day, another couple billion dollars gets dumped into the big banks and has more or less guaranteed an up day for the market. Unfortunately, people have started to notice this and front-run the Federal Reserve... So, it's not as lucrative as it was a while back.

That's what makes the market (as a whole) go up, and since stocks are now way out of whack, in terms of correlation, it makes individual stocks go up also.

There are loads of reasons NOT to buy stocks right now. About the ONLY reason to consider buying stocks right now is if you think that the Federal Reserve will be able to print somewhere north of 1.5 to 2 trillion in new dollars and hand them to the banks which turn around and recycle them into stocks (or more likely, S&P 500 futures market for greater impact).

However, in spite of all the reason that the market should go down, there is one major reason to beware betting that the market will go down anytime in the immediate future -- You're playing chicken with the most powerful central bank in the history of the world, and it is intent in debauching the world's reserve currency. If this strategy actually worked, Zimbabwe and the Wiemar Republic would be held out as examples of monetary genius -- instead of examples of how to completely and totally destroy the middle class and starve anybody on a fixed income.

Here is my take on why one SHOULD NOT be buying stocks (or bull ETFs or mutual funds at this time):

• Horrific corporate balance sheets that US companies have -- all that "flush with cash" BS ignores the debt they had to sell to get the cash and the way that the items being depreciated aren't getting repaired or replaced.
• The finance sector would have ceased to exist in 2008 and be replaced by entirely new banks if Congress hadn't extorted FASB to allow the financial sector to carry somewhere north of $3,000 billion in mortgage related assets at mark-to-model/unicorn/fantasy levels rather than mark-to-market levels. There is a market for EVERYTHING if you lower the price sufficiently far. Instead of banks actually having MORE than sufficient assets that can be sold (at any given time) to pay off their liabilities (which just happens to be a key tenant of the Federal Deposit Insurance Act and the only reason why such a little Deposit Insurance Fund could possibly backstop the insured deposits of US banks), the banks are almost universally under-capitalized on a mark-to-market basis. Every single large one is. Most of the smaller ones are. Almost every single Friday for the past 18+ months we get another example of this when the FDIC takes over a bank and has to incur a hit to the Deposit Insurance Fund or enter into a loss sharing agreement with the purchaser. If the banks assets could actually be sold on the market for what the bank claimed they were worth, there would be no loss.
• Consumer sentiment surveys that for the past 2 years have shown that people's assessment of their current situation is "lousy", but they're hopeful about the future (eventually the hopium wears off and people start to notice they've had flat to negative real wage growth for a decade during which prices of the things that they really actually need (food and energy) have gone up),
• If unemployment were counted today the way it was counted up to the early 1990s, the unemployment rate is in the 22% range. -- which is awfully close to the 25% it hit in the Great Depression.
• 40.7 million people in the U.S. are receiving food stamps. In the Great Depression you had bread lines. Now, in the Greater Depression, you can see the same thing by going to WalMart at 11:45PM on the last day of the month (food stamps charge cards recharge at midnight on the first of the month). There's our breadlines.
• The rampant fraud in mortgages from origination to securitization to foreclosure. This is probably going to kill no small portion of the banking sector all by itself. With lawsuits and criminal charges (every single instance of a falsely sworn affidavit is an instance of perjury -- and typically a felony that packs a handy fine) on the foreclosure front, tax claw-backs from counties and states (MERS was essentially a way to let "Wall Street" (I hate that term) transfer mortgages around without actually having to refile each time with the county and state land offices -- the same counties and states that have budget holes that make MERS self-proclaimed $2.4 billion in tax and fees savings look awfully appealing), and finally pushback suits from MBS investors who were sold securities that contained massive violations of reps and warranties (to the tune of 80+% for at least two of the MBS sets that Deutche Bank sold) that the bank's execs KNEW for a fact were violations (Citigroup's chief underwriter has testified that over 60% of the mortgages sold in 2006 were defective, a level that rose to 80% in 2007).
• At some point, it seems inevitable that the SEC will be forced to investigate the dealings of the big banks. There's simply too much testimony already extant indicating that the fraud at mortgage origination and securitization time was well known by senior management.
• Ditto for Sarbanes-Oxley liability for the senior execs.
• In FY2010, the U.S. Federal government spent $3.4 trillion and the total borrowed by the U.S. Treasury increased by $1.6 trillion. Almost HALF of federal expenditures were borrowed money. That's either ALL of the social services (medicare, medicaid, and social security) or more than ALL military spending. For 2 years now, the Federal government has propped up 12% of the GDP... that can't possibly continue forever, and it hasn't "primed the pump" on an actual recovery.
• Over half a year of consecutive retail outflows from equity mutual funds. People are either pulling their money out because they need to eat, or because they want to "take profits," or because they've lost faith in the market itself.

None of that paints a pretty picture of the immediate (or medium term) outlook for the US economy. But wait... there's more... :)

The rise of high frequency trading has created a stock market where we have volume (and not much of that to be honest) but very, very little liquidity. The flash crash on May 6 demonstrated that the actual organic bid (an investor looking to hold onto the stock they bought for at least a minute or two) was at least 10% below the market levels at the time. When the HFT engines shut down, the market mostly ceased to exist. With HFTs simply opting to not participate "on the way down," the market suffers significant loss of liquidity at a time when it is needed most. Since the May 6th flash crash, there have continued to be flash crashes in individual stocks multiple times a week.

Over and over again the market is demonstrating that the exit door is very narrow, and the doorway is very sharp. If you buy a stock with the idea that you can always sell it if the price starts to fall, you could be in for a rude shock.

All that said, I actually have some ETFs and mutual fund positions. Every single one of them is bear oriented. And every single one of them is currently below water -- that's the risk of playing chicken with the central bank.

I don't really know how the market will play out in nominal terms. In real terms however, it, like the rest of the U.S. economy faces the enormous headwind of a credit bubble collapse. And, like all credit bubbles that have collapsed before, this one too will bring about a depression since we were unwilling to have the smaller recessions necessary to clear the bad debt earlier.

The good news is that you can see it coming -- if you look in the right places. The bad news is that those responsible for helping regular folks like you and I see this coming are intent on hiding the full extent of the problem from us.

Whenever you see an article or a news program that talks about the intentional filing of falsely sworn affidavits in court as a "document problem" or a "technical problem" rather than what it is, perjury and fraud on the court, you can know for a fact that you have found yet another person who's telling you that's rain falling on your foot.

I get most of my information reading the work of people who have been writing about the mortgage fraud and securitization fraud, and SEC malfeasance and FDIC failure to enforce the Prompt Corrective Action section of the Federal Deposit Insurance Act since back in 2007. But, that means spending a lot of time reading some rather detailed articles from a handful of sites on the web, and it took probably 3 months to even begin to get a handle on the terminology involved -- which is sorta far removed from software development.

The mainstream news media probably can't afford to go into detail, but they could start calling a spade a spade. When the head of our central bank manages to miss the biggest credit event in the past 70 years, maybe it's worth wondering out loud if he's a moron (since a large number of people saw it coming and explained how and why), or he's complicit in creating the problem. Instead, we got some more, "this guy is smarter than all of you so you'd better listen to what he has to say" treatment.

Here are the aggregators and commentators that I read (beware, the first two frequently contain "salty" language and course imagery and metaphors):

www.zerohedge.com
Market-Ticker
Global Economic Analysis

I've tracked others off and on over the past few years, but those guys seem to consistently cover all the major points -- including several that I really lack the expertise to follow.

Naturally, nothing in this post is investment advice. I'm not allowed to give that. Most things in this post actually constitute "don't invest" advice. I think I'm allowed by law to suggest that.

We don't need to pay more people to ignore the problem

This is just asinine.

WASHINGTON, Oct 23 (Reuters) - The Obama administration plans to unveil on Monday a new plan for dealing with troubled financial giants, said a senior U.S. lawmaker, who also mentioned potentially big changes for the insurance industry.

No doubt, many people will be saying "about damn time." But that's missing the actual point.

Instead of enforcing existing laws, the plan is to come up with new laws. We aren't suffering from a shortage of laws (well, except in the repeal of Glass-Steagal), we're suffering from our government not enforcing the existing laws.

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There are basically two types of loans -- those that are backed by the government (FDIC insured deposits) and those that aren't.

If you make a loan to a bank (by making a deposit or buying a CD) and the bank fails, the FDIC covers any loss you would have incurred by the bank not having the ability to repay your loan. (Yeah, up the FDIC insurance limits per deposit account per institution.)

If you make ANY OTHER LOAN at all, and the borrower can't repay, you loose the amount loaned (excepting whatever you can recover from any assets pledged as collateral for the loan).

That's it.

If the government were to actually enforce the law, then your tax dollars wouldn't be going to pay the large salaries and bonuses of companies that made stupid, NON-FDIC insured loans that went bad. Instead, your government decided to use you, me, my kids, your kids, and probably our grand kids to protect the financial giants that made hundreds of billions of dollars worth of stupid loans.

Oh, and the FDIC refuses to do its job of shutting down the banks that are STILL gambling capriciously with your deposits. Instead of banks being shut down before they become massively insolvent, the FDIC is waiting until they are dramatically underwater. That's a violation of the law.

Is this just a jobs plan for more people who will ignore the problems they are required by law to address?

Market Cap -- what it means

While reading about the Citigroup bailout I saw a rather dumb statement in some of the news coverage.

Okay, okay, I saw a great many dumb statements, but most of those were of the ordinary "this bailout is a sad but necessary step to ensure the stability... blah blah blah variety." What stood out this time was a blatant misunderstanding of how the stock market, and indeed, free exchange, works from somebody who should know better.

Here's the statement that got my attention:

Given that Citigroup's entire market value on Friday was $20.5 billion, "instead of taking that $20 billion in preferred shares we could have bought the company," he says.

On the surface, that sounds pretty reasonable. After all, Anil Kashyap, the Edward Eagle Brown Professor of Economics and Finance at the University of Chicago's Booth School of Business should know what he's talking about.

There's just one problem.

This statement is only correct given circumstances that basically never exist.

So, here's an explanation of what Market Valuation actually means, so the next time somebody smart says something dumb like this you too can be annoyed. As a side note, I've said things like this myself -- without realizing I was just grossly wrong. Live and learn.

What does Market Value or Market Capitalization mean.

From Wikipedia: "Market capitalization represents the public consensus on the value of a company's equity."

Again, this statement is only sort of correct.

The market cap is the based on the price "negotiated" between the most recent buyer and seller of the stock.

Each stockholder has their own perceived valuation for their shares. Each knows the minimum amount they would sell for. Each potential buyer of a stock also has their own perceived valuation for the shares and each knows the maximum they would pay.

At any given time, many shareholders aren't currently interested in selling their shares because their valuation doesn't match a buyer's. If I held Citigroup stock and felt it was worth $60 a share, I'm not going to sell -- not today anyway.

The market cap of a company is based on the price of the last sale -- independent of the size of that sale. As few as 1share may have changed hands, but that still sets the market cap. The only time the price of the last sale is indicative of the actual cost to buy all of the outstanding shares is when all of the existing shareholders would be willing to sell for that price.

That clearly wasn't the case last Friday when only 1billion of the 5.45 billion outstanding shares changed hands.

The current share price is best information about the perceived value of a company, but it most certainly doesn't reflect the price at which all outstanding shares could be purchased.

Thinking of market cap that way is just sloppy thinking.

Bailout blues

It has been a while since I could stand to write about the economy. I've continued reading and paying attention, but the amount of "stupidity in the system" is just painful.

The US has put the taxpayer on the hook for $7.7 trillion dollars, so far, as part of the bailout. That's half of the estimated 2008 GDP. It's probably a bit over half of the GDP for 2009.

The scary thing is that we've still got a long ways to go. Expect rising unemployment until 2010. With that will come more corporate bankrupcies as the US economy is forced to give up the asinine notion that it can be consumer driven. That only works as long as folks are willing to lend you money. We're coming to the point where nobody is that stupid.

Well, nobody, but the Federal Reserve and the US Government.

The Federal Reserve today put together a $200 billion dollar package of financing for supporting consumer finance (credit cards, student loans, auto loans, and Small Business Admin loans). The Treasury will be backstopping it from the $700 billion TARP bailout. The goal seems to be that if the central bank and the US government can get enough debt off the books of banks, things will be okay.

The problem is that much of that debt is going to default. Who would you rather have holding bag when it does, Citigroup, or your nation's central bank?

That's a trick question. You don't get a choice. haha :(

So, hunker down. At this point, the real question seems to be when the US or the Fed are going to be forced to default or effectively default by firing up the printing presses.

Happy Thanksgiving.
Be glad you don't live in Iceland, or Russia, or Europe, or China. Things will be even worse there.

Crazy times

It's 1:00AM, that must mean it's time for a new blog post.

I've been watching the Asia/Pacific markets move up today. I so don't get what is happening in their markets today and the U.S. markets last week.

The engine of the world economy for the past two decades has been the American consumer. We buy stuff. Even when times were bad, we kept spending more money, carrying the global economy through a couple of downturns and recessions. We were the unstoppable juggernaut.

We did this by eliminating our savings (from 10% to 0 and occasionally less than 0), tapping into the equity in our homes (by HELOCs and refinancing), and by running up credit card balances.

But the engine has died.

In September, consumer spending fell by .3% in the U.S. That news came out last week, along with the most dismal report on consumer confidence ever.

Any bets on how the October numbers will look? They won't be better.

I'm trying to understand the thinking that has gone into the purchases in the market last week. There has been precisely zero new information indicating that the economy is going to improve anytime in the near future. In fact, every single bit of new information has been negative. Note that I'm not considering more debt (at the corporate level, or cheaper debt to banks a good thing -- that's like using bad tequila to kill a hangover).

I suppose that psychologically, the upturn in the market is driven by hope. A great many people hold out hope that the worst is over, that their 401(k)s and IRAs will start growing in value again. The baby boomers are going to need their money soon enough that they might be all but dependent on a market recovery coming soon. With all the media coverage asking whether or not the market has "found a bottom", perhaps people are expecting a V shaped market recovery.

I suppose that would be a comforting thought.

But, here's the hangup I have.

What exactly is going to drive the business growth that would warrant higher stock prices? Every step of the economic chain is either stressed or broken. I fully expect that after Christmas we will ring in the New Year by watching company after company go bankrupt. While these bankruptcies are necessary, the opacity in our financial markets today mean that it is nearly impossible which third-parties will be injured in any given corporate bankruptcy.

Market growth is supposed to be driven by a reasonable expectation of earnings growth -- not by the near certainty of unexpected negative balance sheet events.

For a graphical view of last weeks economic news, check out:
http://econompicdata.blogspot.com/2008/10/econompics-of-week-103108.html

This has been an interesting week to have a bear-structured portfolio. If it wasn't for my near certainty in the economic mess heading our way, I would probably be pretty worried. Instead, it's been a good time to pickup a bit more "bearish" holdings on the "cheaper." If I'm wrong, I'll be one of those funny guys who lost money as the market got better.