Saturday, September 15, 2012

Remembering June 2008 On The Anniversary Of Lehman Brothers' Bankruptcy

One of the best parts of the "story" behind the credit crisis was not what took place on September 15, 2008, but what took place months before leading up to the failure of Lehman Brothers.

I read about the first 5 or 6 books that came out describing in detail step by step what happened in the years leading up to the crisis and one of the most fascinating parts of the story for me was the battle between hedge fund manager David Einhorn and Lehman.

During the early stages of the crisis, during early 2008, Einhorn would get on conference calls and ask questions that made everyone feel very uncomfortable. He not only took tremendous flak from Lehman, who went after him legally for "purposefully" trying to slam the stock and make money shorting it, but he took flak from almost every analyst in the market who essentially had no idea what he was talking about.

The following is an interview he gave on CNBC in June 2008, three full months before the Lehman failure, and it is staggering how close he was to being exactly correct on every single issue even though he was only working with a fraction of the information.

The best part comes at 4:45 in when he says; imagine if the loss they are planning on reporting today (during the conference call) is 3 to 5 to 10 times bigger, they will not announce it because they know they can not raise enough money to cover those lossesThis turned out to be exactly what was happening, confirmed well after the fact with documents discussing how Lehman would try and spin its problems during the conference calls. Unbelievable.

He rode the Lehman short all the way down to zero making a fortune for his clients.

Today Einhorn is once again laughed at for continuing every quarter to make major purchases for his clients in another very, very, strange investment.


We'll how that one works for him this time around.

Friday, September 14, 2012

Achuthan Re-Confirms We Are In Recession Right Now

Back in July I posted the video timeline series of the interviews that Lakshman Achuthan has provided both CNBC and Bloomberg  over the past year (see ECRI's Achuthan: The Recession Is Here Now) . He originally made his recession call last year at this time and said in January that it would arrive around the mid point in the year. He has come back on Bloomberg once again to get laughed at (how could a country be in recession when the stock market is rising?), and to provide some excellent points on how people viewed the economy just days and weeks before Lehman collapsed back in 2008.

At that point we were still looking at positive GDP data, the stock market had only fallen a small percentage amount, and most people felt it was just a small dip on the road upward. Just weeks before Lehman most analysts did not even have a recession on their radar and we had already been in recession for a full 8 months. Try not to pay attention to the other talking heads making ridiculous comments that are unfortunately also part of the interview. Bloomberg and CNBC usually have the courtesy of letting Achuthan speak alone.

Marc Faber: Fed Policy Will "Destroy The World"

The legend Marc Faber takes some time to speak with Bloomberg to discuss the Fed's recent announcement of QE to infinity. He sees relative undervaluation in Asian stocks compared to the recent massive out performance in the United States stock market (I couldn't agree more). How high will gold go and how low will the dollar go? To get a number Faber says that you need to call Mr. Bernanke, but in the mean time the trends are locked in place. He says that you want to own physical gold and hold it outside the United States (see Helicopter Ben Bernanke Delivers: Unlimited QE Forever for a link on how to do so through the services of Goldmoney).

Nigel Farage On The European Madness

It is always amusing to hear Nigel tear into the status quo over in Europe where, like across the pond here in America, they continue to enact policy that will ultimately make things worse down the line. The IMF's announcement this week that Greece will need another bailout provides yet another glimpse into the idea that you cannot solve a debt crisis with more debt. Oh well. In the meantime we can enjoy the few voices that could see what was coming before it got here.

Thursday, September 13, 2012

The Next Four Years

Couldn't have said it better Mr. President.

Based on what is in store for whichever candidate is unlucky enough to oversee the misery in the economy coming over the next four years, I recommend voting for the President you like the least.

The Dark Side Of QE: The Next Chapter In Our Story

I am about to tell a story with a very happy beginning and a very sad end. Unfortunately, it happens to be the story we are living in today, but because we are still in the happy part of the story most people cannot see what is coming ahead. I will provide that for you here.

The immediate knee jerk reaction to the Fed's announcement today is that the Fed printing $40 billion per month and pumping it into the banking system is fundamentally strong for every type of asset in the world. Those that graduated from college in 2009 and have only been watching the market for a few years would believe this is a fact.

In essence: buy everything and just keep on buying.

Now that we know we are on the path of QE to infinity it is very important to understand how an endless running stream of new money fundamentally impacts assets differently. You'll notice a repetition of the word fundamentally because for long periods of time assets can move in the opposite direction of their fundamentals. Think of the 100% par value of subprime mortgage tranches in early 2006 or the multi-billion dollar valuation of in 1999. Over time assets have a tendency, like gravity, to revert back to their fundamental value. This is what causes booms, busts, opportunity, and disaster.

Before we go any further, let's quickly review how QE actually works. The Fed shows up at the doorstep of primary dealer (the largest) banks with a printed bag full of money and asks them if they can come in and buy some mortgage bonds. The banks agree, hand them the bonds, and take the bag full of cash. The banks now have a new lump sum of money to spend or do with what they like. This is also new money that did not exist in the economy before which is how the money supply is increased. In reality, there are no knocking on doors with bags of money, this process takes place electronically with a few key strokes from either side. The outcome, however, is the same.

Part 1: The Positive Benefits Of QE (March 2009 - September 2012)

We'll start with mortgage bonds as a completely separate conversation because the Fed has targeted this one asset as their choice of purchase. Mortgage bonds and mortgage rates will have an obvious fundamental advantage to the Fed purchasing them every single month. If the Fed decided they were only going to purchase blue Honda Accord cars every month, it would have a positive fundamental impact on the price of those cars.

The QE process of mortgage bond purchases has the immediate impact of lowering mortgage rates (a new larger buyer of mortgages in the market - higher demand equals lower rates). It also has an alternative impact due to the bag of money left at the doorstep of the banks. The banks can now take this money and spend it. They can purchase treasury bonds, corporate bonds, and municipal bonds (plus a few other assets we'll get to in a moment).

This bond purchasing lowers the cost of borrowing for everyone as lower interest rates allow corporations, local governments, and the federal government to borrow more. This is the Fed's second goal: to lower the cost of borrowing to stimulate the economy.

Stocks rise with the Fed easing in part for the very reason just discussed. If it costs corporations less to borrow money it increases their profits and allows them more opportunity to grow. QE also has the ability to push up stock prices because banks now have more fresh cash that they can put to work in the stock market.

The positive benefit of QE, the happy part of the story, is essentially what we have experienced since the first QE program began in March of 2009. Interest rates on every type of bond in America: treasury, corporate, municipal, mortgage, auto, credit card, and junk bonds have fallen significantly.

Stocks have soared, rising over 100% in the S&P 500 since the first QE began that March. This creates an immediate wealth effect for those holding stocks (their portfolio says $400,000 instead of $200,000 making them more likely to spend and boost the economy).

Corporate profits have surged with the lower cost of borrowing, the massive reduction in expenses (mostly through employee layoffs), and an increase in productivity.

Over the past 3.5 years when rolling out QE 1 & 2 the dollar index has moved sideways and even appreciated (due mainly to the over weighting of the index to the euro).

So far we have only experienced the good part of inflation. We have only experienced the high of the drug, and the buzz of the alcohol. If the story ended here today it would appear that QE was the correct decision all along and that the unlimited QE program announced today has no reason to be anything but positive.

But the story will not end here today. We will look now look at what comes next.

Part 2: The Dark Side Of QE (2013 - 2016)

This is where we move away from the fairy tale and back into reality.

When the Fed shows up at the bank with the bag of cash there is another asset class the bank can purchase with the money: commodities.

Commodities include agriculture (food), energy (oil and natural gas), metals (copper, steel, aluminum), lumber, water, precious metals, and every other tangible good in the world. Many of these items are either directly purchased by consumers (food and energy) or they are purchased as a byproduct of other items they use such as a car, shirt, or washer and dryer. This directly raises the cost of living for consumers. A higher cost of living means less disposable income and less money available to buy goods such as iPads, furniture, vacations, or cars. A slow down in spending in these areas not only impacts the stock prices of these companies, it spurs lay offs at them as well.

This is looking directly at the consumer side, but what about the corporate side? At the end of the day a company is judged (with its stock price) based on its ability to generate profits. If the cost of goods to produce rises (with rising commodity prices) and companies are not able to raise prices enough to offset those costs (which would occur if wages were not rising at an equal or greater pace) then profit margins fall.

Do you see, based on the fundamentals of economics, how inflation does not help the price of stocks. This is, in part, why stocks were crushed during the stagflationary period of the 1970's.

What about bonds?

Bonds face a similar dilemma, only magnified. Why? Because bonds do not have the ability to raise prices the way a company can to offset inflation (even though we just saw how companies can only raise prices so far without choking off all demand). Bonds are set at a fixed interest rate. If the underlying value of the currency the bond is held in depreciates in value then the investor is trapped.

Many bonds today actually have a negative yield. This means that the cost of living is rising more rapidly every year than what is paid out in interest. Investors buying these bonds know going in that they are losing purchasing power. Why would anyone ever do this? I have no idea. Why would they purchase Internet stocks in the year 2000 at sky high valuations when the companies had no profits? Bonds today, like stocks then, are in a bubble. The madness of crowds has set in.

At some point, as new QE money enters the money supply and continues to depreciate the value of the currency there will be an awakening moment for bond holders. What will trigger this "moment?" I have no idea. But I know that it is coming. Those trapped inside the long term bonds that have been front running the Fed's QE programs will suddenly realize that they are running in quicksand.

How about the currency itself? Paper bills. They have no interest rate risk right? They have no corporate margins to worry about right? Holding cash at the bank seems like the best available option.

In reality it will be ultimately be the worst. The only thing worse than a low interest rate during a period of high inflation is no interest rate. We live in a borderless world today where investors do not have to hold their money in a domestic bank (just watch what is taking place right now in Spain). Money can be moved to a bank in Switzerland, Hong Kong, Brazil, or Canada. It can also be held in those currencies at those banks.

This is what will take place at first slowly in America and then in a rush at the end. Most will likely not be allowed to escape as the borders are shut when the politicians realize what is taking place. Their money will be trapped inside the closed room being filled with water by Bernanke. Their purchasing power will drown.

How about real estate? This is one of the favorites for those arguing for an inflation investment. The problem is that real estate is purchased with debt. If the cost of the debt rises significantly (interest rates rise) then the price of the asset is going to fall, even if the cost of building a new home is rising as well. This will only occur over the short term because we still have an enormous amount of untapped supply to mop up. It is only in a hyperinflationary environment, not a very high inflationary environment, that real estate will be a strong investment.

So after understanding why stocks, bonds, cash, and real estate fundamentally should go down in a high inflationary environment, what is the best investment option?


I have explained numerous times using historical examples and charts how we are in a long term secular bull market for commodities which began in the year 2000. Energy, agriculture, water, rare earths, and precious metals have been and still are my personal favorites.

If the Fed prints more money tomorrow there is no fundamental downside for the price of gold. There are no corporate margins squeezed. There are no interest rate risks. There is no dilution of the money. It is just a larger amount of paper money chasing a stable amount of physical gold. Throughout history that has only led to one thing: a price adjustment in the price of gold to account for the paper money that has been created.

Usually this happens very slowly over a long period of time and then very suddenly and violently at the end. Almost all of the entire bull market run in gold during the 1970's happened in the last 90 days leading into January 1980. I think it will be the same this time as well.

For an in depth look into the inflation/deflation discussion see Would The Fed Printing $50 Trillion Tomorrow Cause Hyperinflation?

Helicopter Ben Bernanke Delivers: Unlimited QE Forever

The Federal Reserve has launched Quantitative Easing Part 3. The announcement read that the Fed will print $40 billion per month to purchase mortgage securities.

How long will this program go on for? There is no time limit. The Fed will purchase assets (and re-evaluate periodically if they should purchase more) every month until they feel the economy has improved enough to stop printing.

Those of us who have taken the time to study real economics understand that the Federal Reserve printing money hurts the economy. This has created the ultimate paradox and set us up for maximum disaster.

Think of a friend of yours who is extremely drunk at a party. One of your other friends walks over and says that to get him feeling better he will give him another beer every 15 minutes forever. If that doesn't work he will start doubling the amount of alcohol he provides him every 15 minutes. If that doesn't work he will double it again.

This is what Bernanke has just announced. Unlimited QE forever. He will pump the economy with alcohol and drugs until it sobers up. In addition, he has promised to keep interest rates at 0% through 2015 protecting speculators who are currently loading up on the most toxic of assets (that will explode when interest rates rise).

I spent all of June, July, and August endlessly discussing the extreme pessimism in the precious metals and precious metals mining shares. See Inside The Mind Of A Tuna: How I Invest & Why. For those that had the courage to make a purchase over the summer during the maximum point of pessimism as I was pleading to buy, I congratulate you.

If you own 0% of your personal wealth in precious metals it is the equivalent of living your life without car insurance, health insurance, home insurance, or life insurance as a nuclear war is taking place in your city right outside your door. There is a mad man at the helm of our Federal Reserve.

It takes 5 minutes to open an account by following the link below. I am not recommending this as an investment, I am recommending it as insurance.

GoldMoney. The best way to buy gold & silver

Wednesday, September 12, 2012

Good News For Sellers: Home Prices To Rise 7%

Ugh. How many times do we have to go through this? After numerous times calling the housing bottom since 2008, Barron's is once again back and providing the good news that anyone who is brave enough to purchase a home today will make at least a 7% return on their money. The only decision is how much money do they want to make? A larger purchase price only means greater returns.

What readers here know is that most foreclosures continue to be held off the market today artificially reducing the available supply.

We also know that a zero interest rate policy with all loans guaranteed or purchased by the government has created an artificial lending environment. The following chart shows the difference in government mortgage origination in 2005 (50%) vs. government mortgage origination last year (95%). Remember that in 2005 it was already was too high at 50%, which fueled a large portion of the housing bubble. At 95%? God bless the American tax payer. Click for larger image:

The next great chart shows the upticks every step along the way during Japan's twenty plus year housing decline (homes are still declining today).

Why is real estate still declining in Japan 22 years after it peaked? The has government stepped in at every possible point to "stimulate," and they never allowed the inventory to clear the market. Sound familiar?

16 more years to go

h/t Zero Hedge, Dr. Housing Bubble

A Conversation With Ray Dalio: Europe, The Global Economy, Gold, & More

Due to the fact that hedge fund managers charge a hefty premium to invest in their funds, 2% annual fee plus 20% of all profits, it is usually the case that any such slow down in performance causes investors to jump ship.

This means that it takes a very special manager to last over the long run because you must have essentially an endless string of success which is almost impossible in the financial world we live in today. One of those very special fund managers is Ray Dalio who formed Bridgewater Associates in 1975; now the largest hedge fund in the world with over $120 billion under management.

It is always a treat to read reports from Dalio or even get a 5 to 10 minutes interview on the markets, but today I have something far more special. Ray sat down with Maria Bartiroma this week and provided an hour long interview and Q&A session that is provided in the video below.

Ray discussed his thoughts on Europe, the global economy, current investments strategies and gold, saying "there is no sensible reason not to own gold" based on the current negative interest rate environment. Much more from one of the greatest ever:

The Muni Bond Massacre Approaches: Understanding The Coming Storm

The video below provides an excellent primer for those trying to understand why cost cutting seems impossible at the state and local government level. Unions have come to dominate the employee base for public (tax payer paid) workers at the state level (teachers, police officers, etc.). Unions pay huge campaign contributions to choice up and coming politicians who then reward the employees with massive pay increases when they arrive in office. These conversations all happen behind closed doors.

Things only come to the surface when the states "surprisingly" run out of money. What happens next? Exactly what is taking place this week in Illinois, which you have probably seen all over the news, with the teachers striking and impacting the education for 350,000 students in the state.

The initial reaction, for those that do not understand how this tax payer paid circle jerk works, is to feel terrible for the teachers. But just how bad is it?

The average teacher in Chicago makes $76,000 per year for 9 months of work. That means they make $95,000 annualized (if they worked a full year). The offer was to increase their pay by 16% this year. They chose to strike instead and keep the students out of school. After all, they paid for the current politician to be in office and feel they should get a return on their money.

Illinois, as you have probably also read in the news, is completely broke. Cities have begun to move toward bankruptcy, similar to the domino of bankruptcies currently spreading across California like wildfire. The situation will continue under the current structure until we reach the inevitable outcome in this process:

When the governing body paying out the ridiculous salaries can no longer borrow additional money in the bond market (when the credit card finally runs dry), they will declare bankruptcy. Then the current salary and pension structures in place will be wiped away, as will the savings of anyone stupid enough to invest in municipal bonds (most Americans right now unaware in their 401k's).

At that point the teacher's salaries will fall by at least 50%, and their retirement pensions will have disappeared. This will spread, state by state, slowly across the country. Of course, this exact process will take place at the federal level for those government workers as well, but that is down the line due to Federal Reserve's full backing of the treasury bond market with the printing press (state government workers have no such backing).

The first states to tell the unions to go f' themselves and declare bankruptcy will be the winners. With a cleansed balance sheet and expenses slashed they will soon be able to enter back into the bond market and start fresh. In the meantime, let's get those campaign contributions higher and the teacher salaries and life time pensions as close to $500,000 per year as possible.

h/t Mish

Marc Faber: Global Market Review & How To Invest Capital Today

Marc Faber took some time to speak with CNBC this week regarding his thoughts on the world and where he would put his money today. Over the next 3 to 5 years he said he sees the entire financial system going bankrupt, which was followed by laughter on the CNBC set, and Faber telling them they will need to purchase gold, farmland, and the means to survive on your own.

After quickly dismissing such a thought they asked him what he sees happening in the markets "right now." Faber bought European shares at their lows a few months back and is now looking at American real estate based on its relative value to other property around the world (a topic I will be discussing much further soon). He sees an incredible slow down in Asia.

His best line came at the very end where he said that those that purchased real estate and stocks in Germany over the last 100 years still own their assets. Those that purchased government bonds or held cash were wiped out three different times. An excellent history lesson for those rushing into bonds that will soon once again learn how much a paper promise is worth from a bankrupt government.

Visit for breaking news, world news, and news about the economy

David Rosenberg Discusses QE3, Financial Repression, & Bond Buying

David Rosenberg spoke with Bloomberg this week in the video below discussing the Fed's decision tomorrow on QE3. He also reviews financial repression; the cost to savers of an endless period of zero interest rate policy.

Rosie also posted a great chart last week in one of his articles showing the mutual fund flows since 2007. The flow has been steady; out of stock funds into hybrid funds (bonds and stocks) and bond only funds. Mutual funds provide a great look at what the "average" investor is doing with their money (this tracks 401k funds). It shows that the general public has once again position themselves perfectly for maximum disaster when the bond bubble implodes.

Tuesday, September 11, 2012

CNBC Interview: David Stockman

David Stockman discusses why it is pointless to argue back and forth on an Obama/Romney discussion when the entire capitalist market system is controlled by decisions the Federal Reserve makes with their printing press.

Ten minutes of relentless honesty that is becoming more and more rare on CNBC as the complacency of the "permanently high plateau" has set into the S&P 500.