Thursday, October 16, 2008


Michael sez: Another great article from the Daily Reckoning.

Oh my…oh my…how much is a soul worth?

Yesterday was another bad day on Wall Street. After gaining more than 900 points on Monday, now the Dow has given back nearly all of them. The index fell 733 points on Wednesday.
Sell the rallies in stocks. Buy the dips in gold…(and you can still do so for just a penny per ounce…)

That has been our formula for this entire decade. It still seems to be working. But now the action is on the stock market side of the trade.

What's going on? Hank Paulson is taking desperate measures to save his friends on Wall Street. Worldwide, the rescue effort is expected to cost more than $3 trillion. At least, that was the big number on the front page of the Telegraph yesterday.

How much it will really cost is anyone's guess. Some say the rescuers will actually make a profit. Others say it will be a total washout.

We don't know. We just marvel at the bold bamboozle itself.

The Goldman crew - there are several ex-Goldman executives in the nation's top financial posts - now get to decide the shape of America's financial industry. You won't believe this - we barely did - but Gretchen Morgenson reported in the New York Times that the decision to save AIG was made by a very small group. Not only was a recent Goldman chief in attendance - Hank Paulson - but the current Goldman CEO, Lloyd Blankfein, was there too - the only representative of Wall Street. The report went on to explain that Goldman Sachs had a lot of money at stake in AIG - about $20 billion.

We're not accusing anyone of anything. We don't have to. We take it for granted that the game is rigged. We'd rig it ourselves, if we had the chance.

And with $700,000,000,000 in their main man's checking account - courtesy of the U.S. government - we have no doubt that Goldman and the rest of Wall Street's insiders are working overtime to make sure it ends up where they want it.

But yesterday - and today - it looks like Wall Street was going to get what it deserved anyway. Stocks fell hard, and today fall even more. Crude oil is sitting at its lowest point in 13 moths - below $72 a barrel. Industrial production in the United States fell the most in close to 34 years. J.P. Morgan announced an 84% drop in next income. The feds are supposed to be rigging the game to avoid such massive losses; the fix is in…but the markets won't stay fixed.
Yet, we've rarely seen such unanimous opinion on the subject. Every journal, every television commentator, every newspaper, every economist - all agree: the risk of a meltdown is too great to ignore. The feds had to take action.

"Just as there are no atheists in a foxhole, there are no economic fundamentalists in a crisis like this," says Jared Bernstein, an economic advisor to Obama.

"Governments have at last thrown the world a lifeline," writes Martin Wolf in the Financial Times.

"We didn't want to do it…but we had to take action," Hank Paulson told the world.

Nobody wants a financial meltdown; everyone agrees that rapid and forceful state intervention is necessary. Once again, here at The Daily Reckoning, we are like a man showing up at a wedding in a coonskin cap. We're not dressed for the occasion.

Meltdown? What's wrong with a meltdown? Why shouldn't bankers fear to lend? Why shouldn't prices go to what willing buyers and sellers will accept? Why should Wall Street be bailed out? Why shouldn't investors take the losses they deserve? Why shouldn't house prices fall rapidly? Why shouldn't the mistakes of the past five years be corrected quickly, in other words?
The financial crisis was caused by too much ready credit (more below on the culprit of these E-Z credit policies). Because of it, people made mistakes. Investment mistakes. Business mistakes. Spending mistakes. Even lifestyle mistakes. Those mistakes need to be corrected. The sooner, the better. Besides, we've never had a real financial meltdown in America. We'd like to see what one looks like.

But everyone is against it… running scared and eager to sell his soul, if he had one, to avoid it. The Democrats, of course, never had any principles. And the Republicans only pretended to have them. And now they're selling out their residual respect for the free-enterprise system. At least, they hope to get a good price. If they go along with Goldman & Co., they are told, they'll be helping to avert a catastrophe. (That they might also get a slice of the $700 billion pie hardly needs to be mentioned. They are all already getting out their knives and forks.)

Our guess is that they will end up short on both ends - at the end of the day they will have nothing left…neither their (mostly) free market system…nor their money.

*** Chris Mayer specializes in finding opportunities to profit in times of economic crisis - not a bad guy to have on your team in times like these.

He passes on an intriguing example of one of the many opportunities out there.

"Although I'm not recommending it to my Capital & Crisis readers - I hardly know anything about the company - this example from Irving Kahn, by way of Barron's over the weekend.
"Kahn is the 102-year old chairman of Kahn Bros., an investment firm in New York. (There's that longevity again among the long-term value set.) As Barron's notes: "Kahn… is one of the few professionals who not only remembers the 1929 market crash, but who sold short prior to that famed downturn." He likes Nam Tai Electronics, which has a market cap of $266 million and cash of $271 million. It seems to have a profitable business and trades for 8 times this year's earnings guess.

"There are a lot of these kinds of opportunities out there now. At least in pockets, we have the kind of true Depression-era valuations that Ben Graham would have recognized."
There are some silver linings in these clouds…you just need to know where to look. Chris has some more of these opportunities up his sleeve…learn about them here.

*** "Next victim of the turmoil: you salary," announces one New York Times headline.

"Grim outlook for profits and jobs," says another.

Comes news this morning that retail sales are down 1.2% in September - the biggest drop in three years. Consumer spending will collapse; you heard it here first.

Every businessman in America is reading the headlines. And everyone is wondering how the financial crisis will affect him and his business. The smart ones are already taking action to reduce costs. They know that revenues will almost certainly fall - maybe substantially.
"Cut out the deadwood," they say to their lieutenants. Even in our own little enterprise, that message is making its way around. 'Don't hire anyone new…we can't afford it,' we advised our associates.

Even old oaks give way to chainsaws. Which poses a particular problem for the over-50 set. They are expensive employees to keep - often costing more in salary and healthcare benefits than younger ones. And they offer nothing for the long term. By the time this slump is over, they could be retired - and living off the company's pension program.

Our guess: this downturn will be worse than most people expect…and it will fall particularly hard on older workers.

*** Yesterday, we went to the Frankfurt Book Fair, where we were honored by a publishing group from Switzerland, called GetAbstract. Every year, the group gives an award to the best business and finance books of the year. Last year, for example, Nassim Taleb's Black Swan was the winner.

But this year, our Mobs, Messiahs and Markets, co-authored by Lila Rajiva, edged out Thomas L. Friedman's and Robert Shiller's books to take the top place.

"We are pleased and honored," we told the crowd in our acceptance remarks. "We thought at first that the 'GetAbstract' award was a category…like children's books or romance novels. We hadn't thought our book was that 'abstract.' After all, it's about very real phenomena - mass delusions, collective hallucinations and the madness of crowds.

"Two years ago, we saw a huge delusion forming in the financial markets, so we decided to write a book about the way in which these delusions work and where they come from.

"All delusions, of course, eventually blow up. And we appreciate the timing of this award. This financial madness is blowing up right now.

"But people come to think what they must think when they must think it. So, at the height of the bubble people thought that capitalism would make them rich. Now that the bubble has popped they believe that government must step in to save them from capitalism. Both ideas are equally and oppositely absurd. "

*** The crisis was made in Washington; it is now being made worse by Washington:

Our old friend Jim Davidson sends this comment:

"I think we should underscore the fact that perverse regulation, rather than de-regulation is a root cause of the crisis. Contrary to the myth that the housing bubble and sub-prime lending were driven by greed in a climate of deregulation, the impetus to sub-prime lending came from federal mandates, like the Community Investment Act, which imposed penalties on banks for not lending to underprivileged borrowers.

"We're getting Smoot Hawley Two in the form of the collapse of letters of credit facilities which finance trade. Citibank won't honor letters of credit from PNP Paribas. So goods are piling up at ports not because there are no borrowers but because the credit freeze has spilled over to letters of credit. Thus the well-established mechanism for funding trade is a casualty of the mortgage meltdown. 1929 comes again."

Until tomorrow,
Bill BonnerThe Daily Reckoning


Phil said...

"Even old oaks give way to chainsaws. Which poses a particular problem for the over-50 set. They are expensive employees to keep - often costing more in salary and healthcare benefits than younger ones. And they offer nothing for the long term. By the time this slump is over, they could be retired - and living off the company's pension program."

Let me point out something to this person, 99% of fixing a problem is coming up with the right diagnosis.
You can train a monkey to turn a wrench and pay it peanuts all day.

It is still a monkey with a wrench.

Staying Alive said...

I have to agree with this analysis. Skill is not replaceable by a trained monkey. The guy who can get it done right the first time is always going to be in demand. There is a big difference between a part changer and a mechanic.