Category: Finance

Economics Update

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Normally, I don’t comment on normal swings in the stock market, but there is nothing normal about the Iceland Stock Market, which dropped 77% after trading resumed following a 3 day suspension.

Iceland is in for some very hard times. It’s because the past few years of their prosperity were due to the pseudo-economy of the carry trade, which makes nothing, and so now they will bear the costs of the resultant excesses.

Speaking of excesses, it looks like the Royal Bank of Scotland will be first in line to sell itself to the British government, which is unsurprising as they were at the forefront of complex financial deals and mergers.

It should be noted that U.S. banks are lining up for partial nationalization too.

Additionally, we are having confusing moves by the FDIC on Regulation. It appears taht the FDIC will guarantee, “Senior unsecured debt, such as commercial paper and transfers between banks, issued through June 30, 2009, to help banks fund operations and let the institutions convert maturing senior debt into new issues fully backed by the FDIC.”

There has to be some sort of major blow-up at the center of this, but I am not sure exactly what it is.

In the mean time, oil is down, on expectations of a deep recession and reduction in demand, and so is the dollar, on….I’m not sure, but my hunch is on the realization that Treasury Secretary Paulson is a moron.

That being said, the newly nationalized GSEs are not getting much love with the debt spreads widening on Fannie and Freddie, probably because the Treasury is directing them to buy some really awful financial instruments.

Inflation is the Solution, Not the Problem

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So, we have noted investor Julian Robertson saying that the US is looking down the barrel of a 10-15 year downturn, and we have concerns that the bank bailouts will cause a period of “hyper inflation”.

I think that these are related, but not in the way that the economic community does.

I think that inflation is the solution, rather than the problem.

The problem right now is that assets are in too many cases worth less than what is owed on them.

The problem is not that assets are currently underpriced, but that they were overvalued when they were purchased.

The solution is to devalue the currency that is owed on these loans, and the word for this devaluation is inflation.

As long as we put in a structure that ensures that wages (not income, but earned wages) for the bottom ½ or ¾ of the population keep pace, so that people can live, people will do OK, and the people at the core of this crisis, banks and entities that act like banks, will pay for their problem by a reduction in the value of their cash hoards.

Retirees and near retirees will take a serious hit, but society as a whole will do better.

I think, given the enormous amount of money pumped into the system by Alan “Bubbles” Greenspan over the past 20 years, and the positively mind boggling amount of money pumped into the system over the past few months by Bernanke and Paulson, that inflation is inevitable anyway.

With 20% inflation, prices would double in about 3½ years*.

One of the problems here is how to reign in the beast before you need a wheelbarrow of currency to buy a loaf of bread, and how you stop inflation once the problem is done.

My suggestion is to do it via legislative fiat: Instead of allowing inflation to come, simply pass a law devaluing the US dollar by 50%.

This law would necessarily ensure that the payments for existing contracts, including wages, would necessarily double, as would regulations such as the minimum wage.

Of course, I I’m an engineer, not an economist, dammit,† and I’m sure that any economist would consider my proposal batsh%$ insane.

*Rule of thumb on interest: If you divide the number 72 by the interest, you get the approximate time to double. It’s called the rule of 72.
†I LOVE IT when I get to go all Doctor McCoy!!!

I Really Hope that He’s Right

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William Volk, a long time denizen of the tech industry,* wonders if the financial crisis spells the death of Web 2.0, or more accurately whether it spells the death of the venture capital supported business models for internet companies.

I hope so, because I am sick to death of the kule kidz business model.

What is going on here is that the capital costs of creating an internet presence are vanishingly small, look at the cost of building just one automobile assembly plant, so silicon valley snake oil salesmen are(were) able to get money and line their pockets.

To be fair, there are two groups of people making out like raped apes on this bit of dishonest persiflage, the owners of the internet firms with non-existent business models, and the VC firms that get a commission every time that they spend other people’s money.

It’s been a profitable scam for some time, funded largely by the stupidity of Alan “Bubbles” Greenspan, and now it looks like the the carnival is over.

*He was actually at the legendary meeting where a senior executive doubted the marketability of Teenage Mutant Ninja Turtles in a video game. The company also turned down licensing the Simpsons when they were still just a short bit on the Tracy Ullman Show.

Economics Update

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If there is any major difference between the US and the European response to the financial crisis, it is that the Europeans have their sh$# together relative to the US.

Britain was already taking equity stocks in banks this morning, and any sensible action by the Treasury department still appears to be weeks away, so it’s not surprising that the dollar is down relative to European currencies.

It is a vote on the confidence that investors have in the relative competencies of the governments involved.

Or maybe it’s the fact that the markets realize that the foreign exchange markets are subject to supply and demand too, and with the central banks of the industrialized world are shoveling dollars out their doors, with the Fed being the most aggressive.

I think that the goal was to lower interbank lending rates, which it appears to have done for a while, at least.

It appears that the markets are still seeing a recession, as commodities are generally down though oil ended up, above $80/bbl, today.

The bit of disturbing news is that it appears that the Treasury is
using Fannie Mae and Freddie Mac to buy $40 billion in junk mortgage securities, which is the wrong thing to do.

It’s why the even the knuckle draggers at the White House are moving from buying the sh#$pile to buying the banks that need recapitalization.

This is what the Swedes did, though they added a lot of F&^% you to bank management that we are unfortunately leaving out.

Morgan Stanley Is Not Dead.

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Kind of like that old man in Monty Python and the Holy Grail.

We had Moody’s looking at downgrading Morgan Stanley’s debt, followed by their stock tanking, so their Mitsubishi UFJ was demanding more favorable terms to make a capital infusion, which led to
the Treasury department offering a promise protection to the Japanese investors, which means that group of government acronyms was just about ready to seize them.

After much hand wringing, and many attempts to make a buck off the situation by people not directly involved in the deal, they sealed the deal today.

One of the consequences of the collapse of the Japanese financial markets in the 1990s is that many of the companies are cash rich. They had to be to survive 15 years of very tight credit.

We may see a lot more of this for Japanese entities as a result.

Economics Update

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Let’s start with the fact that this has been a TEOTWAWKI week.

That being said, we are seeing a huge increase in borrowing from the Fed Discount window, as a part of the Fed’s sh^%pile for cash program.

OTOH, jobless claims did fall a bit, to 475,000 though they were at 7 year highs to begin with, and job creation is lagging.

Also, Oil fell to $82/bbl, the lowest in a year and gasoline is heading down too.

Also, the dollar continues to climb, as is the Yen.

In real estate, we are seeing mall vacancies skyrocket.

A Partial Resolution on the Citi-Wells-Wachovia Menage à Bank

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Well, it appears that Citi has concluded that it will not get Wachovia, though it’s still looking to get some sort of payment for its time and effort.

My guess is that the revalations taht the FDIC was threatening to seize Wachovia if it did not cut a deal with Citi had something to do with their decision to abandon their quest to take over Wachovia:

Early on the morning of Monday, Sept. 29, FDIC officials contacted Wachovia executives and said the bank would not be able to open for business on Monday because of liquidity problems. The FDIC instructed Wachovia to negotiate with Citi, which was the only remaining bidder for Wachovia.

That morning Bob Steel told the company’s board that it had two options: Place Wachovia into bankruptcy or seek a government-assisted deal with Citi and the FDIC. The board voted in favor of seeking a deal.

The deal could be considered coerced, and courts look very dimly on these sorts of shenanigans….Particularly when the competing offer is 7 times more.

Note that even though Wells-Fargo’s offer was much larger, it was still less than 1/10 of what its assets were supposed to be just a year of so back.

Iceland® a Wholly Owned Subsidiary of Russia

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Well, it looks as if as bad as the US has been hit, tiny Iceland has been absolutely destroyed by the financial crisis.

Despite regulatory actions intended to shore up Icelandic banks, Icelandic banks have all failed, and they are in talks with the Russians about a €4 billion loan…..For a country with just over 300,000 people….That’s a bit under $20,000 per resident.

It also looks like there may be some action from the IMF, which raises an interesting question, how will Europeans feel when one of their own is told to gut labor protections, reduce union rights, end free health care, and make payments for primary education mandatory?

That is, after all what the IMF demands of dark skinned folks.

Of course, no crisis is complete without one complete pratt making things worse, and (not surprisingly) this role is assumed by British PM Gordon Brown, who is upset that the Icelandic guarantees only apply to domestic account holders, so he, “has used powers granted under anti-terrorism laws to freeze British assets of Landsbanki until the standoff is resolved.”

I think that once the Icelanders find out what the IMF is demanding, and if they are true to form, it will be the complete dismantling of their social safety net, they will run to Russia for their loan, which will come with its own strings, probably a naval base, and possibly an air base.

GMAC Unable to Resell $2.7 Billion In Loans

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This situation is not getting better:

GMAC $2.7bn loan sale failure

GMAC yesterday failed to sell a $2.7bn portfolio of loans as conditions across the credit markets continued to deteriorate.

It put the loans, which are part of GMAC’s commercial finance business, on the block as part of previously announced plans to shed non-core assets, said a spokeswoman. It withdrew the sale due to “market conditions”.

GMAC is majority owned by investors led by private equity firm Cerberus Capital Management. General Motors holds a 49 per cent stake

Menage à Bank

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Well, it looks like Citi and Wells are going after it hammer and tongs over who gets wachovia.

First, Citi got a NY state judge to grant an injunction against Wells proceeding, and then Wachovia went to Federal Court to overturn that, and he
vacated the lower court ruling, as did a New York state appellate court.

Basically, Citi was going to pay $1/share, and getting money from the FDIC, and Wells is offering $7/share with no FDIC involvement.

Not sure what Citi’s motive is, but they seem to be eager to spend this money, for reasons that are unclear to me, particularly since they have lost money in the past few quarters.