Sunday, October 26, 2008

U.S.'s creditors to be knocking on the door soon

Below the radar, there was a meeting this weekend of 43 European and Asian nations in Beijing to prepare a “comprehensive reform of the international monetary and finance system.” The U.S. was not invited. At the Nov. 15 international financial summit in Washington, D.C., we can expect the rest of the world to present their plan to us. Essentially, our creditors met this weekend, and they will present their “workout plan” to the debtor next month. While it is certainly NOT the end of the world, it is the end of the era when we can dictate to the rest of the world.

The stock markets hate uncertainty. By the end of next month the presidential election will be over and the future shape of the international financial system will begin peeking at us. Besides, November is historically a much better month than either September or October . . . thank goodness!

Russia and China positioning smartly amid crisis

I’ve always been told that “he who has the gold, makes the rules” and hope that is not always true. For decades, the Russians have wanted better refueling operations in the north Atlantic for its Navy. A few weeks ago, Iceland nearly went bankrupt and was very desperate. Immediately, Russia was there with a $3 billion handout. After all, Russia has $556 billion in foreign currency reserves and needs increased presence in the north Atlantic more than it needs the money!

But that pales next to China’s $1,906 billion or $1.9 trillion. They are also the largest holders of U.S. debt. First, our economy over-leveraged or took on too much debt. Now, our government is assuming much of that debt for us. The best way for the U.S. to de-leverage is to do something really, really nice for the Chinese. I can only guess . . .

Working a deal with them quickly would be very good for our markets immediately, but I do worry about the long run. Of course, the famous economist, Lord John Keynes, was fond of pointing out that “in the long run, we’re all dead!”

Friday, October 24, 2008

Greenspan revives Casablanca character

In the movie classic Casablanca, the corrupt local government official, who goes to the casino every night, indignantly admits to being “shocked” there is gambling there. Yesterday’s congressional testimony by Alan Greenspan reminded me of that movie. He said he was shocked that Wall Street would take on excessive risk. In theory, a firm would not and therefore needs no regulation. In practice, however, the compensation plans of individuals within the firm eventually overwhelm the best interests of the firm itself. There are a lot of very wealthy former bond salesmen who have lost their jobs and are now sitting on the beach!

Thursday, October 23, 2008

Leadership shifting to Europe

While we have been through many recessions in the past, there is one thing very different about this one. It is the first one in a truly globalized world. There are reasonable arguments on both sides as to whether globalization will make the recession better or worse. While it is far too early to have a firm opinion, I suspect it will make the first one worse but subsequent ones easier.

One little-noticed result of this credit crisis has been a shifting of world leadership in dealing with financial problems. While Washington dithered, England implemented a plan that did a great deal of good. Europe and the U.S. followed them. I recently attended a lecture at the International Monetary Fund in DC and they discussed the lack of a global solution to the global credit crisis. Last week, two European heads of state visited the White House, asking the U.S. to immediately convene an international monetary summit. Fortunately, they prevailed. Leadership is shifting to Europe.

Because no global solution is possible now, I suspect the current recession will be made worse by globalization, but future recessions will have a better mechanism for dealing with them.

Wednesday, October 22, 2008

Dow fell 231 points -- but that's great news

The Dow fell 231 points yesterday because of concerns about the global recession and disappointing earnings announcements -- but that is great news! Like the dog Sherlock Holmes noticed that didn’t bark, there is no mention of the credit crisis, which has totally dominated the news for the last two months. While it is certainly not over, it is clearly receding, as demonstrated by the continued decline in three-month LIBOR rates. This takes depression off the table. We’ve had nine recessions since World War II. It won’t be fun, but we’ll survive this one as well.

Tuesday, October 14, 2008

Bad economic cycle not finished yet

Are we at the bottom of the economic cycle yet? Absolutely not. There is a lot of pain ahead for us. Are we at the bottom of the financial cycle yet? Just maybe . . . yesterday’s strong bull performance must be confirmed by the bond market, which was closed yesterday. If the bond market loosens up this morning, I'll be an aggressive buyer this afternoon.

Monday, October 13, 2008

Markets looking tasty again

It has been a long time since I was a kid in a candy store who wanted everything he sees, but I’m starting to feel that way when I look at the stock market now. There are so many good companies to buy, and they’re 40% off. It may be time to start nibbling again!!

Friday, October 10, 2008

Sept. 30 statements caused havoc

With stock markets crashing around the world, it is important to understand who is selling, besides the routine panic-seller. Two other things are also pushing the markets down strongly. First, the stock markets are the only source of new liquidity right now, as the credit markets are frozen. If you think you'll need cash to weather the recession, you can only get it out of the stock market. Second, hedge funds have been hurt particularly bad, the worst in 20 years. Usually, clients can only get out of a hedge fund quarterly, not daily like stocks. When they got their 9/30 statements, a record number of clients elected to get out, which forces the hedge fund to sell stock to raise cash. Even more important, a great many hedge funds have reportedly received margin calls. The frozen credit market is crushing the stock market.

These are strange times indeed . . . but NOT the time to sell!

Thursday, October 9, 2008

Rewarding bad behavior must not be repeated

One of the concerns I have about all the recent government efforts to repair the credit crisis is that we’re creating a “Moral Hazard," which means we’re rewarding bad behavior. Examples would be CEOs getting huge pay packages for poor management or unscrupulous homebuyers getting bailed out. I was discussing this today with another economist, and he told me about his daughter, who bought a puppy that liked to do his business on the living room carpet. She decided to make him change his behavior. Unfortunately, she waited two years and it was already too late. His point is that we have already created a “Moral Hazard.” We have to live with the consequences now for not dealing with it sooner. I hate to admit it, but he is probably right. But, never again . . .

Credit crisis leadership shifts to London

Yesterday’s headlines obscured the news. The headline was the global coordinated interest rate cut of half a percent, which calmed the markets nicely . . . for about five minutes. But, lower interest rates will not end the current credit crisis, nor will more liquidity. We need to reduce bank leverage. There are two ways to do this: reduce debt, which they cannot do, or increase capital, which has been very tough (just ask Bank of America).

The news is that England will begin injecting capital into its banks. While there will be much consternation about “creeping Socialism,” history shows that governments usually make money when they later privatize the banks. This also shifted leadership in the fight against the global credit crisis from Washington to London. It is time to learn at the knee of the Mother Country once again.

Wednesday, October 8, 2008

No 'decider-in-chief' for global crisis

I recently talked with a senior official of the IMF about the global credit crisis. He thought a global crisis required a global solution, but there is no “decider-in-chief.” The U.S. can no more solve the global credit crisis than Virginia can solve the American credit crisis. Interesting! By coincidence, the G-7 conference is this weekend, and may be the most important one in decades. There will be some serious horse-trading in the hallways. It might even be less dignified than passage of the “bailout/rescue” package approved by Congress . . . if that is possible.

Tuesday, October 7, 2008

Credit derivatives gone wild

Long-time readers know I have railed about the potential problems from credit derivatives, such as credit default swaps. They must have been designed by financial engineers gone wild! Because they are not regulated nor traded on any exchanges, there is far too little information to evaluate the problem. On Sunday, I talked with the Fed’s top economist on this and was impressed he understood the issues so well. In addition, CNBC reported Monday that the Fed is talking to various exchanges about listing credit derivatives. At long last, it looks like the problem is being addressed . . . better late than never!

Sheila Bair is shining

Someday, the United States will have a female President, and her name may be Sheila Bair. Mentored by retired Senate Majority Leader Bob Dole, she has been masterful as Chairman of the FDIC, winning praise for her handling of IndyMac, the largest bank failure in history, as well as deftly protecting the taxpayers in the struggle between Wells Fargo and Citigroup over the late Wachovia. I met her briefly after her luncheon address yesterday and was mightily impressed. Now, where can I mail my campaign contribution?

Sunday, October 5, 2008

Badly needed piece of bad legislation

Friday’s House passage of the “bailout/rescue bill” was the most badly needed piece of bad legislation in American history. It was bad legislation because it focused on the symptoms of the credit crisis, and it was badly needed because it may have bought us enough time to focus on the cause, which is falling home prices. After all, they are the collateral for all those mortgage loans. Loan quality is increased when collateral quality is increased.