Some people are discussing these financial issues as if they were a random black swan event. But that’s incorrect; these events are the result of a long series of missteps in central banking, government actions, corporate errors, and risk mismanagement,.
A reader writes in, noting: These charts reflect a perfect mosaic of market and economic conditions. It also encapsulates decades of blind denial about what it takes to run a good business:
click for ginormo chart
Dave says: It’d be a belly laugh except I keep
crying.
~~~
if you were a nice guy, you would flip those and call it a bullish market….you could get on kudlow more. wooo
How many of us have been in our cubes and shaken our heads at managements decision.
I want to say they deserve this but it’s sad thinking about all those jobs and families.
“…these events are the result of a long series of missteps in central banking, government actions, corporate errors, and risk mismanagement…:
____
You forgot ubiquitous criminality.
The level of fraud is astounding.
“…these events are the result of a long series of missteps in central banking, government actions, corporate errors, and risk mismanagement…:
____
You forgot ubiquitous criminality.
The level of fraud is astounding.
“…these events are the result of a long series of missteps in central banking, government actions, corporate errors, and risk mismanagement…:
____
You forgot ubiquitous criminality.
The level of fraud is astounding.
“…these events are the result of a long series of missteps in central banking, government actions, corporate errors, and risk mismanagement…:
____
You forgot ubiquitous criminality.
The level of fraud is astounding.
Don’t look now, but Lehman is blowing up while everyone is watching F&F. Not a rumor…just chart watching again.
Disclosure: Long QID…Nasadaq going to drop 5% in next few days.
instruments to get rich by
killed Rock n Roll
years of practice is so passe
Consider this the bill for a 20 year debt-fueld orgy…Easy Al walked out on the tab.
(Barry, you can use that quote free of charge anywhere you like)
So… are you saying that owners of these stocks woke up and smelled the stinky coffee over the last few weeks?
This is good. It’s a very rapid change in majority psychology… a change in a more rational direction reflecting the real risks faced by these firms.
What we have here, Barry, is an Anti-Bubble.
The sooner all these five companies disappear (at least in their current form), the better. Then the irreversible losses can be recognized and bad business models buried for good.
I sense a busy blogging day/weekend for The Big Picture…..
Hank Paulsen to speak later today. That could be a headline maker.
I guess these are white swans if you are a skeptic/bear and black swans if you an idiot follower. Thanks BR.
Paradigm: A set of assumptions, concepts, values, and practices that constitutes a way of viewing reality for the community that shares them, especially in an intellectual discipline.
— Ride out the volatility and short-term swings.
– Buy the dips.
– It is unamerican to short(oops! I meant capital un-AMERICAN).
— Support the troops and now the markets and the banks/broker-dealers.
I agree asset allocation works but when people are deluded to trust the historical performance (hard work benefiting the society) in equity markets/ownership human society, you end up creating and trusting Greedy Thugs/CEOs at the top (90% of the S&P 500 generals) , who will lever up the company balance-sheet and society, to buy back stocks and support their stock options for as long as possible instead of investing in research (XOM;l banks; B-D). You can add the fed, past and the present, and the current president to the mix; they both have eroded the currency/good-will that past generation had created.
No wonder people want real stuff now and not $$$.
Sounds like a “Black-swan” is about to hit the “free/random-markets.”
BR: You should do an anticipatory post: Coming soon: “Black-Swan” — XXX days to the Grand Show; Coming to The “free/random markets” near you.
And, yes, I will be happy to share the credit for the post/warning against this “anti-delusion” orderly markets/world that they have fed to smaller Joes (wink, wink 401K investor with a growth objective).
Oh, well. It is all cyclical & in the grand scheme of things it is all mind-stuff!
Posted by: Nihilism | Jun 28, 2008 10:12:53 AM
Erin Burnett: Things are fine…only down 118.
When fingers are pointed to what ruined this country, CNBC must be included.
In fact, I have never seen such smug complacency by CNBC anhors…”we are seeing a major recovery…Dow only down 100″…today “could have been a big sell-off”…”we’ll take the consumer sentiment number…better than expected”
We’ll see how smug they are at 3PM…
FRB deathmatch: Bill Poole 1 – Bernanke/Paulson A BIG FAT ZERO! slamdown
Has anyone seen kudlow and his little friend goldilocks???? Where has John Rutledge been, he was a bobble head on kudlows show for a long time? would anyone let Don Luskin manage their money? Is anyone having a mental recession? So many questions, I don’t know where to start!!!!
Steve, that’s why many here (present company included) refer to them as “CNBS”…
Anbody see CON Ed (emphasis on con) is hiking electricity 22% this summer over last in NYC? Is that considered energy and excluded from core inflation??? Anybody?
I expect the Bushies to change the subject from financial melt down to gay marriage. Maybe Paulson will speak about the dangers of capital markets that gay marriage poses. Will be lucky if the dollar is par with the peso after Jorge’s Term is over…..
$$$$$$$$$$ Sheik…..
P.S.we all should consider moving to Dubai… No Gay marriage there, Republicans should like that…
STOP WHINING…. This is a great buying opportunity…. mortgage the house on LEH,FRE, FNM…….
Love Jimmy Cain
so do we get our first shut down today or monday ????
I bet it’s today….with some happy news over the weekend.
Ciao
MS
“Mr. McKittrick, after very careful consideration, sir, I’ve come to the conclusion that your new defense system sucks” – WarGames 1983
“No wonder people want real stuff now and not $$$” – Nihilism minutes ago
and its land property in America preferably with building on it (but not a full market value) – Greg0658 now
Pat Robertson blames all this on Americas heathenism…. remember 9-11…it’s God’s judgment…. He also says this is just the beginning if a black man becomes President. FLASH!!! Jerry Falwell just rolled over his grave…
BR,
Speaking of charts and the “black swan”, maybe an update of the previous black swan chart is in order.
nk
the current financial events are due to Iraq war.
Can I use CNBC bucks to pay my bills????? It would be nice if the people on CNBC would spend more time trying to improve their programming then running some con- game to increase viewership!
It’s all about LEVERAGE. For the most part, big business heavily relied on massive amounts of leverage.
That’s all fine and dandy as long as the system works and everyone plays nice, but when the music stops it falls apart (as we’re seeing now)
I think you’ve described the situation exactly right. Both Fannie Mae and Freddie Mac went out of their way to staff their executive suites with people with government and political connections rather than people who knew the business well – a pretty clear indication that they thought those kinds of connections that can influence how regulations get set and enforced mattered more than running a viable business.
The truth is that doing so paid off for a while, so successfully that they thought the rules they had rewritten at their direction would protect them from the risk of backing loans of ever worsening quality. And now, they’re using the same connections to try to get out of the hole they dug for themselves.
I can’t say whether either GSE is too big to fail, and should be bailed out by the federal government. But I do think that a reasonable trade to make in return for the government bailing one or both of them out is for those most politically connected in the executive suites of Fannie Mae or Freddie Mac to serve some quality time in a different kind of federal institution.
This is what happens when ideology trumps common sense. When Wall Street elites and political leaders of both parties get together to loot the treasury.
Now all these free market capitalists make even the biggest marxists blush as they scream for nationalization and taxpayer backstops of their losing positions.
The sheeple used to bending over will do so another time as commanded.
Performance Matters !
Performance = Competence + Hard Work + Discipline + Knowledge + Integrity
Which companies will perform looking thru this nightmare ? Warren seems to be finding a bunch to throw a few coins at. Mr. Liviris has just seized his opportunity to make a brilliant l.t. move.
Consider this shopping list of screening criteria: http://tinyurl.com/66n4xb :)
For even more entertainment, look at them over the past 10 years, and compare with, eg, Honda (HMC) on the car makers, S&P 500 (on the homebuilders)
We need a new book about Black swans diving…
The real questions to start thinking about are what happens when we come out the other side of this. Are we going to keep letting the Chicago schoolers and Harvard MBAs and the Yale idiots run things, or start listening to those who have been speaking reality the last few years and put them in charge?
Don’t you believe that the reason the shorting of stocks has become so popular by so many on Wall Street, is that many are looking for ways to make some sort of return. It’s un-American to short to make a return, unless it’s so obvious to some for quite some time about the dire straights of the US economy and the desperation is setting in to find some sort of return, unfortunately however they can get it. Which seems to spiral things out of control.
Barry,
You should throw the charts of the airlines up there. I got an “open letter” e-mail from United and the other air carriers asking me to join their campaign to “stop oil speculation now” (that’s also the name of the website they created.) Because, you know, it’s a bunch of guys in their late 20’s & 30’s that are to blame for the woes of the airlines; not the profound incompetence of management and the incessant greed of the unions!
Regards,
TDL
Dead right, I think: this is not a random event, this is a result of some bad policy and stupid decisions, with some ‘asleep at the wheel’ included.
I think it is important, to not that the decisions made by investment bankers, mortgage companies, government, auto companies, etc. were conspicuously lacking is social responsibility. Short term greed at the clear expense of the general population was an admired, approved and accepted goal.
Don’t those charts essentially reflect the results of twenty years of ‘Easy’ Al’s cheap money policies?
The auto companies were lulled into believing they could go on forever selling light trucks and SUVs rather than even bothering to try to make competitive cars because Greenspan made credit so cheap. Easy credit disappears and they have no product to sell.
Fannie and Freddie were sucked in because the low interest rates made buying a home appear realistic for many people who shouldn’t have bothered. Remove the easy credit and those “homeowners” discovered they would be moving. The homebuilders experienced the same effect.
Lehman just lived off the pickings which abounded in that environment. Since all of the folks in the investment banking industry weren’t expecting to be around when the music stopped, why bother actually managing the business, furchrissake. That takes work.
It all gets back to the cheap money the Fed made available for twenty years. The additional debt dropped on us by trying to conduct a war of choice in the Middle East was just the last double we ordered at closing. The hangover is going to be terrible. It will be “mourning in America”, to paraphrase Ronnie Ray-gun’s slogan.
REBUILDING THE U.S. FINANCIAL SYSTEM WITHOUT FEDERAL BAILOUTS:
Whereas: The Government of the United States has already taken as many financial obligations as its Taxpayers can reasonably afford; and
Whereas: The Taxpayers are unwilling to extend, to those who borrowed or lent foolishly or fraudulently and are now in financial trouble, ANY “bailouts”, “credits”, “backstops” or “guarantees” based on access to the National Debt; and
Whereas: The Taxpayers find that few Members of Congress actually represent the interests of the honest, hardworking, and financially sound Taxpaying Public,
BE IT RESOLVED THAT:
1) We Taxpayers urge Congress to pass a bill to prevent the Federal Reserve from adding any more sub-AAA securities to its balance sheet and to prevent the Federal Reserve from setting up ANY “off-balance-sheet” enterprises, including but not limited to entities like “Maiden Lane LLC”, and
2) We Taxpayers urge Congress to pass a bill indicating that should Fannie Mae and Freddie Mac become insolvent the INVESTORS and BONDHOLDERS of FNM and FRE should EAT THEIR LOSSES, and
3) To rehabilitate the U.S. Mortgage industry a NEW SYSTEM should be put in place which does not create the same MORAL HAZARDs which have brought down Fannie and Freddie! Let private lenders lend at rates that are FINANCIALLY SOUND, without RECOURSE to TAXPAYER FUNDS, and
4) We Taxpayers will VOTE AGAINST any and all Members of Congress who agree to give or lend OUR TAX MONEY to ANY financial institutions (most of which are FAILING because they traded in foolish or fraudulent loans), or who otherwise debauch the national debt in order to socialize the losses of PRIVATE institutions or individuals, and
5) We WILL SEEK LEGAL RECOURSE against any and all persons in the Federal Government and/or Federal Reserve who overextend their authority and provide, in any way, access to TAXPAYER Funds for any PRIVATE institution or “GSE” beyond current legistlatively authorized limits without explicit Congressional approval.
Ben Bernanke, just because CONGRESS won’t rein you in, don’t expect the Taxpayers to sit still for anything you care to do!
Why do the charts of these poorly run companies look just like the charts of well run outfits like Deere and CAT?
Ouch!!! You’re all killin’ me!!!
GM and Ford’s problems are probably bigger than they are. They’re victims of their own past success. They’re also victims of national policy and what we all expect out of health insurance and retirement.
Imagine if our public servants had, years ago, decided that with obvious dwindling domestic petroleum reserves they should begin to prepare us for a transition. They came to a fork in the road … and they took one of them.
A) A tax. An expanded federal tax on each gallon of fuel. In the first year, a dime. The next year, a quarter and so on. The slow movement from $2 to $5 gasoline would give people a chance to get used to it and adjust their lives accordingly. Manufacturers would have the time to redirect their product development cycles into vehicles more suited to expensive fuel as older vehicles completed their design service lives and were junked. The new tax revenues might be used for expanded alternative energy research, public mass transit (passenger rail!!) or road and bridge repairs. $5 gas isn’t so bad if most of the $5 comes back to you.
B) Or, we could just wait and let the market catch up. Laissez faire. Market determined prices stay low until almost overnight, demand catches up to supply and the price of a gallon of gasoline jumps from $2 to $5. The sudden, new price differential going to speculators and sovereign national oil companies to fund larger luxury yachts and jumbo personal jets for the royal family. Vehicle manufacturers turn turtle as customers evacuate the showroom as suddenly no one can afford to fuel up the Hummer anymore. Joe Sixpack trades his European vacation (ah, Paris – in the Fall!!) for a long weekend in the Ozarks (ah, Branson …) enjoying embalmed country music singers.
Is it too late to choose “A”?
(This is GM and Ford’s biggest problem. It’s not totally a problem of their own making. Sorry for the long comment but it’s late and the thread is old. American manufacturing can do some incredible things. We have lots of smart, hard working people and we can do better work than anyone else in the world.)
The graphs above are very misleading because they don’t extend far back into the past.
The big story is that “something” happened in 1995 that created a gigantic bubbled of leverage, and that “something” happened again in 2001 and 2006 as PEs and thus stock prices were reverting to the mean.
As two classic examples here are long time stock charts for IBM and Procter&Gamble:
http://finance.yahoo.com/q/bc?t=my&l=off&z=l&q=l&s=IBM
http://finance.yahoo.com/q/bc?t=my&l=off&z=l&q=l&s=PG
(the insanity for IBM is particularly crazy because IBM went to being a money minting scalable monopolist in a fast growing market to a me-too business/IT consultancy after nearly going bankrupt, and still their stock price shot up in 1995).
What has been happening in the past few years is in general a tendency for PE reversion to the mean countered by powerful intervention in the “free” markets.
What is the “something”? it is not so clear, but so far all I have is some hints.
Well, in 1995 the new permanent Republican majority took power, sponsored by campaign donations by people who make lots and lots of money if they can sell options and stocks at ever higher prices, and as a chart that TBP put up some while ago, there was “coincidentally” a gigantic explosion in credit and in particular in stocks bought on margin, and every time stock prices go down or money owed to Republican campaign donors might go missing the Fed just cuts interest rates and props up asset prices.
Following up my previous comment, this is the long term TBP graph on margin; it is probably the most important, revealing and scary that I have seen in a long while:
http://bigpicture.typepad.com/comments/2007/10/margin-debt-gro.html
No discussion of stock prices can be meaningful without having it well present, for its whole 40-50 year span.
This is what Newt Gingrich and Alan Greenspan wrought.
«Is it too late to choose “A”?»
Well, Usians have chosen “B” by overwhelming consensus. Choosing “A” means rewarding losers, moochers and looters.
Every good Usian believes they are WINNERS and that they will be among the few that will MAKE A LOT OF MONEY from case “A”, and then they will be able to say “F*ck you! I am fully vested”.
Why would the 60% of Usians who believe thanks to “positive thinking” that they will end up in the top 1% of wealthy owners give a damn about what happens to the 99% of LOSERS that they will be leaving behind? They will choose case “B” every time.
«MAKE A LOT OF MONEY from case “A”,»
Oops, I meant of course that winners can make a lot of money from case “B”.
Paying taxes is for losers — making money from speculation is for winners. That’s the American Dream: losers pay taxes, winners make money.
«The graphs above are very misleading because they don’t extend far back into the past. The big story is that “something” happened in 1995 that created a gigantic bubbled of leverage, and that “something” happened again in 2001 and 2006 as PEs and thus stock prices were reverting to the mean.»
Ah just found a fascinating additional bit which is doubly fascinating because it is from a “gold bug” who writes admiringly of Luskin’s economics (so doubly insane) but regardless reports two important points, that in 1995 the Fed (Newt Gingrich and Alan Greenspan) effectively lowered/abolished reserve requirements, and at the same time M3 started growing insanely:
http://www.signallake.com/innovation/FedReserve1995.pdf
«The key event that happened around 1995 is that the fractional reserve ratio was not only lowered, it was effectively eliminated entirely. You read that right. The net result of changes during that period is that banks are not required to back assets which largely correspond to M3 or “broad money” with cash reserves. As a consequence, banks can effectively create money without limitation. I know that sounds hard to believe, but let’s look at the facts.»
«What was the result of these two changes, the creation of classes of zero and near zero reserve ratio accounts and the ability of banks to move money from accounts with high reserve requirements to accounts with low or now reserve requirement?
A flood of free money.
There was then almost no limit to the promissary notes, in the form of various securities, that could be created by banks — with fees of various sorts — interest, originating fees, maintenance fees, penalties, and so on — collected all along the way and booked as profits. This transformation of banking practices seems to have started small, but really picked up steam by 1996 and 1997, likely due to competitive pressures among banks; those banks that used these methods could easily out-compete those that did not.»
«Well, in a world of very mobile capital between developed countries and no limit to paper money creation in the largest of them, hundreds of billions of dollars exited Japan for US shores, in search of a higher interest rate in a process known as global basis-point arbitrage. To make matters worse, third parties began borrowing in Japan and investing in the US at a higher return, and the yen carry trade was born. Hedge funds would later greatly multiply the effect of this phenomenon. Like a giant vacuum cleaner, the US had sucked up much of Japan’s free capital, likely exacerbating Japan’s recession instead of
alleviating it. As my good friend Jameson Penn has observed, all that was left in Japan after this setup was “the dumb money,” not exactly conducive to a domestic recovery.
This all helps explain the anamoly of the strong dollar of the mid-to-late 90s, and the accelerating death of the US manufacture-for-export sector. It also probably has a lot to do with the soaring fortunes of the ultra-rich, in contrast to the inflation-caused flat-to-declining real wages of most everyone else, as discussed in The Modern Depression.
With the observation of the changes made to reserve requirements and rules for qualifying accounts, it looks like we can close the book on questions about those two trends.»
Note that after the Japan-to-USA carry trade, there was the USA-to-China carry trade, over-sterilized though by gigantic purchases of USA debt by Chinese authorities, as they sought to subsidize their country’s exports not directly, but by subsidizing the USA’s exchange rate and borrowing ability.
Blissex I copied to paste with ire “choice A … rewarding losers, moochers and looters” but reading all you posted just above, I’m not quite getting you
that was an interesting disection
At first thought, maybe your a high school jock with no way to make a living post HS; ie; weren’t talleted enough for the big game; and manufacturing has left your land for cheap dumb labor. So the financial game was choice for the big money.
Thats the geeky band & art oriented kid in me coming out post 50years. I apologize in advance if your not that psych breakdown.
I’ll repeat “that was an interesting disection”
Society needs workers, and that means you can’t poop on them, unless there is so many of them that will suck it up for the team that it (the game) works.
I hope that wasn’t to whinny for the team.
«I copied to paste with ire “choice A … rewarding losers, moochers and looters” but reading all you posted just above, I’m not quite getting you»
I was being sarcastic — because the idea that Usians will willingly pay more taxes to allow for a more efficient transition to a less energy intensive economy runs against the grain of USA culture, which is based on the idea that by screwing everybody else everybody can become rich. Oh yes :-).
Consider this article about people who complain about their 30% tax burden that makes it more difficult for them to live on $300,000/year, as they are already suffering:
http://lanekenworthy.net/2008/06/24/making-ends-meet-on-300000-a-year/
http://www.businessweek.com/magazine/content/08_24/b4088081624555.htm
«Many of America’s affluent, squeezed already, worry they will be burdened with higher taxes»
This kid of people feel exploited and victimized. They want the good times to roll for as long as possible, not for the government to make their using their SUV any more expensive than it already is.
«Society needs workers, and that means you can’t poop on them, unless there is so many of them that will suck it up for the team that it (the game) works.»
But 60% of workers think that they will become RICH and then pooping on the other workers will be all fine, and they (the others, the losers) will have to be suck it up. Until 60% of voters stop thinking they will get into the 1% of the richest, there will be no political pressure to do sensible stuff for the majority.
looking at that chart in >
http://bigpicture.typepad.com/comments/2007/10/margin-debt-gro.html
I wonder if that created the shot across the bow that hit Bld7? And why we are where we are.