Bush’s Plea for $700 Billion

I’ve often considered George W. Bush to be one of the most arrogant Presidents of my lifetime. A Republican friend of mine argues that it was William Clinton, and I do have to concede that Clinton certainly had his arrogant moments, but he came off humble when he had to be. By comparison, Bush has always seemed to me to be someone who was reveling in the fact that people intensely disliked him. Maybe it was the way he would tend to give a half-smile to his own jokes when he thought he had told a zinger, or maybe it was the way he won by both of his elections by very thin electoral margins yet seemed convinced that he had a mandate from the people in favor of what he was doing. Whenever I hear him speak, I feel I can hear him telling me that he doesn’t care whether he’s popular with the people or not, he’s going to do with this country whatever he and his cronies decide and the rest of us will just have to live with it. 

Consequentially, on occasions like last night where he comes on national TV to convince us all that *gasp* the economy’s not going so well and desperately needs a bailout, I really wish there was a service that could show me the speech complete with those robots from Mystery Science Theater at the bottom to make snaky comments. President Bush’s speech included a description of exactly how our economy got in such dire circumstances to begin with- that cheap credit caused a housing boom and that now both the loans made to the homeowners as well as the value of the underlying real estate are all in question. As I read his description, the feeling I get must be the same as a parent who is listening to his teenager tell him that somehow the idea to sneak out, go to a friends house, and get hammered somehow didn’t turn out so well. I mean, if it really is as simple as credit inducing a inflationary boom which later came crashing down, why didn’t President Bush call a halt to the easy credit terms that lead to the inflationary boom to begin with?

It’s not like he didn’t know it was going on. In fact, it was a point of pride for the President who in 2003 crowed that low interest rates had given rise to a record level of home ownership in the United States. In fact, President Bush went on to say that he goal was to increase home ownership further by reducing the purchasing price of the home via tax credit, the interest rates one would have to pay, and the amount of paperwork one would need to go through to get approved for a mortgage. Looks like all those chickens are coming home to roost, eh George?

That’s the real kicker about macroeconomists and politicians; when the economy is booming because it’s being force feed credit like a goose being fattened for a French delicacy, they want to talk about how amazingly healthy the economy is. When it finally all comes crashing down, they act as though they had nothing to do with it. It’s strange, but of all the individuals involved in the current Presidential race, I think I agree with Sarah Palin the most when she said that America was facing “another Great Depression.”  Although it’s hard for me to admit that, because she’s probably my least favorite person of the four, but I think she may have accidentally nailed it. We’re not just talking about a recession anymore, we’re talking about a depression. And it’s probably not going to be the complete slow down of commerce that the 1930s was, but instead the Japanese type of downturn that never seems to end. America is about to have it’s own “lost decade” or two, and that’s unfortunately turn regardless of which party you vote in for President. 

As I council my friends, there’s nothing that can be done to stop the fall of the Pax Americana, nor is there anything that can be done to stop the oncoming depression. Perhaps certain politicians can help to make it a harder or softer depression, but it’s going to come. Make yourself ready.

Waiting for the bailout shoe to drop

The markets started this week with quite a fall on Monday with the Dow down over 4% and gold up strongly. Tuesday and Wednesday have been a good bit more calm with stock prices falling slightly along with gold. It seems investors want to hold onto cash until things become more certain. Everyone seems certain that the government will bail out Wall Street from this situation, but there seems to be some disagreement about the details. 

 

I’m sure that there are a legion of Wall Street lobbyists right now working furiously to try to get Washington to pay top dollar for all of the dead assets currently sitting on so many balance sheets. And if this were anything but right before an election, they’d probably get their way. But Senators McCain and Obama are no doubt wondering how this bailout is going to look to the voters if Wall Street makes out like bandits on taxpayer money.  So now Wall Street is uncertain as to what the terms of the plan are going to be.

The American voter, much like the American consumer, is expected to have a very short attention span. They aren’t suppose to be able to really understand what’s going on for themselves, you see, so this bailout plan has to be turned by the political pundits to become something so easy that your average voter could understand it. “Wall Street is bailed out by your money after a long period of making money off of you,” is just the kind of thing to work up voter ire. It is, as Bill Bonner suggests, just one grand spectacle. 

The one question that I’m sure will never be asked by either of the candidates or anyone, is “Where is this $700 Billion supposed to come from?” Much like the war in Iraq, it’s just expected that someone will be nice enough to front us the money for us to continue down the path of spending far more than we’re making. That someone has increasingly been foreign investors, and I’m not sure how well they’re going to react to our asking for another Trillion or so. They probably think that it’s a shame that they don’t get a voice in this election, but if things keep going like this it’s a good guess that their time will come. 

After all, a politician may get elected promising to keep us safe from terrorism by “fighting them over there, so we don’t have to fight them over here”, but when the American people have to actually start paying the real bill for these military misadventures, we may suddenly find that we’ve lost our taste for blood. Let’s not forget that we asked a lot of foreign investors to buy these same toxic credit derivatives in the first place, and no government has been nice enough to step forward and bail them out.

SEC Decision to Hinder Short Sellers

The first stock market to develop after the fall of the Roman Empire found it’s home in The Netherlands. The Dutch East India Company’s shares of ownership became traded amongst Dutch citizens in coffee houses and soon an exchange was born. To buy a share in the Dutch East India Company was to hope that the company’s health and revenues would be higher in the future and that you would therefore own a piece of a more valuable company. But not long after this first stock market came about, did other kinds of stock transactions come about. Among them was the “short sale”. 

A short sale is where you borrow shares of stock from someone else and enter into a contract to replace those borrowed shares at some future date. You would then sell the borrowed shares on the open market and look for an opportunity to buy them back at some point in the future. If you could buy them at a lower price, then you would have realized a profit on the difference between the price you originally sold it at and the price you were later able to buy it at. It’s a twist on the old axiom of buy low and sell high; you sell high and then buy low. 

Since the practice first came about, short selling has not been popular. Buying stock in a company is basically betting on the company’s future success while shorting stock in a company is betting on the company’s future failure. It’s akin to playing craps and putting your money on the “Don’t Pass” line; you just don’t make friends betting on other people’s failure. And unpopular figures often find themselves the scape goats during a crisis, which is what we’re seeing now. 

For those of you who don’t follow the financial news everyday, the SEC has been taking an increasingly aggressive stance against short sellers. Back in July of this year, the SEC banned a practice called “naked” short selling against a handful of financial firms. A naked short sale is when you sell the stock without having to borrow it first. The strange thing is that this practice is already against the law. So in essence the SEC came out in July and outlawed an already outlawed practice, but only against a select handful of financial firms such as Freddie Mac and Fannie Mae. Clearly this was an attempt to bolster the price of the stock of financial firms who were perceived as vulnerable. 

Fast forward to this month, and the collapse and bailout of Fannie Mae and Freddie Mac. The SEC once again took the bizarre step of banning the already illegal practice of naked short sales, but this time around they extended it to the entire market. Then came the bankruptcy of Lehman Brothers and the bailout of AIG last week. As part of the bailout proposed by President Bush, there are two provisions which specifically target short sales:

1. All investment managers must publicly disclose whatever short positions they have. 

2. Short selling has been out-and-out banned for financial firms.

Clearly the SEC are taking a more aggressive stance against the short sellers in an effort “to maintain stability.” It’s also clear that the SEC is acting on concert with both the Secretary of Treasury Hank Paulson as well as Chairman of the Federal Reserve Ben Bernanke to try to prop up the market. 

Blaming short sellers for market collapses or having the government ban the practice altogether is not an old tactic. Historically it would seem every time a market collapses, the government comes down against short sellers. The US Government outlaws short sellers after that market collapse of 1929, but found that the stock market only continued it’s decline. Similarly, the moves against short sellers this year has done nothing to stem the tide of stock market loses for people who were shareholders in Fannie Mae, Freddie Mac, and Lehman Brothers. 

The reason that banning short sellers is ineffective is that they are not really the cause of the market decline. Short sellers did not force the bankruptcies that have occurred this year. They did not entice prospective home owners with adjustable rate mortgagees they couldn’t afford, nor did they convince Wall Street Firms to buy securities associated with these repackaged mortgage loans. They did place a wager that the enterprise wouldn’t turn out well, and that has allowed them (including myself) to profit off of the demise of others as markets have collapsed this year. But so what? 

It’s the height of hypocrisy for the government to try to protect Wall Street firms, who has always been motivated by profit before anything else, by banning the very tools that many of them are still using to this day to earn a profit. When Goldman Sachs disclosed last year that it had a strong quarter because it had placed short sales against the very credit instruments it was selling to its customers, no one batted an eye. But now that Goldman finds itself the target of the short sellers, it gets bailed out by the government.  And it’s particularly ironic that the this government is run by Republicans who have long been advocates of the “free market”. 

It would seem that President Bush’s free market policies are similar to his policies of against nation building; a convenient sound bite to give out when times are good, but quickly forgotten when it might actually matter.

The Week of the Bailout

Well. This certainly has proven an exciting week for anyone with money in the stock market. It started off on Sunday with the announcement that Lehman Brothers was going to declare bankruptcy. Many had thought the bank “too big to fail”, but it seems that US Treasury Secretary Hank Paulson and Fed Chair Ben Bernanke felt otherwise.

The stock market fell quite a bit on Monday, as people began to wonder if AIG was next. Then on Tuesday, Bernanke announced that there was no need to cut rates, because the US economy was strong enough to weather the current crisis.

And the result?

A rally of roughly half the losses suffered Monday as Wall Street figured that this ‘tough love’ was a good sign; then, the next day, it’s announced that Bernanke was offering a loan of $85 billion, or so, to bail out AIG and, in so doing, take over the company. So much for tough love!

What was really peculiar here was Wall Street’s reaction: a huge sell-off of all stocks across the board — and that gold rallied $89 an ounce; the biggest one-day rally ever! This bailout suddenly prompted people to lose faith in the system. The next day was more of the same as the stock market continued to rout and gold continued to rally.

That is, until President Bush announced the biggest bailout in history.

The results are still sketchy, but essentially, the government is going to “buy” all of the bad, toxic, or dubious “assets” off of everyone’s balance sheet. The details are a bit shaky at this point, but the plan sounded bold enough for the stock market to stage a huge late-day rally that’s continued on into today. It would seem the market is nothing if not confused as to whether it wants tough love, or the mother of all bailouts.

Like most bold promises made by politicians, it leaves most of the important questions unanswered:

Just how bad does an asset have to be for the government to buy it?

What price is the government going to purchase it for?

How much is itgoing to cost the US taxpayer?

And, my personal favorite:

Where exactly is the government going to get the money for all of this?

But no one seems to care about all of that right now. Wall Street traders breathe a huge sigh of relief as President Bush pledged taxpayer dollars to cover the sins of their gross excesses. It’s as if the Pope had suddenly visited a whorehouse and not only forgiven all of the sinners, but agreed to pick up the tab.

Truth, as they say, is stranger than fiction and this week proves that yet again. No work of fiction would have all of its major characters be so fickle from one day to the next. Can you imagine if Romeo and Juliet seemed to sway between all-consuming passion and a sober coolness? Or if their warring families had similarly gone from feuding one day to offering an alliance the next? I’m pretty sure that if Shakespeare had penned such a tale that it never would have made it to the big stage, much less become a timeless classic.

Yet, this week we see all the authority figures vacillate wildly between the stances of needing to be cruel to be kind, and offering outright martyrdom for the American taxpayer to cover the sins of the financier’s bad beats. And we’ve seen the market all over the place — going from hating it on Monday, to loving it on Tuesday, hating the bailout on Wednesday, to then loving it on Thursday and Friday.

What remains the biggest mystery of them all is the US Dollar is rallying today on the bailout news. Why a currency would rally when its sponsor government just pledged to spend an extra half-trillion dollars or so that it doesn’t have is truly mystifying, but it seems to go with the carnival-like insanity that we’ve seen the rest of this week.

Until next time,

Preston Poulter