You can't expect people to unite behind you if you're trying to jam a whole bunch of things down their throat" --investor and Obama supporter Warren Buffett
We have rights, as individuals, to give as much of our own money as we please to charity; but as members of Congress we have no right so to appropriate a dollar of public money." --American hunter, frontiersman, soldier and politician Davy Crockett (1786-1836)
Thursday, March 12, 2009
Bear Rally - March 12th
Market had another good up day today, yesterday it was flat. The Dow needs to break 7300. Expecting a good rally between 10-20%
Today the Dow up 238 points - 3.4%
S&P 500 up 3.9%;
Nasdaq up 3.9%.
From the Monday lows, the markets have now gained 12%.
The bank sector has seen a 45% gain; Homebuilders up 20%.
Crude Oil for April delivery gained $4.70 (11%), to $47.03/barrel.
Today the Dow up 238 points - 3.4%
S&P 500 up 3.9%;
Nasdaq up 3.9%.
From the Monday lows, the markets have now gained 12%.
The bank sector has seen a 45% gain; Homebuilders up 20%.
Crude Oil for April delivery gained $4.70 (11%), to $47.03/barrel.
Wednesday, March 11, 2009
Quote....
The great advances of civilization, whether in architecture or painting, in science or in literature, in industry or agriculture, have never come from centralized government." --economist Milton Friedman (1912-2006)
Recession? No, It's a D-process, and It Will Be Long
AN INTERVIEW WITH RAY DALIO: This pro sees a long and painful depression.
Ray Dalio, Chief Investment Officer, Bridgewater Associates
By SANDRA WARD
Barron's - February 9, 2009
NOBODY WAS BETTER PREPARED FOR THE GLOBAL market crash than clients of Ray Dalio's Bridgewater Associates and subscribers to its Daily Observations. Dalio, the chief investment officer and all-around guiding light of the global money-management company he founded more than 30 years ago, began sounding alarms in Barron's in the spring of 2007 about the dangers of excessive financial leverage. He counts among his clients world governments and central banks, as well as pension funds and endowments.
Matthew Furman for Barron's
"The regulators have to decide how banks will operate. That means they are going to have to nationalize some in some form." -- Ray Dalio
No wonder. The Westport, Conn.-based firm, whose analyses of world markets focus on credit and currencies, has produced long-term annual returns, net of fees, averaging 15%. In the turmoil of 2008, Bridgewater's Pure Alpha 1 fund gained 8.7% net of fees and Pure Alpha 2 delivered 9.4%.
Here's what's on his mind now.
Barron's: I can't think of anyone who was earlier in describing the deleveraging and deflationary process that has been happening around the world.
Dalio: Let's call it a "D-process," which is different than a recession, and the only reason that people really don't understand this process is because it happens rarely. Everybody should, at this point, try to understand the depression process by reading about the Great Depression or the Latin American debt crisis or the Japanese experience so that it becomes part of their frame of reference. Most people didn't live through any of those experiences, and what they have gotten used to is the recession dynamic, and so they are quick to presume the recession dynamic. It is very clear to me that we are in a D-process.
Why are you hesitant to emphasize either the words depression or deflation? Why call it a D-process?
Both of those words have connotations associated with them that can confuse the fact that it is a process that people should try to understand.
You can describe a recession as an economic retraction which occurs when the Federal Reserve tightens monetary policy normally to fight inflation. The cycle continues until the economy weakens enough to bring down the inflation rate, at which time the Federal Reserve eases monetary policy and produces an expansion. We can make it more complicated, but that is a basic simple description of what recessions are and what we have experienced through the post-World War II period. What you also need is a comparable understanding of what a D-process is and why it is different.
You have made the point that only by understanding the process can you combat the problem. Are you confident that we are doing what's essential to combat deflation and a depression?
The D-process is a disease of sorts that is going to run its course.
When I first started seeing the D-process and describing it, it was before it actually started to play out this way. But now you can ask yourself, OK, when was the last time bank stocks went down so much? When was the last time the balance sheet of the Federal Reserve, or any central bank, exploded like it has? When was the last time interest rates went to zero, essentially, making monetary policy as we know it ineffective? When was the last time we had deflation?
The answers to those questions all point to times other than the U.S. post-World War II experience. This was the dynamic that occurred in Japan in the '90s, that occurred in Latin America in the '80s, and that occurred in the Great Depression in the '30s.
Basically what happens is that after a period of time, economies go through a long-term debt cycle -- a dynamic that is self-reinforcing, in which people finance their spending by borrowing and debts rise relative to incomes and, more accurately, debt-service payments rise relative to incomes. At cycle peaks, assets are bought on leverage at high-enough prices that the cash flows they produce aren't adequate to service the debt. The incomes aren't adequate to service the debt. Then begins the reversal process, and that becomes self-reinforcing, too. In the simplest sense, the country reaches the point when it needs a debt restructuring. General Motors is a metaphor for the United States.
As goes GM, so goes the nation?
The process of bankruptcy or restructuring is necessary to its viability. One way or another, General Motors has to be restructured so that it is a self-sustaining, economically viable entity that people want to lend to again.
This has happened in Latin America regularly. Emerging countries default, and then restructure. It is an essential process to get them economically healthy.
We will go through a giant debt-restructuring, because we either have to bring debt-service payments down so they are low relative to incomes -- the cash flows that are being produced to service them -- or we are going to have to raise incomes by printing a lot of money.
It isn't complicated. It is the same as all bankruptcies, but when it happens pervasively to a country, and the country has a lot of foreign debt denominated in its own currency, it is preferable to print money and devalue.
Isn't the process of restructuring under way in households and at corporations?
They are cutting costs to service the debt. But they haven't yet done much restructuring. Last year, 2008, was the year of price declines; 2009 and 2010 will be the years of bankruptcies and restructurings. Loans will be written down and assets will be sold. It will be a very difficult time. It is going to surprise a lot of people because many people figure it is bad but still expect, as in all past post-World War II periods, we will come out of it OK. A lot of difficult questions will be asked of policy makers. The government decision-making mechanism is going to be tested, because different people will have different points of view about what should be done.
What are you suggesting?
An example is the Federal Reserve, which has always been an autonomous institution with the freedom to act as it sees fit. Rep. Barney Frank [a Massachusetts Democrat and chairman of the House Financial Services Committee] is talking about examining the authority of the Federal Reserve, and that raises the specter of the government and Congress trying to run the Federal Reserve. Everybody will be second-guessing everybody else.
So where do things stand in the process of restructuring?
What the Federal Reserve has done and what the Treasury has done, by and large, is to take an existing debt and say they will own it or lend against it. But they haven't said they are going to write down the debt and cut debt payments each month. There has been little in the way of debt relief yet. Very, very few actual mortgages have been restructured. Very little corporate debt has been restructured.
The Federal Reserve, in particular, has done a number of successful things. The Federal Reserve went out and bought or lent against a lot of the debt. That has had the effect of reducing the risk of that debt defaulting, so that is good in a sense. And because the risk of default has gone down, it has forced the interest rate on the debt to go down, and that is good, too.
However, the reason it hasn't actually produced increased credit activity is because the debtors are still too indebted and not able to properly service the debt. Only when those debts are actually written down will we get to the point where we will have credit growth. There is a mortgage debt piece that will need to be restructured. There is a giant financial-sector piece -- banks and investment banks and whatever is left of the financial sector -- that will need to be restructured. There is a corporate piece that will need to be restructured, and then there is a commercial-real-estate piece that will need to be restructured.
Is a restructuring of the banks a starting point?
If you think that restructuring the banks is going to get lending going again and you don't restructure the other pieces -- the mortgage piece, the corporate piece, the real-estate piece -- you are wrong, because they need financially sound entities to lend to, and that won't happen until there are restructurings.
On the issue of the banks, ultimately we need banks because to produce credit we have to have banks. A lot of the banks aren't going to have money, and yet we can't just let them go to nothing; we have got to do something.
But the future of banking is going to be very, very different. The regulators have to decide how banks will operate. That means they will have to nationalize some in some form, but they are going to also have to decide who they protect: the bondholders or the depositors?
Nationalization is the most likely outcome?
There will be substantial nationalization of banks. It is going on now and it will continue. But the same question will be asked even after nationalization: What will happen to the pile of bad stuff?
Let's say we are going to end up with the good-bank/bad-bank concept. The government is going to put a lot of money in -- say $100 billion -- and going to get all the garbage at a leverage of, let's say, 10 to 1. They will have a trillion dollars, but a trillion dollars' worth of garbage. They still aren't marking it down. Does this give you comfort?
Then we have the remaining banks, many of which will be broke. The government will have to recapitalize them. The government will try to seek private money to go in with them, but I don't think they are going to come up with a lot of private money, not nearly the amount needed.
To the extent we are going to have nationalized banks, we will still have the question of how those banks behave. Does Congress say what they should do? Does Congress demand they lend to bad borrowers? There is a reason they aren't lending. So whose money is it, and who is protecting that money?
The biggest issue is that if you look at the borrowers, you don't want to lend to them. The basic problem is that the borrowers had too much debt when their incomes were higher and their asset values were higher. Now net worths have gone down.
Let me give you an example. Roughly speaking, most of commercial real estate and a good deal of private equity was bought on leverage of 3-to-1. Most of it is down by more than one-third, so therefore they have negative net worth. Most of them couldn't service their debt when the cash flows were up, and now the cash flows are a lot lower. If you shouldn't have lent to them before, how can you possibly lend to them now?
I guess I'm thinking of the examples of people and businesses with solid credit records who can't get banks to lend to them.
Those examples exist, but they aren't, by and large, the big picture. There are too many nonviable entities. Big pieces of the economy have to become somehow more viable. This isn't primarily about a lack of liquidity. There are certainly elements of that, but this is basically a structural issue. The '30s were very similar to this.
By the way, in the bear market from 1929 to the bottom, stocks declined 89%, with six rallies of returns of more than 20% -- and most of them produced renewed optimism. But what happened was that the economy continued to weaken with the debt problem. The Hoover administration had the equivalent of today's TARP [Troubled Asset Relief Program] in the Reconstruction Finance Corp. The stimulus program and tax cuts created more spending, and the budget deficit increased.
At the same time, countries around the world encountered a similar kind of thing. England went through then exactly what it is going through now. Just as now, countries couldn't get dollars because of the slowdown in exports, and there was a dollar shortage, as there is now. Efforts were directed at rekindling lending. But they did not rekindle lending. Eventually there were a lot of bankruptcies, which extinguished debt.
In the U.S., a Democratic administration replaced a Republican one and there was a major devaluation and reflation that marked the bottom of the Depression in March 1933.
Where is the U.S. and the rest of the world going to keep getting money to pay for these stimulus packages?
The Federal Reserve is going to have to print money. The deficits will be greater than the savings. So you will see the Federal Reserve buy long-term Treasury bonds, as it did in the Great Depression. We are in a position where that will eventually create a problem for currencies and drive assets to gold.
Are you a fan of gold?
Yes.
Have you always been?
No. Gold is horrible sometimes and great other times. But like any other asset class, everybody always should have a piece of it in their portfolio.
What about bonds? The conventional wisdom has it that bonds are the most overbought and most dangerous asset class right now.
Everything is timing. You print a lot of money, and then you have currency devaluation. The currency devaluation happens before bonds fall. Not much in the way of inflation is produced, because what you are doing actually is negating deflation. So, the first wave of currency depreciation will be very much like England in 1992, with its currency realignment, or the United States during the Great Depression, when they printed money and devalued the dollar a lot. Gold went up a whole lot and the bond market had a hiccup, and then long-term rates continued to decline because people still needed safety and liquidity. While the dollar is bad, it doesn't mean necessarily that the bond market is bad.
I can easily imagine at some point I'm going to hate bonds and want to be short bonds, but, for now, a portfolio that is a mixture of Treasury bonds and gold is going to be a very good portfolio, because I imagine gold could go up a whole lot and Treasury bonds won't go down a whole lot, at first.
Ideally, creditor countries that don't have dollar-debt problems are the place you want to be, like Japan. The Japanese economy will do horribly, too, but they don't have the problems that we have -- and they have surpluses. They can pull in their assets from abroad, which will support their currency, because they will want to become defensive. Other currencies will decline in relationship to the yen and in relationship to gold.
And China?
Now we have the delicate China question. That is a complicated, touchy question.
The reasons for China to hold dollar-denominated assets no longer exist, for the most part. However, the desire to have a weaker currency is everybody's desire in terms of stimulus. China recognizes that the exchange-rate peg is not as important as it was before, because the idea was to make its goods competitive in the world. Ultimately, they are going to have to go to a domestic-based economy. But they own too much in the way of dollar-denominated assets to get out, and it isn't clear exactly where they would go if they did get out. But they don't have to buy more. They are not going to continue to want to double down.
From the U.S. point of view, we want a devaluation. A devaluation gets your pricing in line. When there is a deflationary environment, you want your currency to go down. When you have a lot of foreign debt denominated in your currency, you want to create relief by having your currency go down. All major currency devaluations have triggered stock-market rallies throughout the world; one of the best ways to trigger a stock-market rally is to devalue your currency.
But there is a basic structural problem with China. Its per capita income is less than 10% of ours. We have to get our prices in line, and we are not going to do it by cutting our incomes to a level of Chinese incomes.
And they are not going to do it by having their per capita incomes coming in line with our per capita incomes. But they have to come closer together. The Chinese currency and assets are too cheap in dollar terms, so a devaluation of the dollar in relation to China's currency is likely, and will be an important step to our reflation and will make investments in China attractive.
You mentioned, too, that inflation is not as big a worry for you as it is for some. Could you elaborate?
A wave of currency devaluations and strong gold will serve to negate deflationary pressures, bringing inflation to a low, positive number rather than producing unacceptably high inflation -- and that will last for as far as I can see out, roughly about two years.
Given this outlook, what is your view on stocks?
Buying equities and taking on those risks in late 2009, or more likely 2010, will be a great move because equities will be much cheaper than now. It is going to be a buying opportunity of the century.
Thanks, Ray.
Ray Dalio, Chief Investment Officer, Bridgewater Associates
By SANDRA WARD
Barron's - February 9, 2009
NOBODY WAS BETTER PREPARED FOR THE GLOBAL market crash than clients of Ray Dalio's Bridgewater Associates and subscribers to its Daily Observations. Dalio, the chief investment officer and all-around guiding light of the global money-management company he founded more than 30 years ago, began sounding alarms in Barron's in the spring of 2007 about the dangers of excessive financial leverage. He counts among his clients world governments and central banks, as well as pension funds and endowments.
Matthew Furman for Barron's
"The regulators have to decide how banks will operate. That means they are going to have to nationalize some in some form." -- Ray Dalio
No wonder. The Westport, Conn.-based firm, whose analyses of world markets focus on credit and currencies, has produced long-term annual returns, net of fees, averaging 15%. In the turmoil of 2008, Bridgewater's Pure Alpha 1 fund gained 8.7% net of fees and Pure Alpha 2 delivered 9.4%.
Here's what's on his mind now.
Barron's: I can't think of anyone who was earlier in describing the deleveraging and deflationary process that has been happening around the world.
Dalio: Let's call it a "D-process," which is different than a recession, and the only reason that people really don't understand this process is because it happens rarely. Everybody should, at this point, try to understand the depression process by reading about the Great Depression or the Latin American debt crisis or the Japanese experience so that it becomes part of their frame of reference. Most people didn't live through any of those experiences, and what they have gotten used to is the recession dynamic, and so they are quick to presume the recession dynamic. It is very clear to me that we are in a D-process.
Why are you hesitant to emphasize either the words depression or deflation? Why call it a D-process?
Both of those words have connotations associated with them that can confuse the fact that it is a process that people should try to understand.
You can describe a recession as an economic retraction which occurs when the Federal Reserve tightens monetary policy normally to fight inflation. The cycle continues until the economy weakens enough to bring down the inflation rate, at which time the Federal Reserve eases monetary policy and produces an expansion. We can make it more complicated, but that is a basic simple description of what recessions are and what we have experienced through the post-World War II period. What you also need is a comparable understanding of what a D-process is and why it is different.
You have made the point that only by understanding the process can you combat the problem. Are you confident that we are doing what's essential to combat deflation and a depression?
The D-process is a disease of sorts that is going to run its course.
When I first started seeing the D-process and describing it, it was before it actually started to play out this way. But now you can ask yourself, OK, when was the last time bank stocks went down so much? When was the last time the balance sheet of the Federal Reserve, or any central bank, exploded like it has? When was the last time interest rates went to zero, essentially, making monetary policy as we know it ineffective? When was the last time we had deflation?
The answers to those questions all point to times other than the U.S. post-World War II experience. This was the dynamic that occurred in Japan in the '90s, that occurred in Latin America in the '80s, and that occurred in the Great Depression in the '30s.
Basically what happens is that after a period of time, economies go through a long-term debt cycle -- a dynamic that is self-reinforcing, in which people finance their spending by borrowing and debts rise relative to incomes and, more accurately, debt-service payments rise relative to incomes. At cycle peaks, assets are bought on leverage at high-enough prices that the cash flows they produce aren't adequate to service the debt. The incomes aren't adequate to service the debt. Then begins the reversal process, and that becomes self-reinforcing, too. In the simplest sense, the country reaches the point when it needs a debt restructuring. General Motors is a metaphor for the United States.
As goes GM, so goes the nation?
The process of bankruptcy or restructuring is necessary to its viability. One way or another, General Motors has to be restructured so that it is a self-sustaining, economically viable entity that people want to lend to again.
This has happened in Latin America regularly. Emerging countries default, and then restructure. It is an essential process to get them economically healthy.
We will go through a giant debt-restructuring, because we either have to bring debt-service payments down so they are low relative to incomes -- the cash flows that are being produced to service them -- or we are going to have to raise incomes by printing a lot of money.
It isn't complicated. It is the same as all bankruptcies, but when it happens pervasively to a country, and the country has a lot of foreign debt denominated in its own currency, it is preferable to print money and devalue.
Isn't the process of restructuring under way in households and at corporations?
They are cutting costs to service the debt. But they haven't yet done much restructuring. Last year, 2008, was the year of price declines; 2009 and 2010 will be the years of bankruptcies and restructurings. Loans will be written down and assets will be sold. It will be a very difficult time. It is going to surprise a lot of people because many people figure it is bad but still expect, as in all past post-World War II periods, we will come out of it OK. A lot of difficult questions will be asked of policy makers. The government decision-making mechanism is going to be tested, because different people will have different points of view about what should be done.
What are you suggesting?
An example is the Federal Reserve, which has always been an autonomous institution with the freedom to act as it sees fit. Rep. Barney Frank [a Massachusetts Democrat and chairman of the House Financial Services Committee] is talking about examining the authority of the Federal Reserve, and that raises the specter of the government and Congress trying to run the Federal Reserve. Everybody will be second-guessing everybody else.
So where do things stand in the process of restructuring?
What the Federal Reserve has done and what the Treasury has done, by and large, is to take an existing debt and say they will own it or lend against it. But they haven't said they are going to write down the debt and cut debt payments each month. There has been little in the way of debt relief yet. Very, very few actual mortgages have been restructured. Very little corporate debt has been restructured.
The Federal Reserve, in particular, has done a number of successful things. The Federal Reserve went out and bought or lent against a lot of the debt. That has had the effect of reducing the risk of that debt defaulting, so that is good in a sense. And because the risk of default has gone down, it has forced the interest rate on the debt to go down, and that is good, too.
However, the reason it hasn't actually produced increased credit activity is because the debtors are still too indebted and not able to properly service the debt. Only when those debts are actually written down will we get to the point where we will have credit growth. There is a mortgage debt piece that will need to be restructured. There is a giant financial-sector piece -- banks and investment banks and whatever is left of the financial sector -- that will need to be restructured. There is a corporate piece that will need to be restructured, and then there is a commercial-real-estate piece that will need to be restructured.
Is a restructuring of the banks a starting point?
If you think that restructuring the banks is going to get lending going again and you don't restructure the other pieces -- the mortgage piece, the corporate piece, the real-estate piece -- you are wrong, because they need financially sound entities to lend to, and that won't happen until there are restructurings.
On the issue of the banks, ultimately we need banks because to produce credit we have to have banks. A lot of the banks aren't going to have money, and yet we can't just let them go to nothing; we have got to do something.
But the future of banking is going to be very, very different. The regulators have to decide how banks will operate. That means they will have to nationalize some in some form, but they are going to also have to decide who they protect: the bondholders or the depositors?
Nationalization is the most likely outcome?
There will be substantial nationalization of banks. It is going on now and it will continue. But the same question will be asked even after nationalization: What will happen to the pile of bad stuff?
Let's say we are going to end up with the good-bank/bad-bank concept. The government is going to put a lot of money in -- say $100 billion -- and going to get all the garbage at a leverage of, let's say, 10 to 1. They will have a trillion dollars, but a trillion dollars' worth of garbage. They still aren't marking it down. Does this give you comfort?
Then we have the remaining banks, many of which will be broke. The government will have to recapitalize them. The government will try to seek private money to go in with them, but I don't think they are going to come up with a lot of private money, not nearly the amount needed.
To the extent we are going to have nationalized banks, we will still have the question of how those banks behave. Does Congress say what they should do? Does Congress demand they lend to bad borrowers? There is a reason they aren't lending. So whose money is it, and who is protecting that money?
The biggest issue is that if you look at the borrowers, you don't want to lend to them. The basic problem is that the borrowers had too much debt when their incomes were higher and their asset values were higher. Now net worths have gone down.
Let me give you an example. Roughly speaking, most of commercial real estate and a good deal of private equity was bought on leverage of 3-to-1. Most of it is down by more than one-third, so therefore they have negative net worth. Most of them couldn't service their debt when the cash flows were up, and now the cash flows are a lot lower. If you shouldn't have lent to them before, how can you possibly lend to them now?
I guess I'm thinking of the examples of people and businesses with solid credit records who can't get banks to lend to them.
Those examples exist, but they aren't, by and large, the big picture. There are too many nonviable entities. Big pieces of the economy have to become somehow more viable. This isn't primarily about a lack of liquidity. There are certainly elements of that, but this is basically a structural issue. The '30s were very similar to this.
By the way, in the bear market from 1929 to the bottom, stocks declined 89%, with six rallies of returns of more than 20% -- and most of them produced renewed optimism. But what happened was that the economy continued to weaken with the debt problem. The Hoover administration had the equivalent of today's TARP [Troubled Asset Relief Program] in the Reconstruction Finance Corp. The stimulus program and tax cuts created more spending, and the budget deficit increased.
At the same time, countries around the world encountered a similar kind of thing. England went through then exactly what it is going through now. Just as now, countries couldn't get dollars because of the slowdown in exports, and there was a dollar shortage, as there is now. Efforts were directed at rekindling lending. But they did not rekindle lending. Eventually there were a lot of bankruptcies, which extinguished debt.
In the U.S., a Democratic administration replaced a Republican one and there was a major devaluation and reflation that marked the bottom of the Depression in March 1933.
Where is the U.S. and the rest of the world going to keep getting money to pay for these stimulus packages?
The Federal Reserve is going to have to print money. The deficits will be greater than the savings. So you will see the Federal Reserve buy long-term Treasury bonds, as it did in the Great Depression. We are in a position where that will eventually create a problem for currencies and drive assets to gold.
Are you a fan of gold?
Yes.
Have you always been?
No. Gold is horrible sometimes and great other times. But like any other asset class, everybody always should have a piece of it in their portfolio.
What about bonds? The conventional wisdom has it that bonds are the most overbought and most dangerous asset class right now.
Everything is timing. You print a lot of money, and then you have currency devaluation. The currency devaluation happens before bonds fall. Not much in the way of inflation is produced, because what you are doing actually is negating deflation. So, the first wave of currency depreciation will be very much like England in 1992, with its currency realignment, or the United States during the Great Depression, when they printed money and devalued the dollar a lot. Gold went up a whole lot and the bond market had a hiccup, and then long-term rates continued to decline because people still needed safety and liquidity. While the dollar is bad, it doesn't mean necessarily that the bond market is bad.
I can easily imagine at some point I'm going to hate bonds and want to be short bonds, but, for now, a portfolio that is a mixture of Treasury bonds and gold is going to be a very good portfolio, because I imagine gold could go up a whole lot and Treasury bonds won't go down a whole lot, at first.
Ideally, creditor countries that don't have dollar-debt problems are the place you want to be, like Japan. The Japanese economy will do horribly, too, but they don't have the problems that we have -- and they have surpluses. They can pull in their assets from abroad, which will support their currency, because they will want to become defensive. Other currencies will decline in relationship to the yen and in relationship to gold.
And China?
Now we have the delicate China question. That is a complicated, touchy question.
The reasons for China to hold dollar-denominated assets no longer exist, for the most part. However, the desire to have a weaker currency is everybody's desire in terms of stimulus. China recognizes that the exchange-rate peg is not as important as it was before, because the idea was to make its goods competitive in the world. Ultimately, they are going to have to go to a domestic-based economy. But they own too much in the way of dollar-denominated assets to get out, and it isn't clear exactly where they would go if they did get out. But they don't have to buy more. They are not going to continue to want to double down.
From the U.S. point of view, we want a devaluation. A devaluation gets your pricing in line. When there is a deflationary environment, you want your currency to go down. When you have a lot of foreign debt denominated in your currency, you want to create relief by having your currency go down. All major currency devaluations have triggered stock-market rallies throughout the world; one of the best ways to trigger a stock-market rally is to devalue your currency.
But there is a basic structural problem with China. Its per capita income is less than 10% of ours. We have to get our prices in line, and we are not going to do it by cutting our incomes to a level of Chinese incomes.
And they are not going to do it by having their per capita incomes coming in line with our per capita incomes. But they have to come closer together. The Chinese currency and assets are too cheap in dollar terms, so a devaluation of the dollar in relation to China's currency is likely, and will be an important step to our reflation and will make investments in China attractive.
You mentioned, too, that inflation is not as big a worry for you as it is for some. Could you elaborate?
A wave of currency devaluations and strong gold will serve to negate deflationary pressures, bringing inflation to a low, positive number rather than producing unacceptably high inflation -- and that will last for as far as I can see out, roughly about two years.
Given this outlook, what is your view on stocks?
Buying equities and taking on those risks in late 2009, or more likely 2010, will be a great move because equities will be much cheaper than now. It is going to be a buying opportunity of the century.
Thanks, Ray.
Canadian Dollar - Time to go Long?
I have to think the Canadian dollar is one of the better currencies out there. Yes Canada is having its share of problems with the down turn in its economy. However, its fiscal policies are sound and as well their banks are in much better shape.
********************
The Canadian dollar has been among the weakest currencies in the past two weeks and the downturn has run too far, according to Citigroup currency strategist Todd Elmer.
“CAD weakness has overshot fundamentals. With USD broadly trading towards the top of recent ranges we believe there is a tactical opportunity to sell USD/CAD,” he said in a note to clients.
Mr. Elmer said both the fiscal and financial sector strength in Canada provide a strong foundation even as the Bank of Canada moves toward quantitative easing. He added that a base for commodity prices and stabilization in the flow of economic data could act as an immediate catalyst for the loonie’s appreciation.
“Canada benefits from one of the strongest financial sectors in the world and is better positioned fiscally than many of its peers. While Canada is set to run deficits for the first time in a decade, it still ranks close to the top by our gauge of fiscal resilience.”
He added that weakness for the Canadian dollar is likely a knee-jerk reaction to the Bank of Canada’s hint regarding quantitative easing, while investors may have entered into long U.S. dollar positions amid the decline in risk appetite.
However, Mr. Elmer does not think a sell-off for the loonie can be sustained on the basis of the Bank of Canada’s actions alone. Citigroup’s indicator shows that investors unwound peak Canadian dollar long exposure over the course of the past two years.
“Entering 2009, positioning was close to flat, suggesting there is now limited scope for a flush-out of CAD longs,” he said. “With investors still seeking to preserve capital, a sharp build-up in CAD shorts looks unlikely.
********************
The Canadian dollar has been among the weakest currencies in the past two weeks and the downturn has run too far, according to Citigroup currency strategist Todd Elmer.
“CAD weakness has overshot fundamentals. With USD broadly trading towards the top of recent ranges we believe there is a tactical opportunity to sell USD/CAD,” he said in a note to clients.
Mr. Elmer said both the fiscal and financial sector strength in Canada provide a strong foundation even as the Bank of Canada moves toward quantitative easing. He added that a base for commodity prices and stabilization in the flow of economic data could act as an immediate catalyst for the loonie’s appreciation.
“Canada benefits from one of the strongest financial sectors in the world and is better positioned fiscally than many of its peers. While Canada is set to run deficits for the first time in a decade, it still ranks close to the top by our gauge of fiscal resilience.”
He added that weakness for the Canadian dollar is likely a knee-jerk reaction to the Bank of Canada’s hint regarding quantitative easing, while investors may have entered into long U.S. dollar positions amid the decline in risk appetite.
However, Mr. Elmer does not think a sell-off for the loonie can be sustained on the basis of the Bank of Canada’s actions alone. Citigroup’s indicator shows that investors unwound peak Canadian dollar long exposure over the course of the past two years.
“Entering 2009, positioning was close to flat, suggesting there is now limited scope for a flush-out of CAD longs,” he said. “With investors still seeking to preserve capital, a sharp build-up in CAD shorts looks unlikely.
Global recession deepening, Geithner says
Global recession deepening, Geithner says
Jennifer Loven
Wednesday, March 11, 2009
WASHINGTON — U.S. Treasury Secretary Timothy Geithner says the global recession is deepening.
He called for strong actions by all major countries to combat the economic downturn.
His comments echoed those of President Barack Obama, who asked other countries to take more aggressive steps to jump-start their economies.
Mr. Geithner says the Obama administration believes it is essential for other major countries to commit to substantial and sustained efforts to bolster their economies.
His comments highlighted a growing rift with European countries that are balking at the U.S. call for increased stimulus efforts.
European officials argue they do not want to pile up more debt to fight the downturn.
After a meeting with Mr. Geithner at the Oval Office, Mr. Obama told reporters: “We can do a really good job here at home, with a whole host of policies, but if you continue to see deterioration in the world economy, that's going to set us back.”
Mr. Geithner is headed to Britain this week for talks with the finance ministers of 20 advanced and developing countries. Those meetings are a precursor to a leaders' summit on the global financial crisis that is taking place in London early next month.
Mr. Geithner said there have been many ideas passed among the nations, and good progress made, but that the time for talk is over.
“It's time now for us to move together and to begin to act,” he said. “Everything we do in the United States will be more effective if we have the world moving with us.”
Mr. Obama said the United States has two goals for the so-called Group of 20 summit: to make sure there is “concerted action around the globe to jump-start the economy” and to achieve consensus on regulatory reform to take place in each country.
He did not directly criticize other nations, such as in Europe, which have been reluctant to adopt the kind of expensive stimulus packages for their own economies that have been approved in the United States. But his message that allies are not doing enough compared with the United States was clear.
“The United States has actually taken a significant lead on a number of these steps that are required,” he said. “As aggressive as the actions we are taking have been so far, it's very important to make sure that other countries are moving in the same direction, because the global economy is all tied together.”
Mr. Obama has met with several G20 leaders already in the lead-up to the summit, hammering home the notion that they benefit from a strong U.S. economy. The president said those talks have made him “optimistic about the prospects” for a good agreement to come out of London.
Jennifer Loven
Wednesday, March 11, 2009
WASHINGTON — U.S. Treasury Secretary Timothy Geithner says the global recession is deepening.
He called for strong actions by all major countries to combat the economic downturn.
His comments echoed those of President Barack Obama, who asked other countries to take more aggressive steps to jump-start their economies.
Mr. Geithner says the Obama administration believes it is essential for other major countries to commit to substantial and sustained efforts to bolster their economies.
His comments highlighted a growing rift with European countries that are balking at the U.S. call for increased stimulus efforts.
European officials argue they do not want to pile up more debt to fight the downturn.
After a meeting with Mr. Geithner at the Oval Office, Mr. Obama told reporters: “We can do a really good job here at home, with a whole host of policies, but if you continue to see deterioration in the world economy, that's going to set us back.”
Mr. Geithner is headed to Britain this week for talks with the finance ministers of 20 advanced and developing countries. Those meetings are a precursor to a leaders' summit on the global financial crisis that is taking place in London early next month.
Mr. Geithner said there have been many ideas passed among the nations, and good progress made, but that the time for talk is over.
“It's time now for us to move together and to begin to act,” he said. “Everything we do in the United States will be more effective if we have the world moving with us.”
Mr. Obama said the United States has two goals for the so-called Group of 20 summit: to make sure there is “concerted action around the globe to jump-start the economy” and to achieve consensus on regulatory reform to take place in each country.
He did not directly criticize other nations, such as in Europe, which have been reluctant to adopt the kind of expensive stimulus packages for their own economies that have been approved in the United States. But his message that allies are not doing enough compared with the United States was clear.
“The United States has actually taken a significant lead on a number of these steps that are required,” he said. “As aggressive as the actions we are taking have been so far, it's very important to make sure that other countries are moving in the same direction, because the global economy is all tied together.”
Mr. Obama has met with several G20 leaders already in the lead-up to the summit, hammering home the notion that they benefit from a strong U.S. economy. The president said those talks have made him “optimistic about the prospects” for a good agreement to come out of London.
Tuesday, March 10, 2009
Renewed fears rattle through credit markets
BOYD ERMAN
Tuesday, March 10, 2009
CAPITAL MARKETS REPORTER
Credit markets are lapsing into a renewed slump, stymieing central bankers who have gone to unprecedented lengths to get money flowing into the economy.
After taking some baby steps toward normalcy in the first months of 2009, the market for risky corporate debt such as junk bonds is again seizing up, pushing interest rates higher for those companies lucky enough to find financing and threatening to leave many borrowers shut out. The premium that investors are demanding to buy junk bonds has jumped to 19 percentage points above government bonds from 16 points just three weeks ago.
Investors also fear more financial institutions may fail, sending measures of the risk of bank bonds to record highs. At the same time, the rising cost of interbank lending signals bankers are again growing leery of one another. Banks are now charging 1.31 per cent interest to lend each other U.S. dollars for three months, up from a recent low of 1.09 per cent in mid-January.
About the only debt that investors will buy is the two-year U.S. Treasury, traditionally seen as the safest of all havens.
The flow of money out of risky assets into only the safest exacerbates the economic malaise by making it tough for companies to raise money to expand or even to just stay alive, forcing them to cut jobs and spending to cope.
For Canadian companies that need to refinance debt soon, such as miner Teck Cominco Ltd., the renewed troubles in the credit market are bad news.
"Against a background of worsening fundamentals, a poor fourth-quarter earnings season - thankfully drawing to a close - and the spreading of the crisis's tentacles far, wide and deep, more areas of the credit market are starting to feel the strain," said Suki Mann, a credit strategist at Société Générale in London.
The rapidly worsening recession is one reason for the latest slump in credit markets, with the World Bank yesterday saying that the global economy will shrink in 2009 for the first time since the Second World War.
But analysts say the underlying problem is that while central banks such as the U.S. Federal Reserve are pushing hard to get the economy going again with rate cuts and by printing money, the U.S. government is sabotaging those efforts by failing to lay out a clear and credible plan to deal with problem banks.
"This is really uncharted territory," said Michael Devereux, a University of British Columbia economics professor and a Bank of Canada research fellow. "Most economists would have expected that with this level of expansionary monetary policy and expansionary fiscal policy, we would have started to see some things happen."
The issue for many investors, he said, is "the critical steps to fix the banks have not been taken, and because of that there's just no possibility of a resurgence of financial confidence."
Impatient credit investors panned the announcement yesterday by the Obama administration that Treasury Secretary Tim Geithner will unveil his plans for fixing the banking system in "coming weeks."
"Perhaps the market is pushing, in a free-market manner, the government to make the decisions sooner rather than later," said Tim Backshall, chief strategist at Credit Derivatives Research, a California firm that tracks debt markets.
In the meantime, hard-won gains in confidence from late 2008 and early 2009 are bleeding away.
The Credit Derivatives Research Counterparty Risk Index, a measure of investor fears that banks will fail, rose to a record high yesterday, led by concern that Citigroup Inc. might not make it after posting $28.5-billion (U.S.) of losses since the credit crunch began.
And despite perceptions that Canada's banking system is safer than any, the cost of insuring against a default on five-year debt issued by the country's largest bank, Royal Bank of Canada, also rose to a record yesterday, according to Markit Group Ltd.
That means banks will have to pay more to raise funds, leading to higher rates for borrowers, and many companies that depend on debt will have trouble rolling over loans.
The result is that no matter how much central bankers slash their targets for rates, the economy will struggle until credit markets are fixed because companies will cut jobs, close factories and put off expanding to hang onto what little cash they have.
Tuesday, March 10, 2009
CAPITAL MARKETS REPORTER
Credit markets are lapsing into a renewed slump, stymieing central bankers who have gone to unprecedented lengths to get money flowing into the economy.
After taking some baby steps toward normalcy in the first months of 2009, the market for risky corporate debt such as junk bonds is again seizing up, pushing interest rates higher for those companies lucky enough to find financing and threatening to leave many borrowers shut out. The premium that investors are demanding to buy junk bonds has jumped to 19 percentage points above government bonds from 16 points just three weeks ago.
Investors also fear more financial institutions may fail, sending measures of the risk of bank bonds to record highs. At the same time, the rising cost of interbank lending signals bankers are again growing leery of one another. Banks are now charging 1.31 per cent interest to lend each other U.S. dollars for three months, up from a recent low of 1.09 per cent in mid-January.
About the only debt that investors will buy is the two-year U.S. Treasury, traditionally seen as the safest of all havens.
The flow of money out of risky assets into only the safest exacerbates the economic malaise by making it tough for companies to raise money to expand or even to just stay alive, forcing them to cut jobs and spending to cope.
For Canadian companies that need to refinance debt soon, such as miner Teck Cominco Ltd., the renewed troubles in the credit market are bad news.
"Against a background of worsening fundamentals, a poor fourth-quarter earnings season - thankfully drawing to a close - and the spreading of the crisis's tentacles far, wide and deep, more areas of the credit market are starting to feel the strain," said Suki Mann, a credit strategist at Société Générale in London.
The rapidly worsening recession is one reason for the latest slump in credit markets, with the World Bank yesterday saying that the global economy will shrink in 2009 for the first time since the Second World War.
But analysts say the underlying problem is that while central banks such as the U.S. Federal Reserve are pushing hard to get the economy going again with rate cuts and by printing money, the U.S. government is sabotaging those efforts by failing to lay out a clear and credible plan to deal with problem banks.
"This is really uncharted territory," said Michael Devereux, a University of British Columbia economics professor and a Bank of Canada research fellow. "Most economists would have expected that with this level of expansionary monetary policy and expansionary fiscal policy, we would have started to see some things happen."
The issue for many investors, he said, is "the critical steps to fix the banks have not been taken, and because of that there's just no possibility of a resurgence of financial confidence."
Impatient credit investors panned the announcement yesterday by the Obama administration that Treasury Secretary Tim Geithner will unveil his plans for fixing the banking system in "coming weeks."
"Perhaps the market is pushing, in a free-market manner, the government to make the decisions sooner rather than later," said Tim Backshall, chief strategist at Credit Derivatives Research, a California firm that tracks debt markets.
In the meantime, hard-won gains in confidence from late 2008 and early 2009 are bleeding away.
The Credit Derivatives Research Counterparty Risk Index, a measure of investor fears that banks will fail, rose to a record high yesterday, led by concern that Citigroup Inc. might not make it after posting $28.5-billion (U.S.) of losses since the credit crunch began.
And despite perceptions that Canada's banking system is safer than any, the cost of insuring against a default on five-year debt issued by the country's largest bank, Royal Bank of Canada, also rose to a record yesterday, according to Markit Group Ltd.
That means banks will have to pay more to raise funds, leading to higher rates for borrowers, and many companies that depend on debt will have trouble rolling over loans.
The result is that no matter how much central bankers slash their targets for rates, the economy will struggle until credit markets are fixed because companies will cut jobs, close factories and put off expanding to hang onto what little cash they have.
Monday, March 9, 2009
Hedge funds turn to gold
Something to thing about...purchasing some Gold.
I like Peter Munk quote...regarding governments solution to the crises by printing money...."that will end in tears".
*******************
Fiancial Times
By Henny Sender in New York and Javier Blas in London
Published: March 8 2009
Hedge fund investors who made money last year by betting against investment banks are now buying gold as a way of betting against central banks.
The gold bulls include David Einhorn, founder of hedge fund Greenlight Capital, who last year came under the spotlight for his short selling of shares in Lehman Brothers, after arguing that the bank did not have enough capital to offset its exposure to falling property prices. Other funds looking at gold include Eton Park and TPG-Axon, investors said.
Their belief in bullion is being expressed even as gold prices have retreated from last month’s break above the $1,000 an ounce level. Spot gold in London closed last Friday at $939.10, after falling last week to $900.95 an ounce.
Investors such as Mr Einhorn are turning to gold because they are worried about the response of the US Federal Reserve and other central banks to the global economic crisis. A bet on gold is essentially a bet against all paper currencies.
“The size of the Fed’s balance sheet is exploding and the currency is being debased. Our guess is that if the chairman of the Fed is determined to debase the currency, he will succeed,” Mr Einhorn wrote in a recent letter to his investors. “Our instinct is that gold will do well either way: deflation will lead to further steps to debase the currency, while inflation speaks for itself.”
Mr Einhorn’s comments – and the revelation he is buying gold itself – are in line with the views held by other large institutional investors in Europe, according to bankers in London. The head of commodity sales at one major bullion bank told the Financial Times that he had never been so busy dealing in gold for large investors in his life.
Goldman Sachs, Morgan Stanley and UBS all forecast the gold price will surge above $1,000 this year. Peter Munk, chairman of Barrick Gold, the world’s largest miner of bullion, told investors last week that all countries have embarked on policies that will favour gold.“The only option to governments is to print and print more money,” he said. “That will end in tears.”
In the past, hedge funds, which depend on absolute returns to earn high fees, had avoided gold because it does not produce any yield and costs money to store and insure. But those issues have become less important as central banks have pushed interest rates to nearly zero, reducing the yields on currencies.
I like Peter Munk quote...regarding governments solution to the crises by printing money...."that will end in tears".
*******************
Fiancial Times
By Henny Sender in New York and Javier Blas in London
Published: March 8 2009
Hedge fund investors who made money last year by betting against investment banks are now buying gold as a way of betting against central banks.
The gold bulls include David Einhorn, founder of hedge fund Greenlight Capital, who last year came under the spotlight for his short selling of shares in Lehman Brothers, after arguing that the bank did not have enough capital to offset its exposure to falling property prices. Other funds looking at gold include Eton Park and TPG-Axon, investors said.
Their belief in bullion is being expressed even as gold prices have retreated from last month’s break above the $1,000 an ounce level. Spot gold in London closed last Friday at $939.10, after falling last week to $900.95 an ounce.
Investors such as Mr Einhorn are turning to gold because they are worried about the response of the US Federal Reserve and other central banks to the global economic crisis. A bet on gold is essentially a bet against all paper currencies.
“The size of the Fed’s balance sheet is exploding and the currency is being debased. Our guess is that if the chairman of the Fed is determined to debase the currency, he will succeed,” Mr Einhorn wrote in a recent letter to his investors. “Our instinct is that gold will do well either way: deflation will lead to further steps to debase the currency, while inflation speaks for itself.”
Mr Einhorn’s comments – and the revelation he is buying gold itself – are in line with the views held by other large institutional investors in Europe, according to bankers in London. The head of commodity sales at one major bullion bank told the Financial Times that he had never been so busy dealing in gold for large investors in his life.
Goldman Sachs, Morgan Stanley and UBS all forecast the gold price will surge above $1,000 this year. Peter Munk, chairman of Barrick Gold, the world’s largest miner of bullion, told investors last week that all countries have embarked on policies that will favour gold.“The only option to governments is to print and print more money,” he said. “That will end in tears.”
In the past, hedge funds, which depend on absolute returns to earn high fees, had avoided gold because it does not produce any yield and costs money to store and insure. But those issues have become less important as central banks have pushed interest rates to nearly zero, reducing the yields on currencies.
Buffett says economy fell off a cliff
Warren is stating the obvious! The economy is hurting. The is the debt bubble unwinding.
High risks in future is the restart of inflation.
LR
**************
Jonathan Stempel
Monday, March 09, 2009
NEW YORK — Warren Buffett said Monday that the U.S. economy had “fallen off a cliff” and eventually would recover, although a rebound could rekindle inflation worse than experienced in the late 1970s.
Speaking on CNBC television, the 78-year-old billionaire also said the economy was mere hours away from collapse in September, when credit markets seized up, Lehman Brothers Holdings Inc. went bankrupt and insurer American International Group Inc. got its first bailout. “The world almost did come to a stop,” he said.
Mr. Buffett also called on banks to “get back to banking” and said an overwhelmingly number would “earn their way out” of the recession, even if stockholders don't go along for the ride.
“A bank that's going to go broke should be allowed to go broke,” but customers should not worry about their insured deposits, he said. Mr. Buffett said there was a “paralysis of confidence” in banks, which he called “silly” because of safeguards such as deposit insurance.
Mr. Buffett spoke nine days after telling shareholders of his Omaha, Nebraska-based insurance and investment company Berkshire Hathaway Inc. that the economy was in a “shambles” likely to persist beyond 2009.
On Monday, Mr. Buffett said the economy was experiencing “close to the worst-case” scenario, with business activity declining and unemployment rising, and that the economy “can't turn around on a dime.”
He said Americans, including himself, did not predict the severity of the decline in the housing prices, which then led to problems with securitizations, complex debt and other instruments whose value depended on home prices continuing to rise, or at least not plummet.
“It was like some kids saying the emperor has no clothes, and then after he says that, he says now that the emperor doesn't have any underwear either,” Mr. Buffett said.
Maintaining his long-term optimism, Mr. Buffett said that “five years from now, I can guarantee you that the machine will be running fine,” although he hoped it would not take that long.
“We do have the greatest economic machine that man has ever created,” he said.
But he said an economic rebound could trigger higher inflation once demand rebounds. “In economics there is no free lunch,” he said. “We are going to attempt to have a lunch that to some extent we're going to pay for later.”
Mr. Buffett also urged Democrats and Republicans in Washington to work better together, and to communicate bipartisan efforts to fix the economy to voters. “You can't expect people to unite behind you if you're trying to jam a whole bunch of things down their throat,” he said.
Mr. Buffett also said the ailing Citigroup Inc., which Berkshire does not own, would probably keep shrinking, but that depositors should not be worried.
High risks in future is the restart of inflation.
LR
**************
Jonathan Stempel
Monday, March 09, 2009
NEW YORK — Warren Buffett said Monday that the U.S. economy had “fallen off a cliff” and eventually would recover, although a rebound could rekindle inflation worse than experienced in the late 1970s.
Speaking on CNBC television, the 78-year-old billionaire also said the economy was mere hours away from collapse in September, when credit markets seized up, Lehman Brothers Holdings Inc. went bankrupt and insurer American International Group Inc. got its first bailout. “The world almost did come to a stop,” he said.
Mr. Buffett also called on banks to “get back to banking” and said an overwhelmingly number would “earn their way out” of the recession, even if stockholders don't go along for the ride.
“A bank that's going to go broke should be allowed to go broke,” but customers should not worry about their insured deposits, he said. Mr. Buffett said there was a “paralysis of confidence” in banks, which he called “silly” because of safeguards such as deposit insurance.
Mr. Buffett spoke nine days after telling shareholders of his Omaha, Nebraska-based insurance and investment company Berkshire Hathaway Inc. that the economy was in a “shambles” likely to persist beyond 2009.
On Monday, Mr. Buffett said the economy was experiencing “close to the worst-case” scenario, with business activity declining and unemployment rising, and that the economy “can't turn around on a dime.”
He said Americans, including himself, did not predict the severity of the decline in the housing prices, which then led to problems with securitizations, complex debt and other instruments whose value depended on home prices continuing to rise, or at least not plummet.
“It was like some kids saying the emperor has no clothes, and then after he says that, he says now that the emperor doesn't have any underwear either,” Mr. Buffett said.
Maintaining his long-term optimism, Mr. Buffett said that “five years from now, I can guarantee you that the machine will be running fine,” although he hoped it would not take that long.
“We do have the greatest economic machine that man has ever created,” he said.
But he said an economic rebound could trigger higher inflation once demand rebounds. “In economics there is no free lunch,” he said. “We are going to attempt to have a lunch that to some extent we're going to pay for later.”
Mr. Buffett also urged Democrats and Republicans in Washington to work better together, and to communicate bipartisan efforts to fix the economy to voters. “You can't expect people to unite behind you if you're trying to jam a whole bunch of things down their throat,” he said.
Mr. Buffett also said the ailing Citigroup Inc., which Berkshire does not own, would probably keep shrinking, but that depositors should not be worried.
Sunday, March 8, 2009
US Banks - Insolvent
“All the major [US] banks are basically insolvent at this point. Until that changes and until credit gets flowing again, it’s hard to see how we have any real recovery.” – David P. Prokupek, chief executive of the Denver portfolio manager Geronimo Partners in Bloomberg article Thursday.
*********************
It could be years before recovery starts. It has been years for the excessive credit spending. The solution to the problem is not more credit spending that the government is promoting. This problem will not be solved overnight. It will take time. The question is how do we want to correct the problem that has been created; and the blame can be laid at Bush...he deserves it; he started it. However, I fear that Omaba is following Bush but in much bigger way, and that is not real change! Just more of the same...only faster!
*********************
It could be years before recovery starts. It has been years for the excessive credit spending. The solution to the problem is not more credit spending that the government is promoting. This problem will not be solved overnight. It will take time. The question is how do we want to correct the problem that has been created; and the blame can be laid at Bush...he deserves it; he started it. However, I fear that Omaba is following Bush but in much bigger way, and that is not real change! Just more of the same...only faster!
U.S. Bubble Collapse to Be Worse Than Japan’s,
By Patrick Rial
Feb. 23 (Bloomberg) -- The U.S. is facing a deflationary collapse more severe than the crash that hobbled Japan’s economy in the 1990s, leaving gold as the only defensive play for investors, according to CLSA Ltd.’s Christopher Wood.
The housing recession in the U.S. led to a crisis in the banking system as lenders became saddled with illiquid mortgage assets, souring the securitization industry that helped drive credit growth in recent years. The nation’s retail sales fell 10.5 percent in December as consumers became more pessimistic and scaled back purchases.
“The collapse of securitization is a much more deflationary situation in the U.S. than anything seen in Japan when the bubble collapsed in the early 1990s,” Wood, Institutional Investor’s top-ranked Asia strategist, said at a conference in Tokyo sponsored by CLSA. “What we need in the future is a more fundamentally disciplined system, even at the cost of higher levels of growth.”
Gold may be the safest haven for investors as policy makers accelerate responses to the crisis, devaluing currencies versus hard assets such as gold in the process, said Wood. Gold is likely to more than quadruple from the current level of $986 per ounce currently to $3,500 in 2010, he said.
Wood, who in 2003 predicted the U.S. housing crisis, joined New York University economist Nouriel Roubini in cautioning against investment in Europe due to the rising risk among economies in the eastern and central parts of the continent that carry current account deficits.
Moody’s Investors Service Inc. on Feb. 17 said some of Europe’s largest banks may be downgraded because of loans to eastern Europe, sending shares of lenders tumbling.
“In my view, we will have a full-scale currency collapse in central and eastern Europe,” the strategist said. “This will lead to a growing focus on the huge exposure of the European banks to these distressed economies.”
China and India remain the best bets for equity investors over the long term, Wood said.
Feb. 23 (Bloomberg) -- The U.S. is facing a deflationary collapse more severe than the crash that hobbled Japan’s economy in the 1990s, leaving gold as the only defensive play for investors, according to CLSA Ltd.’s Christopher Wood.
The housing recession in the U.S. led to a crisis in the banking system as lenders became saddled with illiquid mortgage assets, souring the securitization industry that helped drive credit growth in recent years. The nation’s retail sales fell 10.5 percent in December as consumers became more pessimistic and scaled back purchases.
“The collapse of securitization is a much more deflationary situation in the U.S. than anything seen in Japan when the bubble collapsed in the early 1990s,” Wood, Institutional Investor’s top-ranked Asia strategist, said at a conference in Tokyo sponsored by CLSA. “What we need in the future is a more fundamentally disciplined system, even at the cost of higher levels of growth.”
Gold may be the safest haven for investors as policy makers accelerate responses to the crisis, devaluing currencies versus hard assets such as gold in the process, said Wood. Gold is likely to more than quadruple from the current level of $986 per ounce currently to $3,500 in 2010, he said.
Wood, who in 2003 predicted the U.S. housing crisis, joined New York University economist Nouriel Roubini in cautioning against investment in Europe due to the rising risk among economies in the eastern and central parts of the continent that carry current account deficits.
Moody’s Investors Service Inc. on Feb. 17 said some of Europe’s largest banks may be downgraded because of loans to eastern Europe, sending shares of lenders tumbling.
“In my view, we will have a full-scale currency collapse in central and eastern Europe,” the strategist said. “This will lead to a growing focus on the huge exposure of the European banks to these distressed economies.”
China and India remain the best bets for equity investors over the long term, Wood said.
Saturday, March 7, 2009
Euro Area Risks Breakup
By Bo Nielsen
Feb. 27 (Bloomberg) -- Hayman Advisors LP, the firm that earned $500 million betting on the U.S. subprime mortgage-market collapse, says Europe’s monetary union is about to fall apart.
Richard Howard, a managing director for global markets at Dallas-based Hayman, said Germany may opt to shore up its own economy, Europe’s biggest, rather than bail out fellow euro nations such as Austria, Italy and Spain as their banks sag under the weight of bad debts. That might lead to defaults and compel Germany to renounce the euro, he said.
“People said subprime could never blow up but it did and now they’re saying the exact same thing about the eurozone,” said Howard. “There’s no stopping what is now a downward spiral.” He declined to discuss his investments.
Hayman joins a growing number of investors seeing the possibility of a breakup of the $12 trillion euro bloc, conceived more than 10 years ago to cut unemployment, tame inflation and create a rival to the dollar. Societe Generale SA said this week Germany may refuse a bailout in an election year. ABN Amro Holding NV said Feb. 17 the crisis is “Europe’s subprime.”
Euro-region bank loans to Eastern Europe topped $1.3 trillion in the third quarter last year, or about 9 percent of the bloc’s gross domestic product, ING Groep NV said Feb. 18, citing Bank for International Settlements data. Now lenders face losses after extending credit to finance everything from industrial development to domestic real estate.
Debt-Default Insurance
Irish banks and foreign banks operating in Ireland together took on debt equivalent to 11 times the nation’s gross domestic product, Dutch-bank credit reached seven times GDP and Belgium four times, according to BNP Paribas SA.
As concern intensified that the loans won’t be repaid, the cost to insure against defaults jumped six-fold to records since August. Credit-default swaps on Ireland climbed to a record 395.8 basis points, from less than 50 basis points in September, according to CMA DataVision. Austrian swaps traded at 265 basis points, compared with less than 25 points six months ago.
The breakup may occur as investors shun all but the safest government bonds, said Hayman, which in 2006 was among the first to bet against Wall Street’s rush to securitize the debt of the least creditworthy U.S. borrowers, correctly predicting a slump in home values that sparked the global credit crisis.
Investor demand for the lowest-risk securities already drove the difference in yield, or spread, between Greek, Austrian and Spanish 10-year bonds and German bunds, Europe’s benchmark government securities, to the widest since the euro’s debut.
Steinbrueck, Soros
German Finance Minister Peer Steinbrueck said Feb. 18 euro countries would “show our ability to act” should countries face difficulties paying debt. Billionaire investor George Soros said Feb. 17 he doesn’t expect a breakup of the region.
The World Bank, the European Bank for Reconstruction and Development and the European Investment Bank will provide up to 24.5 billion euros ($31 billion) to help central and east European banks and businesses cope with the crisis.
European Central Bank officials also said solutions can be found that will ensure cohesion of the region. Executive Board Member Lorenzo Bini Smaghi said Feb. 21 that European Union rules permit the EU “as a whole” to aid states in “economic difficulty.” ECB President Jean-Claude Trichet said a day earlier “there is no weak link of the euro area.”
“The argument that the euro zone will find a solution contains some sense if the assumption is that the situation isn’t that bad,” said Howard. “But the more dire it gets, the less are the consequences of departing from the euro.”
Shrinking Economies
German GDP contracted 2.1 percent in the fourth quarter, the biggest decline since 1987, the Federal Statistics Office said on Feb. 25. The economy will shrink by 2.5 percent this year, with France contracting 1.9 percent and the euro-region 2 percent, according to an International Monetary Fund report on Jan. 28.
European governments, which committed more than 1.2 trillion euros to rescue ailing banks as the recession eroded tax revenue, will require more cash as defaults occur, Howard said. Faced with the prospect of a deepening recession, Germany and France may be reluctant to bail out euro-region members such as Spain and Italy, Howard said.
“Because of the size of this crisis and because of the linkage with Eastern Europe, I think we need to see more broad- minded thinking coming out of the big European countries, in particular Germany,” Jim O’Neill, chief economist at Goldman Sachs Group Inc., said in a Bloomberg Television interview today in London. “Germany has got to create demand for many countries in Europe that have a strong need for some help coming out of elsewhere.”
German Elections
The German government, facing elections in September, might refuse requests for help amid political pressure to spend money at home, Societe Generale said in a Feb. 24 report.
“A bailout of a debtor country from a surplus country like Germany would be like opening the box of Pandora,” former Bundesbank President Karl Otto Poehl said in London yesterday. “It’s a very dangerous course that we will enter” and “I’m very much against it, many people in Germany are against it, but the political pressure will increase,”
Feb. 27 (Bloomberg) -- Hayman Advisors LP, the firm that earned $500 million betting on the U.S. subprime mortgage-market collapse, says Europe’s monetary union is about to fall apart.
Richard Howard, a managing director for global markets at Dallas-based Hayman, said Germany may opt to shore up its own economy, Europe’s biggest, rather than bail out fellow euro nations such as Austria, Italy and Spain as their banks sag under the weight of bad debts. That might lead to defaults and compel Germany to renounce the euro, he said.
“People said subprime could never blow up but it did and now they’re saying the exact same thing about the eurozone,” said Howard. “There’s no stopping what is now a downward spiral.” He declined to discuss his investments.
Hayman joins a growing number of investors seeing the possibility of a breakup of the $12 trillion euro bloc, conceived more than 10 years ago to cut unemployment, tame inflation and create a rival to the dollar. Societe Generale SA said this week Germany may refuse a bailout in an election year. ABN Amro Holding NV said Feb. 17 the crisis is “Europe’s subprime.”
Euro-region bank loans to Eastern Europe topped $1.3 trillion in the third quarter last year, or about 9 percent of the bloc’s gross domestic product, ING Groep NV said Feb. 18, citing Bank for International Settlements data. Now lenders face losses after extending credit to finance everything from industrial development to domestic real estate.
Debt-Default Insurance
Irish banks and foreign banks operating in Ireland together took on debt equivalent to 11 times the nation’s gross domestic product, Dutch-bank credit reached seven times GDP and Belgium four times, according to BNP Paribas SA.
As concern intensified that the loans won’t be repaid, the cost to insure against defaults jumped six-fold to records since August. Credit-default swaps on Ireland climbed to a record 395.8 basis points, from less than 50 basis points in September, according to CMA DataVision. Austrian swaps traded at 265 basis points, compared with less than 25 points six months ago.
The breakup may occur as investors shun all but the safest government bonds, said Hayman, which in 2006 was among the first to bet against Wall Street’s rush to securitize the debt of the least creditworthy U.S. borrowers, correctly predicting a slump in home values that sparked the global credit crisis.
Investor demand for the lowest-risk securities already drove the difference in yield, or spread, between Greek, Austrian and Spanish 10-year bonds and German bunds, Europe’s benchmark government securities, to the widest since the euro’s debut.
Steinbrueck, Soros
German Finance Minister Peer Steinbrueck said Feb. 18 euro countries would “show our ability to act” should countries face difficulties paying debt. Billionaire investor George Soros said Feb. 17 he doesn’t expect a breakup of the region.
The World Bank, the European Bank for Reconstruction and Development and the European Investment Bank will provide up to 24.5 billion euros ($31 billion) to help central and east European banks and businesses cope with the crisis.
European Central Bank officials also said solutions can be found that will ensure cohesion of the region. Executive Board Member Lorenzo Bini Smaghi said Feb. 21 that European Union rules permit the EU “as a whole” to aid states in “economic difficulty.” ECB President Jean-Claude Trichet said a day earlier “there is no weak link of the euro area.”
“The argument that the euro zone will find a solution contains some sense if the assumption is that the situation isn’t that bad,” said Howard. “But the more dire it gets, the less are the consequences of departing from the euro.”
Shrinking Economies
German GDP contracted 2.1 percent in the fourth quarter, the biggest decline since 1987, the Federal Statistics Office said on Feb. 25. The economy will shrink by 2.5 percent this year, with France contracting 1.9 percent and the euro-region 2 percent, according to an International Monetary Fund report on Jan. 28.
European governments, which committed more than 1.2 trillion euros to rescue ailing banks as the recession eroded tax revenue, will require more cash as defaults occur, Howard said. Faced with the prospect of a deepening recession, Germany and France may be reluctant to bail out euro-region members such as Spain and Italy, Howard said.
“Because of the size of this crisis and because of the linkage with Eastern Europe, I think we need to see more broad- minded thinking coming out of the big European countries, in particular Germany,” Jim O’Neill, chief economist at Goldman Sachs Group Inc., said in a Bloomberg Television interview today in London. “Germany has got to create demand for many countries in Europe that have a strong need for some help coming out of elsewhere.”
German Elections
The German government, facing elections in September, might refuse requests for help amid political pressure to spend money at home, Societe Generale said in a Feb. 24 report.
“A bailout of a debtor country from a surplus country like Germany would be like opening the box of Pandora,” former Bundesbank President Karl Otto Poehl said in London yesterday. “It’s a very dangerous course that we will enter” and “I’m very much against it, many people in Germany are against it, but the political pressure will increase,”
COT - Update for March 9th
COT reports for next week March 9:
- S&P - has been bearish since Nov 08, moves to cash on Monday, then following week back to bearish.
- Gold - Cash
- S&P - has been bearish since Nov 08, moves to cash on Monday, then following week back to bearish.
- Gold - Cash
Bass Shorted `God I Hope You're Wrong' Wall Street
Great story of investing and checking things out by Kyle Bass of Hayman Advisors.
***********************
By Mark Pittman - Bloomberg
Dec. 19 (Bloomberg) -- J. Kyle Bass, a hedge fund manager from Dallas, strode into a New York conference room in August 2006 to pitch his theory about a looming housing market meltdown to senior executives of a Wall Street investment bank.
Home prices had been on a five-year tear, rising more than 10 percent annually. Bass conceived a hedge fund that bet on a crash for residential real estate by trading securities based on subprime mortgages to the least credit-worthy borrowers. The investment bank, which Bass declines to identify, owned billions of dollars in mortgage-backed securities.
``Interesting presentation,'' Bass says the firm's chief risk officer said into his ear, his arm draped across Bass's shoulders. ``God, I hope you're wrong.''
Within six months, Bass was right. Delinquencies of home loans made to people with poor credit reached record levels, and prices for the securities backed by these subprime mortgages plunged. The world's biggest financial institutions would write off more than $80 billion in subprime losses, while Bass, his allies and a handful of Wall Street proprietary trading desks racked up billions in profits.
Bass and investors like him saw opportunity in a range of new investment tools that banks created to sell subprime securities worldwide. These included mortgage bond derivatives, contracts whose values are derived from packages of home loans and are used to hedge risk or for speculation. The vehicles allowed hedge funds like Bass's to bet against particular pools of mortgages.
Money to Be Made
From the bankers who expanded the subprime market, to the sales companies that mass-marketed high-risk mortgages, to the ratings companies that blessed securities based on such loans with investment-grade designations, there was money to be made, and everyone charged after it.
The new subprime derivatives amplified the risks of the underlying mortgages, and now investors are reaping the consequences. An index designed to be a proxy for the lowest investment-grade subprime mortgage bonds sold in the second half of 2005, the ABX-HE-BBB- 06-01, traded as high as 102.19 cents on the dollar when it started in January 2006 and today trades at about 30 cents on the dollar.
Private Island, Racing Porsche
Bass, a former salesman for Bear Stearns Cos. and Legg Mason Inc., had struck out on his own in early 2006. He started Hayman Capital Partners, specializing in corporate turnarounds, restructurings and mortgages. Bass isn't related to the Texas billionaire Robert Bass.
Bass named Hayman for the private island off Australia where he spent his honeymoon. He drove a $200,000 500-horsepower Porsche Ruf RTurbo with a built-in racecar-style crash cage.
A former competitive diver who had put himself through Texas Christian University in Fort Worth partly on an athletic scholarship, Bass was about to take his most ambitious plunge yet: betting home values would decline for the first time since the Great Depression.
``We were saying that there were going to be $1 trillion in loans in trouble,'' Bass says. ``That had really never happened before. You had to have an imagination to believe us.''
New Tools, Deep Research
Other early converts were Mark Hart of Corriente Capital Management in Fort Worth, Texas, and Alan Fournier of Pennant Capital in Chatham, New Jersey. In his earlier sales jobs, Bass had sold securities to Fournier. Now the two joined forces to research bad loans.
On the other side of their trades would be investors chasing the high yields from securities based on subprime loans. This group included Wall Street firms, German and Japanese banks and U.S. and foreign pension funds. They were reassured by the securities' investment-grade ratings, even as foreclosures started in some parts of the U.S.
The traditional way for a speculator to wager against, or short, the housing market was to sell the stocks of major home- building companies with borrowed money and repurchase them for a lower price if the shares fell.
Bass had tried that strategy in the past and found there were limits on its effectiveness, he says. There was always a danger that a leveraged buyout firm would bid for the home- building company and cause the stock to rise, which would cost anyone shorting the stock money.
Understanding the Trades
The new, standardized mortgage bond derivative contracts created a strategy with less risk and greater profit potential.
To learn about the contracts, Bass visited Wall Street trading desks and mortgage servicers. He met with housing lenders and hedge fund analysts. He read Yale Professor Frank Fabozzi's book on mortgage-backed securities, ``Collateralized Debt Obligations: Structures and Analysis.'' Twice.
``What I didn't understand was the synthetic marketplace,'' Bass says. ``When someone explained to me that it was a synthetic CDO that takes the other side of my trade, it took me a month to understand what the hell was going on.''
Bass and Fournier hired private detectives, searched news reports, asked Wall Street underwriters which mortgage companies' loans were at risk of default and called those lenders directly. In this blizzard of research, Bass turned up the California mortgage lender Quick Loan Funding and its proprietor, Daniel Sadek.
Guy `to Bet Against'
The hedge fund traders learned from a news account that Sadek was dating a soap opera actress, Nadia Bjorlin, and using profits from his mortgage company to fund a movie about car racing, in which she starred.
``When they started catapulting Porsche Carrera GTs and he says, `What the hell, what are a couple of cars being thrown around?' I'm thinking, `That's the guy you want to bet against,''' Bass says.
Bass called Quick Loan Funding directly. He says he got on the phone with a senior loan officer, identified himself and said he was interested in the mortgage business. As Bass tells it, the conversation sealed his determination to short Quick Loan's mortgages.
For his part, Sadek says he was never told that hedge funds had asked how his firm did business. He disputes Bass's characterization of Quick Loan's mortgages.
``If my loans were so bad, why did Wall Street keep buying them to securitize?'' Sadek says.
Recruiting Investors
Armed with their understanding of the loans they wanted to short and a plan for doing so, Bass, Fournier and Hart hit the road, making pitches to potential investors that the market was about to collapse.
``My biggest fear was that it was going to happen before I could get the money,'' Bass says.
One of Bass's first investors was Aaron Kozmetsky, a Dallas investor with whom he already had a business relationship. Kozmetsky's grandfather, George Kozmetsky, was one of the founders of Teledyne Technologies Inc. While Aaron Kozmetsky had invested in almost every venture Bass had ever offered, this time Bass put a note of urgency into his pitch.
``It was the first time he's said, `Drop what you're doing. You need to meet with me on this. Make time for me,''' Kozmetsky says. Kozmetsky invested more than $1 million.
Daniel Loeb, the chief executive of Third Point LLC, a New York-based company that oversees about $5.7 billion, had put money in another of Bass's pools. He describes Bass as ``probably the most astute salesperson who covered us.'' Loeb passed on Bass's subprime fund.
``I obviously missed the boat on that one,'' Loeb says now.
Laying the Bets
Loeb still did all right. He invested in Bass's main hedge fund that specializes in turnarounds, restructurings and bankruptcies. Loeb says that fund is up 160 percent this year.
Bass and Fournier focused on single-name mortgage bond derivatives to be more certain that their bets were right. Both bought only securities rated BBB and BBB-, rather than AAA rated securities, expecting them to pay off more quickly.
Bass says he raised about $110 million and used the leveraging effect of derivatives to sell short about $1.2 billion of subprime securities. Two-thirds of it was based on BBB rated mortgage instruments, some involving Sadek's loans. One was Nomura Home Equity Loan Inc. 2006-HE2 M8, an instrument based 37 percent on loans issued by Quick Loan Funding.
The remaining third of Bass's investment involved securities rated one grade lower, BBB-, some also incorporating Quick Loan Funding mortgages.
As Bass and Fournier executed their trades in August and September 2006, foreclosures were beginning to spread across the U.S.
`Fat Pitch'
``This is the fat pitch,'' Bass says. ``This is the once-in- a-lifetime, low-risk, incredibly high-reward scenario where we're going to be right.''
In January, Bass decided he needed ``to meet the enemy'' by going to the American Securitization Forum convention in Las Vegas and listening to presentations from managers of the synthetic collateralized debt obligations that took the other side of his trades.
``I came away relieved,'' Bass says. ``They said, `We know what we're doing. We've been doing it for 10 years. Our models are robust.'''
In May, two independent researchers, Joshua Rosner of Graham Fisher & Co. and Joseph Mason, of Drexel University, concluded in an 84-page study that the U.S. ratings companies Standard & Poor's, Moody's and Fitch had been wrong to bless billions of dollars of mortgage securities with AAA and BBB ratings.
After a May 3 presentation at the Hudson Institute in Washington, Rosner stood on K Street and lit up an American Spirit cigarette.
``The ratings are just wrong,'' Rosner says. ``Completely wrong.''
For Bass and Fournier, it was validation of their trading strategy. As investors worldwide began to panic, Bass and Fournier watched the values of their short positions soar.
***********************
By Mark Pittman - Bloomberg
Dec. 19 (Bloomberg) -- J. Kyle Bass, a hedge fund manager from Dallas, strode into a New York conference room in August 2006 to pitch his theory about a looming housing market meltdown to senior executives of a Wall Street investment bank.
Home prices had been on a five-year tear, rising more than 10 percent annually. Bass conceived a hedge fund that bet on a crash for residential real estate by trading securities based on subprime mortgages to the least credit-worthy borrowers. The investment bank, which Bass declines to identify, owned billions of dollars in mortgage-backed securities.
``Interesting presentation,'' Bass says the firm's chief risk officer said into his ear, his arm draped across Bass's shoulders. ``God, I hope you're wrong.''
Within six months, Bass was right. Delinquencies of home loans made to people with poor credit reached record levels, and prices for the securities backed by these subprime mortgages plunged. The world's biggest financial institutions would write off more than $80 billion in subprime losses, while Bass, his allies and a handful of Wall Street proprietary trading desks racked up billions in profits.
Bass and investors like him saw opportunity in a range of new investment tools that banks created to sell subprime securities worldwide. These included mortgage bond derivatives, contracts whose values are derived from packages of home loans and are used to hedge risk or for speculation. The vehicles allowed hedge funds like Bass's to bet against particular pools of mortgages.
Money to Be Made
From the bankers who expanded the subprime market, to the sales companies that mass-marketed high-risk mortgages, to the ratings companies that blessed securities based on such loans with investment-grade designations, there was money to be made, and everyone charged after it.
The new subprime derivatives amplified the risks of the underlying mortgages, and now investors are reaping the consequences. An index designed to be a proxy for the lowest investment-grade subprime mortgage bonds sold in the second half of 2005, the ABX-HE-BBB- 06-01, traded as high as 102.19 cents on the dollar when it started in January 2006 and today trades at about 30 cents on the dollar.
Private Island, Racing Porsche
Bass, a former salesman for Bear Stearns Cos. and Legg Mason Inc., had struck out on his own in early 2006. He started Hayman Capital Partners, specializing in corporate turnarounds, restructurings and mortgages. Bass isn't related to the Texas billionaire Robert Bass.
Bass named Hayman for the private island off Australia where he spent his honeymoon. He drove a $200,000 500-horsepower Porsche Ruf RTurbo with a built-in racecar-style crash cage.
A former competitive diver who had put himself through Texas Christian University in Fort Worth partly on an athletic scholarship, Bass was about to take his most ambitious plunge yet: betting home values would decline for the first time since the Great Depression.
``We were saying that there were going to be $1 trillion in loans in trouble,'' Bass says. ``That had really never happened before. You had to have an imagination to believe us.''
New Tools, Deep Research
Other early converts were Mark Hart of Corriente Capital Management in Fort Worth, Texas, and Alan Fournier of Pennant Capital in Chatham, New Jersey. In his earlier sales jobs, Bass had sold securities to Fournier. Now the two joined forces to research bad loans.
On the other side of their trades would be investors chasing the high yields from securities based on subprime loans. This group included Wall Street firms, German and Japanese banks and U.S. and foreign pension funds. They were reassured by the securities' investment-grade ratings, even as foreclosures started in some parts of the U.S.
The traditional way for a speculator to wager against, or short, the housing market was to sell the stocks of major home- building companies with borrowed money and repurchase them for a lower price if the shares fell.
Bass had tried that strategy in the past and found there were limits on its effectiveness, he says. There was always a danger that a leveraged buyout firm would bid for the home- building company and cause the stock to rise, which would cost anyone shorting the stock money.
Understanding the Trades
The new, standardized mortgage bond derivative contracts created a strategy with less risk and greater profit potential.
To learn about the contracts, Bass visited Wall Street trading desks and mortgage servicers. He met with housing lenders and hedge fund analysts. He read Yale Professor Frank Fabozzi's book on mortgage-backed securities, ``Collateralized Debt Obligations: Structures and Analysis.'' Twice.
``What I didn't understand was the synthetic marketplace,'' Bass says. ``When someone explained to me that it was a synthetic CDO that takes the other side of my trade, it took me a month to understand what the hell was going on.''
Bass and Fournier hired private detectives, searched news reports, asked Wall Street underwriters which mortgage companies' loans were at risk of default and called those lenders directly. In this blizzard of research, Bass turned up the California mortgage lender Quick Loan Funding and its proprietor, Daniel Sadek.
Guy `to Bet Against'
The hedge fund traders learned from a news account that Sadek was dating a soap opera actress, Nadia Bjorlin, and using profits from his mortgage company to fund a movie about car racing, in which she starred.
``When they started catapulting Porsche Carrera GTs and he says, `What the hell, what are a couple of cars being thrown around?' I'm thinking, `That's the guy you want to bet against,''' Bass says.
Bass called Quick Loan Funding directly. He says he got on the phone with a senior loan officer, identified himself and said he was interested in the mortgage business. As Bass tells it, the conversation sealed his determination to short Quick Loan's mortgages.
For his part, Sadek says he was never told that hedge funds had asked how his firm did business. He disputes Bass's characterization of Quick Loan's mortgages.
``If my loans were so bad, why did Wall Street keep buying them to securitize?'' Sadek says.
Recruiting Investors
Armed with their understanding of the loans they wanted to short and a plan for doing so, Bass, Fournier and Hart hit the road, making pitches to potential investors that the market was about to collapse.
``My biggest fear was that it was going to happen before I could get the money,'' Bass says.
One of Bass's first investors was Aaron Kozmetsky, a Dallas investor with whom he already had a business relationship. Kozmetsky's grandfather, George Kozmetsky, was one of the founders of Teledyne Technologies Inc. While Aaron Kozmetsky had invested in almost every venture Bass had ever offered, this time Bass put a note of urgency into his pitch.
``It was the first time he's said, `Drop what you're doing. You need to meet with me on this. Make time for me,''' Kozmetsky says. Kozmetsky invested more than $1 million.
Daniel Loeb, the chief executive of Third Point LLC, a New York-based company that oversees about $5.7 billion, had put money in another of Bass's pools. He describes Bass as ``probably the most astute salesperson who covered us.'' Loeb passed on Bass's subprime fund.
``I obviously missed the boat on that one,'' Loeb says now.
Laying the Bets
Loeb still did all right. He invested in Bass's main hedge fund that specializes in turnarounds, restructurings and bankruptcies. Loeb says that fund is up 160 percent this year.
Bass and Fournier focused on single-name mortgage bond derivatives to be more certain that their bets were right. Both bought only securities rated BBB and BBB-, rather than AAA rated securities, expecting them to pay off more quickly.
Bass says he raised about $110 million and used the leveraging effect of derivatives to sell short about $1.2 billion of subprime securities. Two-thirds of it was based on BBB rated mortgage instruments, some involving Sadek's loans. One was Nomura Home Equity Loan Inc. 2006-HE2 M8, an instrument based 37 percent on loans issued by Quick Loan Funding.
The remaining third of Bass's investment involved securities rated one grade lower, BBB-, some also incorporating Quick Loan Funding mortgages.
As Bass and Fournier executed their trades in August and September 2006, foreclosures were beginning to spread across the U.S.
`Fat Pitch'
``This is the fat pitch,'' Bass says. ``This is the once-in- a-lifetime, low-risk, incredibly high-reward scenario where we're going to be right.''
In January, Bass decided he needed ``to meet the enemy'' by going to the American Securitization Forum convention in Las Vegas and listening to presentations from managers of the synthetic collateralized debt obligations that took the other side of his trades.
``I came away relieved,'' Bass says. ``They said, `We know what we're doing. We've been doing it for 10 years. Our models are robust.'''
In May, two independent researchers, Joshua Rosner of Graham Fisher & Co. and Joseph Mason, of Drexel University, concluded in an 84-page study that the U.S. ratings companies Standard & Poor's, Moody's and Fitch had been wrong to bless billions of dollars of mortgage securities with AAA and BBB ratings.
After a May 3 presentation at the Hudson Institute in Washington, Rosner stood on K Street and lit up an American Spirit cigarette.
``The ratings are just wrong,'' Rosner says. ``Completely wrong.''
For Bass and Fournier, it was validation of their trading strategy. As investors worldwide began to panic, Bass and Fournier watched the values of their short positions soar.
Friday, March 6, 2009
Is it Inflation or Deflation / Depression?
Is it Inflation or Deflation / Depression??
Your call
**************
Hans-Werner Sinn, president of the German Ifo Institute, said Japanese-style deflation with surging government debt is the “true danger” the world is facing and inflation fears due to central banks’ liquidity provisions are unfounded.
Your call
**************
Hans-Werner Sinn, president of the German Ifo Institute, said Japanese-style deflation with surging government debt is the “true danger” the world is facing and inflation fears due to central banks’ liquidity provisions are unfounded.
Relax ....we are looked after...if.....
Relaxing investing
***************
From now on if you listen obediently to the commandments that I am commanding you today, love God, your God, and serve him with everything you have within you, he'll take charge of sending the rain at the right time .... Deuteronomy 11:13-14 (MSG)
***************
From now on if you listen obediently to the commandments that I am commanding you today, love God, your God, and serve him with everything you have within you, he'll take charge of sending the rain at the right time .... Deuteronomy 11:13-14 (MSG)
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