Indigestion on Wall Street

The credit market mess is oh-so sticky…and quite confusing, we must admit. Mainly because we are treading on uncharted territory – the world has never seen anything quite like this credit cycle – and because there are words like ‘securitization’ being thrown around. Who know what that means, anyway?

Luckily for your humble editors, we don’t have to pull out our old, dusty Econ 101 books…we have Dan Amoss, CFA to explain the “labyrinth of credit contracts and derivatives that provides sources of financing that never pass through the door of a traditional bank, know as ‘securitization.'”

Dan Amoss
August 29, 2007

Still don’t get it? Keep reading today’s guest essay for the full scoop…

Indigestion on Wall Street

Let’s see what Short Fuse is up to in Los Angeles…


Views from the Fuse:

*** The minutes from the August 7 Fed meeting were released yesterday, showing that Fed heads were feeling a little torn and uncertain about the effect of subprime mortgages on the overall U.S. economy, but expected “a return to normal market conditions” – although it may take a while.

Of course, everything that happened after that is history: Bernanke & Co. cut the discount rate by half a percentage point on August 17…but what they’ll do next is anyone’s guess…and oh, are they guessing.

The majority of those who weigh in on these types of events think that there will be a rate cut (which hasn’t happened since June 2006), but others aren’t so sure. All point to soon-to-be released economic data (on real estate, car sales, etc.), as well as a speech Bernanke is giving tomorrow, to give more clues to what their decision at the September 18 meeting will be.

“Bernanke is stuck between a rock and a hard place,” says Dan Amoss.

“On one hand, he’s worried about ‘inflation expectations’ running rampant, and on the other, he’s worried that a plummeting housing market could threaten the entire banking system. I expect that he’ll promote as much creation of money and credit as he can get away with and hope that the public’s fear of inflation doesn’t return to the extremes it reached in the 1970s.”

Dan has quite a few positions in his Strategic Investment portfolio that gives his readers exposure to a worst-case scenario for housing – and still others to give them exposure to a weakening dollar. It is possible to make money while everyone is losing it, after all…

*** As you know, we have been hard at work on our documentary, which can be best described as a follow-up to our 2005 book, Empire of Debt.

Over the past few weeks, the whole documentary team has been in awe of how much life is imitating art…that is, how much events in the markets, in the housing and the like are fitting in just perfectly with the points we are aiming to make in our film.

While investors are pulling their hair out, we are grinning with glee… finally, one of our main themes – there is no such thing as a free lunch – is right there in front of us, splashed across the pages of the Wall Street Journal, scrolling across the screen on the MSNBC ticker.

We aren’t the only ones reveling in this bittersweet joy: we assume Sir Alan Greenspan is feeling the same way in recent days, as his memoir The Age of Turbulence hits stores on September 17 (the day before the next FOMC meeting).

Greenspan proves the theory that any press is good press: he is being slammed for causing the credit crunch, while other pundits simultaneously assert that Big Al would be acting much more aggressively in favor of the markets than his successor. We think that the buzz surrounding the Maestro will do nothing but push up his book sales…

Enjoy the rest of your day,

Short Fuse
The Daily Reckoning

P.S. Interestingly, a little birdy told us that Amazon will be pairing Bill’s latest tome, Mobs, Messiahs and Markets with Greenspan’s memoir in September – how’s that for juxtaposition? Someone at Amazon has a good sense of humor…

Scientists report finding a big hole in the universe. We’re not surprised; we thought something was wrong.

“You don’t want to spend the evening alone, do you?”

The question was put to us by a blond woman, attractive, about 35-years old. The honest answer was ‘no, we’d prefer some company.’ But there are times for truth…and times when lies pay off.

“You are very kind,” we replied, “but no thank you.”

We knew what she was selling. She was standing on the south side of the Arc de Triomphe at 10 PM…waiting for a customer. The companionship she offered would have been very welcome. So would the carnal intimacy, for that matter. But we have our principles.

Yesterday, the Dow fell 280 points and we went to visit our old friend in the Hospital Pitie-Salpetriere. “Mercy Saltpeter” seems like a strange name for a hospital, but that is the fact. The place is a city within the city of Paris, with streets, buildings, parks, courtyards, parking garages and so forth. It is also a very quiet and very pretty place, as there is no traffic to speak of.

“Bill, how are you doing?” said our friend.

“Better than you,” was our reply.

He had lost 20 pounds in the last two weeks…since the cancer was discovered. He looked cadaverous. But he was in a good mood.

“Yes, cancer has been very good for my marriage,” he explained. More tomorrow…

These thoughts and remembrances all flashed through our mind this morning…as we sat in a café near the office.

Reading the paper, we discovered that the Dow has taken a biggish hit yesterday. It is still not clear what the stock market intends to do. We’ll just have to wait to find out.

But anyone who would put money into U.S. stocks, generally, deserves what he gets. Stocks have gone nowhere for the last seven years. That means they are still expensive. The correction that is coming hasn’t yet come. Which means, it hasn’t yet gone either. Our guess is that the next seven years will be even worse than the last seven…as the correction finally does its work.

Our money is still on gold to save the day…at least for those who have turned to the precious metal as a form of wealth insurance. Remember, gold can’t be printed out of thin air – and it will always hold value. And what’s this…the yellow metal is up on weaker dollar sentiment today? Seems like now is as good a time as any to pad your portfolio with gold…

Oh…and here’s an interesting item. Remember, the present economic system is not capitalism…it’s a kind of Marxism for rich people…in which the elite make the profits while the losses are redistributed, shared throughout the entire population like Mao jackets and influenza. The genius of the present system is that it dupes the masses into thinking they are capitalists, making it possible for the speculators and hustlers to offload their risks onto them.

You can see how it works by looking at the mortgage industry. Lenders make a profit by writing mortgages…the mortgages get sold on, repackaged, and bought up by hedge funds, insurance companies, and even pension plans. There are more than a trillion dollars worth of CDOs around and about. No one knows exactly who loses money when they go bust because the downside has been socialized…spread to the masses. In the old days, the banker who provided the mortgage loan would have taken the loss when it went bad. Not today. Now, it’s likely to be a retired teacher in Anaheim…and millions of other make-believe ‘investors’ just like him.

Likewise, the LBO mavens make a fortune in fees. Ultimately, their creations are taken up by the lumpeninvestoriat. Again, the dealmakers and speculators take their profits…and then the risk of inevitable loss – when the stock goes down – is borne by average investors.

And when the speculators get in trouble, the feds rush to their aid with liquidity – more cheap money.

But wait, the problem at the heart of the economic system is not a lack of credit…it’s that too much easy credit has loaded too many people and too many deals with too much debt. More credit just postpones the inevitable loss…which, as we’ve been saying, will not be suffered by the capitalists who caused it…but by the masses.

Barack Obama wrote in the Financial Times recently that it’s time to rescue the masses from their mortgages. He’s got a plan worthy of a leading presidential contender. He says he’ll impose fines on the bad lenders…and give the money to the good voters (oops…we mean, the good homeowners). Just what you’d expect. A safety net for everyone.

The ratio of houses-to-be-sold to those sold, rose to its highest level in 16 years. Foreclosures continue to rise. And now credit card defaults are rising too.

But here’s some good news:

“WASHINGTON (AP) – Five years into a national economic recovery, the share of Americans living in poverty finally dropped.

“The nation’s poverty rate was 12.3 percent in 2006, down from 12.6 percent a year before, the Census Bureau reported Tuesday. Median household income increased slightly, to $48,200.”

Hey, wait a minute. We’ve been reporting that Americans are getting poorer. How could there be fewer poor people? Something is wrong here.

And here it is, in the next paragraph:

“Individual earnings dropped for both men and women in 2006, but more members of each household worked, resulting in the overall increase in household income, said David Johnson, chief of the Census Bureau’s Housing and Household Economic Statistics Division.

“The numbers provided some good economic news at a time when financial markets have been rattled by a slumping housing market. But they were tempered by an increase in the number of Americans without health insurance, from 44.8 million in 2005 to 47 million last year.”

Wait a minute again…how is it good news that people are earning less money…but working harder and longer in order to keep up household income? Here’s a suggestion that will double household income – the Joneses can move in with the Smiths…the Newtons and Smallskys can combine households too. Hey…presto…greater household incomes.

What nonsense…

Bill Bonner
The Daily Reckoning

P.S. Our cook this summer was a woman from Australia. She warned us about kangaroos.

“They’re very sensitive animals…especially the males. One time I was with my children – in town. There was a big male kangaroo in a state of…well, how should I put it…sexual arousal. The kids looked and laughed. The kangaroo didn’t like that. He got very angry…hopped up to me, put his paws on my shoulders and knocked me down.”

The Daily Reckoning