True Believers in the Theology of Capitalism

Oh la la…

Is our Crash Alert flag still flying? Yes, it is…flapping in the breeze…almost proudly this morning.

Yesterday, the Dow 387 points. The reason for the beating? “Subprime concerns,” say the papers.

Perhaps the most immediate concern came from an unlikely source – France’s biggest bank, BNP Paribas. The bank has followed Bear Stearns (NYSE:BSC) by sealing two of its funds; for the moment investors are stuck.

“The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating,” BNP Paribas said in a statement.

But don’t worry, dear reader. All is well. How do we know? George W. Bush said so. He says he is “confident,” that our modern markets “will work through these issues.”

Everyone is confident. Because we are all true believers in the Theology of Capitalism. But just in case this capitalism thing doesn’t work out, the Bank of Japan, the Bank of Canada, the European Central Bank and the Fed all joined to say that they would put some additional liquidity into the system. The ECB, for example, announced that it would make “unlimited” amounts of money available at 4% interest. The idea is to protect the financial system from a serious mishap. In a truly capitalist world, of course, there are no protections. People get neither what they want nor what they expect. Instead, they get what they’ve got coming. But the world’s banking cartels have stepped in to fix the credit system and make sure real capitalism doesn’t happen.

Meanwhile, Toll Brothers’ (NYSE:TOL) chief executive says he hasn’t seen such little interest in housing in 20 years. And Bloomberg has a report predicting that the housing slump will deepen amid further “mortgage disruptions.”

Thanks to these problems, the entire markets seem to be ‘re-pricing’ risk, say the experts. It looks to us as though they had re-discovered risk. Volatility, long thought dead, seems to have suddenly risen from the grave.

But, we repeat, don’t worry, dear reader. This too shall pass…and soon stocks will be headed to new heights of glory…they will mount the hills of Zion, for sure.

That must be what investors in Blackstone’s new fund think. Blackstone (NYSE:BX) has raised the world’s biggest pile of private equity money ever – more than $21 billion. Even the California state teachers have put a billion dollars of their pension money into it. Talk about true believers! What is Blackstone going to do with so much cash? How is it going to find such huge values that, somehow, the investing public has overlooked?

But that is what happens when you reach the silly side of a credit bubble. People are ready to believe anything. They no longer fear losing money. And they can’t tell the difference between an investment and a rank speculation. So, even pension funds and bible schools put money into swaps, CDOs and private equity funds. They can’t imagine losing it. Things always go up, don’t they?

And things always do go up when the credit bubble is expanding. When it contracts, most things go down. If we are not on that side yet…we will be sooner or later. So, we’ll leave our Crash Alert flag up for a while…

*** The Wall Street Journal reports that desperate builders are offering incentives to get buyers in the door. In Virginia, for example, they’re advertising “Sizzlin’ Summer Sale Savings.” Then, running out of ‘s’s, they offer, yes, free granite countertops. This is amazing to us. We thought every kitchen in America already had granite countertops. We considered granite countertops the one solid, lasting, tangible thing this boom had really produced. Apparently not. There seem to be a few counters still in the USA without granite on top. We hope this boom continues for another couple of years in order to complete the granitization of America’s kitchens.

*** What happened in Florida, according to the press, is that the flippers got flipped. They bought condos and houses…expecting to flip them to other buyers at a higher price. Some new apartment houses were bought almost entirely by flippers. They all thought that the final buyers would come along with fat wallets and empty heads. Many did. But not enough. After flipping the places back and forth between themselves, the flippers could not find retail buyers willing to move in, pay the taxes and mortgages. The whole market is suffering from an overhang of properties – which could take years to work down.

*** “Hey kids, we’re moving to Florida,” we told the gang yesterday.


“That’s right, we’re moving to the Sunshine State.”

“Huh? We don’t even live in the U.S. And besides, you don’t even like Florida.”

“Well, I had a talk with our tax lawyer. I explained that we’ve been paying Maryland state taxes for the last 10 years – even though we haven’t really lived in the state since 1996. He said we should get out of Maryland. And since we have to have a permanent residence in the United States, we should move to a state without a state income tax. Florida is perfect. Plenty of sun and warm weather. Nice beach. Miami is a fun city.”

“But Dad, are we really going to live in Florida?” asked Henry.

“Of course not. Are you crazy? I wouldn’t want to live in Florida. Too flat. And this global warming thing might put it underwater. Besides, too many retired people. They drive too slowly.”

“Well, I guess that makes sense, then. We don’t really live in Maryland either. I guess we can not live in Florida just as well. And the weather is better.”

“I’d rather not live in California,” said Edward.

“It will be a lot cheaper to not live in Florida. Besides, housing prices are coming down. I just saw in the news that condos that sold for $259,000 are now selling for only $180,000. And a Boca Raton builder is offering to pay property taxes for two years. Heck, we might get one of these, stay for two years, and then leave the state. “

“I’m happy to move to Florida,” said Henry, “especially if we don’t really have to go there. But what do we have to do then?”

“We have to get Florida drivers licenses…and a house…and sign up for a church…and buy a burial plot.”

“A burial plot? You mean, we have to die there?”

“No, we just have to pretend that Florida is our permanent home and that we intend to return to Florida someday.”

“But Dad, is that true? We’ve never even been to Florida.”

“Well, that doesn’t matter…I’ve been to Florida. And I’m the one who pays the taxes. Trust me on this, kids. You’ll like not living in Florida.”

Bill Bonner
The Daily Reckoning
August 10, 2007

And now…

…more views from Short Fuse in Tinseltown…


Views from the Fuse:

As the New Orleans levee failure and the recent bridge collapse pointed out, infrastructure in the United States is clearly in need of an overhaul. In fact, the American Society of Civil Engineers does a report card every two years, and check out the most recent one (from 2005):

America’s infrastructure report card for 2005

By the American Society of Civil Engineers National grades

? Aviation, D+
? Bridges, C
? Dams, D
? Drinking water, D-
? Energy (national power grid), D
? Hazardous waste, D
? Navigable waterways, D-
? Public parks/recreation, C-
? Rail, C-
? Roads, D
? Schools, D
? Security, I
? Solid waste, C+
? Transit, D+
? Wastewater, D-
? America’s Infrastructure GPA: D

Not looking too terribly good for us…and in today’s guest essay, Eric Fry talks about a specific area of U.S. infrastructure: Water.

“By 2020 about half of America’s water pipes will have outlived their estimated useful lives. There is no national game plan to address this problem. But there are companies that will be providing the pipes, as they give way – or as they blow up…in the case of New York.

“As Chris Mayer has pointed out in Mayer’s Special Situations, water utilities have been outperforming the S&P 500 for more than a decade. More recently, the Palisades Water Index has produced twice the return of the S&P 500 since 2003. So it would be easy to assume that water stocks are overdone. But I don’t think so. On the other hand, maybe today is not really a great entry point…especially if the overall stock market continues to take a header. But I am looking at an opportunity that I believe will endure beyond 2007. So it’s an area that you, at least, want to begin to examine and begin to invest in.

“And I’ll say this about the water sector in relation to other kinds of sectors: It’s a sector in which opportunities are increasing and certain. And you don’t get those opportunities every day in the financial markets.”

*** Paulson and Bernanke, who both said that the subprime market effects will be “contained” are eating crow today…

OK. We hate to say “I told you so”…well, nah, we don’t really…but surprise, surprise, today all the news organizations are reporting that it turns out subprime is going to affect the overall market after all.

“The $2 trillion market for mortgages not backed by government- sponsored agencies is at a standstill. That’s just the beginning,” reports Bloomberg.

“Other types of mortgages are suffering. So are firms and banks that package the debt for investors. The ripples were felt in Europe and Asia, where central banks offered cash to banks amid a credit crunch. And some corporations, from countertop makers to railroads, are blaming the mortgage meltdown and housing slump for earnings that fell short of analysts’ estimates.”

And, after saying on Tuesday that they weren’t going to bail out the market, today the Fed gave $38 billion in temporary funds to the banking system through the purchase of securities (including mortgage-backed debt) “to meet demand for cash amid a rout in bonds backed by home loans to riskier borrowers.”

“If you would indulge us for a moment,” writes Addison, “please recall June 20th, 2007.”

“The Dow and S&P 500 had just finished a lovely 2 month winning streak, both indexes registering about 7% gains since April.

“You were writing nasty emails to the 5 with phrases like ‘chicken little’ and ‘doom and gloom nonsense’ while we were bracing for impact.  On that very day, Treasury Secretary Paulson eased your concerns by saying that the subprime fallout ‘will not affect the economy overall.’

“Heh. Yes, we suppose it would be rude to ask him about that statement today.”

See what else Addison and Ian have to say about this roller coaster of a stock market in today’s issue of The 5 Min. Forecast

That just about does it for today. Have a great weekend!

Short Fuse
The Daily Reckoning

P.S. Our friend Chris Hancock sends us this note on the subprime mortgage collapse:

“The fear seems to be… No one really knows what these collateralized debt obligation (CDOs) are really worth. No one really knows who owns what.

“When others are fearful, it may be time to get greedy. I’ve got all eyes on the banking sector right now. While the big Western banks grab the headlines, I’m turning my focus to Asia.

“The Chinese market looks extremely attractive for commercial bankers. Unlike Americans, who spend well beyond their means, the Chinese save. In fact, personal savings rates are estimated to be upwards of 40% of an individual’s annual income. That’s great for a business dependent on low-cost funds for loans – one of a bank’s most profitable businesses.

“In the latest issue of Free Market Investor, I argue that only a handful of banks will find much success in the Chinese retail-banking sector.”

The Daily Reckoning