As the time draws near for the second coming of Paulson’s Bill of fiscal resurrection for the chosen on Wall Street we are required (strangely in the words of the Church of England wedding rites, possibly the least adhered to imprecation in human history) to compose our minds to consider that which is to come. DEARLY beloved, we are gathered together here in the in the face of this congregation, (Congress) to join together this Man and this Woman in holy Matrimony; which is an honourable estate, instituted of God in the time of man's innocence, and therefore is not by any to be enterprised, nor taken in hand, unadvisedly, lightly, or wantonly, but reverently, discreetly, advisedly, soberly, and in the fear of God.
The bellows of self interest from Wall Street for Paulson’s bailout package are deafening. Faced with an equal cacophony from Main Street, our leaders are striving to present the current banking crisis as an American problem in an endeavour to blunt constituents anger at the fat cats reprieve when Main Street wants them skinned. Many have advanced alternate plans with varying degrees of usefulness as they range from impractical to impossible.
What we have on the table for Thursday (likely) is a pre nuptial agreement that allocates all the goodies to Paulson and Co and vague “language” on oversight, transparency and claw back to the helpless bride; and a shotgun wedding! Zero evidence of “discreetly, advisedly or soberly”, but indeed unadvisedly and wantonly. The only innocence apparent is in the hapless taxpayers who knowing little, will bear this burden and the others to come.
Unfortunately the banking crisis is now a global banking crisis as UK, European and Asian banks too have been polluted with the global asset securitisation bomb. With emotions running high and everybody talking their trade, it behoves us to step back a pace and review what is real and what is spin. Regardless of whether the Bailout Bill is passed this week, next week or never, the facts remain the same and they are being massaged to substantiate whatever agenda is being pushed by a world wide range of incumbents.
In this debate there are basically three propositions advanced which stripped of the spin can be summarised as follows:
Paulson’s proposition A: “Give me the money and trust me to do what has to be done even though I don’t know what that is yet”. Congressional leaders said the price tag of the bill may be unpalatable but is necessary to keep credit flowing for student loans, car loans and home mortgages. Boehner said it's needed to "avert the crisis" in the nation's financial markets." "If we don't pass this bill, serious harm will occur," agreed House Financial Services Committee Chairman Barney Frank, D-Mass. The legislation got a tentative thumbs up from presidential candidates John McCain and Barack Obama. "My inclination would be to vote for it, with the understanding that I'm not happy about it" Obama said. McCain called the bailout "something that all of us will swallow hard and go forward with." Backers of the bill said it will help ordinary Americans as well as teetering investment houses. "This isn't about a bailout of Wall Street," said Pelosi. "It's a buy-in so we can turn our economy around."
Opponents proposition B: Democratic member of the House Financial Services Committee, Brad Sherman of California, accused the Bush administration of creating an "exaggerated panic" about the possibility of the stock market collapsing. "Basically they gave Congress a ransom note: 'We've got your 401(k) and if you want to see your 401(k) alive again, give us $700 billion in unmarked bills,' " Sherman said.
Bankers’ proposition C: What the banks are lacking is capital. Give us direct injections of capital rather than fixing impaired assets. PS You need to fix up the assets as well.
Irretrievable breakdown of marriage.
The grounds for the irretrievable breakdown is that banks including the largely now defunct shadow banks have losses of about $1.5 trillion to face up to from their ruinous affair with that saucy securitisation chick. The foibles of complete ignorance coupled with the exuberance of greed leading to the application of vastly excessive leverage have devastated all who flirted with this vamp. Like all philandering husbands, the banks tried to the end to keep their nocturnal activities shielded from public gaze and hence much of the off field drama happened in SIVs, conduits and other off balance sheet vehicles. With no central register of these securities and completely misleading balance sheets, how was an erstwhile suitor to make an assessment of the transgressors worth?
Many tried, with sovereign wealth funds and hedge funds being first into the fray to provide additional injections of capital in the mistaken belief that the party had only been temporarily adjourned and they could be the first guests into the new venue. They were properly rewarded for their lust when those unselfish but foolish early contributions were destroyed by subsequent insolvency.
In their trip towards acknowledging the extent of their losses, banks have admitted to about $600 billion in losses which has comprehensively destroyed almost that much in capital. Having seen what fate beheld for earl adopters, those suitors who still have some lead in their pencils are being extremely cautious. Nobody wants to do a deal without Grandma Fed giving some guarantees of virginity or at least a modicum of decorum.
Banks quite rightly don’t want to lend to each other because they now know that the balance sheets are palpably false and they can no longer (if ever) assess counterparty veracity.
Let’s Fake it!
You don’t need a degree in economics to understand why credit markets are locked. Banks who have been trading on their counterparties’ reputational risk have been burned as it has become apparent that many reputations were more hot air and corporate posturing than real assets. We all know now that the lack of oversight all the way from the risk managers to the auditors, to the CEOs, regulators and the ultimate overseers the Fed and Treasury, has been at best negligent and at worst clueless. That’s why the counterparty risk has continually fallen over. With the best will in the world, the off balance sheet SIVs, conduits and unregulated derivatives have made a proper assessment of counterparty risk impossible.
Now to add insult to injury the Treasury has approved the SEC changing the rules on impaired asset valuation. Under the new aegis if you don’t like the numbers that the market gives you on asset valuation you can adopt one of several alternatives all of which allow subjective assumptions. In other words-just fake it.
Let’s add to that the ban on short selling and US and Australian corporates (Australia is one of the nine central banks participating in the TARP program) are simply being invited to cook their books. Inevitably the devolution of counterparty risk has become so murky that credit markets don’t want to trade without the Government’s guarantee.
From Bloomberg today: Credit markets have frozen as financial institutions hoard cash to meet future funding needs amid deepening concern that more banks will collapse. The London interbank offered rate, or Libor, for three-month loans in dollars rose to 4.15 percent yesterday, the highest level since January. Libor, set by 16 banks in a daily survey by the British Bankers' Association at about noon in London, is used to set rates on $360 trillion of financial products worldwide, from home loans to derivatives.
That’s what happens guys.
Your future suitor is now Barack Obama. Markets have decisively failed to hang on for McCain as they endeavoured to do six weeks ago and McCain now has just a one in three chance of success at the polls. McCain had the chance of a lifetime to show some of that fabled courage and lead the Republicans against Paulson’s absurd bailout bill. That would have left the Democrats and the current administration in the role of Wall Street’s saviours and McCain could truly have positioned himself and his party as opposed to both Democrats’ ideas and the current administration. Exactly where he says he is. It didn’t happen, as McCain’s fabled courage failed him in Washington. In truth much as I admire McCain’s personal story, I have to say that when I heard him talking about AIG with the line that it needed to be rescued by Treasury to save your insurance (all AIG’s general and life insurance subsidiaries are State regulated) it became apparent that as he himself stated “economics is not my strong suit”. I defended that statement at the time on the grounds that Presidents have advisers and a detailed understanding of economic issues was not essential. My mistake was in assuming that he had competent advisers. Apparently he hasn’t.
To prepare you for your new bed fellow let’s just look at these statements from Presidential candidate Obama to see what is likely in store for you guys, and by osmosis much of the rest of the world including the lands Down Under:
“We cannot risk another week or another month where American businesses are afraid to extend credit and lend money,” Obama said. “That has an impact on housing here in Nevada. That has an impact on a small business owner who has got to make payroll, and if he can’t make payroll on Friday, he may lay you off on Monday. If he lays you off on Monday, then that means you may not be able to make your payments to somebody that you just bought something from. It ripples throughout the economy.”
Obama just doesn’t get it. It was loose credit that got us into this mess. There is plenty of mortgage money available for qualified buyers. The problem is that most don’t qualify for the houses they want to buy and others want to sell them. The days of aspirational buying are over. People now and at least in the foreseeable future will have to buy what they can afford and at 3.5 times income that’s still a long way from current prices. As for the businessman who can’t make payroll, odds are that he won’t be able to make it next week either. Borrowing to pay fixed business expenses is where we are and is part of the total credit binge. Ever heard of retained cash flow Barack? Hmm, it hasn’t been in fashion for many years so possibly Obama’s generation are not familiar with that concept.
Obama said the plan must treat taxpayers like investors, allowing them to recoup the bailout funds once the economy recovers. “That last part is important because it’s been the most misunderstood and poorly communicated aspect of the entire plan, when it is called a bailout – nobody is in favour of a bailout,” Obama said. “But this is not a plan to just hand over $700 billion of your money to a few banks on Wall Street.”
What rubbish. Of course it is. That’s exactly what the plan has been and is. If taxpayers were to be treated as investors then they would have the tools to make a proper valuation of what these tarnished assets are truly worth. And they would have choices. The whole point of the bailout is that the new investors, ie US taxpayers:
- Are not to know what these assets are worth
- Will buy them at many times their true market value
- Will be forced to buy them whether they want to or not with opposition to the bailout bill running at 300-1
- Will fund another layer of bureaucracy to manage these monsters
- Will have no effective board representation or oversight with an oversight board of five including Paulson and Bernanke, the very perpetrators of this hoax
- Will be knowingly buying into insolvent businesses
- Will be buying into businesses where the management has already proven that it can’t assess or manage risk and can’t properly value its own assets
- Will be buying into businesses where the management has already proven that it can’t respond to changing business circumstances and are in fact clueless.
- These businesses are not only Wall Street. US taxpayers have just guaranteed $25 billion to the auto companies, one of the least efficient industries in US. If punters won’t buy GM and Ford shares why should Obama’s taxpayer/investors have to do so?
As for “recouping the bailout funds once the economy recovers”, I guess inflation over a long enough period will fix almost anything on the asset side of the Government balance sheet but nothing can hide the fact that this is all a most expensive bailout, which those who have not participated in the party are now being asked to clean up. Other than assertions of imminent disaster, none have explained why this proposal is the only alternative.
What part of those choices do you think entails treating US taxpayers as willing investors!
One in three marriages fail within 3 years. This one might last for 4, until the hapless bride gets a chance to vent her anger at the 2012 elections. Like many marriages, deteriorating economic circumstances in the home tend not to make for a happy bride. Quite apart from this bailout nonsense, US and the world can look forward to a prolonged period of sub par growth. Consumers will be constrained and at some point in time taxes are going to have to pay for the goodies.
Having to eventually live on a budget even vaguely related to real disposable income without the joys of loose credit to add debt at every opportunity, will be a shock and disappointment to many. For the older generation it has always been a fact of life.
In most western societies seduction is acceptable practice and coercion is a taboo. On this occasion you are not being given that choice so have fun! In truth with $1.2 billion already committed by US Fed and Treasury to the support of insolvent businesses, Paulson’s bailout package is more about a morale booster in the “do something…anything” vein, and the legitimation of still more executive powers, than it is about any solution. Buying degraded assets even at 90% of face value (and there must be at least a haircut) fixes up the asset side of the balance sheet but will not restore the lost capital. Eventually Paulson and Bernanke are going to have to pick winners and losers and recapitalise the “to be saved” banks and businesses. Ah…there is the taxpayer as investor again! Nobody else is going to be stupid enough to do it! As lovely as the bride undoubtedly is, this will not have a happy ending.
Gold and Silver, Equities and Bonds
Back in the relative sanity of markets, Gold and Silver continue to reward traders while keeping investors on the hook without a clear determination. The Danielcode Gold and HUI Trend charts, still free for Financial Sense readers have HUI on a monthly and weekly sell signal and Gold still maintaining its monthly sell signal as it has since March. The weekly Gold sell signal has been voided and we await the next weekly directional signal. These charts provide longer term directional signals and the exact prices at which the current signals will fail so they are quite straight forward. Please note that the binomial numbers on the trend charts are not DC price levels per se and you should not try to trade those numbers. These charts are only trend charts. DC price levels at which markets will turn are contained in the members’ charts.
On the shorter time frames you will recall that Danielcode members bought the exact low in Gold and Silver on 09/11 to the day and almost to the tick. It eventually rallied to the DC proprietary retracement level.
As an elderly Attorney and the most conservative of gentlemen I am a complete Luddite. The joys, indeed the efficacy of modern technology have escaped me entirely. I don’t have a cell phone, have never seen a Blackberry other than the ones that grow at the bottom of my garden (and which make delicious pies together with the fruits of my apple and pear trees), don’t know how to text and have no intention of learning how. The ubiquitous email has been quite enough of a shock thank you.
I got married very late in life having been a confirmed bachelor for 50 years and thinking I was well past such aberrant nonsense (one woman at a time: perish the thought), but I have been blessed and my life complete by the gift of two beautiful children who do know how to text and work modern electronic marvels as all the young do. With their help I have been pushed, kicking and screaming into the Jet age and have created some very much home made videos which may be of interest to traders.
More of this trade is explained in those new DC videos which I have posted on the DC website. They are still a work in progress and my technicians (children) are working on a “Green Screen”, an up-spec video camera, lights and other toys. So for my debut efforts, I apologise. We will learn by doing as always.
In Silver whilst we did not get the huge points that the Gold trade generated with the biggest one day move in 26 years, we did buy the September low to the day and within 1.5 points of the low and as a bonus the T.03 indicator created a sell signal for DC members on the day of the rally high so we had a nice trade out of the high as well.
Randy H, a USA native said “The Gold call was nothing short of amazing and the Silver trade was sweet.” Randy also enjoyed the US T Bonds trade that the Danielcode delivered with a buy signal for the big bar on 09/29 that returned some part of 3^20 points. “I watched the Bond trade with amazement!”
Amazement indeed. It is the biggest bar on the chart.
In the Dow, S&P, DAX and other equity indices, the Danielcode numbers pinpointed Monday’s drama filled low to within a few points. What appeared as a panic was in fact an entirely orderly move right to the DC number. Bet you wish you had known that number on the day. DC members knew. The rally so far has found the DC retracement with its usual precision. These numbers are posted for members days and sometimes weeks in advance. Please note that some of the DC numbers in these charts have been removed in the interests of subscribers, and some are outdated. Do not attempt to trade these numbers.
Randy H is a conservative, down to earth trader and investor. He is a bit younger than me but has seen much in his lifetime. As a native of Iowa he brings a countryman’s sense and awareness to his trading and is a foundation member of the Danielcode.
He finishes the week by writing “I truly mean it when I say Thank you. The gift you are sharing is amazing”. I have responded to Randy as I do to you all by saying that after the many years of searching for the elusive Danielcode, nobody is more thrilled and amazed at its prescience and precision than me.
It is not for all, as it requires some work and application but for those who truly want to know, the rewards are great.
I invite you to share the gifts of the Danielcode and trust that you find my new videos informative and entertaining. There will be more to come.
Copyright © 2008 John Needham