Signs of The Times
"A deep-subprime auto finance company... is packaging $154 million
of loans made to borrowers with weak credit - and some without a credit
score."
- Bloomberg, November 2.
"Automakers reported the best two-month stretch of U.S. Sales in fifteen
years."
- Bloomberg, November 3.
"Credit risks are rising to the fore as private equity groups seek
to put a near-record cash pile to work, pushing leverage back to levels
not seen since the boom of 2007."
- Financial Times, November 4.
"Fannie Mae, Freddie Mac Will Need a Bailout"
- House Wire, November 5.
Perspective
One could take headlines and fill in the gaps to write a novel about the sordid
side of policymaking and the markets. In 1987 Michael M. Thomas published The
Ropespinner Conspiracy, a novel about a KGB plot to corrupt the US banking
system. We wrote a "book review" and published it as timely in early 2000 and
in September 2007.
This is attached, but rather than a novel, today's headlines would provide
the basis for a short story.
Stock Markets
The ChartWorks "Analog Model" had targeted the DJIA rebound to reach the Keltner
Channels at 1750 to 17870. Recording some animation, the high was 17977. Last
week, we noted that the target had been reached with good momentum and that
a Sequential (9) Sell had been accomplished, which is pattern. Also noted was
that it could take a few days to roll over.
The next event would be a downer. On the S&P there is support at the 2000
level. But how long will it hold?
The senior indexes, such as the S&P, reached speculative highs as well
as distorted highs. Exceptionally low interest rates prompted stock buybacks
which artificially raised earnings per share. Then weighted indexes have been
higher than unweighted and underneath it all the market is made up of individual
stocks.
There are still many excesses to be washed out of the equity markets.
Broker-Dealers (XBD) has been of particular interest and the latest rally
made it to 188, just above the 200-Day ma. That was on Monday and it is in
significant retreat. Near-term support at 175 will likely not hold. Recent
lows at the 160 level should hold, briefly.
In the middle of September, we noted that the action for the NYSE Comp (NYA)
was similar to its action in 2007. This now includes replicating the two severe
hits into January and March 2008. This was accomplished on August 24th and
in late September.
Replication includes the latest rebound up to just below the 50-Week ma. A
very similar rally made it to just above the 50-Week in May 2008. That was
the last attempt to bull that market.
What's more - both rebounds were Fibonacci at .618 of the decline.
The basic pattern has been covered in the ChartWorks "Analog Model" on the
DJIA.
The correction in widening credit spreads has helped the stock markets and
it has been similar to the one that ran from March to May 2008.
We have had November as a possible intermediate low. This was based upon the
four-month count from taking out the 50-Week ma. That would be similar to the
March 2008 low, but the action has been compressed and the equivalent low was
accomplished in late September.
The next intermediate low could be in December-January.
Recession?
- The NBER determines the start and finish of the business cycle.
- Most of the time, the determination is announced a year after the actual
start.
- Most of the time, the recession starts some 12 months after the cyclical
peak in the stock market.
- Except, at the completion of a classic financial bubble when stocks and
the business contraction turn down at virtually the same time.
- Examples include 2007: Stocks October, Recession December.
- 1929: Stocks September, Recession August.
- 1873: Stocks September, Recession October.
- All using the NBER determination.
- On the current chart, the key seems to have been both red and yellow lines
falling through the flat line.
- The 2000 Bubble was not a "Classic" one and the recession started 12 months
after the stock market peak.
- The recession has likely started, but it will take many months before the
NBER paints in the vertical blue band.
Oooops!
When taking on debt in the enthusiasms of a financial mania, one never considers
servicing costs let alone paying it back.
Except for perpetuals, all bonds have a settlement date.
Mister Margin knows this.
Cars Sales Soaring
On the contraction into 2009 sales slumped to 9.8 million units, the low set
in 1982 slump.
The rise in sales since 2009 has reached an annual rate at 17.7 million.
The rise has been outstanding with the last two months being the best two
months in 15 years.
The 18 million level represents solid resistance.
The Ropespinner Consipracy
The Ropespinner Conspiracy is a novel by Michael M. Thomas, a former investment
banker who writes enjoyable novels about high finance.
The title relates to Lenin's observation the "Capitalism will sell us the
rope with which we hang it". Published in 1987 the story is about a brilliant
but insidious Soviet conspiracy to infiltrate the U.S. banking system and corrupt
it to its own destruction.
The attempt starts in the late 1930s with a brilliant young economist who
fell for Keynes' persuasions in more ways than one. Waldo Chamberlain becomes
a Harvard economics professor and rises to pre-eminence. He is also KGB controlled.
The plan is implemented through his bright and presentable nephew, Mallory,
whose successful career takes him to the top of a big New York bank. Altogether,
the trio introduce a number of "new" concepts to banking.
The KGB controller is knowledgeable and quotes Bagehot in describing the scheme
-
"But error is far more formidable than fraud: the mistakes of a sanguine
manager are far more to be dreaded than theft by a dishonest manager."
The young protege, Mallory, rises with his bank until -
"There was no question that he and CertBank had been the pathfinders.
Man and institution had combined to transform the face and nature of banking
and, with it, the face and nature of whole economies, of nations. Mallory
and CertBank had perceived markets and opportunities . . . and had grasped
the business of banking might be redirected, its nature irrevocably, irresistibly
altered."
The Ropespinner plan was to take the banks, then set midway between Main Street
and Wall Street, and return them to Wall Street.
The Glass-Steagall Act of 1933 separated commercial banking from investment
banking. Beyond that, it was another example of post-bubble recriminatory legislation.
The anti-bubble act (England) with the South Sea disaster of 1720 was taken
off the books just in time for the bubble that blew out in 1772.
Glass-Steagall was passed in 1933 and repealed in 1999, which belatedly acknowledged
that commercial banking had already embraced Wall Street.
"The problems were to legally find a way around the Fed's grip: How to "dehabituate" the
relationship between banks and their depositors: how to engineer a massive
increase in money supply (almost impossible to have a financial cataclysm
otherwise); how to destabilize exchange rates, perhaps eliminate the gold
standard; how to ignite a commodity-driven inflation, each was so rich
in possibility."
This was to be implemented by Certbank's rising star, Mallory, who would -
"Then set the Cert's shoulder to the shiny new wheel and proclaim and
propagate the new gospel from the podium of the bank's eminence, other
banks would follow the lead, frequently hasty, since reflection and competitiveness
were ill-matched bedfellows, and within weeks the new gimmick would be
as accepted and widespread in American banking as if it had been proven
over the years and certified from heaven by Morgan himself."
Preston marveled, 'The lad's the best talker of claptrap I ever heard,
better than FDR!' "
The novelist develops the "new" banking ideas in a readable manner. Starting
with negotiable CDs, EuroDollars, banks as a "growth" industry leading to the
struggle for "market share", and total commitment to "total return", all the
major changes in banking are placed in perspective.
Waldo plants the idea of negotiable CDs and, as the market for them developed,
a traditional banker wonders:
"If a short-term obligation could successfully be renewed time after
time, should it not be viewed as truly long-term capital and as a legitimate
source for funding longer-term loans?
Waldo listened to these arguments and nodded sagely, and smiled inwardly.
If ever there was a surefire recipe for banking disaster, it was to borrow
short and lend long."
A book reviewer at the New York Times described "Ropespinner" as "a sophisticated
piece of work - the story generates plenty of tension, and it is anchored in
a series of well-documented and well-described settings."
It is a parable of our era and a more timely read now than in 1987. As far
as plausibility goes, it's not too far off the mark.
Innovative banking always seems to go with experiments in currency. It's fascinating
that there are two different views on arbitrary expansion of currency. Orthodoxy
claims that it is an essential tool of policy making but military intelligence
has used it for destructive purposes.
The Brits have been masters of "war by other than gentlemanly means". In order
to destabilize the colonial economy, the British, during the American War of
Independence, invidiously introduced huge amounts of counterfeit colonial currency.
American inflation was sufficient to raise short interest rates to 10,000%.
At other times inordinate amounts of currency were clandestinely introduced
into an enemy's country with hopes of destabilizing their economy and ability
to fund their war effort.
It was done during World War II as well as to Argentina during the Falklands
War in 1982.
In the post-bubble contraction of the early 1980's two Wall Street economists,
nicknamed by the street as "Dr. Death" and "Dr. Doom", were pleading that the
Fed should "open the taps" or something worse would happen.
Obviously the understanding of credit/currency expansion by spooks in intelligence
is vastly different to that of academics and Wall Street economists.
The fictional Waldo, Mallory, and the KGB controller would be pleased with
today's "new" banking practices.
