THE
OBVIOUS IS OBVIOUSLY WRONG
Time
and again we have been witnessing a variety of actions taken by the FED as
well as by the rest of the Worlds Central Bankers, each one thought to be the
exact right thing to do and met with initially manipulative enthusiasm only
to turn to back to despair in less than a mourning as the market not only
stop rising but actually crashed. What is Happening and Why?
UNINTENDED
CONSEQUENCES
SOCIALISTS
(Populist) policies always seem at first glance to be the obvious feel
good actions that must be taken but in actuality are rarely true for two
reasons. #1 they never take into account the unintended consequences and
ramifications that are always there lurking in the background in any complex
economy. #2 Of even greater importance is that the problem that these actions
are designed to fix are NEVER the real problem but are only the effects or
consequences of the REAL PROBLEM which by their very nature is never obvious.
THE
REAL PROBLEM
From
the very beginning: Government interference in the Market Economy, is and
will continue to be the Real Problem; primarily by artificially lowering
interest rates, increasing the money supply and lowering lending standards.
Initially these actions were deemed to be very positive in stimulating job
creation but the unintended consequences, such as inflation and the
elimination of the allocation and risk function of interest rates take a
while to build up before they come into play: The obvious one being
INFLATION. A good example is drinking High in Sugar and Caffeine energy drinks.
You get an initial burst of energy but it is not long before you come
crashing down. You can try to extend the high by taking more and more sugar
and caffeine but there is a limit and once that limit is reached the crash is
much more severe. It is just impossible to keep on going on sugar and
caffeine eventually the body must go to sleep or die. The economy works in
exactly the same fashion.
A
Second Problem and perhaps of greater underlying long term Importance are the
UNINTENDED CONSEQUANCES that are always lurking beneath the surface but
remain invisible to all but a very rare few, (who are always ignored): Such
as the reduction in underwriting standards and risk and capital allocation.
Capital is provided to borrowers that would never have qualified for loans
under normal interest rates and if the banks were not flooded with created
out of thin air money.
ECONOMICS
101: THE BIG FIX
If
there is one thing that I know for sure, it is that socialist solutions can
never fix economic problems. They are just “Feel Good” actions
the merely paper over some of the side effects but actually end up making the
real problems worse. If we ever hope to repair our banking and financial
systems as well as save our Social Security and Medicare from bankruptcy and
fix our schools - only Free Market Solutions can accomplish any of that.
CONFIDENCE
AND TRUST
The
root cause of our most urgent financial problems is the complete breakdown of
confidence and trust throughout the world’s banking systems. One thing
that should be obvious to everyone except the cadre of Ivy League Keynesian
Socialists is that the $ trillions of socialist solutions that have been
poured into the system have not only not worked, but have actually made the
problem worse. The Economy has reached the maximum level of Caffeine and
sugar it can tolerate. We now also have the car industry, homeowners, the
States (soon to be followed by the cities) and every other group in trouble,
all coming to the Federal Government with their hands out demanding bailouts.
Is there no one but me who can see that we are doing the exact same thing
here and now that Germany’s Weimar Republic did in the 1920 which
resulted in HYPER INFLATION and DEPRESSION?
RESTORING
CONFIDENCE
1: The
financial institutions for whatever reason need a large injection of capital,
but instead of getting it from the Government and socializing the industry,
they should be getting their own money from their own shareholders along the
same lines that GS and GE got money from Warren Buffet. However, instead of
allowing outsiders to dilute the equity of the existing owners (the common
stock shareholders, who are, by and large, the American People through their
Pension Plans) lets reduce the role of government instead of increasing it. HOW?
By simply suspending the audited statement requirement and simplifying the
filing requirements necessary to have a rights offering: Offer the existing
shareholder the right to subscribe to the exact same deals that were given to
the Sheik and Buffett. The reason that the Banks have chosen the likes of
Buffett to get money from is that he is considered an exempt institution and
no prospectus is needed. Raising money from the public requires not only
audited financial (which cannot be done at this time) but at least 6 months to
a year, to file a complex and SEC approved prospectus. By suspending the
highly complex Government regulations that actually serve no purpose; the
banks in not time at all, could easily raise $200 billion minimum, from their
own shareholders and the public: Assuming a 10% reserve requirement, would
immediately make available $ 2 trillion for loans.
2: Let
us have the FED do what it was initially set up to do; provide short term
liquidity in case of an emergency and through the FDIC, guarantee 100% of all
deposits while increasing the premiums that deposit institutions pay into
the FDIC. After all, when did we pass a law that all men were no longer
considered to be equal? And don’t the banks have to pay a premium on
all deposits? Why discriminate against large deposits. Does the system not
want their money?
3: Begin
applying the most basic of all capitalistic principles that of Supply and
Demand, by Increasing interest rates, NOT lowering them. Who in his
right mind wants to lend money at 1.5% or some such low rate, which is in
really a negative 10%, if you take inflation and taxes into consideration?
That is why the Banks are hoarding their cash. Let the banks start offering
5% to 7% CD’s and you would see a flood of money from all over the
world come pouring into our banking system. The banks, now flush with cash
could start lending at reasonable rates of interest; between 8% to 15% and
higher depending on the risk and credit worthiness of the borrowers. Even
today, despite record high delinquencies, the Banks are still soliciting
people to take out new credit cards, the simple reason being that they can
charge upwards of 30% on credit card debt, which more than compensates them
for the increase in losses. (At the same time, limit the amount that they can
charge their credit card debtors to 15% while reducing fees to a maximum of
$5 for late fees), It is about time we allowed Interest rates to accomplish
one of their primary functions; that of allocating scarce capital to only the
best projects as well as allowing a risk premium to be built into the rates.
4: Set
up a modern RTC: History tells us that when even a small real estate BUBBLE
bursts, it takes between 8 to12 years to clear the overhang of unsold
overbuilt homes. An aggressive RTC can clear the foreclosures from the
bank’s balance sheet that they cannot handle while taking all the un
priced CDO’s that they have on their books at a punitive rate of 30% of
face value. That would encourage the banks to work out their own solutions as
much as possible and only sell to the RTC if they have to, while at the same
time reducing the eventual cost to the taxpayers. Why, at that rate we may
even end up turning a profit. The negative is that the prices of most homes
not in foreclosure would also drop for a time but not that for long or as far
as they will eventually drop to anyway. In so doing we could probably clear
the deck in 3 to 5 years, instead of 15, while providing affordable homes to
the masses at 7% 30 year fixed mortgages; which they could now afford to pay
for as their taxes and insurance premiums would also be less based on their
now lower priced affordable homes.
5: Five
years of undeserved bonuses MUST be returned by all senior executives on
anything over $100,000, since it was all paid out on Phantom Earnings.
Franklin Rains, of FNM fame, took home over $90 million in bonuses plus a
golden parachute, even though he resign after being forced to restate $5
billion of profits (on which his bonuses were based) into $5 billion in
losses.
6: FMN
and FRE are bankrupt, so declare them as such and then recapitalize them in
the same fashion as we are recapitalizing the banks: In conjunction with
offering all of their outstanding Preferred stock and Debt holders - 50 cents
on the Dollar in 4%, 50 year U.S. Treasury Bonds. It’s no longer a
matter of what is fair or not fair. It is a matter of saving the
world’s financial system. It’s a matter of getting 50 cents with
interest or ending up with nothing and a collapsed system.
There
is more, but I am not writing a book here, it is just a bare bones proposal
whereby we could restore CONFIDENCE and TRUST virtually overnight by simply
announcing Capitalistic plans for a Capitalist economy. Every person with a
modicum of common sense, except the Ivy League Keynesian Economists, would
understand immediately the beauty and simplicity of the plan. After all, are
not all good plans simple? We would also be demonstrating a sense of fairness
to the people, that the fat cats cannot get away with their white collar crime
living high on the hog while our country and the world sinks into depression
due to their reckless (I am being kind) behavior, especially since it was not
their own money that they were gambling with
CONFIDENCE AND
TRUST can only return when it is in conjunction with fairness and must be
restored to everyone not to just the privileged few
GOLD:
THROWING OUT THE BABY WITH THE BATHWATER
On
Friday we witnessed what a margin induced SELLING PANIC looks like. Even
though everyone knows that you are supposed to cut your losses short and let
your profits run, everything goes out the window once Panic sets in. When
there are margin calls flying across the board (not to my subscribers) and
you need money and you want out. Many of your positions have either very wide
spreads or no bids: You dump what you can and still have a profit in,
thinking, take the profit before you lose it. Plus you sell what you have
that can raise the most cash. They DUMPED their GOLD to raise cash. They know
it’s a mistake but they figure they will buy it back later after things
calm down and with a little luck they will be able to buy it back at less
than what they sold it for: But we all know that rarely if ever happens.
THE
STOCK MARKET
After
a troubled two nights that I had even though I have been right, and all I was
doing last week was covering my short positions and although my next letter
is not due until the November 1st I spent all weekend taking a long hard look
back in time, examining all of my own as well as others research into
Thursdays and Fridays action which seem to me to be screaming for at the very
least, a temporary oversold bottom. As you all know I
was looking for a bottom last Thursday, Friday, we got a climatic sell off
but I did not foresee the degree of devastation that we ended up getting.
However, even though it certainly was climatic deserving of a Dramatic Rally:
I DO NOT THINK IT WAS THE BOTTOM. The expected bottom here, will,
only be a technical corrective ziz zag 3 wave consolidation. However because
of the sharpness and speed of the sell-off, the coiled spring effect that it
created could rally the market maybe as high as 11,000: However the economic
fiasco that I have been warning about for almost two years now has not yet
hit home: Panic has not yet spread to the non investing public nor has it yet
infected Main Street severe enough for a major low to have been made and is
therefore Definitely not the beginning of a NEW BULL MARKET
Aubie Baltin CFA, CTA, CFP,
PhD.
UNCOMMON COMMON
SENSE
2078 Bonisle
Circle
Palm Beach Gardens FL.
33418
aubiebat@yahoo.com
561-840-9767
Also
by Aubie Baltin
Please Note: This
article is for education purposes only and is designed to help you make up
your own mind, not for me to make it up for you. Only you know your own
personal circumstances so only you can decide the best places to invest your
money and the degree of risk that you are prepared to take. The Information
on data included here has been gleaned from sources deemed to be reliable,
but is not guaranteed by me. Nothing stated in here should be taken as a
recommendation for you to buy or sell securities.
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