The Government Finally Gets Serious

I almost fell out of my chair yesterday while reading for class. I luckily had CNBC on and they announced that Hank Paulson was talking to Congress about a big move to save the markets, using Congress’s unlimited balance sheet, as Steve Leesman just said on CNBC.

I bought as soon as I could and scalped it for some money… And in general I’m very happy that they made this move. I think this is a serious change unlike previous stopgap options. Will it work? Not sure, but it is at least a move that makes sense.

A lot should happen this weekend…

Whew! And was I reading for class while watching the market and CNBC? Uh… So anyway…

Financial Crash

I’ve been watching the market tick-by-tick this week and it’s been nothing but failed bounces and hard selling.

Credit is most assuredly locked again like it was at the end of 2007. This time, insurance (AIG) and mortgage lenders (Fannie Mae and Freddie Mac) are included. It’s not just investment firms, hedgies, etc. anymore.

The Fed has shot its wad in cash infusions although it’s pumped a lot more in this week.

All those failed firms this week will have had to have sold much of their positions, driving down prices for invested companies as well.

I am almost positive that a lock on credit markets has reduced new business investment to next to nothing — compounded by businesses’ fear of their own dwindling demand — and so the economy should finally slip into solid negative growth. So far economic growth has managed to hang on but I don’t think there’s any escape this time.

Interestingly, people are blaming this as a nationalizing socialist move, when in fact it’s propping up the system. The guys in power are as anti-socialist as you can get and no one really cares about the little guy here. You don’t hear Bush on the air at all trying to calm the people. The people can go fuck themselves, as far as the people on the top are concerned. This is purely about saving the system that they’re bailing out firms like AIG.

Speaking of Bush:

It’s not clear whether the entire financial system will collapse in the next week or two. Chances are pretty high that they won’t, and I’ve been looking for a big bounce to happen, without success so far.

But businesses are deathly scared; where will any new economic opportunity come from until this all clears out?

Banking Disaster

Cramer on what’s going on, again.

Here’s a working theory (that is, I’m not an insider, and this theory isn’t fully fleshed-out or researched):  Hank Paulson is a Goldman guy — he was a Goldman Sachs CEO along with former government guys like Robert Rubin (now at Citi) and John Snow, who were both treasury secretaries.

Paulson seized the Fed’s purse-strings (by Bush’s will) from Bernanke, who’s mainly an academic.  Paulson opened up the Fed to protect the big institutions.  Money is pouring out of the Fed now.  It added $70 billion in reserves just today. The story is not that the US is turning socialist by bailing out Fannie Mae and Freddie Mac.  The story is that executives are being propped up and being allowed to exit with their money while shareholders get screwed.  FNM and FRE are worthless, as are Bear Stearns and Lehman, in terms of common stock.

It’s kleptocracy.

The upside for the big banks, like JP Morgan (who bought Bear Stearns on the cheap), Bank of America (who snatched up Merrill Lynch), and Goldman Sachs (a feeder for the government), is that they eliminate their main competition and get assets on fire sale.

Meanwhile the news is concerned about poor finance guys in Manhattan losing their jobs, and the government turning into a communist state with state-owned banks.  Keep in mind that Wall Street guys earn six-to-seven figure salaries, and Bush is as anti-socialism as you can get.

Mark Cuban, who’s turned into a tool, is correct in his assessment of banks’ executives:

“If you run a major hedge fund or fund of any kind, once you have put enough cash in the bank to get to your “F U Money Level” there is absolutely no reason not to throw the Hail Mary pass and make high risk investments every chance you get.”

The main story is not being told.

Summer Financial Risks

I just got back from Barcelona. I went for a couple weeks, mainly to see a certain woman. She is spectacular and we are wonderful together, but at the same time I also got to see how amazing Barcelona is. It’s weird sitting on the beach of the Mediterranean, with hills in the background. And being right next to the train that takes you right back downtown. And then having these completely absorbed Gaudian tributes to God in the middle of a city that is very laid-back and content on just getting by. Barcelona made Spain sexy for me, and I could feel its Roman influence (which continues to pull on me even as the time from when I visited Rome gets even more distant).

It’s safe to say I’m living a very good life right now. I’m intellectually stimulated, being rewarded for being a little different now, and got to travel to an alluring city to see a classic embodiment of the complete modern woman.

But the subject of this post is the economy and the market. I ended up selling everything again, after gradually building up all my positions again. I was fully loaded on Nintendo and on international funds in my retirement account. I still owned some Sirius from way back because the risk was lower than potential reward.

But I ended up selling it all over my iPhone while connected to a random hotspot in Barca.

Things just seemed to continue to worsen in the markets. Still credit problems, still write-downs. Intuitively I know that it’s bad out there, and I had that gut feeling before I left that you get when you know you should sell but you don’t want to. So I held on a bit longer than I should have, and lost a little money as a result.

But afterwards, Nintendo fell over 6 points because of expectations being realized and not surpassed. And the market seems clearly to be in a bear mood.

So I’m 100% cash and following my gut that says things won’t really improve economically until structural changes are made.

You see, we’ve benefited from globalization, but now with food inflation and a breakdown in the Doha rounds and outdating of our institutions, there is risk that countries will make bad decisions that worsen free trade. I think this might be part of what is hurting the markets.

You read among the economists a call for restructuring of the World Bank and IMF and creation of an international economic body. Right now it’s almost becoming a mercantilist environment again. Countries are out to protect themselves in the short-term. Oil has finally sent shocks through the system.

What I am hoping to see is the US reengaging the international community and calling for a new Bretton Woods agreement that makes it difficult for countries to shirk their obligations towards lowering transaction costs and tariffs and other barriers.

I think the market may be waiting for signs of something like this — clearly our current system is inadequate for scaling in a growing international environment.

Meanwhile, that 100% cash is languishing in American dollars. I found that they didn’t go that far in Europe, while meals there were also seemingly 25% higher in cost, along with everything else. There were no “bargains” and it’s clear that there’s a division between where Spaniards ate and went and where tourists went. Spaniards know where the bargains are. Because they have to.

Happy Holidays from Iraq

Well, it’s the month of Happy Holidays, so from Iraq (or not-Iraq, where I am, named for the complete lack of evidence in this base that I AM in Iraq), best wishes to you and yours this giving season! I wish I were back home with Julie and my family, enjoying a hot Christmas dinner, Christmas pudding, snow, and my girlfriend’s lovely company. The stuff I thought was cheesy before, I miss now — the Christmas lights, the tree, the decorations around town, even the pristinely white, clean displays in the malls.

My Christmas tree and living room at home in Dallas!

Just to remind you how out of touch the debate is back home, people are worried about talk of sending the troops home being demoralizing to the military effort here. These are not the days of people spitting on soldiers and calling them baby-killers like Vietnam was. I think what’s on most soldiers’ minds these days is the fact that many of them have missed their children’s births, their family members’ last three birthdays, and a couple of the last few Christmases and Thanksgivings. Speculation about returning home is just shrugged off by tired soldiers in their third year of constant deployment. But hey, you keep writing those morale-boosting “keep the troops away” blog entries in between family get-togethers this December, Mr. Concerned Citizen!! Or better yet, join your fellow citizens and serve a tour or two over in Iraq or Afghanistan!

I think it’s interesting seeing GOOG above 400$ — they continue to release more web applications that seem to point towards a vision of the Internet that hardly seems attainable right now. Yahoo! just bought, the link tagging site I now post my links to pretty regularly. (I will start feeding my into my other links page soon) While Yahoo! now owns this and Flickr, two of the most popular web geek apps, I can’t help but think that Yahoo! will never integrate Flickr nor feel Flickr-ish (which it should try to do), and that spending money to buy small web app companies (for anywhere from 15$ million to 40$ million for the latest two) is a waste of cash — they could’ve designed these by themselves, at a fraction of the cost, from the ground up, learning from the small startup’s mistakes and limitations. But I guess Yahoo! is paying for the communities and (if this is a real reason, that’s sad) reputation transference. Put the checkbook away though: communities can be fickle, ephemeral online — offer superior features, reliability, and innovation and people will move at the drop of a hat. I mean, who’s going to use Skype now that Yahoo! is offering cheaper VoIP integrated into Messenger?

Right now I’m contemplating the effect of massive Google networked-ness and bandwidth along with an energy situation relieved by massive estimated alternate energy growth this year of 30% for solar and wind power. The gains in productivity and capital for companies and individuals will be shocking. I see this as bullish for the American economy, but even more so for international economies, which still have yet to benefit as completely as the U.S. has from the Internet, global commerce, and post-bubble corporate re-structuring.

Chart of the Shanghai index, which has been losing for a while now.

I’m bullish on international funds for the next decade or two. And I want to invest in China, even though it still needs to reform many aspects of its economic and political infrastructure, and coöperate better with its blossoming, more expressive society, before foreign investment will really begin to flow in confidently. I am interested in their long-term strategies and their attempting to create eastern brand alternatives to western powerhouses.

I’m almost through this deployment and as a late Thanksgiving notice, I’m very thankful I’ve had Julie this whole time. Julie’s been an awesome, patient girlfriend even while I’ve been away in Iraq. I love you, darling. You’re totally being spoiled this Christmas, that’s for sure! And whenever I get to see you next! And your soundtrack song right now is Jamiroquai’s “Loveblind”, a killer track off their new album.