Vultures coming home to roost

Read this before you travel: Feds can seize your documents without any suspicion of wrongdoing

Now it’s come to light that any papers you have with you when you travel are fair game, and may be taken, read and even copied for any reason or no reason at all.  “The Bush administration has overturned a 22-year-old policy and now allows customs agents to seize, read and copy documents from travelers at airports and borders without suspicion of wrongdoing, civil rights lawyers in San Francisco said Tuesday in releasing records obtained in a lawsuit.  The records also indicate that the government gives customs agents unlimited authority to question travelers about their religious beliefs and political opinions, said lawyers from the Asian Law Caucus and the Electronic Frontier Foundation.”  http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/09/23/BA9P133LEA.DTL&tsp=1

More from the EFF:  “Recently obtained documents show that last year the Department of Homeland Security quietly reversed a two-decades-old policy that restricted customs agents from reading and copying the personal papers carried by travelers, including U.S. citizens. The documents were made public today by the Asian Law Caucus (ALC) and Electronic Frontier Foundation (EFF), which sued the government under the Freedom of Information Act (FOIA) to obtain policies governing the searches and questioning of travelers at the nation’s borders.

The documents show that in 2007, Customs and Border Protection (CBP) loosened restrictions on the examination of travelers’ documents and papers that had existed since 1986. While CBP agents could previously read travelers’ documents only if they had “reasonable suspicion” that the documents would reveal violations of agency rules, in 2007 officers were given the power to “review and analyze” papers without any individualized suspicion. Furthermore, whereas CBP agents could previously copy materials only where they had “probable cause” to believe a law had been violated, in 2007 they were empowered to copy travelers’ papers without suspicion of wrongdoing and keep them for a “reasonable period of time” to conduct a border search.”   

 

Risk of United States losing its AAA credit rating is real

“After the most astounding and terrifying week in markets in a generation, when the whole ‘house of cards’ almost tumbled according to George Bush, . . . [t]here is now a serious risk of foreign investors balking at the scale of US financing needs (and certainly at anything like current yield levels), and the country losing its crucial AAA credit rating, as Japan did in 1998. After calling a dollar rally way back in June, I’m afraid it’s now well and truly over, and the fundamental outlook for US government bonds, already poor, has now become downright appalling. “ 

http://deadcatsbouncing.blogspot.com/2008/09/cash-for-trash-but-will-america-lose.html

Kudos to Russ Winter for following the bouncing ball

An immediate must-read.

Excerpt: 

“Naturally I need to weigh on what is being called the biggest “bailout in history”. I do not believe that is what is going down at all. Instead the US Government is facilitating the greatest asset grab of securities since Alexander Hamilton’s agents and cronies picked off the continentals from the Rubes back in 1790. Hamilton’s associates (friends of Hamilton) did not pay anything close to par either, instead these Continentals went for enormous discounts. And Paulson’s new Leviathan hedge fund (the US Treasury) will end up paying deeply distressed prices as well. Therefore it is most important to follow the real bouncing ball on this, and not be fooled. This post is going to be my primary framework over the next several months, so any discussion with me or use of my ideas is meaningless unless you are aware of my thinking.”

http://wallstreetexaminer.com/blogs/winter/?p=1918

Why the Paulson plan is not a rescue in 31 words or less

“The central bank action treats a symptom of the disease, not the disease itself,” said Stephen Lewis, chief economist at Insinger de Beaufort. “It is a palliative. At root, there is no way of imbuing worthless financial claims with value.”

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/09/19/ccambrose119.xml

 

“To whom and for what?”

A must-read from Interfluidity:

http://www.interfluidity.com/posts/1221805538.shtml

The government has a plan

Looks as if the stock market thinks the government’s (vague at this point) plan will save us all.

But…not so fast.  Those with an attention span of more than 30 seconds will question how, exactly, the government is going to improve anything about the “crisis.”  My favorite synopsis so far is Lee Adler’s:

“The gist of the story is that they are going to ban short selling, and create an agency to buy all the bad paper, which isn’t even possible because there’s not enough money to buy all that crap even if every government in the world participated. Hell, China and Russia already own a ton of it, and look how great they’re doing. So let’s just borrow a bunch of gazillions from them and make indentured servants out of the US middle class for the rest of their lives, their children’s children’s lives, yea even the lives of all the children of the US, South Africa, and Iraq, such as and whatnot till the end of time. Hey, it’s only money after all.”

http://wallstreetexaminer.com/?p=3158

A quick note on CDS

Credit Derivative Swaps – either you really get it, or you’re in the dark – right?  No!  Here’s a primer on the current CDS problems roiling the markets this week:

“Counterparty risk in the CDS market lies with the sellers of protection, or the insurers of risk. Banks are the primary sellers of CDS, totaling 40% of all written CDS and representing notional exposure of $18.2 trillion. Hedge funds appear to be in over their heads as well. According to printed statistics and consistent with anecdotal evidence, hedge funds are sellers of 32% of all CDS, insuring exposure of $14.5 trillion. Recent estimates indicate that the entire hedge fund market is approximately $2.5 trillion in net assets under management. Thus, hedge funds are bearing risk in excess of their ability to pay the piper if anything goes wrong. Those left holding the bag will be the sellers of CDS (the insurers), owners of CDOs, financial guarantors of CDOs, and may include another link in the food chain.”

If we focus on banks alone and convert the roughly $20 trillion notional exposure into a $20,000bn / 50 = $400bn net exposure (factor 50 as in Robert Pickel article) and divide by 10 major banks this still results in a net exposure of around $40bn per bank. “

rgemonitor.com

Strange days: Federal Reserve to take stocks in exchange for cash

Amongst the financial news today is something that is truly strange and new.  For the first time in almost a century, the Federal Reserve has announced it will lend out money in exchange for equities (shares of stock).  According the the Reuters’ report:

“One of the biggest changes the Fed made was to accept equities as collateral for cash loans at one of its special credit facilities, the first time that the Fed has done so in its nearly 95-year history. 

One of the most striking new Fed action was its decision to accept equities as collateral for cash loans under its Primary Dealer Credit Facility for investment banks. Until now, collateral was limited to investment-grade debt securities.”

What does this mean?  Essentially, that the quality of the collateral held by the Federal Reserve is continuing to deteriorate.  Long gone are the days of AAA rated collateral requirements.  The Federal Reserve is now potentially the largest player in the stock market.  At the very least, it will be subjected to stock market risk, a scary thought.  Is this the role of a Central Bank? 

The action is summarized by Nouriel Roubini as follows:

[T]he Fed is accepting even more toxic collateral for the TSLF and PDCF, including even equities; so now after having nationalized the mortgage market via the takeover of Fannie and Freddie the government is also starting to manipulate directly the stock market (a step that started with the SEC restrictions on naked short sales of the primary dealers; so the process of turning the US market system in a socialist system controlled by the government is now in full swing. And the Fed takes massive credit and now market risks by its effective purchase of equities.”  http://www.rgemonitor.com/roubini-monitor/253567/if_lehman_collapses_expect_a_run_on_all_of_the_other_broker_dealers_and_the_collapse_of_the_shadow_banking_system

America is in shock after Fannie/Freddie government action – biggest nationalization in human history

America – home of reverse-socialism, where we privatize gains and nationalize losses. 

Nobody says it better than Nouriel Roubini of RGE Monitor:

“Today instead the US has performed the greatest nationalization in the history of humanity. By nationalizing Fannie and Freddie the US has increased its public assets by almost $6 trillion and has increased its public debt/liabilities by another $6 trillion. The US has also turned itself into the largest government-owned hedge fund in the world: by injecting a likely $200 billion of capital into Fannie and Freddie and taking on almost $6 trillion of liabilities of such GSEs the US has also undertaken the biggest and most levered LBO (“leveraged buy-out”) in human history that has a debt to equity ratio of 30 ($6,000 billion of debt against $200 billion of equity).

 So now Comrades Bush, Paulson and Bernanke (as originally nicknamed by Willem Buiter) have now turned the USA into the USSRA (the United Socialist State Republic of America). Socialism is indeed alive and well in America; but this is socialism for the rich, the well connected and Wall Street. A socialism where profits are privatized and losses are socialized with the US tax-payer being charged the bill of $300 billion.”

“Like scores of evangelists and hypocrites and moralists who spew and praise family values and pretend to be holier than thou and are then regularly caught cheating or cross dressing or found to be perverts these Bush hypocrites who spewed for years the glory of unfettered wild west laissez faire jungle capitalism (and never believed in any sensible and appropriate regulation and supervision of financial markets) allowed the biggest debt bubble ever to fester without any control, have caused the biggest financial crisis since the Great Depression and are now forced to perform the biggest government intervention and nationalizations in the recent history of humanity, all for the benefit of the rich and the well connected. So Comrades Bush and Paulson and Bernanke will rightly pass to the history books as a troika of Bolsheviks who turned the USA into the USSRA. Fanatic zealots of any religion are always pests that cause havoc and destruction with their inflexible fanaticism; but they usually don’t run the biggest economy in the world. But these laissez faire voodoo-economics zealots in charge of the USA have now caused the biggest financial crisis since the Great Depression and the nastiest economic crisis in decades. So let them be shamed in public for their hypocrisy and zealotry that has caused so much financial and economic damage.”

rgemonitor.com

Little hope for a job

In the real world it’s going to be harder and harder to find a job.  Here’s the Manpower chart showing the percentages of employers who expect to  be hiring this year (hat tip Mish Shedlock):

If you’re invested in stocks, be careful

Commentators and analysts far and wide are advising extreme caution in the financial markets.  There is no single answer that will likely work well over the entire period of financial problems.  Obviously, this is not the time to sit back and relax; this is the time to stay alert and pay attention.  You will no doubt need to adjust your strategy as time passes.  Here’s a chart many are using to illustrate what happened to stock market investors during the Great Depression: after the initial stock market decline, many bought at what they thought was the bottom, and indeed made big money on the rebound (in modern parlance, the “dead cat bounce”).  But note what happened next:

Foreign central banks switching into Treasuries, not willing to buy Fannie/Freddie bonds

As noted by many including Brad Setser and Yves Smith, in August 2008, foreign central banks added close to $46 billion ($45.92b) to their custodial holdings of Treasuries at the New York Fed. Also in August, they reduced their holdings of Agencies by a bit over $13 billion ($13.33b).

What this may mean to the U.S. is that if and when Fannie and Freddie cannot find buyers for their bonds at a do-able interest rate, Fannie and Freddie must at that point cease to exist in their current form, by government bailout or otherwise.

Here is the chart:

(Link: http://www.nakedcapitalism.com/2008/09/setser-if-trends-continueagencies-wont.html)

Yes, Virginia, there is a business cycle.

Listening to the “mainstream media,” one would think that we have nothing much to worry about in terms of a real economic downturn.   Does it make sense to hold the belief that business-as-usual will simply continue?  Have we entered a more enlightened golden age in which the business cycle no longer operates? 

No.  In short, what goes up must come down!  Here is Martin Hutchinson’s comment on the reality of the business cycle.  We may be in overshoot mode at the moment, but it will correct downward:

“In the end, it is likely that the market will again overshoot, as it did in the early 1980s, so that even well-run countries like Brazil and Colombia, or adequately run non-Latin countries like Turkey and Indonesia, will be forced into default simply by the absence of new bond market financing. In 1982, Mexico was poorly run and deserved to default, but Brazil was quite well run and could have survived default had the bond market remained open.

Needless to say, the world’s stock markets will not be exempt from the overshoot phenomenon. So far, only a few emerging markets, notably China, have experienced any significant downturn. In the West, stock prices are generally still well above those prevailing in 2006, considered at the time a boom year.

However, when the decline does finally come, it will be severe. Inflating the early 1995 Dow Jones Industrial Index level of around 4,000 by the increase in nominal GDP since then gives a value of 7,800 today, which may be considered the stock market equivalent of the 3.2 times house price-to-earnings ratio that is considered equilibrium in the housing market.

Needless to say, even a drop to 7,800 would cause consternation and hand-wringing among Wall Street and investors generally. It should be noted however that 7,800 is the equilibrium level for stocks, not a prediction for the bottom, which must of necessity be much lower, as price declines reinforce negative investor psychology and pessimism; 5,000, or even 4,000 would seem reasonable predictions for the Dow’s low.

Given the economic changes involved, the market may well take close to a decade to get there. After all Japan, subject to a similar bubble in 1990, took 13 years to reach its low on the Nikkei, which at 7,603 in April 2003 was 81% below its December 1989 high of 38,916. ”

His bottom line summary:  “The overshoot phenomenon means we are not yet halfway through the current downturn, even in housing. It is most unlikely that deflation of the 1995-2007 asset price bubble will be accomplished in less than five years, since its deflation will be fought every inch of the way by politicians and Wall Street. Maybe we should start buying in summer 2012, but 2013 would be safer.”

http://atimes.com/atimes/Global_Economy/JI04Dj01.html