Amoral Majority

“Dirty Jobs”

The Bank Index is down 60% in 2009.  To be able to say that with a straight face is kind of remarkable, seeing as it is early March and 2008 wasn’t too kind to the industry either.  When you also consider that it’s down more than 80% since mid-2007, the magnitude of the crisis is put into perspective.  At the core of the problem is the mortgage market, which is completely clogged.  Since some mortgage securities had become worth less (in some cases much less) and there was no regulated open exchange of these securities, all the mortgages simply became worth zero as the downward spiral was exacerbated by uncertainty. Add to that the incredible problems this has led to in derivatives (AIG’s hemmoraging of money), and we get to where we are now.  Some would argue, though, that the housing bubble would not have collapsed nearly as quickly or as hard (maybe not at all?) if there was an open market for these securities with full information.

Of course, investors did not seem to care much about the information anyways.  They were more concerned with the huge returns and decided it wasn’t worth asking questions… but for now, let’s assume that this happens in all types of markets to some extent, which is probably true. It was kind of like musical chairs: When the music’s over (my favorite Doors song), who is the one stuck without a chair – in our case, who was stuck with large amounts of leverage in assets that were now worthless?

But, to continue the analogy – who decided to stop the music?  If there was more information provided through better regulation and/or open exchanges, not all the securities would have become worthless such as they are now.  Not to mention, everyone holding these certainly shouldn’t have been forced to assume that they will always be worth zero, as is the logic of mark-to-market accounting (M2M).  While the rule does make sense in normal market conditions, the current situation has become one where financial institutions have to mark the securities quarterly at much lower than they would ever sell them for in the future, which then causes them to have to raise more capital, which makes their stock price go down and credit default swaps blow out, so that they have no way of raising capital, etc etc etc.

What sense does any of this make?  If I’m not planning on selling my house, I don’t give a rat’s a** what the price of it is at any one specific time.  M2M is good for comparing companies within industries – it is supposed to help investors gauge what the value of a company is.  But we have strayed far from that goal. I have no doubt we should return to M2M in the future – again, for comparative purposes – but we need to stop this irrationality that has developed as fear has fed on itself.  “…nothing to fear but fear itself.”

This week, Congress will have a meeting to decide whether or not to call the plumber and have him look at unclogging our pipes. They (and the Fed) have been trying everything they can think of to fix the problem themselves with various unorthodox methods, but they should just stick to the norm.  When they decide at the meeting to call the plumber, we may get the water moving again.

By assuming for a minute that the banks would not sell their securities at zero (or 20, 30 cents on the dollar) just because the market doesn’t know what they are worth, why make them hold capital as if they were doing just that?  Why not instead try to get to the bottom of what the prices are of these assets and while we’re sorting that mess out, maybe for just awhile say that institutions do not have to have capital to back up a price they wouldn’t take for an asset?

Congress is having a meeting to discuss M2M this Thursday.  Despite the fact that this plumber has his work cut out for him since the clog in the pipes caused damage of unequaled proportions to our house (financial system), he can unclog this pipe so we can get our water moving again; then we can begin to repair the damage.

I have heard it argued that lifting M2M will cause more uncertainty as investors would know less about the assets on the books, but these have usually been people who are known as short-sellers.  While short-sellers have been right if you want to look at it that way (many do, including myself), it does not give any more merit to their opinion than anyone else trying to sell you on something.  If this huge burden was lifted off institutions’ balance sheets, you can bet that some of the massive amounts of money sitting in conservative investments will come pouring in.  Just as fear can feed on fear, optimism can feed on optimism this spring.  I bought stocks last week for the first time in months, and if nothing else, I think we’re due for a huge global rally.  Global markets have pretty much gone down in a straight line in 2009.  Just since the 2nd week of February, the DJIA went from 8300 to 6500.  Even at my young age I know that kind of thing doesn’t happen often.

Let us return to the metaphor of  “Santa Claus: Benevolent Conspiracy” as it relates to money and banks and fear and faith.

In the case of Sanity Claus, the conspirators must maintain a sufficient degree of consistency and credibility in their deception in order to perpetuate the conspiracy, to alleviate the doubt and boost the faith of the true believer.  Don’t ever give them REASON to doubt, for they will surely grasp upon it if the least bit curious, and eventually unravel the whole freakin’ fairy tale.  Inconsistency was the hobgoblin that swallowed my parents’ version of the myth, and its role in my belief system.  You can’t, on one hand, reward and encourage a child to examine the universe from a scientific, rational, logical western perspective and then try to feed the same child fairy tales about a fat fucker with a flying sleigh.

Cognitive dissonance breeds the questioning of authority and reality.

Unlike myself, when my own children came to the realization that Santa was a crock of shit, they kept their mouths shut. For years. Their faith had been replaced with the fear that if they dared utter the truth, the presents would cease to appear.

They tolerated the deception as long as the gifts came in.  We played along as long as the requests were reasonable.

They knew, and we knew that they knew and we all played make-believe and nobody got hurt because everyone played nice.  If the players become either greedy or irresponsible, the game collapses.

For the kids, that meant reasonable requests.

For the adults: don’t promise what you can’t deliver.

The benevolent conspiracy, the Fractured Fairy Tale of Fractional Reserve Lending and debt-based currency is beginning to unravel.

The reason?

In a word, greed.

Unreasonable expectations.

Unrealistic promises.

Prosperity, abundance and the delusion that Santa can deliver whatever our heart desires has turned us into a society that engages in willful co-conspiring year round.

“Where’s dinner?”

“Under the tree!”

You can only keep the fairy tale alive as long as you don’t try to squeeze too much magic out of it.  Everyone’s gotta play nice, or else.

We have – both literally and figuratively – bought a little to deeply and selfishly into the myth that we can create something from nothing at all.

We’re afraid to call out the allegedly adult co-conspirators for their deception and irresponsible actions, because we’ve become reliant on their largesse for our very survival.

Our faith has been replaced with the fear that if we dare utter the truth, the gifts under the tree will vanish.

The fairy tale:

Too Big To Fail.

Realty is gravity:

i.e.,

What goes up

Must come down.

Lest ye be spooked by my lunatic howlings, look at the Light Side of the Moon.

Defy gravity with levity.

Spin to the yin that completes the yang.

Decouple your perception of value from the dollar standard.

The Power to Love is an unlimited commodity; adopt it as your currency.

Measured in gigaHugz and delivered in person.

Door to door, face to face, cheek to cheek;

On demand or on the dance floor.

If we all play nice, any myth will suffice.

peas bewitchu

We’re All In, America

The striking thing in Warren Buffett’s letter to shareholders (2/28/09) was not that his Berkshire Hathaway had its worst year in his career.  To me, it was striking that his words sounded like those of a 78-year-old man who wishes to warn the world about what scares him before his time has run out.  Never before has Warren Buffett sounded so emotional and forthcoming; nor has he ever sounded his age.  This year he seemed to be ‘spilling the beans’ as the popular phrase goes. In the letter, he warns that derivatives were very dangerous and that many firms had knowingly created this system stating,

“From this irritating reality comes The First Law of Corporate Survival for ambitious CEOs who pile on leverage and run large and unfathomable derivatives books: Modest incompetence simply won’t do; it’s mindboggling screw-ups that are required.”

The superstar investor continued, writing:

“In poker terms, the Treasury and the Fed have gone all in.  (emphasis added).  Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel.  These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects.  Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation.”

He also mentioned a Treasury bubble – as described in my previous post – that may be as extraordinary as the internet and housing bubbles.

The Treasury and Fed are all in with our money. So, we’re all in.  The few who responsibly managed their budgets are now bailing out the majority who didn’t, albeit on an individual or a business level.  Moral hazard is now an extinct ideology.  There is no incentive to be responsible even if it were possible to overcome being soaked dry by ‘the “good” of the people.’  I know this:  I’m no good at poker, but if I had the hand America is being dealt, I sure wouldn’t want to go all in, especially if Buffett’s assertions are even partially true.  Our debt is in a bubble set to pop, we owe the world $10.9 trillion, and we plan to allocate an addition $3.7 trillion to the federal budget this year, which includes $1.75 worth of more deficit borrowing.  The only thing still holding this all together is that the rest of the world depended on our stupidity.  Their exports have fallen dramatically as we stop consuming so much.  It’s only a matter of what will happen first – will the rest of the world find other people to sell their goods to, or will our economy recover fast enough to where they still remain dependent on us in the future?

Warren Buffett said that he agreed with the government’s actions, because without them, we would have faced cataclysmic consequences.  So I guess maybe we look at it this way:  if you only have one chip left, maybe you do have to go all in.  So there you have it.  We’re all in, America.

The market watch for March doesn’t look too promising.  The Dow and S&P indices closed on 12 year lows on Friday.  That said, the government” hope bubble,” as described in the previous post, was alive and well this week.  Before a pull-back on Friday, when the government took up to a 40% stake in Citigroup, the index tracking the banking sector was on pace for the best week in history on hopes that government actions would be beneficial for banks.  With Warren Buffett’s disclosures on derivatives showing how much they were hurting even someone like him, it is clear that the government cannot and will not save the banks from mounting losses they don’t even understand.  At this point, it seems equally dangerous to be invested in Treasuries or equities.  If the financial sector sees a further break-down, the effects on all areas of the economy will suffer.  Precious metals like gold and silver seem to be the safest asset class as it is inevitable that inflation takes off at some point as countries all over the globe destroy their currencies.  Stocks seem cheap right now, but it is likely what’s known as a “value trap. “  There is a reason that stocks are at 12 year lows.  Future earnings for companies are very uncertain, repercussions of government actions remain unclear, and perhaps most importantly, people don’t have money to invest.  All asset classes are seeing heavy withdrawals and redemptions, which means that the deleveraging is far from over.  Commercial real estate is seen as a looming disaster, which means the economic woes are far from over.  It is not a bad idea to start buying some small positions in quality stocks and adding to them as the market declines in the next few weeks or months, but I would not be putting serious money into stocks right now just because they are ‘on sale.’  If you can get them for cheaper later, why buy now?  Don’t go all in like our leaders have done. It’d be one thing if those were my naive words but when they are the words of the greatest investor of our time, it makes you stop and think.

Forgive my rambling, but every once in a while it makes sense to try to think about the problem of government in a free society.  What does it take for a society to be truly free?  For me, it is the freedom to do whatever you may want, as long as it doesn’t stop others from doing so.  I’ll use that as my definition of freedom for now.  So what kind of government is consistent with freedom?

First, because enforcing policy necessarily requires voluntary agreement in a free society, there should be a reasonable level of agreement on any policy adapted by our central planners.  To what extent people agree will depend on the issue.  As these issues are defined more narrowly, we would expect agreement to be less and less likely.  Likewise, as the issues under consideration for control are made more broad and general, the level of agreement becomes greater (e.g. We all agree government should provide defense. We just don’t all agree on the specifics).

You might have heard, for example, that we have just been approved to build a new base in Italy, apparently, to try to prevent “social unrest.” You know, people not agreeing with what their government is doing to them (note to self:  Ask Obama what the hell this has to do with the security of the American people).  We have hundreds of military bases in over 100 countries.  Do Americans really want a new base in Italy right now?  Can we really afford to give any more money to the military-industrial complex? (Shhh…I don’t think it really matters anymore what we want, but don’t call it a conspiracy!)

Because we all have very different views, needs, wants, and morals, Americans embody a very wide spectrum of opinion.  We disagree on all sorts of things.  But the key here is that we do have practical unanimity on some issues, like basic human rights of life, liberty, and the pursuit of happiness.

Even on some issues where people can all agree , like raising the average wage in the US, the methods for accomplishing this goal can vary wildly.  Any given plan is likely to favor one group over another.  And for every plan that favors group A over B, there will be a plan that favors B over A.  The actual number of plans theoretically could be greater than the number of people under the direction of the central planners.  So that even when we have unanimous agreement on one issue, in reality no plan can be said to be objectively better than any other.

And this is where we get to the punchline.  Ultimately, if we are to pass the hypothetical plan to raise the average wage of Americans, some person or committee will have to decide, quite arbitrarily, on a specific plan.  The government will have to decide who wins and who loses, and as we’ve seen for quite awhile now, those in power to make such decisions usually have money and power on their mind; not the “general welfare”.

The problem stems, in this example, from the fact that the policy in consideration was ends-based.  It is not a general rule which must be followed by all, as is the case with laws concerning murder.  Rather, it is focused on a specific end.  This creates the need for specific groups to be mentioned in the policy.  The planners creating this legislation can see its effects in advance.  They use this foresight to please special interests (at the expense of some other group, of course).  However, murder laws, for example, are not the same at all.  None of the planners could possibly foresee what group will be affected by murder laws in advance.  It is true, though it possibly sounds like a contradiction, to say that planners should not have any kind of foreknowledge of the effects of their plan on any specific groups.  This does sound odd, but it is at the heart of why our planners have repeatedly failed over and over.

Furthermore, the arbitrary nature of such decisions will ultimately subvert the rule of law, which has always been the hallmark of a free society.  We have seen in the last eight years, the effects that such a subversion can have.  The rule of law, as opposed to the rule of men, is the natural consequence of the progression of societies from autocratic to democratic rule.  It is the dividing line that separates the totalitarian states of the past from the more liberal states of the present.  If we are to truly preserve the rule of law, policymakers must stop proposing ends-based policy.  As we have seen, ends-based policies subvert the rule of law, have almost no chance for any kind of broad agreement from the people, and are used to please special interests at the expense of the general public.

Furthermore, the world is extremely complex, and understanding all of the interconnected and often conflicting goals of each of its inhabitants can never be achieved by any one man, let alone a committee of men.  Eventually, policy decisions will always favor one group over another (due to the limited scope of the planners’ experience and knowledge), and the laws of economics are such that the favored group is bound to be smaller (so that each member of the losing group ends up “paying” a small amount, lest they revolt).  Thus, ends-based policies have little chance of actually helping a majority of the people.

I sometimes wonder if people truly believe that its okay to have such a powerful executive as long as the guy in control is benevolent.  As I mentioned earlier, the complexity of even the most basic structures of society, like the vast financial system, are such that no one man, woman, or committee could possibly effectively handle tweaking the system to what they perceive to be in the general interest.  But even if we got someone that can manage such control, whose to say Americans will always vote for that person?  In fact, the likelihood seems very small considering our past presidents.  If we continue to give such power to our federal government, we will ultimately find ourselves one day serving under an autocracy and living in servitude to the ruling party and their elite friends (although I’m not totally convinced that isn’t more or less the case right now).

One would like to think that Obama does not fit this group.  However, it is clear that Obama does not share this vision of how we may truly have a government by the people and a free citizenry protected by the rule of law.  He has shown he has no interest in bipartisanship or truly listening to the ideas of both sides, neither of which seems to know anything about economics (Where have all the Austrians gone?).  He had no problem voting against the overwhelming majority of Americans on the TARP.  He favors ends-based policy, which is the enemy of the free society.

I’ve been rambling for long enough, I think.  Time to get back to figuring out how I can use the new laws being passed to my advantage; at the expense of others, of course.