Crisis in the Financial Markets

[nmap]

Two points, if I may.

First, you mention: "You can’t have winners without losers". This is true in the case of a zero-sum game. Gambling, as in Las Vegas, is an example. Commodity futures trading is another. But the stock market is different - a growing economy can make all stocks (technically speaking) go up. It is the essential issue of a growing economy that marks a significant difference between gambling and investing.

Second, with regard to the bailout. I sense a desire among people for a definitive, certain answer with regard to costs and probability of success. These do not exist. Rather, it is a question of risk versus reward - not unlike any other sort of investing.

People with some expertise have made a recommendation. The public has, apparently, rejected that recommendation - although some alternative may come to pass. Each side notes risks; those favoring the bailout seek to stop a developing, spreading problem. Those opposed to the bailout question the cost and the efficacy of the measure.

Should the present trouble spread, the treasury cannot access trillions of dollars without resorting to tactics likely to result in hyperinflation. Thus the $ 700 Billion is an attempt to contain the costs and avoid some of the more destructive aspects of the coming recession.

Suppose a person has cancer. Treatment will cost them their entire savings. A cure is uncertain. Should they refuse treatment? Of course not. The risk justifies the possible (but uncertain) chance of reward.

Overdrawn? Perhaps. But the situation is serious. And the chance it will cure itself without visiting substantial pain on you, and I, and others we know is small.

[Razor]

Excellent point on risk, nmap. On occasions such as this, I like to bring up a favorite quote of mine:

Insisting on perfect safety is for people who don't have the balls to live in the real world.
- Mary Shafer, NASA Engineer

[Richard]

Casino Capitalism: the term to describe how financial executives and politicians operated in this financial crisis' pre-meltdown time period.

Richard's $.02

[nmap]

I came across an item in the WSJ today; I tested the link, and it should work for everyone without the need to subscribe. It describes some of the consequences of the current bank-stock decline.
LINK

[pheepster]

This all reminds me of where I was a year ago. I was working/living in Japan for a company that operated a “bicycle method” of business, which--as I now understand it--is a bit ponzie-schemish. There were some signals that the company wasn’t financially solid; when I started asking I was reassured everything was fine, not to mention I was considered negative for having questioned the company’s solvency. Within a month no one received their salary and, shortly after that, the company closed it’s doors. It was a bit scary how fast it all happened. Roughly 7,000 people instantly out of work, all being owed nearly two month’s salary, some also losing their company housing. It opened my eyes to how hardworking people can find themselves in need of some assistance. There’s a large part of me that is against the “socialization” of this debt, but at the same time I wouldn’t want a large-scale version of the above happening here in the USA.

All that aside, I’ve been trying to follow this as much as possible; however, I’m beginning from a severe deficiency of financial/economic knowledge. One basic question that I have yet to figure out (please excuse me if it’s already here and I didn’t see it) is a matter of where this proposed $700, 000, 000 will be coming from… literally. Meaning, will this come from increased taxes over a certain length of time, would we be “borrowing” it from somewhere to immediately have it, or is it more of a “promised” amount that wouldn’t actually exist in hard currency?

That, and where is Bush in all this? I’m hearing too much on the news about McCain’s and/or Obama’s positions (our prospective leaders) and not too much about what’s coming from the current administration. I realize Bush has spoken, but where is his influence? Was Pelosi’s speech really that inflammatory? I’ll admit, I’m not aware of whose role is exactly what. Is the weight of attention placed on McCain and Obama because they are Senators and their roles as senators require their involvement, or is it more because of their presidential candidacy?

My apologies for throwing this all in here at once.

[nmap]

The $700 Billion will come from additional debt. In fact, the proposal included an increase in the debt limit as I recall.

Conceptually, the Treasury view is that the acquired assets will perform to a greater extent than the present market value suggests. Thus, at some point the securities can be sold for a price close to the acquisition cost, and perhaps greater. If this is so, the debt would be liquidated - at least partially - by sale of the securities themselves. Of course, the optimistic view may not prove correct. In the pessimistic scenario, the taxpayers will face additional burdens.

The Treasury and Federal Reserve would, in essence, create sufficient dollars to effect the plan.

In my opinion, President Bush's influence is small for two reasons. First, his term will end soon. Second, his approval numbers are remarkably low.

Your experience with the insolvent company is very much the risk we face - not only as a nation, but in terms of the global economy. Japan faced 10 years of distress when their real estate market declined with resulting disruption of their banking system. Should the U.S., or the world, experience a similar situation, the possibilities of social and geopolitical consequences may increase.

[82ndtrooper]

Originally Posted by nmap

The problem with describing an outcome is that the economy isn't monolithic. For an elderly widow with no savings and a meager Social Security income the outcome might be horrific. Likewise for a single parent with children, working multiple part-time jobs requiring long commutes. On the other hand, the top 1% of the households in the U.S. have a net worth of $6 Million or more - I suspect that inflation will be profitable for that segment of the population. So, is inflation "good" or "bad"? I guess I see it as a function of perspective.

I, too, like precious metals. One problem is that a mine which is marginal for $500 gold becomes highly profitable at $1,000 - so the supply is dynamic. In addition, one can go for a lifetime without owning an ounce of gold - thus, demand is elastic. I think it's best to use a long-term approach. Acquire precious metals or mining stocks (or, a mutual fund or ETF for the sector), and hold on for years and decades. In addition, consider the new commodity ETFs that I mentioned in the posting to Grateful. You might find DBC of particular interest, if only as a hedge against living expenses.




I don't believe ACORN is in - but we have to remember that a very large honey pot has been created. Flies of every stripe are sure to pay it a visit.

I like your example of Zimbabwe. Interesting, is it not, that the society still functions after a fashion, despite the poorly managed economy. Inflation is a highly effective way to take purchasing power out of the hands of savers, while transferring it to the hands of debtors. Since governments are often debtors, there is a clear incentive.

Where this all becomes interesting is if some other event further distresses the economy. My personal bias is that it will be energy prices, although Grateful advances some good arguments that such events will be farther in the future (on another thread).

Interesting times.

I've only used commod ETFs as a hedge agains't inflation, but with limited exposure. Personally I'm not a fan of precious metals, but more diversified across the broad range of traded commod's. Some open ended commod funds have performed well, but with little exposure to gold. Recently it's been a "gold mine" but over 30 years gold is only about a 5% return on average.

Don't buy commod contracts outright. Unless you know what your doing, your going to wind up taking delivery on a barrel full of pork belly's or a chest full of gold. There's not much liquidity there now is there ?

[nmap]

Originally Posted by 82ndtrooper

Don't buy commod contracts outright. Unless you know what your doing, your going to wind up taking delivery on a barrel full of pork belly's or a chest full of gold. There's not much liquidity there now is there ?

You want liquidity? There's always soybean oil...

Seriously, commodity futures have their place. A person who was willing to allocate an investment of $30,000 to a position in T-Bills, which were then used to secure a contract in corn, might be able to enjoy some nice returns. (Note: The corn is used as an example, not as a suggestion).

The problem isn't delivery; instead, it's the leverage. Usually, people put up the margin (presently, at least $1,688 per contract of corn for a speculator). A minor fluctuation...say, 33.7 cents per bushel...wipes out the original investment. A speculator can be right on the overall move, but be forced out before the trend develops.

I've developed a strong allergic reaction to leverage. It has served me well.

ETFs permit involvement in commodities without the leverage, which strikes me as a very good thing.

[Surf n Turf]

Originally Posted by nmap

Two points, if I may.

First, you mention: "You can’t have winners without losers". This is true in the case of a zero-sum game. Gambling, as in Las Vegas, is an example. Commodity futures trading is another. But the stock market is different - a growing economy can make all stocks (technically speaking) go up. It is the essential issue of a growing economy that marks a significant difference between gambling and investing.
Second, with regard to the bailout. I sense a desire among people for a definitive, certain answer with regard to costs and probability of success. These do not exist. Rather, it is a question of risk versus reward - not unlike any other sort of investing.
People with some expertise have made a recommendation. The public has, apparently, rejected that recommendation - although some alternative may come to pass. Each side notes risks; those favoring the bailout seek to stop a developing, spreading problem. Those opposed to the bailout question the cost and the efficacy of the measure.
Should the present trouble spread, the treasury cannot access trillions of dollars without resorting to tactics likely to result in hyperinflation. Thus the $ 700 Billion is an attempt to contain the costs and avoid some of the more destructive aspects of the coming recession.
But the situation is serious. And the chance it will cure itself without visiting substantial pain on you, and I, and others we know is small.

Nmap,
A couple of points:
You may be correct that the “Bailout” is required to contain some of the financial situation, but then again, the die is cast, and we are headed for an adjustment. After the psychological warfare on the airwaves, the Bill will pass the Senate, and probably the house. I believe that dropping the Capital Gains to Zero, suspend mark-to-market rules, scrapping Sarbanes-Oxley, and The Community Reinvestment Act, and privatizing FNM and FRE would cause an investment bonanza, the likes of which we will never see – Politics vs Practical Solutions. All this will happen without a national debate, and some understanding by the public of what they are getting for their money.

The acquisition and nationalization of Companies (AIG, etc.) by the Central Government is not socialism, and I am worried about the path we are about to tread. We have good reason why we don’t believe our National Leaders, and I have yet to hear one remark on this departure from the Constitution. Collectivism is not a form of government I desire.

Regarding the “growing economy rising all ships”. I seem to recall that all was rosy on NASDAQ until 10 Mar 2000. Then the bubble burst, and it was if fact a “net-sum game”, and I paid off all the kids college loans with some short sales on those that did not follow a standard business model, and Gamblers who were flushed with "Irrational exuberance".

I think that I will stand on the pier and wave this ship goodbye, and along with it our free market capitalism, and concept of a limiting of the Central Government.

SnT

[Surf n Turf]

Originally Posted by nmap

I came across an item in the WSJ today; It describes some of the consequences of the current bank-stock decline.

Originally Posted by nmap

Conceptually, the Treasury view is that the acquired assets will perform to a greater extent than the present market value suggests. Thus, at some point the securities can be sold for a price close to the acquisition cost, and perhaps greater. If this is so, the debt would be liquidated - at least partially - by sale of the securities themselves. Of course, the optimistic view may not prove correct. In the pessimistic scenario, the taxpayers will face additional burdens.
The Treasury and Federal Reserve would, in essence, create sufficient dollars to effect the plan.

Originally Posted by nmap

Seriously, commodity futures have their place. A person who was willing to allocate an investment of $30,000 to a position in T-Bills, which were then used to secure a contract in corn, might be able to enjoy some nice returns. (Note: The corn is used as an example, not as a suggestion).

The problem isn't delivery; instead, it's the leverage. Usually, people put up the margin (presently, at least $1,688 per contract of corn for a speculator). A minor fluctuation...say, 33.7 cents per bushel...wipes out the original investment.
I've developed a strong allergic reaction to leverage. It has served me well.

Nmap,
The article you sited is reinforcement of why non-investors should be in CD’s. Honest Free Market Capitalism is “Darwinism at its finest moment”. I do feel sympathy for the folks in the article, and I believe that was the writer’s desire.

The Central Government may not have the “printing press power” to purchase these assets. In any case, why would our Government become owner / landlord to it’s citizens, and might this not cause some weakening of the currency.

Commodities trading / Short Selling are typically reserved for the 'sophisticated investor', with sufficient funds to play the “Mean streets”. I have mixed results with leverage.

SnT

[nmap]

I've included a couple links to rather long but (in my opinion) informative items.

The first is a strong call for an economic stabilization plan ( ), with reasons. The LINK will take you to a fairly long article.

The second discusses the outcomes experienced by other nations when faced with similar problems. The link is HERE.

Whether you agree or disagree, each presents some facts and cogent arguments which may be worthy of consideration.

[nmap]

Originally Posted by Surf n Turf

The Central Government may not have the “printing press power” to purchase these assets. In any case, why would our Government become owner / landlord to it’s citizens, and might this not cause some weakening of the currency.

SnT

SnT, you bring up some good points, both in this item and your previous post. One item that seems of particular importance is the constitutional issue, along with concern that the Federal Government will become not only the ruler but also the landlord over its citizens. Perhaps we can add in lender, employer, and investor as well.

It does, as you suggest, place a great deal of additional power in the hands of our Federal Government. As with any concentration of power, there is the risk of abuse. These are all reasonable concerns.

That said, we have gone far on the path toward government control and away from free markets. The very existence of Fannie Mae, Freddie Mac, and Sallie Mae (for student loans) speaks to this. And, just as you seem to suggest, each of these entities provides another mechanism of control to the central government.

I suppose the image that comes to mind is a person who eats the large entrée with double potatoes and pecan pie ala mode, who then insists on using artificial sweetener in his coffee. Perhaps the path to virtue lies in some small, symbolic step. Perhaps - a very speculative perhaps - we could, as a people, choose to make this our first step, in full knowledge of the likely extended economic pain such a choice could entail.

I think that you, like I, are a student of the human condition. I do not believe we are up to the task of reforming ourselves toward true free market discipline. Given such raw material, we must work with what is available. Hence, some economic restructuring represents a better path than the social and political outcome should we do nothing at this time. But perhaps you see things otherwise?

[Surf n Turf]

Originally Posted by nmap

I think that you, like I, are a student of the human condition. I do not believe we are up to the task of reforming ourselves toward true free market discipline. Given such raw material, we must work with what is available. Hence, some economic restructuring represents a better path than the social and political outcome should we do nothing at this time. But perhaps you see things otherwise?

nmap – I fear that I am beyond self-reform (as my wife reminds me daily).
I do see some value in economic restructure, with or without the bailout.
I am somewhat concerned with the social and political outcome in any case. There can be little difference in the long term, regardless of how the plan plays out.

The near term has me somewhat upbeat, as opportunities will abound

SnT

[nmap]

Originally Posted by Surf n Turf

The near term has me somewhat upbeat, as opportunities will abound

SnT

On that point, we're in complete agreement.

By the way...

Once the Senate was finished adding sweeteners Wednesday to entice reluctant House Republicans to change their minds and vote for the bailout, the bill heading for passage had grown to 451 pages.



I wonder if there might, perhaps, be some mischief within those 451 pages?

LINK

[Richard]

Anybody wanna play 'September Madness?' Oh, you aleady are?

Richard's $.02