Bridge to Nowhere?:
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http://www.cnbc.com/id/46171675
- (personal observation regarding PIMCO appearances on CNBC tv: ever since they started managing equity in addition to bonds, I always get this uneasy feeling that Bill Gross, El-Erian, and whomever they trot out are talking PIMCO's own book, rather than providing insightful analysis. Smartest guy I've ever seen on CNBC is
Tony Crescenzi and he seemed to have great public (i. e. voiced on CNBC on TV) market insights when he was chief bond strategist at Miller Tabek and U. S. markets were really getting roiled in 2007, 2008, 2009. Would be really interesting to know what someone like that is saying in private to PIMCO investing committees when they are discussing how to really deploy those huge mountains of assets that company has accumulated over time)
Forbearance and "Financial Stability":
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Why I oppose Financial Stability
Financial Stability became a topic in the late 1990s, at a time of peak laxity in international financial supervision. The same minds which promoted the Financial Stability Forum (now the Financial Stability Board) also crafted the deeply flawed and destructive Basel II.
I have never understood why Financial Stability should be an objective of public policy. Desirable, measurable outcomes of benefit to the public should be the objectives of public policy. Stability is a silly and impractical goal in a capitalist economy. Success and failure of competitive firms are the basis for economic progress, capital allocation and market pricing. Capitalism requires recognition of failure, and failure always causes economic loss and some instability as past assumptions are re-examined and re-assessed more objectively in light of current painful reality.
The management of failure can contribute to better future outcomes, but only if the costs of failure are born by those who caused the failure and not by those innocent of it. The 1990s policies promoted by regulators during the Great Moderation aimed to forestall failure by disguising it, delaying it, and subsidising it. Since the collapse of securitisation and inter-bank credit markets in 2008, governments have been too willing to socialise the costs of failure (by then magnified with leverage) to taxpayers through serial bailouts.
One strength of the US banking system from the 1930s to the 1980s was that failures were dealt with quickly and certainly. Foreclosed properties had to be sold by banks within two years of repossession, leading to a quick and certain reallocation of assets from failed borrowers to new owners. The FDIC swiftly and mercilessly shut down failed banks. New owners - often buying at distressed prices - were encouraged to invest in making the assets productive and profitable. It was this simple recycling from failed managers to better managers that was largely behind the short recessions and strong recoveries during this period of American economic history. With forbearance now institutionalized at all levels of the US economy, we are seeing Japanification instead of recovery. And it is even worse just about everywhere else where dominant banks are much more influential.
Financial Stability - like national security - can never be objectively confirmed as achieved. It is more often used to disguise the ulterior aims of its proponents, or to misdirect attention in aid of bad public policy that harms rather than promotes the public interest. For example, the Greenspan Put was a brilliant mechanism for ensuring financial stability by preventing any adjustment of the markets in response to the S&L crisis or dot-com bust. The Bernanke Put and Paulson Plan were financial stability solutions to the securitisation fraud crisis that revealed the undercapitalisation of global banks and over-leveraging of real estate. Bank bailouts and special liquidity facilities were financial stability innovations to prevent mark downs of mis-priced and illiquid capital assets.
Rather than review whether massive financial deregulation and promoting concentration in a few incumbents was in the public interest, the Greenspan Put, Bernanke Put, liquidity facility innovations and public bailouts have disguised misallocation of capital by pumping the markets with taxpayer funds and monetary laxity whenever they began to flag. Financial Stability initiatives have therefore taught incumbent bankers that any disruption is an excuse to double down on bad bets as the central banks and state treasuries would flood enough cash to make bad bets come good. MF Global made this bet, and although it (and its clients) won't be collecting, I expect the creditors/counterparties that seized all its collateral assets expect to come out way ahead.
I oppose Financial Stability because it is the most misleading banner for a set of bad, harmful and expensive public policies protecting bad executive management and preventing recognition of realistic market outcomes.
So what would I promote instead? Resiliency and resolution. Resiliency means the ability to withstand stresses and shocks which will unavoidably arise in global, competitive markets. Resolution means the dispersion of assets to creditors - and competitors - when banks fail, in hopes the assets and enterprises will be better managed by other managers than the same ones that led the bank to failure. Together these two principles - if made the basis for public policy - would do more to restore sanity to global banking than anything else I can think of. Resiliency will favour more and better capitalisation, with a focus on marketable assets with transparent price discovery (e.g., traded on transparent markets and recorded on balance sheet). Speedy and certain resolution of failed banks will make management and shareholders conscious of the risks of failure falling first on them, then on unsecured creditors and bondholders, and never on the taxpayer.
We are a long way from adopting principles of resiliency and resolution, as demonstrated by the EU's continued efforts to forestall defaults while protecting incumbent managements and bondholders. Our policy makers continue to chase the chimera of financial stability, and make bad policies worse along the way."
http://londonbanker.blogspot.com/2011/12/why-i-oppose-financial-stability.html
Clinton-esque Moment and The Ultimate End-Game:
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http://seekingalpha.com/article/321072-europe-staring-into-the-abyss
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http://www.zerohedge.com/news/chris-martenson-interviews-john-mauldin-its-time-make-hard-decisions (I think the full 38 minute audio podcast is well worth listening to, but there are particularly good remarks starting around 24 minute mark - Greece and Portugal in depression, Italy in prolonged recession, moment of truth for France years down the road, U. S. can avert it's moment of truth, but will require politically painful decisions) I guess implicit is Germany will ultimately be fine, UK will come out stronger, though in new world order will they be a marginal player if they don't buy into the EU project, Spain seemed to have responsible fiscal policy in past, but got caught up in credit and housing bubble, are dealing with post-crash fallout, but seem to be putting in place that will let them heal down the road. Also, listening to that full podcast, it seems like he still may be in denial regarding change in market sentiment post-LTRO (his investing recommendations remind me of Kyle Bass' comments in video linked below about recommending to his presumably really, really wealthy investors (maybe more concerned about staying rich after inflation, rather than trying to hit a home run in stock market as Cramer commented on previously when he was broker and was selling municipal bonds to his wealthy clients) real physical assets that generate income while we go through a turbulent and uncertain 5 years - e. g. oil and gas MLPs or like Cramer was doing, buying a physical asset, apartment building, that will generate income while we wait). Whether he ultimately gets proven right, 5 - 10 years down the road, only time will tell...
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http://video.cnbc.com/gallery/?video=3000056089
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Eurobonds? (ultimately, in terms of recapitalizing the European banking system, I start to think back to trial balloons the Troika (EU, ECB, IMF) may have been sending to market in September or October 2011, and specifically Bob Pisani's voicing of what is presumably market participants wishes, are they ultimately hoping to pick up distressed European assets at a tremendous discount and profit enormously when the problem is ultimately fixed and sustained global growth can resume?) Here I also think of news articles about Merkel saying Eurobonds are not the solution right now (fiscal compact has to be in place so German taxpayers are ultimately pouring money into an endless black hole)
"It was late in September of 1998. I was flying from New York to Bermuda to speak at a hedge fund conference, and found myself upgraded at the last minute, back in the day when I did not fly that much, so I was feeling rather happy. As the door closed, a patrician-looking gentleman stepped in and came and sat next to me, immediately picking up a file and burrowing into it. I had a book and the Wall Street Journal, so I was content to read.
As soon as we took off, he asked for a scotch. He proceeded, over the next hour, to wage a very aggressive war on the diminishing cache of scotch bottles stored on board. (No, it was not Art Cashin. He doesn't fly.) It was an arduous campaign, but he was fully committed to winning.
He glanced over to my Journal and noted some headline about the crisis that had occurred the previous week. I had been following the extreme market volatility with interest, but this was in the first decade of the internet, so most of what you came by you still read in print or heard on the phone.
"They don't really know how close we came," he shuddered, his eyes showing the first signs of emotion and fear I had seen from him. That piqued my interest, and I engaged him, though without touching his precious hoard of scotch. I settled for a nice chardonnay. It turned out he was the second-ranking executive at one of the three largest banks in the country. He had been at the table in the NY Fed boardroom when 14 banks were forced to put in $3.625 billion to keep Long Term Capital from collapsing, with only Bear Stearns declining (one of the reasons they had no friends ten years later). The NY Fed president had essentially called all the heads of the banks, told them to be in the room, not to send proxies, and to bring their checkbooks. There was subsequently a lot of criticism of the Fed, but they did what a central bank is supposed to do in times like that: they made the children play nice in the sandbox. They were the only entity that could force the various monster-ego players to even sit in the same room with each other.
"No one will ever really know," he said again. But of course, soon everyone did, as Roger Lowenstein wrote the must-read real-life thriller When Genius Failed.
"We walked to the edge of the abyss, and we looked over." He proceeded to regale me with the stories of the negotiations, as the immensity of what would happen if they allowed the collapse dawned on the group one by one. They all had exposure to LTCM* but did not realize the extent of it until it was too late. Looking back, it might have looked something like the credit crisis of 2008 if they had not acted, except it would have happened much faster.
I can tell you that no one in that room wanted to write a $300-million check. It was not good for their careers. Interestingly, after two years the fund was liquidated and the banks got back their capital plus a small profit.
Now, the bankers and leaders of Europe are getting ready to walk to the edge of the Abyss. It will be a long way down, and look like the 7th level of Dante's Inferno."
* makes me chuckle (in a tongue in cheek, sadistic, self-defeating sort of way) at the irony of the line in the ficticious movie Margin Call where Tuld says there is 7 trillion dollars invested around the world based upon that (mathematical) equation (I don't think Tuld was referring to LTCM's mathematical models, but more alluding profiting from the securitzation of subprime toxic waste with maximum leverage, all using borrowed funds that need to be turned over frequently)
To me,
next real, multi-year, secular (not cyclical) bull market won't occur until markets really, truly believe that everyone gets real and deals with underlying problem* (we all have too much debt and there isn't enough money to pay off at that debt at par), and solution isn't just throwing a wall of liquidity at problem, hoping time fixes problem (gentlemanly default through slower than optimal growth, higher than desired inflation, and competitive currency devaluations) and letting future generations pay ultimate bill...
* For US in isolation, perhaps that means fundamental tax reform that so capital is properly allocated, higher taxes on the uber-rich (0.1% vs. 1%?), real entitlement reform (to me, this specifically means Medicare (not Medicare per se, but health care inflation and things like death panels and how much money is being poured into end of life without seeing improved outcomes for the population as a whole and defense spending (out of controlled defense spending with no real cost controls and competitiveness to enforce market discipline in terms of military really getting what they pay for - there was some CNBC video clip I pasted into either the OT or P&N forum last fall / winter where some politican from Pennsylvania was on Squawk Box and talked about how size of military was same as it was many years ago but how there has been tremendous military expenditure inflation / waste since then), and structural reform to economy to make it more competitive in global markets going forward (infrastructure, education, judicious immigration policy, energy independence, other) Without doing any real in depth study, Social Security just seems to need some minor tweaks to bridge the time between when Baby Boomers are withdrawing a lot of funds and millenials (18 - 24 years olds are supposed to represent larger buldge in U. S. population profile than Baby Boomers do now - I saw this comment on CNBC in some video clip where they were essentially discussing who will be new buyers into stock market going forward) And this is presumably different way of saying Al Gore's lock-box on Social Security and what Kyle Bass apparently told Barney Frank regarding I think IMF funding (it's just an IOU and we'll never have to really pay that bill - Kyle Bass comments starting at
20:30 mark, though if you have an hour, the whole video clip is well worth watching
http://www.youtube.com/watch?v=5V3kpKzd-Yw))
http://video.cnbc.com/gallery/?video=3000060748
(end of most recent, random, stream of consciousness rant)