Financial Sarcasm Roundup for 05/18/15

Behavioral finance research discovered that good financial decisions are often counterintuitive.  Sarcasm can also be counterintuitive but that is not an iron law.

Credit card companies love doing business in hyperinflationary Venezuela.  Charging fees to banks that pay in hard currency (the US dollar at present) is the key to success.  When hyperinflation comes to the US, expect card companies to charge banks using Australian and Canadian currency.  Americans won't know the difference because they'll be swiping that card for a jar of peanut butter priced at $10M of worthless US currency.

Critics of the TPP's fast-track bill may be right about some of its risks.  The business elites pushing the trade deal don't care much for Dodd-Frank rules.  Wall Street sees the rules as little more than a nuisance because its lobbyists helped write the law.  Sleepwalkers at the SEC have little incentive to enforce rules that will harm their chances for future employment on Wall Street.  Waving a weakened Dodd-Frank in the progressive Left's face is a cheap tactic for policymakers who know how banks get around rules.

Fannie and Freddie securities will soon be one combined issue.  The sucker institutional investors who buy MBS will now have an easier time going bankrupt.  They only have to buy one product full of subprime mortgages for people who can't pay bills.  No one learned anything from the mortgage loan nonsense of the last housing crash.  The chase for yield in a zero interest rate world now means dumb fixed-income portfolio managers will pile into MBS all at once.

I have spent way too much time lately dealing with trivial things and people.  I must now make more effort to ignore those things and avoid those people.  I will soon discover whether a small amount of time I spent on a high-payoff opportunity was time well spent.

Please Wind Down Fannie And Freddie

The US Senate is moving on a bill that will end Fannie Mae and Freddie Mac.  This is good news.  Those two "stocks" have been millstones around the neck of the American economy since long before the 2008 financial crisis.  Putting them out of their misery is the right thing to do.

Consider the basic philosophy of securitization that these two monstrosities represent.  Securitization does not create a new asset class.  It creates a pool where high-quality assets disguise low-quality assets.  Ratings agencies gave these pools top-notch reviews for years without bothering to look under the hood.  They would have seen that subprime mortgages were garbage if they had looked but that was too much effort.

Stupid preppies running hedge funds bought these securities by the truckload.  Pension funds backed their trucks up to Fannie and Freddie's loading docks and bought even more.  These were supposedly the smartest people around.  They bought one dumb MBS and ABS after another.  Now the Fed is buying up whatever agency securities remain in the dumbest move of all time.

The fundamentals on Fannie (FNMA) and Freddie (FMCC) tell a pathetic story.  They are both trading far from their 52-week highs and traded in the pennies in early 2013.  They both have massively negative retained earnings despite years of outright government support.  Neither of these zombie entities come remotely close to meeting my personal criteria for investment.  Warren Buffett liked them years ago and got out before things got bad.

Hedge funds think they can wait out this Senate bill.  Let them all go bust.  Fannie and Freddie are like handouts to hedge fund managers who are too dumb to generate alpha.  End the handouts now.

Full disclosure:  No positions in FNMA or FMCC at this time.  

Financial Sarcasm Roundup for 02/03/14

I'm so glad US stocks are headed down.  This is more than just an opportunity to buy assets at reduced prices.  It's another big chance to throw my sarcasm in the face of bull shills who bought in at high prices.

The US and EU are promising economic aid to Ukraine.  I do not see the point of antagonizing Russia.  This risks a retaliation if Gazprom decides to jack up natural gas prices for its European customers.  Perhaps this intervention is some kind of revenge for Russia's ascension after the Syria chemical weapons controversy last year.  Ukrainians are perfectly capable of solving their own problems.  They key to understanding what's at stake is the Russian ethnic minority in the southeastern part of the country.  The southeast is Ukraine's most economically productive region with most of the country's arable farmland.  Ukraine's viability as a political entity is doubtful without control of that region.  The only silver lining is that unrest could potentially force more hot Ukrainian women to emigrate to the US and expand my available dating pool in San Francisco.

Corporations realize that the American middle class is weakening.  The class of middle income consumers is getting smaller and its disposable income is declining.  Enterprises are adjusting their business models to accommodate this change.  I've blogged before about how mid-market retailers are toast.  Extend this change to other brands.  We'll see more low-end restaurants with fast food dollar menus and more five-star venues for rich palates with fat wallets.  If the middle class ceases to exist, class warfare will be inevitable.  Most Americans don't see it coming.  The $35,000 leather hammock I saw in a high-end Union Square shop will end up in a hedge fund manager's office, or it will be looted by a rioting mob.  That linked article said hedge fund investors want a restaurant chain to spin off its high-end properties to isolate their performance.  I think those fund managers just don't want upscale chains associated with the same corporate parent as middle-income chains.  It really is about snobbery.

Politicians can't figure out how to fix Fannie Mae and Freddie Mac.  I've known how to fix those things all along.  I'd shut them down and stiff their creditors.  That would destroy the speculative investors who bought up their stock, counting on continued government lifelines.  I don't care at all.  The housing market can't reach a sustainable long-term equilibrium until every misguided government effort to support housing prices reaches a sunset.  These GSEs' continued existence tempts activists to use them to fund disastrous social justice experiments.  Landlords will have fits during hyperinflation if the GSEs impose national rent controls as conditions for securitizing mortgages on multi-unit properties.

There is so much to be sarcastic about in the world but I only have a limited number of waking hours during the day.  Others are welcome to pick up where I leave off.  

Fannie Mae And Freddie Mac On The Chopping Block

The Administration is backing the ultimate solution for the ginormous albatrosses known as Fannie Mae and Freddie Mac.  Winding them down is a worthwhile goal.  I believe they never should have existed in the first place.  These monstrosities have artificially sustained demand for housing and promulgated the mentality that a home is some kind of investment.  Wrong!  A single-family house should really be considered a durable good that eventually falls apart and needs to be replaced.

I absorbed the government sponsored enterprise (GSE) doctrine like any other MBA student.  These twins existed to provide liquidity to an otherwise illiquid market in real estate, right?  Those millions of mortgage payments aggregated into pools would provide regular income for anyone who bought a Freddie or Fannie security, right?  Hey, it all looked so brilliant.  What could go wrong?  Everything could go wrong, and it did.

People with no assets or income got loans they could never pay back to buy homes they did not need.  Bankers packaged these loans into securities that they knew Fannie and Freddie could resell to sucker investors.  Policymakers kept the carousel ride going because making McMansions available to slobs was good PR and got votes.  Everybody messed up big time and America is poorer for it all.

The Fed is now the buyer of last resort for MBS.  Reinvigorating the private investment market for all of the garbage on its balance sheet is the only thing standing between the US and hyperinflation.  The thing you need to remember is that investors who buy whatever the Fed has to sell will counteract its monetary stimulus and force up real interest rates.  Maybe that's the big plan after all.  You buy the MBS, Fannie and Freddie shut down, rising mortgage rates make your next home unaffordable, and the Fed's loose monetary policy is neutralized so the economy can resume its controlled slide down through stagflation to a lower but sustainable level of activity.  Eventually the MBS either disintegrates when its underlying mortgages go into foreclosure or its principal value is eroded from persistent inflation.  It's all so brilliant I wish I'd thought of it myself.  Wait a minute . . . I just did.

Financial Sarcasm Roundup for 12/26/12

It's one day after Christmas and I'm not any less sarcastic than I was yesterday.

The fiscal cliff is approaching and the relevant parties just can't stop launching trial balloons to impress the folks back home.  Both parties want to lower corporate tax rates in the name of competitiveness.  There's no way such a complicated reform will get done this year but that won't stop the preening and posturing.  Lowering the corporate tax rate while eliminating deductions probably won't raise revenue but it will make CFOs' jobs easier, so maybe some grateful corporate treasuries will step up their giving to super-PACs.

Japan is going nuts.  Their ruling political coalition has voted specifically to destroy the yen with monetary stimulus.  That's like putting some anemic patient on a cocaine diet in the hope that it will accelerate their metabolism.  Forget about structural reforms.  I'm so glad I don't own Japanese stocks or yen.

Some New Jersey union pension fund is suing to block the NYSE-ICE merger.  Come on already.  They should be grateful anyone wants to buy an American exchange at what is likely the high point of the U.S. equity market.  That means ICE is probably at its high-water mark too, and competition from dark pools and internal crossing networks make this merger all the more fortuitous for both exchanges' shareholders.

Here comes the mother of all re-fis.  The Administration is considering a refinancing handout to even more borrowers, along with nationalizing the rest of the secondary mortgage market.  I knew all along that Washington was going for it but it's still thrilling to see my suspicions confirmed in print.  I invite my readers to search my blog articles throughout 2011 and 2012.  You'll find several articles where I propose that large-scale mortgage modification programs would be a transmission mechanism for a wage-price spiral if the federal government flooded them with cash.  If this latest policy boondoggle is enacted, the necessary mechanism to launch hyperinflation will be in place.

The primary Treasury dealers are dumber than ever.  They're hoarding bonds and reducing sales to the Fed. This is the wrong thing for a dealer to do with the U.S. bond market at an all-time high.  The smart thing to do is unload winning positions onto the last sucker in the room - the Fed, of course - and shift the bank's business lines into things like non-dollar debt from emerging markets.

Shoppers didn't come through for retailers this year.  I've been waiting for a downturn in retail activity and this one's been a long time in coming.  Better late than never.  The average American probably has enough unused stuff in their closets and storage sheds to equip several emerging market households, and yet buying more stuff is in our cultural DNA.  The silver lining to any hyperinflationary period is that ordinary folks will be cured of their impulse to consume with abandon.

Finally, the SEC gets my Alfidi Capital award of the day (okay, there's no such thing but it sounds generous) for innovation.  The agency charged with regulating our capital markets is finally acquiring a system that allows it to watch the capital markets.  Funny, I've been using ordinary financial websites and online brokerages for almost two decades.  In true government contracting fashion, they bought a complete system rather than subscribe to terminals and feeds from Bloomberg and Dow Jones.  I recall reading during the financial crisis of 2008 that the Treasury Secretary had the ability to monitor credit markets in real time from his desk.  I don't have to name the Wall Street players who have a vested interest in the keeping the SEC blinded, in exchange for future private employment for the agency's top investigators.  In that context, I expect the SEC's new market monitoring system to work exactly as intended, especially since initial access to the system will be limited to a handful of people.  Read between those lines.

Sovereign Insolvency Iceberg Blocks Mortgage Principal Writedowns

Something has been missing from the economy's alleged recovery.  Despite assertions that Americans are paying off their debt overhangs, our great nation's debt/GDP ratio still rises.  Home mortgages remain a large part of this indebtedness with little hope for relief in sight.  The federal agency charged with overseeing Fannie and Freddie warns us that mortgage writedowns will require massive capital injections from the taxpayer.  Forbearance preserves the GSEs' balance sheets at the expense of household balance sheets.  This in turn preserves the balance sheets of asset management firms and their hedge fund and pension fund clients who own mortgage-backed securities.  Credit Suisse provides a bit of a theoretical assist by arguing that mass principal writedowns won't help homeowners.  That argument is a bit too clever.  Writedowns may not help homeowners borrow in the future to keep lenders like Credit Suisse profitable, but they have potential to help in the present by preventing defaults and thus keeping non-performing properties off of bank balance sheets.

Writedowns do cause pain.  They can wreck homeowners' credit ratings, but this can deter them from future borrowing that may prove unhealthy.  They wreck the MBS/CDO holdings of investment funds, which in turn means pension plans will be underfunded and fixed-income retirees will get smaller checks.  There is no free lunch in a nation carrying many forms of massive debt.

Mortgage principal writedowns can sometimes be a fair thing to do.  They preserve the legal essence of a debt contract and assure the creditor that at least some of the outstanding principal can be repaid, and let an underwater homeowner stay in their house.  Sovereign debtors do it all the time with their bonds.  Greece is negotiating haircuts right now with European banks that own its debt.  If it's good enough for nations, it can be good enough for homeowners too.  Someday creditors will learn not to loan money to borrowers - be they nations or households - who have no hope of paying it back.  Until then, writedowns can take some sting out of poor lending decisions and allow parties to save face.

Nota bene:  I do not owe any long-term debt, and I do not carry revolving credit card debt because I pay my bills in full as they come due.  I cannot benefit in any way from mortgage writedowns because I have never taken out a mortgage.  

Postal Implosion Presages Uncle Sam's Drawdown

The phrase "going postal" needs rehabilitation.  It paints an image of a U.S. Postal worker about to blow a head gasket on a rampage.  Our society can do better than this.  From now on, let's agree that "going postal" should refer to the U.S. Postal Service going bankrupt from lack of mail volume and high fixed costs. 

The sad story of a quasi-government agency losing money even though it has a near monopoly on its market is common to Amtrak, Fannie Mae, and Freddie Mac as well as the post office.  Whether their problems stem from bloated costs and obsolete strategies (Amtrak and the Postal Service) or insane mandates to underwrite malinvestment (FRE and FNM), the best solution should be the same in all cases - pull the plug.  The American empire's experiment in living beyond its means is coming to an ugly end.  This will force a radical reduction in the government's ability to fund stupidity. 

Fed Destroys Your Money

The Federal Reserve has just thrown down the gauntlet to China and other big buyers of U.S. sovereign debt.  It has announced that quantitative easing, phase 2 will begin the imminent devaluation of the dollar and continue indefinitely.  The first pile of junk food in Helicopter Ben's shopping cart will probably be junk-bond grade MBS backed by nonperforming mortgages originated by Freddie Mac, that ward of the state that continues to lose your money. 

I have a small portion of my net worth in short maturity Treasuries that will soon roll over, and an even tinier portion in California muni bonds that mature in late 2011.  Those portions are going to stay small indefinitely (i.e., for as long as the Fed remains indefinitely insane).  The bulk of my cash is looking for a good home in stocks of commodity producers and transporters.  Inflation is on its merry way to your pantry and gas tank. 

Friday's News In Brief

Prepare yourself.  Here it comes. 

Shippers won't be held hostage to trucking costs and are looking for intermodal shortcuts.  This is bad news for truckers who raised rates thinking they had pricing power (yes, YRC Worldwide, I'm thinking of you but you're not alone in that folly).  It's good news for rail and barge carriers.

Speaking of YRCW, it's preparing to triage New Penn if greedy union drivers won't vote for its survival.  I wish I had shorted this stock last year.  Now I just get to watch it spiral down the drain.  I wonder if the asset-backed securitization facility they just renewed will have seniority over other debt holders in the event of liquidation. 

Market observers think trade with the Middle East and Africa will drive Chinese growth.  No argument there, but consider what Chinese strategy demands of this trade.  Their plan is to send value-added finished goods from China to their new resource colonies, primarily in exchange for oil. 

It's a bumper crop for grain exports through the Great Lakes to points across the Atlantic.  Name me some publicly-traded barge operators on the St. Lawrence Seaway so I can have new companies to blog about.

The whopper of the day is the astronomically high expected tab for Phoney and Fraudie - at least $154B.  This presumably excludes the costs of servicing or foreclosing all of these fraudulently securitized mortgages we're just now discovering.  Another TARP is politically impossible, as even folks in Ireland are catching on to bailout scams.  This leads to inevitable big-bank collapses and forced resolutions.  Equity owners and bond investors will eat a big fat mud pie.  Investors who've been sitting this spectacle out - like me - will buy up tracts upon tracts for a song.  Bring it on. 

Remember how the stimulus was supposed to fix America's dilapidated infrastructure?  Surprise!  It never happened and now we have to live with reduced future prosperity thanks to that lack of foresight.  This is the one thing that will cement America's descent into the world's economic basement.  I take issue with the Economist's statement that there is "no urgent need" for high-speed passenger rail.  Excuse me, but Peak Oil will price air travel out of reach of the shrinking middle class.  That's why people will be screaming for an alternative to cars and planes in about a decade.  Nothing could be more urgent, and there is plenty of rail capacity available for both freight and passengers when rail carriers are double-stacking containers. 

I hope you enjoyed reading all of this wonderful news about your immediate future.  Have a great weekend everybody! 

Full disclosure:  No position in YRCW, FNM, or FRE. 

U.S.A.'s Credit Rating at Risk From Future Foreclosures

We're going to hear more warnings like this from S+P due to Uncle Sam's debt load:

The U.S. dollar is still the most important world currency, Standard & Poor's said on Thursday, but added that rising levels of U.S. debt and dependence on foreigners to finance much of pose risks to the currency's primacy. 

Without a credible plan to rein in fiscal spending, the agency said external creditors could reduce dollar holdings, which could put pressure on the United States' 'AAA' credit rating, which keeps government borrowing costs low.

Why worry?  After all, aren't we Number One?  Well, we're certainly tops in rosy assumptions about home foreclosures:
 

The Federal Housing Administration will need taxpayer money because it failed to properly project how borrowers with FHA-backed loans are affected by job losses and diminished equity in their homes, New York University professor Andrew Caplin told a House panel Thursday.

 
 
Wait a minute, why would the FHA need a bailout?  What do you mean they haven't realistically modeled future loss estimates?  Isn't the housing crisis over?  Nah, of course it's not over, in fact it's probably just getting its second wind:
 

The housing market is facing swelling ranks of homeowners who are seriously delinquent but have yet to lose their homes, and this is threatening a new wave of foreclosures that could hit just as the real estate market has begun to stabilize.

 
The funny part is that on PBS's NewsHour today the anchors were talking up the end of the recession.  Baloney.  No way is this over.

Housing Crash Redux 2009

This is it. No, not Michael Jackson's posthumous album. I mean the beginning of the second part of the housing bailout:

Problems at the Federal Housing Administration, which guarantees mortgages with low down payments, are becoming so acute that some experts warn the agency might need a federal bailout.

That says it all. I don't think I have to quote any more from the NYT for you to get the picture. I'm so glad I went on record last year with my opposition to the housing bailout. I knew that if America started down that path it would spell the end of our status as a great power. A second mortgage bailout will cement our national decline and ensure that any hope of reversing it will be monumentally difficult within the remaining lifetime of Generation X.

I'm gradually building cash that I can use after the market tanks to buy equities. I don't think I'll have to wait very long for another real estate-related implosion to bring that on. If both FDIC and FHA need simultaneous bailouts . . . hello 1932 all over again.

Day Traders Never Learn

Some people just shouldn't be allowed to invest their own money. Day traders are playing games with Phoney and Fraudie:

Shares of U.S. government-controlled mortgage lenders Fannie Mae and Freddie Mac soared for a second straight day on Tuesday after attracting the attention of day-traders looking to turn a quick profit with these low-priced household names.

Attention idiots: These two stocks are worthless. Worthless. They have no assets and lost billions of dollars last quarter.

Too many otherwise productive adults are willing to bet their hard-earned money on stocks that don't deserve to exist.

Nota bene: Anthony J. Alfidi has no position in FNM or FRE.

Phoney and Fraudie Suck Your Wallet Dry

Those two fantastic twins, Fannie Mae and Freddie Mac, are at it again. They just can't get enough of Uncle Sam's unlimited wallet:

Freddie Mac, the mortgage-finance company under federal control, needs as much as $35 billion more in federal aid, and Fannie Mae may soon ask the U.S. Treasury Department for rescue funds as well.

I'll spare you the details, but it's clear that their exposure to bad home mortgages is getting larger. There is no end to this in sight. If these two pathetic excuses for finance companies can't be straightforward enough to identify their full exposure to junk mortgages, then other firms can't be far behind.

Take a look at the banks that seem to be successfully navigating the Alt-A implosion, specifically JPMorgan and Wells Fargo. There is no reason to believe that their risk management techniques are any more robust than those of Merrill Lynch or WaMu. They all hire from each other! The same moronic, preppie MBAs hop from firm to firm with their "talent" for massaging turds into gold bricks.

Merrill Lynch and WaMu dissolved partly because they had a weak handle on their true exposure to bad loans. JPMorgan in particular will now have to take a "one-time" charge (who really believes it's just once?!), as the article specifies further down, as a result of WaMu's misrepresentation of the quality of the assets it sold to Freddie. Auditors at JPM and WFC will be very disturbed this year when a lot of their "prime" mortgages are revealed as garbage.

My decision to turn bearish again on XLF is fully justified by the above. Stay tuned for more bloodletting.

To Budget Or Not To Budget

Folks at the OMB have secretly realized the extraordinary damage that the takeover of Fannie and Freddie are about to do to the finances of the United States government.

On Tuesday, two days after the takeover, officials at the Congressional Budget Office announced that the deal had bound the government so tightly to the firms that their business operations, assets and liabilities should be included in the government's balance sheets.

Yesterday, Office of Management and Budget director Jim Nussle said he had decided differently, but may "reevaluate their budgetary status in the future, should conditions change."

Note the political wiggle room left wide open in that last quote. The OMB will get its chance to "reevaluate their budgetary status" before you know it.

You can't have your cake and eat it too. You can't announce in loco parentis control of a prodigal son without having to answer to his creditors. You can't take over two out-of-control mortgage pool issuers without assuming responsibility for the debts they've incurred.

Welcome to the Sovereignty Crunch.

Phoney and Fraudie on the Budget

You know I just can't resist kicking a dead horse. Two of them, in fact.

Any decision to add Fannie and Freddie to the budget wouldn't automatically translate into an explicit government backing for the companies' combined $1.7 trillion in unsecured debt and $3.5 trillion of mortgage guarantees. Granting the full faith and credit of the U.S. would require an act of Congress to change the companies' legal status.

I like how some market observers suspend their disbelief when examining the Treasury's actions, as if they're watching some Hollywood action fantasy. Allow me to clarify: The U.S. Government has made it absolutely clear that it has committed its full faith and credit to the solvency of Fannie Mae and Freddie Mac's debt obligations, placing its own solvency at great risk. Mainstream commentators seemingly don't want to come out and say this, because if they said it now they won't have anything fresh and entertaining to write about for the next few months.

Here's a thought: Why not just fold these two bankrupt zombies into Ginnie Mae? Would that really require a team of Constitutional law specialists or a change in the law?

The Haiku of Finance for 09/08/08

Paulson's bazooka
Fired at Fannie and Freddie
Scored a direct hit

Bye, Bye, Miss American Pie

Future historians will mark today as the most important turning point in the financial history of the United States since the Great Crash of 1929.

This is the day that marks the beginning of the end. Today's announcement of the conservatorship of Fannie Mae and Freddie Mac is the beginning of the end of several very important things . . .

. . . the end of the post-World War II financial system

. . . the end of the U.S. dollar's hegemony as the world's reserve currency

. . . the end of short-term U.S. Treasury debt as the ultimate safe haven for global finance

. . . the end of the United States as the world's sole superpower.

All of these things must now come to an end because the assumption of Phoney and Fraudie's financial obligations will require the U.S. government to issue massive amounts of new debt to supply these GSEs with enough capital to stay afloat. The new debt will need to be issued at much higher interest rates than the 4% or so currently available on 10year T-bonds, just to make it attractive to foreign central banks already loaded to the gills with GSE debt. With Helicopter Ben unwilling to raise the Fed funds rate, the yield curve will quickly steepen.

This new debt is eventually going to be inflated away by Helicopter Ben's printing presses. Mark my words.

Hello, massive infation. Goodbye, U.S. dollar hegemony.

Secretary Paulson will have to fire his bazooka after all, and its backblast will blow the U.S. economy out of the water.

The Haiku of Finance for 09/01/08

Fannie and Freddie
Two giant mortgage monsters
About to collapse

The Fed on The Fed

Someone agrees with me about the Fed hurting its inflation-fighting mandate. And he works at the Fed! In an important job!

"The current stance of policy, while understandably calibrated for responding to the immediate financial crisis, will make it difficult to achieve our mandate for price stability over the longer term," Federal Reserve Bank of Kansas City President Thomas Hoenig said in remarks prepared for delivery at a central banking conference in Argentina.

He's a dissenting voice, so let's see if Helicopter Ben can keep a lid on him at the next FOMC meeting. One problem is that he focuses on core inflation, a Nixon-era politicized gimmick designed to fool people into thinking inflation is lower. His call for supervision of non-bank institutions is a harbinger of things to come. Look for this meme to sprout full-bloom after The Crash.

"To return to my analogy, this means doubling back across the river to a more historic central banking role, and making clear a future crossing would be rare," he added. "And we must accept that the credibility of such an assertion will depend critically on how future crises are handled."

Too late! We've already crossed the Rubicon (and that analogy is more potent given America's imperial pretenses). That "future crisis" is maybe a few weeks away, because as soon as Alt-A and prime mortgage delinquencies explode, the Treasury will have a heck of a time figuring out how to nationalize Phoney and Fraudie without collapsing the stock market. I don't see how they can succeed, which is why I'm out of U.S. equity indices and in gold.

Sure, I talk my book. Just like every investment professional should.