Today we saw a typical Buffet move as he surprised everyone by taking a $5B investment into BAC. Everyone is talking about it and praising how good this is for the company, I guess it kind of is, but there are others, like me, who are more worried now than before Buffet made the investment. I do not own BAC and I am not short BAC or any financial firm right now so I have no self serving purpose for this.
What concerned me is the fact that the figure was $5B just like the Goldman deal. This seems to be a figure Buffet is comfortable risking in times of duress. Buffet has billions on hand, but only $5B that could yield him 6% something isn’t right. Now, I considered the pre-Buffet chatter about BAC to be the typical rumor mill stuff, illiuid, cut off from the markets, huge liabilities that haven’t been realized and the like, but nothing real or substantially true. However, I admit the massive selling of pieces of their business did strike me as if they were concerned about things, but it did not strike me as they were going out of business it was merely troubling. However, now with Buffet adding in his now typical $5B ‘petty risk cash’ into the firm does make me concerned about BAC.
Clearly the firm needed the cash as it was presented to and accepted in, what, 12 hours. You do not take $5B paying out 6% when we are in a zero interest rate environment and can issue paper cheaper without raising any suspicions. Frankly, taking a middle of the night cash infusion from Buffet is strikingly similar to 2008 for my taste. BAC got hosed on this deal, as many others have already said, and they are paying way too much for this cash. A case can be made that BAC paid the premium for the Buffet ‘seal of approval’ but that seal did not work for Goldman in 2008.
If one followed Buffet in 2008 on the Goldman deal they lost out pretty bad. After the cash infusion was made Goldman dropped to $48/share, about $70/share below Buffets investment, and the average investor would have probably sold at a loss given the events of 2008. If they were smart they would have doubled up, but come on, it was 2008! Regardless, Buffet was too early and could have done much better if he waited, but more to the point what kind of due diligence did he do back then? I am thinking more than he did with BAC, but no one knows for sure. What I do know is the government had to follow up on Buffet’s investment to the tune of $700B as they had to save the whole system. The government bailed out Buffet in the Goldman deal, basically.
What is different this time is the fact that countries are going broke now, not just banks, and there is risk everywhere. With BAC not only do you have sovereign risk, but you have derivatives risk and a whole bunch of mortgage issues from put backs to just bad loans altogether. I believe this time is very different because it is sovereign risk and we have had this issue before… in the 1930’s. In the Depression Europe had defaults and many countries devalued their currency which hurt the U.S. as we, at that time, were a net exporter of goods. The European issue deepened our Depression and the same thing will happen this time around, unfortunately. Not only may BAC hold European debt on its books, but they might have CDS exposure as well, not that we would know about that, thanks Frankendodd. In any event BAC is one hot mess and the sad thing is that BAC will not drop from $110 to $48 because it is at $7 already, you do the math to see what a similar drop would look like for BAC.
I do not think BAC is finished, it might be, but I doubt it. I do believe it will be stuck in the single digits for a very long time. For crying out loud, they bought Countrywide, just a reminder.
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I had made a prediction last year, found HERE, that US Treasuries would be put on negative watch by Fitch and downgraded to junk by China. Well, I was wrong as it was S&P who made the call and actually did downgrade the US to AA+ which is still a joke as the government will never be able to actually repay much of the $14T it has outstanding without just printing money, which IS a form of default. China is now saber rattling about the US dollar again, but this time they are serious, I think at least, asking for a new reserve currency and I think they will get what they want as other countries have raised the same concerns.
The US deserved to be downgraded and we should be downgraded much further than AA+ as we will not get serious about debt reduction. To prove my point all we have to do is look at how the debate is structured. The politicians are all talking about annual deficits and NOT the outstanding debt load. They do all sorts of double talk to make sure the average person only believes we have a trillion or o in outstanding debt, but that trillion is just the annual deficit and no one talks about the big number of $14T in outstanding current liabilities. S&P gets it and that is why they are the first one to downgrade the US.
When the downgrade happened the Treasury Department acted quickly calling the move unjustified, political, terrible lapse of judgment, S&P made a mistake, and these are the same people who rated junk bonds AAA to begin with. While it is easy to criticize S&P for their prior actions, but relative to its sovereign debt ratings those arguments hold no water and anyone with a stitch of unbiased rationale realizes that the US is indeed in big trouble and we do not deserve a AAA rating. The worst part about this downgrade is the fact that the government is now baring down on S&P about this downgrade.
It was just announced that the Senate Banking Committee will be looking into the downgrade. While we do not know if hearings will happen or not the person close to the matter did say all options are on the table. I was under the impression that Congress wanted independent ratings agencies along with an independent Federal Reserve. Silly me I guess as the minute a ratings agency does the right thing they try to crush it with Senate investigations, but the Federal Reserve can monetize trillions in US debt without Congress blinking an eye, unreal.
What Congress is saying is be independent as long as you do what we say and want and if you decide to think for yourself, well, we will hunt you down and skin you alive. The government is acting very much like the old Soviet Union and is sending a message, not matter what we do keep us rated AAA. How can a ratings agency offer an independent review of a security if the government demands that it gets what it wants regardless of what the facts are? It is insane to think that the ratings agencies will remain independent if Congress has investigations if the US is downgraded. Frankly, this is extortion, blackmail or a combination of the two since the government is the one who issues S&P with its ratings license. Will S&P lose its license over this? I do not know, but it is possible and shameful if that is what happens.
As an American you should be angry over the downgrade, but not at S&P. You should be angry at the people who rubberstamps every bill that comes along wasting billions of dollars. You should be angry at their inability to work with each other and address the seriously obvious structural issues that will consume immense amounts of capital in the coming years. You should be angry that the Senate wants to investigate S&P while saying other quasi government agencies are left alone even though they are part of the problem. You should be angry that Alan Greenspan, Mishkin, Bernanke and every other clown out there says the US will never default because we can print our own money to pay the debt, devaluation IS a default.
You should NOT be mad at S&P and you should demand that Congress work on real problems because their lack of dealing with those problems is exactly why S&P downgraded them to begin with. We are not showing the world that we are capable of fixing any real problems. What we are showing the world is that if we do not get our way we will simply create problems were none exists and threaten the “trouble maker” with depriving them of their livelihood or by throwing them in jail. Way to go America.
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Listening to the talking heads TV and our political leaders about this debt crisis is merely subjecting you to unneeded heartburn. First and foremost, the USA is not “defaulting” on anything on August 2nd, period. The USA will not be downgraded on August 2nd by any of the ratings agencies, even though we should not be carrying the AAA rating to begin with. Bonds only default is interest or principal payments which will not happen on August 2nd as the Treasury brings in enough money to cover our debt payments on a monthly basis. Social Security checks and Medicaid/care checks will go out and the sun will rise in the East and set in the West.
All that happens on August 2nd is the Treasury Department looses the ability to issue new debt beyond the stated debt ceiling. I have not witnessed such scare tactics in my entire life and the misinformation the media and politicians are giving the public is shameful. In fact this entire debate is shameful as we are not having an honest discussion about debt and the US government. Everything you hear being discussed is merely kicking the can further down the road and I believe the markets will not let this can kicking continue on forever. Everything comes to an end at some point and our crazy spending will have to end and we all need to pay the Piper.
Let’s get real about our debt problem. We are hearing all sorts of nonsense about $4T in deficit reducing spending cuts or a combination of cuts with higher taxes over a ten year period. That means we are raising taxes or cutting spending, or a combination thereof, of $400B a year, big deal. If we subtract the $400B a year from our recent annual deficits we are still running $1 to $1.2T of deficits per year for as far as we can see. These tax hikes and spending cuts are meaningless to our long-term financial health and all the talk we are hearing from Washington or the other experts is meaningless until they lay out the facts like I just did. In my opinion even if we raised taxes and cut spending by $400B a year the USA will be downgraded within 2 years anyhow, which is what should have happened a long time ago.
The talk we are hearing from the left about wasted tax surpluses is so far off base it is ridiculous. The talk from the right about spending controls and how a 4% tax increase will kill jobs is equally as moronic. The surpluses in the late 1990’s and in 2000 were bogus to begin with. We had massive surpluses on Social Security and Medicare which the government simply took and replaced the entitlement surpluses with IOU’s and called them budget surpluses. It was accounting gimmickry and those surpluses should have remained in the entitlement programs. Do tax cuts really spur more jobs? I don’t think so and there is no proof that it does either. What spurred job growth in the 1990’s was technology. What spurred job growth in the 2000’s was housing, both bubbles I might add, but in both cases it was a new “killer app” that spurred economic growth and I do not believe we have anything like that in today’s world. Not to say we couldn’t have a new technology or other “killer app” materializes as fast as tomorrow, but there simply is nothing I see right now that will spur growth and jobs which is the real problem here.
Most people do not want to hear this, but taxes do need to go up, I hate taxes for the record. To prove my point we often hear the right complain that 47% of the USA’s citizens do not pay anything in taxes. Well, if you are going to use that line you simply cannot support tax cuts. Why would I say such a thing? Well, it was the Bush Tax cuts that caused 47% of people to not pay anything, which is not exactly true either, in taxes. The reductions in middle class tax rates were massive and the lowest tax bracket was erased. It is also important to realize that 20-30% of the population will never pay taxes because they do not earn enough to live on.
The Bush tax cuts, all of them, cost the USA $3.7T over a 10 year period or $370B a year, interesting figure don’t you think? The left says the rich need to pay more, but the rich in terms of the Bush tax cuts only account for $700B over 10 years. Raising the top income tax brackets only raises $70B a year which is nothing when we are spending $4T a year. Simply raising taxes on the rich will do nothing to solve our problems as it is the totality of the Bush tax cuts that are part of the problem. I do not like taxes, but let’s get real about this, OK? We cannot reduce our debt with phantom spending cuts and tax increases on a select few people, everyone needs to pay up.
We are in serious trouble and no one has put it all together yet. It is unreal to me that the President can say; “I cannot guarantee that Social Security checks will go out on August 3rd” and no one questioned him about why that would be. Social Security was supposed to be fine until 2036 and self funded but if we cannot issue new debt the checks will not go out… what! Well, our Einstein news anchors and the political talking heads simply do not want you to know that Social Security has no money in it, it is broke. I just talked about this earlier, our political leaders took the surpluses in Social Security and spent it replacing those surpluses with IOU’s. Since Social Security has only IOU’s in order for checks to go out the government must issue debt. That should scare you to death, we have to fund Social Security with debt. That is also why Social Security can never be privatized either. However, no one has put this together yet, unreal.
The fact that the US government cannot do anything without issuing new debt should be a real wake up call for the citizens of the USA, but no one seems to get it. The USA, the so called richest nation in the world, is bankrupt! If we cannot survive without using the credit card we are technically insolvent, if I am wrong what would you call it? The USA has also never paid of our debt, except for when Andrew Jackson was president, and simply rolled over all of our national debt year after year and this was hidden from you by using certain terms like we retired the 30 year treasury instead of we called in and paid off all of our 30 year treasuries, we simply rolled that debt into shorter term debt instruments. The USA also has “grown” our way out of recessions and past debt problems. Growing our GDP is a great way to hide the debt problem and it causes the government to do everything possible to always grow our GDP which is why hedonics accounts for over $2T of our annual GDP, hedonics is made up benefits for certain things like free checking, Google it.
You should be terrified about what you are seeing and not because we are going to “default” but because this whole show is basically telling you how bankrupt the USA really is. If our world shuts down because we cannot issue new debt we are in huge trouble and that is exactly what is happening now. The reasons I have listed here are the reason why everyone should own gold and silver as it is the ultimate hedge against out of control government spending and if the truth was ever told we have already defaulted on our debt through depreciation of the dollar and by simply rolling over old debt into new debt. If we ever really got real about our debt issues I can assure you that the story is even scarier than what I have just laid out. Luckily we have politicians that will always lie to us and hide the truth until it is so obvious you already knew it and it is too late to do anything about it. Good day and good luck.
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Insider trading is profiting from the buying and selling of a security based upon information that is nonpublic. Trading on nonpublic information is illegal and if the SEC catches you be prepared to cough up your gains, fines, being barred from the business and possibly going to prison. Well, that is if you are just the average Joe of course because the SEC views Congressional members who trade on nonpublic information as completely legal.
John Edwards said in 2008 that we live in a 2 society system, the haves and the have not’s. He was partially correct as we do live in a 2 tiered society but it is the average person and the political elite. Being an average Joe is no fun since all laws and rules apply to us and if we break them we go to jail. However, being in the political elite class is the best thing that can happen to you as you can write the laws, exclude yourself from those laws or even break those laws and all that happens is you get some bad press a censure from Congress and then reelected again. There is a 97% reelection rate for politicians in America even those who are found guilty of crimes, Charles Rangel is a great example, so getting elected is much like the Soviet system of appointment for life.
The issue of Congressional insider trading first crossed my mind in 2008 when I pulled Mel Watts financial records and saw he was trading leveraged ETF’s during the market crisis that year. The country was on the brink of disaster and Congress was pressed to pass TARP and Mel Watts, who hails from North Carolina surprisingly from Bank of Americas home office, was trading leveraged ETF’s. Did Mr. Watts know that TARP was not going to pass the first time around? Did he know it was going to pass the second time around? When did he know, he is on the Financial Services Subcommittee, that mark-to-market restrictions were going to be gone for banks? Did Mr. Watts profit at all from this information? I do not know and no one will answer the questions. Even more surprising is the SEC does not even care as they do not consider any of that insider information.
That’s right, a sitting member of Congress can know a bill that will benefit a certain company will be passed or failed and buy or short the stock on that information and the SEC says that is fine. I wish I was making this up, but I am not as this CNBC article points out. Even worse is that our elected officials, who are mostly lawyers, outperform the market regularly based on a study by some heavy weight academics. The odds of the best mutual fund manager outperforming the market over the long-term is against them, 95% of fund managers fail to outperform the S&P 500 on the 10 year benchmark, but our Congressional members can do what these professional money managers cannot do… amazing, right?
The funniest part of this is the simple fact that these people can make a killing for themselves but cannot get the country’s finances in order. Perhaps if they wasted less time making money for themselves with, apparently, questionable information we would not have this debt ceiling issue. Apparently I am not the only person who is worried that the political elites are helping themselves to illicit gains as, for the second time, a bill is being introduced that would make it illegal for Congressional members, their staff or their family members from disclosing and profiting from nonpublic information. Good luck with that, who would give up that gravy train.
I think it is pretty clear that we do indeed live in a culture of complete corruption were it really does pay to be the elite. There is also a striking resemblance to the U.S. and the Roman Empire or any other Empire that has failed in the past. As this type of corruption becomes commonplace and the citizens tend to not care or pay attention the Barbarians tend to storm the gates and the bloodbath ensues. Insider trading is terrible whether it is Goldman Sachs doing it or my elected Congressional member, actually it is worse if my Congressman was doing this as they are breaking the law and betraying my trust. It is time we ask for some accountability and stop this king of behavior from our public servants.
For the record, the Democrats tend to have better performing investment portfolios than Republicans so this is not a partisan issue, based on the study.
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I suppose it was back in the late fall and reiterated again in mid-winter that I believed the market would simply go up for no real reason until QE2 ended and then it would begin to decline as liquidity ended. It looks as though I was somewhat accurate in that prediction although you did not have to be a rocket scientist to figure that out unless you were a permabull with your blinders on and absolute faith in the government and the Fed in which case please move along.
The Fed knew the same thing I and many others did and that is why at the last meeting they emphasized that they would continue to reinvest maturing paper and interest from the existing portfolio, kind of a QE infinity if you will, but on a small scale. I do believe they will let QE2 go and not announce anything new until the fall when they see the economy really weaken. I think a couple months of sub 100K jobs reports, with a healthy BLS birth/death adjustment, along with softening other indicators such as the PMI and so forth the Fed will get the point and step in with $1T in QE since $600B did not work.
That is how it works as one QE is ineffective the next one gets bigger. The really unfortunate part is that Japan has done the same thing and it did not work but there is a big difference between the US and Japan, we are the reserve currency and they aren’t. In other words, Japan could print all they wanted because their citizens bought their own debt and the world settled trades in dollars. However, the US is limited in what they can really do in QE because as the value of the dollar sinks, and we really had a nice scare a week or so ago, the world will pick a new reserve currency on its own. You know how that story ends.
Ben knows this and he knows that his QE options are limited and he can probably only get away with 1 more so it will be big, it has to be. If that one does not work and spur growth, well, the Fed is done and completely out of bullets in a traditional sense. We would see some new things coming to the table like in 2008 with all the new facilities and such, but I have no idea what they will be or what they will look like since we do not know how things will play out.
What I do know is that we should get a nice bounce in the dollar here sending commodities lower for a bit. This will give Ben and Washington a little relief and you an opportunity to buy, buy, buy every commodity you like. I love silver, still, wheat, gold, palladium, soybeans and corn (unless the subsidy is pulled). If those go on sale buy them either directly or via the growers or agricultural ETF’s.
In the mean time enjoy watching Ben sweat it out as he will not have answers for the weakness in the economy or the weakness is ‘transitory’ which is the longest transitory period I have ever seen. Kind of like this recovery it is the longest start of a recovery ever as it gains steam and loses steam every other week. Good luck.
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