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.
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.
The term “Black Swan” is used far too often in today’s discussions about the financial markets and it pertains to unforeseen events that cause havoc on the economy or the markets themselves. Last year was called a “Black Swan” event even though the warning signs were there for at least a year, some say since 2006. In today’s discussion the news coming out of Dubai is being hailed as another Black Swan event as they are talking about delaying payment on some of their debt on December 14th.
The events in Dubai is the furthest thing from a black swan event as we have all known about this problem for the better part of 6 months or more. The country is in poor financial shape and is, basically, insolvent without a bailout from its neighbor Abu Dhabi, the rulers of the two nations are related. I would be willing to bet that the bailout will come in some fashion, but only after an example is made of the smaller nation, but is this a black swan event? What is more a more relevant question is will a technical default on Dubai’s debt be a trigger for something bigger?
I do not believe that the Dubai situation is a black swan event as it was a known situation for some time and those who lent the country money knew they were way over leveraged and lent that money at their own risk. Whether or not this default, if it actually happens, will lead to other events, a domino effect if you will, remains to be seen. Since the sub-prime situation led to a domino effect in the mortgage market it is safe to assume there will be some fallout from a sovereign default somewhere along the way. Considering Mexico was downgraded to BBB and Vietnam raised interest rates and devalued its Dong by 5% there are definitely trembling in the FX markets that cannot be ignored.
The effects of these issues are unknown to me at this time because I do not know how China will respond, although I have my speculations, nor do I know what exposure US or European banks have to the Middles East at this stage of the game. I am willing to bet their exposure, especially JP Morgan, BoA and Citi, is much higher than we all think at this stage of the game since interest rates in that area of the world are much higher than the “norm” in the US and Western Europe. However, the real black swan events that I think are being ignored are the ones in Eastern Europe where currency devaluation and real sovereign default is actually happening and has been happening for some time now. Not that you ever hear about that from the media, but read about it sometime in European blogs or news outlets and it is disturbing.
Basically, I believe the greenback will have the stay of execution I have been expecting for some time now and it should rally nicely on this possible default news. In reality a Dubai default means very little to the US other than it is a sovereign nation defaulting, but it will trigger a flight to quality which means if the dollar equity trade is intact the market could be in real trouble. Further pressure for the greenback is coming from Japan who said it was concerned over the Yen’s strength last night in a Bloomberg story. This is an issue I wrote about a day ago as well, but essentially the Yen is up about 8% against the USD which is an issue for the Japanese since they export more goods than they import. A strong Yen is not good for them as it means their products will be more expensive in the US and China, expect to see Japan intervene in the FX markets to strengthen the USD/JPY pair, IMHO.
This puts the US at odds with its trading partners because while we talk like we want a strong currency we do not. A weak currency means we make our products cheaper overseas, narrow our trade deficit and essentially boost our GDP in a very phony way. As an aside it also makes corporate profits look fantastic if they generate any overseas business as a weak dollar means they can sell the same amount, or less in fact, and when those earnings are turned over to US dollars it looks like sales increased when they did not, Houdini earnings! We will have to see who’s will is stronger, the will of investors who are about to flee to the USD for protection which will surely drive up the USD or Helicopter Ben and our Congress hell bent on devaluing our currency to pay for their crazy social engineering and to make it look like they are leading us to recovery when they are really leading us to a Zimbabwean fate.
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