First, let me just thank London Banker for giving me the opportunity to make an “official” contribution to this website. In addition, I’d like to start of with an acknowledgement and thanks to Nouriel Roubini, The RGE’s Lead Analysts, and the RGE’s Bloggers for helping educate myself and many others on the economic crisis, and the worldwide implications and effects it has had and will continue to have in the various interrelated arenas of our global community. In my past 2 years on this website, I have shared more interest and insight on worldly events then I have with most members of my family, my friends and/or my inner circles. You all deserve a pat on the back for being part of that as well as congratulations on finding this website. For those of you here, your subscription date to the RGE marks the timeline on where you opened up your eyes and mind to the crisis that we now face.
With this crisis, it’s important to know where we’ve been and what was done. We can learn from our mistakes, make corrections, and hold people, companies and governments accountable for their actions and inactions. …but at the end of the day, it doesn’t change the past or bring anything back. The only real solution to our crisis is to keep moving forward. Those who adjust and adapt the most efficiently will be best equipped for what tomorrow brings.So without further ado…
The “Powers” That Be… (Past, Present & Future)
For many of the bloggers on Nouriel’s page that know of me and my past contributions, feel free to skip this section. (just read the “present” & “future”) I am just rehashing some old forecasts that I made, to validate why newcomers or readers might want to take a listen.
For the past 15 years, I have worked on a managed the bank operations side of Wall St. I have learned quite a bit about the many facets of the market and how they affect one another. I have taken that knowledge and pooled it together with data from the past and present, and created simulated market economies to help me reasonably forecast potential economic outcomes. In addition, I use a sensitive cognition of trends to help me forecast things that data can not show you. (Following chatter, confidence, flows of cash, manipulation, intervention, etc…) In addition, I am not, and have never invested with the only exception being a 401k. (I have only given advice to friends and family) I believe this impartial view helps me create a better unbiased opinion. (In other words… I’m not selling my book a la Goldman Sachs)
Here are the blogging highlights:
The Financial War: Over a year ago, and well documented on this website, I stated that a Financial War was taking place. Not bombs and bullets… but instead through bits and bytes. I said this was accomplished through access to credit and well timed coordination between The Powers That Be. (TPTB) At the time, this “theory” was considered more “conspiracty theorist”, as it shook the foundation of “free markets”, but now we know it to be “fact” as the coordination have become well documented and deemed a “necessity to save the economy”. I stated that the market gyrations could be “reasonably calculated” since the problems that were occurring were in the Fixed Income Markets. These “fixed losses” would lead to mandatory losses in other areas of the economy based on the loss of the overall supply of credit. I went so far as to spell out distinct friction lines where the market would turn. This was dubbed by some bloggers on this website as: “The RH Shakedown”.
As you can clearly look back, the markets dropped precisely to the 10,100 10,700 range in late September. Shortly thereafter, the US Gov’t lost control of the markets which required the bailout plan construction. At this time we saw the markets drop to my 8,500/900 low. (These market closing lows have still held.) These calls were made IN JANUARY! I did not see a single parallel forecast anywhere in mainstream media or from the so called “experts” at that time that has come anywhere close to my call.
The Surprise Rate Cut: In addition to the equity market call I also called for the FED to make a surprise rate cut to the Fed Fund Rate. This was days before the cut was made, and had rarely been done in recent years. Since then, predictions like this have become more mainstream, but at the time, this kind of call was seldom heard:
“On the big swing down, GS will give the signal, and cash will fly in. (i.e. I wouldn’t be surprised if there is a surprise rate cut, prior to or after the next Fed meeting) – Written by Rich H on 2008-01-15 21:41:30
Gold: I made a call in the fall of 2007 on where the value of gold would go stating: “we’d see a peak between $1,000 – $1,100”. In early March when we topped $1,000, I said we peaked and that: “we’re approaching what I deem to be peak values, and I decided to throw out the concept that “gold” might no longer be the right play. (based on it’s turning point potentially being right around the corner”. (this prediction was not popular on this website, and drew ire from the many goldbugs. In addition, it was contrary to “expert” calls that saw gold shooting through the roof. Schiff was calling for gold to go much higher at the time.)
This theory flew in the face of both inflation and economic crisis as gold has typically been a safe haven against those forces. My theory still holds that gold is just a good hedge and that the public needs to rid their dogmatic views on its eternal importance in the new world economy.
I said: “Gold is a useless commodity! (At best, it’s a less then average “conductor” for electricity) Its recent run is as a hedge against bad financial news. It has soared. …but the second that those “fears” become “reality” the value will crash harder and faster then the market since there would be no cash to pay for it. (sorta like handing a hot dog vendor a $1,000 bill. He’ll say sorry, I can’t change that for you.) So you don’t get your tasty hot dog. The dollar is playing a similar game right now. All foreign currencies are soaring against the dollar, but once that “fear” turns into “reality”, the market seems to return back to the good old greenback.”
This can all be read in Nouriel’s archive from March 4th 2008 under the title:
Will Default Rates on Muni Bonds Sharply Rise During the Recession? Most Likely: Yes. (From March 4 – Nouriel Roubini)
(If you read the whole blog from that date, you will see all of the Gold posts as well as the foundation for my “principal reduction on housing platform”. It was a great re-read of a past blog.)
Oil: As far a as peak oil price goes… I nailed it. It’s high close was $145.29. In addition, its rapid decent also found my flux point of $96-$110. But I admittedly am surprised by its greater drop to below $70, and now am not sure what’s to stop it from dropping further. On a moments notice, it could fly back up too! I’d hate to speculate on where it’s going because at this point it will strictly be a GUESS.
Below is the posting from June 2008: – Miss America on 2008-06-10 11:01:40
“Now at the beginning of hurricane season, at the beginning of USA/EU SUMMERTIME, when consumption of oil peaks, when Morgan Stanley is calling for $150 oil, and GS ups the odds for $200 oil… I’m putting my RGE reputation on the line again! I truly believe oil will make a rapid decent to the $90-110 range (a 20-30% drop from peak) …and in the event of a flare up, I don’t picture oil breaking $145..”
***this post was also the birthplace of my “Evaporflation Theory”***
In addition to calling the peak on oil, in mid July I explained my theory on the Psyche Effect of oil and it’s lagging affect. The title of that blog was:
“The Broken See-Saw” – Miss America on 2008-07-24 12:51:07
In it I stated that: “I invert the oil chart, and move it 3 months ahead of the S&P. (I also cut Oil down % wise to a comparative level) The 3 month lag allows me to see beyond the cash flow (and market euphoria), and instead take a look on the price pressure that is caused. Once again, the lines do not diverge too much over the course of 2007 through March of 2008. Then, in late-March/early-April, the lines diverge again. By June, the divergence is violent!”
This oil lag pinpointed the first 2 weeks of October as the peak pressure point on our market.
In addition to those posts and calls some additional early forecasts that have played out include:
- I fleshed out the Broker vs Broker vs Hedge Fund battle in my “Survivor Wall St” contribution.
- I put together the platform for: The Debt Servicing Company (back in February) which mirrors what the gov’t is now trying to do.
- The collapse of China’s Market in my “Ch-Enron” contribution as well as a call to question The EU’s ability to coordinate a bailout package that would eventually be necessary but possibly inequitable? (and what the possible results would be.)
- In January I stated that multination stocks that sell cheap products will do well as they can easily pass inflation cost on to their customers (Quoting: MCD, BUD, KO. In general, they have beaten the broader market.)
- The Bailout plan: I have offered countless contributions for “concepts and theories on what needs to be done. (Many of these theories pre-date presidential calls for similar actions and ironically mirror some concepts.)
The current day situation leaves everyone at a loss. Do we panic? Do we hunker down? Is this a bottom? What do the experts say? What qualifies anyone to be an expert? There is plenty of money out there… Where should it go? Where is it going? There is too much debt out there… Where will it hit? To try and answer any of these questions with any degree of confidence is impossible. Anyone, (including me) who thinks they have “the answer” is flat out speculating or lying. Educated guesses are today’s best forecasts. ..and that is all I can offer anyone: An EDUCATED GUESS. Being “well informed” is no longer a qualification for success.
Over the past week or so, I read a lot of chatter on the build up to Lehman’s CDS payday. There was an air of panic for some… To situations like that I say: Don’t you think the market movers have already prepared for events like this? Big players position themselves well when they know what is coming. In today’s market, A premium on “Risk Analysis” is not only important for your company’s well being… but it’s important for your survival through the end of that trading day!
The real weight of the moment remains in 2 simple words:
Transparency & Confidence.
Without transparency, confidence and value can NOT return to the market. …but transparency needs to be found without destroying the economy. Based on the current debt to credit ratios, full transparency can not be attained as it is impossible to meet the net obligations for future earnings at any current moment. This obligation forces the Perma-growth concept as a necessity. (Or at worst, Perma-maintain) Right now, the real economy is not growing on par with inflation or demands of our current obligations so there is less money available then what is needed. This phenomenon causes a constant shift in where that loss is.
To further add pressure to this death spiral, you now have redemptions outweighing subscriptions in the market, along with negative savings, increasing defaults, increased jobless claims, halting of 401k matching by companies and of course depreciating home values. Small to large, the trickle down of all these factors adds up to a large net loss. The money that exits leaves a void that must be filled, or the next round of “hot potato” losses spins around the death spiral.
So where to start?
Equal liquidity/credit needs to be pumped in on par with debt destruction and redemption. The worldwide bailout plans have started to meet that immediate need. …but they can NOT continue this path indefinitely. They must maintain a certain level of confidence until the markets can support their own failures and breed their own success. (Failures are NECESSARY to establish Risk vs Reward, and thus provide the free market its price discovery.) In the soon to come “calm” from liquidity injections, our markets will need to create/regulate a system that restores transparency to the markets. If our market/government/regulators fail to provide expeditiously, the current liquidity that has been added, will need another injection or the death spiral will continue. Confidence will erode unless the shell game ends.
So with our friction line being set between 8,000 – 10,000 (although I see 8,500 being the typical dip)if we take a look at the equity markets in comparison to anything else that we can possibly own, we have to ask: · Do you believe that the markets have fallen enough by %?
· Do you believe that they should fall further? Were these markets so overpriced to begin with that we still have room to go? (remember… there is a large amount of legal tender that is floating around the world. Those slips of paper represent something. A job done, a need met, food, shelter, etc… That tender needs to have a home.)
· Or did the markets grow proportionate to the needs of our current society? (one could even ask… Have they grown enough? There are still people starving/homeless/etc… out there, so maybe we haven’t even reached our potential yet?)
My educated guess is that we are at a bottom that we will see repeatedly until the fixes that needed are met. A few weeks ago I posted my plan which parallels many of the current actions that are pending. It also has some things that haven’t been addressed. I still believe in this and have copied it below: (If you already read this, feel free to skip it)
Rich Hartmann’s / Miss America’s Plan
The world is now looking for someone to blame for the crisis that now exists. We must investigate the causes so we do not repeat our past actions, and so we can hold irresponsible fraudsters accountable for their actions. But in the meantime we must also act immediately on what we do know to address our urgent needs. To prevent a catastrophic financial collapse, we must provide liquidity to banks to keep markets from freezing. Likewise, homeowners must come to a realization that they are holding overpriced illiquid assets too. (Their homes) New regulations as well as regulatory bodies need to be created.
To flesh out what I believe would be a fix for the current problem can be detailed in a multi-level approach. The key points are as follows:
1. Up to $1 trillion credit LEASE.
2. Home Principal Reduction – I have argued this for quite some time and have worked through economic models (that I created) which show recapitalization taking a few short years.
3. Create Central Regulatory/Depository for MBS market, CDS market, and Hedge Fund / Private Equity groups.
4. Pair off of CDS market. – To reduce counterparty exposure, and lessen the need for the allowance of failure.
5. Backstop FDIC on new deposits up to $200,000.00
6. New Regulations on shorts and Derivatives
I have worked through quite a bit of these scenarios and can provide a more detailed approach (if I was employed to do so)
1. – $1,000,000,000,000.00 lease:
To keep credit markets moving, the US Government lease liquidity to ailing institutions versus illiquid securities at par value, with pledged collateral from the institution to cover over 102% of the amortized difference. (Mutual Funds, Pension Funds, etc… can exchange at more favorable rates to meet net redemption outflow) An initial cap of up to $1 trillion can be placed upon this. (I have calculated the need for a net of $1.2 – $2.1 trillion in liquidity that will be needed on a short term basis. $1.2 is likely. $2.1 is doomsday.)
2. – Home Principal Reduction: (10%, but we can do up to 20%!!!)
In a capitalist market, you CAN NOT show blind allegiance to any particular group. If you bailout every bankrupt person, then responsible people will choose not to pay. You can NOT create fail/reward system. A balanced approach with an option of anyone to receive a 10% principal reduction of home loans is needed. (many of the underlying secondary market securities have already been written down this much or more already)
For participating banks that are willing to perform a principal reduction, they will receive a parallel lease line to liquidity to cover the immediate loss.
At the same time, an “open receivable” will be created for the amount written down. (You can chose not to have a reduction which will be discussed below, as well as how the “open receivable works)
A) – At 10%, it will take banks approximately 19 months to recapitalize the losses from the write down through P&I alone.
B) – By reducing the monthly bills of every person, you are putting IMMEDIATE capital in the US citizens hands. While at the same time you are putting equity in the home owner hands, which gives them incentive to stay in their home.
C) – The extra cash that is “saved” by the homeowners will flow (most likely) to 1 of 3 places.
1. Pay off debt
3. Under the mattress.
In the first 2 scenarios, you have cash flowing back into the system. Debt repayment will help aid putting a floor under default or the confidence/fear of default by investors. “Savings” will immediately recapitalize the banks, thus helping start an upward cycle (that may speed up a recovery that would be faster then the aforementioned 19 months) Under the mattress… will have to be addressed. (this can be done through increased bank rates and raising of FDIC caps.)
2a) – Home Principal Reduction (caveats):
* For those whom have paid off their MTG debt, or choose not to write down their principal, a tax break will be created to reward them annually (similar to a STAR reduction)
* For all those that choose to reduce principal, an open receivable is kept on the books for the length of ownership of the home. If the housing market were to recover and you were to see a windfall, the open receivable would have to be paid prior to seeing a profit.
For example, You have a $200,000 mortgage. The bank writes down 10%.
* The bank creates an open receivable for $20,000.
* The Gov’t leases the bank $20,000 liquidity in exchange for that receivable. (Based on lease rules and pricing of risk on that receivable the Bank also offers collateral to cover the amortized difference)
* The homeowner now has a $1,140 monthly payment as opposed to a $1,266 payment, saving them $126 per month which gets infused back into the financial system (It’s a “rolling stimulus plan”. – For a $417,000 conforming loan, the savings would be $264 per month.)
* 5 years from now, the housing market recovers. You sell your $200,000 home (which you were only paying on $180,000) for $230,000. Instead of walking away with a $50,000 profit (230k – 180k = 50k) you would be force to pay off your open receivable first. So you’d walk away with $30k (or maybe less if interest is added???)
3. Create Central Regulatory/Depository for MBS market, CDS market, and Hedge Fund / Private Equity groups.
A Debt Servicing Corp – which I have posted here before is a start point for the MBS market. Parallel market coordinators will also need immediate creation for the CDS market, as well as a central regulatory for the HF/PE business. Without TRANSPARANCY CREATION, there will be no CONFIDENCE restored! It goes in that order.
4 – Pair off of the CDS market.
Through a central regulatory (not the multiple smaller clearing houses), more sophisticated universal systems can pair up unnecessary derivates, and write them against one another. This will reduce counterparty risk/exposure, as well as reduce, net overall debt. For those familiar with TBA’s, it would work in parallel form, by “round robin” payments and straight pairoff wires. An eventual overhaul of this market needs to take place as net CDS moves should not outweigh what they insure.
5 – FDIC insurance raise.
For confidence, and inflation adjustments, the $100,000 will need to be increased. (I won’t bother explaining any more as I believe this has finally been addressed in the current package.)
6 – New regulatory rules
This list can go on and on… but for starters, some simple provisions should be made. “Shorts” should not be banned! Up tick rules should apply. In addition, shorting must find direct lenders to short from. (No more borrowing from Mutual/Pension Fd’s etc…) I believe a direct “conflict of interests” exist here! In the current environment, MF/Pen funds lend securities for 2 typical purposes. Collateral & Shorting. These funds are paid well for the loaning of their securities. …but so are the custodians and so are their advisors. If a “short” is successful, the broker makes money, as well as the custodian, as well as the advisor. …but the underlying investor is now holding a depreciated asset. If MF/Pen fund holders knew their assets were being used against them to bring down the value of their own assets, the never would participate in them (regardless of the fee generation) Most prospectuses of MF/Pen Funds do not state that their assets are being loaned for this purpose. (so investors should be protected from this self destructive process that they aren’t even aware of.)
In addition to these “rules”, accountability for destructive actions must be more aggressively prosecuted. Bear gets taken out by Goldman: By GS cutting off relations, the risk on Bear bonds rise 600bps, and investors immediately pull their cash and $28billion leaves the door in 3 days. The move was well coordinated and done with destructive aim. JPMChase (with GS backing) cuts off liquidity to Lehman through the Tri-party window (by cutting/devaluing their collateral to pennies on the dollar) Lehman is left without cash to cover standard obligations as they cannot raise enough collateral. $200 billion leaves in a no time. In these cases, cannibalism can be euphemized as self preservation. …but in fact, they are aggressive acts of financial war.
Without liquidity added to the credit crisis, consumer stimulus/bailout, new rules, new regulatory’s, we are without a sound direction to go. Confidence will return after transparency has been returned to the investor. Credibility will be returned after fraudsters are held accountable.
In addition to what I originally wrote, I need to specify the importance of principal reduction of existing debt to point out that the rolling stimulus that the general public will immediately feel, as it will put a floor on net redemptions of the broader economy. It will also create a sink or swim line where failure in the housing market would be allowed to return. (for example, if there was a net 20% principal reduction and you still can’t work through it with your bank, then maybe you were meant to be a renter.) Likewise, it will likely provide us with a floor on house prices that should eventually trend upwards from there at a reasonable and monitored pace.
Another course of action the government can take would be a potential “nationalization” of certain utilities. Or a rolling credit for xx% of the average household utilities. This would also be an immediate rolling stimulus package that can springboard the economy. The ultimate goal of a plan like this would be to give our government incentive (rather then just political gesturing and lip service) to work on an immediate transformation of making individual homes more self sustaining for their energy needs.
As a worst case scenario, we will see what I call evaporflation occur in broad daylight. As it is now, I see this being the best description for the hyperinflationary credit injections, coupled with debt destruction, and debt forgiveness that do not give way to inflation. (I have not been able to complete my economic sim-model for this as it grew way too complex.) A coordinated worldwide move will be called for at some time that will flesh out the actions that will mirror this eventual move.
Let’s just call “evaporflation” a hunch and a cute name for now, and let the coming future provide the official hindsight definition.
For all of Nouriel’s great predictions/forecasts, I believe this is the one area where my opinion greatly differs from things he has stated. He has said that there is a risk of the US gov’t/economy becoming insolvent. To this, I believe the great professor flawed. I state that it can not BECOME insolvent, because it HAS ALWAYS BEEN insolvent. That slight technicality makes all the difference in the world. It is the reason I believe this one aspect is flawed, and the reason why insolvency can never happen. It’s illogically, not logical.
My wife recently quipped; “people should sell their “rainy day” funds off and just buy umbrellas with what’s left over.” I thought the line was cute, so I shared it. Unfortunately, though, I do not see this as the time to sell. Instead, it’s the time to start doing homework. When price discovery is eventually found, certain stocks will likely post modest gains as they were unnecessarily brought lower then where they should’ve been just because the overall market dragged them down. Likewise, the opposite will exist where it will be a race to zero. At the same time, it is not a time to buy.
I believe that money that is “stuck” in the market (401k) is what really needs to be assessed. Depending on your age and financial situation, and if you are open to risk, I believe we are at a “buying opportunity” on the equity side of the 401k market. I believe bond and money markets have only a “slightly” better risk factor then equities at the moment, but their reward factor is too low to justify keeping it there in that “safe haven”. The current market volatility will test anyone’s fortitude, but if you don’t mind the stress, then I say jump on the 8,000-8,500 DOW marks and re-shift on the 9,500-10,000 side. Rinse lather and repeat as we bounce in this range for some time. (but first find out how many moves per xxx days you are allowed to make in your particular 401k fund as well as fees/restrictions for holding a fund for a defined length of time.)
As far as where to put your money longer term… I have preached this for the past 2 years: Alternative Energy!!! It will be new “Powers That Be”.
Every other economist has said this… but the official “boom” has NOT taken place. It’s not even close! For a moment stop and ask yourself: What have I really done to learn more about Alt-Energy? Seriously! To look for an equivalent, we are at/where the computer industry was in 1980. Information is sketchy and scattered. There are no official good sources of worldwide universal information in this field. Likewise, there have been few noteworthy industry leaders that have become mainstream.
Now, with elections only 2 weeks away, we are faced with the knowledge that 1 of 2 men will be taking office come 2009. Obama is committed to Solar/Wind/Hydro, while McCain favors Nuclear. Either way, both platforms are so committed to the alternative energy arena that they are looking top spend upwards of $150,000,000,000.00. That figure is before PRIVATE INVESTMENT!!! (which stands to be so much larger) With that knowledge, how can you not be looking for immediate “buy and hold” opportunities in this market. Likewise, entire career paths will open up from button pushers and accountants to science and development. Any learned experiences may translate to an opening that will come about in this market.
It is your job now to find that! ! No waiting. Start researching. I’ve said in the past that from the commercial players, to the manufacturers of Alt-en sources, there are select few players/opportunities. …but on the research and production side, I believe there is a wide range of “next big thing” opportunities. (glass/glaze panel producers, nano tech for energy conversion and battery cell storage, wind farms, etc…) I believe GE’s good company/bad company will result in the “good company” becoming one of the brand name industry leaders as their wind/hydro turbines will be templates for that source. (Their success in splitting away from the financial arm and retail to focus on energy will be paramount to their survival.)
In the solar sector, I postulated a few months ago that we should track the success of a few companies like FSLR, STP, WFR, ESLR, SPWR, AKNS, SPIR, to see what is good & what is “Junk”. I believe trends will soon begin to appear.
Whatever you find, I invite you to share it here. I’ll do my best to review what you find and offer you my take. In addition, for those of you already familiar with this Alternative Energy market I gladly welcome your knowledge and theories. (provide information websites, books, forums, etc…)
My goals here and in life are generally not self serving. I really want to reach out and help as many people as I can. If Nouriel was kind enough (and enough people called for it) maybe the RGE could provide me with a contribution slot where I can continue to build on this. (tracking the future of Alternative energy, as well providing random updates on what I perceive to be market opportunities and anomalies.) But this is not my call. A strong response from the RGE blog community might be what it takes?
Feel free to comment, and I will do my best to reply. Hopefully my history of successful forecasting and timing can continue to benefit those who have taken advice from a complete stranger. And finally… thank you all for giving me the opportunity to speak. (sorry it was so long) Now it’s your turn.
All the best, Rich Hartmann (aka Rich H, Miss America, MA)