The Day After ...

This blog will ramble a bit as I note various "lessons" learned and forgotten.

UK retail sales surprise significantly to the upside. Uh ... I thought there was a global slowdown ?

Seers using "the market" to forecast the real economy should be chastened by that one huge data point of August-October 1987. "The market" then dropped about 35% in two months including 22% in one day. So many pundits predicted a recession and huge effects on Main Street. Nothing happened. It was a Rich Man's Panic caused by that precursor of huge beefers, viz., "portfolio insurance".

Additionally, that event should have forever wiped out any thought of "insuring" correlated events in the financial markets. [cf: see yesterday's post on credit default swaps] Obviously the greed and / or stupidity in Wall Street boardrooms and executive suites either did not learn that lesson's principles or forgot that lesson.

The Russian "market" is still suspended. Look - I'll make it simple. That government is analogous to Mussolini's regime or the "Organization" in 1950s New York or Al Capone's Chicago. The economy is dominated by a gangocracy of thieves of various levels. The Mafia - real or as fictionalized - is a good analogy. "The Commission" (the government) rules and resolves disputes and eliminates troublesome members. The Bosses - aka oligarchs - rule their fiefdoms. The nation's resources are being looted by the gangocracy. The people get some crumbs, which might seem better than in Soviet or Tsarist days, but that is mostly bread for the masses. If one "invests" there, be prepared to get wiped out.

The rich are panicking and probably pulling money out of their wonderful hedge funds - the beefers aka "big, evil funds." Those beefers are the principal problem and the cause of this entire mess. Instead of investing in the real economy in growing companies, trade, new ideas, etc., the rich have invested trillions in "trading" hedge funds. The big Wall Street firms encouraged this as they got huge commissions, management fees and trading order flow. Nothing was created by these "investments".

Even the subprime CDO market was created with hedge fund equity buying the subordinated tranches of those trusts full of junk. That was the essential piece necessary to create that junk. And the beefers provided it. One cannot created a "AAA" class in a subprime CDO without a substantial amount of subordinated classes. And who bought that ? The beefers. Maybe they "hedged" with a credit default swap on the classes. See above for how well that works in a major credit squeeze. So the beefers and all their trillions are the "root" cause of the credit crisis.

The beefers need serious regulation - a full body exam.

Events also prove that gold & silver are an essential part of a diversified portfolio. Gold was up 10% yesterday while stocks were down 4%. That's a 14% swing.

Also, I will point out these events proves that Treasury bonds and T-bills are an important part of the fixed income classes of a balanced portfolios such as the Krypto Fund. David Swensen's book makes this point, too. Corporate bonds just don't provide as much diversification. Using Treasury bonds permits one to maintain a higher long term equity allocation, because in a major credit crisis, the Treasury bills, notes and bonds will hugely outperform.

I heard that even bankers are watching CNBC to "learn" what is going on. Scary. CNBC - aka Babblevision - is a fountain of misinformation and fear mongers. They are really being disgraceful. I had to change the channel this morning as someone touted an RTC-style solution, but he had no idea what the old 1990s RTC actually was and did. Look, in that crisis caused by commercial real estate overbuilding, almost 1000 S&Ls failed. The RTC took those assets and sold them. Interestingly, the RTC used CDOs to sell the loans taken from the failed S&Ls. How many banks have failed in this period ? Uh ... about 10. Sheesh.

How the heck would an RTC style structure clean up a credit default swap mess ? Or a CDO mess. CDOs were the solution then. This utter stupidity and non-thinking blabbing really infuriates me. The problem is the hedge funds. Period.

The SEC finally puts on serious regulation on short selling. Since the uptick rule was eliminated, those beefers were able to emulate Jay Gould, Jim Fisk and Daniel Drew and effectively print new shares to dump on the markets in bear raids. Naked short selling is printing new shares fraudulently. And until now the SEC permitted it. What knaves ! I guess Hank the Tank gave them an earful and that fool, Chris Cox, finally moved. His staff is a bunch of knaves wanting jobs in the funds and their law firms so they were in their pocket. The new rules seem fair. But they still haven't reimposed the uptick rule. So bear raids that are "well-organized" can still be done.

Remember that going into this mess, the balance sheets of non-financial corporations were flush with cash and very strong on balance. So huge swaths of corporate sector are relatively immune to credit shortages.

Asian central banks are injecting more liquidity. As pointed out before this is good and necessary are the lower US trade deficit means fewer dollars going abroad. For decades those dollars became the monetary base of many nations. With a reduced flow of dollars, those central banks need to step up and provide money. And the ECB really needs to do this. They are a problem with their foolish single minded focus on "inflation".

One of the more disturbing facets of modern public discourse is the strident use of false precedents to form claims and conclusions. Three current examples are the suggestions of using an RTC-style agency to lean up this credit crises, the credit crisis itself and claims on effects on "Main Street". The quacksalvers show ignorance of facts behind their precedents, but try to sell the public on their solutions. Disturbing ...

The price of oil is back to its then elevated trading range of the last half of 2007. So it that signalling a "slowdown" or merely the pricking of a bubble ? Facts matter.

Actions

The sales on Tuesday saved Alpha Fund quite a bit. I bought some MS. That stock was hammered yesterday, but its earnings were great. MS was knocked down to around book value, which is all the trading and investment banking businesses are verily worth, but its asset management business is worth a lot more. So this is a trade, like my MBI trade. I'll give is a few months ... weeks ... days. A trade is a trade.

Otherwise, I am doing nothing. This weekend I'll check the Krypto Fund asset allocations to see what might need re-adjustment.

Word of the Day

"Retroduction" - noun [$1000]
Retroduction means 1. (in Philosophy) a type of logical reasoning that develops from some commonly accepted proposition until reasons are found that may alter the acceptance or understanding of the original proposition; 2. a provisional adoption of a hypothesis.

More: (from OED) "There are in science three fundamentally different kinds of reasoning, Deduction ..., Induction ..., and Retroduction ... . Retroduction is the provisional adoption of a hypothesis, because every possible consequence of it is capable of experimental verification, so that the persevering application of the same method may be expected to reveal its disagreement with facts."

More: Retroduction is using reasoning from conclusions to find reasons for conclusions.

Sentence: The modern financial market pundit suffers from both a massive lack of understanding of historical facts and a seeming incapability of using retroductive reasoning to understand events or argue for policies.