Traderbill's Financial Markets Weblog

…TB took BART to SF yesterday for a Christmas luncheon with his client and old friends. It wa a nice break from the markets and during the conversation the subject of market volatility arose. Two senior investment people with more years in the business than TB both agreed on never having seen this much volatility. This was music (although discordant) to TB’s ears since he had stated the other day that in his nearly 35 years he had never seen this much volatility.

Were it not for the extent of this credit crisis, which stretches globally, the volatility would not be nearly as disturbing, but consider the following:

*the extent the consumer has been harmed by the decline in perceived wealth by the real estate market.

*the fact that people are in debt and have borrowed against the equity in their homes.

*the lack of preparedness for emergencies or even for their retirement (average savings is $35,000).

*the financial sector grew to over 30% of the S&P 500 and that is the area that is suffering the most.

*the reluctance of financial institutions to lend to all but the most worthy of borrowers (this includes auto manufacturers who despite rapidly slowing sales are rejecting prospective buyers on credit.

*according to Bob Pisani at CNBC there have been six attempts to rally housing stocks…all have failed and as TB has pointed out it is far too premature as it is for all financial stocks: until there is transparency and an explanation of where the replacement revenues will come from he is avoiding like the plague.

As you know, TB has been bothered by the low tax rates paid by the top individuals…TB is not even talking about those making $1 million a year but those making billions and those are largely through riskless activities where little of their own capital is at risk yet getting preferential tax treatment. Also, the 15% dividend tax rate that benefits the wealthiest yet is promoted as benefiting all Americans when their dividends are in tax deferred accounts which will eventually be taxed as ordinary income (TB favors elimination of the corporate income tax, removing the excuse of double taxation of dividends and thus encouraging management to pay more dividends instead of those inane stock buybacks that are futile and keep management in control of investors money even when they are mismanaging the assets).

TB’s other concern has been the wealth gap which has been created by top management believing they alone are responsible for the success of a company (then getting a golden handshake when they fail). Meanwhile other employees…who directly or indirectly are their customers…are held to bare minimum increases and see more and more of benefit costs transferred to them.

Through all this we are told that capitalism…unbridled capitalism is the best way to go. This is based on the wrong conclusions of Joseph Schumpeter and was aided by Milton Friedman. TB does not believe that Friedman felt that strongly since his belief was that capitalism was based on the long run success of businesses when they are in fact being managed for the short run and thus engaging in activities that favor the current management (including illegal activities), and thus require government regulation.

That regulation is sorely lacking due to both political parties under the control of lobbyists and their inability to work together for the common good. How else do we explain the Federal Reserve ignoring a mandate by Congress after the S&L debacle to regulate lending activities. Yet, as a good man and acquaintance of TB’s, Edward Gramlich, tried to point out to Alan Greenspan and was rebuffed, they failed to do so. Furthermore, and even worse was the inability of the bank regulators to investigate banking promises. Greenspan argued the Fed wasn’t capable of this and that to even attempt it would be to put an imprimatur on the institutions that the Fed approved them (didn’t he know that the SEC does this routinely with a caveat that they are not approving companies, merely that they have not detected anything improper?). 

We now have a failure of government at all levels and whether the Dems or GOP wins is not going to change that…there has to be a will to change and that is the farthest thing from either party’s mind.

We found out yesterday that the Fed’s Term Auction Facility had $61 billion in collateral offered in rather than the rumored $100 billion…still a lot of money and 3.08x the amount accepted. But what is truly of concern is that the Fed allowed this collateral to be offered in at ’stale’ prices…well above the market value…thus putting the Fed in the same camp as the Bank of England with Northern Rock and now desperately seeking a buyer so they can recoup their losses! Of course they hired Goldman Sachs to do this…it is just incredible that we blithely go on our merry way without seeing the depth of these problems…of course neither the Fed nor the BOE is conducting a bailout…no way! 

The Fed is offering another $20 billion at the 35 day TAF auction today…and the beat goes on…and on…

Thanks to the media for giving government a free ride on the new improved lending guidelines which are really nothing new, and then heralding the energy bill signed by Bush yesterday as if it was manna from heaven. Neither of these is nothing new and everyone should be incensed at government’s failure to act on either of these critical issues when it would have had meaning. They are all guilty of producing a recession…TB fears a major, long lasting one, not the blip when Bush was ’swept’ into office.