It’s so easy, maybe even too easy to point the finger of blame for today’s financial crisis at former Federal Reserve Chairman, Alan Greenspan.

 

There, I said it! And coming to the defense of Alan Greenspan on Wall Street these days might even brand me a fiscal heretic. On the “Street�, where I’ve had the comically questionable fortune to know many would-be economic aficionados with cloudy green eye shades, just the mere mention of Greenspan sends people into imitations of Linda Blair’s head spin in the Exorcist. But pea soup and doll swirls aside; In my humble opinion, Chairman Greenspan is not the demon responsible for the current financial systemic malaise. But, before I reveal the devil himself to you my avid reader, let me offer a little defense for Dr. Greenback.

 

In today’s Wall Street Journal there’s an article by David Wessel which notes that as early as 2002, according to minutes from Fed meetings, Chairman Greenspan was quoted as saying, “It’s hard to escape the conclusion that at some point our extraordinary housing boom….cannot continue indefinitely into the future.� So this tells me that Chairman Greenspan was not asleep at the switch, but cognizant of the potential dangers and inevitable decline. The article goes on the note that Greenspan believed that if there was a decline, it would not pose a significant threat too the entire financial system. This was not an irrationally exuberant or wishful thought at the time. No one would have believed at the time that the housing market would experience a severe and precipitous decline.

 

So Alan Greenspan’s position both privately and publicly was that if there was going to be a decline, it would not be severe. Thus all of you with pointing fingers and loaded guns aimed at Alan Greenspan, who want to fault Chairman Greenspan for leaving the punch bowl out at the party for too long, please settle down. Get a hold of yourself and put that six shooter back in the holster. Chairman Greenspan was, as Thomas Friedman would say, dealing with an entirely new paradigm called a global economy, and can not be singularly blamed for today’s financial catastrophe.

 

Ok…now to the real demon behind today’s systemic problem and fiscal crisis.

 

Simply put, (yes simply put as from a 30,000 foot view), it is and has been the worldwide perception that Fannie Mae and Freddie Mac - the holders of over $5 trillion of real estate debt, are government insured entities backed by the full faith and credit of the U.S. taxpayer (notice I did not say government). This was the perception… meaning that even though it wasn’t the reality, investors world wide always believed  (or better yet, ‘wanted to believe’) that should there be a housing market collapse – because these entities were ‘government sponsored,” the government would simply change the word sponsored to insured. Heck…its just a little 7 letter word right?

 

So the U.S. bankers, who believed, and the foreign bankers who believed, and the U.S. investment banks like Bear Stearns who believed, ….BELIEVED in something they knew was not true at the time. But guess what? Today with Congressional authorization, Treasury Sectary Paulson has the authority to lend to Fannie Mae and Freddie Mack whatever it takes to keep them from going belly up. Ahhhh – perception becomes reality. Like my Wall Street mentor always said; “in sex, drugs and rock and roll, perception is always more fun than reality!”

 

So the devil is alive and well, and the flames of future failure on a scale even larger than what we have already seen remains a very real possibility. One has to wonder if we’ll ever learn the lesson from the Japanese real estate bust, and the debilitating period of deflation, the embers of which are still glowing in that economy. One has got to wonder how long the Chinese, Japanese and the British will be willing to support the irresponsible policies of the U.S. government – Republican and Democrat alike.  

No Confidence is worse than false confidence, and the obnoxious and arrogant hubris that is spewed by economic idiots like the current President of the United States – George W. Bush has become nauseating. Lets be crystal clear (as Richard Nixon would say), the record budget deficits, caused by ill advised tax cuts, an ill planed and ill conceived and an illegal war – (yes,,, we were most certainly lied to about the reasons for going to war – and how the man has not been impeached is beyond me – good going Nancy Pelosi!), are the tangible reasons for a weak dollar. I say tangible, because we can easily point to these things as catalysts for a shrinking greenback. But what is not pointed to directly, is that the real reason is the total lack of confidence that the world has in this administration. Let me repeat the old maxim for the value of the realms coin.

The value of the realms coin is determined solely based upon the confidence placed in the ruling administration in power at the time. A weak administration = a weak dollar.

Let me also be clear that Ben Bernanke has done a mediocre job at best running the Federal Reserve Bank. His terms is up in 2010, and were I president I would not re-appoint him to this post. He was far far too late to surmise the extent of the problem of the Sub Prime debt problem – this when his president of the NY Fed was warning last winter – no begging for attention to this problem that would bring down the system. Bernanke paid not heed at all.

Finally…and this really galls the hell out of me. Please, ok please let’s not fall one more time for this baloney that the recent decline in the price of oil isn’t somehow tied to swaying the American Electorate toward McCain (pro oil) and away from Obama (anti oil). It most certainly is. One can simply go back in time and look at the trading patterns of oil over the last several elections and note how the price is jacked up in the in the beginning of the summer and then by August comes crashing down – thus removed as a campaign issue for the anti oil candidate. We’re I an advisor to Sen. Obama, I might point this out and as there are many smarter people than me out there in academia on his campaign, they can work up the tables to show this pattern.

So, if I’m sounding a little jaundiced today, it’s because I’m just a little fed up with the crap that we keep being fed and expected to swallow.

What is true and what I can believe ….

1)      You don’t fight a war and lower taxes

2)      You don’t treat a crisis as if it was an ordinary event

3)      You don’t look at patterns and say there’s not a pattern

4)       Don’t look at George W. Bush and say he’s done a good job

The worst president in the history of the United States by a margin so wide, that you could float the QE II through Erie Canal. = George W. Bush! He should be impeached, and he and Dick Cheney should be tried for War Crimes.

Will the dollar hold up?

Truly, on a sunny day with all the negative economic data streaming across the news tape the pressures building on the U.S. dollar present one dark thundercloud.Many of my friends on Wall Street wonder (”wonder” is the golf clap on Wall Street of “worry” on Main Street) if China, will start to sell their $500 billion+ of U.S. treasuries.

I contend that it is not — I repeat not — in their (the Chinese) own enlightened self-interest to start selling treasuries into the market. It hurts them possibly more than it hurts us.

Let’s not forget that the bubble we materialistic Americans created was fueled in large part by the willingness of the Chinese (and other countries like Japan and the U.K., the other largest foreign holders of U.S. Treasuries) to bankroll the mad American consumer on a drunken spending spree. (For more info on foreign holdings of U.S. treasuries see http://www.treas.gov/tic/mfh.txt)

What was surprising to me was that we are buying all this oil from the Middle East and they don’t rank in the Top 10. On a combined basis they barely hold $100B of our paper.In my opinion the only way the Chinese would be willing to start selling treasuries, would be if their own economy could pick up the slack and consume at the same rate as the American consumer used to.

And my sources in China tell me that the Chinese middle class is no where near that kind of buying power…and is at least 3-5 years away from being able to.

Bottom line: I believe that the dollar will stabilize, trade in a narrow band until the Fed increases interest rates, which is what I believe will happen as soon as we have a new administration in office. (Another reason there will not be a significant or precipitous dollar sell off).

So, that’s my 2 cents (erp or now 1 cent) for what that’s worth.

For the last two weeks, CNN has been airing a wonderful segment entitled “Black In Americaâ€� Hosted by Soledad O’Brien. The entire focus has been on the good, the bad and the ugly, of the lives of African Americans living in today’s American society. We are taken from where the African American Community has come from, to how far it needs to go, before it finds its voice, and racial prejudice is eradicated in America.

As an American who is gay, I have been watching this program fuming! How bad is it for the African American in today’s society with a badly administered affirmative action program, and all the other minority quotas that are designed to give this community a lift?  It’s a math test with a bell curve the size of Kansas. (I’ll be skewered for saying that I’m sure).

But….. (and this is my point):

I wonder when the last time a black man or woman was fired from their job simply because they were black, and then taking this matter to court did not have their wrongful dismissal overturned and given sometimes incredible punitive damages for the offense. I wonder when the last time was when a black teenager committed suicide because he was bullied in school, and feeling like there was no future for him, because he was black, he decided to hang himself in the garage? I wonder what the reaction would be if a black man and a black woman were to be denied the right to marry. I wonder how far a black man would make it in the Naval Academy as an openly black man. Would he make it all the way to “Top Gun� flight school and qualify for training in the most advanced fighter aircraft the world has seen? 

When Anderson Cooper, (yea, he’s a friend of Dorothy that CNN wants him to keep that part of his life under wraps), gets permission from the brass at CNN to do a piece on Gay in America, then maybe this country will see what kind of sick dysfunctional downright mean country America can be. When one can hear the sick demonic laughter in the halls of America’s high schools where a gay kid hears an anti-gay epitaph at least 80 times a day…that’s a good day if he hasn’t already been beaten up one or twice. Where the suicide rate for gay teems is four times the national average. Where a person who is gay can be denied housing, and employment in 31 states simply because he or she is gay. Where we’ll spend millions of dollars training a Top Gun fighter pilot and then eject him from the Navy because he’s gay, or when in a time of war, we’ll dismiss 21 Farsi translators because they are gay. Need I speak to the right to marry…Naa, that would be overkill I suppose?  

CNN…your profile on the state of affairs for Black Americans was wonderful, really. No doubt the African American community has a long way to go – we in America have a long way to go before we accept one another for the content of our character, and not the color of our skin or the orientation of our sexuality.

CNN, I wonder if you will do the American LGBT community the honor and courtesy, indeed the justice, of showcasing the plight of Americans who are gay in this sick homophobic diseased society. Anderson….Can you hear me??

And there on the TV is the umpteenth financial ‘talking head’ stating the grim obvious, such as “we are going to be well into next yearâ€� before the housing market settles down, and banks re-start to lend. This is the financial economic guru from one of the biggest investment banks in the world. He’s just another face on the same breed of cat - the very same know it alls  MBA’s and Ivy League graduates / mathematical geniuses, who with sophisticated computer models and algorithms, attempt to set up a portfolio that doesn’t lose money, but in a whisper - takes some risk. Go figure….The very premise behind risk is that you very well might lose money. — That’s why commercial banks don’t belong in the securities industry in the first place.

I would ask our esteemed members of Congress and the regulatory authorities to consider putting Glass Steagall (or some evolved form of it), back in force. Glass Steagall was a law enacted in 1933 that did not permit commercial banks from being involved in investment banking pr brokerage operations. This would have meant that a bank like Citibank and Citibank Securities would have to be two separate and distinct companies with separate balance sheets and types of risk exposure.

If Glass Steagall were in place during this sub prime lending mess, big banks would have been prohibited from overly investing in the sub prime securities – or any part of an investment bank (aka brokerage firm) that was cooking these things up, in the first place.

 1999 - Glass Steagall Gutted: 

“Enactment of the Gramm-Leach-Bliley Act (GLBA) in November 1999 effectively repealed the long-standing prohibitions on the mixing of banking with securities or insurance businesses and thus permits “broad banking. (James Barth, Dan Brumbaigh, James Wilcox “The Repeal of Glass Steagall and the Advent f Broad Banking – April 2000).  

What is the Glass Steagall Act and what was its intention?   

The Glass-Steagall Act was intended to protect banks from certain of the risks inherent in particular securities activities (FDIC Statement Of Policy on the Applicability of the Glass-Steagalll act to Securities Activities of Subsidiaries of Insured Nonmember Banks – September 1982)  

So as anyone can see, America’s banking institutions – became mixed up in high risk securities transactions either through their directly owned subsidiaries, or by direct lending to those securities firms. It is my belief that were Glass-Steagall in force, then the likes of Citibank, Bank of America, Wachovia, and all other commercial banks that have been stung because of their involvement in this sub prime business would have not been allowed to have been involved in these Securities. And thus the damage would have been limited to those securities firms. And thus the damage would have been far less of a problem because these firms don’t have the capital alone to have extended themselves out to the same degree that they did with the help of commercial banks.  

OK….That’s my clarion call. Congress and the regulators should bring back some form of Glass-Steagall – a hybrid form which would allow commercial banks to own a minority stake in the securities operations, and limit the amount of capital that the bank can lend to that subsidiary. Say 4-1. For every 1 dollar that the securities firm has in capital, the bank can lend up to $4. But not one penny more.

 Doing this, the next time the whiz kids from MIT come up with a new computer model that supposedly “limits the risk� of a certain type of hybrid / derivative / structured/ hedged / security, they will only be able to play the game with a fixed amount – this means “limited� amount of money.  

In my opinion, the lesson in this whole mess is: You can like a trade, a stock, an option, but you don’t need to bet your farm, and your neighbors, and the neighbor’s farm down the street to make a nice profit.  

Greed – like speed – KILLS!

On this day in 1937 (well before my time), the King of England abdicated his throne and married the woman of his dreams. King Edward VIII went back to become a simple Prince of Whales with Wallace Simpson. Boy, do I love this story…its so Disney. I also love one of His former Highness’s quotes which brings life’s journey with all its trials and tribulations into the simplest of terms.

” Perhaps one of the only positive pieces of advice that I was ever given was that supplied by an old courtier who observed: Only two rules really count. Never miss an opportunity to relieve yourself; never miss a chance to sit down and rest your feet. ”
King Edward VIII

Today on Wall Street probably the biggest news is that Lehman Bros is getting ready to report its first quarterly loss since it went public in 1994. Street estimates vary but the guesses range from between $300 - $600 million. As a result the rumor mill (remember, Wall Street is most famous for milling spectacular rumors and tales of the fantastically ridiculous). Anyway, the elves in the mill are talking about Lehman raising possibly another $4 billion in an equity offering…the first equity offering since it went public.

OK, OK…so what about all this and the two rules for us poor folk out here baking like June bugs on hot chevy hood…and believe you me, we never miss an opportunity to rest our two dogs. Well remember yesterday we talked about never fighting the tape? And I still say its good advice… meaning that Lehman’s stock has been under considerable pressure of late. And the tape has not been kind to this venerable insititution of finance and thus very hard to bring oneself to buy it.

 But…this news presents quite possibly one opportunity. So here are the two rules as they pertain to this situation regarding Lehman.

1) Buy on the rumor 2) Sell the news. (One can also buy on bad news but thats for another blog). These two rules are tried, tested and true words of wisdom from canyon of Wall Street. Trust me on this one. I wouldst never intentionally steer thou into troubled waters. And btw… very rarely hath one gone wrong with obeying these two rules.

As for me…While I do not own any Lehman Stock, and since writing this, I will be unable to buy any for one month just by SEC Rule and ethical purposes. I believe that in the long run, Lehman is a great company, well run, and will weather this storm in fine fashion. A very good long term buy.

Oh yea…one more thing…opportunities come along every day, (don’t worry about missing one), and most certainly one should always relieve oneself when one has to. 

 Have a great day…and good luck out there in the jungle of stock market land.
 

When I was on the trading floor of the NYSE as an active broker, we had a saying about when to buy and sell a stock. “Don’t fight the tape�.  The “tape� is the ticker tape, a device to display stock prices and quotes that came into being in 1867, invented by Edward A. Callahan of the American Telegraph Company.  When I started on the trading floor, there were no computers yet.  (Yup, I’ve been around that long). Anyway…the only way one could tell what the market was doing was to read the ticker tape. Today I doubt there are many current traders on the desks of the major brokerage houses who would know how to ‘read, much less fight’ the tape. 

So what does it mean to not fight the tape?  Simply stated it means that if the prices are falling, don’t go against the trend. Which brings up another old saying from the pros on the trading floor which says: “The Trend Is Your Friend�? This saying affirms the earlier one in that one should go with the flow, and not try to go against it.

So today with the ouster of the CEO of Wachovia, and the downgrade by S&P from AA- to A+ of Morgan Stanley, Lehman, and Merrill Lynch, helped all those companies shares decline on the news. 

OK…So now we know when not to buy or sell, but when can we buy the financials. Well, that’s pretty simple. Just watch the tape, and when the volume – the amount of shares changing hands – begins to slow down or as we say in the business “dry up�, this may signal that there is a turnaround coming.  But the tape will confirm this with higher volume and a trend to the upside. 

By all signs – “trends� – this would appear to be a ways off.  So I am holding off a while. The only reason I might go against all of the above were if I were a long term investor with at least a 5 year horizon of investment. In this case, I would ‘nibble’, but really I mean very small bites at this time.

So remember “Don’t fight the tape� and “The trend is always your friend�.

Happy hunting.

With the worlds population at 6.6 billion people, and the U.S. at 302 million (that’s 4.5% of the worlds population), and with  the United States consumers guzzling roughly 14% (13 million barrels a day) of the worlds energy resources, is it any wonder that the U.S. must learn to conserve energy? 

The daily supply produced is approx 85 millioin barrels per day (Source: Energy Information Administration of the U.S. Dept of Energy), and demand is at 87 million  barrels per day. The laws of basic economics says that the prices MUST go higher.

Even if the U.S. economy experiences a slow down, it is unlikely that the economies of China and India are going to slow to the point where demand will be exceeded by the supply anytime soon. Add on top of this, the weak dollar -(down over 30% in the last 2 years against other major currencies), what Saudi Oil Producer wants to take payment for his oil in U.S. dollars? I don’t know how you say it in Farsi, but in essence I can hear the guy saying…”Well..OK if I must, but to make up for the losses in holding this green currency that is getting weaker by the month, I am going to boost the price a bit just to make sure the infidel doesn’t get the best of the deal”.  Its just business after all. Who wants to take a loss on holding a currency that is always going lower? Certianly not Shiek Bin Barrel.

My bet…is that Oil within the next 6 months settles nicely above $150 per barrel and then headlines start talking about $200 per barrel.

Can you spell $8 per gallon for gasoline?

In what I would consider to be one of the biggest shockers of his administration, President Bush actually vetoed a farm bill.

This morning, ”W” vetoed a $300 billion farm bill, calling it a tax increase on regular Americans at a time of high food prices. Best of all, is that if its not Bush whose spending money recklessly, then its the congress, as Bush’s veto is probably going to be overridden by congress. 

This year, net farm income is projected to increase by more than $28 billion, and “W” is actually correct in asking; ‘Why should the American taxpayer be forced to subsidize that group of farmers who have adjusted gross incomes of up to $1.5 million,’ Bush said; ”When commodity prices are at record highs, it is irresponsible to increase government subsidy rates for 15 crops, subsidize additional crops, and provide payments that further distort markets.”

I couldn’t agree more !

Rarely do I agree with this man, but I do in this case. See..I’m actually pretty open minded even when it comes to a guy who is responsible for tripling the national debt in just 7 years. Tough to do by yourself, but “W” had the help of a Republican controlled congress to assist.

Aside from the above…the markets today are sluggish and starting to factor more and more into the picture, the prospect of inflation. The FED raised its estimate of Core Inflation growth from 2.2% to 2.4%. I’m not sure what countries numbers the U.S. Federal Reserve is looking at, but those estimates seem totally wacky to me. A large investment bank on Wall Street is estimating that real inflation rate is above 5%.

What does one invest during an inflationary period? Well, my maven - lets call him Dr. Doright, [that’s Scottish / Swedish mix] thinks 1) being diversified is a must 2) have some overseas holdings, 3) U.S. Mid-caps (if one must invest in the U.S.) is probably the safest class of stocks to invest in.

Ok folks… that’s it for today…

Happy hunting!

It never ceases to amaze me how our elected representatives, and the President in particular blithely just keep on spending money. The national debt is now in excess of $9.3 trillion dollars, and is expected to exceed $10 trillion by January 2009. That’s $47,000 per adult (209 million adults in the 2000 Census). Everyone remember how “W” and the Republican controlled Congress for the first 6 years of this Bull S@#* - erp…I mean Bush administration just went completely wacko in spending? With this war (Mission not accomplished after $1 trillion spent and Osama still on the loose), billions in farm subsidies to grow ethanol (What’s up with giving farmers money when they are rolling in dough already??).

 Anyway… I think you get my point. Reckless spending MUST stop! Has anyone seen a headline announcing a layoff of government workers? I’m almost sorry I didn’t go into the postal service. I have a friend who after 25 years in the USPS, will be retiring at age 48 with nearly full pay and all benefits.

 Were it not my money that was paying for his retirement, I might not be writing this blog, but given that taxes are sure to go up in one form or another so that the spending train can keep on chugging along, I thought I would vent just a little.