^^ That TARP this time around has not lost much is not the point. As long as the policy is to bail out forever, they will inevitably lose much. As long as bad actors get bailed out they will push the envelope further and further until either the government credibly refuses to bail out or the losses are so large not even the government can bail them out and remain solvent.

Such is the history of the 18th century England. The Bank of England was required by law to bail out London financial institutions, privatizing profits and socializing losses. Every seven years or so the bank was forced to bail out the exact same firms. In the beginning, it too made a profit on its lender of last resort lending. However, every cycle the losses became ever larger until the Bank of England nearly failed itself. In response to public outrage, Parliament repealed the law. The next time, however, these same firms were insolvent yet again, but in keeping with the law they were allowed to fail miserably. London as a financial center was devastated and did not recover for several years. However, when it did, such failures never occurred en-mass again until well into the 20th century when, yet again, it became the policy of the British government to bail out failed financial institutions.

4/25/2011 11:54:51 PM

^ Except it's possible to achieve those outcomes without your absurd requirement that our country be "devastated" for several years until it recovers.

4/26/2011 1:04:58 AM

It certainly is. All we had to do was never set the precedent of bailing out anyone. That ship has sailed. Sure, passing a law preventing future bailouts should help, but that didn't work for Britain. So, please, let me in on the secret, how do we unmake a precedent?

That said, I said the financial industry was ruined for years. The actual recession ended rather quickly and unemployment returned to normal, just not among London bankers.

4/26/2011 9:45:47 AM

Quote :

"Such is the history of the 18th century England. The Bank of England was required by law to bail out London financial institutions, privatizing profits and socializing losses."

What a great story. It would be somewhat convincing if it were only true.

First off, the law you are talking about was instituted in the mid 19th century (after the Overend and Gurney crisis). Secondly it was not really used untill almost 30 years later, and after that little prevented the UK from being very seperate from other worldwide depressions like the ones in 1930 and 2007.

4/26/2011 10:01:38 AM

Right, early 19th. Here was where I heard it being talked about by Charles Calomiris of Columbia Business School:
http://www.econtalk.org/archives/2009/10/calomiris_on_th.html

4/26/2011 11:42:44 AM

Quote :

"Right, early 19th"

No, mid 19th, specifically 1866, that is not the 18th century, nor is it the early 19th century.

As for your link, he far overstates the earlier "bail-outs". This is a far less biased article explaining some of the previous crisises:
http://news.bbc.co.uk/2/hi/business/6958091.stm

4/26/2011 12:59:28 PM

Perhaps less biased, in that is says absolutely nothing. The lender of last resort system that reined between 1866 and after was what replaced the hard bailout rule that had caused so many failures prior to and including 1866, in that the new system would only ever lend to those with still good collateral, not the case before 1866, causing the collapse of 1866 but not another crisis until decades later in 1890.

England prior to 1866 is similar to America today in that bailouts can be had for even those that are permanently insolvent. 1980s america is similar to post 1866 Britain in that lending was reserved for those that were otherwise solvent but short on cash temporarily. There is a big difference, although both situations technically have a lender of last resort.

4/26/2011 1:28:37 PM

I still don't understand the point you are trying to make outside of your fairy tales. I also do not understand why you seem to believe that "bailouts" are such a certainty. Several companies still failed and were sacrificed to the great god of capitalism, you make it clear that you did not believe there were enough, but I do not believe that has any ability to disrupt the market's ability to accurately price risk due to over-leveraging.

[Edited on April 26, 2011 at 7:28 PM. Reason : ]

4/26/2011 7:27:42 PM

The problem is that they are pricing it properly, at a price lower than is optimal for society at large.

Did you not claim to work in finance? People do not engage in Venture Capitalism because winning big is a certainty. The odds of any individual venture willing big is quite small, yet finance types manage to price the risk and buy the investment. Well, the odds of a bailout went from 0% to something less than 100% and I guarantee you bond traders have taken it into account when pricing risk.

4/27/2011 12:11:32 AM

I agree that they have taken account that risk. Where I disagree with you is in your implication that the optimal price involves a 0% chance of a bailout. The government, generally, should engage in a bailout when the cost of bailing out is less than the cost of not bailing out.

4/27/2011 12:20:15 AM

And the cost to society of not bailing out is indistinguishable from zero. All a bailout is is a transfer of resources from taxpayers to bad business managers. I see no reason why bad business managers will manage that money better than the average taxpayer.

Insolvency does not destroy physical assets, all it does is transfer ownership from one set of managers appointed by shareholders to another set appointed by the bond holders. I see no reason why the first set of managers should be assumed to be better at their job than the latter. On the contrary, that they ran the company into insolvency should speak rather strongly to their incompetency.

[Edited on April 27, 2011 at 12:36 AM. Reason : .,.]

4/27/2011 12:35:23 AM

Quote :

"The government, generally, should engage in a bailout when the cost of bailing out is less than the cost of not bailing out."

Aside from your wet dreams of a society where governments are Nostradamus's with 100% accuracy (based on full control of society to whatever threshold level you need for your models to work) no single person, group of people, or aggregate of society can know the costs of bailing out or not.

We've reached the pinnacle of human arrogance when we believe we can get control of chaotic systems and know their outcomes. It's exactly what you propose is possible and it's a load of horseshit.

4/27/2011 7:04:18 AM

Quote :

"And the cost to society of not bailing out is indistinguishable from zero."

I don't believe that is true. The world is not zero sum. Companies are interconnected, and if they become insolvent, it would require that someone else has the capital to buy them, which isn't true in a time which people would want to hold cash. At the same time you are literally costing society money. People are losing jobs, people's retirements are being destroied, houses are being reposessed. If we had not had a bailout, the fallout from the recession would have been magnitudes larger than the paltry amount we lended those institutions to handle thier short term liquidity issues.

Quote :

"Insolvency does not destroy physical assets"

Sure it does. There are physical buildings falling into disrepair in Charlotte right now due to it. It destroies anyone who has anything invested in that company and those who work for it.

4/27/2011 10:12:27 AM

Then we should bail out any endeavor that fails. Surely, there could be no social harm when we set the expectation that you can bet on your own failure and win double.

4/27/2011 2:35:41 PM

Quote :

"Then we should bail out any endeavor that fails."

No, only ones who cost less to bail out than they cost to not bail out.

Quote :

"when we set the expectation that you can bet on your own failure and win double"

By doing so you would reduce the benefit of bailing you out while simultaniously raising the cost. Such actions would discourage yourself from being bailed out.

4/27/2011 3:34:57 PM

Quote :

"Companies are interconnected, and if they become insolvent, it would require that someone else has the capital to buy them, which isn't true in a time which people would want to hold cash."

So what? The market resets and then we move on. The value of the company is at some level above zero and at some point it will be more useful for someone holding cash to buy the company than to continue to hold cash.

Quote :

"People are losing jobs, people's retirements are being destroied [sic], houses are being reposessed."

Such is the beauty of capitalism.

Quote :

" the fallout from the recession would have been magnitudes larger than the paltry amount we lended those institutions to handle thier short term liquidity issues."

Again, the pinnacle of arrogance that we think we know by managing short term consequences we even have a vague slimmer of an idea what the long term ramifications will be.

Quote :

"Sure it does. There are physical buildings falling into disrepair in Charlotte right now due to it."

Absolutely not. The buildings are in disrepair because someone isn't repairing them, not because some legal entity stopped making payments. If from a risk/reward perspective it were advantageous for someone to repair those buildings then it would be done.

Quote :

"No, only ones who cost less to bail out than they cost to not bail out."

The human condition is such that this is simply unknowable for a sufficiently large enough economic system, to think otherwise is foolish.

4/27/2011 6:54:09 PM

The impressive YTD gains of the S&pP from 1250 t0 1360 looks pretty flat on a dollar indexed chart. YTD the dollar has been trashed things priced in dollars including equities have risen as a result. The fed buys 100 billion of assets a month since jackson hole. The market is in a melt up, until the very end. This is not the change i was looking for.

4/30/2011 9:42:45 PM

Rally, where are you man? Inflation is getting out of control as indicated by the 30 yr...wait, the fuck?

5/4/2011 6:59:38 PM

Quote :

"Companies are interconnected, and if they become insolvent, it would require that someone else has the capital to buy them"

Then the price falls until the capital available can afford it. That is, unless the holders of the business refuse to sell because they think they can get a better deal from the Fed if they just manage to wait long enough.

5/5/2011 11:28:23 AM

I'm right here. The inflation that the government releases (obviously doctored) is already double the GDP growth rate (which is also doctored).

Rates are dropping temporarily because people are running to "safety" while we get a short term correction in commodities and other risk assets.

What they don't realize is that the US dollar and US govt bonds are terribly unsafe. So in the long run these moves are suicidal if they hold the bag and don't sell out first.

Dude, the dollar is down like 20%. Please don't try to make me out to be wrong when everything I've said is coming true.

5/8/2011 11:20:13 PM

My beef has never been with your macro analysis however imperfect (and possibly ultimately incorrect) it may be...it's the timing that sucks. You and largely the rest of the world has no clue how the US economy may or may not melt down.

5/9/2011 6:51:43 AM

I have no teeth in the inflation debate, but this was posted at reason.com:

Quote :

"And the reason the [Consumer Price Index] is losing credibility is that, as economist John Williams tirelessly points out, it's a bogus index. The way inflation is calculated by the Bureau of Labor Statistics has been "improved" 24 times since 1978. If the old methods were still used, the CPI would actually be 10 percent. Yes, folks, double-digit inflation is back. Pretty soon you'll be able to figure out the real inflation rate just by moving the decimal point in the core CPI one place to the right."

5/9/2011 8:16:32 AM

^ that's what ive been saying (or technically repeating after Schiff) for the past two years.

The formula is fucking rigged and it's obvious to everyone. It's not even really news anymore to anyone with a 6th grade education that there is massive inflation when we should be experiencing massive deflation. What gives? Oh yeah, those trillions of dollars of money printing.


^^ the treasury rally was created by the government. The FDIC changing that rule last week on repo's forced everyone to selloff their repos and enter the 90 day or less short term treasury market.

They are accepting 1 basis point of yield on the 90 day treasury now (it was ~10bps barely a week ago) because they'd rather earn nothing then go out on the long end and get fucking blown up.

No one can predict how the FDIC, treasury, etc will game the markets you are right about that. So the timing might have sucked in your opinion, but the timing only matters to short term traders.

As a long term investor the timing doesn't matter as much as the outcome. And there is literally no doubt what the outcome will be. Higher rates. Much higher.

5/9/2011 6:05:37 PM

Quote :

"I'm right here. The inflation that the government releases (obviously doctored) is already double the GDP growth rate (which is also doctored). Rates are dropping temporarily because people are running to "safety" while we get a short term correction in commodities and other risk assets. What they don't realize is that the US dollar and US govt bonds are terribly unsafe. So in the long run these moves are suicidal if they hold the bag and don't sell out first. Dude, the dollar is down like 20%. Please don't try to make me out to be wrong when everything I've said is coming true."

Just a heads up, ive been making a KILLING shorting you here lately. Thats all.

5/23/2011 6:10:03 PM

Worth reading/watching: David Stockman: "Both Parties And The White House Are Advocating A US Default"

Quote :

"“We have to raise revenue, there is no doubt about that. We have to allow the Bush tax cuts to expire for everybody, not just the rich. We have to reset Social Security if we're doing to make any headway in denting this massive, $6 billion a day borrowing spree we're on… Neither [political] party is facing up to the real truth or telling the public.""

Quote :

""If they were realistic, they would be discussing what are the new revenue sources we can possibly tap in order to fill this gigantic $1.5 trillion hole in the budget. What are the pros and cons, what are the tradeoffs? You hear none of that discussion. They're whistling past the grave. They should be talking about new sources of revenue and possibly increasing some of the existing taxes we have in place today.""

Quote :

""I think [Washington will discuss raising taxes] only when we get a major, thundering conflagration in the bond market." "For the last 10 years, Congress has been lulled to sleep by the central banks that keep buying all the debt and therefore holding down the real cost of interest on the middle and long term debt that we are issuing every day. "

Quote :

""That kind of crisis would be a vicious sell-off in the global bond market. That could come sooner than people think, because the Fed is getting out of the market with QE2 ending.” "For the last six months, the Fed has bought nearly 100% of this $6 billion a day that's been issued. Once they are out of the market, where is the new bid, where is the new demand going to come from? The Chinese are getting out of the market because finally they are having to deal with the rip-roaring inflation they have had. The people's printing press of China will not be buying as much U.S. debt because of its own internal problems.” "When we get to real investors, what are some of the real investors saying today? PIMCO is short the bond, they're selling, they're not buying. "When we get into a two-way market when real investors began to look at real risk, begin to look at the gong show in Washington and the magnitude of the gap that we are borrowing, I think we're going to get a re-rating of sovereign risk. We're going to get a huge dislocation in the global bond market, and then maybe the wake-up call will finally come.""

http://www.zerohedge.com/article/david-stockman-both-parties-and-white-house-are-advocating-us-default

[Edited on May 23, 2011 at 7:45 PM. Reason : ]

5/23/2011 7:42:19 PM

That article is exactly why I have an Assault Rifle thousands of rounds of ammo, and silver bullion. Washington lacks the balls to even dent the massive numbers this country faces. Two ways out from here Default or Print. They will likely not act until a major credit event, then it will be too late. In buying all of the debt issued the fed has pushed the freshly minted fiat to commodities and equities. The Fed cites rising equities as proof of economic recovery, when in fact they have created the higher prices. Now the market is on the juice and cant function without it. Enter QE next, to be followed by QE more.

Ps nice Zerohedge post

5/23/2011 8:59:26 PM

Oh, we back.

For a day or two.

6/14/2011 2:26:15 PM

the calm before the storm......

wait until about August when employment numbers reflect the influx of soon to be out of work government employees (many of which should not have been hired/were not needed to begin with)

that's when unemployment hits new highs and the nice slide will ensue

6/14/2011 11:44:32 PM

want to give a shoutout to an NCSU alum for writing a great piece on zerohedge today.

http://www.zerohedge.com/article/guest-post-could-basel-iii-create-floor-sovereign-debt-prices


David's long-term view differs from mine, but in the short term we are in the same camp. Good piece.

6/14/2011 11:49:20 PM

OMFG DOW 12K!

6/17/2011 4:38:47 PM

Hold on tight, the 1 month tbill just went negative!!!

6/23/2011 9:57:19 AM

You've been telling people to "hold on tight" for months now.

6/23/2011 10:04:30 AM

I know and I've been right, thanks for the acknowledgment!

6/23/2011 10:49:12 AM

Quote :

"the 1 month tbill just went negative!!!"

Briefly, before going back to positive. It's not that infrequent.

But don't worry, I'm sure the sky is still falling. How's all of your gold doing?

6/23/2011 11:15:47 AM

Remember when I said I expect gold to go down two weeks ago?

Everything goes down in a liquidity crunch. Gold isn't actually going down that much in nondollar denominated assets.

I'm basically 100% cash except for about $9k in gold as a hedge in case bernanke unleashes qe3 before I can dump my dollars. Thats probably the most aggressive portfolio on this board and I'm comfortable with it because I know I'm right.

Without stimulus we begin collapsing now. When stimulus occurs ill go long again. When stimulus runs out ill flee again. This is the easiest market ever, just try to be 1 step ahead of policy and you cannot be wrong

6/23/2011 11:45:00 AM

Yet you refuse to post returns. Odd.

6/23/2011 12:24:19 PM

My balance statement looks something like this:

6/23/2011 12:27:19 PM

^^He's a millionare who picks every stock right on the internet

6/23/2011 1:31:59 PM

I post my positions frequently, and no I'm not a millionaire

6/23/2011 1:35:01 PM

What percentage of your portfolio is invested in ammunition and canned goods? I only ask because you've advocated positions in both.

6/23/2011 1:41:58 PM

Did anyone watch the hearing yesterday? Bernanke seemed much more fragile than he has before, even. This is a guy that knows he's lying, he's just hoping that no one calls him on it. At one point he said he was "100% confident" in his ability to control inflation. Given his track record, I take that to mean that there's a 100% chance that he will not be able to control inflation.

Seriously, we're kind of fucked.

6/23/2011 1:44:21 PM

Quote :

"I post my positions frequently"

You do post your positions VERY frequently, and almost exclusively after-the-fact. I rarely see you post a position that does not start with "remeber when...".

6/23/2011 1:49:39 PM

He said within the past week - if I recall correctly - that he is flat on the year. I find that pretty hard to believe considering all the noise, how Schiff is always right, and how easy he says this market is.

6/23/2011 5:17:22 PM

False alarm, they fixed the greek thing, nothing to see here.

6/23/2011 10:22:52 PM

Has anyone said Schiff is always right in the short-term? I think we generally agree that markets can't be predicted, because markets are really just "people," and behavior can't be predicted. Long-term, though, someone has to lose their shirt. Schiff seems to be convinced that it's going to end in hyperinflation which I don't think is a certainty, but damn...if it's not hyperinflation, it's deflationary spiral, and last time I checked those are both pretty lousy.

What kind of position would any of you be in if there was a massive sell off in stocks? That's what happens if there's no more QE. Anything could be the trigger, especially with this mini-tech bubble going on. The S & P is gonna get killed without QE.

When more QE happens (and there's no reason to believe it won't - if the central planners had any intention of tightening, they would have done it years ago), commodities are going to start going ballistic again, fueling further speculation and more leverage. This shit is just building and building, and there's not anyone in a position of power that's willing to come clean. They're pretending. It's Greece right now, but we're worse off than Greece.

[Edited on June 23, 2011 at 11:22 PM. Reason : ]

6/23/2011 11:19:10 PM

Quote :

"Has anyone said Schiff is always right in the short-term?"

Has anyone said he's right in the long term? A broken clock is right twice a day.

Quote :

"if it's not hyperinflation, it's deflationary spiral"

That's quite a range, hyper inflation or deflation? Sounds like you're just rooting for the worst.

Quote :

"especially with this mini-tech bubble going on"

It's not much of one, maybe an IPO bubble, but the cornerstone techs aren't getting much of anything from it, so considering they haven't seen much of the up, I'm not to worried about them getting beaten by the possible down. The market took a lot less water than I thought it would after the fed report, so I'm really not getting too scared of this "WERE GONNA DIE WITHOUT QE3!!!!!1" nonsense.

Quote :

"It's Greece right now, but we're worse off than Greece."

I don't know why so many people compare us to Greece. Greece owes EUROs we owe DOLLARs. There's a big difference there considering that Greece can't make it's money any way but taxing/cutting or getting it given to them. We can print money, not only does that give us dollars to pay the debt with, but it lowers our interest rates and lowers the amount we owe (without even directly paying it out).

6/23/2011 11:35:11 PM

^ dude seek help

6/23/2011 11:55:54 PM

your responses have gotten a lot more thought out and sane lately.

is your tin foil hat helping or are you just taking your medicine?

[Edited on June 24, 2011 at 12:06 AM. Reason : ]

6/24/2011 12:06:08 AM

What a fucking surprise the senate is trading on inside information again.

Oil plummets at 8 AM, Obama administration announces news to release strategic reserves at 9 AM.


And you wonder how Nancy Pelosi's asset manager husband increased his net worth by 60% last year.


Why do congressional and senate members consistently outperform hedge funds in market performance?

[Edited on June 24, 2011 at 12:24 AM. Reason : a]

6/24/2011 12:24:25 AM

The decision had been made earlier by representatives from a bunch of developed nations in response to inaction by OPEC on compensating for the Libyan civil war by increasing production.

6/24/2011 1:08:23 AM