Friday, November 16, 2007

You can't get there from here

Guambat recalls an old yankee joke about a perplexed yankee farmer trying to give directions to a lost wayfarer. You've no doubt heard it. Try as he might, the farmer just could not give an easy-to-follow direction to get the wayfarer from where he was to where he wanted to be; he could describe the way to many other parts but not the place the wayfarer wanted to go. The farmer himself knew how to do it, but it was just too complicated to explain. (Guambat got an email today trying to explain how to get to a friend's house for dinner on Saturday, and this story could just as easily have originated on Guam.)

So anyway, after making several aborted attempts to give proper instructions, the farmer just said, in exasperation, "you can't get there from here".

Guambat feels that the wayfaring markets have been getting the same instructions from Wall Street. Whatever "asymmetric" design you want to put on it, after over a year of warnings and attempts to explain where this new fangled financial engineering and Greenspan induced low interest rate shenanigans was all leading, the markets continue to forge higher as the frantic hand signs and pointing and scratching of heads of the people who believe they know where this is going end up throwing hands up in the air in capitulation.

It seems any little pull back is met with another shove higher. The Australian stock market is within days of having just made yet another all time high. The US markets aren't even in a decent mild-mannered correction off their highs. Randy Newman was right: short people got no reason to live.

Guambat only just returned from a quickie to Sydney and came away with the feeling that the US dollar situation, which is likely linked somehow to the low interest rate manipulation that pumped up the banking/financial system debts so high they had to put the blame on stretched out over-lent home buyers, is quickly re-writing the script but no-one is watching because the Hollywood and tv writers are on a script-strike of their own.

Sydney has turned into a ridiculously expensive place to visit for a lowly Guambat subsisting on greenbacks. And yet, it was still all go go go. But not out in the small towns not far from city centre. There a horse virus has put down the country's third largest industry. In the bush, the drought makes Georgia look like a commodious lake, abundant enough for a jolly swagman to drown himself in. Apart from the stuff dug up out of the ground and from environmentally and culturally sensitive other parts, the rural sector is sick sick sick. North of Sydney, the Central Coast had gone back into hibernation, like a bear, or like a Central Ghost.

Guambat has become confused by the disparity between seeing a bearish roadmap in his head but finding all the money pointing to bull heaven. Thus Guambat continues to try to come up with rational directions that lead to a bear market whilst the market goes on its own merry own (irrational??) bullish way. It seems like the cyclical bear market that some say we're in is pure cant. Indeed, had money been placed on a bear market unfolding over the last several years, that money would have been foolishly wasted, or perhaps, unfoolishly wasted. But wasted either way.

Take the situation with the way the market pendulum swings the way Goldman Sachs do. Guambat read about the most recent swing on his trip Down Under but couldn't post. First, Goldman spends the last several years packaging, marketing and happily handing out (for a fee, of course) trick-or-treat financial instruments to its customers. Then, they realize that this candy is toxic and all the kids on the street who took the candy from them are going to get sick, very sick. So, they spring into action. And do they do that by warning all those kids with the candy and take it all back? No, they lie in wait for the kids to get so sick they have to dump all their treats in a massive puke, and then Goldman merrily scoops it all up.

And the best part is, with the market so sick on this stuff that the market players have been ingesting, the market rallies and soars in apparent glee because Goldman's good health is a sign that the sickies will soon be in good health too. It was a perplexing turn in the road that Guambat couldn't explain and read no news that expressed the surprise of others. Now having time to look a little deeper, Guambat has found, via Barry Ritholtz, that Bill King did a take on that bit of absurdity too. Some tidbits from that post:
"So what we have is a huge rally because Goldie will profit from the US economy and financial system going to hell. Apparently a critical mass of traders believes that not only what is good for Goldman is good for America but as long as Goldman profits everything else is immaterial..."
Reviewing further items in the news now that Guambat has access to the web, poor old Guambat keeps turning over more roadsigns that misdirect him down a bear trail whilst all the bulls are following the money into prosperity. As Guambat sits flailing away at his steam-driven keyboard, the markets are up again as we "speak".

Among these bearish, but obviously wrongly so, signs that Guambat imagines are the following:

David Gaffen blogs, a day or so ago, that Citigroup
"is being forced to pay up to sell its debt. The banking behemoth sold $4 billion of 10-year notes at the highest yield relative to benchmark rates in the bank’s history, according to Bloomberg. Bianco Research notes in recent commentary that options-adjusted spreads on investment banks’ debt are at their highest in history, and are higher than Merrill Lynch’s corporate bond index, which is exceedingly rare."
This item was only a small part of the larger picture produced by Bryan Keogh and Shannon D. Harrington writing for Bloomberg:
For the first time, the world's biggest financial institutions are paying more to borrow in the corporate bond market than the average company.

The total damage may reach $400 billion worldwide, Deutsche Bank AG analysts said this week in a report, and Wells Fargo & Co. Chief Executive Officer John Stumpf said the housing market is the worst since the Great Depression.

"Until credibility can be restored, the banks are going to have to pay prices to investors that they thought were unthinkable until six months ago," IDEAglobal's Atkins said. "But they have little choice as they need to keep the capital taps open."
Ironically, the following ad appeared at the bottom of the online version of that story on Guambat's computer:
"Advertisement: You've worked, you've saved, now PROTECT your nest egg.!"
A day before that story, Christine Richard and Cecile Gutscher wrote, also in Boomberg:
The crisis of confidence in bond insurers that bestow top credit ratings on debt sold by borrowers from the New York Yankees to Citigroup Inc. may cost investors as much as $200 billion.

The AAA ratings of MBIA Inc., Ambac Financial Group Inc. and their five smaller competitors are being reviewed by Moody's Investors Service and Fitch Ratings. Without guarantees, $2.4 trillion of bonds may fall in value and some issuers would get shut out of the capital markets.

"We shudder to think of the ramifications," said Greg Peters, head of credit strategy at New York-based Morgan Stanley, the second-biggest U.S. securities firm by market value. You have politicians, taxpayers, municipalities, states. It just opens up a Pandora's box. That is a huge destabilizing force."

"The insurers can protect you from one unusual, idiosyncratic event, like a Hurricane Katrina," said Daniel Castro, chief credit officer of structured finance at GSC Group in New York, which oversees more than $24 billion of debt. "What if you had 20 Hurricane Katrinas and everything is wiped out? That's what you have right now."
This stuff is bound to make a cynic of poor old Guambat, who is known to be a bit suspicious of the power of Goldman. But Guambat can't begin to touch the cynicism of the British.

Sam Jones (an alias if ever there was one: like John Brown or Bill Smith)
blogs in the FT Alphaville:
The slump in global credit markets may force banks, brokerages and hedge funds to cut lending by $2 trillion and trigger a “substantial recession”.

Coming, especially, from Goldman [Goldman Sachs’s chief economist, Jan Hatzius] this makes very grim reading.

On estimates of $200bn in writedowns on mortgage linked securities, Hiatzus reckons that banks will dramatically cut back their lending elsewhere in the economy. Instead of providing loans to corporations and stimulating growth, banks will be too busy sheltering their SIVs, CDOs and conduits.

No doubt Goldman will already be making money from it.

But the cynic in Guambat just exploded when he read this, from Boomberg (Guambat may have to give up reading Bloomberg for the sake of his blood pressure):
With Ford workers' approval of a new labor pact two days ago, all three U.S. automakers have agreed to turn retiree health-care costs over to a union-run trust known as a Voluntary Employee Beneficiary Association.

The trust may draw interest from investment firms including JPMorgan Chase & Co., State Street Corp. and Merrill Lynch & Co., he said.

The autoworkers' health-care trust will be equal in size to some of the country's largest pension funds, matching the University of California's $54.4 billion endowment, the 25th largest, according to trade publication Pensions & Investments.

"There's nothing like this in America in terms of health care, and arguably in the world, of this size," said Geoff Bobroff, an independent investment consultant in East Greenwich, Rhode Island, with three decades of asset-management experience. "A lot of people are going to be lining up to service this fund."

He estimated that fees for managing the VEBA may total $285 million.

No doubt Goldman will already be making money from it.


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