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Ronald McDonald is a Safer Bet Than Uncle Sam
This past week saw a remarkable occurrence. The
cost of insuring against a US default via credit derivatives hit record
levels. It now costs more to insure against a US default on their debt
than it does to insure against a default by McDonald's. Ronald McDonald
is deemed to be more trustworthy than Uncle Sam!
This is understandable in the light of the
trillions of dollars in additional debt that Uncle Sam will soon be
adding to its balance sheet. Yet the lemmings on Wall Street continue
adding to their US dollar positions. Don't be surprised to see a bailout
down the road for these Wall Street bets which will have also gone bad.
The Black Hole is Growing
A couple of weeks ago, I remarked that a black hole
nearly swallowed Wall Street. It looks like the black hole continues to
grow. Wachovia has been sucked into the black hole. Don't these guys
know that you're not supposed to feed a black hole?
It looks the black hole has spread to Europe as
well. Several European banks had to be bailed out this past week by
European governments. Wall Street has always had great sales people, aka
con artists. Wall Street has managed, over the last few years, to export
more than half of its toxic paper to Europe. This gives new meaning to
the term “Made in America”!
More ominously, we saw the black hole beginning to
envelop the commercial paper market. The commercial paper market is the
lifeblood of economic activity. It provides working capital for many
corporations and municipalities.
Many major corporations have not been able to
obtain funding for anything more than a few days in the commercial paper
market. The state of California has also not been able to access funds.
California governor Schwarzenegger has told the US government that
California may need $7 billion quickly. I say just put it on the
taxpayers tab along with everything else.
The Lehman Domino Effect
As the US government let Lehman go out of business,
they assured everyone that the effects would be minimal. They were
wrong. What a surprise! Since the bankruptcy of Lehman, most parts of
the debt markets have ceased to function.
When Lehman went under, along with Wamu, the
holders of the senior bonds of these firms lost most of their money.
Everyone, and I mean everyone, in the financial community had assumed
that such an outcome would never occur. Everyone assumed that holders of
senior debt would always be protected. Money market funds and others
were left holding the bag. The bad Lehman debt forced some money market
funds to “break the buck” which precipitated an mass exodus from money
markets funds.
This exodus, in turn, led many money market fund
managers to shift much of their money into the safety of very short-term
Treasury bills. Money market funds had been one of the main purchasers
of commercial paper, but no longer. The demand in the commercial paper
market has nearly evaporated, with a fall of $95 billion in the
commercial paper market just this past week.
The situation in the commercial paper market cannot
go on for long without an economy going into a steep nosedive. Look for
a co-ordinated cut in global interest rates in the near future. Perhaps
also direct purchases of commercial paper by either central banks or
sovereign wealth funds.
Wall Street Shifts the Blame
Wall Street, of course, has tried to shift the
blame onto short sellers and mark-to-market accounting. My suggestion
would be to immediately have mirrors installed in Wall Street executive
offices.
The ban on short-selling has only had deleterious
results. It has drained liquidity from markets, leading to greater
volatility. It has also shifted the short-selling from the financial
stocks to the market more generally, engulfing sectors such as
industrials, transports, energy, and materials.
The short-selling ban has also nearly closed down
the issuance of convertible bonds. Convertible bonds could have been one
possible source of much-needed capital for ailing financial firms.
Instead of shooting the messenger, Wall Street
should be embracing mark-to-market accounting. Trust has been
lost. Transparency is critical to re-gaining investors' trust in
markets. Investors must be convinced that they are getting reliable
information. Until then, many investors will opt to sit on the
sidelines. Or perhaps, they will go to Vegas where at least the word
Casino appears at the entrance.
Historical Echoes
Before the dim bulbs in Congress voted for the $700
billion bailout package, they had rejected the bailout earlier in the
week. The dim bulbs were under intense pressure from constituents back
home.
It seems like the hoi polloi, to borrow a
phrase from the 1920s and 1930s, has lost all trust in the
nation's so-called elite. Americans rightly wonder why their taxes
should be used to rescue bankers from their folly. After all, even
novice investors know that assets don't always go up. Yet, Wall Street
gambled everything on assets going up forever.
In the 1930s, Wall Street bankers were called “banksters”
as a result of the many swindles they perpetrated in the 1920s on
investors. Today, investment bankers have once again taken the public on
an expensive ride. In effect, Wall Street has operated a giant scheme to
turn equity in Main Street houses into gigantic fees and bonuses for
themselves. The finance blog, Dealbreaker, calculates that house sales
and mortgage securitization generated roughly $2 trillion in fees
since 2003!
An additional reason for the general discontent on
Main Street may be that wages for the average person have been remained
stagnant for a long time while the incomes of the elite, led by Wall
Street, has soared. The gap between the middle class and the super-rich
is now larger than at any time since the Gilded Age of the 1920s.
Gold Bars
Another symptom of the distrust of the system is
the enormous demand for gold and silver from small investors. There is
such a demand for bars, bullion, and coins that it is difficult to find
them anywhere without paying a premium.
I do own some gold and silver that I have owned for
years. I'm just trying to find a good hiding place for them. Remember
that in the 1930s, the government confiscated gold coins and made it
illegal to own gold. Let's hope that history does not repeat exactly.
Regards,
Tony D’Altorio
Special Situations Analyst,
Oxbury Research
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