Killer satire on the daily show

One of the best daily show episodes i saw…

Here it is and it is a must watch!!!!!!

Here is the best quote of this entire show:

“Isn’t the dow jones industrial average, just a short twitch numerical representation, of a bunch of guesses, about other people’s assumptions, about the financial well being of, an arbitrarily chosen group of 30, out of ten’s of thousands of possible companies?”

That or some thing similar to that is what i would expect any sensible financial journalist to say, but there aren’t too many out there who can say and keep their job. Especially not on CNBC, the network which is taken to the cleaners in the first segment of this episode.

Then this insight, which i think is one of the best thoughts about the bailouts of all these banks and insurance companies. It takes a total outsider to come up with some thing like this, and this is out of the box thinking. Regardless of this not being considerate of accounting practices and what not, this statement shows us how legislators should start thinking…..

“We are paying billions of dollars to the people who insured those crappy loans, and we are paying billions of dollars to the people who made those crappy loans. Aren’t we paying for the same crappy loans twice?”

Jon Stewart is probably the best news commentator out there, all because, no one takes the court jester seriously, but by virtue of that immunity, a court jester can criticize the king and tell the truth and get away with it.

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Media in general and CNBC crowd in particular – You Know Who’s…

If you were watching CNBC or even follow MSNBC, you would have noticed this idiotic rant from one of CNBC’s so called market analysts.

Earlier we had Jim Cramer had a similar rant.

Notice how in the earlier instance, jim cramer was ranting about Ben Bernanke was doing all the wrong things and should cut interest rates and so on and on and on…. The reason mentioned is… People will loose jobs. Who are these people? It is those same market traders and other financial market workers.

Now that they have had their bailouts, “and” recieved their bonuses for the year, and assured of future bailouts as well, these people and their cheerleaders in CNBC want no bailout to home owners!

Rich, isn’t it?

When these guys get hit by a bus, it is a problem of the whole world and government and legislators and tax payers should bail them out, but when others get hit by a bus it is a question of personal responsibility. Even if those others, were suckered in by these very same wall street types into all those ALT A mortgages, sub-prime mortgages and liar loans.

What happened to all those questions of philosophy when house voted out the initial bailout and the stock market tanked? What happened to these rants when wall street executives cut sweet heart deals to pay themselves bonuses even as the tax payers were pumping in the money to save their companies? Ofcourse, this CNBC crowd probably never ventures out of their comfort zones of stock market trading floors and well appointed studio’s. No wonder this particular “reporter” waves his hand at all those traders to say “this is america”. He should really try his own cool aid and visit smaller towns and rural areas of america!

If home owners are not bailed out, then lets also un-bail out financial institutions, and when society degrades to tribal warfare, it will be all those construction workers, factory workers and manual labor who will, for once have an edge, over these masses of over weight and greedy you know who’s.

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American recovery and reinvestment plan…. Whatever!

House passes the granduosly named American recovery and reinvestment plan, and, it is irrelevant at this point. For this plan is not far sighted enough nor does it change the game in any way. But don’t blame the president for this, for he was just working with in the boundaries of consitution. Fact is this is a failure of politicians and ultimately the citizenry. When will legislators realize that idelogy, either left or right, never gets anything done?

Not till, citizens of the country actually kick out politicians off their positions.

Let me elaborate…

Politicians are “ALWAYS” behind the curve in accepting reality, and when idelogy dominates clear thinking, they become spectators rather than take part in actively shaping the future. “Main street” has been hurting for years now. Politicians never really managed to understand that. Why would they? The re-election rate for house is close to 90% and for senate it is about 75 or 80%. And they make the laws. What incumbent would really have to think and adapt when they have a pretty secure career?

So much for my rant, but think about this stimulus plan and i may make sense.

There is a generally accepted, “Conventional Wisdom” (in John Kenneth Galbraith’s words), which says that tax cuts will be spent. Even liberal economists argue that tax cuts for the lower income will be quickly spent. This need not be correct!

Who pays taxes? Thanks to progressive taxation policies, income tax is paid by people who make more than a certain amount of money every year. Sales tax is paid by people who actually buy stuff. Property taxes are paid by people who own property, capital gains tax is paid by people who have invested some capital and inheritance tax is paid by people who inherit.

Except probably for people who have to pay inheritance tax every one else is not in a position to pay any tax. People who loose jobs do not have an income to pay tax on, those who have invested haven’t had any return worth mentioning and other’s who have invested in property are going ask for re-assessment. Finally, given 24 * 7 news cycles, the internet and personal experience pretty much every one out there knows that times are bad and so will conserve their expenditure and so, sales taxes tank.

In this environment, what is the impact of any kind of reduction in taxation? Zilch would be an attractive answer, but i would say negligible is a better answer.

Similarly, cutting business taxes doesn’t make businesses expand during a down turn. It is just a way to improve profitability of businesses there by improving their ROI. Will that impact the “Main Street” in any way? Sorry no dice.

Given all the above, what are all these tax cuts going to achieve apart from bloating up the stimulus plan? Nothing…

Finally, what will actually work? Get people to work, and that doesn’t mean just “Shovel Ready”. Get people to work at a visionary level, some thing like a moon shot, but here on earth. What are the immediate possibilities?

There may be many based on your own perspective on a large number of issues, but… we desperately require some thing huge, visionary, game-changing, “conventional-wisdom” busting, paradigm shifting, build a new framework for the society of the future, in nature.

Green Energy.

This implies, give tax breaks of “very” sizable nature to any thing that will make anything “GREEN” profitable. Hybrid cars? yes. Infact, hybrid anything is a big yes. How about incentives to making homes, public buildings, private buildings etc. reduce energy expenditure? Big yes. Roads, bridges? Big yes. A new power grid? applause. Broadband internet connectivity to every single town / village in the nation? Go now!, a mobile phone infrastructure that actually doesn’t drop calls even with in large cities? big smile,  a national plan to build high speed rail lines across all the big cities? That should get a resounding, collective thumping of the tables across house and senate.

Will that happen?

I doubt.

Elected representatives for the most part don’t need to fear loosing, and when that is the case, they can participate with elan in ideological gamesmanship.

USA is the economic engine for the whole world and the magnitude of the current economic situation doesn’t suit small acts, small moves and small minds.

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Informative article on nytimes

Here is the link to an informative article on nytimes, detailing the genesis and circumstances associated with the quantification of risk in a portfolio.

The book mentioned at the beginning of the article “Against the gods” is a part of a series of excellent books by Peter L Bernstein: Capital Ideas, Against the gods and The power of gold. The breadth of history covered in these books along with the analysis and the author’s insights are well worth the time spent in reading these books.

Highly recommended, both the article as well as the books!

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Is 2008 is forgettable? No, Never… Not if we want don’t want to repeat it

I’ve seen enough of the articles, which say 2008 is forgettable or imply this…
Here’s a sample.
Newyork Times:
Markets Limp Into 2009 After a Bruising Year

AP:
Stocks gain as investors try to forget 2008

SanJose Mercury News:
2008: For stock investors, a year to forget

Atlanta Journal Constitution:
Good riddance to 2008; it’s time to start over

Boston Herald:
2008: A year to forget

The National, UAE:
2008 – a year investors would rather forget

Well, let me give you one sentence for all such stories…

Those who forget history are doomed to repeat it….
Don’t ever forget 2008. This was the year which treated us to many historical lessons.
We will forget it at our peril…………….

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It’s official… We are in a recession

NBER finally made its statement and we are in an official recession.

Apparently economic activity peaked in December 2007.

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Now you are an investment banker, voila… now you are not.

So GS and MS want to become bank holding companies now.

This needs to be thought through properly before any comment is made.

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Stock market is falling. No reason to panic and pass Paulson’s plan with out change.

Dow is currently about a 150 points down. Over the next couple of days there may again be volatile swings in stock market. Such volatility may be used to pressure congress to pass paulson’s plan. Volatility in the stock market is natural in such troubled times and should not cause a panic among the congressional representatives or senators. There will be volatility, lets face it, because there is market uncertainity and market uncertainity is caused by a lot of factors including the discussions in the congress.

That in no way implies congress should capitulate.

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Here we go again!!! Oil is above $104.

The bailout plan is not yet passed by the congress and oil is already above $104.

Why?????

Here’s the logic, US government is giving a bailout to the wall street, but FED has to create those $700 billions. Which means, huge amount of deficit in US. That implies US currency dollar will loose its purchasing power and Oil is sold in dollars across the world. Since, dollar will loose its purchasing power, the same barrel of oil will need more dollars to buy.

What will the impact of this be?

Since, oil gets expensive, transportation costs for companies will increase, both to fetch the raw materials to manufacturing plants and to supply finished goods to the retail store. No surprise, businesses will increase prices. So more inflation.

Will the FED be able to increase the short term interest rates to beat the inflation? Sorry, that won’t happen because economic growth rates are anemic right now and so we need to keep interest rates low to ensure more lending to businesses.

If you think about it, will keeping the interest rates low mean there will be more economic activity? Not really, since, economic activity is not mandated by the low short term interest rates. Low short term interest rates are just a minor push for the system. They do not necessarily imply banks will lend to businesses, as was evident over the past year or so.

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topical, satirical and lucid. Altogether a great first post!

Do read this post on bailout plan.

Congratulations on this great first post.

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Paulson’s Corporate Welfare plan: LOL line

So federal government will buy all these unsellable mortgages from financial companies. And then will ask these very same financial companies to manage these mortgages for it.

I wonder if they could keep a straight face when they were thinking that up.

What next? No-bid contracts for managing these mortgages?

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Paulson’s corporate bailout plan: What is with that time period?

What is with the time horizon of the bailout? Check this link.

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Bailout plan: Why is executive compensation a part of this?

Apparently, democrats want to limit executive compensation as a part of the bailout plan according to this report in the new york times. Apart from being symbolic, it is silly, divisive and very difficult to arrive at. Unless it is being used as a negotiating tactic, this proposal has no place in this law.

The really important aspects are valuation of these mortgages, holding accountability, ensuring no repeatition of such a crisis, and gaining a tax payer upside for the future. I do not see any of that in this plan.

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Bailout plan — Should america bailout foreign corporates?

As surreal as it may sound, paulson’s corporate welfare plan in the guise of an economic bailout plan can not exclude foreign corporates. And that’s not because of the reason that paulson gave on the weekend talk shows (You know that one about “even a foreign corporate with significant american operation”).

It’s becuase most of these target companies to which paulson wants to provide welfare are not US companies, they would have a hierarchial structure and the holding company would usually be in a tax heaven. So including so called foreign corporates is not making such a huge sacrifice as they project. Its a basic necessity to ensure corporate welfare reaches its intended targets.

By the way, even if corporate nationality mattered, it is easy to bypass that minor irritant. excluded corporates will simply back date and sell their junk to an included corporate. They will have to back date since the plan covers all operations till last week, which is a joke!

The more you take in the details, the more this corporate welfare plan looks like some thing out of a thirdworld, crony capitalist, kleptocracy.

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Paulson’s bailout plan wont work for the average american

I know that’s not supposed to be the reaction to this bail out plan. But i do and here is why.

The bailout plan asks the amount of money, which hopefully, will allow all the financial institutions to take off unsellable mortgages off the books. All the following points arise.

1. The $700 billion dollars is not a value for the entire bailout. It effectively means, the initial amount of money will be just a start. Once, let’s say, $500 billions are spent in buying these unsellable mortgages, it does not mean there are only $200 billions left. In effect, if $500 billions are spent, and those mortgages are moved off the Federal balance sheet (and in case you do not there can be any number of ways to do that), treasury can go back and ask for $500 billions again. So, $700 billions are just a start. This apparently can go for the next two years.

2. The draft mentions that three months after the bailout, Treasury secretary is expected to update the congress. After that it will be done semi-annually. If, as is claimed, this is economic armageddon, then would it not be appropriate to have more frequent updates? Will your banker not decide how often you should provide information on your business if you take a loan from a bank?

3. Any decision taken as a part of the bailout will not have any congressional oversight. So, effectively what the treasury secretary is asking for is a blank cheque and no questions asked. What happened to the whole system of checks and balances? Does the treasury secretary think elected representatives of the people incapable of understanding actions taken? Did the treasury secretary as a goldman executive allow the same thing with his subordinates? Why does a past goldman sachs executive think he is beyond conflict of interest? Does Frank Paulson think he is the “ONE”? Why should i believe a past wall street executive not to screw the average american to benefit his peers on the wall street?

4. Most importantly, what is the federal government doing as a part of the bailout to ensure that those corporates that were instrumental in this situation, are held accountable / responsible for their actions? Why doesn’t the federal government take an equity stake in those financial institutions, so that in future profits from these financial institutions will cover the risk of taking up the liabilities of wall street by the government? What at all is being done to ensure that corporates who over leveraged are loosing some thing for their incompetence? How is it different from personal responsibility for the individual?

5. The other important issue is, how will these unsellable mortgages be valued? What is the process to be followed to arrive at the value of these unsellable mortgages? Will the federal government take the values mentioned by Wall street at face value? Fundamentally, if the mortgages are unsellable, then what is the point in valuing them? Why can’t the government simply take over all these unsellable mortgages? That will certainly shrink the financial institutions, but, since the government can hold these for a very long period of time, it can still sell them in 10 or 15 years time hopefully at a profit. (That is highly doubtful.)

6. In order to ensure that some thing like similar doesn’t happen in the future, are there any actions being taken? There is no talk of increasing regulation as a part of the bailout. In seperating re-regulation from the bailout, federal government is just ensuring that the status quo continues. There is no way, a repeat of this situation in 15 to 20 years (remember S & L crisis approximately that time back? That was peanuts compared to this. Also, remember all the de-regulation that happened since then. Do you see a connection between that de-regulation and larger magnitude of this crisis today?) is not prevented, since, re-regulation as an independent legislation will never ever be allowed.

Altogether, the systemic economic risk is a pretext based on which federal government is attempting corporate welfare.

While all the above were aspects that were of immediate interest, here is what will happen in the next few years.

1. Because the federal government is vastly increasing its debt, the direct result will be an inflationary economy, i.e. government prints money and buys all these unsellable mortgages, financial institutions will not shrink, which means there is more money floating around in the economy which implies higher inflation. Does the bail out talk about increasing the short term interest rates? No. Does it commit to any longer term measures to ensure that there is controlled decrement of federal deficit? No. Who will loose in the bargain? It is the average american who will have to pay more at the gas station, at the groceries and will see his / her savings rapidly getting devalued.

2. All this may be for a greater good, but then, will the bailout plan in any way try to address the foreclosures themselves? or reduce the mortgage values for individual home owner’s? Sorry no dice. Average american’s will continue to pay the same levels of monthly payments, even if their mortgages are underwater. Interest rate resets will continue and if you  can’t pay the higher rates, you will still be foreclosed on.

How is the average american going to benefit from this bailout plan? No way!

This is a classic case of peddling economic scare stories to ensure corporate welfare.

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One of the best video’s on english financial system

Here is one of the funniest video’s on financial system in England.

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Discussions by John C Bogle…

This is an excellent speech by John C Bogle, of “Vanguard” fame.

I particularly like the way he corrects claims on “Value Investing” as well.

Of course, we’ve been assured that “value investing wins” (not “has
won in the past”), especially in troubled markets.

It may sound orthodox, quaint and probably even puritanical to some, but to me that statement encapsulates the philosophy of value investing. In its essence, value investing accepts that future “may or may not” reflect the past. So, no one claim any investment strategy to be a pre-ordained success. Not even “Value Investing” which has historically performed well.

This article is particularly interesting since, it does some level of expectation setting to form a baseline for the next decade, in terms of what may be expected from investments in both stocks and bonds. The critique on various stock market innovations is quite revealing of the causes for the current turmoil in financial sector.

All in all, a very interesting read and highly recommended.

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FED’s tough spot coverage by FT

Here is a link to an article on FT where FED’s tough position is explained.

We discussed this some time back.

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Its panic time at the stock market but just like any panic attack, this will pass…

Today the Dow Jones fell by about 390 points and simultaneously crude oil went up by about $10 per barrel. As usual with the market analysts, we have some cookie cutter explanations. Jobs report showing a fifth straight month of losses is supposed to have triggered a wall street collapse, even though the actual fall was less than most market estimates. In the case of crude, an Israeli minister’s statements were attributed to the rise.

This is a great example of rationalization, that market analysts bring to explain market movement.

Consider this, if the actual jobs lost for the month were less than what was expected, it is cause for cheer, not gloom. Especially since, retail sales report showed better than expected results too. Alternately, if the economy was tanking as depicted by the stock market, then direct result would be lesser economic activity and lower demand for crude which would have meant lower crude, not a spike in prices as seen today.

An different explanation would be economy is in recession mode, so FED will have to reduce interest rates again, so dollar would depreciate against major currency basket, so crude oil price which is priced in dollars, goes high to rise to cater to the depreciating dollar. However, this does not explain why crude oil price started lowering to $128 per barrel yesterday.

In essence i think this was a panic impulse and just shows the confusion all market participants are undergoing. I would expect to see Dow Jones increasing and Crude slipping come monday US trading time. But the real question is what are the factors that would affect economy and therefore the stock markets over the next few months?

To analyze this, focus on the factors that would are really relevant. It is well known that real estate prices are still falling and there is no doubt of the fact that cleaning up of the financial system is a task just begun. We haven’t really seen credit card related defaults or losses, we are yet to see mortgage insurance, reinsurance related write downs complete. Most importantly, till the point in time, real estate prices do not stabilize, the domino effect will continue and there will be more and more losses across the board. Remember that all the major financial institutions have raised capital for some time now and have effected write downs. This may prove ineffective and may continue forward till real estate prices stabilize.

Most importantly, these are the kind of sell-off’s that will bring stock prices back to a reasonable level and a series of such sell-off’s are required for reversing the excesses of past few years. As always those who rely on the wisdom of Benjamin Graham will survive.

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Well thought out but a 30000 ft. high view

Check out this article by Lawrence Summers on financial times. Reading the article it is evident there was a lot of thought that went into it. However, this was a very high level thinking. Every single point mentioned there in seem reasonable but putting these into practice takes a lot more detailing. For instance, the second point, “it should be recognised that to a substantial extent self-regulation is deregulation”, while makes great sense, is very difficult to implement.

Nevertheless, this is food for thought.

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A poor case of financial journalism by NYTimes

This isn’t the kind of financial journalism i expect from nytimes. Today, they have an article titled “Conventional Wisdom, Foiled Again“. The article refers to a study conducted by a couple of professors who find that those stocks which have been dropped from Russel 2000 index tend to perform better then their replacement over a period of time.

While the article has enough “ifs and buts” to cover itself, it does not make good financial journalism at all. First of all, the title conventional wisdom, foiled again is mis-leading. Unless you are a stock market trader, an analysis of stock market technicals does not help an average person. In that sense, this article does not have a place in nytimes. Over and above that, the article does not mention any thing about real conventional wisdom, from the likes of Benjamin Graham, which is, if you look deep enough into any set of statistics you will find a random pattern. Most importantly, the article does not take a critical look at the possible causes of the pattern, nor does it evaluate the effects of trading volume, financial results of the company or sectoral performance.

This would have been a mis-judgement on the part of an incompetent editor, if it were not the kind of article that may incite an average person to get into stocks dropped from Russel 2000. As it stands it borders on being irresponsible.

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FED: Between a rock and a hard place

Do you remember those days when Ben Bernanke was termed an “academic” by those on the wall street actively incited by financial media? August 2007 through March 15th 2008, when Bear Stearns was rescued by FED, Ben Bernanke was called that and worse.

Since Bear Sterns episode, have you heard any one say anything negative? Not really, infact he is currently in the good books of a lot of people for his handling of the situation as is evident in this article on NYTimes. It is almost like, he is a super hero of some sort who can over come any obstacle.

Quite to the contrary, the FED and Ben Bernanke are in a tougher position today then they were in resolving Bear Stearns crisis. During a crisis, taking an action is easy, since, the goal is clear and short term. Now that the crisis has passed and a template for resolving a particular financial institution solvency is available, FED faces a much tougher task.

Given the inflationary atmosphere, one path ahead is to raise FED short term interest rates. Given the inverted yield curve for some time now, and current inflation rates, the expectation of the market is that over the next few months, FED will increase short term interest rate.  Here is one blog that describes the situation.

But this is the wall street view and may not necessarily be the right thing to do. Imagine a scenario, where the FED will start raising rates to stem inflation. A direct consequence would be credit access to the general population would be much more difficult. Though TED spread volatility has abated, it has not percolated down to the main street owing to the solvency issues at financial institutions. If the FED increases interest rates now, mortgage rates will shoot up again and it will make the job of clearing the mortgage mess difficult.
Also, interest rate manipulation is a tool to apply brakes on an over heating economy and US economy isn’t over-heated by any estimate.  Given this, FED moving short term interest rates up is very difficult to imagine at this point in time. I am fairly certain it will not happen atleast for the next few months. In the interim, it will be useful to watch out for the results of financial institutions.

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Interesting article

This is an interesting article on financial derivative products on financial times site. A pretty good round up of the last the last 15 years of the industry evolution.

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The brand new factors

I call this an inflection point because, there are certain factors that have come into play which were not around the last time we had a recession, especially financial sector recession.

1. Competitive global economic landscape.

2. Future inflation in commodities.

3. Competing global currencies.

This is not a very late call about, emerging economies, rising oil and falling dollar. I believe these are manifestations of a challenge that has not yet been recognized adequately. More on this later.

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Here comes the inflection point

Andy Grove, celebrated ex-chief of intel wrote a book titled “Only the paranoid survive”. It was a great read certainly, but the reason i recall it, was because, for quite some time now, i felt i was missing some thing, but could not place what it was. This, of course is in the context of the current economic scenario.

Well, i think we are currently in the middle of a “strategic inflection point” for global economy. But first, what is it? Here is what they have on Intel Site. A general google search will also result in quite a few links, so i wont point more. But the essence of a strategic inflection point is that it is a time of 10x change. A time when, the fundamental rules change. At time when the old rules no longer apply.

There may be multiple reasons why such a change occurs in a business environment. Things like a break-through technology (Microprocessors to Integrated Circuits), radically new distribution channel (Internet for media, snail mail etc.), Information source (Internet again for term life insurance and student home work) etc. are some such in the business arena. However, the changes currently in progress are at a far more fundamental level, that of geo-politics and society’s.

The best way to understand and survive current change is by having the context of such changes and the possible consequences My next post will be on the elements that suggest there is some thing to this line of thought.

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Revenge of the nerds??? Nobel Lauretes discuss economy… hold your breath, on CNBC!!!!!

Check out these video’s on CNBC. Nobel Laureates in economics discuss US economy on CNBC, which despite being a business channel, never had this quality in its programming in years…

http://www.cnbc.com/id/24311464

http://www.cnbc.com/id/24313079

Check out all the videos. Great stuff. Generally speaking, i am not a huge fan of CNBC. I think they are just a bunch of cheerleaders for the stock market. Here, they out do themselves. Doubtless, you will notice these clips do not have their star anchors!!!

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Does Regulation Strangle Innovation?

Here is The Economist, suggesting that regulation strangles innovation.

The gist of this argument is, periodic financial crisis are a must for continued financial innovation. The alternative is slow growth and slumbering economy. While this argument may be rebutted in multiple ways, for each of the point made in the article, lets first focus on the premise and its validity.

How can slicing and dicing an existing financial instrument into other similar instruments be termed innovation? What is “New” about creating a variant of an existing mortgage by picking up various bits and pieces of the projected cash flow from it?

As any intelligent person would say, it depends on the context, and it may or may not be innovation.

Thank you for calling it out. It means that usage of the word “Innovation” is a question of semantics.

The article also makes the point that, a family that will not lend a $1000 to the neighbor is willing to lend it to a remote chaebol in korea. Well it is not the chaebol in korea that iam lending to. I am opening a savings account with the neighborhood bank and i still have my savings in the bank account since the FDIC insures my savings account up to $100,000. What the bank does with accumulated savings of thousands of individuals is immaterial to each of the individual since FDIC, a federal regulatory agency guarantees that each one will get back the full amount till $100,000 even of the bank closes shop over night, since the korean chaebol shut shop.

Consider that even as there is such a turmoil in the financial systems, there is nary a run on a single consumer bank that insures its deposits through FDIC. That is what you get out of good regulation. Argument closed.

While there are many such easy picking in this abysmally argued article, it makes no sense to ponder more over it.

The moral of this article is this. Be Skeptical, be very skeptical about what you hear from others, especially when ideology is dished out supporting an argument.

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Its darkest before dawn… Are we close to the bottom of the economic crisis?

First and foremost, please treat all the opinions below as my personal analysis and do not take any action based on this.

Are we at the bottom of the economic crisis in the US? I believe we are close to being at the bottom. Calling the bottom being a question of judgement, there will not be a particular day when it can be claimed we are at the bottom. That may only be done in retrospect, and by those designated, for that purpose. So, this is, in essence a judgmental call.

Let me hasten to add, this by no means implies that we are past the after effects. There will be more asset write downs by all the major financial institutions. There will be major action by the federal government to over come the sub-prime mortgage crisis. And, there will be businesses closing and people facing tough times. This will be the case for many more months to come.

Economists will start to talk about a “Jobless” recovery starting in about 9 months. Whoever is the new president, will praise the “Miracle” of free market capitalism starting in about 12 months. The average person on the street will be shown on various media outlets, talking about the way life not being any better for all that the government has done to bail out the economy.

There then, let me paraphrase what i said above. We are reaching that point where financial institutions will start getting into better shape in about 6 months time. This means that there will not be more asset write downs, there will not be FED assisted bailouts and stock market will be yo-yo-ing, albeit at a slightly higher level. Media out lets will start focusing on the new president and his initial honey moon period. What was promised and how will it be done etc. etc. & etc.  There will also be those “Human Interest” stories about how the stability in the financial system has not really percolated down to the “Common Man”. This will be starting early next year.

Why would this be the case?

Because, this is primarily a financial system meltdown and not a total economy crash. A total economy meltdown would have resulted had this been a less globalized economy, or if this were pre-new deal era economy, where there were no safety nets. Thanks to globalized 24 * 7 financial markets, weekly economy statistics and a media that magnifies every little details in its search for that “Hot” story,  every one (Even the government !) realize a problem that may arise. In this particular instance, there was action taken, though as an after thought.

FED bailout of Bear Stearns has shown that federal government has started taking action and will go the extra step to ensure that the economy (at least the financial system part of it) runs smoothly. If there is any thing the market hates,  it is uncertainty. FED and the federal government have demonstrated that they are willing to act decisively to avert total systemic meltdown and at present stock markets are just awaiting further asset write-downs by various corporates in financial markets. As soon as this is done, (and it is important that they do it fast, to ensure that they get out in the window provided by FED) stock markets will halt their decline. It is back to the business of valuations, of businesses and future revenues, profits etc.

Will this means that life will be hunky dory for the average “Common Man”? Not by any stretch of imagination. What the FED and the federal government have managed to do is to avert a crisis of confidence for the financial markets. They have ensured and made their intention clear of ensuring, that the economic system will not derail.

What may be done to kick start the economic growth? Will there ever be a situation in American Economy when GDP growth will compete with that of all the emerging economies? Will we ever get back to being the engine of global growth?

These are topics of a different post.

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Proposed IPO of Visa — Slippery territory

Apparently visa has decided that it will come out with the largest IPO ever in US stock market. As i see it, this is a risky maneuver for buyers. Currently financial industry is trversing an inflection point, asset repricing is in progress and most financial institutions are increasingly looking at monetizing as many different types of assets as possible.

In situations like this, it is extremely important to run through the financial statements of the IPO company with a fine tooth comb and examine the valuation of the organization skeptically. The more conservative the financials and valuation the better it will be for an investor.

Especially important would be elements of the business model that depend on externalities. Credit card industry is a high visibility industry and the chances of external environment affect, like legislative, regulatory impact on the industry should be factored in while arriving at the valuation of Visa.

This is an interesting IPO process to follow.

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Economy – The sound of shattered conventional wisdom

Given the way most economic predictions are going awry, it is safe to say we are in unknown territory. Trodden though this path is, it pays to briefly examine things that went off the predicted course, since this will allow us to break away from conventional wisdom in charting the way ahead.

When stock market fell mid-way through last year, the instantaneous prescription from market watchers and players was to cut short term interest rates. FED obliged with two of them last year. As financial institutes started writing down previously valuable assets, it was time for crisis management and FED went into an overdrive with more short term interest rate cuts.

Now the conventional wisdom is that when FED cuts rates, and induces liquidity into financial system, it will percolate down and consumer will get lower interest rates. However, as is mentioned in this article in LATimes, average user is experiencing higher credit card interest rates.

This is not a problem with just unsecured debt but even with secured debt like a 30 year mortgage or a 1 year ARM. Check out this trend for the last six months comparing these two rates with Fed funds rate. Even as Fed rate went down, these interest rates do not trend down as may be expected.

A second piece of conventional wisdom, shattered by the past few months is that of inflation rate and how it trends with economic situation. Inflation is moving up over the past six months even as economic growth remains anemic.

And finally Gold, Oil and Commodities (you will have to search for each commodity separately) are still pushing new highs. Again this was not supposed to be this way per conventional wisdom.

Thus, we are heading into the unknown as far as economic predictions go and the right thing would be to temper logic of conventional wisdom with continuing attention to financial system behavior.

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