In the financial markets, 2008 was a year to forget; the worst year in (my) recent memory. But after seven good years, we're allowed to have one clunker, especially since this sets the stage for a rally in 2009. The resource stocks got hit just as hard as every other asset class, with the larger companies down as much as 40-50% and the exploration companies off 80-90%. Because of the credit crunch, some of the smaller companies may not survive, but this only creates opportunities for the better-capitalized survivors. The only asset that held up in 2008 was gold bullion, which actually managed a small gain, year over year. Even its cousin silver declined substantially from July through October. But the year end rally, in which a broad range of mining shares appreciated 100-200% is a portent of things to come.
2008 will be remembered in much the same way 1929 is remembered. It was the year in which the wheels started to come off. The government has already pledged $8.5 trillion in guarantees, bailouts, and assorted rescues, and there is no way even to borrow that much money. It will be created out of thin air, as will the funds needed to finance Medicare and Social Security some day. Bush has managed to delay until he can leave office the total collapse of the financial markets by means of overt manipulation that has gone unreported in the mainstream financial media. But when President Obama has to ratchet up spending another $1 trillion to make up for sharp declines in consumer spending and business investment, the game will be over. All that remains to be determined is which president gets blamed for it. If Obama is smart, he will get the bad news out of the way early.
In sports this may have been the best year ever. It started with the best Super Bowl ever, then the best U.S. Open (Tiger winning a playoff on one leg) ever, then the best tennis tournament ever (Nadal-Federer at Wimbledon) and then the best Olympic performance ever (Phelps 8 gold medals) so I doubt 2009 will measure up.
Leadhead, if you're out there, even you would have enjoyed watching sports in 2008.
Wednesday, December 31, 2008
Sunday, December 28, 2008
So much for Dallas
OK, my prediction of Dallas over San Diego in the Super Bowl doesn't look so good. Today the Eagles beat the snot out of the Cowboys (final score 44-6) to send them home for the winter. Way back when, before the season started, I said the Cowboys only weakness was its coach, and I still feel that way. There were other problems, like losing their QB for a month, the offensive line getting old, injuries in the secondary, and so on. But if they had a good coach, they could have overcome these obstacles. New England has 14 guys on injured reserve, including Tom Brady, and they still won 11 games (which isn't good enough in the AFC) but then the Pats have a real coach.
There was a moment in today's game which highlighted the problem. The game wasn't completely out of reach yet, and Dallas faced a 4th-and-1. Wade Phillips sent the punting team on the field, and Tony Romo waved them off. He kept the offense out there, and they picked up the first down. Great initiative by Romo, but who is running that team? I don't know a lot of head coaches (most of whom are typically control freaks) letting their players make those decisions. It begs the question: why do they need Wade Phillips at all?
At least the Chargers are still alive, although just barely. As I write this, they are leading Denver, and they need this game to finish 8-8, which will qualify for the playoffs. Hey, somebody has to win the AFC West. It's the Chargers luck to play in the weakest division in the NFL, where 8 wins gets you in the playoffs, while New England wins 11 games and misses out.
Which brings me up on my soapbox again. It's time to do away with all of the division and conference concept with respect to wild cards. San Diego can make the playoffs with an 8-8 record, while a bunch of teams with 9, 10, or even 11 wins didn't make it. Therefore, if I were king (or at least NFL Commissioner) I would decree that the teams with the 12 best records make the playoffs. Period. If there's a tie, the appropriate tie-breakers can be used, whether head-to-head competition, strength of schedule, or whatever.
My point is that the AFL-NFL merger took place almost 30 years ago. It's over. If the AFC has most of the best teams in the league, then they should send 7,8 or 9 teams to the playoffs if they have better records. There's no reason some underserving weak sister team in the other conference should be in the playoffs just because it won a weak division, or qualified for a wildcard in a weak conference. And the chance of this suggestion being adopted? Don't hold your breath.
There was a moment in today's game which highlighted the problem. The game wasn't completely out of reach yet, and Dallas faced a 4th-and-1. Wade Phillips sent the punting team on the field, and Tony Romo waved them off. He kept the offense out there, and they picked up the first down. Great initiative by Romo, but who is running that team? I don't know a lot of head coaches (most of whom are typically control freaks) letting their players make those decisions. It begs the question: why do they need Wade Phillips at all?
At least the Chargers are still alive, although just barely. As I write this, they are leading Denver, and they need this game to finish 8-8, which will qualify for the playoffs. Hey, somebody has to win the AFC West. It's the Chargers luck to play in the weakest division in the NFL, where 8 wins gets you in the playoffs, while New England wins 11 games and misses out.
Which brings me up on my soapbox again. It's time to do away with all of the division and conference concept with respect to wild cards. San Diego can make the playoffs with an 8-8 record, while a bunch of teams with 9, 10, or even 11 wins didn't make it. Therefore, if I were king (or at least NFL Commissioner) I would decree that the teams with the 12 best records make the playoffs. Period. If there's a tie, the appropriate tie-breakers can be used, whether head-to-head competition, strength of schedule, or whatever.
My point is that the AFL-NFL merger took place almost 30 years ago. It's over. If the AFC has most of the best teams in the league, then they should send 7,8 or 9 teams to the playoffs if they have better records. There's no reason some underserving weak sister team in the other conference should be in the playoffs just because it won a weak division, or qualified for a wildcard in a weak conference. And the chance of this suggestion being adopted? Don't hold your breath.
Saturday, December 20, 2008
The SEC: Send in the clowns
Way back in the 1920's, corruption was rampant on Wall Street. The government's response was to create the Securities and Exchange Commission to regulate the stock market. In 1933, the Glass-Steagall Act prohibited commercial banks from investing in stocks, and brokerage firms and investment banks from getting involved in commercial banking (among other things.) The point was to establish the proverbial "Chinese wall" to separate commercial banks and investment banks.
This worked well for decades. But Wall Street's greed could not be contained forever. BTW, I may have mentioned this before, but it bears repeating: the real power in this country is in New York, not Washington. That said, in 2004 Treasury Secretary Henry Paulson was the head of the investment bank Goldman Sachs. He (among others) went to the goverment complaining that only being allowed to use 12-1 leverage was constraining his firm's ability to do business. That's like having 8 cents for every dollar you risk in the stock and bond markets. Goldman Sachs (and the other banks) could be more profitable if they were allowed to use leverage of 20-1, or 30-1, or 40-1.
And so it was done; Wall Street firms were transformed into gambling casinos. It wasn't as risky as all that for Goldman and JP Morgan Chase, since their government connections and inside information allowed them to know what would happen ahead of time. It's a lot easier to play the market that way. But some of the less privileged players made bad bets and fell by the wayside. Today I doubt there is one large financial institution that would be solvent if it had to liquidate all of its assets.
Where was the SEC when all of this is going on? Good question. They certainly weren't investigating Bernie Madoff. Madoff, if you haven't heard the news lately, was a distinguished 70-year old former chairman of the Nasdaq. But for the past ten years, he has been running a Ponzi scheme that stole $50 billion from investors. And it's not like the SEC actually caught him; his own people finally turned him in. The SEC had been tipped to investigate him over and over for the past nine years, and never looked into his operation.
As I have said before, people need to go to prison; not just in the failed banks and brokerage firms, but in the regulatory agencies as well. The SEC ignored naked shorting of stocks until it finally had to step in and prohibit the naked shorting of the 17 financial firms that had been doing all of the naked shorting in the first place. In other words, the SEC only protects the criminals. In this country, we don't take disgraced government officials out and shoot them, and that's really a shame where Christopher Cox is involved. Under his "leadership" for the past four years, our financial markets have been manipulated and controlled to a level the old Soviet politburo would have been proud of.
In 1805, the Battle of Trafalgar was fought off the Spanish coast, in which the British admiral Lord Nelson destroyed the combined French-Spanish fleet. The French admiral Villeneuve escaped with his life, and returned to Paris, where Napoleon reportedly was not happy with him. Shortly thereafter, Villeneuve was found dead, stabbed three times in the heart. The police ruled it a suicide. Ah, to live in simpler times, when disgraced leaders got what they deserved!
Tuesday, December 16, 2008
Quantitative easing
Quantitative easing: those are big words that mean, "Oh &*$#@!, we better start printing money like there's no tomorrow!"
Today the Fed cut interest rates by 75 basis points. The federal funds rate is now a Japanese-like 0.25%. It can't go much lower. So now one monetary weapon is out of ammo. Next, the Fed will begin purchasing Treasury bonds (if it hasn't already through covert means in the Caribbean.) Ever wonder why Caribbean countries own tens of billions of Treasury bonds? Are we buying lots of something from them that I don't know about? What do they export, anyway? I suppose it is possible that hedge funds domiciled in the Caribbean have been buying T-Bonds, but I am more inclined to think there is an arm of the US government doing at least some of the buying.
Whatever the case, the Fed is going to be buying A LOT of T-Bonds. More importantly, they will be monetizing the debt, which is a fancy way of saying they will simply print money to buy those bonds. Actually they don't print much money any more. Why kill all those trees, and waste all that paper? The money will be simply created out of thin air. I think the market has finally gotten wind of that in the past couple of weeks; that the deflationary scare was just that, a scare.
For the fist time in at least a couple of years, the mining shares are leading the bullion, providing the leverage they are supposed to. While silver has bounced off its lows of around $9/oz, Silver Standard has rallied some 160% off its lows in the past two months. Silver Wheaton has more than doubled. I think we will see more of this in the months ahead. The key will be the breakdown of the US dollar. I'm not a market technician, but the dollar chart looks terrible, with a head and shoulders top, followed by a move down through resistance around 84. More importantly, the fundamental reasons for dollar strength appear to have run their course, or nearly so. The hedge fund deleveraging is winding down, and there isn't going to be much rational selling of mining shares at these levels. More likely, given the huge moves they have made, momentum players could start jumping on board, followed by short covering, once the shorts realize this game is over.
The major sign of the coming apocalypse is that Bart Chilton, head of the CFTC has agreed to meet with Bill Murphy, chairman of GATA. Once Murphy presents ten years of evidence of market manipulation to Chilton, plausible deniability goes out the window. It will be impossible to look the other way once he's been presented with a mountain of documentation of fraud on the CRIMEX. I don't yet know whether the ongoing investigation will reveal anything, but the recent move in the metals may be an indication that all the smoke is finally going to yield some fire. I think the next few months are going to be the beginning of the next leg upward in the commodity bull market.
Today the Fed cut interest rates by 75 basis points. The federal funds rate is now a Japanese-like 0.25%. It can't go much lower. So now one monetary weapon is out of ammo. Next, the Fed will begin purchasing Treasury bonds (if it hasn't already through covert means in the Caribbean.) Ever wonder why Caribbean countries own tens of billions of Treasury bonds? Are we buying lots of something from them that I don't know about? What do they export, anyway? I suppose it is possible that hedge funds domiciled in the Caribbean have been buying T-Bonds, but I am more inclined to think there is an arm of the US government doing at least some of the buying.
Whatever the case, the Fed is going to be buying A LOT of T-Bonds. More importantly, they will be monetizing the debt, which is a fancy way of saying they will simply print money to buy those bonds. Actually they don't print much money any more. Why kill all those trees, and waste all that paper? The money will be simply created out of thin air. I think the market has finally gotten wind of that in the past couple of weeks; that the deflationary scare was just that, a scare.
For the fist time in at least a couple of years, the mining shares are leading the bullion, providing the leverage they are supposed to. While silver has bounced off its lows of around $9/oz, Silver Standard has rallied some 160% off its lows in the past two months. Silver Wheaton has more than doubled. I think we will see more of this in the months ahead. The key will be the breakdown of the US dollar. I'm not a market technician, but the dollar chart looks terrible, with a head and shoulders top, followed by a move down through resistance around 84. More importantly, the fundamental reasons for dollar strength appear to have run their course, or nearly so. The hedge fund deleveraging is winding down, and there isn't going to be much rational selling of mining shares at these levels. More likely, given the huge moves they have made, momentum players could start jumping on board, followed by short covering, once the shorts realize this game is over.
The major sign of the coming apocalypse is that Bart Chilton, head of the CFTC has agreed to meet with Bill Murphy, chairman of GATA. Once Murphy presents ten years of evidence of market manipulation to Chilton, plausible deniability goes out the window. It will be impossible to look the other way once he's been presented with a mountain of documentation of fraud on the CRIMEX. I don't yet know whether the ongoing investigation will reveal anything, but the recent move in the metals may be an indication that all the smoke is finally going to yield some fire. I think the next few months are going to be the beginning of the next leg upward in the commodity bull market.
Saturday, December 6, 2008
Stagflation or something more?
World War I ended in 1918. Of course they didn't call it that back then. It was simply known as "The Great War." To call it World War I would carry the ominous connotation that there would be more world wars. Then World War II occurred, and the formerly Great War was deemed to be not so great in comparison, so the name had to be changed.
Similarly, the economic upheaval that began in 1929 was named the Great Depression, a name that has lasted to this day. So far. But given the fiscal and monetary policies of the past few months, I am beginning to wonder. We could be on the road to what may be called "The Greater Depression."
At first the economists said the current economic downturn would be V-shaped. A brief spike downward, followed quickly by a recovery. Then they said it would be U-shaped. It looks like it might stay down for a while before it recovers. Now some are saying it could be L-shaped. it goes down and stays down, for a long, long time. They mention Japan, 1989 as an example. The 1990's were Japan's lost decade, a recession that lasted more than ten years. To put this in perspective, in 1989 the Nikkei average topped out at almost 39,000. Last week the Nikkei closed below 8,000. If you bought Japan at the top, you've lost 80% of your money, and nineteen years is a long time to be on the wrong side of a trade.
The real problem is that America's current situation isn't as good as Japan was in 1989, or America in 1929. Those countries were creditor nations, and we are a debtor now. Our manufacturing base is mostly gone, outsourced to countries where the labor is cheaper. The problem is that we have overspent, we have no savings to invest, and we are loaded with debt. So our government's solution is to spend more to keep the economy going.
There is a certain logic that getting drunk is a way to fight a hangover, but in the long run that doesn't work. But it hasn't stopped our government from committing $8.5 trillion (again, so far) that it doesn't have in bailouts and rescues. I used to think we were going down the road to 1970's style stagflation, a nasty mix of unemployment with high inflation. Now I am beginning to wonder is something more sinister is lurking. The dreaded hyperinflation, as practiced in Weimar Germany, and several years ago in Argentina.
A case in point is Zimbabwe, whose annual inflation rate is now more than 200 million per cent. The latest sign of the coming Apocalypse is that The Reserve Bank of Zimbabwe just commended the world's central bankers (including the US and UK) on their policies. This is the text:
Here in Zimbabwe we had our near-bank failures a few years ago and we responded by providing the affected Banks with the Troubled Bank Fund (TBF) for which we were heavily criticized even by some multi-lateral institutions who today are silent when the Central Banks of UK and USA are going the same way and doing the same thing under very similar circumstances thereby continuing the unfortunate hypocrisy that what’s good for goose is not good for the gander....As Monetary Authorities, we commend those of our peers, the world over, who have now seen the light on the need for the adoption of flexible and practical interventions and support to key sectors of the economy when faced with unusual circumstances.
So, if it's working this well in Zimbabwe, the rest of the world may as well try it. Hyperinflation - it's not just for banana republic any more!
Similarly, the economic upheaval that began in 1929 was named the Great Depression, a name that has lasted to this day. So far. But given the fiscal and monetary policies of the past few months, I am beginning to wonder. We could be on the road to what may be called "The Greater Depression."
At first the economists said the current economic downturn would be V-shaped. A brief spike downward, followed quickly by a recovery. Then they said it would be U-shaped. It looks like it might stay down for a while before it recovers. Now some are saying it could be L-shaped. it goes down and stays down, for a long, long time. They mention Japan, 1989 as an example. The 1990's were Japan's lost decade, a recession that lasted more than ten years. To put this in perspective, in 1989 the Nikkei average topped out at almost 39,000. Last week the Nikkei closed below 8,000. If you bought Japan at the top, you've lost 80% of your money, and nineteen years is a long time to be on the wrong side of a trade.
The real problem is that America's current situation isn't as good as Japan was in 1989, or America in 1929. Those countries were creditor nations, and we are a debtor now. Our manufacturing base is mostly gone, outsourced to countries where the labor is cheaper. The problem is that we have overspent, we have no savings to invest, and we are loaded with debt. So our government's solution is to spend more to keep the economy going.
There is a certain logic that getting drunk is a way to fight a hangover, but in the long run that doesn't work. But it hasn't stopped our government from committing $8.5 trillion (again, so far) that it doesn't have in bailouts and rescues. I used to think we were going down the road to 1970's style stagflation, a nasty mix of unemployment with high inflation. Now I am beginning to wonder is something more sinister is lurking. The dreaded hyperinflation, as practiced in Weimar Germany, and several years ago in Argentina.
A case in point is Zimbabwe, whose annual inflation rate is now more than 200 million per cent. The latest sign of the coming Apocalypse is that The Reserve Bank of Zimbabwe just commended the world's central bankers (including the US and UK) on their policies. This is the text:
Here in Zimbabwe we had our near-bank failures a few years ago and we responded by providing the affected Banks with the Troubled Bank Fund (TBF) for which we were heavily criticized even by some multi-lateral institutions who today are silent when the Central Banks of UK and USA are going the same way and doing the same thing under very similar circumstances thereby continuing the unfortunate hypocrisy that what’s good for goose is not good for the gander....As Monetary Authorities, we commend those of our peers, the world over, who have now seen the light on the need for the adoption of flexible and practical interventions and support to key sectors of the economy when faced with unusual circumstances.
So, if it's working this well in Zimbabwe, the rest of the world may as well try it. Hyperinflation - it's not just for banana republic any more!
Wednesday, December 3, 2008
So long, Plax
I think Plaxico Burress will be playing football again next year, but it won't be for the New York Giants. As I expected, the team severed relations with him, suspending him for four games (i.e. the rest of the season) and placing him on the non-football-injury list. The latter is critical, because that means they can go after his money.
As cold blooded as that seems, let me emphasize that the Giants have been more than fair with Burress. They are one of the league's flagship franchises, and their front office is respected around the NFL. They have a record of success, winning Super Bowls in the 80's, 90's and 2000's. What they don't do is place individuals ahead of the team, no matter how talented they are.
The Giants believe in giving athletes second chances. They draft players that no one else would touch. Last year they drafted Ahmad Bradshaw, even though he had been arrested a couple of times and expelled from college. They explained the situation to him, kept him on a short leash, and he contributed to their playoff run last year. This year they drafted Mario Manningham, who wasn't even off some teams' draft boards due to his off the field problems.
But they've already given Burress second, third, fourth, and fifth chances. If he had been a straight arrow (like Antonio Pierce) they would have sent him flowers in the hospital, and told him to rest up for the playoffs. But Burress has been nothing but trouble this year, and his production has been down as well. They think they can win without him, and maybe they can.
The simple fact is that Burress has always been an accident waiting to happen, and the Giants knew that when they gave him a $35 million contract just before the season started. The contract is heavy with incentives, as in a $100,000 bonus just for being active for a game. He doesn't actually have to play, just suit up. So with all of the incentive pay gone, the contract won't cost the Giants much, and it is salary cap-friendly for next year as well.
I expect the lawyers will find a way for Burress to avoid jail time. More problematical is the NFL stance toward him. I think other teams will want Burress, I'm just not sure when the NFL will let him play. Goodell is fed up with football players making headlines for the wrong reasons, and that should cost Burress at least part of next season, at best.
In the strange but true department, the NFL Players Association is appealing Burress' suspension. I should have expected that. I was a union representative, and it seemed like most of my job was to represent people who should have been fired. One day at work a supervisor told me something to the effect that it occurred to him that I always had to deal with the same bad people as he did. I told him it's worse than that: at least you get to punish them, I have to defend them. But like any good union, the NFLPA stands up for its members, claiming the team violated his rights. That was the same reason we always defended bad people, too. We didn't want to establish a precedent they could later use to punish good people. If I had been an attorney, I would have wanted to be a prosecutor, not a defense attorney. It doesn't pay nearly as well, but it would have been a lot more satisfying.
As cold blooded as that seems, let me emphasize that the Giants have been more than fair with Burress. They are one of the league's flagship franchises, and their front office is respected around the NFL. They have a record of success, winning Super Bowls in the 80's, 90's and 2000's. What they don't do is place individuals ahead of the team, no matter how talented they are.
The Giants believe in giving athletes second chances. They draft players that no one else would touch. Last year they drafted Ahmad Bradshaw, even though he had been arrested a couple of times and expelled from college. They explained the situation to him, kept him on a short leash, and he contributed to their playoff run last year. This year they drafted Mario Manningham, who wasn't even off some teams' draft boards due to his off the field problems.
But they've already given Burress second, third, fourth, and fifth chances. If he had been a straight arrow (like Antonio Pierce) they would have sent him flowers in the hospital, and told him to rest up for the playoffs. But Burress has been nothing but trouble this year, and his production has been down as well. They think they can win without him, and maybe they can.
The simple fact is that Burress has always been an accident waiting to happen, and the Giants knew that when they gave him a $35 million contract just before the season started. The contract is heavy with incentives, as in a $100,000 bonus just for being active for a game. He doesn't actually have to play, just suit up. So with all of the incentive pay gone, the contract won't cost the Giants much, and it is salary cap-friendly for next year as well.
I expect the lawyers will find a way for Burress to avoid jail time. More problematical is the NFL stance toward him. I think other teams will want Burress, I'm just not sure when the NFL will let him play. Goodell is fed up with football players making headlines for the wrong reasons, and that should cost Burress at least part of next season, at best.
In the strange but true department, the NFL Players Association is appealing Burress' suspension. I should have expected that. I was a union representative, and it seemed like most of my job was to represent people who should have been fired. One day at work a supervisor told me something to the effect that it occurred to him that I always had to deal with the same bad people as he did. I told him it's worse than that: at least you get to punish them, I have to defend them. But like any good union, the NFLPA stands up for its members, claiming the team violated his rights. That was the same reason we always defended bad people, too. We didn't want to establish a precedent they could later use to punish good people. If I had been an attorney, I would have wanted to be a prosecutor, not a defense attorney. It doesn't pay nearly as well, but it would have been a lot more satisfying.
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