a few months ago, over a very nice zinfandel and overlooking a beautiful valley in the blue ridge, i was discussing the problems in the economy with my brother-in-law john, a perceptive fellow who always enjoys a touch of irony. during this time, there was great discussion afoot that many or all of the problems in the economy, particularly the problems at the big banks, were really the fault of the short sellers. they were driving the prices of the shares of the banks down artificially, it was said, thus making it difficult for the banks to raise capital, and so on. short sellers were reviled as being unpatriotic or worse, and there was a movement afoot to solve the problem by banning short selling.
"ya know," he said, "its really the fault of those long buyers."
well of course, i thought, but what a great turn of phrase. it was, after all, those long buyers who bid up the price of everything and created the bubble in the first place. and of course their co-conspiritors the banks and the fed, who provided all the money and the leverage which facilitated their doing so. those few of us who saw their folly and were selling short into the bubble were the true patriots, trying in vain to counteract the folly and deflate the bubble in an orderly fashion. imagine the pain of shorting lehman brothers, merrill lynch and citibank, and watching them double, against all reason.
furthermore, it was those same short sellers who were later able to provide a modest spurt of buying power just when it was needed. all those long buyers were the ones who were bailing out of their positions when the stocks came down into single digits, and it seems like the short sellers were the only ones buying.
there's a guy called cramer who has been writing all kinds of stuff about how bad short selling is. is he the guy that jumps up and down and wears funny hats on cnbc or one of those financial channels, or do i have him mixed up with somebody else? anyway, he should be that guy, because he seems to be quite the fool. in a bull market, you buy low, sell high. in a bear market, you sell high, buy low. either way, you're providing a balancing force and a vital service to the market, and should be shown a little respect. fugget about it.
Saturday, March 28, 2009
thoughts on the bailout
howdy, y'all, i'm back after a modest hiatus. i've been watching with interest all the plans and machinations for trying to "fix" the economy, and you won't be surprised to learn that i don't think very highly of any of them. i don't want these posts to take on the character of a political rant, so i'll make this a short post before returning to what interests me more, which is the larger view of what the economy and the markets are doing, independent of any efforts to manipulate them by government or otherwise.
essentially, my objection to the bailouts is pragamatic; i don't think they will work. in fact, i am among those who think they will make the situation worse, in addition to costing the treasury an arm and a leg to carry them out. what i believe is that the markets, for stocks, bonds, real estate, commodities, instruments of mass destuction, you name it, all have to hit a real bottom before any recovery can begin. contrary to popular opinion, there are many folks who were not taken in by this massive bubble in all of these markets, who have kept their powder dry and are waiting for the opportunity to invest in real assets at realistic prices. (i would like to believe that some of my readers are among those). these people were willing to forego the potential profits which others were reaping during the bubble phase, in order to be in a position to purchase assets at lower prices after the inevitable crash. included in this category are quite a number of solid banks, who resisted the lure of highly leveraged high yield assets (ie. toxic assets) and kept their feet on the ground doing solid conventional banking (more on this subject below).
these people and institutions are not stupid, although many would have thought them so during the height of the bubble. if they were not taken in then, they surely will not be taken in now. they are waiting for the above-mentioned real bottom before they part with the cash which they have so patiently and carefully held on to during these troubled times. (if you are asking, when will this bottom occur and how will we know when we get there, i will be discussing this with great enthusisam in future posts, as it is the 64 trillion dollar question).
so, what does this have to do with the bailouts? it is my contention that the bailouts are merely delaying the inevitable collapse in the prices of the assets, and thus delaying the recovery. there is no avoiding the pain associated with a collapse in these assets, but there could be some benefit to shortening the period of time during which we have to endure this pain. every element of the various bailout plans is an attempt to prop up the prices of things by injecting liquidity (ie. money) into a system in which the very problem was too much liquidity in the first place. but the mood has changed, and people just aren't "buying it" any more. they've got all the crap they need, be it goodies from walmart, gas guzzlers, vacation condos, or stocks and mutual funds. they're selling, not buying, and it's not just the smart ones now, everyone's doing it. so it's all going down, and the sooner the better, says I, so that a real recovery may begin.
a couple of additional notes:
1. about those banks i mentioned above who acted prudently during the bubble, even though it meant lower profits and derision from the analysts at the time. they deserve the competitive advantage that such prudence confers. it is not right nor useful that their competitors who acted imprudently should be propped up by the government.
2. consider this irony: we hold that home ownership is a wonderful value in our society. what better news then, that home prices are falling, bringing the price of a home within the reach of so many more americans. instead, the bailout folks are doing everything they can to prop up the prices of homes, in direct conflict with our cherished values. i would hold that the real american dream, over the past 15 years or so, has not so much been home ownership, but home price appreciation, a wonderful way to riches without effort or sacrifice. this is pure bubble thinking, and must of course die out as the bubble deflates.
essentially, my objection to the bailouts is pragamatic; i don't think they will work. in fact, i am among those who think they will make the situation worse, in addition to costing the treasury an arm and a leg to carry them out. what i believe is that the markets, for stocks, bonds, real estate, commodities, instruments of mass destuction, you name it, all have to hit a real bottom before any recovery can begin. contrary to popular opinion, there are many folks who were not taken in by this massive bubble in all of these markets, who have kept their powder dry and are waiting for the opportunity to invest in real assets at realistic prices. (i would like to believe that some of my readers are among those). these people were willing to forego the potential profits which others were reaping during the bubble phase, in order to be in a position to purchase assets at lower prices after the inevitable crash. included in this category are quite a number of solid banks, who resisted the lure of highly leveraged high yield assets (ie. toxic assets) and kept their feet on the ground doing solid conventional banking (more on this subject below).
these people and institutions are not stupid, although many would have thought them so during the height of the bubble. if they were not taken in then, they surely will not be taken in now. they are waiting for the above-mentioned real bottom before they part with the cash which they have so patiently and carefully held on to during these troubled times. (if you are asking, when will this bottom occur and how will we know when we get there, i will be discussing this with great enthusisam in future posts, as it is the 64 trillion dollar question).
so, what does this have to do with the bailouts? it is my contention that the bailouts are merely delaying the inevitable collapse in the prices of the assets, and thus delaying the recovery. there is no avoiding the pain associated with a collapse in these assets, but there could be some benefit to shortening the period of time during which we have to endure this pain. every element of the various bailout plans is an attempt to prop up the prices of things by injecting liquidity (ie. money) into a system in which the very problem was too much liquidity in the first place. but the mood has changed, and people just aren't "buying it" any more. they've got all the crap they need, be it goodies from walmart, gas guzzlers, vacation condos, or stocks and mutual funds. they're selling, not buying, and it's not just the smart ones now, everyone's doing it. so it's all going down, and the sooner the better, says I, so that a real recovery may begin.
a couple of additional notes:
1. about those banks i mentioned above who acted prudently during the bubble, even though it meant lower profits and derision from the analysts at the time. they deserve the competitive advantage that such prudence confers. it is not right nor useful that their competitors who acted imprudently should be propped up by the government.
2. consider this irony: we hold that home ownership is a wonderful value in our society. what better news then, that home prices are falling, bringing the price of a home within the reach of so many more americans. instead, the bailout folks are doing everything they can to prop up the prices of homes, in direct conflict with our cherished values. i would hold that the real american dream, over the past 15 years or so, has not so much been home ownership, but home price appreciation, a wonderful way to riches without effort or sacrifice. this is pure bubble thinking, and must of course die out as the bubble deflates.
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