O Canada

The Canadian and US dollars are trading at parity, bringing full circle a cycle that lasted almost 31 years. Back in 1977, I won a $100 (US) bet with a Canadian on whether the C$ would see $1.1o or parity first (Guess what side I picked; if I had only invested that money in Microsoft, Intel, Google, etc.). Now that we are back to this level, I'd like to propose something quasi-radical, a US-Canadian dollar currency union.

Let's not make any mistake here. The reason the C$ has strengthened is the commodity boom. Canada is one of the largest exporters on raw commodities in the world. While they have always been a major commodity exporter, it is the mix of exports that has propelled it higher. Eighty dollar-a-barrel oil makes hard to produce Canadian oil profitable generating huge royalties for provinces involved and the national government, monies that weren't generated exporting wheat and nickel (Maybe diamonds. Watching Ice Road Truckers has led me to believe that companies must be making large profits, given the costs involved in production). These royalties have allowed Canada to post a record budget surplus, reducing the debt-to-GDP ratio by more than half over the past 11 years (Of course, if the US spent as little on defense as Canada, which spends somewhere around the amount that New York State spends, every citizen here would be getting a dividend check from the federal government).

Canada is a boom and bust economy. Currency union would force them to invest, in the good times , in businesses and technologies that would see them through the resource bust times. Historically, Canada has allowed the C$ to depreciate to be more export competitive. People seem to have forgotten that it was just over five years ago that the C$ traded at $1.60. Oil has been the great equalizer this time around, but I don't think Canadians want to go down the road Middle Eastern sheikdoms. Eventually, the oil party will end, either in lower prices, increasing use of substitutes, or a combination of both. It would help the US as well, as new legislation here would help reinforce monetary discipline, either through a merged or overriding central bank and create some fiscal discipline as well, as budget deficits would have to be restrained. I would even go farther as to invite other countries that have adopted the dollar around the world to at least have some observer status in the new central bank.

Parity just makes the mechanics easier, as well as making the explanation easier to all involved parties. It is a long-term positive for both countries.

PS: One line in the previous post shows the US$ fall vs. the C$ this year. Can you guess the other line?

A Little Friday Fun

Just a little Friday fun to close out a long week. Can anyone guess what the graph above represents? A hint: it is currency related. While there will be no prizes awarded for correct answers, you will have the satisfaction of doing a job well-done.

The Next Bubble

A wise man (whose name escapes me) said that burst bubbles do not re-inflate. For proof, please look at the NASDAQ and the Tokyo Stock Exchange now as compared to their all-time highs. But that doesn't mean that new bubbles aren't looking form all the time. For the record, the current housing price declines has less to do with the few subprime borrowers that defaulted and more to do with a world reawakening/reacquainting itself with credit risk coupled with funding/liability mismatches (using CP to finance long-term obligations, the carry trade). Many pundits are serving up Emerging Markets as the new bubble candidate. They certainly qualify. Investments pushing to succession of new highs driven by investors trying to eke out any sort of incremental return. Over the past two months, there were many people calling emerging markets the "safe haven" from the credit market turmoil, Russia, now nine years out of bankruptcy, in particular.

Are the emerging markets the safe haven? It boils down to two very fundamental arguments. The first is no, that credit risk has not been repriced and reevaluated in those markets. The second in the new paradigm argument, that emerging markets are experiencing sustained higher growth rates brought on by global acceptance of capitalism creating free markets that didn't exist. This growth and openness has allowed the massive pools of liquidity invested in developed economies, at ever lower returns given the 25+year secular decline in interest rates, to flow to emerging markets. The answer is somewhere in between, with the no argument being more relevant over the intermediate term and the yes side more important tomorrow and five years from now.

The problem with trying to come up with an answer is the emerging market are viewed generally through developed market glasses. It must be kept in mind that business practices, legal protections, investment diversity, and state involvement are usually quite different. The way investments are made in different regions of the world can vary, although with the opening of capital markets, they are becoming more similar. For example, direct investment used to be more common in Asia than Latin America, but that is changing. It is very difficult to make investments in many countries, China for example. Because the investment scope is limited, investors tend to put money to work in items that will give them market exposure, but allow for necessary liquidity. This provides a constant bid for investments that can easily be trading, propping up the market. However, it can be a small door if everyone exits at once.

Short of a global recession or commodity price correction, emerging markets in general are probably OK. Investors have become much at looking at individual circumstance rather than viewing them as a whole. There are exceptions, China for one. Chinese securities firms and banks hold many places in the top ten in market capitalization worldwide. This has a lot to do with domestic Chinese investors having few other options for there money, especially with inflation there above 6.5%. Twenty years ago, the largest securities firm by market cap was Nomura, now not in the top 15. But, remember where the Tokyo exchange was then.

Isn't It Ironic?

A quick note to point out a some ironies of today's world; please indulge. It is strange (not really) that whenever there is a problem in the US, everyone in the world comes out of the woodwork to jump on the bandwagon. In the pre-Ronald Reagan era, this was common. Maybe with a strike at GM, people think that Jimmy Carter is still President (On that note, the anti-union guy on a midday CNBC debate told the GM workers to "suck it up and face facts). But entities living in glass houses, the IMF and Carlos Slim come to mind as recent bandwagon jumpers, should probably not throw stones. The IMF, struggling for relevance in credit risk-free emerging market world, is trying to justify its existence by coming after the US. Carlos Slim, world's richest man created by having monopoly power in Mexico, is warning the US on this and that. Enough already! Mr. Slim, please donate your billions to a foundation dedicated to reforming the Mexican economy. They could start by breaking up monopolies and selling off Pemex, taking advantage of the worldwide oil boom (Take a look a Petrobras for an example). As for the IMF, I'm sure you could put all your knowledge and resources to helping countries that could actually use it. There's a few countries in Africa that may appreciate your advice.

The $90 Billion Question

Ninety billion dollars is the amount reported in the Wall Street Journal this morning that the Big 3 US auto manufacturers owe their current retirees in future health benefits. Now, the auto industry is on the eve of arriving at an agreement with the UAW to shift this obligation to some off balance sheet trust; GM is the first one up. On the surface, this looks better than the one way ticket to liquidation that GM, Ford and Chrysler seem to be headed. However, it will take much more than this to turn these companies around.

The US auto industry is a case study on how not to run businesses. Once holding a virtual monopoly on the domestic auto market, now 1 in every 2 new vehicles sold in the US is produced by foreign manufacturer. The positive thing here is that a large percentage of those "foreign" cars are actually built in the US (and Canada, which is considered a domestically produced car due to the 40+ year old auto free trade agreement between the two countries). Big 3 employment has dropped by over 40% since 2003, exacerbating the retiree situation. The truly sad thing is that it didn't have to be that way. Most of the innovations in auto industry over the past 30 years came out of the Big 3. This is evident in the fact that most auto manufacturers worldwide have design operations in the US. The Big 3's costs and fairly rigid structures did not allow, however, the "nimbleness" necessary to capitalize on them over the long term. GM. for example, has and had different divisions selling basically the same vehicle to the same customer.

So, the $90 billion dollar question is: Does this move finally help them turn the corner? Well, yes and no. This agreement does nothing to get buyers into showrooms, which is the real problem now with the not so Big 3. If they can convince buyers that there product is competitive (which isn't the case currently on price, as any recent shopper will attest to) and reinvent themselves as smaller, leaner companies, then this agreement will help to some degree. The more likely scenario on how this will help is that it will make it easier, from a public relations standpoint if no other, to file Chapter 11 to force renegotiation of contracts and a restructuring of operations.

We Won The Battle...And The War

The US dollar is getting a lot of press lately, but when you see Maria Bartiromo on the Today show talking about her bar bill, it has really pushed into the mainstream (By the way, it was a incomplete example. Her EUR 70 bill for two drinks in a hotel bar is high, but without equating it into a US dollar equivalent, it is just a EUR 70 bill). Today's hot topic is the parity level of the US and Canadian dollars. Yes, it has been 30 years since that has occurred. What is forgotten is that prior to that time, the Canadian dollar traded at a premium to the US dollar. I'm a very big believer that market forces should set currency levels based on purchasing power parity. When central banks and governments get involved, market players get involved to capitalize on those actions. George Soros and the Bank of England and the breaking of the ERM come to mind.

That brings me to the title of this post. We won the war. With the exception of Venezuela and North Korea, capitalism rules the roost. No need to look any further than Russia or China to see that. The consequence of winning is this war is a more competitive global environment. The US and its currency at at a crossroads. We can either continue down the current path and live with the consequences or change. There is no one option for change, but they must all start with putting domestic US interests first. This isn't meant to be xenophobic. On the contrary, the US should engage our friends and enemies more energetically. The phrase "Freedom isn't free" doesn't apply in most places in this world. The US taxpayer pays for it and the US military enforces it. Since there is very little chance of cutting entitlement spending (let's hope there can be a lid on future entitlements), the only other viable option is to reduce the defense budget. The billions around the world that have benefited now need to foot the bill, in more ways than one. The US could then balance the budget and couple that with a realistic domestic energy policy, one that isn't dependent on the whims of unstable regimes, and the dollar will take care of itself. The US is still the most dynamic country in the world, but it is time to put aside our differences on the critical issues and focus on the task at hand.

Quantitative versus Qualitative

For regular readers of this blog, you know it to be one that has a qualitative bent. That is, a dialogue dedicated to provide some amount of insight garnered from years of experience in the fixed income markets. This is not to say that I ignore quantitative methods. In fact they are quite useful to me, but that information, ex proprietary models, is readily available elsewhere and is used by the author to help draw a conclusion. I have no interest in producing that kind of information, as it would put me into a coma. The basis for what is written here is common sense. In general, if something doesn't meet the "smell" test, there is usually a problem.



Having prefaced this post with the above, it is my contention that the current troubles in the financial markets were caused by an over-reliance on quantitative models, the abandonment of common sense, as it were. Common sense and experience acts as a check on models that can't possibly account for variables like liquidity and fear of loss accurately. Certainly Long-Term Capital could have used more common sense back in 1998. Certainly, the guy that made the highly questionable statement about his model, as mentioned in a previous post, having several 25-standard deviation moves (once-in-100,000-year event). I guess that model will be pretty boring over the next million years!

Unfortunately, it remains to be seen if anything has or will change given what has happened over the past two months. I don't want this to sound like sour grapes (those of you that know me know that I have felt this way for years) but if the job boards are any indication, it looks like the financial world is ready to pile back into the models. If you have a PhD in physics, there plenty of positions open, some with seven figure compensation (guess what I'm telling my son to major in). Physics, however, won't help you when there is no bid. I've had more than one intelligent colleague tell me that the theoretical value of this or that is higher or lower than where it is trading. Sometime anomalies do exist, and there is a definitive reason for them. Market efficiencies usually take care of them quickly. The theoretical value usually doesn't take into account intangibles. That is where common sense comes in. We can hope that fear has instilled some common sense, but I wouldn't bet on it.

Moving Forward

When the world gets caught up in these Fed movement cycles, the fixed income world gets stuck waiting from meeting to meeting to see what will happen. It remains to be seen if the equity market gets stuck in that rut as well, given the primary driver of the Fed Funds rate cut. It looks like Bernanke and Co. want to show that he could be Alan Greenspan too, opting for 50bp cut when 25bp would have been enough for now. Ben is betting that inflation remains low (anyone that has been to a supermarket recently would question that). He is also betting that despite lower rates, the markets will punish those that made bad decisions, particularly on credit issues. Both will probably hold for now, but as mentioned in this blog yesterday, it is the period a few years out that may be the problem. Left to its own devices, the economy will do fine and any excesses will work themselves out. From now until the end of 2008, that will be the case. The Presidential election next November will have tremendous impact going forward. Many of our current tax schemes expire in 2010 and it remains to be seen what we'll have after that date (Look at New Jersey as an example of bad tax policy; imagine that on a national level). The Fed itself can't change everything; many items domestically and an increasing number of foreign items are beyond their control. But over-stimulation leading to inflation could push politicians in the wrong direction.

Now What?!

The half point move was a surprise (read previous post), but now what.? It is certainly good for the equity market and I do appreciate the Fed trying to bail out people in my situation. I don't know if that will be the thought two to three years down the road, but more on that tomorrow.

For The Record...

Since the Fed is meeting today, I want to put my thoughts down on paper, so to speak, about the outcome. The Fed will cut the Fed Funds rate 25bps to 5% and, more importantly, cut the discount rate at least 50 bps. The move lower in the former represents the Fed's acknowledgement that economic conditions are softer and the process toward moving to a more stimulative stance needs to begin now in order to have a payoff six to twelve months down the road. While futures are suggesting 50bp move, that is only going to occur in times of real crisis, not an awakening to the reality of credit risk. (Someone yesterday suggested a cut of 3/8 of a point, an interesting prospect). If the Fed thought things were in crisis mode, they would have made an intermediate cut to express their concern. Which brings us to the latter point, the discount rate. Here, the Fed does think there is at least a mini-crisis going on, as evidenced by the Aug. 17 move 50bps lower in the discount rate. The money markets, while better than four to six weeks ago, are not truly functioning normally. Hence, a further cut in the discount rate is warranted to bring that market back to an acceptable level of liquidity. There is a risk, at some point down the road, that the money markets become too dependent on the discount window, but that possibility is remote. Away from money markets, other credit markets are returning to normal function, albeit at much wider, more realistic levels. We'll all see at 2:15 this afternoon.

I'm Not Euro-Bashing

I'm often accused of Euro-bashing, but I like to think of it highlighting flaws in the system. Those of you who are familiar with this author know my views of European mechanisms. Basically, the problem with the European Union's institutions is that they do not have the political will to be effective, with many items requiring unanimous approval of all 27 countries. Now we are in the throes of a credit market crisis and once again Euro institutions come up short. The ECB has done what it can, flooding the Euro-denominated money markets with liquidity. However, the ECB, always walking a tightrope between the high and low growth countries, is limited to what it can do on rates nor does it have much influence outside of rates (Gillian Tett, one of the FT's best writers, wrote a piece on this on Friday. It is worth a read). It is my contention that the current problem in credit has been made worse by the heavy involvement of European institutions that have little experience in these credit issues.

If you speak with Europeans involved in the fixed income markets, (as an aside, and for the purposes of this post, the UK is not considered part of Europe) they present themselves as very knowledgeable and sophisticated. In fact, many derivative and structured products originate or find homes in Europe. Their cash bond markets are dominated by governments, Pfandbrief, and covered bonds, all triple-A or highly rated, with the latter two being secured loans with various credit supports . The European experience with credit risk is tiny, compared with the US and elsewhere. Their high yield market is relatively small and new, with little comparables on how it will perform in a crisis situation.

Herein lies the problem. Maybe part of the reason is that there isn't a culture of credit risk in Europe, brought on by generations of a welfare state mentality. Part of the problem certainly lies with rating agencies, doling out AAA ratings on products that don't meet the accepted criteria of AAA, and the over reliance on those ratings. Secured loans in the US, with its various tiers of support, is not the same as secured loans in Europe, like Pfandbrief.

Soon enough, the market here will work through these troubles, value items appropriately, punish those that were foolish, and move on. Hopefully, the same will happen in Europe, unless governments step in to bail out the banks, which is tantamount to rewarding bad behavior.

Who's the Anchor Now?

For weeks now, the word on everyone's lips is recession. Is it going to happen, when is going to happen. how deep will it be, and on and on. The one thing that everyone is sure of is that global growth is strong, it's the US that is the problem. How strong is this growth? If the US does go into recession, what is going to drive global growth? In the past, it has been the US consumer. The pundits say the consumer won't be there this time, that everyone is weighed down by there ever-increasing sub-prime mortgage payment (By the way, it is incredible how many people are living in houses with sub-prime mortgages. If you have watched or read the media over the past two months, it would thought that the percentage is somewhere around 96%). The pundits also say that other areas of the world will pick up the slack. This maybe true and I'm not from Missouri, but you will have to show me that if the US is the anchor holding back the world's economic growth, that the rest of the world doesn't slow down too. Japan just posted a quarter of negative growth, however they are the poster child for stagnation (For those of you old enough to remember the Eighties, the same thing that was being said about Japan then, is the same thing being said about China now. In 1989, the Japanese stock market drove off a cliff, never to be heard from since). Europe will be next, then the commodity countries.

Continued global growth would be a better scenario then what is in the previous paragraph. It would be good for this country to be more export-focused; look how it has helped every other country in the world. However, if the $290 billion the US sent out of this country slows down, somebody has to be affected. It's not so easy to develop markets away from the US as US markets are generally open to all.

The Financial Times

While everyone waits to see what happens on Tuesday (Is it a foregone conclusion?), take some time to read the newspaper. I read the Financial Times every day, among other papers. The FT is usually an interesting read as it gives US investors a different take on things. There are two items this week that deserve a look. The first is an article by Arturo Cifuentes, who is the managing director of the fixed income house R.W. Pressprich. It deals with the rating agencies and cuts right to the heart of the problem, namely that the raters define their own standards for the ratings. Here is the link. http://www.ft.com/cms/s/0/60e7a056-60c8-11dc-8ec0-0000779fd2ac.html

The other is a weekly series, on Thursdays, about a fictional character called Martin Lukes. Lukes is "the Chief Great Leader" of a UK subsidiary of a multi-national. The story is told exclusively through his emails and blog entries. He is the king of buzzwords and business fads. It is worth trying to read it on a weekly basis. Here is the link http://www.ft.com/cms/s/69568754-614d-11dc-bf25-0000779fd2ac,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F69568754-614d-11dc-bf25-0000779fd2ac.html&_i_referer=http%3A%2F%2Fwww.ft.com%2Fbusinesslife

A Change of Pace

Something that is a bit outside my area of expertise is commodity prices. Since the beginning of 1995, at least, the price of gasoline has dragged the price of oil higher. Natural gas, given its more local characteristics (as it is not easily transported globally) has been more independent, with radical price differences in various countries. At some point recently, the relationship between gas and oil has changed, with oil being the driver. This despite the fact that there are still no new refineries in this country, nor have there been for the last 30 years. Some have made the case that this relationship has changed due to the weakening US economy and stronger foreign economies. On the face of it, this could be true, and, in fact, probably is a contributing factor. However, there is other things going on in the US. Anyone who has bought gasoline lately, except perhaps in New Jersey and Oregon where it is too dangerous to up you own gas, will have notice that much of the gasoline sold has 10% ethanol. This is helping to keep the price of gasoline in check. Elsewhere in the world, ex Brazil, there is little ethanol use and therefore higher oil prices.

This is being confirmed by higher agricultural commodity prices, and, consequently, higher retail food prices. Everyone and their brother is planting corn, pushing up the price of of every other commodity (as farmers switch to corn) but corn. The price of wheat hit an all-time high this morning.

What does this all mean? The pundits think that the higher inflation generated by food prices will keep the Fed in check. However, the Fed takes a longer term view usually and realizes that short term runs up in food prices will push farmers into planting more acreage of whatever is getting a high price. In this country alone, there is significant acreage, controlled by large farming conglomerates, which will be planted to capitalize on this supply/demand imbalance. The biggest problem here is transporting these commodities to market; that is why Warren Buffett, among others, is buying up the US railroads.

Seven Saudi Arabias

A Quick Note: On Kudlow tonight, he was talking about the resiliency of the US markets, and the country in general since 9/11. The US GDP since then has grown the equivalent on seven Saudi Arabias since 9/11. Take that, Osama!

In Memory of Those Who Passed Six Years Ago

From the Ridgewood Blog, please copy and paste

Post: REMEMBER! LIGHTS ON.....9/11 Link: http://theridgewoodblog.blogspot.com/2007/09/remember-lights-on911.html

In The Short Memory Department...

Today, on Bloomberg's TOP page, there is an article on Russia as a safe haven nine years after the default. It interviews people knowledgeable about the market, rattling off statistics and claiming up and down that it is different this time. There is no denying it is different time; Russia certainly has the ability to pay its debts. However, when push comes to shove, does it have the willingness to do so? Russia, under Putin, has become steadily more aggressive militarily and economically. It doesn't take a huge mental leap to arrive at scenarios where Russia and Russian companies just walk away from their debt obligations. The other way it is different this time is that Russian debt is much tighter this time than in 1998. Russia 30's are currently +118, which is wider than the +90 of six months ago. Still, this is a credit risk situation. Most other credit risk markets have come under lot more pressure. During late August-September 1998, Russian and associated debt dropped 50-60 POINTS.

Russia probably shouldn't be singled out, although there is a history with them, as most Emerging Markets have performed similarly over the past few months. Then the question that needs to be asked is: Is the current market situation the product of problems in the US mortgage market, or is it a problem of the undervaluing of credit risk in general? The markets have been focused so much on the former that they may have ignored the latter.

A Basic Subprime History

The link below is an article from Forbes recopied from Investopedia. It is a basic primer on the subprime situation. Please ignore the use of the word "principle" when the author meant "principal". You may have to paste it into your browser.

http://www.forbes.com/2007/09/10/subprime-default-mortgage-pf-education-in_rb_0910investopedia_inl.html?partner=email

The Absolute View

Today, there was a Bloomberg article highlighting that the cost Bear Stearns' and Lehman's debt is higher than the debt of the Republic of Colombia. In case you've been under a rock the last few months, the primary concern of the markets has been the exposure US sub-prime mortgages, not how a forty-year-old civil war versus drug lords has been going. It shouldn't be surprising that BSC and LEH are under pressure, rightly or wrongly, given their involvement with the mortgage market factoring in those firm's relative size. But how bad is it? Ignoring the commercial paper market for the moment, are things really much worse in the corporate bond market? If you look at spreads, credits are much wider. In this environment, it is more valuable to look at absolute yields rather than relative spreads. Why is this? The US Treasury market is in the throes of what looks like a classic short squeeze. Despite the massive and increasing supply, investors spurning risk have no other options in this market than to buy Treasuries (Remember, investors are avoiding money funds, CP, etc.). Look at the absolute yield on selected financials. Five- and Ten-year Treasuries are roughly 75bps lower than three months ago. However, the absolute yield on Goldman, Citi, and many other top financials are basically the same. Weaker or perceived weaker credits, like the ones mentioned earlier, are at a higher absolute yield, and rightfully so given the increased credit risk. Spreads are wider, but much of it is due to a Treasury rally. The final point to mention is that all of this occurred at a time when credit spreads were ridiculously tight. They still are in certain sectors; look at Colombia and most of the rest of EM. Remember the pendulum, swinging from one extreme to another before finding equilibrium.

The Value of Information

Those of you who know this author know his longstanding opinion of the value of employment numbers. The weekly numbers are next to useless, the four week moving average isn't much better, and the monthly number are subject to wild swings. Certainly, the weekly numbers didn't portend a -4k monthly number yesterday; the consensus was in excess of 100k. Employment numbers consist of a large number of variables and the information is gathered from a large number of sources. The unemployment rate, which was unchanged, is affected by factors like how many people stop looking for work altogether, cheapening its worth.

There are two basic uses for the employment number. The first is the headline factor. Outlying numbers, like the one received yesterday, will drive the markets one way or the other for the short term. It remains to be seen whether this is the beginning of a trend. For those of you that remember back to February 1994 when a 700+k number began an 18-month interest rate rise, that was a case where the headline was the pivot. The current market had already pivoted so this number will probably be just another gallon of fuel to stoke a Fed ease. The second use is more important. The back month revisions downward show a trend, and while the trend isn't likely as bad as the headline number, it is more significant, assuming the revisions themselves aren't revised. The extra time that goes into producing those revisions creates more accuracy, and therefore makes the information more valuable, even though it represents information farther in the past. It is this weakening trend that will push the Fed to lower rates.

The Straight Line

Now that everyone is back at their post, except me, of course, volatility has crept back into the markets. There are a few points that are important to remember. First, virtually nothing, except interstate highways out West, runs in a straight line. There are going to be these up and down jerky moves in all markets until the right balance of fear and greed bring it back into equilibrium. The VIX really is a measure of volatility, but its predictive capacity in this period of time is limited; more on that in the next sentence. Second, as alluded to, the equity market this time is along for the ride. The real show here is fixed income, primarily in the front end. That is why it is different this time. The last time there was a parallel situation was 100 years ago, the Panic of 1907. Back then, in the pre-Fed era, JP Morgan, the man not the back, stepped in and strongarmed his banker friends into providing liquidity during a credit seize-up. That event led to the legislation that created the Federal Reserve. The modern Fed is measured in its response when it can be. They will the appropriate action when necessary. While the talking heads were initially demanding an immediate cut in Fed Funds, the Fed's approach is more gradual, adding liquidity in measured amounts to bring more order back to the money markets. By taking this "straight line" approach, the Fed can keep its powder dry for future actions if necessary. This contrasts with the ECB, which has pumped massive amounts of liquidity into the system, without much longer-term effect. The last point is that there are excesses in the system that need to be resolved. The quants and theoretical guys that own this crap-ola need to change their mindset from a "mark-to-model" to a "mark-to-market" valuation. Only then will markets stabilize.

The Lesson of August

This one will be short and sweet. If there is one lesson learned over the past month it is to maintain a cool, objective head or speak to someone with cool, objective head during these periods of market turmoil. Don't get hurt in the whipsaw. Have a good day.

Hindsight Really is 20/20...

Having more opportunity to do so, I have been watching, reading and listening to the media is putting forth on the current market turmoil. With six weeks of uncertainty behind us and with most people back at their posts, the time has come to affix blame for how the market got here in the first place. The current target of opportunity is the Fed because a) most of the market players want lower rates for a host of reasons and b) the Fed can't respond directly to anyone's criticism, making them a convenient punching bag. This weekend produced an unusually large number of Fed bashing, primarily due to the Fed's annual meeting out in Jackson Hole. Ottmar Issing, former chief economist for the ECB, blamed the Fed for not popping the housing price bubble earlier. We'll have to assume that most of his criticism was meant for Alan Greenspan as it was under his tenure that the easy money inflated housing prices. I guess that Mr. Issing will be upset if the Fed ease occurs in two weeks. Joining Ottmar was Stanley Fischer, formerly of the IMF and Citi, now the Bank of Israel governor, saying the central banks (really meaning the Fed) should do more to control asset prices. Stanley doesn't want an ease either. The last time they were checked, the Fed was doing what it does in the area of asset price control, walking that fine line between inflation control and economic growth. They do that pretty well and if they overshoot from time to time (remember the pendulum), then that is the price to pay for a general sense of stability. This isn't 1929. Nobody has even mentioned it for three weeks now. I guess criticism of the Fed is a good thing as it keeps them honest and gives people like me something to write about. Mr. Issing should focus his efforts on the ECB and Europe in general. Perhaps he could push for greater ECB oversight of European banks that got involved too deeply in the US mortgage market, an area where they have little experience given the mortgage market in their home countries.

The most interesting criticism came from a gentleman on CNBC today who tried to make the case that the Fed shouldn't exist. While fun to ponder, this man (I forgot his name) didn't make a very good case and didn't have a good grasp on what the Fed does (How does this guy get on TV, and I'm in my backyard?). As students of pre-1913 US economic history and watchers of many Star Trek episodes, we have seen the bad and the good of a Fed-less world. But, we're not ready for that yet.