Harvesting Al Gore's Investment

I've been struggling in my attempt to determine whether green tech will become a government-mandated mania that, despite the lack of fundamentals, could create a lot of wealth for investors buying into the mania.
Well, news today show that Al Gore is doing his part to hype the bubble. Of course, the only reason it makes any sense to consider investing in green tech is because it will be a government mandated market. Need proof:

While "An Inconvenient Truth" urged viewers to fully inflate their car tires and to install compact fluorescent light bulbs to combat global warming, Gore said he is now focused on ensuring that the United States enacts a national carbon emission cap and ratifies a new global pact on climate change in the next three years.

"The simple algorithm is this: It's important to change the light bulbs, but it's much more important to change the laws," he said. "The options available to civilization worldwide to avert this terribly destructive pattern are beginning to slip away from us. The path for recovery runs right through Washington, D.C."

"The path to recovery runs right through Washington, D.C." Well surprise, surprise. You watch the touchy-feely "Inconvenient Truth" and everyone gets on board when he says that we just have to inflate our tires. I wonder how the movie would've been received if the message of the movie was that we need to raise taxes on gasoline to 5 bucks a gallon. But, like any good cult leader, Gore starts out small and then tightens the screws. I'm just wondering if now is a good time to buy stock in a Kool-aid company.

McCain's Revised Proposal

WASHINGTON (Reuters) - After receiving much heated criticism over his newly released economic proposal for coping with the largest credit and housing crunch in decades, John McCain has astounded his opponents with a sweeping proposal that is perceived by many as more comprehensive than plans put forth by either the Clinton or Obama campaign.

McCain's proposal would sponsor a new 100,000 employee Government Debt Forgiveness (GDF) bureaucracy reporting directly to the President. The crux of the plan is the assertion that many cashed strapped borrows who are in default on their mortgages must also necessarily have difficulty paying their taxes.

"Getting lenders and banks to agree on a plan for forgiving debt and getting people out of foreclosures will take far too long. Under my plan, we will immediately and automatically forgive anyone with an outstanding tax obligation to the Federal Gov't, this is the way to get to the root of the problem. "

Sen. McCain continued, "The Democrats are proposing a shot-gun method of stimulating the economy, dropping money out of helicopters, if you will. Why should we cut a check to families that have money in the bank and are paying their bills? They don't need the help."

The plan would also rewrite the tax law so that income taxes would no longer be withheld from each paycheck. Each citizen would have full access to pre-tax funds, and at the end of the year, pay the assigned tax obligation. The GDF would track households that consistently fail to pay taxes and put them in the "distressed household" category. Each distressed household would be assigned a personal counselor to work out an agreement such as forgiving the tax debt or giving the family a cash subsidy. "This ensures that gov't funds are given only to families that are truly distressed." said Sen. McCain's spokesperson.

Criticism from Democratic candidates was immediate and direct. Sen. Obama retorted, "The last thing the Gov't needs to be doing is rewarding those that renege on their obligations to this great country, the U.S. of K...ummm...of A. When you receive Gov't assistance, whether it be in the form of interstate highways, or access to courts, or national defense, you have a duty to repay what you owe. Not to mention that this would wreak havoc on Federal budgets..."

Sen. Clinton was likewise unsparing in her remarks, "A get out of jail free card for tax evaders? And what about the lost revenue? Is it fair for taxpayers to subsidize people who aren't responsible enough to pay their taxes? I've got news for McCain, you're going to be seeing a lot of "distressed households.""

The McCain campaign furthered the charge claiming that the tax code is too big and cumbersome for ordinary people to figure out what they owe. For people who didn't understand what they were doing when they signed their tax returns there would be more understanding and compassion. Until the full bill was passed, Sen. McCain declared that there would be a "100-day freeze on all late tax payment penalties, and no more interest charged on unpaid taxes."

An economist for the Clinton campaign, who requested to remain anonymous for fear of reprisal, was quoted as saying, "This is blatant plagiarism. This is a knock-off of our own original plans for addressing the crisis. The main advantage of the Clinton proposal is that you're giving away someone else's money [referring to the banks]."

Hillarycare Part Deux

http://www.nytimes.com/2008/03/28/us/politics/28clinton.html?_r=1&ref=politics&oref=slogin

The media campaign accompanying the roll out of the plan will include the slogan: "Price caps. They worked for Zimbabwe so why not here?"

Man, I tell you, I'm really starting to think about voting for Hillary. I mean, I've always felt that one of our biggest problems has been our inability to adopt effective policies from other countries. Ireland implemented a flat tax and its economy has gone gang busters. Yet we haven't adopted that policy. Poland slashed its corporate tax rate and has been attracting business investment like crazy. Yet we haven't adopted that policy. Finally we have a candidate who gets it, Hillary. We all know that Zimbabwe has been having a lot of success with price caps so, I'm glad to see a candidate willing to finally adopt one of those winning policies of other governments.

But, I tell you I'm really torn. I really like Hillary but Obama is a proponent of my number one issue this election which is:

1-Figure out a way to get people who made good decisions take the punishment for the bad decisions made by the idiots

That is huge for me. Punishing good behavior has always been important to me but especially this year. So, what to do, what do... Either way, anytime we see candidates advocating the policies that made Cuba so great we are in good shape. That's why it's so tough to pick this year. We've got two candidates advocating the effective policies that China had before they went and screwed up their economy with capitalistic reforms.

Fannie/Freddie Rule Change

More on the screw the prudent front...
http://finance.yahoo.com/expert/article/business/73923

U.S. government-chartered mortgage companies Fannie Mae and Freddie Mac can raise up to $20 billion in capital, according to their federal regulators. The Office of Federal Housing Enterprise Oversight (OFHEO) agreed last week to lower the amount of capital reserves held by the companies to 20 percent, from 30 percent, in a bid to shore up the housing market. (Reuters) Fannie and Freddie own or guarantee almost half the $11.5 trillion in U.S. residential debt. The $20 billion figure is at "the top end of the range," said OFHEO director James Lockhardt. "We felt at this point it was important to add liquidity to the mortgage market."

The classic way to keep people from making rational decisions is to constantly change the rules on everyone so that no one knows what is rational. In fact, decisions that were formally rational can instantly become irrational with a quick rule change. Take for instance the case of the poor shmuck, Ryan Parker of Alabama. When considering what type of mortgage loan to obtain two years ago, he was informed that he could either take a 30-year fixed rate mortgage or a fancy new 3-1 ARM which would LOWER HIS PAYMENTS! Well he, looking at the current credit/mortgage market thought to himself, "Hmmm…with all of the lending being done right now, Freddie and Fannie (who have capitalization requirements mandated by the government) may soon be tapped out. In that case, they will most likely be unable to offer lending on more mortgages. Which will lead to higher mortgage rates as banks have to guarantee mortgages themselves instead of being able to sell them off to Freddie or Fannie. That means mortgage rates should rise. Which means that an ARM would adjust up. Most likely even HIGHER than the fixed rate I can get now." Being the prudent and rational gentleman that he his, Mr. Parker went with the 30-year fixed mortgage.

Well, two short years later, Mr. Parker is viewing a sudden credit crisis and the rising interest rates that accompany such crisises with satisfaction because his initial thought has come to fruition. Freddie and Fannie are in fact tapped out and mortgage rates are in fact rising and people holding ARMs will in fact have to pay higher rates than Mr. Parker's fixed-rate mortgage. "Phew!", he thinks to himself patting his forehead. But wait! What's this? Freddie and Fannie aren't in fact tapped out? But why? How? Well, it turns out that those government-mandated capitalization rules weren't in fact rules but whims and can be changed at the drop of a hat. Mr. Parker's elation turns to regret. He is suddenly confused. "Why have capitalization requirements at all?", he thinks to himself. "To reduce risk" is the answer that he finds out after some study of the issue. "But, wait, has the risk associated with Fannie and Freddie been reduced so that lower capitalization requirements are justified?", Mr. Parker thinks. Well, no. Rather, with sinking real estate values across the country the risk has in fact INCREASED! So, shouldn't Freddie and Fannie be required to INCREASE their capital reserves instead of the opposite? No, see, the risk has been transferred from them so their risk is in fact lower than it used to be. "Where did the risk get transferred to?", asks humble Mr. Parker. Well, to the government or, rather, taxpayers. Or, more specifically to, well….you, Mr. Parker. See now, thanks to a rule change, not only do you pay a higher mortgage than your neighbor down the street with the ARM but you also are subsidizing his loan by paying his risk premium to the IRS every year. All that is left if for Mr. Parker to weep bitter tears of disappointment for so foolishly choosing the 30-year fixed. Poor fella'.

Housing, Credit, Inflation...oh my!

Mr. Greenspan on the current credit crisis.

I would add only one thing to Mr. Greenspan's comments. In his book he outlines how past recessions were a matter of disjointed supply and demand. People would get exuberant, stuff would fly off the shelves, and the next thing you know, demand would drive off a cliff. Stores and companies then must work off the excess inventory to "unwind their positions", slashing prices and laying off workers to get by.

He predicts, and I think correctly so, that just-in-time inventory practices and digital commerce have lessened the likelihood of these types of recessions. The last two recessions have been asset bubble based (assuming we are in a recession). Fine. I'm not a fan of more regulation or nationalization (thanks Mr. Summers) in general. What I am a fan of is the Fed using moral suasion on the upside of the next bubble.

The chief issue with an asset bubble is that it involves the masses. In past recessions, Ma and Pa only got involved in recession making if they owned their own store and kept too much stock on the shelves. In the last two recessions, we have all been accomplices in bubble making, and the masses are obviously too foolish to manage ourselves in a mania, no matter how recent the previous asset collapse.

If that is the case then the Fed needs to talk people off the ledge earlier. Greenspan did it cryptically and perhaps prematurely with his "irrational exuberance" comment several years before the dot-com crash. Having missed the mark on the first round, Greenspan joined the ranks of the anti-pessimists, and point-by-point outlined exactly why we were not in the midst of a housing bubble...several months before the contraction began the during the 2nd half of 2005. Bernanke soon thereafter took up the mantle of the swaggering, tobacco chewing, anti-inflation sheriff. "We have nothing to fear but inflation itself."

I completely agree that it's not the Fed's job to value asset prices. That's an incredibly complex problem, and the Fed can't be spooking the markets either. I'm not even blaming the Fed for this last round either...how were they to know it would be this bad? So if the Fed can't attack "inflated prices", what recourse do they have? They need to strike at the ideas of which bubbles are made:

Idea 1: In 2000, "This is a new economy where stock prices only go up."
Fed: Wrong, stock prices go up and down. Now as ever, we must be sure that there is underlying value and underlying income to justify our asset valuations. Markets with irrational expectations have always met with disappointment.

Idea 2: In 2003, "Home prices never go down."
Fed: Wrong, home prices are like all other prices and can go down just as easy as they can go up.

Idea 3: In 2004, "A home is the best investment you can make."
Fed: Wrong, a home is shelter. You pay money, you get shelter. If you're lucky, a home is a form of forced savings and you sell for a bit more than you paid. More dangerously, you must not view a home as an investment because it comes unhinged from the real cost of shelter (the vulgar term is "rent"). A decline in housing prices is viewed entirely different by our culture and our government than is a decline in other assets like stocks. This is especially clear now since people cry "Save my home!" not "Save my investment!"

Irrational times

http://finance.yahoo.com/expert/article/yourlife/71740

I really like this quote:
Also bear in mind that, as Warren Buffett says, markets are at first a voting machine, but always eventually become a weighing machine.

That makes the point succinctly that I have tried to make several times! As much as we try to finesse, massage, tweak, and "fix" the symptoms of the financial world, there is some underlying reality that exists. With systems as complex as financial markets, that underlying reality is very hard to infer. Luckily, there is a mechanism for inferring that reality and it is called price. As prices move, all market participants can learn with the best possible accuracy what the reality on the ground is. Like Warren Buffet says, the market becomes a weighing machine. I totally agree with that statement and that's why this quote troubles me:

Why doesn't Mr. Bernanke call in the big bankers and tell them he'll make sure none of them fails? Why not tell them the Fed will always be there to bail them out and recapitalize them if need be? Why not stop solvency-risk fears today? Why wait until another day? Why wait until a million or 2 million more people lose their jobs or homes or both?

Well, unfortunately, all of those things are how the market signals the underlying reality. If there is a problem that needs to be fixed, people need to know what the problem is and how to fix it. If banks have overextended or residents have overspent on their homes, someone or something needs to let these people know. If people need to be more prudent in the risks they take, that information needs to be communicated to them. Unfortunately, sometimes the only way to communicate that message is to let businesses fail or people to go bankrupt. Otherwise, there has to be another mechanism to let people know that. Apparently Mr. Stein realizes this because he suggests:

Further, why not tell the banks that a condition for recapitalizing them is much stricter regulation about lending policies -- not lending against bad collateral, not lending to borrowers with no credit history? Why not also impose rules about executive compensation to keep top brass from looting their own stockholders even as they kill their own companies?
Regulation to the Rescue
It's a myth that all regulation is bad. In banking, regulation saves greedy, foolish people from killing their own banks and the economy in general. Let's save the banks, save the economy, and lay the foundation for a smarter tomorrow -- starting today.

So, that's fine. Some people think that the best way to run markets is to let them efficiently run themselves. When there are prudent opportunities to invest, the price will indicate that. When there are problems that need to be corrected, the price will again indicate that. Obviously, with this method financial hardships will occasionally occur. The other method is to prevent any pain by bailing out people or businesses that make mistakes but then to prevent them from making bad mistakes in the future, we get the smartest people in the country to figure out rules to force people to make the right decisions. Now both are valid models but, I've always felt that the reason the U.S. is the U.S. and Russia is Russia is because we followed model 1 and Russia followed model 2. Now there are always people that think that the planned economy people always just did it wrong and with even smarter people and even better planning we can make a planned economy work even better than a free-market economy. Apparently Mr. Stein is in the latter camp.

Bear Stearns Meltdown

A $236M sale price basically means that the company had negative equity. Let's get this straight.
The building is worth $1.2B
The Fed guaranteed $30B: The Fed also essentially made the takeover risk-free by saying it would guarantee up to $30 billion of the troubled mortgage and other assets that got the nation's fifth-largest investment bank into trouble.

So, quick math: $236M - $1.2B - $30B = -$30.9B value for Bear Stearns.

How can this be? It's called leverage:
Such an erosion can be devastating for any investment bank, especially one like Bear Stearns, which has a leverage ratio of over 30 to 1, meaning it borrows more than 30 times the value of its $11 billion equity base.

30 to 1 at $11B equity...that's $330B in debt obligations. Maybe that -$30.9B that JPMorgan paid for Bear was overpriced!