The Art of Watching

It’s a bit crazy to think that while watching the DOW plummet how used to the volatility we’ve all become. Adam has been tracking the VIX gyrations for the last several weeks and I agree with his expert opinion that we are in for more of the same.

There’s an old newspaper saying that goes “if it bleeds it leads” and while my mandate from Fly was to “tell scary stories to the children about how Santa is broke” – I didn’t think it would be quite this easy.

Dinero Facile

As noted in my posts in the Peeg, there is another wave coming of bad news in the form of the hobbled American Consumer as banks are removing trillions of dollars in liquidity from the largest component of the US GDP.

The U.S. credit-card industry may pull back well over $2 trillion of lines over the next 18 months due to risk aversion and regulatory changes, leading to sharp declines in consumer spending, prominent banking analyst Meredith Whitney said.

The credit card is the second key source of consumer liquidity, the first being jobs, the Oppenheimer analyst noted.

“In other words, we expect available consumer liquidity in the form or credit-card lines to decline by 45 percent.”

and it’s comments like the following that make Meredith one of my favourite analysts:

“In a country that offers hundreds of cereal and soda pop choices, the banking industry has become one that offers very few choices,” Whitney wrote in a note dated Nov. 30.

She also said credit lines to consumers through home equity and credit cards hadbeen cut back from the second-quarter levels.

“Pulling credit when job losses are increasing by over 50 percent year-over-year in most key states is a dangerous and unprecedented combination, in our view,” the analyst said.

As I said last week – don’t expect the Calvary to come with Mastercards a flashing.

It’s very troubling to consider that the very mechanism that is touted as resolving recessions (spending) is being torn away from the very entity that could prevent this mess from leaping across the barrier between recession and the Big D.

Let’s just put to bed any of the wrong headed ideas that the American Consumer is going to save the world on this one. Because, if they’re not buying Cafe Lattes at Starbucks – we’re all in for a bumpy ride.

Whistling Past the Graveyard

Ben was speaking in Austin yesterday and had more than a few things to say about how there were “many other options to take” in regards to the financial crisis I couldn’t stop thinking about a certain black knight:

[youtube:http://www.youtube.com/watch?v=2eMkth8FWno]

While we’re talking about Helicopter Ben and all – I found this very insightful post from a year ago over at Market-Ticker that explains how some of the steps taken this fall will probably have exactly the opposite effect:

Liquidity is a loan!

Let’s apply it to a typical individual’s situation and it should become clear.

Let us say that you have some diamonds, a Rolex, and a couple of handguns.

Let’s also say that you have a job, and that job pays you $5,000 a month, after taxes. You spend basically all of this, having only a few hundred dollars in the bank in cash. After all, you’re a good little consumer, right?

Now let us assume that your car has no collision or comprehensive insurance. That is, you maintain only the legally-required liability insurance.

Ok, so late one night while you are sleeping Joe Thugg shows up and steals your car. You wake up in the morning and find that your car is gone! This is, of course, a disaster. You need to get to work, or you will soon not have that $5,000 a month in income.

Well now you have a problem, don’t you?

You could go to the bank, but the bank is likely to look askance at your request for a loan. After all, you don’t have a house, and they’re not all that interested in your Rolex.

So you go down the street to the local pawn shop. Here you find “liquidity.” You execute the equivalent of a personal TOMO with the pawnshop owner. He gives you cash, and you give him your Rolex, your diamonds, and all but one of your handguns (you need the last one in case Joe Thugg shows up again!)

Note that once you walk out of the Pawn Shop you are actually in a worse financial situation than you were before! Yes, you’re “liquid”, but you now have an interest payment monkey on your back to go along with the cash.

When The Fed “injects liquidity” they have not created money; in fact, they have made the bank’s balance sheets more encumbered because the interest has to be paid too!

But of course, just like the bank, you use that $2,000 to buy yourself a car. This allows you to go to work and keep your job. A month passes, you tighten your belt, and the “TOMO” matures – you pay the Pawnshop owner back (with interest) and retrieve your Rolex, guns and diamonds.

….

Just remember folks – “liquidity” isn’t hard cash. It’s a loan, it carries interest, and it has to be paid back – on a short term basis.

The fact is even Ben doesn’t know what to do next.

Things too big to notice

Goldman Sachs, now resplendant with Federal funding is probably going to report a loss in the area of $5/share.

The US is officially in a recession for over a year now.

[note – don’t let anyone from NBER give me any financial advice – it’ll be too late]

No one is driving the car!

From IHT:

Elizabeth Warren, the chairwoman of the oversight panel, said in an interview Monday that the government instead seemed to be lurching from one tactic to the next without clarifying how each step fits into an overall plan.

….

Meetings with Treasury officials so far have made her question whether they understand that “household financial health is profoundly tied to the economic health of the nation,” she said. “You cannot repair this economy if you can’t repair those families, and I’m not sure the people directing the bailout see that as their job.”

….

and some are slinking towards the door away from this oversight

But on Monday, Senator Gregg, who is also the ranking Republican on the Senate Budget Committee, announced that he “will need to step aside from this effort.” He cited the legislative burden facing the Senate, specifically “an extremely large stimulus package” and “the ongoing issues of developing fiscal policy relative to the budget.”

The Takeaway

Shiny metals are getting cheaper by the day.

UDN and DXD look good as well from here for the time being.

Theme Song

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