This week we visit an essay from an old friend of Outside the Box, Paul McCulley, the Managing Directpr of PIMCO. This is a speech he did at the Minsky Conference sponsored (I believe) by the Levy Institute. It was also the same speech he gave at my conference mid-April that was quite well received.
Essentially Paul argues that the cause of the recent crisis was the creation of the Shadow Banking System outside the purview of regulation. And while he did not use the line in this speech, he did at my conference, which is one of the truly great lines I have heard this year.
"The rating agencies were like the man who went to an under-age drinking party and handed out fake IDs (identification cards). They were the necessary enablers as Paul shows. This is a think piece and one you should take some time to read as when you "get it," you will have some understanding of what must be done all over the world to prevent the next crisis. Let me offer two paragraphs as teaser copy"
"And I think the first principle is that if what you're doing is banking, de jure or de facto, then you are in a joint venture with the public sector. Period. If you're issuing liabilities that are intended to be just as good as a bank deposit, then you will be considered functionally a bank, regardless of the name on your door. That's the first principle.
"Number two, if you engage in these types of activities – call it banking, without making a big distinction here between conventional banking and shadow banking, as Paul Krugman intoned this morning – in such size that you pose systemic risk, you will have higher mandated capital requirements and you will be supervised by the Federal Reserve. Yes, I just told you who I think the top-dog supervisor should be. You will have tighter leverage and liquidity restrictions: You will have to live by civilized norms. In fact, a great deal of what is on the regulatory reform table right now proceeds precisely along those lines. If you're going to act like a bank, you're going to be regulated like a bank. That simple. And maybe you just might find the time to go back to working on your golf game at 3. That is the core principle.
(Note: Paul uses the following Latin terms a lot. For those not familiar with them, Ex-post is Latin for "after the fact." Ex-ante is Latin for "before the event or beforehand".)
Have a great week!
Your rushing to yet another plane analyst,
I have been writing for a very long time about the coming debacle that the commercial real estate problem is going to be. This week's Outside the Box is an interview that my good friend David Galland did with Andy Miller, a man on the inside of the coming commercial real estate crisis. I thought it was very revealing, as there are so many nuances to the problem. For instance, in some cases, if you default and walk away from the loan you may trigger huge taxes as the loan loss to the bank is now considered income to you. Ouch! So many strings to unravel as you figure this one out.
I asked David if I could use this as an Outside the Box, and he agreed. This was from Casey Research, a very good source for non-mainstream investment ideas. You can learn more or subscribe at a discount at here.
I really think you will find this a very easy and informative read. Have a great week.
Your writing from Monaco on my way to Zurich analyst,
This week we visit some very thoughtful analysis by an old friend of Outside the Box, Dr. John Hussman of the Hussman Funds (http://www.hussmanfunds.com/index.html). Is the new PPIP program and related activities likely to help or hurt the situation? Will this help keep banks for bankruptcy or will it push the FDIC into insolvency requiring massive tax payer cash. This week's Outside the Box is brief, but poignant.
It is important to understand the thinking of those who are in fact making the decisions at the Fed and Treasury. In today's Outside the Box, Paul McCulley, Managing Director at PIMCO, gives us some insight into the thinking that is driving the massive stimulus and bailout programs. Whether or not you agree, it is important to have a handle on what is actually happening and the thinking behind it.
As a bonus, let me give you a link to David Kotok's excellent and very clear analysis of the Public-Private Investment Program (PPIP). The PIPP is basically a call option financed by the US tax-payer. David shows us why as tax-payers we should be concerned. You can read it for your self http://www.cumber.com/commentary.aspx?file=032909.asp&n=l_mc. Have a great week!
How do you spell short-selling rally, gentle reader? In this week's Outside the Box we look at several short items (pardon the pun) from various sources, which paint a not pretty picture. The first hit my inbox this morning from Art Cashin (of CNBC fame and also Head Floor Trader for UBS).
"Deconstructing The Rally - The sharp rally that sprang from the new short sale restrictions has been spiky and, in several ways, very powerful. The impact of the short rule change was evident. As Barron's notes, the 150 stocks with the heaviest short interest rallied a stunning 15%. The stocks with the smallest short positions rose only 2%. That may be a function of existing shorts scrambling to cover to pass the new, belated, scrutiny. That thesis got added weight from a couple of areas. The Merrill Lynch results got mostly panned by several analysts and TV pundits. Nonetheless, the stock closed 24% above its lows for the week. Also, the financial sector ETF rose nearly 25% from the lows.
"All of the above suggests that the rally is based on the two pronged government move. First, put a safety net under the financials, especially Fannie and Freddie. Second, restrict opportunities to sell the financials short. We'll wait to see if those efforts have further legs this week."