The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

I did a long video interview with Steve Forbes — it should be posted later this week. Meanwhile, this is part of the pre-interview I did prior to that shoot:

What is the greatest financial lesson you’ve ever learned?

You’re a monkey. It all comes down to that. You are a slightly clever, pants-wearing primate. If you forget that you’re nothing more than a monkey who has been fashioned by eons on the plains, being chased by tigers, you shouldn’t invest. You have to be aware of how your own psychology effects what you do. This is why we as investors sell at the bottom, get panicked. All the other lessons I’ve learned have come out of that. As has the field of behavioral economics.

Wall Street clichés, like “cut your losses and let your winners run” come back to prevent the monkey part of your brain from doing what it does. There’s a banana–I want it. That’s how chimps behave. Us humans react to greed and fear in predictable ways. We are predictably irrational. If you understand that you can take steps to prevent that–we don’t own anything in the office that doesn’t have a stop-loss on it. In 2008, we watched the market go down 40%. We figured out we’re chimps, and don’t let the chimp inside us make those chimp-like decisions.

Every good financial decision I’ve made comes from, “Wait a second, monkey boy, step back, don’t do that.” Once you realize how your own brain chemistry works against you, it gives you a chance to not panic at the bottom.

Yes, I called myself Monkey Boy.

The full interview is at Forbes; I’ll post the video this week when it goes up

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Source:
Monkey Theory
David Serchuk,
Forbes, 03.13.09, 06:00 AM EDT

http://www.forbes.com/2009/03/12/barry-ritholtz-interview-intelligent-investing-ritholtz.html

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Source:
Resurrection on Wall Street
ANDREW BARY
Barron’s March 16, 2009

http://online.barrons.com/article/SB123698562029125353.html

Amazing back and forth on large bank resolutions.

I saw an interesting poll on a web site  called The Globalist run by my friend Stephan Richter.  He and I share a delight in telling the truth — or at least what we see as truth — in public in Washington.  Since 95% of what is spoken in Washington is sponsored by some  corporate interest, expressing actual honest opinions is a radical concept.

Here are the poll questions:

Should the U.S. government let some of the big banks fail?

	No, it would have catastrophic consequences.
	Yes, it would finally lead to real banking industry reform.
	The banks are already failing. Nationalization is the only option.

The thing which caught my interest was 2/3 of the respondents favor allowing the large banks to fail and be broken up, this to advance the concept of reform.

Chart via Globalist

Almost a third of the respondents said that the banks were already failing and should just be seized and broken up.

What is interesting about this poll to me is that The Globalist is a pretty broad, non-financial portal with a definite international following.  Not a hotbed of Republican, conservative politics.  But there does seem to be a broad and broadening public disgust with the problems on Wall Street.

Of note, something interesting happened at the Financial Services Hearing this week that very few people picked up on, but that is actually somewhat newsworthy.  During the hearing on mark to market accounting standards Robert Herz of FASB (Financial Accounting Standards Board) said that about two weeks before insolvent institutions go under, they come to him and ask for accounting rules changes.  The exchange is at about minute 4:45.

So guess we should be tracking Bob as a bank fail indicator?  When Rog Cohen calls with a patient on life support and Bob gets on the conference call, we know the time is nigh?

On Wednesday, Bloomberg News wrote a piece about lawmakers (Brad Sherman) thinking of giving bad bank bondholders a haircut based on the GMAC model whereby bondholders were given a 40% haircut. That would help improve capital ratios, and make them smaller. Both desirable outcomes, the financial clog could clear and confidence could be restored. 

But, on Thursday, Bloomberg News reported other lawmakers were talking about legislating an end to FV accounting, to allow banks to continue the lie. Paul Kanjorski is the nutbag on the Hill spear-heading this lame-brained effort. The goal is to let banks decide what marks to give their assets. Presumably, these marks would be marked-to-model, that is whatever fictitious fantasy model they wish to create. The financial system would not clear and confidence would remain in the shitter.

The FASB chair Robert Herz is being pressured by lawmakers to change the FV rules, according to the chatter. Barney Frank is doing some of the arm-twisting, a role he does with only modest skill.  SEC Chairman Mary Schapiro appears to be against eliminating mark-to-market, but she is not forceful on this point.

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Sources:
Banks’ Bondholders May Be Next to Share Bailout Pain
David Mildenberg and Bryan Keogh
Bloomberg, March 11 2009

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aKqHkkFlnvfM

Lawmakers Tell FASB to Change Fair-Value ‘Quickly’
Ian Katz and Jesse Westbrook
Bloomberg, March 12 2009

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a6RX9zOA4Td4

Alan Grayson Questions AIG Math
You Tube, March 13, 2009

In all the week’s lunacy, we neglected this story — which can be resolved with a simple cartoon:

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via Time Magazine

Marcia whipped up this amusing parody:

Further to our post yesterday about the Stress Test Zombies (“19th Nervous Breakdown: TBTF Stress Test Banks”), below is our latest comment about bank stress tests and other such nonsense.  It is not that we do not wish to be helpful, you understand, but if our public officials are not going to say and do things that are credible, we have a duty to say so.  Am I right?

Anyway, one thing I did not put in the post but which definitely deserves some time on the BP is the shenanigans by certain members of Congress around the bank bailout boondoggle.  Like Rep Maxine Waters (D-CA) and her buddies at OneUnited Bank. A mess.  The bank had -7% TCE at year-end 2008.

Click here to see the Q4 2008 profile for OneUnitedBank, which we rated “F.” Now just imagine the entire Congress conducting the bailout of the large banks with the same diligence and clarity of purpose displayed by Ms Waters with respect to OneUnited Bank.  Now you know why we sound a little testy when we write about the zombie dance party in Washington.   Enjoy.

The Institutional Risk Analyst

March 13, 2009

Last week, we learned from Fed Chairman Ben Bernanke and Treasury Secretary Tim Geithner that Washington lacks the guts to fix the problems eating away at the US financial system, at least so far. So large are the derivative-fueled losses and so majestic the collective incompetence of the Congress, regulators and the Sell Side dealers on Wall Street in enabling these losses, that the judgment of the single party state called Washington is to simply hide the problem under an ever-widening public TARP.

Now, in most parts of the country, a TARP is used to cover unneeded things, usually a pile of stuff nobody wants, far in the back yard. This is essentially the plan articulated by Bernanke and Geithner: Buy the bad assets, invest more capital in the zombie banks, and hope asset prices eventually recover. This is not a plan to do anything but buy time and extend losses. The scary part is that nobody else in the Obama White House seems to know enough about finance to argue the point.

As we told the subscribers to IRA’s Advisory Service, the Fed and Treasury have created a rule without reason, a ridiculous standard that only ensures the unsoundness and instability of the US financial system. Apparently, banks that fail the Supervisory Capital Assessment Program stress test will not be broken up as required by law, but instead given more capital at taxpayer expense. This is the solution to the financial crisis embraced by President Barack Obama. There is no market discipline, no bad results for the bond holders who stupidly funded these giant derivatives-driven, risk-creation machines.

Below is our best guess as to the identity of the 19 or so banks that are part of the stress test process. We hear in the community that these 19 domestic financials are the de facto “Too Big Too Fail” banks, which of course means that all other banks are not part of the group. We should probably add American International Group (NYSE:AIG) and the Depository Trust and Clearing Corp, which owns a Fed member bank, to the TBTF list.

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peak debt:

n. In an economy or household, the point at which the costs to service increasing debts become so high relative to income that no more debt can be taken on, so consumption plummets.

A corollary, peak debt, was coined in 2006 by a former Cisco employee named Jaswant Jain, who calls himself the Prophet of Doom and Gloom, and who first observed the deleterious effects of unrestrained borrowing as an eight-year-old in a village near the city of Jodhpur, where debt-ridden Brahmins appeared worse off than solvent untouchables.

—Ben McGrath, “The Dystopians” (paid registration required), The New Yorker, January 26, 2009

Via Word Spy

Last nite, I mentioned U.S. Household Net Worth fell 18%. This morning, Rolfe Winkler sends along this chart based upon the Q4 2008 Flow of Funds from the Federal Reserve.

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Rolfe adds:

To put data from the chart above in perspective, the one below compares the data to GDP. I’m using annual data here, so the increase at the end of 2008 is understated.  GDP for the full year 2008  was higher than 2007.  But Q4 2008 GDP was lower compared to Q3.  So towards the very end of the year, the denominator (GDP) is going down even as the numerator (Debt) is going up.  On a percentage basis, this means Debt/GDP is presently rising at an accelerating rate.

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Source:
Charts: U.S. Debt Expanding, Homeowner Equity Crashing
Rolfe Winkler
Option Armageddon, March 12, 2009 – 9:51 pm

http://optionarmageddon.ml-implode.com/2009/03/12/updated-debt-stats/

Previously:
US Household Net Worth Falls 18% (March 12th, 2009)

http://www.ritholtz.com/blog/2009/03/us-household-net-worth-falls-18

Video-o-rama: Stock markets – turnaround time

Tuesday marked a reversal of fortune for global stock markets as investors adopted a more positive view of the prospects for the banking sector and cast aside concerns about the economy.

The movements of the major US indices over the past three days tell the story of the nascent rally: Dow Jones Industrial Index (+8.7%), S&P 500 Index (+11.0%), Nasdaq Composite Index (+12.4%) and Russell 2000 Index (+13.7%). A positive close by the end of trading today [Friday] will record only the second up-week out of 10 in 2009.

On the video front, footage was produced debating whether markets were witnessing A bottom or THE bottom and also the usual dosage of the dour outlook for economic growth and speculation about the “next penny” to drop.

Also included in this week’s compilation is a mega interview with celebrity stock endorser Warren Buffett, as well as a no-holds-barred face-to-face encounter between Jon Stewart and Jim Cramer (in three parts at the end of the post).

Bloomberg: Marc Faber says government actions will boost stocks
“Government spending will spur gains in the Standard & Poor’s 500 Index after it fell 56% from an October 2007 record, investor Marc Faber, the publisher of the Gloom, Boom & Doom report, said. ‘Equities could rally between here and the end of April,’ Faber said in an interview with Bloomberg Television. ‘The government’s efforts will fail to boost economic activity. They can boost stocks. Stocks have adjusted meaningfully.’”

Source: Bloomberg, March 9, 2009.

Charlie Rose: Barton Biggs on the stock market

Source: Charlie Rose, March 9, 2009.

Tech Ticker, Yahoo Finance: Ritholtz – get long torches & pitchforks; bailouts “absolutely asinine”

Source: Tech Ticker, Yahoo Finance, March 10, 2009.

Fox Business: Fleckenstein – not in a hurry to buy
“Bill Fleckenstein talks about the economy and why he isn’t rushing back to the market to buy.”

Source: Fox Business, March 5, 2009.

John Authers (Financial Times): China and the markets
“Should US or European stocks have sold off on the Chinese news [of poor exports]? Not necessarily. By this week, the S&P 500 had priced in much future bad news, says Authers.”

Click here for the article.

Source: John Authers, Financial Times, March 11, 2009.

CBS News: Your bank has failed – what happens next?
“What would happen if your local bank failed? Scott Pelley and ‘60 Minutes’ were given extraordinary access, as the Federal Deposit Insurance Corporation moves in to take over a failed bank in Chicago.”

Click here for the article.

Source: CBS News, March 8, 2009.

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