Monday, March 17, 2008

The Federal Reserve Is Using Taxpayer's Money To Buy A Bunch Of Bear Stearns Traders Maseratis

No regular reader of this blog is likely to have failed to notice my deep admiration of Jim Rogers. Not only is he one of the most successful investors of all time, becoming rich first in his partnership with George Soros in the Quantum fund in the 1970s and then correctly calling in late 1998 for the start of the commodity price boom just a few months before it actually started in early 1999. And in the recent year, he has made the really good moves of selling shares of Wall Street investment bankers short while buying commodities in general and food commodities in particular. In short, he has been as right as you could get. The only thing he is bad at in this aspect is by his own insistent admission short-term market timing, but that have certainly not prevented him from becoming one of the most successful investors of all times. And as if that weren't enough, he is one of the sharpest analysts of current events around. And he expresses this correct analysis in a very straight-forward easy to understand way and doesn't bother to modify his wording to be polite or diplomatic. Case in point is his latest Bloomberg News interview, in this case by phone. I especially liked his very, shall we say straight forward way of explaining what the Fed bailout of Bear Stearns means

"The Federal Reserve is using taxpayer's money to buy a bunch of Bear Stearns traders Maseratis"

(Maserati, in case you don't know, is a prestigious Italian luxury car)

He points out that in January, just weeks before its collapse, Bear Stearns paid out billions in bonuses(!), you know to reward them for having made the mistakes that caused their company to ultimately collapse and for causing massive losses for the U.S. economy. But thanks to the Fed bailout, that reward is not in jeopardy, translating in effect to what this quote said. Rogers also notes that he has been waiting for an opportunity to get out of all his U.S. dollar assets during a briefly lived U.S. dollar rally. But now he realizes that he might again be taking losses from his one weakness, short-term market timing, as Bernanke seems determined to ensure this rally will never occur. Anyway, here is interview as a whole.


Anonymous Justin Rietz said...

I was looking back through your older posts (and my comments) and couldn't find whether or not we discussed the affects of credit implosion on the money supply. Some of your "favorite" economic evangelists say that if bank debt was marked to market, it would be a lot less than is currently reported.


(again, sorry if I am rehashing something you have already commented on - in that case, I would appreciate it if you would point me to your relevant posts).

6:32 AM  
Blogger stefankarlsson said...

Why do you refer to Jim Rogers as an "evangelist" and with quotation marks around favorite?

As for the effect on the money supply, it wont have any effect, or at least not any direct effect, unless the Fed and the FDIC suddenly starts to allow banks to collapse and with them the deposits that are part of the money supply, and that appears highly unlikely (They wouldn't even allow Bear Stearns to collapse even though it isn't a bank). Writedowns of loans issued directly by the bank will on the liability side of bank balance sheets hit bank equity and not have any effect on deposit values. And writedowns on loans backed by mortgage backed securities will hit the holders of these securities, which are not part of the money supply.

Hypothetically though, if (something which hasn't happened yet) this causes banks to reduce credit growth, then this would have the effect of slowing money supply growth.

8:51 AM  
Anonymous Justin Rietz said...

I actually pulled that idea from Mish's most recent post (and hence the quotes):

"The above chart shows bank credit to be expanding at 10% annually. Certainly that is not deflation if the chart is accurate. But is the chart accurate? What if bank credit was marked to market? What would that look like? For that we turn to Bear Stearns (BSC)"

Don't take this is a sign of my support of Mish - rather, I'm just trying to decipher his (and others) position, and you have a good grasp of the issue that I don't.

Ad sorry if my question wasn't clear - rereading it made me realize it was a bit confusing.

9:42 AM  
Blogger stefankarlsson said...

Well, here Mish is confusing bank credit and money supply. Of course bank credit will be reduced if it is marked to market. But that is the asset side of bank balance sheets. (Part of the) Money supply is on the liability side of bank balance sheets, as in customer deposits. But as I've said, unless the banks go completely bankrupt, the entire hit of this reduction will go over another liability post, namely bank equity and that isn't part of the money supply.

11:25 AM  
Anonymous Justin Rietz said...

Would it also be accurate to say that the reason a decrease in a bank's assets doesn't affect the money supply is because the bank doesn't have to reduce the number of loans it is making since it can borrow from the Fed? Moreover, as we have discussed previously, the bank can basically side step reserve requirements given the 0% requirements for many types of assets.

As a side note, I'm a fan of Rogers too and so wouldn't take a cheap shot at him (or you for that matter). Your explanations have been helpful in helping me sort this all out. Thanks.

11:51 PM  
Blogger ghamal said...

So do you think there will be a dollar "rally" in the near future?

12:56 AM  
Blogger stefankarlsson said...

Justin:that is a reason why it doesn't have to effect the growth of newly issued credit or the money supply. If however this nevertheless scares the banks, then it will have an effect. But judging from the latest statistics, this hasn't happened yet.

And as for the side note, I clearly misunderstood who you refered to. Since this was a post about Jim Rogers and since he has been warning about bank losses I assumed
that it was him you refered to, but I thought your characterization of him was kind of strange. But now that I know you refered to Mish it doesn't seem strange anymore.

Ghamal: there are always short-term rallies within bear markets and short-term sell-offs within bull markets. And during the current dollar bear market there will probably be more short-term rallies. However, they are not likely to be long-lived or large, and the trend remains down, so I myself wouldn't try to time in any of them. The risks are too high in relation to the small potential gains

2:16 AM  

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