Paul Volcker: “Not an Ordinary Recession”

http://www.ritholtz.com/blog/2009/02/paul-volcker/

Paul Volcker recently gave a speech that has gotten a lot of replay action on the blogosphere. I believe most are saying that Volcker is calling for a return to “narrow banking” (see Jesse).

A lot of people listen to Volcker as he led the charge at the Fed over taming inflation back in the late 70s and early 80s. I wonder more if he wasn’t just at the right place at the right time, doing what had to be done — raising rates. I’m convinced that most people give entirely too much credit both on blame and accolades. Don’t get me wrong, the Fed has enormous power, but my estimation is that they are almost always messing things up. The Fed is reactionary always and almost always reacts too far.

Therein lies the problem. The Fed fails at regulating. Hardly surprising, really. Is it not a joke to pay lip service to free markets, which are incredibly dynamic decentralized systems, and then use a central body to regulate the blood of the system, money? It’s a sad joke.

I could go on, but I’ll hold off. There are two pieces of Volcker’s recent speech I want to quote and comment on briefly. First:

One of the saddest days of my life was when my grandson – and he’s a particularly brilliant grandson – went to college. He was good at mathematics. And after he had been at college for a year or two I asked him what he wanted to do when he grew up. He said, “I want to be a financial engineer.” My heart sank. Why was he going to waste his life on this profession?

A year or so ago, my daughter had seen something in the paper, some disparaging remarks I had made about financial engineering. She sent it to my grandson, who normally didn’t communicate with me very much. He sent me an email, “Grandpa, don’t blame it on us! We were just following the orders we were getting from our bosses.” The only thing I could do was send him back an email, “I will not accept the Nuremberg excuse.”

There was so much opaqueness, so many complications and misunderstandings involved in very complex financial engineering by people who, in my opinion, did not know financial markets. They knew mathematics. They thought financial markets obeyed mathematical laws. They have found out differently now. You know, they all said these events only happen once every hundred years. But we have “once every hundred years” events happening every year or two, which tells me something is the matter with the analysis.

So I think we have a problem which is not an ordinary business cycle problem. It is much more difficult to get out of and it has shaken the foundations of our financial institutions. The system is broken.

The system is broken. The system was too opaque. Finance is incredibly complex. It is here where I actually started wondering if Volcker “gets it” as far as understanding that our system is far from robust as centrally controlled and designed. As it is, Nassim Taleb is the only person I’ve seen who seems to glimpse the complexity of the financial system. However, I’ve seen even Taleb defer in theory to people “who saw this coming,” like Nouriel Roubini, for potential ways to “fix” the system.

Volcker’s comment about his grandson also hits home with me as I went into finance/accounting. When everyone you know is running into a field, that may be cause to rethink your choice of education (Everyone I knew in college was getting into Real Estate — this was back in 2001). Then again, I still wish I had gone and pursued computer science, but the dotcom crash (2000) scared me away.

More from Volcker:

What do I mean by different? I think a primary characteristic of the system ought to be a strong, traditional, commercial banking-type system. Probably we ought to have some very large institutions – or at least that’s the way the market is going – whose primary purpose is a kind of fiduciary responsibility to service consumers, individuals, businesses and governments by providing outlets for their money and by providing credit. They ought to be the core of the credit and financial system. …

What has happened recently just underscores that. And I think we’re at the point where we can no longer fool ourselves by saying that is not the case. The government will support these institutions, which in turn implies a closer supervision and regulation of those institutions, a more effective regulation than we’ve had, at least in the United States, in the recent past. And that may involve a lot of different agencies and so forth. I won’t get into that.

So just as soon as I thought maybe Volcker “gets it,” he goes and says we should have a strong core (read: centralized) system of banking that is heavily regulated. He wants this core to be firewalled from entrepreneurial finance to eliminate conflicts of interest.

I’ll be brief. Regulation has failed. The Federal Reserve is a monstrous regulatory body that has repeatedly exemplified failure, and I’ve already mentioned its innate centralization. The SEC? Failure at every turn. More regulation? More centralization? How many examples do we need whereby larger organizations display a need for more regulation, and when more regulation is presented, said regulatory agency is either captured by the body it intends to regulate or is inept?

What we need are decentralized banking systems that are free enough and unencumbered enough to fix themselves or self-destruct without taking down the entire network.

The great centralization experiment has failed. Let’s move on (and follow the example of the internet, which exemplifies the power of decentralization).

Enough for now.

Update 2/24/09: Saw a youtube clip of Volcker’s speech. Wanted to get this quote down:

The description of a fat tail reflects a kind of analysis that isn’t appropriate. They think that financial markets follow normal distributions. pattern like the law of physics. The one remark I’ll leave with you: if you think the financial world follows a normal distribution pattern like the laws of physics. If you think that you’re a financial engineer but you’re not a very good financial analyst.

So he recognizes how inherently unpredictable financial markets are but then goes on to suggest that the Federal Reserve can fix imbalances that present themselves.

Cognitive dissonance.

@ http://www.youtube.com/watch?v=O3ROf8ln9rg

Why Is This Bubble Different From All Other Bubbles?

http://jessescrossroadsca…t-from-all.html

Mostly interested in the latest Case-Shiller chart with the nice dotted line reversion to the mean. Based on the intersection point on the index, we can’t expect to hit a bottom on house prices until 2012, and then we would likely expect to overshoot a bit to the downside.

Takeaways include: expect house prices to fall further on a nominal basis, an inflation-adjusted basis, or both (likely both). This is information I’d almost rather not have as even if we don’t find a house in the next couple of months and relegate to renting for another year or so, we’re only marginally better off a year from now in the overall correction.

What can you do?

Here is the full-size.

George Soros finally gets it

http://optionarmageddon.m…inally-gets-it/

Rolfe over at Option Armageddon tackles George Soros amazing flip-flop from his side-pocket banking position that he publicized a bit over two weeks ago (Feb. 4).

As I commented on OA, it seems more and more true believers in the financial system are losing faith and turning into apostates. What’s interesting in Soros’ case is how dire he paints the present situation, comparing it to the collapse of the Soviet Union. Perhaps he’s not far off the mark.

Per Rolfe:

Anyway, only three weeks after arguing “side-pockets” were the magic bullet, Soros now sounds downright despondent. Reuters:

Renowned investor George Soros said on Friday the world financial system has effectively disintegrated, adding that there is yet no prospect of a near-term resolution to the crisis.

Soros said the turbulence is actually more severe than during the Great Depression, comparing the current situation to the demise of the Soviet Union.

He said the bankruptcy of Lehman Brothers in September marked a turning point in the functioning of the market system.

“We witnessed the collapse of the financial system,” Soros said at a Columbia University dinner. “It was placed on life support, and it’s still on life support. There’s no sign that we are anywhere near a bottom.”

Three weeks ago George thought all we needed was a little financial engineering. Now he sees “no prospect” of resolution and says we’re falling like the Soviet Union. What changed? My guess is that George finally started to think outside the box; he put his big brain to work thinking about the very foundation of our economic system and realized its broken.

Why highlight this particular flip-flop with a blog post? I think it’s emblematic, and not in a good way.

I continue to be struck by the level of ignorance among our captains of industry, our leading policitians, our financial elite and, most ominously, our economic “experts.” Few appear to recognize the depth of the crisis we face. Most still aren’t prepared to ask the hard, fundamental questions about our economic system. Anyone who mentions the gold standard, for instance, is treated as a novelty.

The problem, I think, is that so many of our leaders are tied immovably to the old way of doing business. A man will make himself believe most anything if his salary depends on it. Lots of salaries are at risk, so lots of heels are digging themselves in.

Anyway, as I’ve argued for awhile, the only way to “solve” the crisis is to let asset prices fall. And that means the balance sheets on which those assets currently reside need to recognize substantial losses. Call it the “Fight Club” solution*—everyone goes back to $0. This would be highly painful for ALL Americans. But it would be most painful for those with the most to lose…

—————

*Fight Club screenplay:

JACK
…I believe the plan is to blow up the headquarters of these credit card companies and the TRW building.

STERN
Why these buildings? why credit card companies?

JACK
If you erase the debt record, we all go back to zero. It’ll create total chaos.

As I noted (H/T MVC), today happens to be Chuck Palahniuk’s, Fight Club author, birthday.

While Rome Burns

http://www.ritholtz.com/b…ile-rome-burns/

John Mauldin over at the Ritholtz’s Big Picture writes about long-term investing, what it means (He defines as a 20 year horizon), and when it works (He also discusses how Europe is in big, big trouble, but that is another topic that is being widely discussed).

As part of this long-term investing discussion, he takes to task some of the bromides bantered about regarding missing bull markets, “no pain no gain,” blah blah buy! buy! buy! etc.

It’s a long read for a blog post, but there is some worthwhile nuggets. What I really took away was here:

In the 103 years from 1900 through 2002, the annual change for the Dow Jones Industrial Average reflects a simple average gain of 7.2% per year. During that time, 63% of the years reflect positive returns, and 37% were negative. Only five of the years ended with changes between +5% and +10% – that’s less than 5% of the time. Most of the years were far from average – many were sufficiently dramatic to drive an investor’s pulse into lethal territory!

Almost 70% of the years were “double-digit years,” when the stock market either rose or fell by more than 10%. To move out of “most” territory, the threshold increases to 16% – half of the past 103 years end with the stock market index either up or down more than 16%!

Read those last two paragraphs again. The simple fact is that the stock market rarely gives you an average year. The wild ride makes for those emotional investment experiences which are a primary cause of investment pain.

The stock market can be a very risky place to invest. The returns are highly erratic; the gains and losses are often inconsistent and unpredictable. The emotional responses to stock market volatility mean that most investors do not achieve the average stock market gains, as numerous studies clearly illustrate.

Not understanding how to manage the risk of the stock market, or even what the risks actually are, investors too often buy high and sell low, based upon raw emotion. They read the words in the account-opening forms that say the stock market presents significant opportunities for losses, and that the magnitude of the losses can be quite significant. But they focus on the research that says, “Over the long run, history has overcome interim setbacks and has delivered an average return of 10% including dividends” (or whatever the number du jour is. and ignoring bad stuff like inflation, taxes, and transaction costs).

The 20-Year Horizon

But how long is the “long run”? Investors have been bombarded for years with the nostrum that one should invest for the “long run.” This has indoctrinated investors into thinking they could ignore the realities of stock market investing because of the “certain” expectation of

ultimate gains.

This faulty line of reasoning has spawned a number of pithy principles, including: “No pain, no gain,” “You can’t participate in the profits if you are not in the game,” and my personal favorite, “It’s not a loss until you take it.”

These and other platitudes are often brought up as reasons to leave your money with the current management which has just incurred large losses. Cynically restated: why worry about the swings in your life savings from year to year if you’re supposed to be rewarded in the “long run”? But what if history does not repeat itself, or if you don’t live long enough for the long run to occur?

For many, the “long run” is about 20 years. We work hard to accumulate assets during the formative years of our careers, yet the accumulation for the large majority of us seems to become meaningful somewhere after midlife. We seek to have a confident and comfortable nest egg in time for retirement. For many, this will represent roughly a 20-year period.

We can divide the 20th century into 88 twenty-year periods. Though most periods generated positive returns before dividends and transaction costs, half produced compounded returns of less than 4%. Less than 10% generated gains of more than 10%. The P/E ratio is the measure of valuation reflected in the relationship between the price paid per share and the earnings per share (“EPS”). The table below reflects that higher returns are associated with periods during which the P/E ratio increased, and lower or negative returns resulted from periods when the P/E declined.

Look at the table above. There were only nine periods from 1900-2002 when 20-year returns were above 9.6%, and this chart shows all nine. What you will notice is that eight out of the nine times were associated with the stock market bubble of the late 1990s, and during all eight periods there was a doubling, tripling, or even quadrupling of P/E ratios. Prior to the bubble, there was no 20-year period which delivered 10% annual returns.

Why is that important? If the P/E ratio doubles, then you are paying twice as much for the same level of earnings. The difference in price is simply the perception that a given level of earnings is more valuable today than it was 10 years ago. The main driver of the last stock market bubble, and every bull market, is an increase in the P/E ratio. Not earnings growth. Not anything fundamental. Just a willingness on the part of investors to pay more for a given level of earnings.

Every period of above-9.6% market returns started with low P/E ratios. EVERY ONE. And while not a consistent line, you will note that as 20-year returns increase, there is a general decline in the initial P/E ratios. If we wanted to do some in-depth analysis, we could begin to explain the variation from this trend quite readily. For instance, the period beginning in 1983 had the lowest initial P/E, but was also

associated with a two-year-old secular bear, which was beginning to lower 20-year return levels.

Look at the following table from my friend Ed Easterlin’s web site at www.crestmontresearch.com

(which is a wealth of statistical data like this!). You can find many 20-year periods where returns were less than 2-3%. And if you take into account inflation, you can find many 20-year periods where returns were negative!

Look at the 20-year average returns in the table above. The higher the P/E ratio, the lower (in general) the subsequent 20-year average return. Where are we today? As I have made clear in my last two letters, we are well above 20. Today we are over 30, on our way to 45. In a nod to bulls, I agree you should look back over a number of years to average earnings and take out the highs and lows of a cycle. However, even “normalizing” earnings to an average over multiple years, we are still well above the long-term P/E average. Further, earnings as a percentage of GDP went to highs well above what one would expect from growth, which is usually GDP plus inflation. Earnings, as I have documented in earlier letters, revert to the mean. Next week, I will expand on that thought.

And given my thesis that we are in for a deep recession and a multi-year Muddle Through Recovery, it is unlikely that corporate earnings are going to rebound robustly. This would suggest that earnings over the next 20 years could be constrained (to say the least).

In all cases, throughout the years, the level of returns correlates very highly to the trend in the market’s price/earnings (P/E) ratio.

This may be the single most important investment insight you can have from today’s letter. When P/E ratios were rising, the saying that “a rising tide lifts all boats” has been historically true. When they were dropping, stock market investing was tricky. Index investing is an experiment in futility.

You can see the returns for any given period of time by going to http://www.crestmontresearch.com/content/Matrix%20Options.htm.

Now let’s visit a very basic concept that I discussed at length in Bull’s Eye Investing. Very simply, stock markets go from periods of high valuations to low valuations and back to high. As we will see from the graphs below, these periods have lasted an average of 17 years. And we have not witnessed a period where the stock market started at high valuations, went halfway down, and then went back up. So far, there has always been a bottom with low valuations.

My contention is that we should not look at price, but at valuations. That is the true measure of the probability of success if we are talking long-term investing.

Now, let me make a few people upset. When someone comes to you and starts showing you charts that tell you to invest for the long run, look at their assumptions. Usually they are simplistic. And misleading. I agree that if the long run for you is 70 years, you can afford to ride out the ups and downs. But for those of us in the Baby Boomer world, the long term may be buying green bananas.

If you start in a period of high valuations, you are NOT going to get 8-9-10% a year for the next 30 years; I don’t care what their “scientific studies” say. And yet there are salespeople (I will not grace them with the title of investment advisors) who suggest that if you buy their product and hold for the long term you will get your 10%, regardless of valuations. Again, go to the Crestmont web site, mentioned above. Spend some time really studying it. And then decide what your long-term horizon is.

Boy Wonder: Ben Croshaw vs. Yahtzee

http://hellforge.gameriot…shaw-vs-Yahtzee

Interesting write-up on Ben Croshaw a.k.a. Yahtzee of video game reviewing fame and hilarity (See Zero Punctuation). I rarely even own or care about the games Croshaw reviews as its just fun to listen/watch his dry, humorous video reviews.

I liked the angle of nobody-turned-somebody that the author of this article took. That Croshaw is an outsider is also a refreshing and increasingly common meme we’re seeing as the internet-world competes with the established “authorities.”

H/T to David Byars for first telling me about Yahtzee.

Croshaw is beloved by many, and envied by most. He is the Peter-Pan-gone-right that misleads many of us to think that a little luck and a general lack of focus might lead to our discovery. Aspiring models and actors tell themselves the same myth, although it’s admittedly a larger leap for someone to genuinely identify with Kate Moss or Christian Bale. Croshaw, on the other hand, is just unkempt and self-deprecating enough for us to emotionally access him. At the end of the day, odds are we find ourselves to be prettier, richer, hipper, or nicer than little Ben C, which makes it all the more easier to think we could do what he does.

Yahtzee is living the collective dream of plenty of people I know online. In fact, he’s living the dream of some of the most ambitious, charismatic folks I know in the real world as well. Nobody is asking him to define himself by trade, title, or career path. He has dabbled in most aspects of the industry he enjoys, enough to give him the ethos and vocabulary that substantiate his reviews. Simultaneously, this lack of specialization gives him the refreshingly removed perspective of an outsider, and at least at one time, the enthusiasm of a fan boy.

It is indeed the sensation of Yahtzee that causes us to forget the hard labor of Ben Croshaw. Almost by the book, he got his lucky break being discovered by The Escapist (and a number of other outlets who wanted him) after MS Painting just two installments of Zero Punctuation and uploading them to YouTube.

After feeling a 400% increase in traffic, it was clear to The Escapist that Croshaw had been a lucrative acquisition. It may be tempting to say Zero Punctuation was a bit of a lottery ticket on both ends, but to undermine the work that went into production is hazardous. An avid writer, Croshaw understands narrative. A student of humor, he understands timing. His breadth of knowledge of game mechanics comes not only from playing, but developing, constructing, and imagining. The difference between Yahtzee and every mook who thinks he or she can, is that Yahtzee does and frequently, Yahtzee fails. His own site is stacked with work that never really got off the ground ranging from novels to games to storytelling in GMod. He hit it big by synthesizing many of his talents in a way that rang culturally relevant, but that took the kind of insight that grows out of patient observation. For most of us, patience is the missing link.

Ultimately, the internet is drawn to Yahtzee because he is one of the faceless masses, yet he has a face (and a hat). He is still, in part, a boy with loaded questions and an affinity for sex jokes. He is a forum troll with his very own forum. His opinions are manifold and he enjoys the audience. In 2003 he was blogging the sentiments of bloggers past and bloggers yet to come:

“I am a consumer, part of the system of capitalism. To the corporations that control our lives, I am nothing but a huge mouth wearing designer jeans, just one of billions, to be cajoled or threatened with advertising into giving my money to people who already have too much. Although I vocally consider this a despicable state of affairs, I buy their loveless food and wear their manufactured garments. I am simultaneously antagonist and component.”

A better way to die?

http://www.proteinpower.c…ter-way-to-die/

Michael Eades talks about the implications of humans eating animals with regards to:

  • The symbiotic relationship created therein (i.e. there are more cows because humans like eating them – similar to trees and paper)
  • Relativistic comparisons between the humane harvesting of animals via slaughterhouses and the normal way millions of animals die every day in the wild — i.e. natural causes like a hawk tearing the lung of a crow and the crow dying of asphyxiation or lions causing an elephant to suffocate, etc.
  • Cortisol’s (stress hormone) meat-ruining impact incentivizing slaughterhouses to be humane, not stressing out the animals.

It’s a thought-provoking, well-written piece. The book referenced is one I should probably add to my wish list.

Here’s a snippet:

When animals (ourselves included) are stressed, they release cortisol, a hormone that looms large in the fight or flight response. This cortisol can be measured and used as an indicator of stress. Cattle are minimally tamed animals. They are by nature skittish. They don’t take well to being handled and, in fact, don’t really like to have people around. Dr. Grandin has taken cortisol samples from animals just standing around the farm with people within view and discovered that they have a slightly elevated cortisol levels. When she tests animals in properly designed slaughterhouses right as they reach the final station, she finds that they have similar cortisol levels as animals standing in the barnyard with humans present. In other words, a little stress, but not a lot.

I can pretty much assure anyone that these animals meet their deaths in today’s slaughterhouses with orders of magnitude less stress than they would were they living in the wild and being preyed upon by large carnivores. In fact, had they been living in the wild, they wouldn’t exist today. They would have been relegated to the long list of animals that have become extinct.

Let’s consider cattle. Cows are large, fairly placid, relatively slow, and exceptionally stupid. They are also uncommonly good to eat. All these facts taken together make it clear why cattle are still with us. (It also reminds me of a great and very true statement I heard once but can’t remember where: ‘If you want to preserve the American bald eagle, all you’ve got to do is make ‘em good to eat, and before long, you’ll be overrun with them.’) And not just a few specimens in zoos, but by the millions roaming pastures the world over. Cattle, unlike other wild animals, allowed themselves to be domesticated. Humans complied and domesticated them. A covenant arose between humans and cattle in which we provided for them and they for us. We kept them safe and allowed them to breed and survive as a species; they provided us with meat in return. It’s been a great bargain for all sides. Although any individual steer trudging off to slaughter may not see it this way, the covenant has been a godsend for the breed, which has grown and prospered. There is a wonderful book titled The Covenant of the Wild detailing this animal-man symbiotic relationship that should be on everyone’s bookshelf, especially anyone’s who doesn’t feel right about eating meat or who is being relentlessly hounded by vegetarian friends or family. Although it’s never pleasant to think of animals being put to death so that we can eat them, it is reassuring to know that it is done as stresslessly as possible. If done right, with almost no stress at all. If, however, the PETA folks had their way, these animals would be turned away from the slaughterhouse doors and sent to live out their days peacefully on lush pastures somewhere.

If this vegan fantasy came to pass, what would happen to these cattle? Would their deaths be more or less stressful than at the hands of their human handlers? You probably know the answer, but let’s take a look. And, remember, not for the squeamish.

Crisis of Credit Visualized

http://vimeo.com/3261363

Even as simplified as this great 10 minute video is, it still gets complicated. And as you can imagine, when you’ve got so many transactions handling a piece of mortgage paper, even the bankers have a hard time keeping track, which just complicates this process further — sending it to a grinding halt in some cases.

I.e. you’re foreclosing and the bank wants you out of the house. You demand to see the loan and the bank can’t find it. Until they can show it to you, they can’t kick you out. Yeah, really. So often people are staying in their houses mortgage-free for months before the bank can track down the loan and actually foreclose/kick them out.


The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

Jedi Mind Tricks: How to Get $250,000 of Advertising for $10,000

http://www.fourhourworkwe…sing-for-10000/

Tim Ferris of Four Hour Work Week has some good tips on negotiating a deal. These were specifically for negotiating advertising, which could be useful, but they seem good enough to be applied generally to any negotiation.

I need to commit these to memory:

Principle 1: Negotiate just prior to the other side’s deadlines. If purchasing advertising, find out when the space or air time must be filled and negotiate last minute. No one will sell you hard goods such tractors for $5 to get rid of them, but this happens all the time with ad space, as it is worth $0 if not filled. It expires like food products on a shelf. The same approach can be used for cars if you find out when new models come in or when sales quotas are calculated. In this dialogue, assuming the deadline for ad submission is June 30th and the rate card for a full-page ad is $3,000, the follow-up call is around June 20th at around 3:30pm your time (just prior to FedEx drop-off deadlines).

Principle 2: Make them negotiate against themselves. Give them multiple chances to lower their own price before making an offering yourself. People will often offer less than you were planning to ask for.

Principle 3: Use a “flinch” whenever someone mentions their first discounted offer. Recoil in shock and then be silent. DO NOT speak, even if the other side says nothing for minutes (I often check e-mail during this battle of wills). The tension is uncomfortable, and the salesperson usually fills this void with a concession.

Principle 4: Increase value while lowering price. Ask for bonuses as you negotiate on the original dollar amount. Most people across the negotiating table let these slip while too focused on negotiating a single price. Our goal is to get the most advertising per dollar, so add to the package as you cut price. This also gives you items to later concede or remove for further discounts.

Principle 5: Never be the ultimate decision maker. Having partners or superiors, often imagined, with veto power allows you to negotiate hard and make impossible demands without being viewed as a bastard and damaging the ongoing relationship with the other side. This is the same reason business people perfectly capable of negotiating their own deals use lawyers as go-betweens: to blame points of disagreement on “legal” and create a non-hostile bargaining environment where egos don’t collide.

Principle 6: Use intelligent “bracketing.” If the list price is $2,000 and I want to pay $1,500, for example, I’ll offer $1,000, creating a $500 buffer on either side of the target price. The other side will offer $1,750, I’ll compromise at $1,250, and then we’ll settle at $1,500. “Let’s just split the difference” creates the illusion that they are getting a concession from us when, in fact, it was all pre-planned.

Principle 7: Practice using the “firm offer.” This is when, rather than asking the non-committal “Can you do $___?” you make an if-then commitment such as “If you can do $____, we will pay you now.” The latter is an offer of payment rather than idle haggling. To circumvent this entire phone conversation, it is possible to use a pre-emptive firm offer and send an e-mail stating that you are prepared to immediately pre-purchase one ad—whether full-page, half-page, or 1/3rd-page; whichever they prefer—at 30% or 40% of rate card. To make this “firm offer” even harder to resist, FedEx them three signed checks for 30% of each of those ad sizes and tell them to cash one, whichever preferred, or rip them all up.

Negotiate once per item (whether a one-page ad or a 12-month radio campaign) and do it hard.

Fannie Mae Rescue Hindered as Asians Seek Guarantee

http://www.bloomberg.com/…_DcY&refer=home

This strikes me as being incredibly naive of the Asians. Do they really think it matters if the U.S. explicitly guarantees the mortgage-backed securities of Fannie and Freddie? The U.S. can always run the printing presses. They should be more concerned (and I know the Chinese government is concerned based on recent comments) the U.S. government destroys the value of the dollar and obliterates their dollar-denominated holdings. .

Put another way, there’s no free dessert, nor can you have your cake and eat it, too.

Below are the relevant quotes from Bloomberg:

Asian investors won’t buy debt and mortgage-backed securities from Fannie Mae and Freddie Mac until they carry explicit U.S. guarantees, similar to those given on bonds issued by Bank of America Corp. or Citigroup Inc.

The risks are too great without a pledge that the U.S. will repay the debt no matter what, according to Hideo Shimomura, chief fund investor in Tokyo for Mitsubishi UFJ Asset Management Co., and other bondholders and analysts in Japan, China and South Korea interviewed by Bloomberg. …

[Shimomura continues] “there is still a concern that there is no guarantee” from the government, said Shimomura, who oversees $4 billion in non-yen bonds for the arm of Japan’s largest bank.

“Looking at the risk, they’re not so attractive,” he said. “We need a guarantee before we’ll buy.”

I’m reminded of the scene in Tommy Boy where the protagonist, Tommy Callahan, makes a sale by speaking truth about guarantees:

Tommy: Let’s think about this for a sec, Ted, why would somebody put a guarantee on a box? Hmmm, very interesting.
Ted Nelson, Customer: Go on, I’m listening.
Tommy: Here’s the way I see it, Ted. Guy puts a fancy guarantee on a box ’cause he wants you to fell all warm and toasty inside.
Ted Nelson, Customer: Yeah, makes a man feel good.
Tommy: ‘Course it does. Why shouldn’t it? Ya figure you put that little box under your pillow at night, the Guarantee Fairy might come by and leave a quarter, am I right, Ted?
[chuckles until he sees that Ted is not laughing too]
Ted Nelson, Customer: [impatiently] What’s your point?
Tommy: The point is, how do you know the fairy isn’t a crazy glue sniffer? “Building model airplanes” says the little fairy; well, we’re not buying it. He sneaks into your house once, that’s all it takes. The next thing you know, there’s money missing off the dresser, and your daughter’s knocked up. I seen it a hundred times.
Ted Nelson, Customer: But why do they put a guarantee on the box?
Tommy: Because they know all they sold ya was a guaranteed piece of shit. That’s all it is, isn’t it? Hey, if you want me to take a dump in a box and mark it guaranteed, I will. I got spare time. But for now, for your customer’s sake, for your daughter’s sake, ya might wanna think about buying a quality product from me.
Ted Nelson, Customer: [pause] Okay, I’ll buy from you.
Tommy: Well, that’s…
Tommy, Richard Hayden: …What?

Cross-posted (well, sort of) to IEHI.

Santelli’s Chicago Tea Party

http://www.cnbc.com/id/15840232?video=1039849853

Though I don’t think Chicago traders represent the silent majority in America (these guys make money on trading, volatility, etc.), you gotta love Santelli’s frank talk getting airtime on CNBC. Capitalist Chicago Tea Party on Lake Michigan? Sounds like fun.

Oh and I liked his soundbyte asking, “Who wants to pay your neighbor’s mortgage because they have one too many bathrooms?”

Here’s a YouTube upload of the clip (backup to CNBC’s clip):

@ http://www.youtube.com/watch?v=bEZB4taSEoA

Update 2/20/09 11:05 pm: Just read this:

Gibbs Blasts CNBC Ranter ( http://www.cbsnews.com/blogs/2009/02/20/politics/politicalhotsheet/entry4816372.shtml )

Relevant quote:

“I also think that it’s tremendously important that for people who rant on cable television – to be responsible and understand what it is they’re talking about. I feel assured that Mr. Santelli doesn’t know what he’s talking about,” Gibbs said during the daily White House briefing for reporters, CBS News’ Mark Knoller reports.

The White House press secretary did not stop there. Knoller reports that Gibbs went on to criticize the objectivity of cable news reporting.

“If I hadn’t worked on the campaign but simply watced the cable news scorekeeping of the campaign – we lost virtually every day of the race….” he said.

Added Gibbs: “If I would have just watched Cable TV – I long would have crawled into a hole and given up this whole prospect of changing the country.”

After President Obama announced the details of his housing relief plan in Arizona Wednesday, Santelli, “the government is promoting bad behavior.” His increasingly outraged comments drew cheers from the trading floor where he was speaking.

Santelli then challenged the new administration, which he said is “big on computers and technology,” to “put up a website and have people vote on the internet as a referendum to see if we really want to subsidize losers’ mortgages.”

The White House is showing some awfully thin skin here. Santelli hardly said anything half as outrageous as the regular comments by Rep. Ron Paul. Mind, by “outrageous,” I of course mean, “dead on but relegated as fringe/insane/stupid by the mainstream corporate/political machine.”

Beyond that, is it really the White House’s responsibility to comment no a CNBC reporters opinions regarding their bailout bill? Is it getting stuffy to anyone else in here? Free speech ::cough:: ::cough:: …

Update 2/23/09:

Here is Santelli’s on-air address to Gibbs’ comments:

And Gibbs’ original comments:

Gibbs is a chump.

H/T to Tim for the extra videos.

Update 3/2/09: See also Barry Ritholtz’s:

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