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Jim Rogers Was Right About Wall Street And Their Maseratis

Over the past several months, legendary investor Jim Rogers has made a few comments about a certain make of car— the Maserati. Now, it doesn’t appear that Mr. Rogers dislikes Maseratis for any reason in particular. Rather, he’s been mentioning the Italian manufacturer of racing and sports cars to make a point about how out of whack things have gotten down on Wall Street. Back on June 6, Rogers told Bloomberg in an interview:

You don’t see any 29-year old cotton farmers driving around in Maseratis, but you do see a lot of 29-year olds on Wall Street driving around in Maseratis. This is not the way the world is supposed to work.

The CEO of Rogers Holdings said such a situation exists due to the tremendous excesses that have taken place in the financial communities over the past several years.

And it’s not only Wall Street traders who have been associated with the exotic sports car. Investment bankers too. Yet, they almost came close to losing theirs a few months ago— if it weren’t for their pals over at the Federal Reserve. Rogers told Bloomberg on March 17:

And here he [Fed Chair Ben Bernanke] goes and gives more of our money to Bear Stearns so these guys can continue to drive around in their Maseratis… The Federal Reserve is using taxpayer money to buy a bunch of Bear Stearns traders Maseratis.

Looks like Jim was right about Maserati being the vehicle of choice down on Wall Street. While surfing the web yesterday, I happened to notice that Bloomberg.com had posted a review of the $115,000 Maserati GranTurismo on their site. Bloomberg’s Jason Harper wrote:

The Maserati GranTurismo delivers on a quality increasingly rare in the auto world: beauty. Put it against any dozen modern cars and the GT’s supple lines, perfect swells and ideal dimensions will outshine them all.

At $115,000 it’s not exactly a drop in the bucket, yet those exotic looks leave most people thinking it’s as expensive as a Ferrari.

Don’t fret, Wall Streeters. A few more taxpayer bailouts here, and some government interference/market manipulations there, and you’ll have enough of Main Street’s hard-earned cash to finally afford that Ferrari…

Jamiroquai, “Cosmic Girl” (1996)
YouTube Video Link

Sources:

Jim Rogers Interview
Bloomberg News Video
Bloomberg, June 6, 2008

Jim Rogers Interview
Bloomberg News Video
Bloomberg, March 17, 2008

“Maserati GT, $115,000, Evokes Classic Beauty of Italian Coupes”
Jason H. Harper
Bloomberg, July 23, 2008

U.S. Senator Mocks The System

I don’t know about you, but I’m starting to get this feeling that our Senate is evolving into that “legislative” body from the Roman Empire (not Republic, mind you) and from whom they derive their name. Well, at least they’re not assassinating each other in the hallways of the Dirksen Building (at least, not yet).

However, even those among its ranks are starting to mock the establishment and its growing reputation of being out of touch with mainstream America. The Wall Street Journal’s Damian Paletta wrote a great post for the Real Time Economics blog on Wednesday about Senator Jim Bunning (R- Kentucky) and his assault on the system. Paletta said:

The Senate Banking Committee plans to vote on legislation Thursday that would create a new regulator for Fannie Mae and Freddie Mac and allow the Federal Housing Administration to insure up to $300 billion in refinanced mortgages. Lawmakers plan to file up to 70 amendments during the committee vote, with 31 of those coming from Sen. Jim Bunning (R., Ken.).

According to a summary of all the amendments, Sen. Bunning wants:
• “to stop the bailout of the rich”
• “to prevent the bailout of illegal aliens”
• “to prevent the bailout of homeowners who used their homes as a credit card”
• “to stop the bailout of sex offenders”
• “to stop the bailout of drug offenders”

Another of Sen. Bunning’s amendments would change the name of the bill from “The Federal Housing Finance Regulatory Reform Act of 2008” to the “Bailout of Irresponsible Lenders and Borrowers Act of 2008.”

A good example of how to fight fire with fire, considering all the humorous initiatives coming from Capitol Hill these days. But, what would you expect from a Congress with an 18% approval rating, according to the latest Gallup poll?

Sources:

“Bunning Campaigns Against ‘Bailouts’ in Housing Bill”
Damian Paletta
Wall Street Journal (Real Time Economics blog), May 14, 2008

“Congress’ Approval Rating Ties Lowest in Gallup Records”
Lydia Saad
Gallup, May 14, 2008

Despite Falling Prices, Homes Are Still Unaffordable

Yesterday, the newswires were reporting that the decline in U.S. home prices accelerated in February, falling a record 12.7% in the past year for 20 key cities, according to the Case-Shiller home price index released Tuesday by Standard & Poor’s. David M. Blitzer, chairman of the index committee at Standard & Poor’s, went so far as to say:

There is no sign of a bottom in the numbers.

Despite the recent drop in prices, homes are still unaffordable for the average American family. Craig Guillot for Bankrate.com wrote back on April 17 that:

…the median price in many markets is still out of reach for a median-income family, according to “Paycheck to Paycheck: Wages and the Cost of Housing in America,” a study by the Center for Housing Policy, or CHP, in Washington, D.C.

Comparing housing costs in 210 metropolitan areas with the wages earned by workers in 60 occupations, the study found that homeownership is often unaffordable for workers in each of the five-fastest growing occupations — registered nurses, retail salespeople, customer-service representatives, food-preparation workers and office clerks. Registered nurses, who typically have high salaries, were unable to purchase a median-priced home in 108 of the markets.

“Even with the housing downturn, the drop in prices still just isn’t enough for many workers in traditional backbone occupations to afford houses,” says Rebecca Cohen, a CHP research associate.

Guillot noted:

Between 2000 and mid-2007, the median home price soared 64.9% to $229,200. The median income, meantime, rose just 16.6%. For would-be buyers, the math doesn’t work.

Back on April 16, Peter Hong of the Los Angeles Times talked about a recent study conducted by Chapman University’s Anderson Center for Economic Research which forecast further double-digit declines for Southern California home prices. Hong wrote:

A typical Los Angeles County family would have to spend 48.6% of its annual income on mortgage payments and property taxes to afford a median-priced home, the Chapman study concluded. Historically, the mean expenditure for a home in L.A. County has been 35.7% of income.

For affordability to return to that historic mean, home prices in Los Angeles County would have to fall more than 20% further, said Anderson Center director Esmael Adibi…

Sources:

“Home prices fall record 12.7% in past year, Case-Shiller say”
Rex Nutting
MarketWatch, April 29, 2008

“Average Joe still can’t afford a home”
Craig Guillot
Bankrate.com, April 17, 2008

“Foreclosure glut further depresses housing prices”
Peter Y. Hong
Los Angeles Times, April 16, 2008

Signs Of The Time, Part 7

As Wall Street flees from precious metals, I noticed the following message today on the home page of the American Precious Metals Exchange (APMEX) website:

Dear Valued Customer,

Due to the OVERWHELMING demand for precious metals, our online ordering system has been unable to keep up with our customers’ needs. We have had to disable the APMEX ordering system to allow us ample time to upgrade our site to accommodate the increased demand. We apologize for this temporary problem. In the mean time, we will be accepting telephone orders for the following items only as we have them available:

• 1 ounce Gold American Eagles
• 1 ounce Gold Canadian Maple Leafs
• 1 Ounce Gold Krugerrands
• 100 oz Silver Bars
• Misc Generic .999 Fine Silver
• 90% Coin Silver

During this time, we will have a minimum order of $5,000. We regret we have had to make this drastic change to our ordering process and rest assured, we are working expeditiously to correct the problem. As soon as we have our new site up and running, we will notify you via e-mail when you can again place orders online.

You may contact us during normal business hours Monday – Friday 7:30 am – 4:00 pm cst. (800) 375-9006

If you have existing orders with us, we have in-stock all items needed to fulfill your orders and are shipping them as scheduled. Once our new site is functional, we will be able to activate our complete inventory line again.

Respectfully,
Scott Thomas
President & CEO

P.S. We are actively looking for new bullion inventory to purchase. If you have items that total $2,500 or more and are interested in selling, please call our trading offices at the number listed above. We are paying strong numbers for ALL Precious Metals!

Think Main Street knows something that Wall Street doesn’t?

No Sympathy For Wall Street

“Shanna, they bought their tickets, they knew what they were getting into. I say, let ‘em crash.”

-Airplane! (American comedy film. 1980)

I have this strange feeling that Washington Post columnist Steven Pearlstein is not Wall Street’s biggest fan. Maybe it has something to do with his piece from this morning entitled “Time for Wall Street to Pay,” in which he wrote:

I’d be lying if I didn’t admit there’s part of me that takes some perverse satisfaction from the ever-widening crisis that has engulfed Wall Street, humbling its most powerful institutions and exposing its hypocrisy and corruption.

Pearlstein was just getting started:

Over the ensuing two decades, Wall Street has been brilliant at dreaming up other financial innovations that picked up where junk bonds left off. These included complex futures and derivatives contracts; loan syndication; securitization; credit default swaps; off-balance-sheet vehicles; collateralized debt obligations, or CDOs; and blank-check initial public offerings.

As the industry and its cheerleaders constantly remind us, these innovations have helped to lower the cost of capital and make the business sector more efficient and globally competitive. But what we are now discovering — or perhaps rediscovering — are all the ways in which all this glorious financial innovation has weakened the economy and the society it serves.

Pearlstein listed how Wall Street’s “innovations” have taken their toll on America and its economy:

For starters, these innovations have helped to create a cycle of financial booms and busts that have a tendency to spill over into the real economy, contributing to a heightened sense of insecurity.

They have shortened the time horizons of investors and corporate executives, who have responded by under-investing in research and the development of human capital.

They have contributed significantly to massive misallocation of capital to real estate, unproven technologies and unproductive financial manipulation.

They have made it easy and seemingly painless for businesses, households and even countries to take on dangerous levels of debt.

They have given traders a greater ability to secretly manipulate markets.

They have given corporations clever new tools to hide risks, liabilities and losses from investors.

And by giving banks the tools to circumvent reserve requirements and make more loans with less capital, they have enormously increased the leverage in the financial system and with it the risk of a financial meltdown.

But far and away the greatest damage from all this financial wizardry is the obscene levels of compensation it has generated for a select group of Wall Street executives and money managers.

Regarding this last point, Pearlstein warned that because “huge bonuses paid in the good years are never required to be paid back in the bad years,” this creates an “asymmetric compensation system that encourages excessive leverage and risk-taking.” Furthermore, he lamented at the fact that the prospect of earning untold wealth on Wall Street has attracted “an enormous amount of young talent that could have been more productively used in science, engineering, medicine, teaching, public service and businesses that generate genuine long-term value.” He asked:

Is it not fair to ask whether the United States can remain the world’s most prosperous and innovative economy when half of the seniors at the most prestigious colleges and universities now aspire to become “i-bankers” at Goldman Sachs?

At which point, Pearlstein went nuclear:

So I hope you’ll forgive me, dear readers, when I say that the best thing that could happen to our economy is for a dozen high-profile hedge funds to collapse; for investment banking to enter a long, deep freeze; for a major bank to fail; and for the price of a typical Park Avenue duplex to fall by 30 percent. For only then might we finally stop genuflecting before the altar of unregulated financial markets and insist that Wall Street serve the interest of Main Street, rather than the other way around.

Yes, I know it’s harsh and vengeful solution, and there will be lots of collateral damage. But as I look out over the destruction sweeping across the financial sector, I just can’t silence the small voice in my head that keeps repeating that old ‘60s expression, “Burn, baby, burn.”

A Nation Of Idiots?

Consider the one in five American adults who, according to the National Science Foundation, thinks the sun revolves around the Earth…

-Susan Jacoby, “The Dumbing of America”

On the heels of last Friday’s post, I happened to read an article last night from the Washington Post entitled “The Dumbing of America.” On Sunday, Susan Jacoby, author of The Age Of American Unreason, wrote:

Americans are in serious intellectual trouble — in danger of losing our hard-won cultural capital to a virulent mixture of anti-intellectualism, anti-rationalism and low expectations…

Dumbness, to paraphrase the late senator Daniel Patrick Moynihan, has been steadily defined downward for several decades, by a combination of heretofore irresistible forces. These include the triumph of video culture over print culture (and by video, I mean every form of digital media, as well as older electronic ones); a disjunction between Americans’ rising level of formal education and their shaky grasp of basic geography, science and history; and the fusion of anti-rationalism with anti-intellectualism.

An independent scholar who focuses on American intellectual history, Jacoby said first and foremost among the vectors of the new anti-intellectualism is video, accompanied by a decline in book, newspaper, and magazine reading. She cites a report from the National Endowment for the Arts last year which showed:

• In 1982, 82% of college graduates read novels or poems for pleasure. By 2002, this had shrunk to 67%.
• More than 40% of Americans under 44 did not read a single book (fiction or nonfiction) over the course of a year.
• The proportion of 17-year-olds who read nothing (outside of school assignments) more than doubled between 1984 and 2004. She noted that this same time period encompassed the rise of personal computers, Internet surfing, and video games.

Some could argue that the tremendous amount of information made available through new technologies compensates for the decline in reading print material. However, the former Washington Post reporter claimed that the manner in which this information is presented erodes our attention spans. Video consumers, she said, are becoming progressively more impatient with the process of acquiring information through written language. And, according to Jacoby:

…the inability to concentrate for long periods of time — as distinct from brief reading hits for information on the Web — seems to me intimately related to the inability of the public to remember even recent news events.

The author linked the shrinking public attention span fostered by video to what she claimed is the second important anti-intellectual force in American culture: the erosion of general knowledge. She cited a 2006 National Geographic-Roper survey which showed:

• Nearly half of Americans between ages 18 and 24 don’t think that it’s necessary to know the location of other countries in which important news is being made.
• More than a third consider it “not at all important” to know a foreign language.
• Only 14% consider it “very important” to know another language.

Source: HousingPANIC

Ms. Jacoby said that the third and final factor behind the “new American dumbness” is not a lack of knowledge, but arrogance about that lack of knowledge. Jacoby explained:

The problem is not just the things we do not know (consider the one in five American adults who, according to the National Science Foundation, thinks the sun revolves around the Earth); it’s the alarming number of Americans who have smugly concluded that they do not need to know such things in the first place. Call this anti-rationalism — a syndrome that is particularly dangerous to our public institutions and discourse. Not knowing a foreign language or the location of an important country is a manifestation of ignorance; denying that such knowledge matters is pure anti-rationalism. The toxic brew of anti-rationalism and ignorance hurts discussions of U.S. public policy on topics from health care to taxation.

Ms. Jacoby sadly concluded that, “There is no quick cure for this epidemic of arrogant anti-rationalism and anti-intellectualism… It is past time for a serious national discussion about whether, as a nation, we truly value intellect and rationality.”

Wall Street May Know ‘Within A Week’ If Recession

According to the Times Online (UK) today, Wall Street may know within a week if the United States has entered into an economic recession. Suzy Jagger wrote this morning that:

Wall Street, however, may decide by the end of this week whether the US is in a technical recession, with key data on payrolls, industrial production, business inventories and retail sales all due out in the next five days. Such a declaration would mark the first recession since 2001.

“Within a week, we could know if we are in a recession,” Kevin Logan, senior economist at Dresdner Kleinwort, the investment bank in New York, said.

In the wake of this data’s release, Wall Street may have a much clearer picture of where the U.S. economy stands. Jagger said:

This week’s data - something like a Super Tuesday for the economy - could draw to a close an economic chapter that has left economists, financiers, central bankers, homeowners and the media worrying about whether America is on the brink of a slowdown. Two months ago Merrill Lynch, the US investment bank, went as far as declaring that America was already in a recession. It was waiting only for the official data to prove it right.

Referring to the Business Cycle Dating Committee at the National Bureau of Economic Research, which makes the “official” call on a recession:

Mr. Logan said that the Dating Committee was “in the business of writing history. We have to wait a long time for their pronouncements. They look at all the revised data and then declare it. We [Wall Street] can’t wait that long.”

On February 7, the Dresdner Kleinwort economist also spoke to Reuters. Logan told columnist James Saft that:

They don’t ring a bell when a recession starts, but that tinkling sound seems to be getting louder… Some shift is taking place in January and February that wasn’t evident in 2007.

Source: Rick Steves (yes, that one)

Main Street may have decided that a recession is already here. According to the Associated Press earlier today, the latest Associated Press-Ipsos poll shows 61% of the public believes the economy is now suffering through its first recession since 2001. The poll was based on the responses from 1,006 adults surveyed last Monday through Wednesday. Survey results had a margin of sampling error of plus or minus 3%.

Polls Show Concerns Growing About U.S. Economy

Two recently-released surveys jointly-conducted by ABC News and the Washington Post depict just how negative Americans’ attitudes have become about the economy. Last night, MarketWatch reported that a weekly survey of consumer attitudes on the U.S. economy fell to its lowest level since late 1993. The ABC News/Washington Post consumer comfort index fell 6 points last week to negative 33. According to ABC, the index’s 13-point decline in the past month is “an unsettling sign,” as a 13-point drop occurred just before the 1990 recession and a 14-point drop took place prior to the 2001 recession. The record low for the index, negative 50, was reached in February 1992.

On Monday, Washington Post staff writers discussed a separate ABC News/Washington Post economic survey that was conducted at the end of last month, which showed Americans are more negative now on the economy than at any point in nearly 15 years. According to the poll:

• More than 8 in 10 Americans describe the economy as “not so good” or “poor.”
• Nearly 6 in 10 believe we are already in a recession.
• Three in 10 are pessimistic about their financial prospects for 2008.
• 39% of all Americans now cite the economy and jobs as the number one issue in the 2008 presidential campaign, up 10% in the past 3 weeks. No other issue reached double digits.

On the economic stimulus plan being crafted in Washington, only about 3 in 10 think it will be enough to avoid or mitigate a recession. When asked what they would do with the extra money, 27% said they would put it in the bank, 26% would pay off bills, and 5% percent would pay down debt. Only 20% of respondents said they would spend it. One individual told pollsters, “I’d go buy a hamburger.”

“Would you like fries with that?”

On America’s longer-term prospects, the respondents were evenly divided, with half saying the United States is in a long-term decline and the other half saying the fundamentals of the economic system are basically solid. Two-thirds are optimistic about what 2008 has in store for them and their families.

Weird Housing Tales, Part 1

Once in a while, I come across some really weird stories about Americans’ infatuation with everything housing-related. Try this one on for size. “Jane Zinfandel,” as I’ll call the protagonist of the story, was in the process of having her home’s exterior re-painted. Apparently, Mrs. Zinfandel wanted her door’s appearance to be different from any of her neighbors, so she had it painted a unique color. However, one day Lady Jane was driving home when she happened to notice something different about her neighbor’s place. Apparently, “Mary Merlot” was doing a bit of painting herself, and painted HER door the exact same color as Jane’s. Mrs. Zinfandel got out of her car, went up to the door, verified that it was indeed the same color, and raced home. Steaming, she summoned the painter. Sure enough, he admitted that Mrs. Merlot had popped on by earlier and told the painter how much she loved the color, at which point he gave her the info she would need to mix up a batch for herself.

Purple Pain

Janey went back down the block to her neighbor’s, knocked on the door, and accused Mary of stealing the color of her door. Mrs. Merlot, who was not one to back down from a fight, decided to have it out with Mrs. Zinfandel right then and there. Jane, still upset, left Mary’s house and returned to her own residence. Later that night Mary’s husband paid a visit. “Joe Merlot” was really nice, thought Jane Zinfandel, and he apologized profusely for his wife’s actions.

The next day, Jane told her next door neighbor, “Fanny Franzia,” about the previous night’s episode. While she complained about what the battle-axe down the street had done, she made it a point to mention that the husband was a really sweet guy. “Oh,” said Fanny, who knew everyone’s business in the neighborhood. “The reason he tried to make peace with you is that he’s a registered sex offender who didn’t want any more trouble with the law…”

Panic In The Streets

This morning I read an interesting article by Steven Pearlstein of the Washington Post. In “Caught in a Downdraft and Starting to Panic,” Pearlstein noted how Main Street and Wall Street have come to terms with a troubled economy:

The country and Wall Street have already made great progress in moving through the stages of economic grief:

• Willful blindness. (“Bubble, what bubble?”)
• Denial. (“House prices never fall. It’s only those speculators in Las Vegas and the Gulf Coast.”)
• Rationalization. (“Maybe subprime did get out of hand, but it’s really a small part of the market.”)
• Fantasy. (“Things should be pretty much back to normal by the second half of ‘08.”)
• Anger. (“If it weren’t for those yahoos up in structured finance…”)
• Capitulation. (“We might as well take these write-downs now and get it over with.”)
• Depression. (“This is going to get worse before it gets better.”)

Now we’re entering a new stage: Panic.

Pearlstein pointed to the following as evidence of this next stage of grief:

Hedge funds scrambling to actually hedge their positions. Central banks throwing money at money-center banks. Huge financial institutions desperately raising capital from foreign investors on concessionary terms. Day after day of triple-digit declines on the Dow. Gold prices heading toward $1,000 an ounce, with record lows on the dollar. Policymakers and politicians tripping over one another to offer economic-stimulus plans.

Not even the cheerleaders can turn the tide:

Despite the brave exhortations from the CNBC Squawk Box, we are nowhere near the end of the financial unraveling that is necessary for an economic bottom to be reached.

Pearlstein predicts that the final stage will involve the unraveling of credit-default swaps:

Looking ahead, the final phase of this unraveling is likely to implicate the giant market in credit-default swaps. Those swaps are essentially contracts that allow sophisticated investors to bet on whether a company, a government entity, or even a securitized package of loans will default on its debt obligations. And they can place these bets whether they own the underlying security or not.

Because these contracts trade on unregulated derivatives markets, nobody knows who holds the losing side of the bets. But it’s a good guess that if defaults rise even to historically normal levels, a big hit will be taken by highly leveraged hedge funds, some of which may be unable to pay off on their bets and simply collapse. That, in turn, would trigger even further losses by banks and other investors that, unlike pure speculators, rely on those instruments to insure against default.

The credit-default swap has become so central to modern global finance that its size — the amount insured, in effect — is estimated at $43 trillion. If the losing side is unable to make good on even a fraction of a percent of those contracts, it could set in motion a financial chain reaction that could easily rival the subprime debacle.