Dont dare use the "D" word

The announcement on March 31 (US time) that secretary Paulson is going to regulate the United State's financial markets with changes to it not seen since the Great Depression leaves me with a thought that has been running rat wheels in my mind ever since the current "Credit Crunch" kicked off.

Midway through last year, the Fed began sticking its filthy little hands in dikes all across the financial backbone of the USA by propping up institutions who had lent too much money to those who now cannot pay and to keep the wheels of commerce greased by trying to increase liquidity in the credit market-so we can do business with each other.

Now I am skeptical at the best of times as to State involvement in anything, let alone interfering in capital markets and don't have the foggiest whether the announcement by Paulson is going to change anything in the future at all.



Latest on global financial fallout

German watchdog eyes $600 bln global bank losses: report Reuters
Overhaul of Wall Street regulation doesn't address current crisis Int' Herald Tribune
International Financial Panel Urges Bank Disclosures on Risk Exposure Wall Street Journal
G7 to press big banks to reveal extent of credit crunch losses Times Online
US prepares to give Fed sweeping oversight powers Taipei Times
Ghosts of the Great Depression Business Spectator
US Fed to be grilled over massive support to financial system MercoPress
World Bank cuts East Asia growth forecast Channel News Asia
East Asia Economies Pressed by Inflation The Associated Press

The 1933 changes didn't stop the bear market in the 1970s, it didn't stop the sharemarket crash of 1987 or the tech bubble bursting in 2000 or the current credit crisis because of dodgy lending and investment practices related to that lending.

The interventions by the Fed and its global equivalents, to shore up credit liquidity is the main rat on the wheel in my mind.

What have these interventions stopped?

One can only speculate but one can do that with a largish amount of surety.

During the Great Depression, when faith in financial markets at the time was at an all time low there simply wasn't any intervention by the State apparatus to ameliorate what happened on that infamous day in 1929 when Wall Street threw a woopsey and capitalism jumped out of tall buildings in the financial districts around New York and around the world.

Have interventions in financial markets by State backed funds globally stopped some sort of 2008 crash from happening?

Probably, but not to the extent of 1929, but it is clear that it would have been a crash of some serious nature had there not been intervention.

Another question I have running through my head is, how long will the squillions of taxpayer dollars pumped into the economy stave off the inevitability of a bigger blowout?

That is harder to answer. In order to know better one would have to know the losses involved in the Sub prime loans and associated sub prime bonds, and we are no closer to knowing that than knowing if Hillary Clinton is going to be the Democratic Party leader or if Barry Obama still loves his preacher.

The vexed question of the massive derivatives market also looms in the minds of investors:

Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one another. The troubles of one could quickly infect the others. On top of that, these dealers are owed huge amounts by nondealer counterparties. Some of these counterparties, as I’ve mentioned, are linked in ways that could cause them to contemporaneously run into a problem because of a single event (such as the implosion of the telecom industry or the precipitous decline in the value of merchant power projects). Linkage, when it suddenly surfaces, can trigger serious systemic problems.

"Derivatives are financial weapons of mass destruction. The dangers are now latent--but they could be lethal".

[Warren Buffett 2003]


Warren Buffett aside, I don't think anyone fancies the Fed's chances of shoring up the derivatives market should the dominoes start to topple.



Warren Buffett has always
feared the massive derivatives
market.

What is clear is this scenario has at least the rest of the year to fully play out and further State intervention should be carefully applied only if is really going to work and not because the Fed needs to be seen to be doing something.

Hold onto those gold bars and keep the cash under the mattress, you just might need them.


Essential related reading from Share Investor

The Global Economy looks bad now? But wait there's more
Global credit squeeze: There is no free lunch
Current Credit crunch a blessing in disguise
Lenders must come clean over losses to restore faith in credit markets
Watch for dead cats bouncing
Global Market Meltdown: I can smell the fear from here
Warren Buffett's The Intelligent Investor
Global Market's dropping and your portfolio
Global Market Meltdown: What is Warren Buffett doing?
A sensible approach to global market volatility

Visit Everything Warren Buffett-for everything Warren Buffett

C Share Investor 2008

Wheres the Love?

Government cost to business hasn't been ameliorated by today's quadrangle of
State interference that kicked off, appropriately, on April 1.


I cant help myself talking about it, politics is intrinsically linked to investing and business and in New Zealand our economy is hugely influenced by what the government of the day does to it more than most global economies.

The introduction and trumpeting today by our Labour government of 4 things that "they are proud of" that will "help business" has less to do with helping business but more to do with election year and keeping control over the economy and its participants.

The much ballyhooed 3% cut in corporate tax rates, taxpayer handouts to business for research and development, employer contributions to Kiwisaver and the lift of the minimum wage to 12 bucks all run against each other in their purpose and execution.

The over hyped tax cut and R & D subsidy for our corporates hides the fact that Kiwisaver, the associated paper work and the lift in wages easily dwarfs the meager 3% cut already.

Include all the other government imposed costs to business over the last 9 years, like higher ACC, energy and carbon taxes and nonsense like employer funded maternity leave(what is wrong with the family paying, a novel idea I know, but just an idea) and an extra weeks leave for workers and even the blind, deaf, dribbling and Labour voters(OK maybe that is a stretch) can see how far behind business is.

The tax cut would have to be at least down to a 25% rate to get business back to where it was in 1999, in terms of costs and return of capital.

That way, business could afford to fund R & D from cashflow instead of another army of extra State funded bureaucrat's handing out taxpayer money to those they see should get our money-I mean these people picking business winners? I doubt many of them can remember their PIN numbers let alone pick good businesses.

What is missing from today's election focused "take more it and give some back" approach to business is a bold statement to business, especially small business, the back bone of this country, that the country values your contribution and we are going to reward your entrepreneurship.

State attached funding via R & D subsidies and other quasi government welfare schemes, extra business expense and paperwork isn't a good way to show that we love business.

I fear the present administration doesn't like the independence and confidence that self employment or owning your own business brings and are doing everything they can to inextricably link business owners quest for economic freedom by weighting business and therefore the economy down with cost and bureaucracy.

A 3% company tax cut isn't going to cut it for those hard working individuals who own companies and in fact bypasses those who are sole traders entirely.

Its time to show business we love them.

Not the opposite.


Related Political Animal reading

Labour's State Control Out of control

c Share Investor 2008

Blue Chip's Mark Bryers at top of shaky pyramid

Mark Bryers, architect of the Blue Chip pyramid
scheme, in better times.

Securities Commission - What we do
Commerce Commission - Fair Trading Act
Bryers has clear conscience - Stuff.co.nz


From the Blue Chip website (more)

At Blue Chip, everything we do is about helping our customers to build the future they want. Here are some of our clients’ stories which explain how Blue Chip has helped make a difference".

Gordon and Margaret Taylor

"At our stage in life we need our investments to be making money - not losing it!"

The column inches given over to discussing the Blue Chip fiasco would rival the length of a million toilet rolls stuck end to end and reaching to the moon and back.

Like alot of financial collapses though, investors or the public don't seem a hell of a lot wiser as a result of all the chatter.

In Blue Chip though, what is clear is that Mark Bryer's and his management built a pyramid scheme where he was at the top while his investors pumped cash into keeping him there.

Like every pyramid scheme of the past the only people who make money are those at the top and those that get in then get out first. Bryer's is still worth more than NZ$70 million according to the National Business Review.

These arrangements can go well when economic conditions are good but in this case, when the "asset", real estate, being invested in starts to lose its over inflated value, those at the bottom of the pyramid are going to lose.

Many have lost their life savings after either being greedy, trusting or naive. I recall going to an investment day at the Ellerslie Racecourse some 4 years ago, all the banks, share options people,brokers, finance companies, gold sellers etc were there.

So was Blue Chip.

While many of the above mentioned were quite "pushy" in their sales patter, I distinctly remember the Blue Chip people meet my quick gaze at their stand and from then on the push to buy was relentless, aggressive and quite slick-and their lawyers were there!

I felt decidedly uncomfortable with everything about their pitch but can understand why some caved into their charms.

But I digress.

The fact that property deals were arranged so that overly large deposits on overinflated unbuilt housing was paid directly into Blue Chip coffers and not into the normal trust situation and signed off by buyers after getting "advice" from Blue Chip's own lawyers, should at least raise the ire of the Securites Commission who have so far been deathly silent on this matter.

In my humble opinion, at the very least the Fair Trading Act has been breached and action needs to be taken. The Commerce Commission, who agonize over the likes of The Warehouse sale saga haven't made a public statement. The Fair Trading Act(1986) basically states that you cannot hide or be untruthful about what you are selling or be devious or sly in hiding the nature of what is being purchased; i.e. small print is not an out for the dodgy seller and it should have been crystal clear about what those Blue Chip real estate buyers were signing.

Like others have been saying though, I suspect we have only seen the tip of the pyramid uncovered, and just like an iceberg most of what lurks underneath is looking decidedly crooked.

I fear though, that Mark Bryer's and his merry bunch of tuggers at Blue Chip will get away with this errant behaviour and not even get a lick of a taste of the anguish that they so clearly deserve, and their former clients are now suffering from.

It is time for the talking to stop and action to start, lets not let another economic vampire go free.


Related Share Investor reading

New Zealand Financial Oversight bodies fail Blue Chip investors
Money Managers Saga-3 story wrap
Money Manager's First Step gives investors the middle finger

Recommended Amazon Reading



Forensic Accounting and Fraud Investigation for Non-Experts by Howard Silverstone
Buy new: $40.00 / Used from: $32.05
Usually ships in 24 hours



Essentials of Corporate Fraud (Essentials Series) by Tracy Coenen
Buy new: $26.37 / Used from: $24.64
Usually ships in 24 hours


c Share Investor 2008

Fitna the Movie: Dutch Politician's film about the Quran(UPDATED with replacement video)

The mad Mullahs, junk Jihadists and irritated Islamists have threatened death on the staff of LiveLeak, where I posted a copy of the Film "Fitna" on Friday ,( go here and click on video for explanation by LiveLeak) and they have removed the film as a result.

The making of the movie, which tells it like it is, has been widely condemned by Muslims around the world but its the thrust of the message that Muslims have for the West that lays largely intact and free from similar condemnation by those same people.

That the non believers are infidels and must be wiped off the face of the earth.

Geert Wilder's film had been  generously posted on youtube but has been removed because of pressure from Mad Islamists.

Luckily I have found another copy at Clipser and posted it again. Cross your fingers it doesn't get taken down .

Film originally posted on LiveLeak.com

Related Political Animal reading

LiveLeak Video
Reaction to Muslim cartoons defended by some
Cartoons depict Muslim faith for what it is
Jihad and Understanding
Having a multiple Muslim

c Political Animal 2008