Wednesday, September 17, 2008

Bonfire of the Vanities

Despite a brief foray into the financial world some years ago, my knowledge of world markets is basically non-existant (a fact which goes a long way in explaining why I'm no longer foraying in said world). Notwithstanding this utter lack of knowledge, I would be remiss if I didn't comment on the current state of the U.S. economy.

I have been saying for quite some time now that the reign of George W. Bush will go down as the presidential equivalent of Rob Babcock's tenure as G.M. of the Toronto Raptors. Rob Babcoak had Rafael Araujo with the 8th pick, Rafer Alston on a 5-year deal, Joey Graham over Danny Granger, and the Vince Carter for Alonzo Mourning's $10 million buyout trade. Bush had 9/11, Hurrican Katrina, and the search for non-existent weapons-of-mass-destruction that would prove to be a thinly veiled excuse to engage in a war that could never be won, the end result being the inevitable and eventual collapse of what had once been the world's strongest economy.

Although on vastly different scales, the two regimes can be viewed as little beyond complete catastrophes, and the two architects will almost certainly go down in history as the worst at their respective professions.

I'm still waiting for resident economist Mike Foley to weigh in with his take on the past 72 hours, but in the meantime, here are some words from minds immensely more informed than yours truly:

From The NY Times (Monday, Sept. 15): Lehman Files for Bankruptcy; Merrill is Sold

From The Globe and Mail (Tuesday, Sept. 16): A New World on Wall Street

From Dealbreaker (Wednesday, Sept. 17): I Need A Moment to Vent

(Thanks to Flats for the links)


Anonymous said...

At least Rob Babcock gave us Jose Calderon.

Anonymous said...

i thought foley was the resident fashion expert?

Anonymous said...

I got called out in a big way, so here goes nothing. Below is a cut and paste of an email I wrote on Tuesday morning. Things have changed a little since then (there has been a massive liquidity injection by several central banks, the Fed did not cut rates, AIG has been quasi-rescued, oil has rallied about $10 in 2 days, and gold jumped $80 yesterday, which is very close to an all time record move. But the overall themes remain the same). For a lot of these US financials, the problem is not earnings (Morgan Stanley makes tons of money) it is liquidity. Credit markets are drying up, and counter party risk (the risk that the party on the other end of the trade goes bankrupt, or can't meet the obligation) has never been higher. The value of a lot of derivative securities (all the acronyms you read about: ABCP, CLOs, CDSs, etc) have essentially gone no bid, which means, for all intents and purposes, they are worth zero. Spreads are widening to ridiculous levels, which means the cost of borrowing is through the roof. It's scary. I can't stress enough that overall, this kind of environment has essentially NEVER been seen before (at least in our lifetimes).

My 48-hour old email is below...


Here goes the Coles notes version:

- Lehman Brothers filed for bankruptcy, which was the largest bankruptcy in US history
- Merrill Lynch got taken over, basically just before it was going to go bankrupt
- AIG, Wachovia and other financials are on the ropes and may go bust shortly
- All other financials (even in Canada) get affected in varying degrees by their exposure to the above
- Oil is at $93, which is basically off $10 in two days, since Hurricane Ike didn’t do anything and oil probably on its way to $80 as global growth slows
- Which, of course, kills all the oil stocks (especially since the marginal cost of production in the oil sands is about $85, making a whole bunch of projects far less economic)
- Slowing global growth is punishing commodities, and commodity stocks, like copper, nickel, zinc, etc as emerging economies will need less ‘stuff’
- And then the second derivative stuff... less investment banks (or downsizing, etc) means less demand for blackberries
- Less investment banks (and downsizing) also means less demand for downtown real estate, which hurts REITs
- Etc, etc, etc.

Put that all together, plus the fact that financials, energy and materials make up about 80% of the weighting of the TSX, and you could see why yesterday was not only painful, it was broad based. There was literally no where to hide. Plus, we are still searching for that catalyst that will eventually take us higher. The Federal Reserve is widely expected to cut interest rates today, which I suppose will help (at least temporarily), but it is only going to create more inflationary pressures, which are really bad for an economy (read Dilbert for the past two days, and you’ll see what I mean).

The good news from all this?? Everyone is pessimistic, especially the little retail investor, which usually means that we are close to a bottom. Do I have the conviction to act upon that? Not a chance.


Hope that helps kids. If it makes you feel any better, a lot of people who get paid a lot of money to do this for a living are as lost as the rest of us.

It is darkest just before dawn. It will come back. It always does.


Anonymous said...

Two words, "You're Gay".
Speaking of words, I'm an English teacher and I didn't understand 3/4of the words you used in that posting, including the coles notes version. I think this version would be better. Please read below...

-Companies went in the shitter
-Market dropped
-Oil sucks my balls
-I'm losing money
-Your still gay (but rich)

Anonymous said...

You spelled my last name wrong, therefore, you're an asshole.

Understand any of those words, Richie??

Anonymous said...

That was not me (this is Richie). Honestly, there has to be another English teacher who reads this blog. But if I was to spell your name wrong, I would have spelt it Folly.

Sean McCallum said...


That's what I was hoping for when I asked for the "resident economist" to weigh in. Nice work. Even if Richie (or the mysterious English Teacher who sounds a lot like Richie) doesn't understand most of what you wrote.

Anonymous said...

While I think there are many things you can pin on the Bush administration (Iraq and the deficit being the most obvious), I think it's hard to pin the blame for this crisis on them. Greenspan's interest rate policy is one of the biggest culprits - keeping the rate too low for too long as a way to avoid a recession. This was a key (but not only) factor in the surge in lending that led to the subprime mortgage crisis. Greenspan had been appointed and reappointed by both Democrats and Republicans, so there would be plenty of blame for all parties for keeping him in that position. And the Fed acts completely independent from the executive branch of the US government.

Sean McCallum said...

Good points listed above, all of them. I don't claim for a second to be fully versed in the intricacies of domestic economic policy, but the man at the top needs to be held accountable on some level.

When you're the President of the United States of America, you're responsible for the state of your country. And at the end of the day, we'll look back on the state of the country on January 21, 2001, and compare that to the state the country will be in come January 2009, and you'll be hard pressed to find a more alarming slide than that which has taken place over the course of the past 8 years.

Someone recently said to me: "George Bush has bankrupted every business he's ever run; how could you have expected anything different this time around?"

So despite the fact that you can't blame the president for everything that goes wrong in his country (in the same way that a president can't be lauded for every one of his country's successes), he's ultimately the man that has to be held responsible. He is the commander-in-chief. And when the ship goes down, regardless of what specifically caused it to sink, the blame has to fall solely on the head of the captain.

Anonymous said...

Thought this NY times article was interesting considering it was written in 2002.


Anonymous said...

Llibs, Should I go with black or brown oxford lace-ups with a three-piece grey suit?

Anonymous said...

Contrary to popular belief, I'm actually not the resident fashion expert, but I will say this:

If you're rocking the three piece charcoal grey suit, I'd opt for the black kicks. Especially for an interview. I've only bought into the 'brown shoes with blue suits' look, but then again, my idea of high fashion is wearing a throw back 'Spos lid paired with a white old school Jays tee, so take my advice with a grain of salt.

But, do me one favour... have the belt match the shoes. Always. And don't do up the bottom button of the suit or vest. Ever. And for the love of God, get a shoe shine once in a while. It won't kill you.

P.S. Largest point gain in history today on the TSX. 848 points (+7.0%) on record volume. Just in case you care.

Anonymous said...

I just wanted to comment because I didn't want to be left out of one of the best blog comment secions EVER.

By the way, I currently live in the U.S. of A. I'm going to agree with Sean on this one....


P.s. There is no gasoline.


Sean McCallum said...

From Greg Easterbrook's TMQ column 09/23/08:

Gimme! Gimme! Gimme! Last week, TMQ asked why no one was paying attention to the fact that the national debt ceiling was quietly raised by $800 billion during the summer. Well, toss that column: The White House just asked the national debt ceiling be raised another $700 billion, for the proposed financial-sector bailout. If that happens, in 2008 alone, $1.5 trillion will have been added to the national debt: every penny borrowed from your children and their children. Stated in today's dollars, in 1979 the entire national debt was $1.5 trillion. George W. Bush and Congress have in a single year added an amount equal to the entire national debt one generation ago. And the year's not over!

It took the United States 209 years, from the founding of the republic till 1998, to compile the first $5 trillion in national debt. In the decade since, $6 trillion in debt has been added. This means the United States has borrowed more money in the past decade than in all our previous history combined. Almost all the borrowing has been under the direction of George W. Bush -- at this point Bush makes Kenneth Lay seem like a paragon of fiscal caution. Democrats deserve ample blame, too. Harry Reid and Nancy Pelosi, Democratic leaders of the Senate and House, have never met a bailout they didn't like: Harry and Nancy just can't wait to spend your children's money. Six trillion dollars borrowed in a single decade and $1.5 trillion borrowed in 2008 alone. Charles Ponzi would be embarrassed.

If you borrowed, borrowed, borrowed, you could afford to live high for a while -- then there would be a reckoning. Hmmm … that sounds a little like what many Americans did with gimmick mortgages in 2005 and 2006. They were only imitating their political leadership! Why is it both parties in Washington think the United States can borrow, borrow, borrow without a reckoning ever coming? Bush, Reid and Pelosi seem poised to transfer hundreds of billions of dollars of borrowed public money to political insiders on Wall Street and in banking, whose bonuses will now be tax-subsidized. The capitalist maxim is, "She who reaps the gains also bears the losses." Now Washington wants those who reaped the gains to shift the losses to those who lived humbly. The young will pay and pay for these cynical ploys to insure the luxury of the powerful old. Why aren't the young outraged?