Merits (and Dangers) of Removing Rick Wagoner

The recent ousting of General Motor's CEO Rick Wagoner by the federal Government is an event that will likely be recorded in history books as a defining moment of the Obama Presidency. The removal of a CEO is obviously in stark contradistinction to the business-lenient Bush Administration, where Industry was allowed to evolve unfettered. For our part, we are tentatively in agreement with the President's decision, provided that the Administration treads carefully down the new path it has cleared for itself.

General Motors has been slowly deteriorating for upwards of twenty years, nine of which saw Mr. Wagoner at the helm. Following 9/11 and the ensuing mild-natured recession, GM embarked upon an aggressive financing campaign that incentivized millions of buyers to purchase a new car, despite the fact that the condition of his/her current vehicle did not actually warrant the purchase of a new one. The strategy, which Mr.Wagoner presided over, would have stymied demand for new cars even if the Great Recession hadn't hit. Our purpose is to illustrate the point that Mr.Wagoner, while not entirely responsible, does share some of the blame for the demise of GM.

In addition to removing a CEO with a history of inept management capability, Obama has also sent a message to the executives of other Corporations on the Government dole. The message is this: Floundering about on the brink of bankruptcy, and praying for an economic recovery is not an acceptable strategy in the eyes of your new creditor: Uncle Sam.

Of course, there are also competing dangers involved when a Government chooses to assert itself in this fashion. Namely, we have noticed that Government has a propensity towards the permanent retention of a newfound base of power. The implications for the economic preeminence of America would be devastating in the event that the Government takes an assertive and protracted role in the day to day operations of large multinational corporations. Unfortunately, such actions could easily become a reality given the fact that Government intervention always occurs through a set of lens known as the Best of Intentions.

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Announcement: Mortgage Broker Competition

On Friday, March 27th, Carneades penned an analysis entitled "Blame the Existence of Mortgage Brokers". Apparently, numerous individuals interpreted the piece to be highly derogatory in nature, as evidenced by the vitriol which emanated from various pseudo-sectors of the mortgage industry. The high volume of comments that we received certainly ran the gamut in terms of intellectual pedigree, logical soundness, and proper use of grammar/punctuation. Needless to say, we can not allow a handful of Rogue Commentators to desecrate these pages with ill-conceived and emotional comments. However, in the spirit of debate and fairness, we will allow users to submit their official rebuttals to the post dated March 27th. We will then select the best argument, based upon the criterion of intellectual pedigree, logical soundness and grammatical correctness, and post that argument to this site.We will not impose restrictions upon the number of words that you may submit. 

We will be posting submission instructions at the site www.brokeroutpost.com. Thank you Comrades, and good luck.

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Spanish Bank Bailout, More to Come?

On Sunday, the Spanish Government announced its first banking sector bailout measure of the current Crisis. Although this rescued institution is not a financial behemoth, it is still, relative to the size of the Spanish economy, a rather substantial "savings and loan insitution". Now, we have previously discussed the looming troubles in the Spanish economy and banking system, so the announcement regarding the necessity of a Government rescue scheme did not surprise us. What did pique our interest however, was the multitude of official assurances from the Spanish Government, characterizing this situation as an isolated event that was in no way indicative of greater financial system woes. Throughout this global financial crisis, Government forecasts and statements have, regardless of the country from which they emanated, served as a fairly reliable contrarian indicator. The situation in Spain should not be interpreted any differently from the plethora of inaccurate Government forecasts that have been proferred to date. The country is obviously on the brink of a massive banking sector consolidation process that will likely leave only a handful of large institutions intact. The lucky ones will be absorbed by the likes of a Banco Santander, while the unfortunate many will flounder about, eventually slipping into bankruptcy. So is how we anticipate it to be. Sphere: Related Content

Evaluation of Market Bottoming Evidence

The most recent chatter concerning evidence of a market bottoming pattern is widespread in nature, occurring in both financial and traditional media outlets. The impetus for this new found optimism was the release of several economic data points throughout the past week, and subsequent media analysis of the chart pattern formed by the inclusion of these data points. We will first offer an assessment of the data itself, followed by our observations concerning the individuals who are aggressively promoting this new economic storyline.

The two data points that are most widely cited as evidence of a market bottom are new orders for durable goods and existing home sales. The durable goods data is notoriously volatile, and thus we will not pass any judgment until at least four additional months of data are available. The trend in existing home sales however, has the ability to offer a bit of insight. More importantly than the headline data figure, we think, is the fact that approximately 40% of these sales involve a distressed property. This is actually to be expected, and provides evidence that the Market is working to clear the inventory of foreclosures, a prerequisite for any sustainable recovery. Sales of existing homes will likely continue to rise in the coming months, until at least, the Government's refinancing and foreclosure prevention efforts begin to work their way into the economic data. We expect these efforts to slow the intensity of foreclosures at any given point in time, although the total volume will remain relatively unchanged. Ultimately however, the level of existing home sales does not serve as an indicator as to the extent of deterioration in the underlying collateral of the securitized pools of mortgages that continue to rot the financial system from within.

As for the "pushers" of this new bottoming theory, we are not surprised to see that the chief proponents are none other than the usual Wall Street asset managers, who are unashamedly attempting to lure the public back into stock related investments. This is, and has always been, the Name of the Game. Sphere: Related Content

Government Debt Investors Revolt

The past 48 hours have brought interesting developments in both the US and UK Government bond markets. In the United States, a Treasury auction of $34Billion of five-year notes drew meager levels of support at the intitial yield offered by Treasury, forcing the Government to bribe investors with higher yields. In the United Kingdom, the Government lacked the ability to complete its most recent gilt auction altogether, resulting in an actual auction failure.

Now, in a world where Government policy Influencers could assess market developments in an apolitical, cogently sound fashion, the recent activity in the Government bond market could be construed as a good thing. The reason being, any honest observer would process the auction developments and conclude that, perhaps, a break should be taken from the Debt Agglomeration Rampage.

We interpret the happenings in the US market to be quite similar to when one feels his car sputter or stall for the first time. Often times, the internal cause of the first sputter will be readily identifiable. However, the human tendency is to avoid the inconvenience and expense of bringing the vehicle to a mechanic at first sign of trouble, and instead wait until the issue has become sufficiently problematic and presents the possibility of permanent damage.

Yesterday, the US Government's primary operation funding vehicle  experienced a very minor engine sputter. In the near term, such disruptions are likely to remain sporadic and isolated in nature. However, if the United States Government continues to travel down its current path, and delays the necessary engine repairs, the Consequences Will Be Severe.

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Russia Distinguished

As global economic disruptions have caused a collapse in oil prices, Russia has been exposed as having fooled itself into thinking that the past eight years of prosperity was the result of brilliant economic planning. With that veneer now stripped away, the reality is that Russia merely accessed many partially depleted Soviet-era oil wells, and watched gleefully as oil prices continued to rise. At the same time, one could question whether Vladimir Putin's immense popularity(until recently) was merely a reflection of ever increasing Russian living standards, enabled by oil wealth.

The above reality, we feel, is relevant when assessing the recent Chinese calls for a "global currency", and the supposed international support it is receiving for such calls. Cited by the media as supposedly pertinent to the Chinese comments is the fact that Russia also voiced these World Currency concerns just a week ago. First of all, we would dismiss the idea that any group of countries are about to unite under the noble and common goal of creating a global currency for the purpose of global stability. Clearly, the Governments of the world are only concerned about stability within their Specific country, and each has a specific reason to advocate a global currency. The Chinese are obviously upset that they have ignored the old adage "Don't put all your eggs in one basket", in addition to the fact that they see now as an opportunity to wield an increasing amount of influence concerning the restructuring of the global financial system. Russia however, is a different story.

Russia's situation is simple math. Where spending and oil revenue used to both equal 4X, revenue has now declined to 1.5X, but spending has remained the same. The country did have 7.5X saved, but has has to spend 2.5X to finance its deficits and support the flimsy ruble. Assuming oil prices remain relatively range bound(or don't fall further) the Russians will either have to cut Government spending significantly, or they will go bankrupt. The country is already allowing some of its smaller state supported entities default on their debt, and we don't think investors will lend money to the Motherland.

We believe that the above reality is already quite well known in the upper levels of Russian government, and that steep cuts to government spending are being planned. The Kremlin understands that the populus will not take kindly to sudden cuts in levels of service, and thus has decided to use the oldest trick in the book: the external enemy. We expect that anti-American/dollar rhetoric will emanate from the Kremlin at levels commensurate to that Government's inability to provide for its own citizens. The final stage, however, could very well involve Russia once again lashing out at a neighboring country, a la the Georgian incident.

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The(Newest) New Plan

The Plan we refer to is obviously the latest in the long procession of bailout schemes proferred forth by the Government's wizards over the past 18 months. As expected, and in contradistinction to previous bailout measures, this New Plan is largely predicated upon private sector support. Ironically, Mr. Geithner's grand unveiling occurred amidst one of the most intense populist, anti-bonus/reward/ excess-profit uproars in our memory. For that specific reason, we believe that, more likely than not, the Treasury's latest plan will be a failure.

The private sector's fear is that inevitably, the following will take place: Hedge Fund manager Johnny committs a certainl amount of capital to the Geithner Program. Treasury allows Johnny to lever himself substantially, potentially amplifying profits while limiting the downside. In the end, Johnny earns his Fund X amount of profits. As the manager, Johnny rips .2X for himself (We can assume that .2X is a hefty sum). CNN is alerted to some flagrant display of wealth that Johnny has made, and all of a sudden, everyone knows just how much .2X really is. The best case scenario at this point is that Johnny simply gives the money back, and fades quietly into the night. At worst, an angry mob holding signs bearing unintelligible scrawlings forms on his front lawn. Why subject oneself to this?

We are often critical of the Government, and for reasons that can be justified with relative ease. However, we also feel the need to expose the sad reality that is not recognized by the masses: Everything that you don't like about Washington happens because you permit it to happen. Very few voters have properly educated themselves with regard to each candidates stance on the issues. You instead choose to marinate your mind in the festering cesspool of reality television, emerging from a stupor only to bemoan the System. We have cowards and weasels(for the most part) in Washington because the populus has developed a voting pattern which favors the election of cowards and weasels. Should we really be surprised that, to date, no politician in Washington has accepted even an iota of responsibility for fostering the conditions necessary for our current Economic Predicament?

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