Soros: This Is Act 2 of the Crisis

I’ve been a Soros fan ever since reading “The Alchemy of Finance” in the early ’90s and an even bigger fan since seeing him speak at the “Secretary’s Open Forum” at the U.S. Department of State in 2003.  The following is a clear, concise, and up-to-date explanation of his main theories and their implications for financial markets and their participants and regulators.

This Is “Act 2″ of the Crisis
George Soros
2010-6-14

In the week following the bankruptcy of Lehman Brothers on Sept. 15, 2008 — global financial markets actually broke down, and by the end of the week, they had to be put on artificial life support. The life support consisted of substituting sovereign credit for the credit of financial institutions, which ceased to be acceptable to counterparties.

As Mervyn King of the Bank of England brilliantly explained, the authorities had to do in the short term the exact opposite of what was needed in the long term: they had to pump in a lot of credit to make up for the credit that disappeared, and thereby reinforce the excess credit and leverage that had caused the crisis in the first place. Only in the longer term, when the crisis had subsided, could they drain the credit and re-establish macroeconomic balance.

This required a delicate two-phase maneuver just as when a car is skidding. First you have to turn the car into the direction of the skid and only when you have regained control can you correct course.

The first phase of the maneuver has been successfully accomplished — a collapse has been averted. In retrospect, the temporary breakdown of the financial system seems like a bad dream. There are people in the financial institutions that survived who would like nothing better than to forget it and carry on with business as usual. This was evident in their massive lobbying effort to protect their interests in the Financial Reform Act that just came out of Congress. But the collapse of the financial system as we know it is real, and the crisis is far from over.

Indeed, we have just entered Act II of the drama, when financial markets started losing confidence in the credibility of sovereign debt.  Greece and the euro have taken center stage, but the effects are liable to be felt worldwide.

Couple of Good Roubini and Einhorn Articles

As some of you know, Nouriel Roubini and David Einhorn are, IMHO, two of the best minds in their fields and I’ve been posting some of their stuff on here since at least 2006 (list of posts here).  Here are their latest articles:

Quick Market Update: NASDAQ and USD Charts

Just time for a quick update on the action that began last month (see previous blog or TwitPic):

• See annotations on the above and below chart for today’s updates.
• My short position this time is double what it was last time (reinvesting profit), but I’ll keep it on a short leash.

Quick Market Update / NASDAQ Chart

2009-10-29 UPDATE: Updated NASDAQ chart and comments.

Just time quick post. The annotations on the chart are self explanatory. Coming after a 7-month, 73% rally, they represent a yellow flag (caution). See also this weekly chart I posted last month, when we were at this same level, the one I posted yesterday, and the one shown below:

1) Chart of the Day; 2) Chuck Norris + Downturn

(click for larger version of this image)

1a) The image above (except for my comments) came from Mary Meeker’s “Economy + Internet Trends” report (PDF). It’s is pretty much the same stuff her and her interns have been pumping out since the ’90s. Check it out for a regurgitation and updating of conventional “wisdom.”

1b) Comparing Rallies: 2009 vs. 1974-75 vs. 1938-39: Click to view.

2) Now on to the fun stuff: Chuck Norris on the downturn (finance humor):

• Chuck Norris has killed black swans with his bare hands.
• Chuck Norris rubs the VIX into his chest.
• Chuck Norris continues to short the Aussie market.

Ten Principles for a Black Swan-proof World

A year and a half ago, Nouriel Roubini gave us his recipe for financial meltdown, The Twelve Steps to Financial Disaster, each of which unfolded in sequence. Now Nassim Nicholas Taleb gives us his “Ten Steps for a Black Swan-proof World” (below).

Roubini’s steps were the inevitable outcome of a flawed system. Sadly, perhaps, Taleb’s steps are not inevitable.

Additional reading:

• Selected Roubini articles on this blog
• Nouriel Roubini’s Global EconoMonitor blog
• Nassim Nicholas Taleb’s Fooled by Randomness blog

Now on to the article:

Market Update: Why I Closed My March Longs

Just time for a quick market update (here’s my prior update) and explanation of my May 6th tweet (the time stamp says 9:46 PM because I’m in Sweden, six hours ahead of USA ET, where it was 3:46 PM):

Just closed out all stock positions (long) I put on in the beginning of March: http://bit.ly/3299rF. Biggest gain: RIMM 89%; loss INTU -8%.

Comments on the chart below:

Article: The Quiet Coup

A long, but interesting and important article.

The Quiet Coup
By Simon Johnson
2009-05
The Atlantic

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

One thing you learn rather quickly when working at the International Monetary Fund is that…

Market Update: Now and Zen

Just time for a quick follow up to my March 11th blog, which nailed the March 10th low. Since then, we’ve had multiple follow-through days, however volume has been suspiciously low, which could, actually, be interpreted bullishly (in a “double bluff” kind of way, to make a poker analogy).

Day 1 of New Rally Attempt

Just a quick post to mark the first day of a new rally attempt, lead by financials, lead by Citigroup (NYSE: C). Look for follow-through (or failure) next week. I am slightly exposed to this rally, but not “all in,” especially with me living out of a suitcase for the past month (and for another two months). Cheers!

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First Post From the USA and First Post From the New MacBook

Just time for a quickie:

1. NYT: Bailout Plan: $2.5 Trillion and a Strong U.S. Hand
2. NYT Graphic: The Government’s $8.8 Trillion Bailout Tab
3. Nouriel Roubini: Treasury’s Financial Stability Plan: Will It Work?
4. Nouriel Roubini: It Is Time to Nationalize Insolvent Banking Systems
5. Video and My Comments: Obama and Henrietta Hughes at Town Hall Meeting

UPDATE: Two additional articles:

1. NYT: Stopping a Financial Crisis, the Swedish Way
   (September 2008)
2. Matthew Richardson and Nouriel Roubini: Nationalize the Banks! We’re all Swedes Now (current)

Two Excellent Michael Lewis and David Einhorn Articles

I’ve posted a bunch of stuff from these guys over the years:

• Here’s an especially good David Einhorn speech from October 2007: What’s Wrong With the Credit Ratings System?
• And at the end of my 11/21/08 market update are two Michael Lewis articles: Hank, Let Me Help You Help This Great Country and The End.

Here’s the latest:

Titles:

1. The End of the Financial World as We Know It
2. How to Repair a Broken Financial World

By Michael Lewis and David Einhorn
2009-1-4
New York Times

In the past year there have been at least seven different government bailouts, and six different strategies. And none of them seem to have pleased anyone except a handful of financiers.

Santa Claus is Comin’ to Town?

Just a quick update on last week’s post noting the high and tight downward-sloping handle (in indexes and stocks).

Today (December 16th), we got the upside breakout/follow-through, and it came  on increased volume, but the volume was below average, which is a question mark, perhaps the kind of question mark that leaves some doubt/worry, which is what can sustain rallies.

The news of the day was the U.S. Fed cutting continuing to push on it’s little string, cutting its Fed Funds target rate to a record low 0% to 0.25% (Washington Post article and LA Times article).  Now that it’s out of bullets there…

Quick Market Update: High and Tight

This chart (taken intraday today), shows some very tight, low-volume action above a moving average that has not held for a long time. This comes after the gap up of a few days ago, which is also still holding.

We really could break either way here, but this action, combined with multiple other signs of decreased fear and flight-to-quality (risk assets and gold are up, spreads are down) and ability to hold on “bad news” (Jobless claims jump to 573,000, a 26-year high), is interesting.  The Fed is printing massive amounts of money.  It’s going to go somewhere (eventually).  Cheers!

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Margin Debt Down, But More Room Below

Just a quick chart I made to take a look at NYSE margin debt vs. the NYSE Composite stock index. I ran the chart back far enough to cover the peak of the dot-com bubble. That way we can see over at least one complete cycle.

I don’t think we’re at the new trough yet (but maybe close), here’s why:

Good Closed-End Fixed Income Funds

Do they exist? Where? I’m especially curious about closed-end funds that invest in senior-secured loans. I did a little research and found these “senior” funds, but don’t know much about them:

Rally Attempt Ends, NBER Makes It Official

Just a quick post to note the end of the rally attempt (its start was noted here: Market Update: Good News/Bad News).

Here is the Yahoo Finance arket summary and here are the volume leaders. As you can see, it was a 90% downside day and not a single stock was up on the volume leaders list (except a short ETF).

Also of note is today’s National Bureau of Economic Research (NBER) “news”: “The economy’s yearlong downturn, officially declared a recession.” I put “news” in quotes because their “economic indicator” (or whatever you prefer to call it) is backward looking, just like all non-market based economic indicators are.  Here is an LA Times article and here is the official NBER release.  Here is a blog I published over a year ago (in November 2007) saying the U.S. was likely already in a recession and why (includes annotated chart).

The only forward looking indicators, of course, are market-based ones, such as the stock markets and bond markets themselves, which discount things around 6-12 months in advance, which means (as always), that the bear market low will occur 6-12 months before the recession ends.

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Market Update: Good News/Bad News

Just time for a quick post before a busy afternoon of prep work for our Thanksgiving dinner party tomorrow night (we’re in Sweden, so the Saturday before the official Thanksgiving Day is when we do it).

Ok, the post got a little long when I used Fred Wilson’s tweets  (links below) to launch into some of my investment philosophy.  I like Fred a lot, and his tweets and blog, it’s just that I’ve been watching him buy Google from above $400 down into the $200s.  It’s been painful, but he will eventually catch that oh so sweet bottom!  More below.

Bonus! At the end I tagged on two great pieces by Michael Lewis, the author of Liar’s Poker: Rising Through the Wreckage on Wall Street.

First, some market stats:

• Thursday: Summary and volume leaders. Look at that volume! Over 10 billion shares on the NYSE and 3 billion on the Naz. That is people saying “I can’t take the pain any longer, get me out, I don’t care about the price, just make the pain stop!” Margin calls, mutual and hedge fund redemptions, portfolio insurance (see The Anatomy of a Crash), and delta hedging by put sellers, like Warren Buffett, have forced a lot of sales, of course. Call it a perfect storm, a rare glimpse at the naked and ugly side of human emotions, greed into panic. The story never changes, just the names, faces, and dates.  Of course, great opportunities also come at times of extreme emotions.  That will be the same this time, as well.