Two Mark-to-Market Alternatives

New mark-to-market guidance proposed by regulator

The FASB's proposed guidance would stop short of changing the mark-to-market rules, but it would clarify how auditors should unterpret those exisitng regulations. It would allow banks and other companies that have had a difficult time valuing illiquid mortgage and other securities, the ability to use "significant judgment" when valuing the assets.

"Unterpret" those "exisitng" regulations? Seriously? Freudian slip meet spell checking nightmare. I must say that unterpret seems a pretty good word to describe an illusion of proper accounting though, lol.

That being said, it just doesn't seem right to me that the banks would be allowed to use significant judgment when they clearly have a history of showing poor judgment. That combination could end up creating some significantly poor judgment and why I propose two alternative ideas.

Idea #1: Mark-to-Marxism Accounting

The government could simply step in and buy all assets, troubled or otherwise, or even just credibly threaten to do so. Dow 36,000 here we come! Sure, the government would need to take on debt to do it. However, think of all the assets the government would then own. As an added bonus, we'd all be government workers. Let's bring the full power of the Department of Motor Vehicle efficiency technology to every aspect of our lives. Prosperity, baby! Genius!

Marxism

Since the tension between social classes is deemed to be the cause of political unrest, Marxism attempts to solve this problem by establishing public ownership as its dominant feature.

Idea #2: Mark-to-Undead Accounting

The government could create Zombie banks and give them the ability to create Zombie loans exponentially. This could ripple through our entire financial system until everything is undead. It's basically what we have now but at least we'd know what to call it.

Zombie apocalypse

Authorities are slow to respond to the threat giving the zombies time to grow beyond containment. The zombies cannot be controlled despite the broad choice of countermeasures with available technologies. This outcome then results in the collapse of the given society. Zombies take full control while small groups of the living must fight for their survival.

I know. It sounds far-fetched. It would take someone with poor judgment to support this plan of course. Let's see. Do we know anyone who might meet that criteria?

March 15, 2009
Banks Can Live as Walking Dead

American bankers are fighting — for the right to be zombies.

60 Minutes vs. CNBC

I watched Ben Bernanke's interview on 60 Minutes last night. I thought he did a pretty good job overall. I'm not going to comment much more on that though. I was more amused by the reaction to it.

I flipped on CNBC this morning. They thought he did well too. They also told me to make no mistake though. Bernanke's talk was intended for the general population and not the typical CNBC audience.

I nearly lost it in a fit of hysterical laughter. Seriously!

They sure got that right. Ben Bernanke talked to the interviewer in a calm and relatively relaxed environment about the serious issues our country is facing right now. There was no screaming. There was no array of sound making devices for him to push every time he made a point ("Mad Money"). The were no "Boo-yahs!!!" There was no lightning round. And lastly, from what I could see there was very little crappy advice, lol.

January 30, 2008


Starting 46 seconds in...

Cramer: Let's start with Nicole in California. Nicole!

Nicole: ...Boo-yah to you Jim!

Cramer: Excellent, excellent boo-yah, right there....

Nicole: Thanks Jim. Thanks for taking my call. Thanks for the book. Thanks for the show. Love everything about you.

Cramer: Thank you. Wow, really? We're out there September 7th at USC if you want to check out the merchandise.

Nicole: All right.

Cramer: I mean, you know, like Real Money, the books.

Nicole: *giggle*

Cramer: All right. Go ahead.

Nicole: Is Caterpillar still going to 120?

Cramer: Listen to me! You know what? Chastised by all my bearish friends...

[waves stuffed bears at us]

...this weekend while I was sipping on some real cheap vino because I can't even afford Scotch any more I went over line by line the Caterpillar quarter, the Caterpillar press release, and the Caterpillar conference call and you know what? It was really a pretty good quarter and I wish I hadn't talked about it so I could have bought more for... I URGE you to buy that. I see a big upside surprise. I'd pull the trigger.... Caterpillar's DONE going down!

[points finger at us]

2 Year Chart of Caterpillar

Cramer: How about Joanne in Arizona? Joanne!

Joanne: Hey Jimmy! A big hot and steamy boo-boo-boo-boo-yah from the valley of the sun.

Cramer: Holy cow. I wish I were in the valley of the sun.

I'll spare you the details. Hopefully you assumed that the Caterpillar advice wasn't the worst. It was simply the first.

2 Year Chart of Level 3 Communications Inc.

You can't wait and then buy it. You have to keep in it now!

Here's the next one.

2 Year Chart of Allscripts-Misys Healthcare Solutions, Inc.

It's a triple buy!

Here's a comment someone left on YouTube.

I just had a seizure watching this. Am I supposed to actually make money watching this guy? Trading is more than hot stock picks, it's all about money management. - powerfullogic

That reminds me. I did not have a seizure last night watching 60 Minutes.

Tackle Debt After Crisis?

U.S. must tackle debt after economic crisis: Summers

Once the debt crisis is over, we must then tackle the debt crisis. Genius!

Thwack! That's just my forehead hitting my desk. Sorry.

Summers: Obama's Plan May Have Stabilized Consumer Spending

He said there was "one ineluctable lesson of the history of financial crises: They all end."

Ineluctable

Not to be avoided or escaped

Why would anyone be trying to avoid or escape the ending? Hold on. How will this crisis eventually end? He seems to have left that little detail out. I sure hope it doesn't involve me hauling money to the grocery store in a wheelbarrow just to buy a loaf of bread. Thwack! Thud! Thud! Thud!

They should also "remember this central paradox of financial crisis: that while the problem was caused by excessive complacency and excessive optimism, what we need today is more optimism and more confidence."

Optimism

1. ...to expect the most favorable outcome.

Confidence

1. full trust...

I'm looking at my desk. Oh man, this one is seriously going to hurt. *whimper*

Corporate Profits Revisited

Here's something I posted back in 2007. I consider it to be one of my most important charts. This one really gave me an epiphany. Perhaps it will do the same for you.

December 7, 2007
Corporate Profits



This chart shows the total domestic financial, farm, and non-financial corporation profits (before taxes) divided by the total compensation of employees.

How long will it be before we return to the red trend line? Or is this a new permanent era of prosperity? Note that the long-term trend is down. I believe I can offer a simple explanation for that. I would think that in a capitalistic society, competition would eventually squeeze the life out of all profits.

If money can be made, someone will figure out a way to extract it. If a lot of money can be made (like right now it seems), MANY people will find MANY different ways to extract it. You know, just like homebuilders in California once were. Build them fast and sell them even faster!

I excluded the profits made off the "rest of the world" primarily because I'm interested in how our domestic economy is doing. Right now it is doing absolutely fantastic. Just look at all those fat profits ripe for the picking. You'll excuse me if I wait until the bottom falls out first though. I'm no thrill seeker these days.

Here's an updated chart using the most recent Flow of Funds data.



I offer three observations for stock market investors. Keep in mind they are just my opinions though.

1. As predicted, we are clearly heading back down towards the red trend line. There really was no other choice. As seen above, that's the way capitalism must work. Fat profits that are that ripe for the picking will be picked repeatedly until they are gone (one way or another).

2. The red trend line is down. That's actually something that Karl Marx predicted. He claimed that capitalism would eventually squeeze all profits to the vanishing point. In 2007, I was just trying to make sense of the chart. I didn't realize at the time I was actually backing his theory.

3. The line represents the average trend. By definition, we must spend as much time below an average as we spend above an average. That would imply that there's a decent chance we won't conveniently stop once we hit the line. It is not outside the realm of possibility that we drop to 7.5% on the chart. We've done it before. We're at 13.6% right now. That's a long ways down. It is also not outside the possibility that we drop even further than that. First, the trend is down. Second, the bigger the climb the bigger the fall. As seen in the chart, it was a very big climb. We certainly spent a lot of time well above the average.

Any one of those points would scare me away from the stock market, even at these supposedly bargain basement prices. The combination is brutal though. I just don't need the risk. The sidelines have been treating me very well and I'm quite content to stay here. I certainly have no desire whatsoever to bottom feed ABOVE the trend line.

Note that I haven't even mentioned debt yet. That's what originally turned me bearish. I thought we were trying to borrow our recovery. I think you can see how well that worked out by simply looking at the chart from 2004 to 2008. It felt good to borrow the money and then it didn't feel so good. Big shocker.

Are we better off than we were in 2004? I would argue that we are worse off. Most of that debt we threw at the problem back then is still with us. Meanwhile, our stock market is much lower and our unemployment is much higher.

Using debt to solve our structural problems didn't work long-term the last time we tried it so of course we're going to try borrowing again in a much bigger way. That pretty much goes without saying.

Insanity: doing the same thing over and over again and expecting different results. - Albert Einstein

See Also:
Trend Line Disclaimer

Source Data:
FRB: Flow of Funds Accounts

2009: The Year of Living Dangerously

World Bank head says stimulus alone won't fix economy

Warning that 2009 will be a "very dangerous year", he said state stimulus alone would give only a short-lived economic boost that would soon evaporate unless credit flowed again.

Perhaps what we need is stimulus that initially covers a wide area of effect but can also provide economic boosts consistently in the future.

Cluster Bomb

While all weapons are potentially dangerous to civilians, cluster bombs pose a particular threat to civilians for two reasons: they have a wide area of effect, and they have consistently left behind a large number of unexploded bomblets. The unexploded bomblets remain dangerous for decades after the end of a conflict.

Behold the cluster debt bomb. Serious stimulus baby, that's what I'm talking about.

Optimists vs. Pessimists

I have gone through the Fed's Flow of Funds report today and offer you the following chart. It's two ways to look at the exact same data.



The data is drawn from Table L.100 Households and Nonprofit Organizations.

Deposits are taken from line 2 of the table.

Credit Market Assets are taken from line 7. They consist of treasuries, savings bonds, municipal bonds, corporate bonds, and other forms of household savings.

Credit Market Liabilities are taken from line 25. They consist of home mortgages, consumer credit, bank loans, and other forms of household debt.

For the optimists, I offer a blue line version of the data. It shows the increasing leverage over the years as a ratio between credit and savings. Optimists might say, "Credit is the life-blood of our economy. That blue line clearly needs to start going back up again. Only then can things return to normal."

For the pessimists, I offer a red line version of the data. It basically shows savings minus debt. They might say, "Saving is critical. That red line clearly needs to go back up. Only then can things return to normal."

As seen below, I think it is safe to say that our political leaders have embraced both versions. They have plenty of practice talking out of both sides of their mouths though.

May 1, 2007
Bernanke Advocates More Saving

“Saving is critical,” Bernanke said in response to questions after a speech at Montana Tech.

January 8, 2009
Credit: "The Life-Blood of the American Economy"?!

Yes it has finally come to this... The "experts," the politicians, the corporations, and the financial community are beating their chests for even more bailout credit, deeper debt, more government spending and larger loans. I can't stand hearing this soundbite of stupidity, yes even from the Chairman of the FED!! When did credit... when did owing other people even more money become the Life-Blood of the American Economy?!

It's the United States Country Fair. Step right up. Everyone is a winner! All you need to do is simultaneously save more AND borrow more. Barring that seemingly impossible task you can also win a prize by simply tossing a "quarter" of your earnings onto the wobbly glass plates. If it manages to somehow stick, we'll give you an 800 pound stuffed gorilla!

Source Data:
Flow of Funds Level Tables (PDF)

GE Loses AAA Credit Rating

The Madoff Rally, The GE Credit Relief Rally, The Accounting Rule Change Rally

While the downgrade of its credit rating, in and of itself, would generally be considered a demerit for a company such as GE, which lost its standing as one of just six non-financial companies with an AAA-rated debt, the downgrade wasn’t as severe as some GE watchers had feared - it was cut one notch to AA+, instead of the two- or three-notch decline that some investors braced for - and had been widely discounted in a stock that traded aat a 13-year low earlier this month on exactly those worries about a hit to its credit rating. And, for all intents and purposes, credit-rating agency calls these days have become regarded as lagging, not leading, indicators. S&P might have been about the only institution out there that regarded GE’s debt as triple-A quality as recently as Wednesday.

Why would anyone even care what the rating agencies think of GE's debt? These are the same rating agencies who assigned AAA ratings to subprime debt. The theory seemed to be that if toxic assets were properly bundled then they could be pressed into fine wine.

February 20, 2009
Mortgage "AAA" bond downgrades could double -Citi

In the subprime category, the Citi analysts, led by Rahul Parulekar, project downgrades for AAA bonds originated during the peak years of 2006 and 2007...

On AAA-rated "Alt-A" bonds, which are backed by mortgages short on proof of income and others most vulnerable to falling house prices...

Just imagine what Benjamin Franklin would say if he was still alive today. Actually, you might not need to imagine it.

I conceive that the great part of the miseries of mankind are brought upon them by false estimates they have made of the value of things. - Benjamin Franklin

We live in an era of falseness. Of that I am fairly certain. Just look at that first headline. We're having a rally based on a ponzi schemer, a debt downgrade, and a potential accounting rule change that can make at least some of these toxic assets magically vanish.

Let's not stop there though. A more aggressive accounting rule change could turn these toxic assets back into the appearance of fine wine again. That could lead to an actual debt upgrade and even more ponzi schemers! Hurray!

The Economic Cycle Revisited

September 8, 2007
The Economic Cycle (Theatrical Version)

Using the benefit of hindsight, I think you can see that our cat Tigger and our dog Honey clearly did a pretty darned good job acting out the future back in 2007, but conditions have changed. They now offer you an expanded director's cut version of the show.

Cast of Characters

"Fat Cat" corporations played by Tigger
"Happy Dog" consumers played by Honey
"The Taxpayers" played by Tigger and Honey
"The Fed" played by Alan Greenspan and Ben Bernanke
"Treasury Secretary" played by Henry Paulson and Timothy Geithner
"President" played by President Obama
"Congress" played by Congress
"House Speaker" played by Nancy Pelosi

Act I


The economy is broken. All eyes are on the Fed.


The Fed slashes interest rates. The fat cat continues to watch the Fed as the happy dog begins to show some signs of life.


As business begins to pick up the fat cat is more than happy to offer cheap products to the happy dog and a certain balance is achieved.


Cost pressures begin to mount for the fat cat and are transferred directly to the happy dog in the form of higher prices. The Fed, seeing the struggle, opts to raise interest rates.


Cost pressures continue to climb for the fat cat. Portion sizes are reduced on happy dog's food in hopes she won't notice. Unfortunately, she notices. The Fed raises interest rates further.


As prices continue to spiral higher, so does the happy dog. The Fed panics and continues to raise interest rates to contain the problem.


The happy dog has had enough and begins to lose her brand loyalty. She calmly explains to the fat cat that she will be buying generic food instead. In response, the fat cat rushes off to explain to the shareholders that the unseasonably warm winter has caused the company to miss its numbers. The Fed, upon seeing the cost pressures begin to recede and noting the warmer winter, is satisfied that the economy is once again in balance. Meanwhile, the economy crashes.


The economy is broken. All eyes are on the Fed.

Act II

The economy is broken. The Fed slashes interest rates but nothing happens. All eyes are frozen on the Fed.


The economy is broken. Treasury Secretary Henry Paulson announces a Troubled Asset Relief Program (TARP) that doesn't actually end up buying many troubled assets. All eyes are frozen on the Treasury.


The economy is broken. We finally elect a new president. President Obama tells us that if a stimulus package is not passed "our nation will sink deeper into a crisis that, at some point, we may not be able to reverse." All eyes are frozen on the President.


The economy is broken. We finally have a new Treasury Secretary. Treasury Secretary Timothy Geithner unveils a cunning plan to fix the economy that was months in the making but ends up being amazingly short on details. All eyes are frozen on the Treasury.


The economy is broken. Congress finally passes a massive stimulus program that borrows massive amounts of money from the taxpayers to bail the taxpayers out. All eyes are on frozen on Congress.


The economy is broken. President Obama tells us that although we clearly can't restore fiscal discipline right now, restoring fiscal discipline at some point in the future will be very important. All eyes are frozen on the President.


The economy is broken. House Speaker Nancy Pelosi tells us that Congress needs to "keep the door open" to another stimulus package. It may be necessary to borrow even more massive amounts of money from the taxpayers to bail the taxpayers out. All eyes are frozen on Congress.


The economy is broken. All eyes remain frozen.

This concludes Act II of the play. There will be a brief intermission to finish the production of Act III and rest the eyes of the actors. That "frozen in the headlights" look takes more energy than it might otherwise appear. In the meantime, cocktails will be served in the lobby. As part of the current stimulus package, all drinks are on the house!

You say alcohol isn't actually a stimulant? It's a depressant? Look buddy, if it's in the stimulus package then it is a stimulant. Okay? Stimulants cannot lead to depressions. Don't go looking for trouble.