Video embedded below

Related posts:

• Bill Gross thinks the June unemployment data is bad
• Bill Gross: Fed on hold through 2010
• Bill Gross: Sell equities and buy Treasuries
• Bill Gross: “almost all assets appear to be overvalued on a long-term basis”
• The $1 trillion deficit: has Bill Gross gone crazy?

I want to take a break from banking and macro stuff and talk a little bit about technology. I wrote an article about Android a few weeks back. That was a more personal account on why I was switching from a Windows Mobile phone to Android, the latest whiz-bang operating system running mobile phones. (Don’t ask me why I stuck with Windows Mobile for so long – even I don’t know any more). This article is looking at the Android phenomenon more from a strategic perspective.

You may have seen the Verizon commercials on TV. They’re everywhere: Droid has arrived. And this happens to be a big problem for Apple Computer.

(In case you haven’t seen the commercials, here is one embedded below)

As you probably know, I am a bit of a technophile.  I’m that guy you remember from high school who was taking AP Computer Science and programming in Pascal, the guy you remember who always had the latest gadget. And I’ve done my stint in technology companies too. But, at heart, I am a finance guy and when I look at technology, I do so from a finance guy’s point of view.  That’s why I see the emergence of Android phones as significant. The recent flurry of announcements about hardware manufacturers adopting the Android platform has me thinking about Apple Computer and the 1990s again – and that’s not good for Apple.

The Macintosh

From the mid-1980s to the mid-1990s, I was a Macintosh user and an avid fan of Apple Computer and its products. I started using PCs only because incompatibility with my colleagues’ work product forced me to do so.  The Macintosh was miles ahead of the PC in user-friendliness and platform robustness. And Apple is a company that cares about customer service too.

But, forced to do so or not, I did switch to the PC, as did millions of others.  The reason: one company cannot compete against 100s. Apple refused to open its system and that limited production to Apple alone. Meanwhile, in PC world, you saw Compaq, Gateway 2000, HP, Dell, IBM, Toshiba, NEC, Packard Bell and a host of other vendors jumping onto the PC platform. Eventually, the PC was ubiquitous – and often incompatible with the Macintosh. How could Apple compete?  It couldn’t. Eventually, the Macintosh lost market share and became a niche product for die-hards, education and design.

Digital Music

But, Apple maintained its core competencies of user-friendliness, platform robustness and customer service. While PC makers were technology companies run by engineers, Apple was a consumer product company run by design and marketing. So, when Apple hit upon the digital music scene with iTunes and the iPod, it instantly became a success.

I am a big music fan. Because I tend to be an early adopter, I went all-in for digital music and CDs, buying my first CD player in 1988 – a top-rated Kyocera DA-610cx. When digital music hit the portable device market, I was there as well with my portable supposedly skip-free CD player plus car adapter. But, eventually I switched to Mini Disc and then on to Digital Audio Players. Remember the Diamond Rio 500?

The iPod

Then came the iPod. This was a ground-breaking product which was to digital music players what the Macintosh was to computers. It revolutionized the industry, bringing Apple Computer back to prominence as a technology company. The iPod became the dominant digital audio player (the hardware) – and with it, iTunes became the dominant digital music player (the software). It was almost like Intel and Microsoft rolled into one. Again, it was the product design and robustness of the iPod and the user-friendliness of Apple which made the difference.

Since then, Apple has successfully branched out into all manner of related spheres: video, podcasts, and most crucially digital music purchases and mobile telephones. They have also been very successful at integrating all of the platforms.

The iPhone – Android wars

But, everyone knows the standalone digital music player is passé. And iTunes, the digital music software application is free, a loss leader. The real money is going to come from digital music purchases and Apple’s mobile telephone, the iPhone. So, strategically speaking, this is why I see the flurry of announcements about Android phones as a problem for Apple.

Android is the Linux-based operating system developed by Google. it is now being implemented on a number of different platforms from internet tablets to low-end personal computers to mobile telephones. 

What I question is how Apple is going to compete in mobile telephones. Don’t let the hype around the Verizon Droid fool you. The phone, manufactured by Motorola, is a very good phone. But, it is only one of many that are now coming to market. There are also phones in the works from Sony Ericsson, Samsung, HTC, Dell, Garmin, LG, and a host of other manufacturers. Even Google is supposed to be coming forth with the much anticipated Google Phone – the phone designed to prevent the splintering of Android which doomed Unix as a consumer-based operating system.

To my eyes, this is looking like a repeat of the Macintosh-PC Wars of the 1990s which Apple lost. On the one side, you have Apple, competing at the high end and very concerned about platform integrity and control, and preventing other manufacturers from building its hardware. On the other side, you have another operating system designed for the lower end and installed on a host of manufacturer systems – which may or may not cause serious platform integrity problems down the line.  Who wins that battle?

In the 1990s it was Intel and Microsoft. And they went on to reap massive rewards as Apple foundered.  Today, Apple risks a repeat of this if it does not come out with a credible solution to deal with its burgeoning Android problem.

Related posts:

• Android gaining momentum on Apple’s iPhone
• Yahoo: run into the ground
• Walt Mossberg says Apple’s new browser Safari is fast
• eBay to cut 10% of its workforce
• Porsche and VW merge as auto consolidation continues

Hat tip Rolfe Winkler.

Related posts:

• Steve Keen and the spectre of terminal debt
• Steve Keen: On the Edge with Max Keiser
• Bloomberg News is still after the Fed for more disclosure
• Dilbert on the asset-based economy
• What does Mises say about trying to stimulate the economy out of recession

Below is a CNBC video with Meredith Whitney in which she joins Nouriel Roubini on the doom and gloom parade.  Over the summer, both Whitney and Roubini were fairly optimistic. In June I said:

Think of the consensus forecast as an anchor which restricts the outlook of any individual forecaster afraid of failing unconventionally.

In Roubini’s case – and this logic also applies to media darlings like Meredith Whitney – it does NOT pay to up the ante.  What Faber is saying is that they have already benefitted from the bold and unconventional contrarian market call they initially made.  There is little payoff and much risk from continuing on that path.

To wit, Whitney upgraded Goldman Sachs to a buy and by July she almost sounded bullish. But, things are vastly different now. The banking index is up some 136 percent, with many stocks doubling and tripling. Some are up nine times. This is way over the top.

In her interview with Maria Bartiromo, Whitney gives ample reason to expect significant headwinds in the financial services industry and the economy more generally. While I am less certain that we are presently seeing a secular move to consumer deleveraging yet as evidenced by recent retail sales and current account deficit numbers, there is no doubt that credit lines to small businesses and consumers have been cut as Whitney details. 

I have also been getting much gloomier about the prospect of a sustainable recovery as a result.

With fiscal belt-tightening on the agenda at states and municipalities and, now, federally, I expect a double dip in 2011 – a view Whitney shares.

The key question in financial services?

Maria Bartiromo: Do you think that the sector is adequately capitalized today?

Meredith Whitney: No way.

Maria Bartiromo: No way?

Meredith Whitney: No way.

She is bearish on bank stocks generally. As for relative value trades, Whitney says the trade was large cap banks over regionals until now. However, she says now is the time to reduce weight in large cap banks as the outperformance due to government backstops may be about to disappear.

A lot more in the video below. The interview with Whitney runs 11:47.

Related posts:

• Bill Miller and Meredith Whitney: The Bull and the Bear
• Meredith Whitney: “I would diversify out of financials here”
• Meredith Whitney seems onboard with the fake recovery
• Meredith Whitney: more bearish than ever, but…
• Is Meredith Whitney bullish now?

Marc Faber is in a bullish mindset, particularly on gold. In a wide-ranging interview with CNBC TV-18 in India, Faber talked about where he sees markets headed and why he thinks gold will never drop below $1,000 an ounce.

Private sector contracting while public sector expanding

This is the frame that Marc Faber puts on recent events post 2008 panic, namely that we are likely to see an era of increased government intervention. This is an echo of comments Bill Gross has been making for some time. We are seeing this stimulus on both the fiscal and monetary sides through fiscal stimulus programmes and quantitative easing worldwide.

The economy has not responded robustly given the size of stimulus, Faber says. Asset markets, on the other hand have. This sets up a clear dichotomy between ordinary citizens and those who benefit most from asset price appreciation on Wall Street and elsewhere in the financial sector. Moreover, the spill-over of asset price appreciation into commodity prices further constrains purchasing power for ordinary citizens.

Less certain about carry trade

Faber is less certain about the U.S. dollar carry trade. He sees a dollar overhang due to the enormous U.S. current account deficit and $7.7 trillion in U.S. dollar reserves as more the issue. Many are looking to sell these dollars and hedge their exposure in precious metals and other currencies.

Treasury bearish

The one area where Faber is bearish is U.S. treasuries. He says:

There is a risk that at some stage in 2010, the government bond markets (would) weaken considerably because I don’t understand why anyone who would now buy a 10-year US treasury at a yield of less than 3.5%. It’s a losing proposition. I also don’t understand why anyone could buy a 30-year US treasury at a yield of 4.4%. So I think that eventually yields will go up and this could disturb the stock market.

Not as bullish on equities

Given the huge uptick in share prices globally, Faber believes there is now limited upside going forward.  He says the risk/reward in equity markets at present is not favourable. Moreover, profit margins are cyclically high due to cost-cutting. Faber anticipates weakness in profits in 2010, causing earnings to disappoint and precipitating a correction.

Bullish on commodities and precious metals

His logic is as follows: cash is now trash with zero interest rates. So holding cash means underperforming.  Bonds present an unfavourable risk/reward.  Therefore, commodities and precious metals look attractive. One must also have equities exposure.

Interestingly, he makes a fairly explicit statement in favour of peak oil from about 1:40 in the second video below. The world is adding less in oil reserves than it consumes. That necessarily means a tighter supply/demand dynamic, especially given the demand in emerging economies for oil.

He uses a technical argument to make his money quote (in bold):

I believe that whereas in the past the USD 1000 per ounce level was kind of a resistance level, now it becomes a support level. I don’t think that you’ll see gold below a USD 1000 per ounce probably ever again.

So I’m actually quite positive. Maybe gold at this level is a better buy than it was at USD 300 per ounce in 2001.

Much, much more below.

(videos embedded below)

Marc Faber Interview: Part 1 (6:19)

Marc Faber Interview: Part 2 (5:42)

Sources

Gold will never fall below $1,000 an ounce: Faber – Live Mint

Gold won’t fall below $1000/oz level ever again: Marc Faber – Money Control

Related posts:

• Marc Faber says avoid financials and buy gold
• Marc Faber: I advise every American to hold his gold outside of the United States
• Marc Faber makes bullish comments on Bloomberg
• Marc Faber: “Monetary policy in the United States will stay expansionary”
• Marc Faber: “I am 100% sure that the U.S. will go into hyperinflation”

There are a lot of threads to tie together in today’s reporting of news in the auto sector.

General Motors has reported a third-quarter loss of $1.15 billion. But all indications are that car sales continue to outpace expectations in the United States.  Meanwhile, there are conflicting stories that GM both plans to pay back its bailout money, and to use it to help its ailing European operations. I will try to tie all these stories into a common thread.

First are the earnings. This is the first report by General Motors since leaving bankruptcy.  The results are decidedly mixed showing increasing sales, but a large loss and declining liquidity.

The video above points to losses and negative cash flow. But Bloomberg has reported that GM had significantly positive cash flow in Q3: $3.3 billion worth. Irrespective, sales are up.

The New York Times’ Deal Book says:

Excluding taxes and one-time items like the costs related to restructuring its dealership network, G.M. said its operations lost $261 million from July 10 and September 30. The loss in North America was $651 million.

For the entire third quarter, including the final 10 days of G.M.’s bankruptcy, the company said its revenue was $28 billion, up 21 percent from the second quarter.

In addition, retail sales have revealed that car sales in the U.S. are still relatively brisk for October despite the expiration of cash for clunkers. So, GM is benefitting from more sales, but is still not making money and still seeing cash go out the door. Obviously, they are going to need to cut costs even more, unless they count on sales returning to pre-crisis levels.  However, all indications are that they do, as CEO Fritz Henderson says revenue growth is their number one priority.

“We have significantly more work to do, but today’s results provide evidence of the solid foundation we’re building for the new G.M.,” the chief executive, Fritz Henderson, said in a statement. “With a healthier balance sheet and a competitive cost structure, our focus is on driving top line performance.”

See the Bloomberg video below for my comments by Henderson.

Meanwhile, in what should be seen as a PR move, General Motors has also announced it will begin repaying government money. The first $1 billion to be repaid in December. The company will make $1 billion payments to the U.S. government and $200 million payments to the Canadian government every quarter. It has said it could repay all the aid money by 2011, four years ahead of schedule. Presumably, this does not include the equity government stakes which can be sold on in the open market in an I.P.O.

Given the fact that General Motors is still losing money, it would make sense for them to delay repayment. However, I reckon they are going to repay early in order to tamp down criticism about their government-funded bailout.

The same is true in Germany as well as GM has also announced it will repay ALL German state aid before month’s close.  That is big. It significantly reduces the German government’s leverage over GM plans for restructuring in Germany.

This makes the recent statements about using bailout funds to bolster European operations seem inexplicable. If GM is losing money and needs to use bailout funds to plug up holes in Europe because it has decided to renege on an agreement to sell operations, why is it paying back bailout funds?  Is it not obvious the company needs the money?

My interpretation of GM’s actions is this: they are still a loss-making company and their cost basis is unprofitable at present sales levels. In order to return to profitability, they will need to further reduce costs or increase sales. At present, management have opted to grow the top line – and this makes retaining the European operations vital as the auto technology at Opel is considered first class.

So, GM has reneged on the Opel sale, risking the political backlash, because it is flush with bailout cash.  However, it knows that its desire to use these funds to stabilize the European business is likely to invite populist outcries in North America. This is why they have announced the repayment schedule today; it is purely a public relations maneuver to quell any anti-bailout sentiment. They are repaying German state aid for similar reasons, but also because it gives them greater flexibility in making operating decisions about job cuts and plant closures.

As GM is not publicly traded, we do not have stock prices as a gauge of how receptive investors are to these latest moves. But, according to Bloomberg, GM 8 3/8 bonds maturing 2033 jumped significantly, adding $2.63 to move to $20.3 on $100 par value.

You can expect to see GM as a topic in both the business and political press for some time to come.

Related posts:

• GM looks to use US and Canadian tax money to bailout Opel
• GM and Chrysler to get more bailout money
• GM headed for bankruptcy
• GM considers keeping Opel, raising capital
• Chrysler: bulls make money, bears make money, pigs get slaughtered

Max Keiser certainly has a way with words. In one of his latest TV appearances, using the colorful analogy of “Warren Buffett’s toilet paper,” he calls the U.S. dollar worthless.

He goes on to say that China is addicted to this worthless paper because they are using it to stimulate their domestic economy. In another memorable analogy, he labels this an “opium” addiction which will cost the Chinese dearly.

While the Chinese (and the Indians) are increasingly turning to gold as a currency alternative, it is fairly clear that China will have to eventually take an enormous haircut on its holdings of U.S. paper assets. One reason the Chinese are refusing to revalue the renminbi is their desire to forestall this eventuality – and with good reason. Last year, the Chinese central bank needed to go cap in hand to the Finance Ministry because the central banks U.S. dollar paper assets had so depleted the central bank of capital.

Keiser has a lot more to say. Very entertaining. Below is the video. It runs just under 5 minutes.

Related posts:

• China “serious about the plan to internationalise” Yuan
• China launches retaliatory investigation into U.S auto subsidies
• Japanese defend dollar’s status while China tears it down
• Quote of the day: China hopping mad about GSEs
• China wants to get rid of the dollar

Bill Gross of Pimco spoke on Bloomberg with Tom Keene and Ken Prewitt. He thinks the U.S. is entering a new normal of low nominal GDP growth. However, financial bets have been made on 6-7 percent nominal GDP (think pension liabilities).  Unless we get 5-6% nominal GDP growth debt deflation and deleveraging dynamics (the D-process)will take hold, Gross says.

This is not a bullish scenario for equities as revenue growth is based on nominal GDP, meaning profit growth must come from trimming expenses and a secular increase in already high profit margins. Lower interest rates are the only other way to improve the net present value of future profit streams.

Pimco is dipping a toe into equities, however.  Gross remains cautious on high yield, which he sees as fully priced (buyer beware) a.k.a. overvalued. Mortgage backed securities are also overpriced in his view.  That leaves you emerging markets, corporates, and treasuries in the bond area.

So the Fed will be on hold because they need to see at least 4-5% steady nominal GDP growth, something unlikely to occur before the end of 2010, Gross says.

Video below.

Se also: Bill Gross Says Value Diminishing in Credit Markets – Bloomberg

Related posts:

• Gross isn’t buying corporates, high yield or equities even with zero rates
• Bill Gross: Sell equities and buy Treasuries
• Bill Gross: the new normal means investors should shun risk
• Bill Gross: Government intervention in markets will last
• The $1 trillion deficit: has Bill Gross gone crazy?

The long-coming commercial real estate bust has arrived in the U.S. and elsewhere, a result of sky-high prices met by a severe downturn.  Prices could only work in a best-case economic scenario and large busts are now coming (see my posts on Stuyvesant Town and Capmark Financial).

This bust is certainly another major impediment to a sustained recovery – along with a host of other wild cards like unemployment, trade conflict, and oil prices. But, the most worrying aspect about the CRE market is the marks on the balance sheets of our capital-constrained banks, which do not reflect the level of distress evident in the marketplace. And since securitization plagues the CRE market, some analysts expect bankruptcy to be the only workout option for many troubled deals. You will recall, this problem with securitized assets is a dynamic which has also plagued residential real estate (see posts here and here).

The video below explains how this real estate bust is different and what it will mean for the U.S. economy and likely bank failures. (Sorry that it starts automatically. If the wrong video pops up, see the link below).

Related posts:

• Circuit City as canary in the coalmine for commercial real estate
• Commercial Real Estate bust
• Commercial real estate is next
• Commercial poperty ‘im Visier’
• Commercial real estate: down even more than residential

This is pretty funny. Hat Tip Rob Johnson and New Deal 2.0.

Source

Money performed by Cypress Hill – Answers.com

What does "dollar, dollar bill, y’all" mean? – Yahoo! Answers

Related posts:

• Simon Johnson: Too big to fail is “too big to exist”
• Application for the Federal Bail Out Program, 2008-2009
• Dilbert on the asset-based economy
• Bank of America cuts its dividend
• Saturday Night Live Grades the Stress Tests

The Motorola Droid is the so-called iPhone killer. Is it the real deal?  Mossberg seems to think so.

See also: Motorola’s Droid Is Smart Success for Verizon Users – Walt Mossberg, WSJ

Related posts:

• Mossberg: Palm Pre to Rival iPhone
• Walt Mossberg says Apple’s new browser Safari is fast
• Walt Mossberg reviews the new iPhone
• Walter Mossberg: Top 2009 Gadgets
• Android gaining momentum on Apple’s iPhone

Josh Rosner, a Managing Director at Graham Fisher & Company, an independent research for institutional investors in financial service assets, has some pretty strong words for the reform legislation proposed by the Obama Administration and now making its way to Congress. On Bloomberg, he said it favors large too big to fail institutions and hurts smaller community banks. In sum, he calls it “the single worst not-yet passed piece of legislation” he has ever seen in financial services. Pretty harsh words.

Tim Geithner defended the proposal to a skeptical Congress yesterday, saying that we need large institutions to compete internationally and that the companies should be regulated rather than broken up. When asked why Obama is not proposing that systemically dangerous firms be broken up, Rosner says it’s regulatory capture (something Arianna Huffington and Eliot Spitzer have argued for months).

Rosner also notes that the proposal increases the power of the executive branch giving them “unlimited authority,” which Congress pushed back on during Geithner’s testimony yesterday.

The most worrying charge that Rosner levels has to do with what he sees as an implicit government subsidy for TBTF institutions that puts them in a situation akin to Fannie and Freddie before the crisis. This gives them a large funding advantage over smaller firms, allowing them to generate excess profits and/or take higher risk.

See also “Guest Post: Conservatives and Liberals Agree: Proposed Bank Oversight Bill Will Make Things Worse” on Naked Capitalism.

Rosner’s video is below.

Related posts:

• Video: Geithner calls for single agency to oversee systemic risks
• Obama caves to pressure on consumer financial protection
• Why not protect the homeowner?
• Greenspan: “If they’re too big to fail, they’re too big”
• The U.S. financial system is effectively insolvent

Yesterday, Moody’s cut the outlook for the sovereign debt of Portugal and put Greece on negative watch for a downgrade, signaling growing concern over spiraling debts. Just as with Spain and Ireland which I discussed yesterday, Portugal and Greece are smaller countries within the Eurozone with large fiscal problems due to the recession. For example, the Wall Street Journal says that Greece expects a budget deficit of 12.5% of GDP this year – that’s more than 4 times larger than the limit set by the Maastricht treaty.

Bonds sold off on the news. The Wall Street Journal reports:

The news spooked investors in government bond markets. The yield spread between 10-year Greek government bonds and comparable German government bonds, or bunds, widened to 1.42 percentage points from 1.36 points. The impact was milder on Portuguese yield spreads, which widened to 0.56 point from 0.54 point against German bunds, because a possible downgrade appeared less imminent.

Moody’s said it hoped to complete the review process promptly, and within three months in the case of Greece. It added that it might keep Greece on a negative outlook even if it decides upon a downgrade.

Standard & Poor’s downgraded both Portugal and Greece in January, while Fitch downgraded Greece last week and revised its outlook on Portugal to negative in September.

And we should certainly expect these downgrades to continue. Back in January, when Portugal was downgraded, the spread to German Bunds moved out to a 12-year high of 146 bps. We are now only 4 beeps lower than that. So, that sounds bearish for their bonds. However, their is a silver lining as Peter Schaffrik of Commerzbank explains in the video below.  Bond investors are incredibly starved for yield and that means there is a good bid for these sovereign issues as they offer relatively more yield pickup than German Bunds.

On the other hand, Chris Wyllie of Iveagh says he is zero weight in bonds now because even these bonds and corporate issues simply do not have enough yield to make them attractive.

You should see this as further evidence that stocks are being artificially buoyed by an increased risk appetite driven by low interest rates.

Related posts:

• Spain can’t sell its bonds
• More trouble in the Baltics as S&P downgrades
• Treasury yields go below zero
• Baltics: Fitch downgrade and more downgrades to come
• Corporate defaults mean more hedge fund blow-ups

Elizabeth Warren, chair of the Congressional Oversight Panel, is certainly looks to be fighting the good fight. At the conclusion of the Buttonwood Gathering in New York on Fixing Finance, she met with Tech Ticker’s Aaron Task and gave him quite an ear full.

Listen to what she has to say about the way the lay of the land.

On the Obama Administration’s victory lap:

• “It is not the case people go to bed wondering if there will be an economy in the morning," she quips, but "we still have lot of serious problems."

On the banks:

• “They have all the money. they have all the lobbyists.”
• “I don’t understand how they can’t see that the world has changed in a fundamental way – it’s not business as usual. All I can say right now is they seem to be winning this argument.”

On housing:

• "We see things getting worse in the housing market."
• "We have to get foreclosures under control."

On this moment in history:

• “This is a moment when all around the country people are saying we’ve had it about up to here with these large financial institutions that want to write the rule then take our money. I find it astonishing that they have the nerve to show up and say, ‘I’m a big financial institution. I took your money. And now I’m going to lobby against anything that might offer some protection to ordinary families in this marketplace.”

More below in the three part interview. Links below.

Source

Wall St. Is Winning: Elizabeth Warren "Speechless" About Record Bonuses – Tech Ticker

Warren: Housing Market Getting Worse – Tech Ticker

"Astonishing" That Big Banks Are Taking Taxpayer Money, Writing the Rules, Warren Says – Tech Ticker

Related posts:

• Warren: Banks have “shattered” our trust
• A conversation with Elizabeth Warren on Charlie Rose
• Blodget interview with “the man who destroyed my Wall Street career”
• Independence Weekend Massacre: 7 banks seized
• Insurance companies now feeding at the TARP trough

In one of my latest posts I said “greed is not good.” Quite frankly, I looked at this statement as self-evident in the wake of an economic catastrophe where greed was a defining element.  Yet, a remarkable number of people commented in defense of greed; they seem to believe greed is a good thing. So, I would like to clarify a few things about greed in the context of the recent financial crisis and prudent regulation of the financial industry.

Greed is not good

Greed is defined as:

• A selfish and excessive desire for more of something (as money) than is needed (Merriam Webster)
• An excessive desire to acquire or possess more than what one needs or deserves, especially with respect to material wealth (Free Online Dictionary)
• The selfish desire for or pursuit of money, wealth, food, or other possessions, especially when this denies the same goods to others. It is generally considered a vice, and is one of the seven deadly sins in Catholicism. (People who do not view unconstrained acquisitiveness as a vice will generally use a word other than greed, which has strong negative connotations.) (The Free Dictionary)
• The obsession with accumulating material goods (Access-Jesus)

Do you notice the commonalities in all these definitions? Excessive, selfish, more than what one needs or deserves, unconstrained, obsessive.  You can make the non-judgmental argument as I did that greed is neither good nor bad. But, in what twisted world view is any of this good?  Greed is not ambition or hunger or drive. Greed is by definition excessive and unconstrained, and, thus, leads to unstable and suboptimal outcomes. Greed is not good.

This version of the definition was quite telling:

Greed is something that can never be satisfied. Greed and slothfulness have similarities in definition. The greedy and slothful both crave material goods as well as they have no desire to work for or to exchange anything of value for the object of their desires. The slothful will not work even for basic necessities much less add value to the world around them. The greedy will use deception to acquire material goods. The greedy will lie and use false pretenses to acquired goods at the expense of others.

For more on this, see the Seven Deadly Sins.  And just to make it clear, greed is antithetical to the core beliefs of all major religions in the Indo-European world. Why Americans who are ostensibly religious think ‘excessive wealth accumulation’ is in keeping with the tenets of their faiths is beyond me.

Free market ideology is a religion

This is where the financial system comes into play. Back in 1987 when Oliver Stone made the movie “Wall Street,” he intended Gordon Gekko to be an anti-hero emblematic of a period of excess. Yet, for some reason Gekko has since become a hero worthy of emulation amongst Wall Street’s entrants. Why has this ‘greed is good’ anti-hero become the man to emulate?

Let’s go back to what Jared Diamond says about how kleptocracies maintain power:

“1. Disarm the populace, and arm the elite.”

“2. Make the masses happy by redistributing much of the tribute received, in popular ways.”

“3. Use the monopoly of force to promote happiness, by maintaining public order and curbing violence. This is potentially a big and underappreciated advantage of centralized societies over noncentralized ones.”

“4. The remaining way for kleptocrats to gain public support is to construct an ideology or religion justifying kleptocracy.”

Method number four, construct an ideology or religion justifying kleptocracy, should stand out for you. The religion, of course, is free market ideology. Now, I happen to believe quite fervently in the primacy of liberty and freedom over the the coercive power of the state. However, I see the free market as a means to an end not as an end unto itself.

In my post “Deregulation as crony capitalism” I said:

Obviously, if some always have more power and wealth than others, there is never a situation in which the economic playing field is level. Moreover, it is axiomatic that those with the means and access will always have greater influence over government than those without. So, in a very real sense, the socioeconomic elite of any advanced, stratified society will always  have disproportionate control of the economic and political system.

By that, I meant that a society with a perfectly free market is a fiction which is used to justify the theft from those with less access and power by those with more. It is an ideology which has never had any real world manifestation in any stratified society in history. To believe that markets are or should be completely free is to de facto believe that those with greater access and wealth should be free to use this access and wealth to bend the system in their favor.

Trust but verify

Regulators are there much as police officers, sports referees or teachers on schoolyard playgrounds are: to make sure people follow the rules or suffer the consequences. 

When I wrote the ‘Greed is not good’ post, one reader responded that regulation was unnecessary; market discipline is the only regulation we need.

Is market discipline alone going to prevent mortgage finance companies from engaging in predatory lending?  Is market discipline alone going to prevent mortgage originators from making bad loans, knowing they can offload the risk in the securitization market? Is market discipline alone going to prevent bank holding companies from retaining excessive leverage? No, it is not. The credible threat of the regulator is necessary.

“Speak softly and carry a big stick; you will go far."

So what about Lehman?

The Lehman decision was disastrous because it produced anarchy that resulted from the uncertainty of government action. I wrote a detailed post to this effect. When Lehman Brothers failed, I said the day after:

Yesterday was a volatile day in the global financial markets. With the Nikkei down 5% and European bourses down 2% in overnight trading, we should understand that more volatility awaits us in the coming days and weeks.

As I survey this situation in serene tranquility away from market turmoil, I realize that I am very troubled by how the Lehman Brothers bankruptcy was handled. In my estimation, it was like putting the cart before the horse – allowing a financial institution to fail before you have worked out a mechanism of how to deal with that failure.

This one action will expose the global financial system to enormous additional risk.

Hank Paulson at the U.S. Treasury and Ben Bernanke at the U.S. Federal Reserve wanted to avoid the moral hazard of supporting the acquisition of a failed institution with government funds as it had done when JP Morgan Chase bought Bear Stearns. Therefore, Paulson and Bernanke were both fairly adamant about not offering any backstops for a Lehman Brothers takeover.

This is the principal reason both Bank of America and Barclays decided not to pursue a takeover of the firm. And this is also the reason Lehman Brothers failed. Had the U.S. government offered guarantees on Lehman’s debt, Barclays or Bank of America would have bought Lehman Brothers. In fact, I reckon BofA would have preferred to buy Lehman Brothers over Merrill Lynch as the price tag was much lower.

Were Paulson and Bernanke correct? After some time to digest events, I must answer no. They were wrong.

They were wrong for three principal reasons:

1. The U.S. government has failed to provide a framework and process for dealing with failed institutions of this size and the impending wave of future bankruptcies it should expect.
2. Failure will lead to asset liquidation, depressing asset prices further and putting further pressure on the remaining solvent financial services firms to writedown asset values.
3. This will potentially result in a Great Depression-like chain of failures, credit contraction and asset liquidation.

Rather than learning from the Great Depression, we are likely to repeat it.

Why we need a framework and process
It is clear from the difficulties facing AIG and Washington Mutual right now that further large failures are likely to occur.

In the case of AIG, we are presented with a potential derivatives nightmare as this $1 trillion firm has its tentacles in all manner of Credit Default Swaps, Collateralized Debt Obligations and insurance products generally. AIG represents a much more ominous case of potential systemic risk than either Bear Stearns or Lehman Brothers.

Washington Mutual is a large bank with $300 billion in assets. It is very leveraged to Alt-A and pay-option mortgages. Unlike subprime mortgages, which have seen the maximum number of interest rate resets, the majority of these products are resetting to higher interest rates now and in the future. This means a significant number of defaults in the sector will occur and that Washington Mutual will be stressed by these events. That may create liquidity or capital concerns which would force WaMu into insolvency. Were WaMu to be declared insolvent, the FDIC would need to be bailed out as it does not have adequate funds to deal with the likes of Washington Mutual.

These two institutions are suffering even more as a result of the uncertainty that allowing Lehman Brothers to fail has created. Due to investor and counterparty jitters, AIG and WaMu are now more likely to fail than had Lehman Brothers been rescued. This fact and the systemic risk that AIG represents and the threat to the FDIC’s adequacy that WaMu represents makes the need for a government bankruptcy framework and process more evident.

A too big to fail resolution process is needed

By and large this is exactly how things played out. AIG and WaMu both went bust and a Great Depression-like chain of events unfolded. Only due to herculean efforts and extreme government intervention was worse averted.

The problem with Lehman was not that Lehman was declared insolvent and put into bankruptcy, but rather that no adequate resolution process for the firm was in place to address this too-big-to-fail institution’s collapse without precipitating a market panic.

When a systemically important institution faces collapse there are three potential avenues a resolution can take:

1. Anarchy. Allow the company to fail spectacularly without any planning whatsoever so that the whole financial system faces financial Armageddon. The hope is that this solution does not produce despotism, war or famine. Let’s call this unpreparedness. This is what was originally tried with Lehman Brothers.
2. Crony Capitalism. Prop the institution up through bailouts, government backstops and guarantees, creating a moral hazard so that other banks know they too need to be too big to fail in order to avoid the consequences of market discipline. Let’s call this kleptocracy. This is what happened to AIG, Citigroup, and Bank of America after Lehman’s failure created panic.
3. Free market. Stop poor or potentially illegal lending and excess credit growth and risk through prudent regulation in order to prevent a spectacular bust and crisis. But, if presented with a bust, allow the institution to fail and potentially be liquidated in a controlled resolution process. This is what I am advocating. I see this as a more realistic free market solution.

What was needed when Lehman failed is also what is still needed today: a robust too big to fail resolution process. This should be priority one for regulatory reform in order to restore market discipline and reduce moral hazard. The heads of Standard Chartered, JPMorgan Chase and the FDIC understand this. Yet, there has been zero discussion of this issue in Congress.

What might this process look like?

1. Lay out specific rules regarding the provision of liquidity by the central bank at a penalty rate of interest or collateral to prevent bankruptcy if the true problem is liquidity and not solvency.
2. Set up a special court for adjudicating bankruptcies of large financial institutions quickly.
3. Mandate guidelines on haircuts equity and subordinated debtholders must take before any taxpayer money is used.
4. If liquidation is necessary, require a strict timetable for milestones in the process.
5. Set strict guidelines on what if any government guarantees a bankrupt or soon to be liquidated organization should receive and what the government should receive in return as compensation.

These are just a few ideas.  The point is that a robust TBTF resolution process can definitely be crafted if the effort is made. Future Lehmans can happen in the future without bringing the whole system down.

Lehman will happen again

Below is a 40-minute panel interview I did with Canadian TV station TVO and its program “The Agenda with Steve Paiken” just over two weeks ago. The questions: Saving Wall Street but forgetting Main Street? One year after the financial sector came close to collapse; could it happen again?

The answer is yes and yes.

Alan Greenspan was right when he reviewed lessons learned from Lehman’s collapse and said about the excesses leading up to the crisis:

It’s human nature, unless somebody can find a way to change human nature, we will have more crises and none of them will look like this because no two crises have anything in common, except human nature.

But let’s not absolve ourselves of the need to take action to prevent the negative fallout as Greenspan attempts to do. If we set the right course, we can also prevent a future economic crisis from being as severe as this one has been.

Related posts:

• Quote of the day: Gordon Gekko – greed is good
• Why Lehman failed
• The U.S. financial system is effectively insolvent
• Greed is not good
• Lehman missed out on $5 billion from Korea

Below is a YouTube clip featuring Elizabeth Warren, the chair of Congress’ oversight panel of TARP (the Troubled Asset relief Program), the bailout started by Hank Paulson and passed by Congress.  In it she talks about her fears regarding the lack of real regulatory reform in the world of finance and how this is setting up the destruction of the middle class in America.

Her argument about the shaking down of the middle class is the same one I made in the post about greed. She has long been a champion of the middle class. I recommend the compelling book she wrote with her daughter called “The Two Income Trap,” which gets at the heart of why middle class families have become so indebted in the United States.

I don’t think Warren is out to score political points (at least not against the Obama Administration as she is a Democrat). But, she is not convinced the Administration is committed to reform and has decided to speak out to help encourage a greater will to reform. To be fair, I should point out that progress on this front was made today in OTC derivatives. And Larry Summers has been waxing prosaically about the middle class as well. But, her depiction of earlier conversations with Tim Geithner are telling in regards to her worries (H/T Zero Hedge).

Related posts:

• Did Larry Summers fire derivatives whistleblower at Harvard
• Is Bernanke Toast? If he is, Summers is a shoo-in
• Ratigan, Spitzer and Huffington think Obama is captured
• Why not protect the homeowner?
• Deregulation efforts from the late 1990s were blocked

I recently switched from a Windows Mobile telephone to an Android-based mobile phone.  When I was making the switch, I had to decide whether I was going with the iPhone, which my wife uses. or to run with Blackberry or Android, a Google-centric operating system (Symbian, which runs Nokia phones, and the Palm-based OS look like losers and I don’t want to get caught with limited app choice or upgradeability).

I liked the iPhone but the lack of keyboard made Blackberry look inviting. In the end, what sealed the deal for me was the apparently anti-competitive behavior of Apple and AT&T in declining to accept Google Voice as an App for the iPhone.

• Apple Is Growing Rotten To The Core: Official Google Voice App Blocked From App Store
• FCC Takes On Apple And AT&T Over Google Voice Rejection
• Why The FCC Wants To Smash Open The iPhone
• Andy Kessler: WSJ: Why AT&T Killed Google Voice
• Apple Isn’t Even Bothering To Lie Anymore

Why should I reward companies which are engaging in this type of behavior with my business?  Apple is already acting anti-competitively by tying iTunes to the iPhone and iPod. So I went elsewhere.

Android is an open-source software system, which means that the code is available for everyone to see, which gives developers maximum flexibility. It also means that Google can’t win the OS war by making your life more difficult and tying you into their system like Microsoft and Apple do. Instead, they must compete to be the best at what they do.

And they are doing that well.  The video below from Bloomberg features Nicholas Thompson of Wired Magazine telling us why Android is gaining ground on Apple.

Related articles

Google enables Push Gmail for iPhone & Windows Mobile – Download Squad

AT&T Risks Losing Voice To Skype – Wall Street Journal

Related posts:

• Apple: Can it stop the Android menace?
• Mossberg: Palm Pre to Rival iPhone
• Walt Mossberg says Apple’s new browser Safari is fast
• Walt Mossberg reviews the new iPhone
• Why GM is repaying bailout money while it is still loss-making

Pete Cashmore launched a blog called Mashable from his home in Scotland in 2005.  You may have seen the articles from the site in the links from time to time. Well, this happens to be the number 1 social media-focused blog on the Internet, usurping prior leader TechCrunch’s position. Cashmore’s site gets 10 million page views a month and is highly profitable. His Twitter page has 1.6 million followers and rising.

In the video below, he talks to Bloomberg about his take on social media, blogging and the Internet. He sees the web as a meritocracy where anyone who has something valuable to say can succeed if they work hard at it.  New media like blogs are more interactive and democratic and provide a better sense of community than traditional media outlets. Well said, Pete.

Related posts:

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Roger Bootle sat down with the Telegraph and ran through a few themes in regards to the stock market, the financial crisis, government debt, currencies and compensation in the financial sector.  He has a lot to say, in particular on banks, which he argues do not operate in competitive markets – one reason they pay so well. He argues there is a cartel of too big to fail institutions which should be broken up.

The video of his comments runs just over five minutes. Catch his book “The Trouble with Markets” at Amazon. A link to the article accompanying the video is below.

Does banking contribute to the good of society? – Telegraph

Related posts:

• Greed is not good
• More on why big capital markets players are unmanageable
• Are European banks sitting on 16.3 trillion in toxic assets?
• Regional banks: Zions falls
• Doubling down at AIG

The Reserve Bank of Australia unexpectedly raised rates by 25 basis points to cool down its economy. It will “gradually reduce stimulus” in anticipation of sustained recovery. Australia has probably been the major economy least affected by the global economic slowdown, so one would expect the RBA to be the first major central bank to increase rates. However, the question now is whether other central banks will follow.

In the U.S., Donald Kohn and Richard Fisher have made fairly hawkish statements suggesting that the Federal Reserve is going to be more anti-inflation now than in the Greenspan era.  However, New York Federal Reserve Chairman William Dudley obviously didn’t get the memo about jawboning the market in a hawkish way.  Yesterday, he indicated that the U.S. Federal Reserve is likely to keep rates very low for a prolonged period for fear of choking off a tenuous recovery.

So while the RBA is raising rates, the Fed and the ECB may not follow anytime soon. That is certainly supportive of the Australian dollar.

Below is a CNBC video that gives you a chance to see the real-time reaction to the RBA’s decision and another with some commentary on the Aussie dollar.

Related posts:

• Reserve Bank of Australia lifts rates again
• The ECB cuts rates 50 basis points to 2 percent
• Is the Fed just jawboning?
• Chart of the day: interest rates
• Norway makes three

Janet Tavakoli was a recent guest on “On the Edge with Max Keiser” and had some troubling things to say about the state of the present U.S. financial system. 

She believes the liquidity pumped into the system will not be sufficient to reflate the economy because of over-leveraged U.S. households. The real burden of debt is already increasing as nominal GDP contracts.  This means the system is now more fragile than ever.

Meanwhile, banks have been recapitalized in an effort to save the system when mechanisms to organize a bankruptcy resolution process for too big to fail institutions would be much less costly for the economy. This is a topic I covered in a recent post.

Steve Keen told Max that the only way out of this is a debt jubilee – a notion I believe is a political non-starter. So expect this end in a debt deflationary scenario as the Fed and other central banks are not yet getting any traction except in asset prices.

Below is the video of Max Keiser talking to Tavakoli by phone.  Tavakoli provides some enlightening words about fraud, derivatives, and broker-dealer bankruptcy. The video runs about 10 minutes.

Related posts:

• Janet Tavakoli: C-Span Q&A
• Steve Keen: On the Edge with Max Keiser
• Citi agrees to do cramdowns
• Forstmann on Charlie Rose: easy money caused crisis
• Chicago Tribune near bankruptcy

This is how the famed investor and Chairman of Tiger Management began an interview with CNBC yesterday. Yes, the recession is probably over, he says.  But, in his view there is likely to be problems going forward because the U.S. has so much debt.

The money quote: “It’s almost Armageddon if the Chinese and Japanese don’t buy our debt.”

I am not sure I agree because a recession caused by a fall in the dollar’s value will almost certainly mean a reduction in imports and an increase in savings and domestic purchases of government bonds, something we are already witnessing.

As to inflation versus deflation, consider Robertson an inflationista. He is betting on inflation going higher in his investments. “We could easily see 15 to 20” percent inflation if the Chinese and Japanese go on strike, Robertson says.

Below are both the short video, which runs for the first eight minutes of his interview, and a longer full 30-minute version beneath it.

Related posts:

• China cuts holding of U.S. Treasury securities
• Japanese defend dollar’s status while China tears it down
• Mea culpa on the need for a new currency
• China sovereign wealth fund diversifies into a massive loss
• Faber: Gloom, Boom or Doom?

In what is shaping up to be a common occurrence at these global meetings, protesters are shaking things up.  My understanding, however, is that there are more police on hand than protesters.  Rubber bullets, pepper spray and tear gas have been used.

Below is a five-minute video showing the mood surrounding the G-20 summit in Pittsburgh.

Related articles

Trouble breaks out at G20 summit – BBC News

The G20 Summit in Pittsburgh: Should You Care? – Simon Johnson

Related posts:

• Violence erupts in Iceland
• Simon Johnson: Too big to fail is “too big to exist”
• Baltics: Violence from an Argentina-style collapse
• Ahead of G-20, China blames west and west blames China for meltdown
• Violence erupts in Latvia

Mark Mobius is one of the most famous Emerging Markets investors and right now he is bullish on Emerging Markets despite a huge rally in shares from late last year. Mobius turned bullish right as shares troughed and has remained so ever since.

Mobius likes the so-called ‘Frontier’ Markets more than the well established BRICs.  He mentions Kazakhstan, Romania, Kenya and Vietnam as examples. Below is a video of Mobius from the Telegraph, explaining that investors need to take a five-year view and be prepared for lower liquidity and extreme volatility (20 or 30% corrections) to profit.

Note that his reasons to be bullish are:

1. Money printing globally will underpin shares (a view Marc Faber also holds)
2. “Derivatives are not dead. There are $600 trillion worth of derivatives out there,” according to Mobius. As a result, leverage will goose returns supplied by the money printing.

Both of these are technical factors that do not speak to the underlying fundamentals.  It does suggest that government action may be the dominant force in markets for some time to come, a view espoused by Pimco’s Bill Gross.

The video runs just over five minutes.

Related posts:

• Mobius: Emerging market stocks are breaking out
• Marc Faber makes bullish comments on Bloomberg
• Marc Faber on passing the baton to emerging economies
• Whitney Tilson of T2 Partners, a new media darling, strikes a bullish tone
• Fred Hickey: Gold starts secular bull, tech ends secular bear

How about all three. Faber released another provocative newsletter this month that has a little grist for investor of all stripes.

Boom. His short-term outlook is bullish because he believes money-printing will underpin the market even after the 60% increase in the S&P 500 from March 2009 lows. This puts him in the same camp with Rich Bernstein and Jim Grant. Interestingly, he says that a “very weak” economy is best for stocks because it will induce more money printing from central banks.

Gloom. However, he says this will only make matters worse over the longer-term as the U.S. government has no stomach for reigning in budget deficits expected to reach $2 trillion. It is merely underwriting the bankers’ mistakes. Down the line a point of debt revulsion will come.

Doom. In five to ten years, Faber sees major problems as a result.  In the September Gloom, Boom & Doom report he writes:

The future will be a total disaster, with a collapse of our capitalistic system as we know it today, wars, massive government debt defaults and the impoverishment of large segments of Western society.

Let’s call this Financial Armageddon. While he certainly presents a dire worst-case scenario, I sympathise with this view because, as I have warned in the past, unsustainable debt bubbles like the one we are now witnessing usually end in depression, war and strife.

Below are three videos of Faber on Bloomberg earlier today spinning his tale of waste and woe.  Pretty entertaining and they run twenty minutes in total.  Faber likes drug stocks.  He thinks that bonds and cash will be the worst long-term investments because of inflation.  Faber also would be overweight Asia as he believes emerging markets will grow faster than the West.  He has good things to say about Goldman. “They are really a smart group of people.”

See also Bullish Today, Marc Faber Is “Highly Confident” the Future Will Be Very Bleak and the attached video at Tech Ticker with Aaron Task. Faber gives another entertaining performance there as well.

(three videos embedded)

Related posts:

• Marc Faber: “A huge move is coming in the dollar, in bonds and in equities” but…
• Marc Faber: “Monetary policy in the United States will stay expansionary”
• Marc Faber: China’s numbers are fake
• Marc Faber: “I am 100% sure that the U.S. will go into hyperinflation”
• Mobius: Still bullish on Emerging Markets