Yesterday, we saw the two-week rally reignite after Treasury Secretary Tim Geithner rolled out his plan to help banks remove as much as $1 trillion in bad assets from their books. Also helping the markets was news that home sales increased as prices went down. Traders are happy to see any indication that the glut of available homes is easing.
Geithner’s plan is a partnership between the government and private, well-heeled investors which will buy up the bad bank debt. This plan will use $75 billion to $100 billion from the government’s existing $700 billion bailout program for the purchase of bad assets — resources that will be supported by loans from the Federal Deposit Insurance Corp. and a loan facility being operated by the Federal Reserve.
Under a typical transaction, for every $100 in toxic mortgage debt purchased from banks, the private sector would put up $7 and that would be matched by $7 from the government. The remaining $86 would be covered by a government loan provided in many cases by the Federal Deposit Insurance Corp. If you think this sounds a lot like the plan that former Treasury Secretary Hank Paulson tried to push, you’re absolutely right. It’s essentially the same plan with some new whistles.
As someone much smarter than me said:
“The Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt. So this isn’t really about letting markets work. It’s just an indirect, disguised way to subsidize purchases of bad assets.”
My take: In the longer term, this will not work, and will probably make things worse. It’s also a pass-through of your and my hard-earned tax dollars from the U.S. Treasury to Wall Street banksters including Goldman Sachs. But in the short-term, the rally it is igniting is quite real. We are seeing money rotate out of the dollar and into stocks. This is bullish for most commodities. And, of course, for stocks. As Bloomberg noted, this capped off the biggest 10-day rally for stocks since 1938.
Using more recent history, we have not had a 5%+ up month on the S&P since December 2003 — a streak of about 62 months. With a week left in March, and the SPX up +9%, we could end that cold streak. The last such month was December ’03.
MEANWHILE …
Nobel Prize-winning economist Joseph Stiglitz, the guy who should be our Treasury Secretary, gives his take on the latest plan from the insane clown posse who run the U.S. financial system …
“The Geithner plan is very badly flawed,” Stiglitz told Reuters. U.S. Treasury Secretary Timothy Geithner’s plan to wipe up to US$1 trillion in bad debt off banks’ balance sheets, unveiled on Monday, offered “perverse incentives”, Stiglitz said.
The U.S. government is basically using the taxpayer to guarantee against downside risk on the value of these assets, while giving the upside, or potential profits, to private investors, he said.
“Quite frankly, this amounts to robbery of the American people. I don’t think it’s going to work because I think there’ll be a lot of anger about putting the losses so much on the shoulder of the American taxpayer.”
Read the whole thing.
And then we get to today’s must-read. Steve Waldman explains in “Dark Musings” how he thinks the plan really works. WARNING: Only click through if you want to get ‘HULK-SMASH’ angry.
GOLD CHART
Actually, it’s a chart of the GLD. But gold has pulled back to its intermediate-term uptrend …
It looks like a buying opportunity. But the gold market was obviously manipulated last week. So, I’m hesitant to buy. I’ll give this one some thought.
Gold Falls Most in 2 Months as Equity Gain May Curb Precious-Metal Demand Gold fell the most in two months on speculation that a U.S. government plan to rid banks of toxic assets will spur investment in equities and erode the appeal of the precious metal as an alternative. Silver also declined.
IN OTHER, OTHER NEWS …
The New York Times has a great chart showing where the unemployed are in America. I see my home state of Florida is taking its licks.
Mortgage Lending in U.S. May Reach $2.78 Trillion This Year, Bankers Say Mortgage Bankers Association boosted its forecast for 2009 home-loan originations by $800 billion to $2.78 trillion, which would make it the fourth- highest year on record.
I don’t Twitter, but if I did, I would hope I’d be as good as actor Christopher Walken. His Twitter posts are hilarious.
Related Posts
- New Video: Is the Economic Crisis Over? (08/25/09)
- Update on AIG — The Latest Outrage (03/18/09)
- Stories to make you Hulk-Smash Angry (04/14/09)
- Why the Banks Are So Eager to Pay Back TARP Money (04/22/09)
- A Good and Golden Sunday Morning to ya (02/22/09)
{ 6 comments… read them below or add one }
Could you expound a bit on what you term manipulation of gold last week? I am clueless.
Sean, as a subscriber to both RH ETS and RH small caps I would like thank you for some great guidance since I have been a subscriber. I do have a quick question. If there is a large market sell off which many are still predicting and gold/silver hold up well during this sell off, will the associated mining stocks with gold/silver hold up as well or are they selling off with the rest of the market?
Congrats. First time (unless I missed it) that I’ve mention of gold manipulation by Sean. But I question if it indeed does exist, where does that leave gold investors. From the perfect storms on multiple fronts that have existed in the last couple of years, too numerous for my mention here, resulting in spikes that seem containable by manipulators, can they continues this affront on the free market? If governments and central banks are jumping into gold, where are the net sellers coming from? I would like to read more analysis of manipulation head on from you, Larry and the like instead of just buy signals that are subject to subsequent manipulation. Can gold really go to 1200, 2000, beyond. If we hit hyperinflation then all the talk about the inflation adjusted price of what gold should be will be just more talk, not money in my pocket.
Mike, I’ll answer your question.
On Wednesday of last week, the Fed announced it would buy as much as $1.15 trillion in bonds to lower borrowing costs, including as much as $300 billion in Treasuries. This is a sign that US debt will soar, and it hurt the dollar and sent gold soaring.
However, earlier in the day, gold sold off something fierce. On a technical chart, gold cracked the neckline of a head-and-shoulders formation. Not to get too technical, but it was a strong signal that gold was going lower.
So, a lot of traders, including me, took bearish positions. And we got blown out of the water when the Fed made its “surprise” announcement that it was buying Treasuries.
I put “surprise” in quotes because it sure looks like insiders knew what the Fed was going to do ahead of time. My theory is they sold gold early (using futures or the GLD), got it to give a “technical” sell signal, and then went in and bought a heck of a lot of gold at a cheap price just before the Fed’s announcement.
I have no proof of this. It just sure looks like it from the market action. It looks like short-term manipulation of a market that is small enough for that sort of thing — gold.
Usually, when people talk about manipulation of the gold market, they are talking about long-term manipulation by the central banks. I’m not speaking to that. I’m just talking about a gold market that is so crooked the floor traders must have to screw their pants on.
Where does this put US as gold traders? Again, I have no proof and maybe I’m wrong. And just becuase the game is rigged doesn’t mean we don’t play — otherwise, no one would gamble in Vegas. And short-term manipulation doesn’t matter much if you’re a long-term investor. But I’m going to give the gold market some time, and probably wait for a new weekly buy signal before going in again in Red-Hot Commodity ETFs, which is a short-term trading service.
That’s a good question, Steve. We saw in the Great Depression that gold miners with a sound financial structure remained good investments. But that doesn’t mean they can’t go lower. That’s why I’m recommending stops with most of my new recommendations in RGS, and keeping mental stops in my head for the others.
The risk of a large market sell-off is there. But it’s far from a sure thing. If the market behaved the way we thought it would, we’d all be rich.
Mike, I think gold has the potential to go much higher, ESPECIALLY if there is a financial crisis. There are three basic kinds of gold investments — physical gold, gold in ETFs and gold mining stocks. I recommend keeping a portion of your wealth in physical gold not as a way to get rich, but as a way to preserve wealth.