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Tradecraft by Jonathan Hoenig (Author Archive)
Bailouts: Throwing Good Money After Bad
Pricey Intervention Has Failed Miserably
It was March of 2008, one year ago this month, when the government originally stepped in with $29 billion to help bail out Bear Stearns. At the time, it seemed like a large number and a highly unprecedented move. Of course, $29 billion has become little more than a rounding error in the multitrillion dollar socialist coup that’s left a large proportion of the financial sector (and the economy in general) firmly in Washington’s hands. Backstop became bailout, bailout became control. Now Rep. Barney Frank (D., Mass.) isn’t just regulating the banks -- he’s running them.
How much money is that? Consider that the entire market capitalization of the S&P 500 is only around $6.4 trillion dollars, meaning that the government is now on the hook for a sum in excess of the entire stock market — and it’s already spent more than 30% of that solely just trying to “restore confidence.”
There is no objective evidence to suggest the intervention has been anything but an unequivocal failure. The only rationale proponents can muster is that, “Had we not intervened, things would have been much worse.” The S&P 500 is down nearly 45% since that first intervention. How much worse can it get?
The uncertainty continues. Just Friday, Washington unveiled yet another plan to shore up Citigroup (C), converting its already formidable stake in the firm into common shares —which promptly fell 39%. AIG (AIG) is poised to receive another $30 billion from TARP funds, and reports are swirling that the Obama administration is considering ways to — wait for it — bail out distressed auto-parts suppliers like Tenneco (TEN) Inc. and Lear (LEA).
Government intervention in the market has gone from merely erratic to absurd. No wonder many investors are simply throwing up their hands. As long as Uncle Sam is playing, it’s a game they cannot win.
Nowhere to Hide
Stocks have lost ground in 2009, with the Dow and S&P 500 both down nearly 20% in just two months. Yet wealth destruction isn’t just reserved for stocks these days. Even bond investors seeking the relative “safety” of U.S. Treasurys have lost money, with the Merrill Lynch Government Master Index having lost 2.72% in January and 0.36% in February, yielding a year-to-date loss of 3.06%.
Bonds also bombed:
Dow, S&P 500, Nasdaq and ML Government Master Bond Index – YTD Monthly Returns
Unhappy with the miniscule returns on money-market funds and anticipating inflation, more investors are betting on higher rates. ProShares UltraShort 20+ (TBT), the exchange-traded fund that corresponds to twice the inverse of the long-term Treasury (essentially a bet on higher interest rates) traded a few thousand shares a day last year. Today? It trades more than five million shares a day.
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC.
Order ReprintsI was interviewed on the matter previously by Bloomberg: Obama Rejects 'Car Czar,' Naming Geithner, Summers to Head Team
http://www.bloomberg.com/apps/news?pid=20601103&sid=aQHVRdBzyUxI&refer=news
and, as a 28 year auto industry veteran, thought to share what I believe can be done now to unclog the enormous log-jam of new vehicle inventory on-ground US factories and their franchised new vehicle dealerships so we can put our people back to work.
We have invested considerable time and effort developing a very deep and powerful auto industry prescrIption.
A Proposition to Save our Auto Industry - Andrew Gross, Chairman & CEO, Automotive Consulting Services, LLC.
On the matter of what's needed now to unclog inventories of existing new vehicles on-ground at dealerships and factory lots in the US set to put people back to work at US Company owned factories in the US (and elsewhere) A...(Read more of this comment)
Right now rigid opposition to any help from Washington, I don't think, is possible because, in fact, they have the money, whether they borrow it or print it. I am not one to believe the market will take care of it. The market is not holy; it is a conglomerate of human beings who are fallible. Small recessions may be solved by the market, but deep problems like the one we're in and especially like the Great One, need help, and as far as I can see, the government is the best choice we have.
I am probably w...(Read more of this comment)
Jonathan is usually right because those idiots in Washington are almost always doing the wrong thing; they make it too easy for him to be right!
In 1929 no one in government did anything, including Hoover, then president. We'll never know, but more involvement by government in 1921 might have stopped or softened 1929. If Hoover had done something in 1929, the GD might have been lessened.
Please give the current administration a chance. It has been barely two months. It seems some people expect to just add water, and everything will be all right. Please give the plan more time, and for God's sake cooperate, help, don't just stand by and criticize.
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