Wall St vs Main St

With the overnight failure of the bailout plan in the US House of Representatives, it looks like the stock markets are going to have some major, um, challenges in the next couple of days.

Although – I am critical of the plan (privatise profits, socialise loses), the failure to act will probably have vast ramifications on the world economy. I cannot help but think that the money would be better spent trying to help those who have got into trouble in the first place. That is, help the people who’s homes are in danger of being repossessed. Help Main St, that way – Wall St will be able to recover. What point is there in having a thriving Wall St if the people on Main St are without homes or money to spend.

And I guess my super will not be looking so super at the end of the market today.

I also wonder how this will play out in the presidential polls. My guess (if the posts on the US blogs at politico and huffington are anything to go by) is that McCain is going to suffer badly over this. Most seem to be saying that McCain now has to suspend his campaign again, as he said he would not campaign again until a deal is reached.

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27 Responses

  1. The Financial Times has run an article by George Soros titled
    Paulson cannot be allowed a blank cheque. In simple terms Soros oozes credibility and Paulson doesn’t.

    Soros writes:

    Hank Paulson’s $700bn rescue package has run into difficulty on Capitol Hill. Rightly so: it was ill-conceived. Congress would be abdicating its responsibility if it gave the Treasury secretary a blank cheque. The bill submitted to Congress even had language in it that would exempt the secretary’s decisions from review by any court or administrative agency – the ultimate fulfillment of the Bush administration’s dream of a unitary executive.

    Mr Paulson’s record does not inspire the confidence necessary to give him discretion over $700bn. His actions last week brought on the crisis that makes rescue necessary. On Monday he allowed Lehman Brothers to fail and refused to make government funds available to save AIG. By Tuesday he had to reverse himself and provide an $85bn loan to AIG on punitive terms. The demise of Lehman disrupted the commercial paper market. A large money market fund “broke the buck” and investment banks that relied on the commercial paper market had difficulty financing their operations. By Thursday a run on money market funds was in full swing and we came as close to a meltdown as at any time since the 1930s. Mr Paulson reversed again and proposed a systemic rescue.”

    Soros rightly points out:

    “Something also needs to be done on the supply side. To prevent housing prices from overshooting on the downside, the number of foreclosures has to be kept to a minimum. The terms of mortgages need to be adjusted to the homeowners’ ability to pay.

    The rescue package leaves this task undone. Making the necessary modifications is a delicate task rendered more difficult by the fact that many mortgages have been sliced up and repackaged in the form of collateralised debt obligations. The holders of the various slices have conflicting interests. It would take too long to work out the conflicts to include a mortgage modification scheme in the rescue package. The package can, however, prepare the ground by modifying bankruptcy law as it relates to principal residences.”

  2. Ouch – 15 mins into the session and the ASX is off over 4.5%.

    This is not gonna be pretty.

  3. I’m hoping that our politicians can take their blinkers off, especially now, and have an honest look at where we’ve gone wrong and what we need to do to alter our course through trying times. I suspect Mark Davis has mapped many of the challenges out.

    Mark Davis writes:

    “Australia’s ‘age of prosperity’, as Peter Costello calls it in his memoirs, has been underwritten by the mining boom (even as manufactured exports stagnated during his tenure) and massive increases in household debt (now more than $1 trillion – about the same as the annual national output), even as the government has wound down its own debt. The national debt has in effect been privatised while, at the same time, risk has been shifted away from government and business onto the shoulders of ordinary people, in the shape of long working hours, casualisation, and the sort of uncertainty that is written in the fact that Australians take the least holidays of any western nation.”

  4. Joni

    The world has changed considerably and dramatically for sure.

    You know that I’ve been very vocal for some time now about where this crisis was going and I believe the reality is going to be very long, slow and painful. It’s the heartbreak and hardship that many people now face is still a very sad reality to digest.

    Based on the impressions I’ve been getting for over 12 months now, I put forward a prediction months ago which I still stand by, yet I wish it wasn’t so :

    “We will, in my opinion, continue getting ‘snapshots’ that are aimed at providing greater hope and optimism about the economy and our wealth status. I’m just hoping people take a more realistic view of what is really happening. Nobody wants to see a major panic or excessive pessimism, however, we’ve had well over a decade where it seems nothing could stand in our way.I personally think that our average wealth will decrease (taking away previous gains through heated housing and stock markets), credit card spending will have to slow significantly and therefore consumer spending will decline, and housing prices will continue to fall. For how long? anywhere from between 18 months to 5 years – seriously (and the 5 years is a conservative guess). The problem that some people are not seeing clearly is that many of us are leveraged to the hilt with debt and we now need to start shedding much of the excess debt we’ve been carrying – this could be a lengthy process”

  5. these is a very tough situation and looks like it will only get worse. i am very glad i am not exposed to it in any way as i took jim rogers advice.

    http://jwojdylo.wordpress.com

  6. I’d also say theres another myth well and truly busted.

    Rewind back twelve months and I can still hear Howard repeating the same dangerous mantra “interest rates are lower and people can borrow more.”

    Howard said the heavier debt burden reflected rising affluence.

    “It is the case that people are buying ever more expensive houses, and they are doing that because of a number of factors,” the Prime Minister said. “One of them is that interest rates are lower and people can borrow more.”

    Yes, our hero was pushing a dangerous mantra indeed. In his opinion, it seemed as though a new era had arrived under his leadership.

    He then went on to say: “Debt levels are rising, but we are choosing to use the debt more productively to buy assets that traditionally rise in value, like shares and property.”

    At around the same time the Reserve Bank’s figures on household finances showed that assets were rising faster than debt (in spite of many Australian’s carrying record levels of debt). Households, they claimed had assets, including housing, superannuation and other investments, that are equal to eight times their annual income.

    I guess now it’s all Kevin’s fault that the bubbles have burst?

  7. Howdy, it’s nice to have a home again!

    I’m very worried about the market. Looks like the bailout is not having the desired effect…

  8. Yay!

    I can still have access to the cutting analysis of JMcP.

    Just dragged my carcass out of bed & had a brief glimpse at the daily news…

    BLOODBATH ON WALLSTREET…cries the headline.

    Looks like the Empire is crumbling, I wonder how many other countries/people will be dragged down with it?
    OZ appears to be taking a fair hit at the moment also. Happy days.
    I guess greed isn’t so good as we’ve been lead to believe. Profits at any cost seem to trump trivialities such as basic human decency or a reasonable standard of living for all.

    How much worse is this gonna get?

  9. Surely this has to be the kiss of death for McCain.

    Why would anyone re-elect a republican (and a moose shooter).

    It would be like us re-electing Howard over an over again!

    oh D’oh! At least we got wise eventually!

  10. Not so many folks “deerhunting with jesus” here reb.
    While I agree that this should be a no-brainer & McCain should be dead in the water I still think it’s really hard to call.

    Hopefully commonsense & a little bit of global awareness might prevail.

  11. If you look at some of the RWDB blogs in the US, the failure of the bailout is all Pilosi’s fault – because she mentioned “republicans” in here speech to the house.

    :-/

  12. Rewind back twelve months and I can still hear Howard repeating the same dangerous mantra “interest rates are lower and people can borrow more.”

    And not only but also, Howard said that it didn’t matter about record household debt because your assets are ‘worth more’. Mind you I did notice that his eyes were darting back and forth in a somewhat serpentine fashion while he said this.

    Just a small note: when were interest rates ever lower under Howard??? Which is not to say that Howard wouldn’t have said this.

  13. Min,

    Add to that Mantra “Australians have never had it better off”

    Fast forward 12 months and we’ve Talcum barracking for the poor old pensioners…

    It’s enough to make you puke!

    Speaking of which, the latest on Amy Winehouse is that she’s been returning ‘hired’ designer dresses to Harrods covered in vomit!!

    What a class act!

  14. I am getting tempted to post “happy feet” if you keep this up!

    Where is Sherlock telling us that there is nothing to worry about?

  15. reb | September 30, 2008 at 5:21 am. Don’t you worry. My parents, my late Dad then aged 88 and Mum age 84 said at the last election: They’re not going to buy my vote.

    Now if the Labs had done the bleeding heart thing, according to the press it would have been a stunt. Good grief, how many times do the government have to state: Yes, yes and yes we know that the pensioners, especially single old age pensioners are doing it tough. But we have to get it right. The days of the Libs have passed, the days where you can just chuck a few dollars at the problem and if you close your eyes then it will all go away.

    I do get very very p’d off with the standard of reporting. It often verges on the ludicrous. For example: Sky News – Kevin Rudd plleeeeded with the US Congress. And now we’re going to speak with Malcolm Turnbull. Traa daaa!!! Mission accomplished, Mal will fix it. Apparently (according to Sky News) it’s all bad news for Kevin Rudd. Can’t wait to hear how Mal will fix it.

  16. these is a very tough situation and looks like it will only get worse. i am very glad i am not exposed to it in any way as i took jim rogers advice.

    http://jwojdylo.wordpress.com

    Here’s some trivia Jim Rogers and George Soros were co-founders of the highly successful Quantum Fund. Both geniuses and very hard to ignore.

    I cannot think of any writer who could explain in such clear and simple terms where the US were heading, in 2003 he wrote::

    “The current bubble that Greenspan does not see is the consumption bubble he is causing. He has the lunatic idea that a nation can consume its way to prosperity although it has never been done in history.

    By contrast, the countries that have been doing well the last 30 or 40 years, are the countries that encourage saving and investing. Singapore is one of the most astonishing cities in the world. Forty years ago it was a slum. Now, in terms of per-capita reserves, it’s one of the richest countries in the world. One of the reasons Singapore was so successful is its dictator, Lee Kwan Yu, insisted that everyone save and invest a large part of their income. Whatever Lee’s policies toward personal freedom, at least he forced people to save and invest. History shows that people who save and invest grow and prosper, and the others deteriorate and collapse.

    Artificially low interest rates and rapid credit creation policies set by Greenspan and the Federal Reserve caused a bubble in the US stocks of the late 1990s, policies now being pursued at the Fed are making the bubble worse. They are changing it from a stock market bubble to a consumption and housing bubble. And when those bubbles burst, it’s going to be worse than the stock market bubble, because there are many more people who are involved in consumption and housing. When all these people find out that house price don’t go up forever, with very high credit card debt, there are going to be a lot of angry people.

    No one, of course, wants to hear it. They want the quick fix. They want to buy the stock and watch it go up 25 percent because that’s what happened last year, and that’s what they say on TV. They want another interest cut, because they’ve heard that’s what will make the economy boom. “

  17. Am just enjoying the impartial and fair-minded reporting of Gerard Henderson at: http://www.smh.com.au/news/opinion/gerard-henderson/its-economy-with-the-truth-stupid/2008/09/29/1222650989174.html

    One immediately realises that one is dealing with a superior intellect, someone who is able to impartially dissect information when one reads the following:

    the sneering left intelligentsia – left-liberal types – personal criticism from the left-intelligentsia, primarily because she (Palin) is a conservative, Christian, married mother of five from the small town..

    Ohhh, so that’s the reason that Palin has been criticised, it’s because she’s a Christian and a mother of five from a small town.

    Oh bugger..just think I could have been VP of the USA. Hands up, I’m married and to a person of the opposite gender, I’m a Christian, well sort of..umm a Godling..well I was christened (as an adult) but I don’t go kerflop and speak incoherently [unless it was due to a bad dose of Mateus ;-)) I have 3 children and all in wedlock too.

    Henderson is comparing Palin with PM Joseph Lyons from Tasmania both being from small states. Good grief how much are they paying Henderson to write this one!

  18. Min,

    It is the curse of the “lonely boy” chair at Insiders. They just try so hard to get noticed.

    🙂

  19. I’m just glad that I’m not rich enough to have a “cher” portfolio.

    All those wall street wank*ers must be real proud of themselves now NOT.

    But the Super account. Me thinks we should all switch to “conservative balanced” or equivalent for the next 12 months or so.

  20. Hey min…How did you manage to insert a “happy face?”

  21. That was not min, reb, that was me!!!!

    I just used the old way : – )

  22. And actually reb, I am staying where I am in the aggressive growth super funds. I reckon that buying more units at the cheap price will benefit me later as I still have 20 (hopefully) more years before I need the money.

  23. joni

    I’m certainly hoping they aren’t playing too aggressive. May I suggest you purchase a book titled ‘The Little Book of Value Investing’ it’s based on the investment philosophy of Warenn Buffett and Ben Graham (acknowledged as the father of Security Analysis). The author Christopher Browne is an accomplished investor and takes you through the fundamentals in an easy to understand way.

    Whether you remain with a fund or decide to make selections of your own in the future, this book gives you a very good understanding the critical elements of finding excellent companies at bargain prices.

  24. John

    It is a managed fund, where it is not too aggressive. It has lost about 20% in the last 12 months. It is only 50% of my super portfolio – so I am not too worried about the short term losses.

    The other thing is that because I have worked OS for a long period in time, my super is quite low at the moment, and I am just going to continue to buy the units in the funds, with the knowledge that they will come back. And if they don’t – I have not lost too much anyway (in the big scheme of things).

  25. Phew Joni, you had me a little worried when you mentioned ‘aggressive growth super funds’ – it sounded like something a ‘master of the universe’ would have tried selling to you.

    The most important thing I’ve learned is in order to win, the first thing you have to do is not lose. It sounds absolutely simplistic, of course you should not lose money if you want to win. There is more to it than that.

    Start with the supposition that your money is at risk; the first thing you must no do is lose money, even before you think of making more with it. The joys of compounding are there if you keep your stake growing, but all you need is one year in which you give back half and your program, at the same growth rate, must stretch out years longer.”

  26. Hi guys,

    A stock tip…buy into Geodynamics at around $1.30 and sit on them and watch the value multiply…I’m buying half a million over the next year.

    I’ve got some meetings scheduled with politicians over the next two months concerning the MDS…I need the rivers to come under control of one authority to realise Terry Bowring’s water transfer project.

    Plan ‘B’ is to go it alone with the state governments…two of the four premiers are very interested and if I can pull it off then there will be egg on Rudd’s and Wong’s faces!

    The way I see it is that if my businesses failed it would be my problem as I took the risk…I don’t see any reason why the banking institutions should get any special treatment…it sounds harsh but I believe that the west has lost its way over the last few decades and greed has become the cornerstone of society.

    It’s all me, me, me, without any consideration for others or the future that the next generations will inherit.

  27. I agree scaper, re special treatment, I guess the problem is that the nature of things (as wrong as they are) means that everything with a $ value (what a shit way of attributing “worth”) is intertwined & there will be a gigantic flow on effect (trickle down if you like).
    As much as I’d like toi see corporate pirates get their comeupance, by extension many innocent parties shall suffer.
    Good luck with your efforts mate, I only hope you don’t strike too much impediment beyond your own considerable motivation.

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