Saturday, September 06, 2008
Marginalizing John Maudlin
John Maudlin writes a financial newsletter - "Outside the Box" - that gets emailed to something like 1,000,000 "informed investors" all over the globe at least once per week. Obviously he is pretty bright, otherwise we'd need to use the terms "sheep" and "cult" in explaining his ginormous readership.
I started reading his letter sometime in the past year or two and have, I guess, learned a few things from him. BUT, every once in a while his commentary really chafes me. I have a problem with his latest:
Additional Thoughts On The Continuing Crisis
We are entering the next stage of the credit crisis, and one which is potentially more troubling than what we have seen over the past year, absent some policy reactions by the central banks and governments world wide. The crisis was started by an intense run-up in leverage by financial institutions and investors world wide, investing in increasingly risky assets such as subprime mortgages and then the realization that leverage could hurt. The deleveraging process started to intensify last year about this time. The easy part of that process has been just about done. Now is the time for the really hard work. It will not be pretty. In this week's letter, we look at the process and think about its implications for the markets and the economy, and visit some data on the housing market and unemployment.
Action Is Needed Now
It is unfortunate that the crisis in housing and the credit markets seems to be coming to a head in the middle of a hotly contested election cycle and a lame duck president. Matters are such that waiting until a new president is in power and has his new appointees in place is a very bad option. Things could spiral down very quickly without action by the Treasury and the Fed and other regulators.
Lax regulation of both the mortgage industry and the rating agencies allowed the current crisis to develop. While new regulations will be helpful in the future, we have to deal with the problems as they are today. As I noted above, the credit crunch has the potential to get much worse in the coming quarters. It is clear to a number of observers that Freddie and Fannie are dead men walking. They are going to need capital from the Treasury. Those with mortgages that have the ability to pay at some level should be helped, and the rest need to be sold off at market clearing prices. But that means mortgage debt must be available. Because of the problems in the markets, mortgage rates are higher than they should be, making the housing problems worse.
Since we are going to have to take action sooner rather than later, we should do it sooner. One of the main rules in investing is that "The first losses are the best losses." The longer we wait, the more distress there will be in the housing markets and the lower values will go. Putting off action until next year will mean more losses for taxpayers and more pain in the markets when action is finally taken.
It physically hurts me to write those words. It is so against my free market economic beliefs. But a slow implosion of Freddie and Fannie, and a non-existent jumbo loan market, will mean a very serious recession if not checked soon.
Okay, that's the second time I have used that *hypocrite* image in about a month. I could probably use it in every single post!
It's one thing for say, a drill sergeant whose life is *discipline* to be a wee bit hypocritical and perhaps let his children slide on light punishment for heavy sins.
But for John Maudlin to claim to have *free market economic beliefs* in the same paragraph where he advocates the LARGEST GOVERNMENT BAILOUT in the history of Earthly civilization....well, that's more than a little tough to digest.
This weekend, the government is about to announce a bailout for Fannie Mae's and Freddie Mac's debt. Don't believe any of the spinmeisters' claims on the true cost of this bailout for wealthy investors and foreign governments. This will add roughly $5 trillion to our national debt - taking it from $9 trillion to $14 trillion at the stroke of a pen.
Point of fact, if an impartial reader came upon Maudlin's bit under the subtitle "Action Needed" (you'll have to click on the link above to read it in its entirety), you'd have trouble convincing him that the author wasn't Ted Kennedy or Barney Frank, outright communists.
Since we are going to have to take action sooner rather than later, we should do it sooner.
That ridiculously illogical sentence sounds EXACTLY like a lispy Barney Frankism!!!
How much do you want to bet that John Maudlin's *clients* are knee deep in Fannie and Freddie Agency debt?
It would be a reckless inference to say that guys like John Maudlin and Bill Gross have exchanged their principles for *fees*. There's simply no evidence they had any to begin with.
What can be claimed, however, is that extreme wealth AND probity rarely mark a Wall Street guy.