26 October 2010
 
Short or Long

(The Great Pumpkin creating mortgage-based securities. I had always suspected but never knew. Photo credit unknown, but reserved.)

I am pleased not to be Tarik Aziz this morning, one of the few good things I can think of this week. The Iraqi courts sentenced him to climb the short ladder and swing by the long rope. He was the urbane face of Saddam’s monstrous regime, and while he still has an appeal, it can’t be good news to get with your croissant and coffee.
 
I was reading “The Big Short,” when I heard the news. It is a horrifying true-life-story about the financial melt-down by Michael Lewis.
 
The book was recommended by a good pal up in Michigan who is in the Economics racket, and it crackles along like a horror story. If you didn’t hate the bastards who did this to us before, you will certainly hate them when you are done with it, and just when you thought this mess was starting to be over, the news this week is that there is much more to come.
 
In the shadow of The Great Pumpkin, I am trying to figure it out and chart a course through the troubled waters ahead. The only people who did well in the crisis were the ones who figured out “going short,” or taking a position that bet that the system was going to fall apart, did well.
 
The rest of us chumps, the paycheck-to-paycheck crowd, just rode the bubble and got robbed when it collapsed. We tired to stay long, and never got far enough ahead to go short on anything.
 
Life is short, or long, depending on your perspective. Got a note from Jackie at Potemkin Village yesterday, in mid-consideration of what to do:
 
"Hello,
 
Well, we are moving into a new phase, and I am sorry that things seem to change frequently.  What we are thinking is putting on a double-keyed lock on their door, so that Big Mama can open the door, but Raven cannot.  He has been attempting the doors of  other residents more frequently, and sometimes successfully. It will cost about $100, what are your thoughts?"

I wrote back immediately and said "Yes, put it on the tab." I don’t care how long it gets, since the only alternative is a real lock-down for Raven and the short end of the couple's 63 years together.
 
I was a little puzzled by this development, since I thought a lock was the obvious short-list answer to Raven’s nighttime wandering, but Jackie informed me at the time that fire codes did not permit the option.
 
I was thinking through the long and short of that as I fed my older boy last night. I stopped on the yo-yo trip to the farm on Sunday and picked up a half rack of BB ribs and a pound of pulled pork at the country smoke pit at Opal, conveniently located at the junction of Routes 17 and 29, so I could not go far wrong on something savory and delicious.
 
The people behind the smoking process prefer a North Carolina-style vinegar based sauce, and of course I get the spicy version. I was home early enough to get a pretty good walk with a lot of arm curls with my five pound dumb-bell, so I was feeling that I had justified a decent meal to close the day.
 
It was a Monday busy with things that should have been done a long time ago. At the conclusion of it, I tried to sort things out, Democrats are all but certain to lose a number of seats, as the people vote short on their specific performance in the crisis. The conventional wisdom is that then the new Congress will take a long position on the nation, and we will have some bi-partisan cooperation to address the looming entitlement problem as we deal with the current financial wreckage.
 
Here is the problem. The Dems who are going to be thrown out of office are the ones who were elected in basically conservative districts, which means the ones who will be re-elected are going to be "purer progressives," refined by the fire, and the Republicans who come to town are going to be more aligned with the Tea Party, who have a fundamentally short position on the whole Government.
 
Hence, there is the real possibility that the divide will get more stark as the Blue Dogs are diminished in number, and the discourse is likely to get even uglier. I could be wrong, of course, since I can’t figure out whether to go long or short on the future from moment to moment.
 
The commentators are saying was the move that saved the Clinton Administration. The two streams of probability are incompatible- increased civility on the long side and and enhanced polarization on the short, and sadly, Mr. Obama doesn't seem to have much of a clue about what motivates the independent vote, many of whom are clutching guns, bibles or vodka bottles.

Or all three.
 
That is what this is all about, of course, that third of voters who care about the issues more than the parties, and whose support is essential to building a majority these days.
 
Against the backdrop of the election, the investing community is buying twenty year T-bills that have a negative value- $100 bill costs $105- which is insane, unless one presumes that the inflation rate is going to spike after whatever it is that the Fed is going to do at the next meeting. Mr. Bernanke at the Fed is poised to do something really creative, and goodness knows what the consequences of that will be.
 
Certainly energy will continue to inflate in price, with pressure from China and India on available resources. But balancing that is the entitlements sector- the Boomers greedily staking a long claim on the future of everyone else. I am regrettably one of them, and it is me- The Man, if you will, who needs to be sat on, and that will be the toughest fight of anyone who pretends to be a grown-up in this mess.
 
We need to take a short position on our own generation and I don’t know if we have the guts to stand up for our kids. Like Raven, we need to lock the door and give the key to someone else.
 
“The Big Short” lays out the lies told for years by those bastards in the bonds market, which ran essentially unregulated all through the Bush-Clinton-Bush years, and apparently still is.
 
Here is the deal. It isn’t over. The NY Times picked up on a problem I saw in a curious e-mail yesterday that got my attention. The OpEd this morning commented on the implications of the millions of robo-signed foreclosure documents:
 
"Last week, Bank of America also acknowledged receiving a letter from mortgage investors — including Freddie Mac and the Federal Reserve Bank of New York — demanding that it repurchase tens of billions of dollars in problem loans that were bundled into securities. Investors can demand that banks repurchase loans that did not meet underwriting guidelines or were inadequately vetted or processed. The repurchases are important to taxpayers, because — through Fannie, Freddie and the Fed — the government now owns or backs a large number of problem loans and related securities. If the banks do not take the hit, the taxpayers will.
 
Fannie and Freddie have increased their repurchase demands on lenders over the past year, but banks are sure to resist large repurchases, setting up more clashes and disruption."

Just what we need. But what I take from all this is that rather than better relations in Congress, things have the possibility of getting worse, though how that could be is almost unimaginable, and rather than deflation (like Japan's last decade, or the appraisal of Refuge Farm) we are going to roll into the inflation I was expecting from the beginning.
 
Either way, oil and gas will go up, since any recovery depends on energy, and China and India want more of it. Sorry to rattle on, but I am trying to figure this out and not doing very well. Long or short? Bet on the future or against it?
 
Damn.

Copyright 2010 Vic Socotra
www.vicsocotra.com
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