May 26, 2010

Tim Geithner on sustaining the unsustainable

European leaders face the difficult challenge of trying to restore sustainability to an unsustainable system.

~ Timothy Geithner, US Secretary of the Treasury, remarks at the U.S.-China Strategic and Economic Dialogue, Beijing, China, May 25th, 2010

May 21, 2010

Jim Grant on the Too Big to Fail banking doctrine (1990)

If anything is new about banking in the 1980s, it is the substitution of federal guarantees for the liquidity of individual banks. It is the policy that, even in smaller institutions, depositors will be protected. It is this regulatory sea change that distinguishes the current debt expansion from so many earlier ones.

Rothbard’s theory holds that a run-resistant, semi-socialized, fractional reserve banking system is a house of cards.

~ Jim Grant, "Bring Back the Bank Run," The Free Market, February 1990

May 20, 2010

Philip Fisher on faulty investment community appraisals of market conditions

Ridiculous as it may seem to us today, in the period from 1927 to 1929, the majority of the financial community actually believed we were in a "new era." For years earnings of most U.S. companies had been growing with monotonous regularity. Not only had serious business depressions become a thing of the past but a great engineer and businessman, Herbert Hoover, had been elected President. His competence was expected to assure even greater prosperity from then on. In such circumstances it seemed to many that it had become virtually impossible to lose by owning stocks. And many who wanted to cash in as much as possible on this sure thing bought on margin to obtain more shares than they could otherwise afford. We all know what happened when reality shattered this particular appraisal. The agony of the Great Depression and the bear market of 1929 to 1932 will be long remembered.

~Philip Fisher, stock legend, "Still More About the Fourth Dimension", Common Stocks and Uncommon Profits, 1958

Larry Kudlow on the fallout from Europe's troubles

The economic fundamentals in this country are good and don't deserve this kind of trouble.

We need to take the next step: just guarantee all the bank debt!

~ Larry Kudlow, as appeared on CNBC at 11:10 am EST, May 20, 2010

May 16, 2010

Time magazine on financial regulation

A typical individual investor: "I'm not jumping into this market" (1982)

I'm not jumping into this market. I'm selling in this market and would advise anyone else to do the same. This is one of those times when you can't see very far ahead.

~ David Logan, 60, retired real estate developer in Chicago, "Wall Street's Super Streak," Time, September 6, 1982

May 15, 2010

Jean-Claude Trichet on buying sovereign debt in the eurozone

Our measures are explicitly authorized by the (EU) treaty. We are not embarking on quantitative easing. We are helping some market segments to function more normally. And, as I said, we will take back all the additional liquidity that we will supply in our Securities Markets Program.

~Jean-Claude Trichet, president, European Central Bank, "A 'Quantum Leap' in Governance of the Euro Zone Is Needed", Der Spiegel, May 15th, 2010

Nancy Pelosi on the entrepreneurial spirit of the healthcare reform bill of 2010

We see it as an entrepreneurial bill, a bill that says to someone, if you want to be creative and be a musician or whatever, you can leave your work, focus on your talent, your skill, your passion, your aspirations because you will have health care.

~Nancy Pelosi, Speaker of the House, 110th US Congress, remarks from a speech given to the Asian American and Pacific Islanders Summit, May 14th, 2010

Alan Skrainka on the European bailout of May 2010

One trillion dollars is a big number. This is enough to buy all of Greece's debt twice, with enough left over to buy all of Portugal's debt. It was meant to remove any potential for contagion. Problem solved.

~Alan Skrainka, Chief Market Strategist, Edward Jones, "They Said What? European Bailout", Barron's magazine, May 15th, 2010

Kevin Duffy on the European bailout of May 2010

If healthy economic systems require taxing the responsible and debasing the currency to bail out the profligate, the EU's rescue package should be a raging success.

~Kevin Duffy, principal, Bearing Asset Management, "They Said What? European Bailout", Barron's magazine, May 15th, 2010

Jim Cramer on investing in the "New World" (2000)

You want my top 10 stocks for who is going to make it in the New World? You know what? I am going to give them to you. Right here. Right now. OK. Here goes. Write them down -- no handouts here!: 724 Solutions, Ariba, Digital Island, Exodus, InfoSpace.com, Inktomi, Mercury Interactive, Sonera, VeriSign, and Veritas Software.

You have to throw out all of the matrices and formulas and texts that existed before the Web. You have to throw them away because they can't make money for you anymore, and that is all that matters. We don't use price-to-earnings multiples anymore at Cramer Berkowitz. If we talk about price-to-book, we have already gone astray

So, if you can't own the retailers, and you can't own transports, and you can't own banks and brokers and financials and you can't own commodity makers and you can't own the newspapers, and you can't own the machinery stocks, what can you own? A-ha, that just leaves us with tech. That's why we keep coming back to it. That's why, despite the 80% increase in the Nasdaq last year, we are looking at another record year now.

~Jim Cramer, former hedge fund manager and host of CNBC's Mad Money, "The Winners of the New World", speech delivered February 29, 2000.

(Note: some analysis of this speech and the later results of Cramer's picks available at Credit Bubble Stocks.)

Stifel Nicolaus analyst on financial regulation

The evolution of trading technology and market structure over the last decade has been far too rapid for regulation to keep pace.

~ Chris Brendler, Stifel Nicolaus analyst, May 7 note to clients, quoted in BusinessWeek, "'Flash Crash' Poses Further Uncertainty for Stocks," May 10, 2010, by Ben Steverman

May 14, 2010

Philip Fisher on the inevitable bullishness of war for stocks

What do investors overlook that causes them to dump stocks both on the fear of war and on the arrival of war itself, even though by the end of the war stocks have always gone much higher than lower? They forget that stock prices are quotations expressed in money. Modern war always causes governments to spend far more than they can possibly collect from their taxpayers while the war is being waged. This causes a vast increase in the amount of money, so that each individual unit of money, such as a dollar, becomes worth less than it was before. It takes lots more dollars to buy the same number of shares of stock. This, of course, is the classic form of inflation.

~Philip Fisher, stock legend, "Five More Don'ts for Investors", Common Stocks and Uncommon Profits, 1958

Philip Fisher on portfolio size

Usually, a very long list of securities is not a sign of the brilliant investor, but of one who is unsure of himself.

~Philip Fisher, stock legend, "Five More Don'ts for Investors", Common Stocks and Uncommon Profits, 1958

Jimmy Cayne on the collapse of Bear Stearns due to market forces

The market's loss of confidence, even though it was unjustified and irrational, became a self-fulfilling prophecy. Subsequent events show that Bear Stearns' collapse was not the result of any actions or any decisions unique to Bear Stearns. Instead, it was due to overwhelming market forces that Bear Stearns, as the smallest of the independent investment banks, could not resist. Only a few months after Bear Stearns collapse, the same market forces caused the collapse and near-collapse of much larger institutions such as Lehman Brothers. The efforts we made to strengthen the firm were reasonable and prudent, although in hindsight they proved inadequate. Considering the severity and the unprecedented nature of the turmoil in the market, I do not believe there were any reasonable steps we could have taken, short of selling the firm, that could prevent the collapse that ultimately occurred.

~Jimmy Cayne, former chairman and CEO, Bear Stearns, opening remarks in testimony given to the Financial Crisis Iniquiry Commission, May 5th, 2010

Alan Schwartz on speculation and rumor as the cause of the fall of Bear Stearns

During the week of March 10th, 2008, unfounded rumors and attendant speculation began circulating that Bear Stearns was in the midst of a liquidity crisis. Due to the stressed condition of the credit market as a whole and the unprecedented speed at which rumors and speculation travel and echo through the modern financial media environment, the rumors and speculation continued throughout the week. The rumors thus became a self-fulfilling prophecy and there was, simply put, a run on the bank.

~Alan Schwartz, former CEO, Bear Stearns, opening remarks of testimony given to the Financial Crisis Iniquiry Commission, May 5th, 2010

Jim Cramer flip-flops on his Dow 9,000 price target, embraces change

This morning several people asked me if my Dow 9,000 price target was still on because I did hint about that last week and the answer is: no.

See, remember what I said, I said, we could go back there if Trichet, the head of the European Central Bank, continued to do nothing to solve the euro's problems and the disaster that is Greece. But that's not what happened. I said I was negative because Trichet had left the building, remember I had said he had left the building-- he came back in Friday night! Dragged by other countries' ministers, particularly France and Germany.

He and his fellow European finance ministers did something, and not just anything. They did amazing things this weekend along with the EU and in coordination with our Fed Chairman Ben Bernanke and Treasury Secretary Geithner, they understand these problems we're facing better than any other people in the world. And you know Ben Bernanke is the best central banker in the world, I said that on Friday.

Now, when that European contagion risk is taken off the table, what am I supposed to do, just stay negative? I can't! When a plan that basically delivers all the things I was calling for and crying for on Thursday and Friday comes along, I can't fight it and say, "Uh uh, nope, it's not what I want, gotta stay negative, uh uh!" I can't. The plan was exactly what I wanted.

In the words of the late, great economist and investor, maybe the best of both, John Maynard Keynes, who would have absolutely approved of Europe's solution, and I quote, "When the facts change, I change my mind. What do you do, sir?"

~Jim Cramer, "Embracing Change", Mad Money, May 10th, 2010

Jim Cramer on being confused by the short-sellers and those who hire them

Despite today's gigunda-, beautiful, incredible rally, with both the Dow Jones and the S&P 500 soaring beyond levels nobody imagined; despite the decision by European governments to go nuclear against the opponents of the euro, these short-sellers, who are leaning all over Greece and Spain and Portugal last week, tossing nearly a trillion dollars of firepower against the euro's enemies in one of the most amazing displays of force I have ever seen in my thirty years of investing; what happened?

The nattering naybobs of negativity and the chicken littles just would not stop all day. In short, probably because they are short, people who can find fault with anything and everything. I have one question for these people: how the heck do these people make money? Or how about a second question: who pays for that advice?

~Jim Cramer, "Embracing Change", Mad Money, May 10th, 2010

Jim Cramer on leadership potential in growth stocks following the "flash crash"

They are all fabulous barometers of the market's health, and right now it's in great shape according to these swift, Marine generals. These leaders are in full 'paths of glory'-mode, only this time they go over the top and take the anthill instead of being decimated.

They've trumped Spain, they've trumped Portugal, even Greece! And remember, we're already less worried about those ne'er-do-well countries because the market is still soaring in recognition that the International Monetary Fund, which doubles as the Impossible Missions Force, is getting the job done. And I gotta tell you, from the strong rally in the bonds of the ne'er-do-well countries, I gotta tell ya-- we're not done. By the way, we don't mind sayin' it-- we told ya so!

The bottom line: with fast-growing stocks like Apple, Salesforce.com, Intuitive Surgical, Chipotle and Deckers, the true Marine generals of the market are taking the lead and the whole growth cohort should soon follow. We've got great leadership and that's a powerful reason to believe in this rally. Semper fi stocks, for a surging market!

~Jim Cramer, "Leaders of the Pack", Mad Money, May 12th, 2010

Jim Cramer on the "flash crash" flushing out the marginal stock holders

Take the bogus 1,000-point drop last Thursday. As unfortunate as it was, it cleansed the market of a lot of froth; froth is the signal that we're nearing a top. Second, last week the oft-quoted pessimists grabbed the microphone and scared away all the wafflers. Thanks to the negativeness, the "we-cants" were easily panicked. They've been blown out by inter-locking fields of bearish fire. They're all gone!

Now we've got a situation where the only people left are the solid, long-term holders. So, we don't have to worry about or fight our fellow shareholders who are desperately trying to get out the door-- they've already left the building.

I want to thank the "Roubs" for this, so-called because of their leader, Nouriel "Roub"-ini, the professor who seems to have tenure on television. All these Johnny-One-Notes would make you very poor if you actually took their advice.

~Jim Cramer, "Curb Your Enthusiasm?", Mad Money, May 13th, 2010

Jim Cramer on skepticism and pessimism as engines of wealth

When I see greed, when I see froth, when I see over-confidence, I will always hit this button ["Sell! Sell! Sell!"]! I will ring the register ["Cha-ching!"], and what am I gonna do? I'm gonna go get a couple of nice cashmere sweaters.

But right now, I see skeptimism [sic] and pessimism, and judging by the 500-point rally since the bogus sell-off a week ago, plus today's ugliness, pessimism and skepticism are going to be engines of wealth not purveyors of poverty.

~Jim Cramer, "Curb Your Enthusiasm?", Mad Money, May 13th, 2010

Jim Cramer on the success of the IMF-sponsored eurozone bailout

People have to realize the IMF is going to be successful. It's going to save us from the total collapse of all these sovereign bonds. Italy just had a terrific bond auction this morning. Greek and Spanish bonds are trading like they're almost investment-grade. That means the IMF's intervention is working, that's what you look at, not the dollar versus the euro. The euro is going to go down because the IMF is throttling back purchasing power.

~Jim Cramer, "Curb Your Enthusiasm?", Mad Money, May 13th, 2010

Jim Cramer on deflationary oil prices

Don't forget: declining oil is deliciously deflationary, something that will keep Ben Bernanke's inflation-fears in check and allow interest rates to stay low for longer periods.

~Jim Cramer, "Curb Your Enthusiasm?", Mad Money, May 13th, 2010

May 13, 2010

Bill Ackman on ratings agencies as underwriters of the financial crisis

I actually think it would be a good thing for rating agencies if they suffered some consequences for bad opinions.

One of the problems is, when you have an institution who is allowed to write opinions that have enormous market impact, but they have no economic – they have an exemption for free speech, it can create some problems. Rating agencies, in my view, during the credit crisis acted effectively as underwriters. Deals could not get done without their imprimatur.

~Bill Ackman, CEO, Pershing Square Capital, Bloomberg News, May 13th, 2010

Anthony Scaramucci on the barbarous relic

They printed trillions and trillions of dollars of money, and gold has gone up a little bit, and it went up a lot today, okay, but do you really think that this is the answer? I'm thinking that gold is probably full to the top right now. Everyone in the market is long gold.

Gold is the twisted mistress of investment. It hurts everybody: it hurts the gold bugs; it hurts the gold bears; it brings everybody down over a long period of time. Be very careful on gold.

~Anthony Scaramucci, founder and managing partner, SkyBridge Capital, CNBC Fast Money, May 11th, 2010

Dennis Gartman on the time horizons of hedge fund managers

You're a hedge fund manager. I'm a hedge fund manager. We live in a world where if we can get through to next Tuesday, that's important and that's as far forward as I can look.

~Dennis Gartman, "The Commodities King", author of the Gartman Letter, CNBC Fast Money, May 11th, 2010

May 12, 2010

Karen Finerman, Fast Money trader, on the ineffective TARP bailout

When we think about TARP, we thought we were turning on a firehouse when we said $700 billion for TARP, and that really didn't do anything. That didn't even last for that day, the market went straight down.

~Karen Finerman, "The Chairwoman", CNBC Fast Money, May 10th, 2010

May 11, 2010

Ludwig von Mises on the compatibility of logic and life

Logical thinking and real life are not two separate orbits. Logic is for man the only means to master the problems of reality. What is contradictory in theory, is no less contradictory in reality. No ideological inconsistency can provide a satisfactory, i.e., working, solution for the problems offered by the facts of the world. The only effect of contradictory ideologies is to conceal the real problems and thus to prevent people from finding in time an appropriate policy for solving them. Inconsistent ideologies may sometimes postpone the emergence of a manifest conflict. But they certainly aggravate the evils which they mask and render a final solution more difficult. They multiply the agonies, they intensify the hatreds, and make peaceful settlement impossible. It is a serious blunder to consider ideological contradictions harmless or even beneficial.

~ Ludwig von Mises, "The Role of Ideas," Human Action, pg. 185

May 10, 2010

MoStan Asia's Stephen Roach on the increasing frequency of financial crises

The crises are coming with greater frequency. Over the last 25 years we have had an average of one crisis every 3 years. The gap this time is 18 months. The scale is bigger. This is a much more serious problem in the eurozone than it was in the late 90s with the the Asian financial crisis.

~Stephen Roach, chairman, Morgan Stanley Asia, Bloomberg Radio interview, May 10th, 2010

May 8, 2010

Fred Hickey: "I don't regard the selloff as a great short selling opportunity"

Virtually all bear markets in this country's modern history have been preceded by Fed interest rate tightenings. [...]

Today, there's not even a hint of Federal Reserve rate hikes nor of significant liquidity draining. [...]

This kind of support from the Fed makes it unlikely that the current correction will turn into any kind of sustained bear market for stocks. The Fed would likely reinstate its QE [Quantitative Easing] program if stocks declined too sharply. Bernanke told Congress last month that there was nothing that says the Fed couldn't buy more mortgage-backed securities if conditions warranted. Therefore, even though I'm expecting this downturn to continue for a while, I don't regard the selloff as a great short selling opportunity, unlike what I had foreseen in the late 1990s-2000 and again in 2007 when interest rates were hiked.

~ Fred Hickey, The High-Tech Strategist, May 5, 2010

BofA's David Bianco on market timing during the global equity crisis of 2010

Now is a good time for anybody that has got anything longer than a week or two, or a month investment time horizon to be buying the best companies in the S&P.

~David Bianco, Head of US Equity Strategy, BofA Merrill Lynch Global Research, "Market Update: Is Volatility Back?", May 7, 2010

Michael Hartnett on buying the global equity dip

We've had a 10% correction now in global equity markets. I think we'd like to see the policy actions that give us the buy-signal that say "It's safe to go back in now" and we haven't seen that yet. We're not willing to say right here and now, move back into equities. I do think, however, if you have a list of best-of-breed, or the large-cap multinationals [that David's been talking about] that you like and that you trust those companies, now is a very good opportunity to start purchasing those again.

~Michael Hartnett, Chief Global Equity Strategist, BofA Merrill Lynch Global Research, "Market Update: Is Volatility Back?", May 7, 2010

Nicholas Sarkozy is serious about defending the euro

When the markets re-open Monday, we will have in place a mechanism to defend the euro. If you don’t think that’s significant, you haven’t been to many EU summits.

~Nicholas Sarkozy, president of France, Bloomberg, "EU to Set Up Fund to Prevent Spread of Greek Crisis", May 8, 2010

May 7, 2010

Bove on European debt crisis

What you're faced with is you simply do not know which countries are solvent, which countries are insolvent. You do not know who the counterparties are for these insolvent countries, so you run for the hills.

"US banks exposed to Europe debt woes", CNBC.com, May 7, 2010

BofA's David Bianco on the hope of mercantilism in Europe

[European Central Bank chief] Trichet's nonchalance certainly shocked investors, but something to realize is that much of the European economy, particularly Germany, has a very strong manufacturing-recovery and export economy occurring right now. So, what I'd point out is that the key businesses to the S&P, in core Northern Europe, that are manufacturing and technology-oriented, they're doing well.

Now, if the contagion spreads, that could not be the case but a weaker Euro should actually stimulate those parts of the European economy. So, I can certainly see why certain Europeans are taking the attitude of, "This is not our problem." But that's dangerous.

~David Bianco, Head of US Equity Strategy, BofA Merrill Lynch Global Research, "Market Update: Is Volatility Back?", May 7, 2010

Michael Hartnett on the need for quantitative easing in response to the PIIGS crisis

The market really started off when [European Central Bank chief] Trichet had that look of "We're not worried about what's going on in the markets" and the markets basically said, "Well, we will make you worried, because we think it is worrying what's happening with Greece and Spain and Portugal." So, asset prices fell very quickly and they'll continue to fall until the European authorities do something. And what we think they should do is launch what is known as a 'quantitative easing' program, whereby the central bank uses its balance sheet to buy assets and in so doing it will stem the contagion out of these countries into the banking system and thereafter into the real economy.

So, damage has been done, without a doubt and you are likely to see GDP estimates in Europe fall, but they won't fall too far so long as the ECB steps in.

There's an old adage, "Markets stop panicking when policymakers start panicking." That's what you should keep in the back of your mind the next couple of weeks. Once you see the panic, it'll be over.


~Michael Hartnett, Chief Global Equity Strategist, BofA Merrill Lynch Global Research, "Market Update: Is Volatility Back?", May 7, 2010

BofA's David Bianco on why investors shouldn't panic over Greece

Well, I don't think you should panic-- the elevated uncertainties certainly suggest there is more uncertainty out there, and you have to not be overly-confident about the outlook. We are feeling good that parts of what we see playing out right now, particularly in Europe with the weaker Euro, we've built that into our earnings estimates. They could deteriorate, so I don't want to promise certainty on our earnings estimates, the $88 earnings outlook we have for 2011 for the S&P assumes a Euro of $1.23 on average.

It's the earnings that are supportive of the market at these levels and it's earnings as volatility comes down and confidence gets better, that should take the market to our price target of 1300 for this year, and 1350 over twelve months.

Particularly for long-term investors, I wouldn't panic, I wouldn't dump stocks. I'd nibble at the larger cap companies in the S&P that I think are going to do well.

~David Bianco, Head of US Equity Strategy, BofA Merrill Lynch Global Research, "Market Update: Is Volatility Back?", May 7, 2010

Michael Hartnett on the outlook for the global economy after the panic

I still think the global markets have upside. We have a 350 target for the MSCI-ACWI which is the global benchmark and that's probably 10 or 15% higher from where we are today. I think that's really driven by the earnings story globally, and as long as we don't see a double-dip globally in the economy, and obviously there are bigger fears of that now because of what's happening in China and also in Europe, but as long as we don't see that, and that's the forecast we have from Ethan Harris who is our global economist, earnings will be fine. I think earnings going up is going to take the market higher but I would certainly caution right now about jumping into the market. I think over the next couple of weeks you've really got to see the Europeans, the Chinese, step up. Until you do, we won't be issuing a buy signal.

~Michael Hartnett, Chief Global Equity Strategist, BofA Merrill Lynch Global Research, "Market Update: Is Volatility Back?", May 7, 2010

Michael Hartnett on living in a stock-picker's paradise

One of the messages today that we'd certainly like to relay to the financial advisors and their clients is that there's the beginning of a stock-picker's paradise out there. There are a tremendous amount of macro concerns, and we share them as well, but when you see this dislocation it does often throw up a lot of opportunities to buy very, very good companies at much cheaper prices.

~Michael Hartnett, Chief Global Equity Strategist, BofA Merrill Lynch Global Research, "Market Update: Is Volatility Back?", May 7, 2010

May 6, 2010

Sheldon Richman on Michael Moore distorting the history of top income tax rate cuts

[Michael] Moore even complains that the top income-tax rate was lowered from 90 percent some years ago. Conveniently, he gets the history wrong. He says Republican Ronald Reagan cut the 90 percent rate, but it really was Democrat Lyndon Johnson who did it, following through on John Kennedy’s proposal. (Reagan presided over a cut from 70 to 50 and then to 28 percent.) At any rate, Moore is perfectly comfortable with government’s taking 90 percent of wealthy people’s earnings and seems indifferent to whether the money is made through honest trade or political privilege.

~ Sheldon Richman, "The Phony Radicalism of Michael Moore,"Freedom Daily, April 27, 2010

Philip Fisher on selling stocks

If the job has been correctly done when a common stock is purchased, the time to sell it is -- almost never.

Philip Fisher, stock legend, "When to Sell", Common Stocks and Uncommon Profits, 1958

May 5, 2010

Bill Gross on the incompetence of the ratings agencies

Firms such as PIMCO with large credit staffs of their own can bypass, anticipate and front run all three, benefiting from their timidity and lack of common sense. Take these recent examples for instance: S&P just this past week downgraded Spain “one notch” to AA from AA+, cautioning that they could face another downgrade if they weren’t careful. Oooh – so tough! And believe it or not, Moody’s and Fitch still have them as AAAs. Here’s a country with 20% unemployment, a recent current account deficit of 10%, that has defaulted 13 times in the past two centuries, whose bonds are already trading at Baa levels, and whose fate is increasingly dependent on the kindness of the EU and IMF to bail them out. Some AAA!

Now let’s go the other way. GMAC, that only too recently near-bankrupt finance company, carries recently upgraded B ratings from the rating services. Profiles in courage for all three, I say! I mean the U.S. government has injected $20 billion of capital and owns 65% of the company. It’s the auto industry’s equivalent of FNMA and FHLMC, except those are AAA and GMAC is B with a “positive outlook!” For that, you can buy a GMAC two-year bond at 6½% (8% with what are called “smart notes” that Investment Outlook readers can buy through their broker), while you receive only 1.2% at Fannie and Freddie. Vive la différence!

~Bill Gross, founder, PIMCO, "Investment Outlook", May 2010

Paul McCulley on the ratings agencies

[The breakdown of our financial system] was about the invisible hand having a party, a non-regulated drinking party, with rating agencies handing out the fake IDs!

~Paul McCulley, PIMCO, as quoted by Bill Gross, date unknown

Bill Gross on the ratings agencies

In all of the hullabaloo over Goldman Sachs, a CQ analysis of the rating services – Moody’s, Standard and Poor’s and Fitch – has escaped front-page headlines. Not that a number of observers haven’t been on to them for a few years now, including yours truly. Back in July of 2007 some of you will remember my description of their role in the subprime crisis. “Many of these good-looking girls are not high-class assets worth 100 cents on the dollar. You were wooed, Mr. Moody’s and Mr. Poor’s, by the makeup, those six-inch hooker heels and a ‘tramp stamp.’” Now, it seems, I was a little long on humor and a little short on the reality. Tramp stamp and hooker heels do not begin to describe the sordid, nonsensical role that the rating services performed in perpetrating and perpetuating the subprime craze, as well as reflecting the general deterioration of investment common sense during the past several decades. Their warnings were more than tardy when it came to the Enrons and the Worldcoms of ten years past, and most recently their blind faith in sovereign solvency has led to egregious excess in Greece and their southern neighbors. The result has been the foisting of AAA ratings on an unsuspecting (and ignorant) investment public who bought the rating service Kool-Aid that housing prices could never really go down or that countries don’t go bankrupt. Their quantitative models appeared to have a Mensa-like IQ of at least 160, but their common sense rating was closer to 60, resembling an idiot savant with a full command of the mathematics, but no idea of how to apply them.

~Bill Gross, founder, PIMCO, "Investment Outlook", May 2010

Jim Rickards on similarities between Greece and the US, gold as an alternative currency

I'm having trouble finding a Greek metric where the US isn't as bad or worse, or will be shortly. You look at where our deficit-to-GDP ratio is, you look at where our debt-to-GDP ratio is going, money creation and other things-- we look a lot like Greece.

One big difference is that we can print our own money. But where does that get you? That's really the problem world-wide.

In every asset class, investors no longer think about the fundamentals, they think about government policy. In China, the question is, can the government prop up the housing market? In Europe, can the government prop up Greece? In the United States, can the government prop up the banks? We don't think about the fundamentals or balance sheets anymore.

[The US dollar and Treasuries] are the only place to go, but there are limits to that. The G-20 and the leaders may try to go to the IMF and SDRs to take the dollar off the hook, the market may go to gold on their own. So, it's kind of a race between SDRs and gold.

~Jim Rickards, senior managing director of market intelligence, Omnis Inc., CNBC Squawk Box, May 5th, 2010

Jimmy Cayne on the fantasy belief of politicians that legislation can alter reality without cost

If it was easy as just saying it and then doing it, it would've been done already.

~Jimmy Cayne, former CEO, Bear Stearns, Financial Crisis Inquiry Commission testimony, May 5th, 2010

Myron Scholes on the importance of risk modeling

I haven’t changed my ideas. A bank needs models to measure risk. The problem, however, is that any one bank can measure its risk, but it also has to know what the risk taken by other banks in the system happens to be at any particular moment.

~Myron Scholes, 1997 Nobel prize in economics winner, "Crash Course", NYT Magazine online preview, May 5th, 2010

May 4, 2010

Franklin Raines on the erosion of credit standards

Most of the erosion in credit standards happened on Wall Street, it didn't happen amongst the GSEs. Wall Street led with the securitization of subprime loans, they led with the securitization of non-performing loans, loans that didn't fit the Fannie and Freddie standards. So, they really were the engine.

~Franklin Raines, former chairman and CEO, Fannie Mae, CNBC, May 4th, 2010

Franklin Raines on risk management at Fannie Mae

When I was at Fannie Mae, we had a very tough risk management structure. That was 5, almost 6 years ago [2003, when housing bubble first took off]. Instead of staying the course as later management said, they changed that structure in order to become a bigger player in the market. They were losing market share by maintaining their tough standards, they wanted to be players, they jumped in and they bought a lot of things they shouldn't have bought. They've testified to this themselves so I'm not really speaking out of turn here, and that really led to the company's failing financially because they took on more risk than they should have.

~Franklin Raines, former chairman and CEO, Fannie Mae, CNBC, May 4th, 2010

(Of course, this directly contradicts the point he made moments earlier in the interview, in which he argued that Fannie Mae, Freddie Mac and the FHA need to be available to support the mortgage market when traditional lenders become risk-averse and flee from these very types of mortgages he now says shouldn't have been made.)

Franklin Raines on how to prevent financial crises amongst large institutions

I think the American system and its focus on 30-year fixed-rate mortgages is a very, very powerful thing. Canada is a country of 20, 25 million people with adjustable-rate mortgages for banks, not a very consumer-friendly environment. Although, if you put the burden on the consumers, it's true you won't have as many crises amongst your large financial institutions.

~Franklin Raines, former chairman and CEO, Fannie Mae, CNBC, May 4th, 2010

Franklin Raines on the importance of federal mortgage subsidies

Today, they [Fannie and Freddie] and the FHA are 100% of the mortgage market and we have seen in this last crisis that ordinary financial institutions will withdraw from that market at the slightest indication of problems. You simply can't have a country like ours, with a large middle class, that doesn't have a functioning mortgage market all the time.

~Franklin Raines, former chairman and CEO, Fannie Mae, CNBC, May 4th, 2010

May 3, 2010

Warren Buffett on the US government's stimulus efforts circa 2008

I think they went all in, and the American public needed to see that they were going all in. When the whole world wants to deleverage, the only party that can lever up is the government and the United States government did something perfectly proper. Whether they did it perfectly, nobody knows.

What became clear in the fall of 2008 is that the chairman of the Fed and the secretary of the Treasury and Sheila Bair at the FDIC we're willing to do extraordinary things to essentially prevent a panic. They were the only ones that could've done it and I cheer them mightily for that.

~Warren Buffett, Goldman Sachs investor, "The Buffett Express", CNBC's Squawk Box, May 3rd, 2010

Warren Buffet on large government deficits

It's certainly hard to imagine deficits like we've [the USA] been running, or like other countries have been running, being consistent with low interest rates over time. If you could really run deficits of 10% of GDP and not have anything bad happen, people would've figured that out a long time ago, because it's too much fun to do. There will be a price to be paid for the medicine we used to break out of our panic situation.

Who wants to lend money to someone who has a long-term policy of running deficits at 10%? It's unsustainable over time.

~Warren Buffett, Goldman Sachs investor, "The Buffett Express", CNBC's Squawk Box, May 3rd, 2010

Warren Buffett on jobs

We have jobs when we have demand for our goods, we're not going to hire somebody just to stand around. The best jobs program is demand. Demand is coming back, and that means we hire people.

~Warren Buffett, Goldman Sachs investor, "The Buffett Express", CNBC's Squawk Box, May 3rd, 2010

Warren Buffett on the historical resilience of the US economy

The American economy is an amazing engine of growth over time. We may try to mess it up occasionally and we go to excesses and all of that. But if you look at the history of this country, this country works. It's a mistake to bet against it.

~Warren Buffett, Goldman Sachs investor, "The Buffett Express", CNBC's Squawk Box, May 3rd, 2010

Warren Buffett on the integrity of Goldman Sachs' leadership

I think Lloyd Blankfein has done a great job of leading Goldman Sachs. I've known the people that run Goldman Sachs ever since Gus Levy, everyone one of them. Goldman has had a history of picking first class people to run the business, the sort of people who you'd feel fine having married to your daughter and who are plenty smart about running a business.

~Warren Buffett, Goldman Sachs investor, "The Buffett Express", CNBC's Squawk Box, May 3rd, 2010

May 2, 2010

Thomas Piketty on insane Greek sovereign debt interest rates

Austerity can be justified, but 8 percent interest rates on a debt that amounts to more than 100 percent of gross domestic product is just crazy. They will have to restore their public finances and then pay back this huge debt at the same time — and Greek debt amounts to so little when you compare it to what was needed to bail out the banks [last year]. Not only is this not going to help growth, it’s going to end very badly, politically speaking. Taxpayers cannot accept this in the long run.

~Thomas Piketty, professor and founder, Paris School of Economics, as quoted in "Deflation Could Stall Efforts to Revive Greece in Debt Crisis", NYT.com, May 2nd, 2010

French economics professor on virtue damning debt-burdened Greece

How can Greece grow out of its debt if there is deflation? Deflation increases the debt burden, so we are following this virtuous circle that is bringing us toward hell. Economics has nothing to do with virtue, which can kill an economy.

~Jean-Paul Fitoussi, professor of economics, Institut d’Études Politiques, Paris, France as quoted in "Deflation Could Stall Efforts To Revive Greece in Debt Crisis", NYT.com, May 2nd, 2010

Ken Fisher on gold (timing)

The history of gold is that, for most of its history, it's been declining in price, followed by short periods with very rapid spikes in price. In history, if you take out 15% of the months, which have come in 6 or 7 spurts depending on what currency you're in, the cumulative rest of history gold has been a net money loser. Whenever you have something that gets 100% of its return in 15% of the months, you better be really good at timing.

My point is I am neither pro-gold or con-gold, when I am asked, "What do you think about gold?" I ask, "Well, what do you think about your ability to time?"

~Ken Fisher, Intelligent Investing with Steve Forbes, April 23rd, 2010

May 1, 2010

Ken Fisher on investor psychology

I am what most people would view as crazy bullish.

The fact of the matter is most people think my optimism is pretty Pollyanna-ish. I think most people are caught up in this period I call the "Pessimism of Disbelief."

~Ken Fisher, Intelligent Investing with Steve Forbes, April 23rd, 2010

Ken Fisher on American un-exceptionalism

America is not an island alone, it hasn't been for a long time and it never will be again.

~Ken Fisher, Intelligent Investing with Steve Forbes, April 23rd, 2010

Ken Fisher on the global recovery led by emerging markets

The fact of the matter is, we've got a very nice global recovery being led by emerging markets countries, which collectively are bigger than America, pulling the developed world forward and consistently economic events are coming in better than expected, surprising people. Yet, people just keep batting it off, saying 'I don't believe it, anything good's going to morph into something bad, whatever happens is probably going to be bad.'

~Ken Fisher, Intelligent Investing with Steve Forbes, April 23rd, 2010

(For comparison, consider this recent snippet by Kevin Duffy from the Azimuth blog: "According to the latest Investors Intelligence poll of investment newsletters, for the week ended August 20, 51.6% were bullish and 19.8% were bearish. This reading of +31.8% net bulls registered the highest level of optimism since December 21, 2007. At the time the S&P 500 stood at 1484, on the precipice of a 65% plunge in 15 months.")