No Recovery Without Failure

I'll expand more on this concept later, but the irony of our financial problems today lay partially in the failure to allow failure. Without failure there can be no success, this is the essence of creative destruction. Our system of bailouts has distorted the marketplace and rewarded failure while punishing success. What about those that lost money buying the stocks of bailed out financial firms you may ask? That is punishment, however please explain to me why taxpayers had to step in ahead of the bond holders of these companies? Please tell me why my hard earned money, which was not invested in bank stocks was required to bailout bond holders of these firms when they in fact made an active choice to invest in these firms? Shouldn't people who make an active decision to bear investment risk actually take losses before the taxpayers are expected too? This failure to allow bond holders to lose money will have severe repercussions long term throughout our entire capital system.

By not allowing failure we prop up companies like Citigroup and GM we punish the companies that could have gained market-share as a a result of the failure. This is how markets work, good decisions are rewarded (eventually) and bad punished (or so we thought). Instead we have created a system where the good decisions are no longer being rewarded (at least like they should) and the bad decisions are in fact being rewarded (bailed out bond holders and government backing). This market distortion can only continue for so long - at some point it must fail. The problem with this new system failing is that it will be much, much worse than had we allowed failure to happen in the first place.

Scott Dauenhauer CFP, MSFP, AIF

NY Times: Building a Cushion Into Investments for When Inflation Returns

I really like Tara Siegel Bernard, she is an interesting personal finance writer. Today I got mentioned in this New York Times article that basically speaks to inflation. For the record, this is the first time in the New York Times which pretty much means I've hit every major publication in the U.S. You name it, I've probably been quoted.

Anyway, if you've got a few, hit the link above.

Scott Dauenhauer CFP, MSFP, AIF
www.meridianwealth.com

Hussman: The Outlook is Not Up, But Very Widely Sideways

Another great update by John Hussman, Ph.D.

Scott Dauenhauer CFP, MSFP, AIF

WSJ: Are Inflation Fears Over-inflated?

Here is a quick video run down of what could potentially cause inflation.

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Scott Dauenhauer CFP, MSFP, AIF
www.meridianwealth.com

A New Mark-to-Market World - Banks Lie

In today's Wall Street Journal an interesting article was written that focuses on individuals and corporations who are trying to make a buck by buying bad "toxic" mortgages and then working them out, pocketing some money in the meantime. The problem? They can't find any "toxic" mortgages to buy, at least not at prices they are willing to pay. A passage from the article:

"Initially, we thought there would be a plethora of opportunities" to buy loans, says Mr. DellaCamera, 55 years old, who headed trading at hedge fund Elliott Associates for more than a decade. "But we pulled back from buying these loans because the pricing isn't there and we were having trouble hedging." He calls servicing troubled loans a "tremendous opportunity."

Because most mortgage-loan sales are private, statistics are difficult to come by. Prices currently vary from 20 cents per dollar of unpaid principal for some of the riskiest subprime mortgages to nearly 90 cents on the dollar for current loans to borrowers in strong housing markets, says Kingsley Greenland, chief executive of DebtX, an online marketplace for loans.

Those types of prices would produce losses far greater than most have reserved for, says Keefe, Bruyette & Woods analyst Frederick Cannon. "Banks are essentially holding loans in the system at a value of 97.5 cents on the dollar," he says.

Did you get that? Banks are holding loans "at a value of 97.5 cents on the dollar." Can somebody please explain this too me?

This is the result of the change to Mark-to-Market rules which allow the banks to carry worthless or highly suspect loans on their balance sheets at prices that have no relation to economic value. I think that Mark-to-Market was ripe to be changed, however a return to Mark-to-Fantasy has begun.

Do you ever wonder why just a few months ago the banking system was on the brink of insolvency and all the talk was about nationalization.......and now everything is fine and banks are paying back TARP? I believe the answer lies in the loosening of mark-to-market rules and the fact that banks are carrying loans at near full value when in fact the collateral securing those loans are severely impaired and no improvement is expected. The stress-tests were a joke and the banks are not as clean as we are being led to believe. This should scare you, it scares me.

Scott Dauenhauer CFP, MSFP, AIF