Talk about putting your foot in your mouth. This would be funny if it wasn’t sickening.
During congressional questioning on Friday, Sen. Elizabeth Warren (D. Mass.) commented that the U.S. Federal Reserve‘s job is like that of “a cop on the beat.”
And that’s when New York Fed President William Dudley inserted a foot in his big mouth.
He responded, “I don’t think our primary purpose as supervisors is a cop on the beat, it’s more like a fire warden; make sure that the institution is well run so that, you know, it’s not going to catch on fire and burn down. And managed in a way that if the institution is stressed that it doesn’t collapse and threaten the rest of the financial system.”
In other words, there’s no “policing” going on.
Dudley said it – not me.
But today I’ll share with you what I do have to say – and I’ll show how the close relations between Wall Street and Washington could lead to yet another financial conflagration…
Too Close for Comfort
According to Dudley, then, the Fed’s job – its reason for existence – is to protect banks from burning themselves down when their greedy schemes ignite depositors’ ample piles of kindling.
The New York Fed president was testifying before the Senate Banking Committee’s Subcommittee on Financial Institutionsand Consumer Protection on the subject of the Fed being too close to the banks it’s supposed to police.
Now we know why banks and the Fed are so close. When the banks’ crack pipes break from excessive heat, the Fed is there with liquidity beer bongs to dampen their highs so they don’t OD and send the whole economy on a bad trip.
And here’s even more evidence that lawmakers failed to jam the revolving door between the big banks and their so-called regulatory agencies following the 2007-’08 financial crisis: Dudley is the former chief economist of Goldman Sachs Group Inc. (NYSE: GS).
And after that statement, he wasn’t done.
Dudley stuck another foot in his mouth by explaining why the Fed is not the cops.
“Our main goal is to ensure the safety and soundness of the institutions that we supervise,” he told Sen. Warren. “If in the process of doing that we see behavior that we think is illegal, then our job is to refer it to the enforcement agencies.”
A stunned and angry Sen. Warren replied, “But you don’t think you should be doing any investigation? You should wait to see if it jumps in front of you?”
Yep, that’s what the Fed’s job is. It’s not an arson investigator or fire inspector, just a fire department putting out pesky conflagrations by pumping more flammable liquids into their basements.
How else are banks going to survive and thrive?
When it comes to foot and mouth disease, the Fed is Patient 1.
There’s a lot of action over in the subprime auto sector, and it’s not pretty
The saying is “Where there’s smoke, there’s fire.” So, it’s probably just a matter of time before the mainstream media and the general public catch on and see the flames being vigorously fanned by greedy lenders.
It’s the same old story – and one I’ve recounted here before.
Lenders are making subprime auto loans to low-income (and no-income) borrowers, most of whom are down on their luck. And the lenders are teeing those folks up to hit them out of the park again.
The name of the game is yield. That’s what it’s been since the U.S. Federal Reserve started manipulating interest rates further and further down.
Yield-hungry investors want more income. Fee-hungry bankers want to deliver it to them. And car-hungry buyers are getting suckered.
A lot of the country’s current economic “optimism” is predicated on surging auto sales. So, maybe the state of the economy isn’t as rosy as the president, Congress and the media would like us to believe.
And today I’ll show you why…
Bottom Feeding for Borrowers
Auto lenders fan out to dealers, especially to used-car dealers, where low-income borrowers are more likely to shop. The lenders tell the dealers to sell cars, and they’ll make loans so borrowers can drive off in that shiny used clunker.
However, the lenders don’t want customers with good credit to borrow to buy. They want to lend to struggling people whose credit is so bad that they know they’re going to get hit with a lot of interest.
And these borrowers, no matter how “subprime” their situation, can get loans.
You see, the worse their credit, the higher the interest rate. Because the car might be older, they’re going to want a warranty and some other must-have services and “upgrades” to make sure the car is going to get them where they want to go. And for too many of those folks, that’s the unemployment office.
But what if the borrowers don’t pay? No matter – lenders “protect” these cars as collateral and can pick them up wherever they are turned off and left on the side of the road because of the neat shut-off devices dealers are installing.
That, however, is another story.
What am I worried about? I’m looking at the smoke and figure the flames are coming.
If you haven’t seen the smoke, here’s where it’s coming from:
The U.S. Justice Department has subpoenaed GM Financial (NYSE: GM) and Santander Consumer USA Holdings Inc. (NYSE: SC) over their subprime auto underwriting and securitization practices.
The U.S. Securities and Exchange Commission (SEC) is looking into Ally Financial Inc.’s subprime auto lending practices.
The New York State Department of Financial Services is suing Condor CapitalManagement, a subprime auto lender accused of stealing from its customers.
The New York County District Attorney’s Office recently subpoenaed Capital One Financial Corp. (NYSE: COF) regarding its subprime auto-lending business.
The New York City Department of Consumer Affairs said on Friday it’s investigating used-car dealers’ tactics for getting low-income borrowers to take out more expensive loans with hidden fees.
The federal Office of the Comptroller of the Currency’s deputy comptroller for supervision risk management said in a speech on Oct. 28 that he’s concerned about borrowers’ equity in their cars relative to the amount borrowed and the actual resale value of the cars.
And the federal Consumer Financial Protection Bureau is on the case, too. It’s opening more investigations after extracting $98 million from Ally Financial last year, having charged the lender with jacking up interest rates and fees to African American subprime auto borrowers.
That’s a lot of smoke.
What’s sad in all this is that sophisticated lenders and auto dealers are using these poor folks in order to soak them and then repossess their cars. And then they’re doing it again and again to as many down-on-their-luck borrowers as they can wave into their showrooms and onto their lots.
Do you still think auto loans are just the minor leagues compared to the mortgage game that home lenders played not long ago?
U.S. stocks have been making new highs in recent days. And I believe we’re looking at strong odds for a market rally that lasts to the end of the year.
There are lots of reasons why stocks are headed higher, but one in particular is both surprising and telling.
It’s also a difference maker.
You see, if you understand what that “catalyst” is, you can pick some winners yourself.
And today we’re going to look at it together…
The Bonus Round
The financial markets – stocks, bonds, derivatives and currencies, for instance – can be quite complex.
But the catalyst that’s likely to drive U.S. stocks higher between now and New Year’s Day is surprisingly simple.
You see, if the players on Wall Street are going to earn their fat year-end bonuses – and, in some cases, actually keep their jobs – the Dow, the S&P 500 and the Nasdaq need a good rally during the final weeks of 2014.
Here’s why the institutional players are feeling such urgency.
In spite of markets making new highs repeatedly this year, it hasn’t been a smooth ride.
The bumps throughout the year, especially the mid-October swoon, kept money managers on edge and too often took them to the sidelines and out of the action. Worse, a lot of hedge funds were betting against the rising tide of stocks and shorting U.S. government bonds.
2014 started out well enough, but an ugly 5% dip in late January scared stock players into believing that the long-in-the-tooth rally was nearing a possible end.
That didn’t happen.
Stocks rallied back and higher, though not without a few minor bumps here and there.
Then at the end of July, after the S&P 500 poked its head above 2,000, we got another quick 5% pullback. Once again, there was talk of the rally getting tired and petering out.
That didn’t happen.
By late September, stocks made new highs, closing nicely above 2000. Then, seemingly out of nowhere in mid-October, stocks tanked about 8.75% in what seemed like the blink of an eye.
That’s when a lot of managers threw in the towel.
Most mutual fund managers sold winners and raised cash, while at the same time aggressive hedge funds shorted momentum stocks and tried to push the market lower.
Unfortunately, hedge funds got a double whammy in the mid-October selloff.
The mini U.S. stock market panic caused the usual “flight-to-quality” run into U.S. government bonds. The U.S. 10-year yield dropped from about 2.25% down to 1.85% with stunning speed.
The mini-panic had resulted from a sell-off in European stocks when weak European sovereign peripheral countries saw interest rates unexpectedly rise on their government bonds,
The problem for hedge funds was that they were short U.S. government bonds, believing that the coming end of quantitative easing would cause rates to rise. Bond prices fall when yields rise.
However, the flight-to-quality run into U.S. bonds caused bond prices to rise to near record highs – not fall. Hedge funds that were short government bonds got killed when prices went through the roof.
Then, even more quickly than it fell, the stock market bounced to new highs yet again. And just as quickly as bond prices rallied, they fell back to where they were before the stock-market sell-off.
Net, net, mutual fund managers and long-only money managers (“long-only” means they don’t short stocks) sold stocks, raised cash and went to the sidelines. Hedge funds had little choice but to lick their wounds and scratch their heads.
When the picture in Europe all of a sudden looked brighter, thanks to calming pronouncements from the European Central Bank, U.S. stocks rallied back with a vengeance.
However, because they feared the October sell-off was the end of the rally, long-only money managers missed the quick run-up to new highs.
Now, those managers are lagging the S&P 500′s positive 2014 performance, and hedge funds sitting on losses all have to figure out how to make money by New Year’s. Their bonuses and jobs depend on it.
So, the easiest path for them all is the path of least resistance, which is up, up and away. That’s what they’re betting on. They all got into stocks as the bounce was creating new highs, and now they have to push stocks higher so they don’t lose out.
That’s how Wall Street wants to play through year’s end. It doesn’t mean the market is guaranteed to go higher. There will be some big players who will short stocks up here and try and create a panic.
And the market is facing the usual macro-global headwinds. Russia is entering Ukraine again, and there’s the possibility of a full-blown conflict there.
Still, when it comes to Wall Street paychecks, they’re going to do whatever they can to get markets higher through the end of their December performance and bonus calculation period ends.
How can you play along?
The best opportunities will be getting into big-cap stocks that have lagged in the recent rally to new highs.
Players will look to push those stocks higher. Stocks having made new highs will be looked at as fully valued for the moment, and big-caps with good earnings that haven’t moved up as much will be seen as undervalued and ripe for a bounce.
Here’s why big-caps are the way to go.
After saving their jobs and earning their bonuses, managers may want to pull out after their year-end accounting periods have passed. And it’s easier to get out of more liquid big-caps than mid-caps and small-caps.
They look ripe to bounce, too, but are less liquid than big household names – so now’s the time to go large.
That’s what I told you all earlier this week when I answered one of your questions about how to start making money in the trading markets.
Get started by taking positions in stocks, exchange-traded funds (ETFs) or whatever it is that you know something about. Next, learn more about what you don’t know, and then keep learning.
The second basic principle when you get started is that you have to be OK with losing some money – but never lose more than you can laugh off. And you must learn from every loss. Understand what happened and why.
Of course, there’s a lot more to it than that. So today I’ll answer some more of your questions.
Consider these columns the first couple chapters of our How-to-Make-Money Manual.
Is that something you’d want to read?…
Q: Other than wanting to grow my investible money, I have no clear strategy and seem to be bouncing around the multitudes of advice and going by trial and error. Do you have any thoughts about how to find what works for me? -John P.
Q: I’ve heard of day trading but don’t know much about it compared to longer term investing. What are the risks of day trading, and do you recommend trying it instead of long-term investing? -Kenny T.
I do have thoughts about how to find what works for all of you, and part of that includes addressing trading and investing.
First, there is a huge difference between trading and investing.
Trading is short-term positioning where the trader gets into a position to make money, take profits and move on to another trade. That may include taking another position in what he just got out of, or taking an opposite position on the same instrument he just got out of.
Some of the most successful traders on Wall Street do just that. Those traders are specialists on the New York Stock Exchange and market makers. And a lot of institutional traders do the same thing.
Think about that. They’re doing exactly what I told you all to do on Monday – taking positions in something they know about.
If you trade the same stocks over and over and over, you will become an expert in how they trade, how they react to news and earnings and how they trade on the market’s movements.
The great majority of “professional” traders do their swapping in a limited universe of stocks or commodities, or whatever they follow.
If you’re going to trade to make money, follow a few stocks and trade them until you become an expert in how they trade. Trade them on the way up and short them on the way down. You can make money both ways.
When you know your stocks, trading becomes a game. And besides being lucrative, trading is fun, too.
Investing, on the other hand, is the old “buy and hold.” But there’s a lot more to it.
I advocate and practice both trading and investing, and you should, too.
It doesn’t matter what you think you are, or what you want to be, a trader or an investor. You absolutely, positively have to be both.
Again, investing is not rocket science – it’s about making money. You make money when opportunities present themselves. And when they do, the first thing you do is put on a trade.
It doesn’t matter if you buy something expecting its price to go up or short something expecting its price to go down. You always start the same way – you put on the trade, you take a position.
Whether any given trade starts out as an investment or ends up being an investment is just a matter of time. How long will you have the position?
I have made many trades that turned into long-term investment positions. And I’ve made what I thought were investments only to sell them fairly quickly.
Taking the Long View
Here’s my guide to making an investment, meaning getting into a position for the long haul.
First, I want to know enough about what it is that I’m buying to be comfortable understanding why the position might rise and, more importantly, why it might fall.
Second, although I like and do invest in “growth” stocks, I prefer to invest in good dividend-paying stocks that have strong, if not dominant, industry positions and are too-big-to-fail and too-big-to-be-derailed by some up-and-coming technology or competitor.
Because I’m thinking about investing and not trading, I’m probably going to take a bigger position and intend to add to it. That doesn’t mean I’m going to jump in big. I’m still going to put on a trade, and from there I’ll add to the position according to a plan.
If you’re putting a lot of money into an investment position, you better have a plan for when the stock or the market goes down and for when things go up.
The reason I prefer dividend-paying stocks and instruments is because then I don’t mind adding to the position when the stock goes down. If the dividend is secure, as the price goes down, the dividend yield goes up. So, I like adding more income for less money in an investment.
On the way up, because it’s doing what I expected, I’ll add more to the position until I get to my predetermined allocation of my investment capital to that position.
That’s the plan. But it doesn’t always work out. And that’s when I trade out of the position.
If my investment isn’t working out, or looks like it might face a down-trending market, I’ll get out and wait to reenter the position at a better time.
However, that is the biggest problem traders and especially investors have – timing.
There’s no hidden formula for timing a trade or getting into an investment. Your knowledge about timing comes from your own experience.
I’d say I’ve been lucky doing that, but I’m not really lucky. I’m good at trading and investing because I’ve been doing it for so long.
You, however, don’t need more than 30 years to be good at it. You just have to keep learning and understanding how your positions move. And if you start out with small number of positions that won’t hurt you if you lose and get out, you’ll learn – and your timing will get better and better.
One last thing on timing. No one teaches you this, but it’s all you need to know. Timing is about you. You have to listen to yourself and trust your feelings – you already know more than you realize.
If you only trust other people’s advice and timing, you’ll never be successful, not the way you want to be. To make money, you have to know it’s your money and you rule over it, and what you do with it is all up to you.
You can learn to trade and invest and make a lot of money. I learned. It took a while, but I got it.
I want you to get it, and get a lot of it.
What works for you, whether it’s trading or investing, is up to you. You can choose or, better yet, you can do both. They both work.
In the next chapter of our How-to-Make-Money Manual, I’ll talk about when to get out if things aren’t going your way and how to use stops.
However, today I’m going to answer only one question.
This question is about getting started.
Getting started is extremely important – and we do it all the time.
You get started every time you make a trade, every time you pick an investment. So, you should treat every position you take like you’re starting over.
It’s that important…
Q: Everyone has opinions – bear/bull market, don’t buy bonds, sell and take your profits, buy XYZ stock… For a beginner, how do you figure out the best way to start investing? Thank you! -K
A: That’s a great question, because it speaks to the heart of the matter. How do you do it?
There’s good news and bad news in the answer.
First, the bad news. There are almost innumerable ways to trade and invest and more “how-to” books and Web sites than any individual can count. And there’s a lot of great advice out there in the information-overloaded world.
However, there’s no single starting point that encompasses a universal truth from which you can launch headlong into the investing game and be successful.
The good news is… there is a single universal truth from which you launch yourself. And even better, that truth, if you employ it above all others, will make you successful.
Here it is. There is no “figure out the best way” strategy. There is only the position, putting on the trade, getting into it.
Make no mistake. All “investments” start out as a trade. It doesn’t matter if you’re putting on a stock trade, a bond trade or a commodity trade – it’s a trade.
There are only two directions the trade can go in: in your favor or against you.
Now, I’m going to digress here for a moment, and then come back to what you should invest in and when.
Personally, I can trade anything. I have traded stocks, bonds, commodities, currencies, packaged products, options, forwards, futures and derivatives – all quite successfully. I’m not an expert in everything I have traded, by any stretch of the imagination. But I have made money trading everything.
How? Because it’s a trade. I’m either going to be right and make money or be wrong and lose money. And for me, not doing a trade is itself a trading decision.
The game is all about making money, nothing else. It’s not about being an expert. It’s not gambling either. It’s simple. Do you know enough about where your trade may go to make money?
It’s not about overanalysis, nor is it about jumping in on a guess. Making money in the market, any market, is about what YOU know, or think you know. That’s why I can trade just about anything be comfortable and, far more often than not, make money. I trade on things I understand – not that I’m an expert in.
If I’m wrong, I get out. If I’m right, I stay in the trade. Sometimes I stay in for a long time, which make it an investment holding.
So, how YOU do it? Obviously, start with something you know something about or are interested in enough to keep tabs on. Then you buy some shares. Then you manage the trade. You have to be in it to win it.
Here’s a real-world example. A young lady at a TV studio where I was appearing asked me the exact same question. And I gave her the same advice, along with some more that I’ll give you below. She understood she had to make a trade to be in the game and asked me what she should start with.
I asked her to tell me what she was interested in. She liked fashion. I said pick a fashion stock. She didn’t hesitate.
She blurted out, “I really love Michael Kors clothes.” I said, “Then start with Michael Kors.”
And she did. She didn’t hesitate. She did some homework on the stock (NYSE: KORS) and the company, and she jumped in. The following week she told me she bought a few shares at $80.
She was happy when they were at $100. I asked her if she had followed my other “trade management” advice, and she said she hadn’t. She was going to keep the stock because she was up so much.
She ended up selling it back down where she got in – actually a little lower.
Now, here’s the advice you need. Make a decision to get into a trade because you believe (there’s no such thing as “knowing”) you understand the company, what it does, how it does it, how it makes money and whom its competitors are. Buy a few shares if you think they are going up. That’s how you start.
You could buy a tech company, you could buy an industrial company, a fashion company, an ETF based on oil, or corn, or a basket of financial stocks. The only thing that matters is that you think you understand what might happen. Then there’s trade management.
You’ll never panic when you put on a trade if you know how much money you’ll BE COMFORTABLE LOSING.
Don’t lose more than you can laugh at. It’s not a laughing matter, but if you lose a little and chalk it up to a learning experience (and you better figure out your lesson on every losing and winning trade), then you can keep trading. The more comfortable you are with understanding how much you can lose and be comfortable actually losing that, the more you will actually make.
Before you put on the trade, have a trade management plan. If it goes down a certain amount, get out and figure out what happened. Why did the stock go down? Was it something the company did? Something a competitor did? Did a falling market drag it down? What happened?
It is NOT important that you lost on that trade. What’s important is that you understand WHY the stock went down.
Losing is not about you losing money (though it is in a secondary way). It is about you understanding why the stock or ETF or commodity went down.
If you understand, then you’re not a loser. You’ve won by learning something, by gaining more experience, by understanding.
That’s everything. Understanding makes you comfortable. It’s power. It gives you power to believe it is YOU who will make money, it is YOU who controls your destiny.
Trade management is knowing where you’ll get out if you start losing on the position. And it’s about what you do when you’re making money.
There are many fun and profitable ways to manage the winning side of trades.
We’ll get to them in due course.
Let me know if this was helpful. It’s worked for me for 33 years. I’m never afraid. I love to trade.
I hate to lose. But when I do, I always study what happened – I try to understand.
After all is said and done, trading and investing isn’t complicated. Wall Street just wants you to think it is so you go running to them for advice – so they can soak you.
You can trade and invest and make a ton of money. It really isn’t rocket science
It’s mostly basic common sense, understanding who you are… AND TRUSTING YOURSELF.
I’ll be answering some more of your money questions later this week. See you then.
And you thought the federal government was getting out of the mortgage guaranteeing and backstopping business.
In fact, the feds are not only not getting out of the mortgage business, but they’re already blowing up the next bubble.
As a result, the Great Recession – spawned by the credit crisis, easy-money mortgages and low interest rates – is going to make a comeback.
We already have artificially low interest rates, so check that box. All we have to do now is start dishing out easy mortgages again.
Well, we can now check that box, too…
Now when I say “federal government,” I mean asinine legislators directing equally asinine regulatory agencies.
And here are a few of those “august” agencies now.
The U.S. Federal Reserve, the U.S. Securities and Exchange Commission and the U.S. Department of Housing and Urban Development all just signed off on new mortgage rules.
Originally, in the aftermath of the mortgage meltdown, here’s what was supposed to happen.
Lenders in the private-money mortgage origination and securitization game (“private” meaning not guaranteed by the federal government in some way) were going to have to demand a 20% down payment from borrowers. Or they were going to have to retain 5% of the mortgages they made on their own books if they wanted to securitize those loans and sell them to investors.
However, here’s what showed up in the final version of the long-awaited mortgage rules.
Our stalwart government lackeys bent over backward on behalf of banks and said, “Fuhgettaboutit! You don’t need to get a 20% down payment, and don’t bother keeping some of that crappy risk you’re taking on your books.”
Basically, here are the new rules: Check the borrower’s ability to repay (which means check for a pulse and a job), and make sure they don’t have more than 43% debt-to-income levels. Then, have at it all you want.
Of course, not everyone in government is an idiot or on some bank’s payroll. Two out of five SEC commissioners voted against the lenient rules. Republican commissioners Daniel Gallagher and Michael Piwowar strongly objected.
Gallagher said, “Today’s rule-making takes the untenable housing policy that injected irrational exuberance into mortgage lending and, as a result, caused a catastrophic financial crisis and chisels that failed policy into the stone tablets of the code of federal regulations.”
Now, the private-money mortgage game is a tiny slice of the whole game. Last year, private mortgages amounted to $27.8 billion out of $1.58 trillion in total mortgage loans (including refinancings).
The idea was to tighten up rules in the private (nongovernment-backed) market first and then get the government out of the mortgage business.
So much for that idea.
Legislators and regulators caved in to lenders on these rules, in part, because they’re seeing the housing market start to slip again on account of heightened lending standards. And the way to strengthen the housing market, of course, is to make it easier for people to borrow to buy houses.
The private mortgage market isn’t ever going to replace the public market as long as the government keeps growing its backstopping engines: the Federal Housing Administration, Freddie Mac and Fannie Mae.
You remember Fannie and Freddie. They were the private companies (with lots of stockholders and bondholders)/government-sponsored enterprises taken over by the government in 2008 before they imploded the United States into a hole we may never get out of.
They guaranteed trillions of dollars of mortgages and bought pools of them so they could reap the interest income from them. That is, until the game came crashing in on them.
Well, they’re bigger than ever. Between Fannie and Freddie and the FHA, the federal government backs (in some way) more than 95% of all mortgages now created in the United States.
That’s right. We’re headed right back where we just came from.
I’m all for loosening up lending standards – but not for taxpayer backing.
Government idiots are all about slathering voters with easy mortgage money avenues, and the Fed is all about slathering banks with profit-making opportunities.
Together, they are cooking up another you-know-what stew.
Beleaguered and desperate student loan borrowers need immediate help.
There is a way out for them. That same way out could also rein in college costs.
But it’s blocked by law. Obviously, the law has to be changed.
It can be done in just one step.
And today, I’ll tell you how we can get there…
The wrongheaded law, which the financial industry pushed hard for, of course, is the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).
BAPCPA basically says the courts cannot wipe out any student loan debt – federal or private – in bankruptcy unless the borrower can prove repaying the loan would cause “undue hardship.”
And you can pretty much forget demonstrating undue hardship unless you suffer from a severe disability.
BAPCPA lumps student loan debt in with child support and criminal fines as types of debt that can’t be discharged in bankruptcy.
While the “Bankruptcy Abuse Prevention” part of the law is obvious, one wonders where the “Consumer Protection” part of BAPCPA resides.
It’s in there, but to find it, you have to understand how bull(you know what) is spun into colorful yarn and woven into legislation.
Financial industry lobbyists pushed BAPCPA by promising cheaper student loans and more of them.
“Cheaper” didn’t happen, but “more” certainly did.
In 2010, student loan debt in the United States surpassed credit card debt for the first time. And thanks to BAPCPA – let’s call it the “Protection Racket Act” – lenders are sticking it to students for life.
Student loan debt now exceeds $1.3 trillion, according to the U.S. Federal Reserve.
Private lenders, however, say they’re only a small part of that big number and are wrongly being pummeled. That’s not exactly true.
It is true that only about 10% of the $1.3 trillion of student loan debt is strictly private. But according to the U.S. Department of Education, about 33%, or $403 billion, of the total is private debt backed by government guarantees.
It doesn’t matter what form student loan debt takes – BAPCPA says it cannot be wiped out during bankruptcy.
Obviously, the law is a bad one, foisted on us by bad actors – the usual suspects.
BAPCPA has to be changed or struck down.
Declaring personal bankruptcy is not an easy or desirable path for beleaguered borrowers. But it is a way out of indentured servitude to lenders who have no legal obligation to work with borrowers.
If lenders had to write off bad loans discharged in bankruptcy, no doubt they’d be less inclined to shovel out money to borrowers without doing better repayment calculations.
That would reduce the amount of easy money flowing into the student loan borrowing arena. And that would be a good thing.
Not everyone who borrows a fortune to get a degree ever gets a degree. And those who do get degrees lately, for almost the past decade, can’t find work.
As long as there’s money to spread about because BAPCPA requires lenders get paid back, college costs will keep rising.
Have you priced an education lately?
It sure looks like colleges, universities and, especially, for-profit schools of almost every stripe are in cahoots with lenders. It’s become a nationalized, legitimized duplicitous and ruinous Ponzi scheme.
It’s got to stop. Making student loans dischargeable is the first step.
They’re telling us that markets are nervous, very nervous. The constant jumping out with both feet and jumping back in with both feet is indicative of nervousness. Investors are jumping out because they don’t want to get caught in a correction, and they’re jumping back in because they don’t want to miss the next leg up.
However, things aren’t exactly what they seem to be. The jumping in and out isn’t being done by individual investors – it just looks that way. And that itself is even more telling, but of something completely different.
Here’s the truth about the new volatility. First of all, it’s part of the system now. Second, volatility will always increase when markets head south or when nervousness pervades.
Volatility has many meanings, and how you slice it and dice it or measure it is another conversation, and a long and complicated one. But there’s a simple understanding of volatility that you absolutely must grasp and not let go of. All other means of describing volatility are part and parcel to the essence of the new volatility.
The “new volatility,” which I’m coining here and now, refers to the big moves (with “big” always being relative) that stocks make. Stocks come first. There is no “market” without individual stocks.
Stocks all have a bid and ask. In normal times, there are investors and traders bidding for (wanting to own) shares at prices they want to buy them at. And there are offers, prices that investors and traders want to sell shares or short-sell shares at. The difference between a bid and an offer, meaning the two prices, is called the spread.
Whenever there is nervousness, especially when a stock, stocks, or the market is going down, spreads “widen.”
The reason spreads widen is straightforward.
Say you’re an investor, or a trader, or a market-maker (I’ll get to market makers) and you are bidding for stock and prices are falling. You’re not going to be so anxious to put up a price at which you are willing to buy shares if you think you can pull your bid and buy shares lower as the price falls.
Because sellers still want to sell and buyers are getting out of the way, when a bid shows up at a lower price, sellers will quickly “hit that bid” (meaning sell to that bid) to unload their stock, or short the stock if they think prices are going lower.
Market makers (and I made markets on the floor of the Chicago Board Options Exchange and as an “upstairs” trader in stocks and other instruments) are designated (subject to regulators) traders in certain stocks. A market maker’s job is to always post a bid and offer in the stocks he or she makes a market in.
Specialists on the New York Stock Exchange are market makers, too. If you get that, you know that market makers have to be willing and able to both buy and sell the same stock at the prices they’ve posted. They have to.
Now, if you’re a market maker and the stock you make a market in is falling, are you going to keep bidding for stock and keep buying stock as the price falls? Of course not.
So what do you do? You widen your spread, making it as wide as you can within the rules that govern those parameters (wink, wink).
Welcome to the New Normal
The new volatility comes from wide spreads that are inherent in the new normal market. The new normal market has wider spreads than anyone really sees – until panic occurs, and then everyone sees how wide they get.
That’s because there just aren’t a lot of bidders and sellers lining up anymore. When I say they are not lining up, that doesn’t mean they’re not there – it means they aren’t putting down their orders anywhere.
We now have 14 exchanges here in the United States, where we once had one, the NYSE, then two with the American Stock Exchange (AMEX), then some other little ones, and finally three big ones when the NasdaqStock Market computerized exchange came online. On all these exchanges, investors and traders can send their orders – mostly to places that will pay them to execute in their houses.
And because stocks now trade in increments or a single penny, investors and traders don’t put down orders and just leave them out there.
The advent of decimalization on top of an increasing number of trading venues and what the confluence of those two had on volatility is a remarkable story, one for another time. But suffice it to say, they resulted in more inherent volatility.
Even when the spread in a stock looks tiny, and you think that means there’s a lot of liquidity there, you’re being fooled. What’s more important than the actual spread is the “depth of the market” or how many shares are being bid for at that bid price and how many shares are being offered at that offer price. That’s what’s important.
That seemingly “tight” spread can widen in a nanosecond if there aren’t any bidders lining up to buy stock.
That’s where volatility comes from. The big moves aren’t necessarily the result of a lot of volume of shares being traded (though that certainly adds to volatility at times).
The new volatility inherent in the system results from the fact that spreads widen really quickly. Both on down days when investors are anxious to get out at any price and on big up days when investors will pay up to get into a stock.
Volatility moves stocks quickly in either direction. The new volatility means that, even on the quietest days, volatility can spring to life in a nanosecond.
What the recent volatility, meaning the triple-digit moves in the Dow, means is that investors and traders are nervous and don’t know what the market’s next direction will be.
Because the market system has embedded new-volatility characteristics that will cause prices to gap up and gap down, we should all take the increasing volatility as an early warning sign.
Whenever markets are this nervous, it’s time to be cautious and make sure you have an exit plan, or at least a strategy to hedge any positions you have.
If you can’t beat ‘em (or manipulate ‘em), then don’t join ‘em.
That’s the new Wall Street mantra, as evidenced by happenings in the “fixing” world.
Talk about irony. “Fixing” or “fix” are Wall Street terms used to describe how benchmarks are priced on hundreds of instruments, from the Libor and other foreign currency exchange rates to gold, silver and swaps.
In all fairness, “fix” didn’t start out as a Wall Street term.
It’s been around, but Wall Street eagerly joined ‘em.
Now, join me as I tell you all about this fix we’re in…
Price Fixing’s Downfall
Most stocks trade on exchanges, and their prices are determined by those trades, and so the closing price of a stock is generally the last price at which it traded. On the other hand, benchmarks (not including stock-market benchmarks) are “fixed.”
Take the Libor, for example – it’s fixed. The London Interbank Offered Rate is actually a series of interest-rate benchmarks in different currencies for different durations.
The Libor is the most widely used interest-rate benchmark in the world. Interest rates on all kinds of loans are based on Libor plus some additional “spread” above the base Libor rate.
But Libor itself isn’t determined on any exchange, or where loans are traded over the counter, or necessarily by any actual transactions. Libor is fixed by a fixing panel.
That means the select, small panel of bankers who trade Libor (interest-rate traders) get together, through computers (for some instruments, sometimes by phone), and fix, which means determine or price, benchmarks. Those benchmarks are then used for valuation purposes, including pricing trade blotters and balance sheet assets; for loan pricing purposes; and to trade against.
While the methodologies used to determine fixes are different, in all cases where benchmarks are fixed by panels, the input of the bankers is what results in the output.
When panels are convened to determine the fixed price of an instrument, and the panelists also make markets, hold as assets, and/or trade those instruments, panel participants may have an agenda in determining price outcomes.
Say, for example, you’re on a panel that determines the price of silver. Maybe your boss comes to you and says, “We have stockpiled silver, and the quarter is coming to an end. We need the price of silver to be as high as you can make it because the value of silver will impact our quarterly earnings.”
Or, say you’re a trader who has a big short position in silver, it’s almost the end of your fiscal year and your bonus will be determined as of the last trading day this week. Because you’re short silver, if you manipulate the price of silver down (by influencing the panel’s outcome), you’ll get a bigger bonus.
The problem with these panels is that they can and have manipulated benchmarks they are charged with determining, presumably in a fair and honest manner.
Big banks responsible for fixing Libor were regularly manipulating rates. So far, a group of them have paid more than $6 billion in fines for their dirty work.
Member banks of panels that determine fixings on foreign currency exchange rates have manipulated them and will end up paying billions of dollars in fines to settle those charges. And there are other ongoing investigations where regulators are looking at other instruments whose prices are determined by panels.
Well, now that the big banks are subject to huge fines for their manipulations, they are packing up their panel positions and closing shop.
That’s right. Banks that got away with manipulation for years and probably decades – and got caught – are getting out of the business of being on panels.
Several big banks, including Deutsche Bank AG (NYSE: DB), JPMorgan Chase & Co. (NYSE: JPM), UBS AG (NYSE: UBS) and Citigroup Inc. (NYSE: C), have looked at the cost of those fines and dropped out of panels.
I guess the old saying works in reverse: “If you can’t beat and cheat ‘em, leave ‘em.”
How’s that for a slap in the face?
These banks obviously feel that they can’t be honest, or that they can’t control the greed of their traders or higher-ups, who all like their big-fat bonuses, to any degree that they can stop the manipulation that’s become part of the fabric of the soiled cloth they’ve woven. Because they can’t make money cheating, they’re packing up their knitting needles.
First Comes Silver
I say good riddance to you lying, cheating manipulating bonus junkies.
It’s high time we replace panels of poseurs with transparent, real-world, market-based inputs. We’ve had the technology for years now. The old system is antiquated, and the only reason it’s still so predominant is that it’s so easily manipulated.
Silver was the first to get a makeover. Gone is the 117-year-old London Silver Fixing Market and its panel pricing methodology.
It was killed off in the middle of August this year when a new system for determining the silver fix was implemented. The new fix, the London Bullion Market Association Silver Price, is determined by actual transactions. And where there aren’t enough transactions, meaning 300,000 ounces of silver trading hands, an algorithm takes over that looks at price and volume transactions and comes up with a dirty-hands-off, free-market fix.
In case you’re wondering why silver went that route, it was because Deutsche Bank, one of the three panel members who “fixed” silver (I used quotes there, because, well, you figure it out) very publicly pulled out of the panel.
Why did they pull out? Who knows?
Maybe they were just tired of getting caught up, or caught, in the fixing game.