Taunter Media

Given enough effort – the whole 10,000 hours thing – most people can perform most tasks fairly competently.  Excellence?  Well, that’s a bit different.  Here is Paul Krugman showing Amity Shlaes how many places there are to run:

[W]ith short-term interest rates near zero, there’s no reason to think that lower wages for all workers — as opposed to lower wages for a particular group of workers — would lead to higher employment.

Suppose that wages across the US economy had been, say, 20 percent lower than they actually were. You might be tempted to say that this would make hiring workers more attractive. But to a first approximation, prices would also have been 20 percent lower — so the real wage would not have been reduced. So how would lower wages lead to higher demand for labor?

http://krugman.blogs.nytimes.com/2008/11/29/changes-in-money-wages-and-amity-shlaes/

Andrew Mellon’s advice to Hoover during the Depression – “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate . . . purge the rottenness out of the system” – has intuitive appeal.  That doesn’t make it right, however.

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What a shock:
http://www.federalreserve.gov/newsevents/press/bcreg/20081123a.htm

For what it’s worth, $7bn of preferred stock paying 8% (not sure if it’s PIK or cash, and really not sure it matters) is an awfully modest fee for guaranteeing the worst $306bn of assets Citi can find, especially since the loan itself is only at 300bps and will, by design, be impaired.

We obviously had to do something, but I would have much rather the government strong-arm an ally like Norway into investing $20bn in voting preferred on commercially reasonable terms than for us to take on such a contingent liability.  I would also point out that the taxpayer would be much better off if the second $350bn of the TARP were used not to inject capital into existing banks but rather to set up ten new banks, each able to go out in the market and lend without the drag of historic liabilities.  Would dilute the existing banking system as a proportion of the total banking system and make us less vulnerable to what comes next.

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November hasn’t been that much better than October – at what point do we start to see major shutdowns?  Almost any levered fund has to be near the event horizon, and many of their individual investors, who took on personal debt to buy into more of them, have to be completely tapped out.  I am less surprised by the selloff to S&P 750 than by the fact that you don’t hear of funds closing up left and right.

http://www.ft.com/cms/s/0/f743863a-b736-11dd-8e01-0000779fd18c,s01=1.html?nclick_check=1

Also, after all of my emails about peak oil, it was with some interest that I watched it cross below $50/bbl today.  Strange thing: I still believe the peak oil guys.  Demand may have dropped significantly – auto miles are down, aviation demand is down, winter has not kicked in – but I have to believe that the production levels we saw in the spring were about all the planet has to offer.  The expensive stuff – the oil sands, some deepwater exploration – might come in and out of the market, but it seems to me that people have short memories and will soon be back to wasting the oil we have.  Not sure what that means for an investment – the oil stocks are actually still up a bit from early October – but I hope our various policy nerds don’t lose sight of this as the Michigan congressional delegation stomps its feet to buy everyone an Escalade Hybrid.

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Every time you think Paulson has been about as corrupt as can be, he goes and does something even more amazing.  Perhaps the most amazing part of the last two months is that he has somehow improved his reputation while doing stuff like this:

http://www.dailykos.com/storyonly/2008/11/15/225049/76/376/661701

I was a bit distracted by the election and while I may have picked up on the supplemental investment in AIG, I had no idea that the original facility was recut so astonishingly in AIG’s favor.  Is there any remotely plausible good faith explanation for this move (eg “If I let these guys fail, the world ends, so I am stuck waiting for them to get around to selling assets, and the original rate I push them into Chapter 11 myself”)?  Or does Paulson simply not care about the taxpayer and feel it perfectly justified to use the government’s money to prop up GS’ share price?

When Palin was nominated she said it would position her well to do things for Alaska.  That sounded awful, but on the bright side it was clear that (a) every other Alaskan politician goes to DC to loot the place for Alaska’s benefit; (b) she had absolutely no idea what the VP is supposed to do.  Paulson is not dumb.  Where is the bright side?

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Investment question – at what price do you buy Goldman stock?  I suppose the general investment theory would be not to buy something you cannot understand, and GS has a lot of specific problems:

• Huge CDS exposure to AIG and everyone else
• Conversion to bank holding company structure (with no deposit base), which dramatically reduces the amount of leverage it can take and, consequently, its steady-state ROE
• Prop trading losses all over the place
• Lousy timing on the private equity fund
• A preferred slug to the government, Berkshire, and whoever comes next to bail them out
• Risk of secondaries
• On January 20, Paulson will no longer be able to divert the full faith and credit of the US government to look out for them.

Still, I wonder if the company isn’t somewhat oversold.  Negative earnings gets in the way of multiples, so there isn’t an effective valuation mechanism, but $28bn of market cap?  If the company went Chapter 11 and you were able to restructure the business with the current employee base (now, apparently, 10% fewer in Japan), network, relationships, brand name, etc, would you inject $28bn to start that company off?  Is it really likely that the company will have a liquidity interruption between now and the date they unwind the toxic waste that forces the current shareholders to give up?

Is this even the right way to think about the company?  Seems to me that most of the credit crisis is over, we are now on to the actual recession/depression, which means that credit card debt and and consumer durables (especially the cars) should be in the eye of the storm.

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