Monday, March 23, 2009

MARKETS LOVE IT - So are crtiics wrong?

NEC head Larry Summers defends THE PLAN saying how can anyone be opposed to a plan that re-starts markets.

or earth to Larry, earth to Larry...

Beam me down Scottie...
NOTHING in this plan restarts markets. It is like a Sci-Fi movie creating a parallel universe only Treasury is just creating a paralell market. All the bells and whistles (as Paul Krugman puts it) attached to participating and privileged investors, those are what MIGHT make it go. There is nothing in this to restart the unaided market. There is no boost in transaction values that anyone outside of the governments select group of investors will benefit from.

Still waiting...
Only when the economy improves will private sector unaided investors change thieir tune or raise their bids.

Bad rules, Still rule!
The government is dealing with a market distorted by bad rules (mark-to-market accounting) by creating a new set of distortions. This does not re-start free markets as Summers claims.

Still markets like it.

Markets like it! That does not mean it's good. Kids like to eat sugar, too
It could be that markets are happy that there is a plan at long last. It is a supportive plan. It could get these special selected investors to buy some troubled assets. it might help some banks. But I think what is being misread by markets is that this plan has no legs, spawns no synergies, creates no externalities. It gets its juice from special breaks (guarantees, risk limitations, low interest rates and synthetic leverage) not available to general market players so it will not lift market prices even if these special players are willing to buy toxicity at a higher price. No one else will...

The real bottom line
This plan simply creates a second special market where troubled assets will have more value because of special treatment.

Taking from the poor to give to the rich?
One other problem is that it makes the troubled banks take some losses and will transfer the eventual gain on these toxic assets to this other special investor group. Is that what you want to do when banks need the capital more desperately?

Why markets are UP!
As these points sink in, markets may no longer be as enamored with THE PLAN. On the other hand, my view is that markets are so over sold they hardly need a reason to rally. So this rally may be less about this plan than about 'a plan' and another day closer to a real recovery. Remember, rallies after huge bear markets are often funny things that people don't believe in. There are many reasons to distrust rallies in bear markets. The big reason is it's hard to tell when its really transformed into a bull. By the time you know, much of the rally is water under the bridge.

A beard rally?
Is this treasury plan just a 'beard' for the market to rise sharply as it looks head to eventual recovery not to the fruits of this limited plan? Is this rally not about THE PLAN at all?

Inquiring minds want to know. After seeing the powerful rally in stocks I remain unconvinced about the Treasury's plan. After hearing Larry Summers talk and register disappointment with Paul Krugman's view I am still not convinced either. I do not necessarily agree with Krugman (who wants nationalization) but I agree that the government is phonying up the market to get results and Summers is pretending like it is just giving it an honest boost. Well hamburger helper is not real hamburger, Larry.

Steroids as the example?
When you inject steriods into some players and they start hititng home runs you should not expect those players who did not get the injections to perform better too. It doesn't work like that. Someone ought to tell Summers that.

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