"A capitalist economy can't be fixed with socialist ideals."
Smartmoney.com
Government Intervention Instills Chaos, Not Calm
By Jonathan Hoenig |Published: September 25, 2008
“Americans have good reason to be confident in our economic strength” President Bush told the nation Wednesday night. “Despite corrections in the marketplace and instances of abuse, democratic capitalism is the best system ever devised.”
Then why, one must ask, is he orchestrating the biggest government intervention into private markets since FDR’s New Deal? This one-time advocate for an “ownership society” is putting the country on course to set executive pay, own large chunks of private business and strictly dictate terms of trade.
It’s not a coincidence that, while the credit crisis has been unfolding for well over a year, markets have only truly become unhinged since the failure of Bear Stearns, when the government first began using taxpayers' money to directly participate in private trade. Every intervention since, including bailouts of Freddie Mac (FRE) and Fannie Mae (FNM), the SEC's short-selling ban and rescue loan to AIG (AIG:), has been enacted to supposedly “restore confidence”.
Yet the more the government intervenes, the more erratic the markets become. Over the last seven trading days, just as the $700 billion bailout proposal was being pitched, the market has moved 3% on five occasions -- a historic period of short-term volatility.
Originally intended only to cover financials, the list of stocks on the restricted short-sale list grows longer and even more arbitrary every day and now includes non-financial companies like prescription-benefits provider Express Scripts (ESRX), auto maker General Motors (GM) and computer colossus IBM (IBM). Companies are actively lobbying either to be put on or taken off the list, meaning that law is literally being determined in a totally subjective fashion by non-elected officials.
And as was reported Wednesday by Reuters, the cost of insuring the government’s 10-year bond against default has risen to a record high, with credit default swaps jumping from 26.5 basis points on Tuesday to an all-time high of 29.2 basis points.
And the TED spread, a longtime indicator of credit risk in financial markets, has now risen above 300 basis points, higher than the level hit during the 1987 stock market crash.
As I’ve been discussing for weeks, markets are now being dictated by political rather than economic factors. Leading politicians, from Treasury Secretary Hank Paulson to Rep. Barney Frank (D., Mass.), are literally winging it on an ad-hoc basis, making up rules as they go along. It’s not confidence they are instilling, but chaos.
I’m a trader, not a political pundit. To that end, I’d love nothing more than to get back to talking about earnings, trends, new products and corporate management. Unfortunately, right now none of those matter. Big Brother is jerking the strings of the financial markets on a daily basis, making normal methods of analysis all but impotent.
Whether the final price tag is $700 billion or not, just as with Sarbanes-Oxley or the Patriot Act, the government’s need to “do something” will deliver a cure that’s much worse than the disease, (likely) turning a normal two-year correction into a multi-decade Depression.
The Barack Obama and John McCain campaigns issued a joint statement Wednesday night proclaiming that “this is a time to rise above politics for the good of the country.” Fat chance. Politics is at the very heart of the problem: A capitalist economy can't be fixed with socialist ideals.
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC.
Tradecraft Archive
Government Intervention Instills Chaos, Not Calm
By Jonathan Hoenig |Published: September 25, 2008
“Americans have good reason to be confident in our economic strength” President Bush told the nation Wednesday night. “Despite corrections in the marketplace and instances of abuse, democratic capitalism is the best system ever devised.”
Then why, one must ask, is he orchestrating the biggest government intervention into private markets since FDR’s New Deal? This one-time advocate for an “ownership society” is putting the country on course to set executive pay, own large chunks of private business and strictly dictate terms of trade.
It’s not a coincidence that, while the credit crisis has been unfolding for well over a year, markets have only truly become unhinged since the failure of Bear Stearns, when the government first began using taxpayers' money to directly participate in private trade. Every intervention since, including bailouts of Freddie Mac (FRE) and Fannie Mae (FNM), the SEC's short-selling ban and rescue loan to AIG (AIG:), has been enacted to supposedly “restore confidence”.
Yet the more the government intervenes, the more erratic the markets become. Over the last seven trading days, just as the $700 billion bailout proposal was being pitched, the market has moved 3% on five occasions -- a historic period of short-term volatility.
Originally intended only to cover financials, the list of stocks on the restricted short-sale list grows longer and even more arbitrary every day and now includes non-financial companies like prescription-benefits provider Express Scripts (ESRX), auto maker General Motors (GM) and computer colossus IBM (IBM). Companies are actively lobbying either to be put on or taken off the list, meaning that law is literally being determined in a totally subjective fashion by non-elected officials.
And as was reported Wednesday by Reuters, the cost of insuring the government’s 10-year bond against default has risen to a record high, with credit default swaps jumping from 26.5 basis points on Tuesday to an all-time high of 29.2 basis points.
And the TED spread, a longtime indicator of credit risk in financial markets, has now risen above 300 basis points, higher than the level hit during the 1987 stock market crash.
As I’ve been discussing for weeks, markets are now being dictated by political rather than economic factors. Leading politicians, from Treasury Secretary Hank Paulson to Rep. Barney Frank (D., Mass.), are literally winging it on an ad-hoc basis, making up rules as they go along. It’s not confidence they are instilling, but chaos.
I’m a trader, not a political pundit. To that end, I’d love nothing more than to get back to talking about earnings, trends, new products and corporate management. Unfortunately, right now none of those matter. Big Brother is jerking the strings of the financial markets on a daily basis, making normal methods of analysis all but impotent.
Whether the final price tag is $700 billion or not, just as with Sarbanes-Oxley or the Patriot Act, the government’s need to “do something” will deliver a cure that’s much worse than the disease, (likely) turning a normal two-year correction into a multi-decade Depression.
The Barack Obama and John McCain campaigns issued a joint statement Wednesday night proclaiming that “this is a time to rise above politics for the good of the country.” Fat chance. Politics is at the very heart of the problem: A capitalist economy can't be fixed with socialist ideals.
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC.
Tradecraft Archive