Dalio: "There Are No More Tools In The Tool Kit" - Complete Charlie Rose Transcript With The Head Of The World's Biggest Hedge Fund
When it comes to reading the world's "tea leaves", few are as capable as Ray Dalio, head of the world's biggest (macro) hedge fund, Bridgewater Associates. So when none other than Ray tells PBS' Charlie Rose that "there are no more tools in the tool kit" of fiscal and monetary policy to help America kick the can down the road, perhaps it would behoove the respective authorities to sit down and listen. Or not... and just to buy S&P futures in hopes that record career risk is big enough to force every other asset manager in the market to do the dumb thing and follow the crowd of lemmings right over the edge. Luckily, there are those who have the luxury of having both the capital and the time to not be drawn into the latest sucker's rally. More importantly, Dalio shares some truly unique perspectives on what it means to run the world's largest hedge fund, his perspective on Occupy Wall Street and demonizing wealth and success (in a way that does not imply crony capitalism unlike some others out of Omaha), his views on taxation, on China, on the markets, on Europe and its insolvent banks, most imporantly on the economy and why the much pained 2% growth (if that) will not be nowhere near enough to alleviate social tensions, such as those that have appeared over the past two months. Dalio's conclusion, in responding to whether he is optimsitic or pessimistic, to the current environment of broad delevaraging of the private sector, coupled with record releveraging of the public, is that he is "concerned." And that's why, unlike the recently unemployed David Biancos of the world, who never exhibit an ounce of skepticism, Dalio is among the wealthiest men in the world (and hence a prime target of the #OWS movement).
You mean, aside from the relentless headline barrage? Why yes, in a vivid reminder of what used to happen when actual fact-based events mattered, here is a complete summary of the key events in the coming week.
Europe has officially entered the Tropic Thunder zone, where one, forget one thousand , monkeys armed with one simple solar-powered calculator, can come up with a better plan than (JP Morgan-advised) Europe. Because as we pointed out on Thursday, "nothing changes the fact that with €100 billion set aside for bank recaps, a woefully low number and one which will do nothing to assure investors that banks have sufficient capital, there is still not enough cash to "guarantee" all future issuance" - well it appears that Europe finally did the math which led us to conclude that the EFSF is DOA. So what is Europe's solution? Why double counting aid already pledged of course: "EU bank plan may include aid already pledged to bailout states-sources." Uh, what? "A drive to lift bank capital across Europe by up to 110 billion euros ($153 billion) is expected to include the roughly 46 billion euros already pledged to Ireland, Greece and Portugal to help their lenders, EU sources told Reuters....Another official confirmed the intention to count money already earmarked for banks in Ireland, Greece and Portugal in any recapitalisation plan. "The problem with shock and awe numbers is that it implies that the money is there," said one official, reflecting on ministers' reluctance to set public goals for recapitalisation. "But governments don't have the money."... Just as was repeated here over and over and over and over... And yes, that red stuff shooting out of the place where your head was a few second ago, is blood. It is now Europe's official "plan" (for at least the next 2-3 hours) to use mystical, magical money, which is somehow double-counted to bail out both a bank and a country at the same time...
Even our non-polyglot readers will have zero problems understanding the response (in French) by Merkozy, when asked during the press conference, whether Italy, which has the second largest debt load in Europe at $2.2 trillion and inches behind German, will succeed in implementing promised 'reforms.' The wholesale laughter 19 seconds in the the clip, by not only the entire audience, but by Merkel and Sarkozy pretty much explains what the "next steps" in Europe are as the continent has now given up any pretense it is even trying to keep a serious facade on the upcoming serial defaults... and why 10 Year BTPs will need much more than just the SMP, EFSF and the hand of god to stay above 90 in the coming week.
American Psychological Association's 12-Steps to recovery, Credit Suisse have produced a clarifying reduced set that enables us to better judge the road being taken by the heterogeneous set of deaf-dumb-and-blind monkeys currently 'solving' the European addiction issues. The critical underpinning, that we have tirelessly brought to the public's attention, is a fear that the illustrious leadership of our world are not even grappling with the real issues. CS tries to answer the following deeper questions: Are we recognizing the cost that is coming to the core, multiplying as we wait? Are we building credibility and starting to stem this overwhelming tide, or are we pretending, taking the target of our addiction from whatever source we can find it (latest target: the IMF) in the interests of a brief respite? Market expectations are simply not considering the right problem set and so we suspect the broad-market-seers will be pleasantly surprised by some ridiculous EFSF bidding process (and markets satiated short-term), but one day WE will not be disappointed; bullets will be bitten, cold turkeys endured and the markets will be enrolled as allies in a financial reconstruction effort not seen for 60 years. In what feels like the biggest sell-the-lack-of-news event, perhaps this week will open the eyes of many to the real problems to be addressed as opposed to back-fitting what markets 'want' to hear.
Monster Prediction From BofA: Another US Debt Downgrade Is Coming In Just A Few Weeks
a great Graphic of the European Debt Crisis
Savings Experiment: Bagging the Best Deals on Groceries
Berlin Experts Fear Euro Break-up From Bail-out Escalation
EU Bank Failures Will Crash Wall Street
US "Misery Index" Rises To Highest Since 1983
Merkel Takes Aim at Italy With Demand That Euro Members Live Within Means
Over the past 12 weeks, between July 22, 2011, and October 14, 2011, the FDIC closed 25 banks, bringing to 80 this year’s total. All together, these 25 banks had reported assets of $10.77 billion and deposits of $9.37 billion. Their failures cost the FDIC an estimated $2.05 billion, about 22% the value of deposits.
The 80 banks that have failed this year had reported assets totalling $32.83 billion and deposits of $29.11 billion. Their failures cost an estimated $6.6 billion, about 23% of deposits. These failures serve to remind us that the problem of troubled banks remains alive and well.
Bank Failures Provide Rare Glimpse Into True Asset Values
Each new bank failure also reveals key information regarding misleading financial reporting throughout the U.S. banking sector. That is because figures disclosed by the FDIC in connection with each closing allow a glimpse into how dramatically bank assets are permitted to be overvalued under present accounting rules.
The true value of bank assets has been murky ever since April 2009, when the Financial Accounting Standards Board (“FASB”) repealed fair value accounting requirements. Fair value requirements compelled banks and other financial companies to value their less liquid assets at prices approximating what they could actually be sold for in the open market.
FDIC Has To Estimate Fair Value
When any bank fails, the FDIC releases a statement that includes its estimated cost of protecting the bank’s depositors. That estimate is based upon what the FDIC has determined, or reasonably believes, a third party is willing to pay for the failed bank’s assets. That is very similar to what banks were required to do prior to the FASB’s repeal of fair value requirements.
Each failed bank’s liabilities are primarily the amounts it owes to its depositors. It may have additional liabilities, but those are not the FDIC’s problem. Therefore, if you subtract the FDIC’s estimated cost of protecting each bank’s deposits from the amount of those deposits, you get an idea of what the FDIC believes it will net from the sale of the bank’s assets.
Extent of Overvaluation is Staggering
On paper, the 25 banks that failed over the past 12 weeks had assets reported to be worth $10.77 billion. Collectively, those banks had deposits of $9.37 billion. The FDIC estimated its cost of protecting those deposits to be $2.05 billion. That means the FDIC believes it will net $7.32 from selling off all the failed banks’ assets. By this estimate, management overstated the value of the banks’ assets by $3.45 billion, or 47%.
Applying this analysis to specific bank failures announced over the past 12 weeks yields some staggering examples.
Patriot Bank of Georgia of Cumming, GA had assets reported to be worth $150.8 million that are now estimated to be worth only $66.9 million, an overstatement of $84 million or 126%.
Sun Security Bank of Ellington, MO had assets reported to be worth $355.9 million that are now estimated to be worth only $172.1 million, an overstatement of $183.8 million or 107%.
Country Bank of Aledo, Illinois had assets reported to be worth $190.6 million that are now estimated to be worth only $101.2 million, an overstatement of $89.4 million or 88%.
Piedmont Community Bank of Gray, GA had assets reported to be worth $201.7 million that are now estimated to be worth only $109.8 million, an overstatement of $91.9 million or 84%.
Lydian Private Bank of Palm Beach, FL had assets reported to be worth $1.7 billion that are now estimated to be worth only $947 million, an overstatement of $753 million or 80%.
BankMeridian, N.A. of Columbia, South Carolina had assets reported to be worth $239.8 million that are now estimated to be worth only $150.1 million, an overstatement of $89.7 million or 60%.
Bank of the Commonwealth of Norfolk, VA, had assets reported to be worth $958.1 million that are now estimated to be worth only $633.5 million, an overstatement of $351.6 million or 56%.
Overvaluation Likely Among All U.S. Banks
There is good reason to believe that this extent of overvaluation is not limited to these specific failed banks. Prior to their closure, 21 of the 25 banks being discussed here had been operating subject to very stringent enforcement orders imposed by their federal regulators.
That means that for a considerable time, federal regulators were constantly scrutinizing every aspect of the failed banks’ operations. For example, Sun Security Bank of Ellington, MO, cited above, had been operating under stringent FDIC enforcement orders since April 2008.
It stands to reason that with regulators breathing down their necks, management of banks like Sun Security had would been valuing asset strictly in accordance with the law. Yet in spite of this, Sun Security’s valuations turned out to have been overstated by 107%.
That suggests Sun Security’s 107% overvaluation, the other examples cited above ranging from 56% to 126% and the average, across-the-board overvaluations of 47% were all permissible under present accounting standards.
These facts indicate that regardless of statements made by politicians or Federal Reserve officials, there will be no end to Quantitative Easing or massive liquidity injections any time in the foreseeable future. Any so-called recovery in the financial sector over the past several years appears to have been little more than an accounting trick permitted by the FASB’s elimination of fair value requirements.
“CIGA Richard B.”
Chaos in the Land of Oz, Part 2