Small Cap Stocks

According to what I read in this NY Times article, this week, “the Senate voted down a proposal to bar the so-called naked buying of credit-default swaps.”

This, of course, is comical, and sad, since as is now well known the entire financial crisis was caused synthetic CDO’s and naked default swaps, which allowed banks to create trillions in synthetic liabilities that far, far exceeded any real underlying mortgage liabilities that existed in the financial system. When push came to shove, nobody of course, was willing to pony up the money for these fraudulent synthetic securities, necessitating all sorts of bailouts from the government.

Common sense would indicate that banning naked CDS, which serve no purpose, and in actuality greatly increases (as has been proven ad infinitum) financial risk in the economy, would be the first thing to ban in any financial regulation bill. In fact, there is really little else that needs to be done to create a more stable financial system. Amazingly, Germany remains the only country with the common sense to ban naked CDS. Presumably, they are the only country that has not been taken over by the financial oligarchy.

Since I am long CALCQ.PK, I was mildly amused to see that famed hedge fund speculator, John Paulson, was now bullish on US residential real estate, particularly the CA market. You can read some of Paulson’s comments at this MarketWatch article.

He he sees: “prices rising 3-5% in 2010 and 8-12% in 2011.”

The question, of course, is why is Paulson now bullish on real estate?

Since intelligence and great wealth are mutually exclusive, I think it is fair to say that Paulson has absolutely no hidden rational knowledge that would suggest a rise in real estate prices.

At the same time, however, since great wealth is primarily the result of a forced suspension of rationality/intelligence (“the crowd” is always and everywhere irrational due to the fallacy of composition) and morality, I think it is possible that Paulson is privy to some inside information as to the future conduct of banks.

It is quite obvious, I believe, that the big banks can easily reignite a real estate boom via an easing of credit and “wink-wink” business deals with appraisers who would be told to raise estimates of value. Of course, these two courses of action would be irrational and immoral, due to high unemployment, and the supposed legal “wall” erected between banks and appraisers. However, the irrational truth, as far as income and employment is concerned, is that banks could care less if you actually pay back your home loan or not as they flip nearly all loans back to FNM and FRE. In turn, FNM and FRE don’t care if you pay your home loan, as they have an infinite amount of capital. On the appraiser front, I think it’s obvious that banks don’t really pay much attention to conflicts of interests and “Chinese Walls”.

The only real mystery to me, is why the banks have not taken the above approach sooner, in order to reignite housing. My only explanation is that there was more money to be made from a housing crash and free bailout money, than there was from starting a new real estate boom. Additionally, Wall Street had not yet tired of the real estate crash and foreclosure crisis story. However, since large parts of the bailout bonanza are slowly coming to an end, political pressure on banks is building, and boredom with the crash story has set in, it does seem conceivable that Wall Street could invent a new positive myth of growth in order to generate more profits.

A positive myth would be a very welcome addition, given the plethora negative myths that seem to have become the new hot trend on Wall Street. Whether a new positive myth gains traction with others on Wall Street is an impossible question to answer.

I haven’t really been bullish for awhile, but the reasons given for the current market sell off are mostly ridiculous and I think should fade shortly.

Below is a good summary of Wall Street’s current mythical creation intended to instill fear and profit from losses: Country Risk.

“The market realizes there is actually a country risk,” said Achim Matzke, head of global index and technical research at Commerzbank AG in Frankfurt. “Since Lehman’s collapse the banks were in focus, now it is the credibility of countries.”

Since for various reasons, country risk for a sovereign currency, like the Euro, is one of the most absurd concepts I’ve heard in a while, one wonders how far Wall Street will take this myth. My guess is not that far and I think the myth will die out shortly and Markets will stabilize rather quickly. This is because the only real risk here is from the leaders of these countries shutting down the whole Wall Street casino of CDS’s, if this new money-making scheme of denying countries capital gets too out of hand.

My only real question is why politicians are still acting so slowly? One theory is that they don’t want to offer a solution, since doing so would seemingly lend credence to the country risk myth and establish it as a legitimate short opportunity. Alternatively, the majority of politicians still actually believe that there is a limit on a sovereign currency, and so they too are buying into the country risk myth.

In any case, governments will have to act soon, because Wall Street’s marketing machine is making the country risk myth a reality anyway.

So after nearly five years, my Casino Capitalism (www.casinocapitalism.com) thesis finally has been vindicated by none other than Lloyd Blankfein. I should really have more patience with my ideas…

As quoted in a recent Bloomberg article:

Blankfein defended the role that Goldman Sachs, and Wall Street as a whole, plays in making markets.

“You could call it a casino, but if it is, it’s a very socially important casino,” he said.

Of course, the definition of “socially important” is rather vague. Gambling on stocks, and other financial instruments is surely fun (at least when you win), which I guess makes it social, but I’m not quite sure it benefits anybody in “social” sense.