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The securities markets have been subject to large percentage daily swings over the last month. The shutdown of a large portion of the economy following the spread of the Covid-19 virus, Democrat primary voting prior to the withdrawal of Bernie Sanders and actions by the Fed, Congress and the Executive branch were precipitating factors, but chart theory, short selling and stop loss orders clearly played a significant role. In my article published on this website on June 3, 2019 I explained why the uptick rule should be reinstated. and margin buying should be more restricted . My blog is not widely followed and my suggestions have been ignored. They should be considered immediately as the markets remain vulnerable to permitted abuses.

The reinstatement and tightening of the up-tick rule is urgently needed. I recently heard on one of the tv talk shows that over $50 billion of securities were sold short during the first week of the recent decline. Every short sale in a declining market contributes to market volatility and a potential market collapse. Traders, like Leon Cooperman who recently suggested the reinstatement of the up-tick rule on CNBC, are aware of the deleterious effects of short selling in a declining market. The ridiculously stupid short selling rules, which the SEC adopted which the current SEC chairman believes are effective and support market liquidity, are on their face worthless. They do not come into play unless a security declines by 10% in a single day. In other words the rule does not become effective until the stock price of the security has already collapsed. Short selling on down-ticks is likely to have significantly contributed to or even been the material cause of the collapse. Furthermore, when the current rule kicks in after a 10% decline it prevents selling at the bid, but doesn’t prevent further abuse that extends the decline.

For example, suppose a $100 stock has declined below $90 in one day with a last sale at $89.60 is bid $89.55 and asked $89.60. The short seller can’t sell at the bid, but can lower the asked by offering to sell below the last sale price as long as the offer is not below $89.56. The short seller may have a large short position and may have sold a large number of shares at declining prices during the decline in price from $100 to $90. If he offers to sell a significant number of shares at $89.56 buyers for such number of shares have to buy at such price before the stock price can sell above that price. Other investors who are long the stock and aware of the price decline and the number of shares and offering price of the shares being offered by the short seller, may anticipate a decline and offer to sell at the bid. The net result is that the bid price is likely to quickly decline further allowing the short seller to lower his asking price. It is no wonder that many sophisticated traders and other investors most of whom are oblivious to the role of short selling but have observed rapid market declines, sell their shares.

I suggest that short selling should be prohibited when any of the major market averages have declined by 20% from the last high point. Such prohibition should continue until all leading averages have recovered at least 10%. from their low point but the short selling prohibition should be reinstated if any of such market average declines below its prior low point within 6 months.

Letter to my daughters 3/20/30

If we get a vaccine or a cure we could have a quick recovery. But that’s unlikely in the next 3 months. I wrote an article in my blog about changing the bankruptcy laws to provide for forgiveness of many small business monthly expenses other than payroll
for 120 days. We must also get money to people
who have lost their income. Even though some companies are not being hurt or are prospering there is a real possibility of a depression. Congress may act too slowly or provide grossly inadequate relief. The stock market could collapse. I don’t know the number of jerks who are subject to margin liquidations if the market declines further. Good stocks are sold to raise cash. Short selling should have been banned. Even if restaurants reopen until we have a cure for the virus only people who are virus survivors will be safe. We must test millions of people before that will be a significant number. How much business will they do and how many of the laid off employees will be rehired? How many people will fly or ride the subway? How many planes will be needed?

I have some thoughts to consider. If there is a depression capitalism as we know it is not likely to survive. Many strong companies will survive but the government may wind up owning numerous businesses. Some strong restaurants will survive, but customers of small restaurants may have to put up funding to reopen their favorite bar or restaurant. I believe that americans are imaginative and will find ways to get the economy going. We will need a huge make work program . My idea for an interstate fresh water pipeline would be perfect. Workers can be kept apart until we have a vaccine. They would be working instead of getting welfare. The problem is that people in the cities are losing their jobs and would have to relocate to where the jobs are. Other make work projects will be needed to reverse the decline in many major industries.


President Trump is urging Congress as part of his fiscal stimulus proposal to take immediate action to provide funding for businesses to enable them to survive the disruption of operations resulting from the Covid-19 virus. Time is of the essence. Such funding is being discussed, but Congressional quibbling will delay it and without adequate revenues the funding when given will be quickly dissipated to pay for rent, mortgage payments, real estate and payroll taxes, loan interest payments and utilities. Unless we find a way to improve their cash flow large numbers of businesses will close and not reopen or will quickly fail and millions of jobs will be lost.

Creating a new form of bankruptcy relief which eliminates selected business obligations offers a better way to resolve their short term cash flow problem.

Congress should amend the federal bankruptcy laws by adopting The Covid-19 Disaster Amendment To The Bankruptcy Act (the “Act”) to permit small businesses, regardless of whether they are operated as corporations, partnerships or as individual proprietorships to file a simple petition to a federal bankruptcy court to obtain forgiveness of the operating expenses described above for a 120 day period beginning retroactively to March 10, 2020. The relief should be immediately available to a business upon the filing of a petition with the clerk of the local federal bankruptcy court listing the name and address of the business and the name and address of the owner of the business seeking relief under the Act. The relief shall become available immediately upon the filing. The clerk shall issue a receipted copy of such filing and at a nominal cost additional copies which the business owner can use to prove its immediate entitlement to such relief.

The relief should apply to all obligations which accrued during the protected period whether or not paid. Unpaid obligations during the period shall be forgiven. Payments made on account of such protected period obligations should be recoverable by subtracting the amounts paid from payments due to the person who received such payments. in the period immediately following the end of the protected period.

Certain large employers or businesses which have remained profitable or have not been seriously disrupted by Covid-19 such as businesses which receive payments from insurance reimbursements or governments and restaurants which regularly derive 50% or more of their revenues from take out orders should not be eligible for the relief.

The recipients of the forgiven payments will in almost all cases be able to absorb the reduction in their revenues.. We can offer protection to landlords and banks if required.

Layoffs and reduced individual income are separate and equally important problems. We must find a way to adequately compensate individuals have lost their job or whose income has been reduced. Providing loans to businesses as they reopen when the virus is under control will not solve the problem. Modifying unemployment insurance to compensate everyone who is laid off or whose income has been reduced should be considered with the same urgency. It might be the best way to get cash to workers. We must not forget service income employees, particularly those who rely on tips.

Has Chairman Powell Learned From His Terrible Mistakes?

For years the talking heads and their guests on cable news endlessly chattered about interest rates remaining near zero in the US and negative in Europe. They talked of the “new normal”. However, some complained that interest rates had remained too low for too long and of the importance of raising interest rates and reducing the Fed balance sheet so that the Fed would have powder to fight a downturn in the economy. Upon his becoming Fed chairman, Jerome Powell quickly demonstrated that he believed in the latter approach.  We were in un-chartered territory. Never before had interest rates been so low for as long  or had QE been used to such an extent. There was talk about a neutral rate of interest. They hadn’t learned that just as every reduction in interest rates or expansion of the Fed balance sheet had spurred the economy, every raise in interest rates or reduction in the balance sheet negatively impacts the economy.  The interest rate and size of the Fed balance sheet you are at at any given time can be considered neutral because any increase in the rate of interest or sale of Fed assets slows the economy and any decrease in the rate or purchase of assets stimulates the economy.

Although the economy was growing and there was no sign of inflation when he was appointed, Chairman Powell chose not to wait patiently. He began his chairmanship by raising interest rates and reducing the Fed’s bond portfolio much too quickly. He did so at a time when the growing economy and rising corporate profits were beginning to generate additional federal tax revenues which would have reduced the federal deficit. As predictable his actions negatively impacted the economy and the stock market which went into a steep decline. His final 1/4 point raise of interest rates in December of 2018 while the stock market was collapsing was not just stupid, it was idiotic. To make matters worse he recklessly announced plans for further rate increases and balance sheet reductions in 2019. His actions were instrumental in killing the momentum that the corporate tax cuts (a once in a generation stimulus) had generated in the US economy and raised a serious likelihood of causing a downturn in the US economy. Corporations that were already spooked by President Trump’s attempt to level the playing field in trade by imposing tariffs, immediately began to reconsider and postpone capital investments.

After being strongly criticized by President Trump and many others he quickly reversed course, He announced that further rate increases would be delayed and introduced the concept of “patience”. This word selection demonstrated that he either still didn’t fully understand his prior mistakes or that he wouldn’t acknowledge them because he wanted to show he was independent and wouldn’t bow to President Trump’s wishes. What he obviously meant by “patience” was that he would delay further increases. He didn’t recognize that rates were already too high and that the December increase should have been reversed. However, cancelling intended further rate increases did stimulate the stock market and permitted economic expansion to continue. Recently when corporate earnings came under pressure and the stock market went into a tailspin again based in large part on trade and border issues and a lack of infrastructure spending, he took notice of the market decline and the possibility of a coming recession by talking about potential interest rate cuts this year. Although he slowed Fed asset asset sales he did not discontinue them to the chagrin of President Trump.

Chairman Powell appears to be learning on the job. I ask if he has learned too little, too late. At the June meeting of the Fed he recognized that the Fed can take preventive steps to extend economic growth and avoid a recession rather than waiting to reverse one. He also recognized that governmental actions relating to trade and  Congressional failures to act should be taken into consideration by the Fed. But, he should have acknowledged his prior errors and reduced interest rates. Although we can expect a rate decrease in July, I fear he still does not appreciate the desirability of low interest rates for an indeterminate period or of growing the economy at a rate in excess of 2% a year and will be more concerned with appearing to be independent. Instead of worrying about his independence, he should be coordinating with administration officials to be better able to coordinate Fed policies with fiscal policy. The Fed’s independence is assured by statute. Its actions do not need approval of the President or Congress. Its role in ending the Great Recession was important to our prosperity. However, when it makes serious mistakes it should welcome criticism from the President and others. Whether or not he can be replaced as Chairman by the President, when the Fed chairman makes repeated errors he should resign.

Since he has spent his time thinking about interest rates and the Fed balance sheet, it seems unlikely that he now recognizes or has even thought about the risk that market factors which might cause a stock market collapse present a similar risk to the US economy as existed in the 1930’s.  As I have written recently he could have worked with the SEC and taken steps to reduce stock market manipulation and volatility and the risk of a stock market collapse which might follow or lead to a serious recession or even a depression. The overheating of IPO offerings in recent weeks has been fueled by increased margin borrowing on both the long and short sides of transactions.

He has recently talked of living with inflation even if exceeds the 2% guideline of the Fed. However I expect that he would probably panic and choke off the economy if it accelerated again (as it could if we spent trillions of dollars on needed infrastructure for highways, bridges, airports or security, or if we spent to limit the effects of climate change by upgrading levees and dams to control flooding or built an interstate fresh water pipeline (the most important project of this century) and began to grow our economy at 4, 5, or 6 %. I expect he would fear inflation even though the causes of inflation were absent. Robots are coming and they will make employees available for non-inflationary economic growth thereby enhancing the Amazon related deflationary effects on the economy. China builds new cities. Why can’t we upgrade ours instead of letting widespread crime turn them into slums? Of course we would have to deal with the limits of available raw materials and the socialist jerks who would argue that the rich are getting richer even if we were creating millions of high paying jobs for a large number of currently low income workers and generating tax revenues to enable us to pay for for the greatest welfare state the world has ever known.

The Fed’s role is important. Unless our economy grows at a satisfactory pace, the rising number of politicians chanting for socialism may in a short time lead to the end of the great American capitalism experiment.

The Fed Funds Rate Should Be Reduced To 1% Or Less For An Indefinite Period

We are foolishly paying hundreds of billions of dollars of interest on the National Debt. Many European nations pay negative interest rates. We should reduce our interest rates and save the interest costs. It will reduce inflationary pressure and the interest saving can be used to fund infrastructure spending.



After every stock market crash we search for the causes and change rules and regulations to prevent future recurrences. Politicians are not well suited for the task. It is unlikely that the current rules and regulations will prevent a future crash because they fail to prevent or adequately limit use of practices which exacerbate market declines such as short selling, stop loss orders, chart theory and excessive margin buying which leads to margin liquidations in declining markets. Managers of many large pools of capital understand the effects of such practices and execute trades timed to further enhance extreme market declines so that they can then become buyers after the precipitous decline.

The talking heads on financial news networks have speculated lately on whether a 20% stock market decline like the one that occurred on October 19,1989 might occur again. They discuss the fact that a 600 point decline in the Dow is currently only about a 2% decline and that a 20% decline would amount to more than 5000 points in the Dow. They often talk about the differences in the US economy between 1989 and now, the possibility of a recession, the strength of corporate earnings and balance sheets, the trade war with China, tariffs, the effects of negative European interest rates, the rate of inflation and the Feds current stance on interest rates and its balance sheet. However, I haven’t heard them talk recently of governmental regulations or controls in place to prevent the recurrence of a 1989 type decline. The safety net value of current regulations and controls in place were about to be tested last year until the Fed reversed its course on interest rates after raising interest rates too fast and projecting ridiculously stupid further interest rate increases and balance sheet reductions. Has the Fed already forgotten the result of its successful policies which enabled our economy to escape from the Great Recession. Does the Fed understand that excessive stock market declines can lead not only to a recession, but as in the 1930’s to a depression? Fed chief Powell stupidly talks of patience when he should have admitted his error in adopting overly restrictive Fed policy decisions. 

Most of us learned from old western movies that a rancher who wishes to avoid a stampede of his horses or cattle builds secure fences or takes precautionary measures when moving his herd. Our current securities regulations and controls which are designed to stem an out of control decline were influenced by investment bankers seeking to maximize their profits by encouraging speculative practices in disregard of stock market stability. Brokers profit from charging high rates of margin interest and charging short sellers for borrowed stock. Speculators often profit in declining markets from short sales at declining prices made possible by the elimination of the uptick rule. A combination of factors acting in concert, including short selling at declining prices,  stop-loss order liquidations, margin calls, tax selling, reaching chart theory sell points and panic, cause stock price declines to be exaggerated.

Now is the time to take action to change the government regulations and controls of the securities markets to greatly reduce the probability of a crash. The Fed and the SEC should work together. Here is what I propose:

  1. The SEC should immediately reinstate the uptick rule and prevent way to avoid it. It was lunacy to remove it.
  2. The SEC should ban all new short selling when  any of the Dow, S&P or the NASDAQ averages (the “leading market averages”) have declined more that 20% from their 6 month highs; and continue the ban until all such averages have recovered at least 10% from their low point after the ban is put in place.
  3. The Fed should limit the risk of margin liquidations by changing margin requirements to provide that aggregate initial margin in an account shall be reduced to 40% during each 30 day period after which any of the leading market averages has hit a 12 month high.
  4. The SEC should change the way stop loss orders operate. Make them become good until canceled limit orders and not market orders when the stop loss point is reached. This will reduce the avalanche aspects of sales at declining market prices and discourage misplaced reliance on the protection of stop loss orders.
  5. Try to reduce dumping of large numbers of shares by active traders by charging a small fee on the dollar amount of all sales of securities held less than 5 years.

The Feds goal of full employment is negatively impacted by stock market declines. A reduction in the wealth of investors negatively impacts their spending. The Fed should stop talking foolishly about “patience” and clarify that it intends to reduce interest rates and engage in QE whenever stock prices decline significantly.

The Fed Should Have Raised The Initial Margin Requirements, Not Interest Rates

Investors who utilize maximum margin to leverage their equity purchases in rising stock markets often greatly increase their gains. The problem is that they also increase their risk of loss. Investors who keep utilizing their buying power resulting from price increases to maximize their margin debt are like casino gamblers who never take any chips off the table. No-one should expect a favorable run to continue forever. Rising stock market averages and prices of the common stock of even the most successful entities tend to overshoot their fair value and eventually incur corrections.

Present margin rules as set by the Fed require initial margin of 50% and maintenance margin requirements of 25%. The maintenance requirement only comes into play if the value of a portfolio declines. For example, assume you have $10,000 to invest. You could buy $20,000 of stock on margin. “The broker lends you the other $10,000. If the stock triples and goes up in value to $60,000 giving you an equity of $50,000  you can borrow an additional $40,000 and purchase additional securities of the same or a different entity. You  have maximized your use of margin. Had you not bought on margin your investment would be worth $30,000. Now suppose the portfolio doubles again. Your initial investment is now worth $150,000 ($200,000 of equity minus $50,000 of debt) versus $60,000 of equity had you not utilized margin. Suppose you borrow an additional $100,000 to purchase additional securities leaving you with $300,000 of securities with maximum margin debt of $150,000.

Now, let’s assume the stock market goes into correction and your securities decline by 20%. They are now worth $240,000, leaving you with $90,000 in equity and $150,000 in debt. To meet the 25% maintenance requirement you must have a total equity of  $187,500 (25% above the debt of $150,000). Suppose the decline from the top reaches 40% leaving you with an aggregate value of $180,000 or a net equity of $30,000. This is below the 25% maintenance requirement and you will be required to either add cash or sell securities to reduce the debt to meet the maintenance requirement. After a meteoric rise from $10,000 to $150,000 the value of your account is back to $30,000. Had you not bought on margin your hypothetical investment would be worth $36,000 ($60,000 less $24,000). Had you not borrowed the last $100,000, Your investment would be worth $$70,000 ($120,000 minus $50,000). You would not have received a margin call.

Every investment situation is different. The above example is an attempt to examine the risks and potential advantages and disadvantages of use of margin leverage. In periods of “irrational exuberance” the risk of loss increases. The Fed can reduce margin risk by increasing the initial margin requirement thereby limiting the ability to increase margin debt if it perceives a significant risk of a market decline.

The Fed should be cautious of margin risk. Sales to meet margin requirements whether by choice or by requirement can exaggerate a decline in a falling stock market. Such sales, coupled with the inept uptick rule adopted by the SEC that permits short sellers to initiate a market decline  and the potential waterfall effect of  stop loss orders that might in a declining stock market be executed electronically at declining prices, can be leading contributors to a stock market crash.

The Fed is raising the wrong rate. As described in my previous post it should not be raising interest rates which both cause inflation and slow the economy leading to stagflation or a recession. It should have been concerned about controlling individual investor and market risk caused by excessive margin debt as market averages and p/e ratios rose to new highs. Hopefully, it will have that opportunity again in the future.






Improving The Republican Tax Proposals

Dear President Trump,

I applaud many of the provisions of the proposed House and Senate tax proposals, but, as discussed below, the reduction or elimination of important deductions will result in unfair tax increases for too many taxpayers and may adversely effect the solvency of high tax states and the growth of the US economy. I fear that the current proposals, if  modified and passed into law, may cause almost as much harm as good to our economy. You can encourage Congress to find better ways to raise offsetting revenue than by eliminating important deductions. This letter will suggest changes to improve the tax proposals by eliminating current loopholes that let many of our most successful individuals avoid paying hundreds of billions of taxes during their lifetimes. I know it is late in the process and that time is of the essence, but I expect there will be almost immediate approval of  the suggested changes. I believe that if the proposed changes are adopted at your suggestion they will be recognized as the major accomplishment of your presidency by making the tax code fairer and enable you to achieve your goals of greatly accelerating the growth of the economy and helping the middle class.

1. THE PROPOSED LIMITATION OR ELIMINATION OF THE HOME INTEREST AND PROPERTY TAX DEDUCTION. I consider the elimination or reduction of deductions for home mortgage interest and property taxes to be the most unjustifiable change. By allowing depreciation of rental properties and not private homes, the tax code currently favors renting over home ownership. The proposed changes compound the unfairness. Prior to the collapse in home values caused in large part by improvident or fraudulent lending practices, owning a home was a major source of wealth accumulation by the middle class as one’s home mortgage was repaid over time and the home value rose due to inflation. Young families today are beginning to rediscover the wonderful benefits of home ownership and the economy has benefitted. The reduction of the tax benefits for home ownership will make it much more difficult financially to purchase and meet the monthly costs of owning a home. It will also significantly reduce the equity value of current homeowners and cause great harm to the home building, maintenance and improvement industries and lead to reduced funding for public school education. It will result in the loss of millions of middle class jobs. We must find a better way to pay for the tax reductions contained in the current proposals even if it means raising the corporate rate to 21% or 22%. Property taxes and interest on mortgages up to at least $1,000,000 should remain deductible.

2. RAISING THE ESTATE TAX CREDIT OR ELIMINATING THE ESTATE TAX. Raising the Estate Tax Credit as proposed or even to eliminate the Federal Estate Tax on estates of spouses with aggregate estates of up to $25 million or $50 million is a good idea to protect family businesses and farmers. But, eliminating the Federal Estate Tax is likely to be political suicide for Republicans. You will be endlessly criticized for giving an enormous and unjustifiable benefit to our richest taxpayers, including you. The richest people in our country are among the most under-taxed. Their aggregate income and wealth that is growing by hundreds of billions of dollars per year is in the form of unrealized capital gains that are not taxed for valid reasons. Our wealthiest people, many of whom will probably be worth well over $100 billion at the time of their death, also avoid federal gift or estate taxation by making large charitable gifts or by creating charitable foundations. We should either deny the charitable deduction for estates or otherwise taxable gifts or provide for a capital gains tax to be payable at death or at designated dates (such as every three or  five years after the change is passed) or by individuals at the time they make charitable gifts of appreciated property. We could provide for such tax to be payable in kind or over a period of years. The assets paid to the government in kind could be non voting while held by the government and be redeemable or sold over time. The rate of tax should be open for discussion, but the amount of the tax should be very significant and allow for most of the deductions being targeted for elimination to be retained. Just think of the US government as one of the largest shareholders of Berkshire Hathaway, Microsoft or Amazon. I do not think Warren Buffett, Bill Gates or Jeff Bezos will object. Tax deductible contributions will be reduced, but mainly be reducing the size of charitable gifts by an amount equal to the current tax underpayments. Eliminating the estate tax might also reduce charitable gifts.

3. REDUCING THE TAX ON PASS-THROUGH ENTITIES. This is also a questionable change favoring the rich. C Corporations pay a tax on net income (after deducting salaries paid that are taxed at individual tax rates) and stockholders pay a SECOND tax on dividends paid. Pass through entities avoid double taxation and they do not need the added benefit of lesser rates. If a C Corporation is more favorable, a Subchapter S Corporation or LLC can convert to a C Corporation.

4. TAXING THE CARRIED INTEREST. After years of discussion your wall street advisers left taxing of the carried interest out of the tax proposal. The amount recovered may not be great, but closing a loop-hole is important for tax fairness. It should have been included with appropriate relief for illiquid positions, such as permitting payment of the tax over time or in kind.

5. THE ELIMINATION OF THE SALT DEDUCTIONS. States with high income tax rates are already losing high income taxpayers to no income tax states. Some of them currently face insolvency. The elimination of SALT deductions causes a sudden change that is unfair to people who relied on the SALT deductions and bought homes and created business in high tax states. As discussed above, most, if not all, of the lost revenues from the rate reductions could be recovered by fairly taxing the unrealized gains of the super-rich and by properly taxing carried interests and pass-through entities. Limiting the SALT deductions to an amount such as 5% of taxable income may be needed to offset a portion of the proposed reduced tax revenues, and such limit should be phased in if possible and the middle class exemptions should be enlarged.

6. ENCOURAGE WAGE INCREASES BY OFFERING A FIRST YEAR TAX CREDIT FOR WAGE INCREASES OF LOWER PAID EMPLOYEES. We are permitting corporations to bring back trillions of dollars of funds parked overseas. Some of it will be spent on capital investments, but most of it will be used for dividends and stock buy-backs unless we encourage middle class wage increases. We could generate much higher GDP growth by giving employers a first year tax credit for wage increases to employees except for the top 10% of wage earners. Such credit would be lost if the wage increases were not continued during the next year. Including such a tax credit may prove to be revenue positive over ten years since it will grow the economy and increase individual incomes.


Stephen Feinberg

Approving and Improving the Kudlow, Moore, Laffer and Forbes Tax Proposal

Kudos for the Kudlow, Moore, Laffer and Forbes “Three Easy Pieces” tax proposal. However, the depreciation change is unnecessary and unrealistic and the tax rate is probably better at 20% or even 22%. I suggest a 4th piece, namely a 100% tax credit for the 1st year of all wage increases except for increases to the top 20%. Otherwise expect most of the earnings growth from tax savings to go to dividend increases, stock redemptions and increased compensation for executives as has been the main use of earnings growth in recent years.

Interest Rate Lunacy

The Obama administration missed an opportunity to extend the term of the US Debt. Each 1% increase in interest rates on the US Debt will soon cost our government $200 billion per year. Janet Yellen babbles on about unemployment, inflation and normalization of interest rates. She ignores the overriding need to keep interest rates as low as possible. The June increase in rates was a major mistake.