Avoiding a Great Depression: Rescue, Rebalance, Reform

The 1920's were marked by a credit expansion, a significant growth in consumer debt, the creation of asset bubbles, and the proliferation of financial instruments and leveraged investments. The Federal Reserve expanded the money supply and the Republican government pursued a laissez-faire approach to business.

This helped to create a greater wealth disparity, and saddled a good part of the public with debts on consumables that were vulnerable to an economic contraction.

The bursting of the credit bubble triggered the stock market Crash of 1929. The Hoover administration's response was guided by Secretary of the Treasury Andrew Mellon. As noted by Herbert Hoover in his memoirs, "Mellon had only one formula: 'Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.'"

Indeed, the collapse of consumption and credit, and the ensuing 'do nothing' policy of liquidation by the government crippled the economy and drove unemployment up to the incredible 24% level at the climax of the liquidation and deleveraging.

Although some assets fared better than others, virtually everything was caught up in the cycle of liquidation and everything was sold: stocks, bonds, farms, even long dated US Treasuries, all of them collapsing into the bottom in late 1932.

The Federal Reserve made tragic policy errors most certainly with regard to interest rates. They were hampered by a lack of coordinated effort because of the official US policy focus on liquidation and non-interference, along with mass bank failures which rendered their attempts to reflate the money supply as largely futile.

Thrifty management of the credit and monetary levels when the economy is balanced in the manufacturing, service, export-import, and consumption distribution levels is a good policy to follow.

But good policies applied with vigor during a period of economic illness may be like forcing patients seriously ill with pneumonia to swim laps and run in marathons because you think such physical activity is inherently good and beneficial in itself at all times.

Additionally, monetary expansion alone also does not work, as can be seen in the early attempts by the Fed to expand the monetary base without policy initiatives to support expansion and consumption. Hoover's administration raised the income tax and cut spending for a balanced budget.

A combined monetary and government bias to stimulating consumption while restoring balance and correcting the errors that fostered the credit bubble is the more effective course of action.

Today it seems to us that the Fed and Treasury are trying to cure our current problems by filling the banks full of liquidity with the idea that it will eventually trickle down to the real economy through their toll gates.

We believe this will not work. The financial system is rotten, and not only in its toxic and fraudulent assets. It is a weakened, rotten timber that will provide scant leverage for the rescue attempts.

Better to cauterize the bleeds in the financial system and assume a 'trickle up' approach by reaching the econmy through the individual rather than the individual through the banks.

Provide secure FDIC insurance to everyone to a generous degree , and let those banks who must fail, fail. You will encourage reform and savings, we guarantee it. Stimulate work and wages, and then consumption, and the financial system will follow.

While the financial system as it is constituted today remains the centerpiece of our economy, we cannot sustainably recover since it is a source of recurring infection.



Globalists like to cite the introduction of the Smoot-Hawley tariffs as a major factor in the development of the Great Depression. This appears to be largely unsubstantiated, and attributable to a dogmatic bias to international trade as a panacea for failing domestic demand.

In fact, before Smoot-Hawley both exports and imports were in a steep decline as consumption collapsed around the world. If the US had declared itself open for free trade, to whom would they sell, and who in the US would buy? Consumption was in a general collapse around the world. Smoot Hawley did not help, but it also did not hurt because it was largely irrelevant.

It is a lesser discussed topic, but the US held the majority of the gold in the world in 1930 as the aftermath of their position as an industrial power in World War I and the expansion that followed. Since the majority of the countries were on some version of the gold standard, one could make a case that the US had an undue influence on the 'reserve currency of the world' at that time, and its mistaken policies were transmitted via the gold standard to the rest of the world.

The nations that exited the Great Depression the soonest, those who recovered more quickly and experienced a shallower economic downturn, were those who stimulated domestic consumption via public works and industrial policies: Japan, Germany, Italy, Sweden.



As a final point, we like to show this chart to draw a very strong line under the fact that the liquidationist policy of the Hoover Administration caused most assets to suffer precipitous declines. Certainly some fared better than others, such as gold which was pegged, and silver which declined but not nearly as much as industrial metals and certainly financial instruments like stocks which declined 89% from peak to trough.

FDR devalued the dollar by 40%, but he never followed Britain off the gold standard, maintaining fictitious support by outlawing domestic ownership. As the government stepped away from its liquidationist approach the economy gradually recovered and the money supply reinflated, despite the carnage delivered to the US economy and the world, provoking the rise of militarism and statist regimes in many of the developed nations.

There is a fiction that the economy never really recovered, and FDR's policies failed and only a World War caused the recovery. In fact, if one cares to look at the situation more closely, the recession of 1937 was a result of the aggressive military buildup for war in the world, the diversion of capital and resources to non-productive goods and services, and of course the general reversal of the New Deal by the US Supreme Court and the Republican minority in Congress.

As an aside, it is interesting to read about the efforts of some US industrialists to foster a fascist solution here in the US, as their counterparts and some of them had done in Europe.

What finally put the world on the permanent road to recovery was the savings forced by the lack of consumer goods during World War II and the rebuilding of Europe and Asia, devastated by war, significantly aided by the policies of the Allied powers.



A Depression following a Crash caused by an asset bubble collapse is a terrible thing indeed. But it does not have to be a prolonged ordeal.

Governments can and do make policy errors that prolong the period of adjustment, most notably instituting an industrial policy that discourages domestic consumption and money supply growth in a desire to obtain foreign reserves through exports.

From what we have seen thus far, we believe that the Russian experience in the 1990's is going to be closer to what lies ahead for the US. Unless the US adopts an export driven, low domestic consumption, high savings policy bias, non-productive military buildup and public works, and discourages population growth we don't believe the Japanese experience will be repeated.

Preventing the banking system from collapsing is a worthy objective. Perpetuating the symptom of fraud and abuse and 'overreach' that was becoming pervasive in the system before the collapse is not sustainable, instead leading to more frequent and larger collapses.

Balance will be restored, and a reversion to the means will occur, one way or the other. It would be most practical to accomplish this in a peaceful, sustainable manner, with justice and toleration.

Does a Weakness in Banking Regulation Result in Economic Imbalances and Asset Bubbles?

"The man who is admired for the ingenuity of his larceny is almost always rediscovering some earlier form of fraud. The basic forms are all known, have all been practiced. The manners of capitalism improve. The morals may not."

John Kenneth Galbraith

There is a hypothesis that the financial sector in the US is oversized, and as such commands an excessive amount of capital allocation and overly influences GDP. We arrived at this conclusion ourselves by studying the percentage of the major stock indices represented by the financial sector, and the expansion of new financial instruments and forms of credit in the growth of asset bubbles.

There are obviously other explanations for this. One thing to bear in mind is that during the 1990's the financial sector mounted a determined, well-funded, and deliberate assault on the regulations that had been put in place in the 1930's to limit its ability to create exotic instruments and speculate in areas beyond the traditional role of commercial banking.

Financial Relativism: Fraud by Any Other Name 15 May 2008

The banks were central to the scheme from the inception as they spent years and many hundreds of millions of dollars to overturn Glass-Steagall to allow this coup de grâce to be delivered to all holders of US dollars.

PBS Frontline: The Long Demise of Glass-Steagall

There is an interesting area of study by Thomas Philippon of NYU, which has been written about recently by Zubin Jelveh in Odd Numbers and is starting to receive more widespread attention.

Its interesting because it tends to support the notion that as the financial sector overcomes the regulatory restraints, it begins to expand its influence in the real economy, ultimately distorting its structure through the introduction of asset bubbles, with a resulting period of significant economic contraction. It also results in disproportionate incomes and the polarization of wealth distribution.

Why Has the U.S. Financial Sector Grown so Much? Thomas Philippon

Human Capital in the U.S. Financial Sector: 1900-2005 Philippon Reshef

"We find a very tight link between deregulation and human capital in the financial sector. Highly skilled labor left the financial industry in the wake of the depression era regulations, and started flowing back precisely when these regulations were removed."

"We find that in 1920-1940 and in 1990-2005 employees in finance are overpaid."

Thomas Philippon

The banks must be restrained from distorting the role of money and finance in the national economy to obtain and direct a disproportionate amount of wealth and power. Such unrestrained financial power is a corrosive influence that destroys the fabric of a free and democratic society by distorting the allocation of resources and corrupting the institutions of the press, of education, and of the government.

Does a weakening of banking regulation result in economic Imbalances and asset bubbles? Yes, always and everywhere.

Charts in the Babson Style for 30 October 2008

The broadest index here, the Russell 2000, suggest that we may have made an important bottom. We will look to see if this is confirmed by the other indices, and by the VIX.

The market is 'guilty until proven innocent' in a bear market downtrend.

As we stated earlier today our bias is to think this is end-of-month paiting of the tape. Do not expect the economy to recover or the financial system to gain efficient function in service of real economic activity until serious reforms are put in place.

Even in a "Market Meltdown" and a "Once-In-A-Lifetime Financial Panic...."

...the Other People's Money (OPM) managers can still find time to paint the tape into the end of month.

When this coat dries, they *might* try to slip on one more layer of paint before the weekend, but if we break to the downside we would look for a complete retrace of this rally to retest the lows.

Why? Because it is based solely on speculation, market manipulation and esperimentation by the Fed and Treasury. It is not based on anything organic to the economy, neither reform nor restructuring.

Wall Street corruption is one of the biggest impediments to an economic recovery. It has become an inefficient obstacle to capital allocation, price discovery, and real economic growth.

The US financial system represents a general systemic risk to the rest of the world because of the manipulation of the US dollar as reserve currency to serve the short term secular interests of a small but powerful financial elite.

"Dubai Runs Out of Gold"

Bahrain Tribune
Dubai runs out of gold

Oct 29 (Bahrain) - A massive rush at jewellery shops has led to a shortage of gold at some outlets, prompting some shopkeepers to overcharge customers, reports Gulf News.

Jewellers are seeing a huge rush of buyers as gold prices are currently at a two-year low.

Shopkeepers said the rush, a combined result of the Hindu festival of Diwali and lower prices has resulted in a shortage of gold bars. But they denied any hoarding by outlets.

"There is enough gold available in the market and sales are at their peak over the last couple of days with the market falling drastically," jewellers said across the emirate.

A buyer who asked not to be named said: "The price of gold prompted me to visit the Gold Souq in Sharjah. However, most retailers claimed they were sold out. Outlets where gold was available were openly overcharging. They said it was in short supply. The price of 24 carat stood at Dh88.75 but they were openly charging Dh92.50. This is clearly an unfair practice."

Shubash Golati, a buyer, said: "It is a tradition to buy gold during the four-day Indian festival of Diwali. I bought 22 carat jewellery worth Dh5,000. I wanted to buy a 100 gramme gold bar but was told that it is out of stock."

HR Bafna, financial controller from Siroya Jewellers, said a physical shortage of gold is happening worldwide.

He said: "It is matter of physical delivery. It might take a day or two to replenish the stocks. But I am sure that there is no hoarding by jewellers because the market rate has dropped. This has resulted in a tremendous rush of buyers and so the gold bars are out of stock."

In reply to buyers’ complaints that gold outlets are cashing in on the limited stocks and buyer rush, Bafna said: "There is a possibility, but I can’t confirm this."

A counter salesman at the Joy Alukkas outlet in Bur Dubai said for the last couple of days there have been no fluctuations in gold prices.

He said: "From a customer’s point of view this is an excellent time to buy."

He too denied any hoarding taking place. "If the demand for gold is high it is but obvious that some stocks will run out. Some retailers take advantage of this."

Countrywide Holds Record Inventory of Foreclosures for Sale

19,618 Homes Offered For Sale on Countrywide Financial's Website
Total REO Asking Price: $3,308,329,521
(As of October 17, 2008)

Source: CountryWide Foreclosures

Pssssst - Here's a Tip for You

The Five Year TIP Yields have crossed up and over the conventional Five Year Treasury Yields for the first time in their admittedly short life span.

That would tend to signal inflation dead ahead. And/or a negative real return on Five Year Treasuries.

It will be interesting to see how those move in the future as the currency crisis unfolds in phase two of the Credit Crisis.

TIP to TIP Spreads

Important Support Level on the Monthly Gold Chart

The support level around 730 is important. It is easier to see on the monthly chart.

If it holds any retests and gives us a monthly print there may be significance for this well beyond the gold market.

Let's see what happens.

In 2009 the US Will Be Forced to Selectively Default and Devalue Its Debt

We have seen estimates that next year the US will have to finance a $2 Trillion annual deficit. They may be able to push it further into the next Administration than that by the forbearance of the world, but not by much. We'd expect a significant drop in Treasuries by 2011 at the latest.

It should be obvious to anyone that we are approaching the apogee of the Treasury bubble, with the credit bubble having broken already.

When the Treasury says they are facing unprecedented challenges in financing the US public debt next year that is an understatement.

Once the deleveraging of the markets subsides, the dollar and Treasuries will drop, perhaps with some momentum, as the rest of the world realizes that the US has no choice but to default. This can be resolved in several ways, including continued subsidies from foreign sources in the form of virtual debt forgiveness, devaluation of the dollar, raising of taxes, and higher interest rates on debt.

The problem now is that the US has breached the point where it can service its debt out of real cash flows, and turning this around will require a severe devaluation of the US dollar.

Devaluation and selective default are the only foreseeable systemic alternatives. There are other exogenous paths of a more political nature such as consolidation and war that may color the default a slightly different color, but a selective default it remains.

This is the fundamental situation. Everything else is speculation and commentary.


Bloomberg
Ryan Says Treasury Faces `Unprecedented' Financing Needs in '09
By Rebecca Christie

Oct. 28 (Bloomberg) -- The U.S. Treasury faces historic demands to fund a growing budget deficit and raise money for a $700 billion Wall Street rescue program the department's top domestic finance official said today.

``This year's financing needs will be unprecedented,'' said Anthony Ryan, the Treasury's acting undersecretary for domestic finance, at a Securities Industry and Financial Markets Association conference in New York, where he was a last-minute substitution for Treasury Secretary Henry Paulson.

To raise the necessary funding, the Treasury is looking at selling more long-term debt and possibly bringing back three- year note sales at the Nov. 5 refunding, Ryan said. The Treasury also is raising money to address ``many different policy objectives'' and reduce bond market disruptions and will try to keep its borrowing patterns as regular as possible, he said.

``We firmly believe that investors value greatly and pay a premium for Treasury's predictable actions,'' Ryan said. ``To the very best of our ability, we intend to stay the course.''

Ryan also said the U.S. government now ``effectively guarantees'' debt issued by mortgage companies Fannie Mae and Freddie Mac, the government-sponsored enterprises placed into government conservatorship on Sept. 7. The preferred stock agreement included in the government takeover means the U.S. now backs ``both existing and to be issued'' GSE debt.

``The U.S. government stands behind these enterprises, their debt and the mortgage-backed securities they guarantee,'' Ryan said. The GSEs have almost $6 trillion in outstanding debt and mortgage securities.

U.S. equity and credit markets remain under ``considerable strain'' and face ongoing challenges, he said. That said, Federal Reserve efforts to backstop commercial paper are ``helping'' to stabilize markets, he said.

To contact the reporter on this story: Rebecca Christie in Washington at Rchristie4@bloomberg.net;

Last Updated: October 28, 2008 10:47 EDT

IMF: Gold Leases, Loans, Swaps and the Gold Forward Rate

As you may recall we have a hypothesis that gold, the swiss franc, and the yen have all been helping to fuel the carry trade.

The yen has exploded higher, while the swiss franc has languished because of that country's heavy exposure to the financial system (16% of GDP) and the toxic debt problems throughout Europe.

As far as we know, gold does not have a similar issue with toxic bank debt, and from the numbers still looks to be heavily involved in carry trades based off leased central bank gold.

In reading this, it becomes clear that the IMF believes that once gold is lent out it becomes the property of the borrower who may in turn lend it out to third parties. What the lender holds is the 'promise' of the return of the gold at some future date.

What we find shocking however is that on the books there is no accounting for this potential liability. The gold that is lent out is still marked as 'gold reserves.'

What is the extent of this lending? How many ounces of central bank gold are really just paper promises for its return? If the dominos start falling in this carry trade it is very likely that there will be a declaration of force majeure, and the contracts will be settled in paper.

But it could be very embarrassing to the monetary authorities who have dealt away the possessions of their countries without inquiring about their ability to do so, or making their behind the scenes deals public. One way to settle this ahead of time is to promote 'gold sales' in which the paper settlement process is accelerated.

Watch this, because its sure to get interesting.

The Nature of Lease Payments on Gold Loans
BOPTEG ISSUES PAPER # 21A

IMF COMMITTEE ON BALANCE OF PAYMENTS STATISTICS
BALANCE OF PAYMENTS TECHNICAL EXPERT GROUP (BOPTEG)

Prepared by International and Financial Accounts Branch
Australian Bureau of Statistics
November 2004

Gold Loans

Gold loans or deposits are undertaken by monetary authorities to obtain a non-holding gain return on gold. The physical stock of gold is "lent to" or "deposited with" a financial institution (such as a bullion bank) or another party in the gold market (such as an intermediary for a gold dealer or gold miner with a temporary shortage of gold). In return, the borrower may provide the monetary authority with high quality collateral, but no cash, and will make a series of payments, known as lease payments.

The party who borrows the gold from a monetary authority may in turn "lend" the gold to a dealer or miner.

This ability to on-lend indicates that, while the package of transactions which makes up a gold loan is clearly very different from an outright sale of the gold, the rights and privileges associated with ownership of the gold have changed from the monetary authority to the borrower.

The loan or deposit may be placed on demand or for a fixed period. The amount of gold to be returned is based on the volume initially lent, regardless of any changes in the gold price.

The security and liquidity aspects of the monetary authority's gold loan claims on the depository corporations are regarded as a substitute for physical gold, such that the loan values are retained within the monetary authority's monetary gold reserves, leaving monetary gold stocks unchanged. If the loan is for a fixed period, it is usually available on short notice, to help meet the criteria for inclusion in reserve assets.

Gold loans or deposits share many of the characteristics of securities repurchase agreements (repos) and securities lending, the statistical treatment of which has proved intractable.

Gold Swaps

In order to analyse gold loans, it is useful to first understand gold swaps.

A gold swap involves an exchange of gold for foreign exchange deposits, with an agreement that the transaction be unwound at an agreed future date, at an agreed price. Gold swaps are usually undertaken between monetary authorities, although gold swaps sometimes involve transactions when one of the parties is not a monetary authority. In this case, the other party is usually a depository corporation. (A monetary authority is a central bank or Treasury. We wonder if J. P. Morgan is one of these swap parties since they are the major player int he global gold derivatives market - Jesse)

Gold swaps are undertaken when the cash-taking monetary authority has need of foreign
exchange but does not wish to sell outright its gold holdings. The monetary authority acquiring the foreign exchange pays an agreed rate, known as the gold forward rate. At maturity, the volume of gold returned is the same as that swapped, while the value of the foreign exchange - as determined at the time of initiation of the swap - is returned.

While, because of the limited number of players, gold swaps are unlikely to be tradable, they have all of the other characteristics of a financial derivative. The gold forward rate, which determines the payments associated with a gold swap, is set taking into account current and expected interest rates and gold prices. If gold swaps are considered financial derivatives, in statistical terms the payments associated with a gold swap are transactions in a financial derivative. Otherwise, the payments may be considered margin payments on a forward contract.

Components of a Gold Loan

A gold loan can be seen as a gold swap where the borrower of the gold provides no foreign exchange in exchange for the transfer of the gold. That is, a gold loan is a gold swap with an extra leg, whereby the gold lender lends the money received back to the gold borrower.

In order to gain an understanding of a gold loan, it is useful to separate it into three parts:

1. Change of Ownership of Gold - the monetary authority transfers the physical stock of gold to the borrower. The borrower can (and usually does) sell the gold to a third party.

2. Loan - as the borrower has ownership of the gold but has not paid for it, the monetary authority is deemed to have issued a loan to the borrower equal to the value of the gold. The borrower has a loan liability to the monetary authority. (Is the gold still reported in the lender's listed reserves? - Jesse)

3. Forward Contract - the borrower enters into a forward contract to deliver the original quantity of gold borrowed, to the monetary authority when the gold loan matures. At the maturity date, the monetary authority extinguishes the loan claim on the borrower in exchange for the receipt of the borrowed gold.

Analysing these components helps to understand the multiple positions and flows which are combined to make up a gold loan, and hence to understand the nature of the loan and the lease payments.

Lease Rates

In the case of a gold swap, the gold lender (cash taker) makes payments at an agreed rate, the gold forward rate, to the gold borrower.

If the above view of gold loans is correct, one component of the lease payments is the same payments as in a swap, but these are more than offset by interest on the loan going in the other direction, resulting in a net payment by the gold borrower to the gold lender (the opposite direction of the payment under a swap).

These payments are called gold lease payments and, according to the above view of gold loans, are made up of:

• interest on the loan, and
• transactions in a financial derivative or margin payments on a forward contract.

London Bullion Market Association Statistics

London Bullion Market Association Gold and Silver Fix and Forwards


To test the validity of this view, it is useful to look at how gold lease rates are determined in the market:

Gold lease rate = LIBOR - GOFO rate

LIBOR is the London Inter-Bank Offered Rate, a widely used international risk-free interest rate.

The GOFO rate is the Gold Forward Offered rate, which is the rate at which contributors (the market making members of the London Bullion Market Association) are prepared to swap gold against US dollars.

The charts below show the daily gold price and the daily one year LIBOR, GOFO, and gold lease rates over the past seven years.



The relationship of LIBOR and the GOFO rate to the lease rate is shown in Chart 2.
Comparing Chart 1 and Chart 2 shows that the gap between GOFO and LIBOR is significant in times of falling gold prices, and GOFO approaches LIBOR in times of rising gold prices.

The composition of the lease rate supports the view of the components of a gold loan outlined above. The payment of interest indicates the existence of a loan and the use of the GOFO rate indicates the existence of a gold swap.

Conclusion

The topic of this paper is the treatment of the lease payments on gold loans. The analysis of the positions and the flows has been done together as it is not possible to draw conclusions on the nature of the flows without looking at the positions to which they relate.

The description of components of a gold loan in this paper is likely to be controversial given the state of the overall debate on reverse transactions, but it is hopefully a useful contribution to that debate. The empirical support lent by the derivation of the lease rate, that is that the loan is seen by those setting the rate as a loan and a swap, may prove useful in that debate.

The conclusion on the nature of the lease payments is that they are the net of two flows, interest on a loan and transactions in a financial derivative or margin payments on a forward contract.

These should be recorded separately.

Hat tip to Steve Williams at CyclePro for bringing this paper to our attention.

I'm Proud to be an Okie Who Is Brokie..

It was a tossup this morning between this story and the one about how J.P. Morgan has virtually destroyed the New Castle school district through dodgy swaps with enormous undisclosed fees, now being investigated by the fraud unit of the FBI. New Castle is in western Pennsylvania near the Ohio border. McCain country. We'uns don't want any of that commie socialism here, unless it is for the good of the Republican party and the banks what ripped us off.

This one about Oklahoma State seems to have more pathos since at one point they were actually ahead 70%, borrowed against ti all and spent it, and then went bust on margin calls that wiped out the gains and principal, leaving them holding the debt.

And they were not really defrauded directly it appears, just recklessly foolish and badly used by an egotistical windbag.

Maybe they can get a co-signer loan from the Aggies or the Sooners.


FanIQ
Oklahoma State Is Officially Screwed

You probably heard a few years ago that T. Boone Pickens, who chairs the hedge fund BP Capital Management, gave Oklahoma State a $165 million donation to be used all for helping the school's athletic program. And the largest portion of it was going to be used to beef up the school's football stadium and football facilities.

Well, there was one problem with Boone's donation. He left the donation in the hedge fund, which initially seemed to be a good idea as oil prices soared in a post Katrina economic climate, swelling the initial gift to over $300 million. That was before things began to turn in 2007, as international demand for oil failed to meet projections, causing the fund to come to a sudden standstill, and then dropping on mistakes made by fund managers, who were managed by Pickens.

Anyway, Pickens resisted pleas by some OSU Regents to bank a good deal of the balance out of the fund when it exceeded $300 million, which was only 14 months ago. Instead Pickens decided on borrowing almost $200 million needed to expand and renovate Boone Pickens Stadium on the Stillwater campus, despite the fact that the donation was dropping in value.

Now, here's the bad news. Yesterday all indications were that OSU Regents had been told last Friday afternoon that a large portion of the Pickens donation in the BP Capital hedge fund was virtually wiped out by margin calls on the funds investments in the third quarter.

Well, that's not actually the case. It seems that ALL of the money is gone (the link provided is for a members site, but you can read the full article here).

Officials were told that actually, the entire $ 165 million donation, and the earnings, which once inflated the gift to over $300 million, had recently been eliminated by margin calls due to drastically falling oil prices.

As of Monday OSU's gift had flat-lined completely and was declared 'gone.'

And just so you know, the school has already made a lot of those improvements to the football field . That's because the school borrowed almost all funds used in the stadium expansion plans using the $300 million balance in BP Capital as collateral.

Yikes. So, um, Oklahoma State is now in debt of close to $300 million dollars.

I have no idea how in God's name they're going to get out of this. State schools don't exactly have an extra $300 million sitting around.

Has a college ever actually declared bankruptcy? I'm not sure, but we're probably about to find out.

It can only get better, it can't get any worse...

Escape Velocity: Take it to the Limit One More Time Like Its 1933

Escape velocity: in physics, the speed where the kinetic energy of an object is equal to the magnitude of its gravitational potential energy. It is commonly described as the speed needed to "break free" from a gravitational field without any additional impulse.

In economics, the growth rate at which the energy of monetary expansion exceeds the magnitude of deflationary forces generated by deleveraging of a prior monetary overexpansion.

In both cases, something gets put into orbit.

On 26 September 2008 Adjusted Monetary Base Rises to Record Levels we noted that the Fed was putting pedal to the metal, boosting the monetary base to levels higher than 911.

Here's an update.



When this reaches escape velocity it could be something to see. The last two times the Fed hit the afterburners we had stock market rallies leading to impressive highs.

Here is an interesting look at the history of the monetary base.



Hopefully the Fed has learned to allow the liquidity to percolate a little to trickle down to the real economy before yanking it back. We believe that this was the hypothesis of Friedman and Schwarz.

When the Fed does put on the brakes to stop the growing inflation, it might be even more impressive for those of you who were not around when Paul Volcker did his interest rate exercise in monetary restraint. Hint: zero coupons were a great buy at the top.

Europe and Asia Seek a Consensus Ahead of Washington Meeting

Sounds as though a consensus is forming, without the United States, to set the agenda for the upcoming meeting in Washington on November 15.

One step closer to a world currency, and a world government.
Tonight I am sick at heart for the damage that has been done to the world over the last eight years. We have squandered the sacrifice of a generation.

ἐδάκρυσεν ὁ Ἰησοῦς


The Economic Times
Leaders call for new rules for financial system
25 Oct, 2008, 0644 hrs IST

BEIJING: Asian and European leaders agreed that the rules guiding the global economy should be rewritten and the International Monetary Fund should be given a lead role in aiding countries hit hardest by the financial crisis.

On a day when stock markets plunged around the world, leaders from nations including China, France, Germany and Japan said Friday that they were moving toward consensus ahead of next month's meeting of the 20 largest economies in Washington.

``Europe would like Asia to support our efforts and would like to make sure that on the 15th of November we can face the world together and say that the causes of this unprecedented crisis will never be able to happen again,'' French President Nicolas Sarkozy said in remarks to the opening ceremony of the Asia-Europe Meeting in Beijing.

A draft of a meeting statement on the crisis seen by The Associated Press called on the IMF and similar institutions to act immediately to help stabilize struggling banks and staunch the flood of red ink on regional stock bourses.

``Leaders agreed that the IMF should play a critical role in assisting countries seriously affected by the crisis, upon their request,'' the draft said.

If adopted, the statement would be among the strongest calls yet for a leading role in the crisis for the Washington-based fund, long known as the international lender of last resort.

Countries as varied as Hungary, Ukraine, Iceland and Pakistan have already turned to the IMF for help bridging their liquidity crunches.

The draft statement also states that leaders agreed to ``undertake effective and comprehensive reform of the international monetary and financial systems.''

Among the first to publicly endorse the proposal was Japanese Prime Minister Taro Aso, head of the world's second-largest economy. Aso ``strongly supports'' a critical role for the IMF, Japanese Foreign Ministry spokesman Kazuo Kodama said.

The biennial gathering, known as ASEM, has no mandate to issue decisions and participants differ widely on their views toward international cooperation and intervention by global bodies. Free-trading Singapore and economic powerhouse Germany are attending, along with isolated, impoverished Myanmar and landlocked, authoritarian Laos.

Responses to the crisis have varied widely so far. Europe has already approved a plan under which the 15 euro countries and Britain put up a total of $2.3 trillion in guarantees and emergency aid to help banks.

Asian financial systems are less shaky, having had less direct exposure to the toxic sub-prime mortgages that are wreaking havoc on US and European markets. Showing a notable lack of urgency, South Korea, China, Japan and the 10-country Association of Southeast Asian Nations recommitted themselves to an $80 billion emergency fund to help those facing liquidity problems - to be established by next June.

China and other Asian economies are, however, expected to take a major hit from a drop in exports and foreign investment.

Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed,
and everywhere the ceremony of innocence is drowned...

Charts in the Babson Style for the Week Ending 24 October 2008

A rough week indeed, with the US equity markets opening this morning with the SP futures down limits. We thought there might be a plunge to retest the lows, and set up a rebound rally, but that was not to be the case.

Is this the first weekend in some time we will not be waiting on some Fed and Treasury action on Sunday night before the Asian markets open? Seems like it. Treasury said they might start buying chunks of insurance companies and other financial firms. That failed to buoy the markets, but as they say, it could have been worse.

Do you remember when watching the market was 'like watching paint dry on a house' intraday? Now it feels like we're watching a tornado rip that house apart every day.

It looke like we'll be retesting the lows, perhaps next week, and continue to bleed on the downside, perhaps another ten percent or so until the market reaches value.

Try to pay the good things you receive forward, payez au suivant, which are the terms of this house. It is ironic indeed but well known that the help that those in need receive so often comes from those who have suffered themselves, and realize that it is by the grace and mercy of God that we are blessed. To learn to love we must first yearn to be comforted.

Have a pleasant weekend.

OCC Derivatives Report: The Four Horsemen of the Apocalypse

In the latest Report from the Office of the Comptroller of the Currency, Derivatives Holdings in the United States have reached some lofty levels as of June 30, 2008.



If Derivatives are Weapons of Mass Destruction, Here Are the Dealers



The even worse news is that the exposure is increasingly concentrated in the top four US Banks. With their intended acquisition of Wachovia, Wells Fargo gets to move up in the charts.



Commodity Derivatives are proving to be a popular preoccupation for some of the frat boys of Wall Street. As you may recall, commodity prices have been taking a wild ride up to about the middle of this year, and then collapsed spectacularly.

So what are we looking at here: the winners or the losers?

Two players seem to hold the biggest hands, JPM and Bank of America.

A special thanks to our friends at The ContraryInvestor who created the graphics from this OCC report. The site is invaluable to anyone who is serious about the US markets and the economy.

A Record Number of Buyers Cannot Take Delivery of the US Treasuries that They 'Own'

He who sells what isn't his'n
Must buy it back or go to Prison.
Daniel Drew

Naked short selling and float and reserve plays are causing a record 'failures to deliver' in the US Treasuries markets. Some of this may be a 'kiting' scheme in which the sellers are playing an aribtrage against the slight fees and penalties versus returns on price distortions and extremes in volatility.

Or it might be a case of selling and using the same thing so many times as collateral that you don't really know what is your actual condition, solvent or insolvent. We can think of several (roughly nine) derivative and instrument laden banks that are utterly insolvent if forced to deliver their net obligations.

The Fed cannot even regulate its own products among its own dealer circles. What could possibly possess anyone to believe that they can do this with any other product in a larger, less exclusive market?

There are system breakdowns that have caused signficant spikes in failures, such as the widespread technical failures following the distruptions caused by 911.

But we are not aware of any massive computer system failures and shutdowns at this time. This may be a case of when the going gets tough, the frat boys bend the rules until they break, and then line up for a slap on the wrist from dad's business associates.

Is this because of the failures of Lehman and Bear Stearns and AIG? Hard to believe but we have an open mind. Transparency builds confidence more effectively than rhetoric and empty promises.

Who are the responsible parties? Let's have a list of the prime offenders of this market. We might *not* be surprised at who is failing to deliver what they sell. It might be an indication that they are in trouble. Oops, perhaps that is why we can't have it.

We suspect the Fed is turning a 'blind eye' to this activity. But more transparency would be helpful to alleviate that concern.

And do not be surprised when other things that you think that you are buying or think you own fail to show up.

There are some who see an approaching 'fail to deliver' spike at the COMEX and they may be right. There were some who believed that LTCM was short 400 tons of gold at the time of its failure, and that several central banks stepped in to depress price and increase supply to alleviate the potential shock on counterparties.

Replay in progress? It could get interesting if it is.



Stand and Deliver: Significant Fails in the US Treasury Market - 10 Oct 2008


Delivery failures plague Treasury market
Total hit a record $2.29 trillion as of Oct. 1
By Dan Jamieson
October 19, 2008

The credit crisis is causing a growing number of delivery failures with Treasury securities.

The latest data from the Federal Reserve Bank of New York showed that cumulative failures hit a record $2.29 trillion as of Oct. 1. The federal settlement period is T+1 (trade date plus one day).

The outstanding U.S. public debt is $10.3 trillion.

"Current [fail] levels are at historic levels," said Rob Toomey, managing director of the Securities Industry and Financial Markets Association's funding and government and agency securities divisions. "There's been significant flight to quality" with the market turmoil, he said.

With the strong demand for Treasury securities, "some of the entities that bought Treasuries are not making them available in the [repurchase] market, which is the traditional way to get them," Mr. Toomey said.

Unlike some past bouts with high failure rates that involved particular bond issues, the current high fails involve all types of maturities, he said. (Such as in the 2001-2003 market crash - Jesse)

This month, New York- and Washington-based SIFMA came out with a set of best practices to reduce failed deliveries.

This year, the New York Fed revised its own Treasury market trading guidelines. Its guidelines, originally released last year, warned that short-sellers "should make deliveries in good faith." (And all good boys and girls should remain pure until they are married - Jesse)

LACK OF LIQUIDITY

Chronic failures can increase illiquidity problems in the market and expose market participants to losses in the event of counterparty insolvency, according to the New York Fed.

"There is a question about there being some impact on liquidity if [delivery failures] last for a long period," Mr. Toomey said.

Many retail investors also own Treasury securities, either directly or indirectly. The Treasury market is also an important fixed-income benchmark, so any liquidity problems can affect all participants.

In extreme cases, chronic fails could cause participants to limit their trading in secondary markets, the New York Fed said.

"Who wants to buy what they're not going to get?" said Susanne Trimbath, a market researcher with STP Advisory Services LLC of Santa Monica, Calif. In a September research paper, she estimated that based on failure rates in 2007 and 2008, the cost to investors from failed deliveries is about $7 billion annually. (Pays for the facials - Jesse)

The cost arises because sellers don't have access to their money. In addition, the federal government loses $42 million a year in lost revenue, and the states miss out on an additional $270 million in revenue due to excessive claims of tax-exempt income on state-tax-free Treasury securities, Ms. Trimbath said.

She and researchers at the New York Fed said that some delivery failures are intentional. (We're shocked, shocked! - Jesse)

As with naked shorting of stocks, naked shorting of Treasuries "allows you to avoid the borrowing costs," Ms. Trimbath said.

"There can be circumstances in a low-rate environment where it's cheaper to fail" than deliver, Mr. Toomey said. Such an environment also reduces incentives to act as a lender of securities, he said.

A 2005 study by the New York Fed confirmed that episodes of persistent settlement fails are often related to market participants' lack of incentive to avoid failing. (Thanks for the kind of knowledge that most mothers, teachers, and adults over the age of 25 could have told us for free, propeller heads - Jesse)

"We've got to get the [Securities and Exchange Commission], the Fed and SIFMA in there to force" Treasury traders to deliver securities, Ms. Trimbath said. (That ought not to be hard. We hear the Fed has people on premise every day with most of the probable perpetrators - Jesse)

The Department of the Treasury has a buy-in rule for the cash markets, but the repurchase markets rely on contracts, Mr. Toomey said. Currently there are no penalties for failures, and regulators to date have not required disclosure whether the dealer or the client fails to deliver. (Self regulation at its finest. Sounds like the honor system my neighbor uses to sell tomatoes in the summer from a box in her front yard. Except for the most part the people here in our neighborhood are not greedy, self-centered, shameless, hedonistic shits - Jesse)

By industry convention, fails are generally allowed to roll over until they are eventually closed out, Ms. Trimbath said.

SCRUTINY

She said that scrutiny by the SEC and the Fed, and widespread investigations into short-selling practices, are driving the industry to rein in questionable practices with Treasuries. (Apparently with 'great success,' Borat, given the record number of fails - Jesse)

Mr. Toomey said that one of SIFMA's best-practices suggestions is to require that extra margin be provided by the party that is underwater due to a failed delivery. (Wrist slap by fines is a real deterrent - Jesse)

SIFMA also said that it is establishing a Treasury fails monitoring committee, with representatives from the Fed and Treasury.

The committee will alert the market "when marketwide mitigation, remediation and the attention of management is warranted" because of a high level of fails, SIFMA said in a statement.

The New Deal for the Banking System as the Financial Storm Intensifies

"Do you think he is so unskilful in his craft, as to ask you openly and plainly to join him in his warfare against the Truth? No; he offers you bait to tempt you. He promises you civil liberty; he promises you equality; he promises you trade and wealth; he promises you a reduction of taxes; he promises you reform... He prompts you what to say, and then listens to you, and praises you, and encourages you. He bids you mount aloft. He shows you how to become as gods. Then he laughs and jokes with you, and is familiar with you; he takes your hand, and gets his fingers between yours, and grasps them, and then you are his."
J.H. Newman, The Times of AntiChrist, 1889

We are seeing an enormous parody of Roosevelt's New Deal being rolled out in a hurried fashion for the bankers and the wealthy under the cloak of dire necessity prior to the likely change in political Administrations.

If we follow the political pattern of the 1930s, we will see a minority of Republicans and a sympathetic majority at the Supreme Court attempt to maintain the disbursal of liquidity largely to the corporations and banks, and to fight any progressive tax increases and social programs designed to push that liquidity directly to the public without passing through the tollgates of the financial system.

If this happens, we may see a powerful polarization in the country between a minority that will attempt to embrace state control to halt those programs and the encroachment on 'true American principles' and a suffering public, with a middle class pinned between them.

The corporatist appeal will be made to social conservatives, small businessmen, the banks and the corporations that spring up around them, and the lowest elements in the hatreds and prejudices and fears in the public, particularly the older middle class, to retrieve our national honor.

And if against all safeguards and probability this succeeds in gaining power, and burning the Constitution to preserve our freedom becomes a popular slogan, and a slyly articulate but otherwise inexperienced, almost mediocre, leader arises, and the corporate powers support this person in order to achieve their ends, then it will be time to leave, without looking back, before the storm breaks, and madness is unleashed, and a darkness falls over the land.

Bernanke May Seek New Ways to Ease Credit as Fed Rate Nears 1%
By Craig Torres

Oct. 23 (Bloomberg) -- Federal Reserve officials are likely to bring interest rates down so aggressively over the next few months that they will have to search for fresh tactics to continue easing credit.

The Fed's Open Market Committee will probably reduce the benchmark federal funds rate by half a point next week to 1 percent, the lowest since May 2004, according to futures trading. The official rate has never been lower since the Fed made it an explicit target in the late 1980s.

Further cuts below 1 percent could turn Fed Chairman Ben S. Bernanke's focus away from the main rate and toward more use of alternative tools. Those might include increasing its holdings of mortgage bonds to lower costs for homebuyers and purchasing securities directly from the Treasury in order to pump more cash into the economy, Fed watchers said.

``If there is need for more stimulus, the Fed will buy up government debt to keep borrowing costs low," said Adam Posen, deputy director at the Peterson Institute for International Economics and a co-author with Bernanke. That's tantamount to ``turning government debt, as it is issued, into money.'' (That is pure monetization and they can do it if they have the will and the need - Jesse)

Bernanke, 54, has already thrown the central bank's balance sheet into action in unprecedented ways. Working with the New York Fed, the Board of Governors has rolled out 11 new programs aimed at absorbing risk or making dollars available when banks don't want to loan. (A New Deal for the Banking System - Jesse)

Assets Doubled

The result: The central bank's assets, which include a loan to insurer American International Group Inc. and a pool of investments once held by Bear Stearns Cos., more than doubled to $1.772 trillion last week from a year-earlier total of $873 billion that comprised mostly Treasuries. The latest weekly figures are scheduled for release at 4:30 p.m. in Washington.

There's more to come. The Fed announced this week a backstop for money-market mutual funds to which it will commit another $540 billion. A commercial-paper program approved Oct. 7 could buy up to $1.8 trillion of securities.

``The net effect of these facilities has been a truly staggering pace of growth in the Fed's balance sheet,'' said Jan Hatzius, chief U.S. economist for Goldman Sachs Group Inc.

When the Bank of Japan fought deflation and a banking collapse earlier this decade, its balance sheet ballooned to more than 30 percent of gross domestic product as it pumped money into the economy, Hatzius said. He predicted ``further rapid growth'' in the Fed's, which is now equal to 12 percent of U.S. GDP. (The policy error is that they pumped the money into foolish projects and into an unreformed financial system, hopelessly compromised by the keiretsu corporatism of interlocking insider dealing. One does not start an engine that is broken by pouring more fuel into it. - Jesse)

`Helicopter Ben'

As a Fed governor, Bernanke did research on alternative policy tools between 2002 and 2004, when U.S. central bankers last cut the benchmark rate to 1 percent. Traders nicknamed him ``Helicopter Ben'' after a 2002 speech that referenced Milton Friedman's comments comparing such unorthodox methods to dropping money from a helicopter.

Vincent Reinhart, the Fed's director of monetary affairs at that time, said Bernanke's policy activism, which contrasts with his predecessor Alan Greenspan's almost exclusive use of the federal funds rate, derives from the chairman's research on policy errors in the Great Depression and during Japan's rolling recessions of the 1990s.

``He saw what we viewed as an obvious policy failure and it was in the ability of human reason'' to fix it, said Reinhart, now a scholar at the American Enterprise Institute.

`Quantitative Easing'

The Bank of Japan, struggling against deflation, slow growth and consumers' reluctance to spend, brought its policy rate close to zero before turning in 2001 to a so-called quantitative easing strategy of increasing money in accounts held for commercial banks. The policy lasted for five years, before the central bank began to draw down reserves and raised its benchmark rate to 0.5 percent, where it has been since February 2007.

The Fed has flooded the economy with so much cash that excess reserve balances at banks, or cash surpluses beyond what banks are required to hold against deposits, soared to $136 billion for the two-week period ending Oct. 8 compared with an average of $1.4 billion in the same month last year. (We showed this in a chart the other day. They are stuffing the banks with liquidity, and the banks are holding the reserves against writedowns and credit risk. At some point this will spill over and perhaps even break out, into what contrivances who knows. We may see a rise of 'superbanks' through acquisition. These will have to be taken apart in the coming years. - Jesse)

``The Federal Reserve has already entered a regime of quantitative easing,'' said Brian Sack, vice president at Macroeconomic Advisers LLC who also worked with Bernanke as an economist in the Monetary Affairs Division.

As their liquidity programs dump excess funds into the banking system, it's become more difficult for the Fed to keep the rate at which banks lend overnight to each other in line with policy makers' 1.5 percent target. (This is an absolutely key point to keep in mind - Jesse)

Below Fed Target

In an effort to put a floor under the overnight rate, the central bank started paying interest on the reserves banks deposit with it. That hasn't stopped the so-called effective federal funds rate from falling below the target every day since officials lowered their benchmark by half a point in an emergency move on Oct. 8.

In the two weeks since then, evidence of a deteriorating economy has mounted and will likely push Fed officials toward a further rate cut when they meet Oct. 28-29, economists said.

Industrial production in the U.S. fell in September by the most in almost 34 years, and retail sales dropped by the most in three years. Inflation pressures are easing as oil prices fall to a 16-month low, and nine months of job losses eliminates any pressure from wage increases.

Whether the target rate ends up below 1 percent depends on how fast consumers and businesses gain more access to low-cost credit. Economists at HSBC Holdings Inc. said the Fed would like to avoid cutting to zero. Still, if the economy doesn't improve, it ``could be at zero'' by the middle of next year, said HSBC economist Ian Morris.

``There is this understanding at the Fed that the worst thing you can do is save your ammunition,'' said Ethan Harris, economist at Barclays Capital Inc. ``You move fast -- that is the whole lesson of past crises in Japan and during the Great Depression.''

Long Term Gold Chart and a New Set of Hedged Positions

We are in a market liquidation that is very powerful and ought not to be underestimated. In the short term value means little when the task is to raise cash and sell assets to do so.

Still, it is good to keep the longer term in mind, while we WAIT for the market to stabilize. Please also remember that the mining stocks are NOT the underlying asset, and should be treated as a speculation.

We started buying high yield and high cashflow per share energy and mining stocks today, hedging them dollar for dollar with QID and SDS and DXD. We will vary the ratios and positions accordingly. We have done this before in this cycle when we reach support and resistance levels we consider to be 'extreme.' The first few attempts were not entirely fruitful.

The objective is to emerge from a short term or intermediate term market bottom with our capital intact, holding a portfolio of very desirable stocks with attractive yields that pay while we wait.

This mix gives us some downside and upside protection, for those who have had this market whipsaw them on the bearish side with 400 point rallies. We actually came to this strategy from our approach to this decline from the short side.

This is not simple to do and we do not recommend it for those not experienced with hedged positions. Getting the ratios to work for you, and not against you for a double hit, is a critical competency. Overtrading is a definite risk.

G20 Leaders to Meet on November 15 in Washington DC

This will be interesting to watch, since it is conceivable that by the time of this meeting Bush's party may have lost the presidency and both Houses of Congress.

However it develops, for some reason it sends a chill to those who are not global unionists and who have an abiding distrust of statists.

This also spells potential volatility for the currency markets, since one thing these fellow do know how to accomplish is to 'fix' the currency markets if not the financial system.

NY Times
Bush Invites World Leaders to Economic Talks
By SHERYL GAY STOLBERG
October 22, 2008

WASHINGTON — President Bush has invited the leaders of 20 nations to come to Washington on Nov. 15 for an international meeting on the economy, the White House said Wednesday. The move could eventually lead to a far-reaching overhaul of the rules governing global financial markets.

The meeting, intended to be the first of several global economic meetings, will come less than two weeks after the presidential election, and its timing underscores the urgency the administration feels in addressing the financial crisis. The White House has said Mr. Bush would “welcome input” from the president-elect, although it is unclear if Mr. Bush’s successor would attend. (At this meeting Bush could be the lamest of lame ducks - Jesse)

The meeting will have a broad agenda, laying the groundwork for the leaders to “agree on a common set of principles for reform of the regulatory and institutional regimes for the world’s financial sectors,” Dana Perino, Mr. Bush’s press secretary, said in announcing the meeting.

Mr. Bush has been under intense pressure for several weeks from leaders in Europe, especially President Nicolas Sarkozy of France, to convene an international meeting of economic powers to address the financial crisis. Mr. Sarkozy has called for strengthening and rewriting the rules governing global financial institutions, fashioned after the 1944 meeting in Bretton Woods, N.H., in which 44 nations remade the global financial system after the Great Depression. (Is Sarkozy the new Tony Blair in Europe? - Jesse)

But the White House initially sounded skeptical of the idea; administration officials have said Mr. Bush is wary of any effort to allow other nations to exercise control over the United States banking system. Over the weekend, though, Mr. Bush; Mr. Sarkozy; and the president of the European Commission, José Manuel Barroso, had dinner at Camp David and apparently brokered an agreement.

While Mr. Sarkozy had been pressing for a meeting of the so-called Group of 8 world economic powers, Mr. Bush insisted that developing nations be included. After their dinner on Saturday night, the three men issued a joint statement saying they would reach out to world leaders with the intent of convening a series of economic meetings.

The venue also appears to have been an issue. Mr. Sarkozy said over the weekend that he hoped the first meeting would be held by the end of November, and suggested it be convened in New York. “Since the crisis started in New York, maybe we can find the solution in New York,” he said. “This is a worldwide crisis, and therefore we must find a worldwide solution.”

By convening the meeting in Washington, his home turf, and by insisting that leaders from developing as well as developed nations attend, Mr. Bush appeared to be putting himself firmly in charge. (The lame duck's swan song? Let's hope so - Jesse)

White House officials have said that the president is especially concerned that an effort to rewrite global financial rules could hurt capitalism and free trade; in her statement, Ms. Perino said the agenda would include “an opportunity for leaders to strengthen the underpinnings of capitalism by discussing how they can enhance their commitment to open, competitive economies, as well as trade and investment liberalization.”

The White House drew the list of invitees from the so-called G20, a forum of rich and emerging nations that was convened in 1999 after an earlier international crisis. Its members are Argentina, Australia, Brazil, Britain, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United States and the European Union.

Other international officials, including the managing director of the International Monetary Fund, the president of the World Bank and the United Nations secretary-general have also been invited to attend, the White House said.

Goldman May Be the Fed's Consigliere, But JPM is Still a Capofamiglia

Bloomberg
Fed to Provide Up to $540 Billion to Aid Money Funds
By Craig Torres and Christopher Condon

Oct. 21 -- The Federal Reserve will provide up to $540 billion in loans to help relieve pressure on money- market mutual funds beset by redemptions.

``Short-term debt markets have been under considerable strain in recent weeks'' as it got tougher for funds to meet withdrawal requests, the Fed said in a statement in Washington. About $500 billion has flowed out of prime money-market funds since August, a Fed official said.

The initiative is the third government effort to aid money- market funds, which in stable times are a key source of financing for banks and companies. The exodus of investors, sparked by losses from the aftermath of the Lehman Brothers Holdings Inc. bankruptcy, contributed to the freezing of credit that threatens to tip the economy into a prolonged recession.

``The problem was much worse than we thought,'' Jim Bianco, president of Chicago-based Bianco Research LLC, said in a Bloomberg Television interview. Policy makers are trying to prevent ``Great Depression II'' by stemming the financial industry's contraction, he said.

JPMorgan Chase & Co. will run five special units that will buy up to $600 billion of certificates of deposit, bank notes and commercial paper with a remaining maturity of 90 days or less. The Fed will provide up to $540 billion, with the remaining $60 billion coming from commercial paper issued by the five units to the money-market funds selling their assets, central bank officials told reporters on a conference call...

How High Will the Dollar Go?

Let's call this one "Your Host Exhibits His Falliblity" and general inability to see the future. Its a good reminder to all of us, of how little we really 'know.'

This is an email sent in response to a question "How high will the Dollar rally? Give us a best guess."

Who can know these things with any certainty? As guesses go this is probably as good as any.

Tell me if the European banks are stabilizing and are no longer starving for dollars, and that there is a meaningful decline in the TED and LIBOR$ and the top in the dollar will be easier to project.

Its hard to say because I don't have the latest data on the Banks balances in europe from BIS.

For my best guess I have to go to the charts. Part of me says it tops this week, but I won't bet on it.

The charts alone call the top around 85. Currencies overshoot. That's why I cannot
be more precise, especially since we are in a short squeeze unrelated to fundamentals.

So I would estimate just on gut instinct and charting that we probably topped about 30 minutes ago, at 84.263,
but might continue on to test 85ish. and mess around there until this clears up. I'd like to see LIBOR$ and TED
confirm this by dropping like a rock. LOL. Then I might bet on it.

The Safety and Immediacy of Liquid Assets in a Deleveraging Panic: MZM, Home Currencies, Bank Reserves, and Gold

MZM is the broadest and most reasonable measure of liquidity in the US economic system. Bank Reserves and Cash are its narrowest component.

Bank reserves are becoming decoupled from MZM now since banks are borrowing heavily from the discount window and building reserves in anticipation of future financial shocks and writedowns of assets. We are in a deleveraging panic.



Breaking this impasse between fear of writedowns and moving forward with economic growth is the preoccupation of the Treasury and the Fed. We agree that this is the problem, we may merely differ on the approach to take to solve it.

This 'crunch' in primary liquidity, or bank reserves, in a deleveraging panic for the banks has a dampening effect on the broader components of liquidity in MZM.

One can make the case that the panic is originating with the banks as they reap the results of their misrepresentations of their assets and reckless speculation by deleveraging.

The Fed and Treasury approach seems to be to fill the Banks' reserves until they overflow and being to trickle down to the real economy. They believe that they will receive more benefit by placing their capital here because of the power of the fractional reserve money multiplier.

In the short term this may not be fruitful. The engine is seized. Pouring more gasoline in it may not be productive.

Banks need a kick start by a component of the economy that is still functioning normally, if in an impaired manner. That is in the real economy. Rather than reaching the real economy through the banks, the Fed and Treasury might well be more effective in focusing on stimulating real economic activity by stimulating consumption and production directly. Trickle up if you will.

One has to wonder what Keynes would have said about these different approaches to applying stimulus: provide stimulus to the broader public through increases in wages and economic activity, or to provide stimulus to the banks and hope that they will lend to the broader public at rates low enough to stimulate projects that would not otherwise be feasible.

This is a critical point, and little debated or understood as it is emotionally charged with words like 'socialism.' Most do not understand the fractional reserve banking system, but it seems more official, more palatable, to give them billions, enormous sums, and to give the public as little as possible for fear of debasing the value of work and the currency.

Paulson and Bernanke both view the economy as an adjunct to the financial system so from their perspective the choice is obvious.

The Fed and Treasury may succeed eventually in their approach of filling all banks, solvent and insolvent, stable and unstable, until they burst with liquidity and overflow into the broader economy.

In doing so they risk a significant bout of inflation and financial instability that may surprise them. But based on the experience of the Fed under Volcker they are convinced they can cure any inflation, having done it -- once.

MZM in turn has its correlation with secondary liquidity in the form of less liquid assets such as stocks and bonds, gold, forex and the time encumbered components of M2.

Do not think of this as 'cause and effect' but more in terms of a teeter totter, as individuals make decisions about their desire for immediacy and safety of assets and move capital, selling some assets and holding others.

If seen on the scale of immediacy and safety things will make more sense as they evolve.

There is a relationship between MZM and Gold, which as liquid assets which differ in Immediacy and Safety as an investment choice. In a short term panic immediacy overwhelms safety. As an aside and not illustrated in this chart, 'paper gold' which is less safe is diverging from 'Physicial Gold' in the lens of investor choice. That divergence may become greater in the short term as investor fears shift from the immediacy of capital to its safety.



Here is something to think about in the chart below. It shows the 'forex' component of liquidity falling to the immediacy of the home currency in a deleveraging panic.



More food for thought. The "why" is all important.

The SP 500 May be in a Cascading Waterfall Decline With a Bottom around 444

US equities as represented by the SP 500 are in a cascading waterfall decline that may not reach a genuine bottom until it reaches 640. If the US dollar starts falling with stocks and Treasuries we may see a capital flight that sets up a decline that may not bottom until the SP reaches 444, with high volatility and sharp rallies along the way. The rally from the final bottom will be tentative and slowly expansive with a modest slope.

Potential Inverse H&S Bottom on Gold

We have been watching this form up for some time.

The targets for a breakout are on the chart.

It works when we hold the lows and breakout over the neckline and stick it on a daily chart. Since much of the gold action is the inverse of the US dollar which is benefiting from a short term squeeze we think the targets may be conservative as the shorts scramble for scarce supply to cover.

The wild cards are the central bank market meddling and a potential 8-10% downdraft in equities which tends to foster liquidation selling of most assets.

At the Decisive Moment Paulson Served His Friends and Bernanke Failed to Lead

"If derivatives are Weapons of Mass Destruction, then the Credit Default Swaps market is the H Bomb. Credit Default Swaps, if they start unwinding, can develop a chain reaction that will take out a fair chunk of the real economy, in addition to two or three big name corporations... Aren't you glad we have men [Ben Bernanke and Don Kohn] so familiar with the mistakes the Fed made in 1929 to 1932 with regard to Fed Policy? We wish they had at least audited the courses covering the Fed's mistakes from 1921 to 1929. Sure, they are the experts; we're just concerned that they may be preparing to fight the last war."
1 December 2007 Professor Marvel Never Guesses

Anna Schwartz
Bernanke Is Fighting the Last War
By BRIAN M. CARNEY
New York

'Everything works much better when wrong decisions are punished and good decisions make you rich."

On Aug. 9, 2007, central banks around the world first intervened to stanch what has become a massive credit crunch.

Since then, the Federal Reserve and the Treasury have taken a series of increasingly drastic emergency actions to get lending flowing again. The central bank has lent out hundreds of billions of dollars, accepted collateral that in the past it would never have touched, and opened direct lending to institutions that have never had that privilege. The Treasury has deployed billions more. And yet, "Nothing," Anna Schwartz says, "seems to have quieted the fears of either the investors in the securities markets or the lenders and would-be borrowers in the credit market."

The credit markets remain frozen, the stock market continues to get hammered, and deep recession now seems a certainty -- if not a reality already.

Most people now living have never seen a credit crunch like the one we are currently enduring. Ms. Schwartz, 92 years old, is one of the exceptions. She's not only old enough to remember the period from 1929 to 1933, she may know more about monetary history and banking than anyone alive. She co-authored, with Milton Friedman, "A Monetary History of the United States" (1963). It's the definitive account of how misguided monetary policy turned the stock-market crash of 1929 into the Great Depression.

Since 1941, Ms. Schwartz has reported for work at the National Bureau of Economic Research in New York, where we met Thursday morning for an interview. She is currently using a wheelchair after a recent fall and laments her "many infirmities," but those are all physical; her mind is as sharp as ever. She speaks with passion and just a hint of resignation about the current financial situation. And looking at how the authorities have handled it so far, she doesn't like what she sees.

Federal Reserve Chairman Ben Bernanke has called the 888-page "Monetary History" "the leading and most persuasive explanation of the worst economic disaster in American history." Ms. Schwartz thinks that our central bankers and our Treasury Department are getting it wrong again.

To understand why, one first has to understand the nature of the current "credit market disturbance," as Ms. Schwartz delicately calls it. We now hear almost every day that banks will not lend to each other, or will do so only at punitive interest rates. Credit spreads -- the difference between what it costs the government to borrow and what private-sector borrowers must pay -- are at historic highs.

This is not due to a lack of money available to lend, Ms. Schwartz says, but to a lack of faith in the ability of borrowers to repay their debts. "The Fed," she argues, "has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible."

So even though the Fed has flooded the credit markets with cash, spreads haven't budged because banks don't know who is still solvent and who is not. This uncertainty, says Ms. Schwartz, is "the basic problem in the credit market. Lending freezes up when lenders are uncertain that would-be borrowers have the resources to repay them. So to assume that the whole problem is inadequate liquidity bypasses the real issue."

In the 1930s, as Ms. Schwartz and Mr. Friedman argued in "A Monetary History," the country and the Federal Reserve were faced with a liquidity crisis in the banking sector. As banks failed, depositors became alarmed that they'd lose their money if their bank, too, failed. So bank runs began, and these became self-reinforcing: "If the borrowers hadn't withdrawn cash, they [the banks] would have been in good shape. But the Fed just sat by and did nothing, so bank after bank failed. And that only motivated depositors to withdraw funds from banks that were not in distress," deepening the crisis and causing still more failures.

But "that's not what's going on in the market now," Ms. Schwartz says. Today, the banks have a problem on the asset side of their ledgers -- "all these exotic securities that the market does not know how to value."

"Why are they 'toxic'?" Ms. Schwartz asks. "They're toxic because you cannot sell them, you don't know what they're worth, your balance sheet is not credible and the whole market freezes up. We don't know whom to lend to because we don't know who is sound. So if you could get rid of them, that would be an improvement." The only way to "get rid of them" is to sell them, which is why Ms. Schwartz thought that Treasury Secretary Hank Paulson's original proposal to buy these assets from the banks was "a step in the right direction."

The problem with that idea was, and is, how to price "toxic" assets that nobody wants. And lurking beneath that problem is another, stickier problem: If they are priced at current market levels, selling them would be a recipe for instant insolvency at many institutions. The fears that are locking up the credit markets would be realized, and a number of banks would probably fail. (And chief among these were Goldman Sachs and Morgan Stanley - Jesse)

Ms. Schwartz won't say so, but this is the dirty little secret that led Secretary Paulson to shift from buying bank assets to recapitalizing them directly, as the Treasury did this week. But in doing so, he's shifted from trying to save the banking system to trying to save banks. These are not, Ms. Schwartz argues, the same thing. In fact, by keeping otherwise insolvent banks afloat, the Federal Reserve and the Treasury have actually prolonged the crisis. "They should not be recapitalizing firms that should be shut down."

Rather, "firms that made wrong decisions should fail," she says bluntly. "You shouldn't rescue them. And once that's established as a principle, I think the market recognizes that it makes sense. Everything works much better when wrong decisions are punished and good decisions make you rich." The trouble is, "that's not the way the world has been going in recent years." (And this is not by accident by intent. Corporatism is not oriented towards competition, but monopolies: not winning and losing, but entitlements and sincecures. - Jesse)

Instead, we've been hearing for most of the past year about "systemic risk" -- the notion that allowing one firm to fail will cause a cascade that will take down otherwise healthy companies in its wake.

Ms. Schwartz doesn't buy it. "It's very easy when you're a market participant," she notes with a smile, "to claim that you shouldn't shut down a firm that's in really bad straits because everybody else who has lent to it will be injured. Well, if they lent to a firm that they knew was pretty rocky, that's their responsibility. And if they have to be denied repayment of their loans, well, they wished it on themselves. The [government] doesn't have to save them, just as it didn't save the stockholders and the employees of Bear Stearns. Why should they be worried about the creditors? Creditors are no more worthy of being rescued than ordinary people, who are really innocent of what's been going on." (Anna is speaking as a capitalist, not a corporatist - Jesse)

It takes real guts to let a large, powerful institution go down. But the alternative -- the current credit freeze -- is worse, Ms. Schwartz argues. (Most economists we've met are underdeveloped in 'real guts' having been trained and conditioned to be bureaucrats playing the political curve and sniping in academic sorority fights - Jesse)

"I think if you have some principles and know what you're doing, the market responds. They see that you have some structure to your actions, that it isn't just ad hoc -- you'll do this today but you'll do something different tomorrow. And the market respects people in supervisory positions who seem to be on top of what's going on. So I think if you're tough about firms that have invested unwisely, the market won't blame you. They'll say, 'Well, yeah, it's your fault. You did this.

Nobody else told you to do it. Why should we be saving you at this point if you're stuck with assets you can't sell and liabilities you can't pay off?'" But when the authorities finally got around to letting Lehman Brothers fail, it had saved so many others already that the markets didn't know how to react. Instead of looking principled, the authorities looked erratic and inconstant. (They should have struck a principle and stuck with it, and laid out the plan for handling the resolution of these large bankruptcies. At the critical moment Bernanke flinched, and Paulson was hopelessly entangled in conflicts of interest because next in line was Goldman Sachs - Jesse)

How did we get into this mess in the first place? As in the 1920s, the current "disturbance" started with a "mania." But manias always have a cause. "If you investigate individually the manias that the market has so dubbed over the years, in every case, it was expansive monetary policy that generated the boom in an asset.

"The particular asset varied from one boom to another. But the basic underlying propagator was too-easy monetary policy and too-low interest rates that induced ordinary people to say, well, it's so cheap to acquire whatever is the object of desire in an asset boom, and go ahead and acquire that object. And then of course if monetary policy tightens, the boom collapses."

The house-price boom began with the very low interest rates in the early years of this decade under former Fed Chairman Alan Greenspan.

"Now, Alan Greenspan has issued an epilogue to his memoir, 'Time of Turbulence,' and it's about what's going on in the credit market," Ms. Schwartz says. "And he says, 'Well, it's true that monetary policy was expansive. But there was nothing that a central bank could do in those circumstances. The market would have been very much displeased, if the Fed had tightened and crushed the boom. They would have felt that it wasn't just the boom in the assets that was being terminated.'" In other words, Mr. Greenspan "absolves himself. There was no way you could really terminate the boom because you'd be doing collateral damage to areas of the economy that you don't really want to damage."

Ms Schwartz adds, gently, "I don't think that that's an adequate kind of response to those who argue that absent accommodative monetary policy, you would not have had this asset-price boom." Policies based on such thinking only lead to a more damaging bust when the mania ends, as they all do. "In general, it's easier for a central bank to be accommodative, to be loose, to be promoting conditions that make everybody feel that things are going well."

Fed Chairman Ben Bernanke, of all people, should understand this, Ms. Schwartz says. In 2002, Mr. Bernanke, then a Federal Reserve Board governor, said in a speech in honor of Mr. Friedman's 90th birthday, "I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."

"This was [his] claim to be worthy of running the Fed," she says. He was "familiar with history. He knew what had been done." But perhaps this is actually Mr. Bernanke's biggest problem. Today's crisis isn't a replay of the problem in the 1930s, but our central bankers have responded by using the tools they should have used then. They are fighting the last war. The result, she argues, has been failure. "I don't see that they've achieved what they should have been trying to achieve. So my verdict on this present Fed leadership is that they have not really done their job."

(We expressed our concern about this last year, but can now draw a more expansive conclusion.

Bernanke has no background in banking or running large companies and organizations, making the tough decisions, sometimes under fire and with inadequate information. The internecine squabbling amongst the academics is surely vicious, but not nearly the same thing and not constructive to the type of character it takes to shape a country's financial system.

At the end of the day Bernanke came to the point of critical decision and simply deferred. He accepted what was being put forward by Hank Paulson who does have that executive drive and experience, but is hopelessly conflicted in his role as Treasury Secretary of Government Sachs.

At the key moment Ben flinched from his role as the independent central banker. In that sense he is no different than Alan Greenspan who repeatedly did what was convenient, politic, easy, ingratiating. - Jesse)

Six Wall Street Banks to Distribute 10% of the $700 Bn Rescue as Pay and Bonuses for This Year's Performance

Shameless greed seems to be a virtue and a way of life on Wall Street

The Guardian
Wall Street banks in $70bn staff payout
Pay and bonus deals equivalent to 10% of US government bail-out package
By Simon Bowers
Saturday October 18 2008

Financial workers at Wall Street's top banks are to receive pay deals worth more than $70bn (£40bn), a substantial proportion of which is expected to be paid in discretionary bonuses, for their work so far this year - despite plunging the global financial system into its worst crisis since the 1929 stock market crash, the Guardian has learned.

Staff at six banks including Goldman Sachs and Citigroup are in line to pick up the payouts despite being the beneficiaries of a $700bn bail-out from the US government that has already prompted criticism. The government's cash has been poured in on the condition that excessive executive pay would be curbed.

Pay plans for bankers have been disclosed in recent corporate statements. Pressure on the US firms to review preparations for annual bonuses increased yesterday when Germany's Deutsche Bank said many of its leading traders would join Josef Ackermann, its chief executive, in waiving millions of euros in annual payouts.

The sums that continue to be spent by Wall Street firms on payroll, payoffs and, most controversially, bonuses appear to bear no relation to the losses incurred by investors in the banks. Shares in Citigroup and Goldman Sachs have declined by more than 45% since the start of the year. Merrill Lynch and Morgan Stanley have fallen by more than 60%. JP MorganChase fell 6.4% and Lehman Brothers has collapsed.

At one point last week the Morgan Stanley $10.7bn pay pot for the year to date was greater than the entire stock market value of the business. In effect, staff, on receiving their remuneration, could club together and buy the bank.

In the first nine months of the year Citigroup, which employs thousands of staff in the UK, accrued $25.9bn for salaries and bonuses, an increase on the previous year of 4%. Earlier this week the bank accepted a $25bn investment by the US government as part of its bail-out plan.

At Goldman Sachs the figure was $11.4bn, Morgan Stanley $10.73bn, JP Morgan $6.53bn and Merrill Lynch $11.7bn. At Merrill, which was on the point of going bust last month before being taken over by Bank of America, the total accrued in the last quarter grew 76% to $3.49bn. At Morgan Stanley, the amount put aside for staff compensation also grew in the last quarter to the end of August by 3% to $3.7bn.

Days before it collapsed into bankruptcy protection a month ago Lehman Brothers revealed $6.12bn of staff pay plans in its corporate filings. These payouts, the bank insisted, were justified despite net revenue collapsing from $14.9bn to a net outgoing of $64m.

None of the banks the Guardian contacted wished to comment on the record about their pay plans. But behind the scenes, one source said: "For a normal person the salaries are very high and the bonuses seem even higher. But in this world you get a top bonus for top performance, a medium bonus for mediocre performance and a much smaller bonus if you don't do so well."

Many critics of investment banks have questioned why firms continue to siphon off billions of dollars of bank earnings into bonus pools rather than using the funds to shore up the capital position of the crisis-stricken institutions. One source said: "That's a fair question - and it may well be that by the end of the year the banks start review the situation."

Much of the anger about investment banking bonuses has focused on boardroom executives such as former Lehman boss Dick Fuld, who was paid $485m in salary, bonuses and options between 2000 and 2007.

Last year Merrill Lynch's chairman Stan O'Neal retired after announcing losses of $8bn, taking a final pay deal worth $161m. Citigroup boss Chuck Prince left last year with a $38m in bonuses, shares and options after multibillion-dollar write-downs. In Britain, Bob Diamond, Barclays president, is one of the few investment bankers whose pay is public. Last year he received a salary of £250,000, but his total pay, including bonuses, reached £36m.

Major Market Bottoms over the Last 150 Years

Guest Commentary this weekend comes courtesy of George Slezak, who used to trade the pits for his own book, and brings a well-developed set of experience to almost any market.

My view is a little different from George's on the macro level. However, the point is to listen to other fact based points of view, and take from them what makes sense for you, even if you may disagree on some of the basic assumptions.

Opinions without facts are almost worthless. Everyone gets on a streak now and then, and carve their hits into marble and write their misses on the sand. But opinions mean nothing, because if the normal trader's opinion is probably little better than a 50-50 coin flip, and if he knows a lot and is an insider, he's probably lying. So take the facts and make something you can estimate and follow with confidence, and try to search out people who have a better than average track record in following the markets.

George and I seem to both agree we have not yet made a major bottom. In fact another 8% down from here at least in a panic selloff looks about right. Its not clear where the bottom will come however, because this selling is being driven by a forced liquidation of the funds, who are getting some brutal treatment from the Gang of Nine Banks. We have an open mind to the continuation of the looting until Bush and Paulson leave town.

Let's allow the market to tell us. And in the meanwhile, here is some valuable information from George, who regularly takes the honors in the tallies of the forecasts of letter writers. His site can be visited here at Stock Index Timing.


Stock Index Timing
George Slezak
Commentary for Saturday, 10/18 9:30 am

A "real" bottom is safe.

Let me begin with a big picture review. I believe we are going into a market pattern like 1938 to 1942, or 1893 to 1897, or 1910 to 1914, or 1946 to 1950, or 1978 to 1982, or 1946 to 1950.



Now, 1938 to 1942 is the primary pattern I expect us to follow, but that pattern is not unique in history. As you can see there are a lot of 4 year market patterns of essentially market consolidation.



I started trading on the trading floor in 1978, so, even though it just looks like the markets were just in a channel, I know those years can be great trading years. Unfortunately, the buy and hold guys are going to feel more pain for another four years or so.

My closest friends that are buy and hold guys followed my advice and put their age in government bonds. So, if they were 60 years old, they have 60% in Ginnie Maes or other Government guaranteed bonds, and the other 40% in dividend stocks. Their 40% is down about 40%, or 16% of their total, and they will survive.

For those of us that want to "trade" the coming years I really think we can prosper! When I say trade, I don't mean we use our "can't lose" investment dollars. I would say maybe 5% of your investment dollars could be used for trading. If you make money, it grows. If you lose it, it needs to be money you won't miss.

The Next Phase of the Market

The next phase of the market we will NOW be facing is the "slide and bottom phase."

We might as well understand a little bit about bottoms because in the coming 4 or 5 years we are going to have a series of up and down markets, and all those "downs" are going to have bottoms.

When I look at the above charts, I see major bottoms and trading bottoms. Right now we are looking for a major bottom so let's talk about it. I am calling a major bottom a bottom after a major slide. I think our slide right now is a major slide and will have a major bottom pattern.

The major slide we are in right now is completely out of control. I think all major slides go completely out of control.

Obviously the 1929 crash was a market pattern that went completely out of control. So did the 1987 crash. But the major bottoms after a long slide in the charts above also went completely out of control, like the 1938 bottom.

In my commentary last week I said I thought we had a major bottom. We had huge volume on the day of the low, and reversed ON THAT HUGE VOLUME BOTTOM DAY to close nearly 9% off the low. The key thing I saw in that Friday trade to make me think it was a major low day was any stock bought by the street on that day had substantial built in profits at the end of the day and could be held through the weekend with the reasonable expectation of only taking risk of loss of profits, not capital.

See, broker dealers are Reg T exempt. They can borrow 100% of the money they need to carry a position. So if they bought stuff real good, they can borrow enough to carry the stock and as long as it stays a good trade they continue to pay just the daily interest on the margin.

It's like day trading stock index futures with day trade margins. Overnight markets on E-Mini S&P futures is around $5,000, and day trade margins are about $1,000. So if you day trade a 20 lot and catch the bottom real good and hold it you have a $5,000 profit in each position. You "earned" enough to cover the overnight margin, so you might carry the position, or at least some of the position, over the weekend.

But if the market stutters and starts to slide back towards the lows, you will take off some or all of the positions because you no longer have that great cushion. See, your just a trader and "you know you don't know." If the trade were good, you wouldn't get squeezed.

That is the reason I moved from a buy signal to a sell signal on Thursday. The market was returning to the lows. The NASDAQ 100 actually traded to a new low. The bottom I thought was a "safe" bottom was retesting and as a trader for many years I KNOW a test can pass or fail! So I know anyone that had great buys on the big volume low day the week before was out of those buys. Why would you hang on for a test?

I know, many of you guys would hold onto those buys until they turned into 5% losses. Those of you that do that, are you doing well? Have you been trading long? Do you view yourself as successful?

I know, sometimes those that buy down are successful. Scale down trading is a valid trading plan only when you budget your capital, ie committing 5% of your capital on each scale.

But the street guys that bought bunches on the 16 billion share trading day were using 10 times their capital and were holding only because they had a lead. If they want to stay around, they took profits on the way back down and were completely out well before the slide back towards the low got close to the lows.

You know, these are some of the most basic concepts of trading and also the most misunderstood. It is like applying "modern portfolio theory" to your individual investments. A broker might tell you a "diversified portfolio of International, value, growth, commodities, etc" will give your portfolio a balanced return over time with less overall portfolio risk. Then you come into a time like know and every one of your market classes is down 40%! And you need your money now!

See, if you are the California Retirement system, the idea of a balanced portfolio over time - ie the next 100 years - works just fine because you do not have any current need on the majority of the funds. If you don't have a 50 year or endless time horizon your screwed if you follow that investment theory.

The same goes for scale buying. Scale buying takes large capital where small pieces are committed a little at a time. Often when you start your scale you only get one buy entry and then when you take your profit at 10% you didn't make a lot of money because you only had a small position. But that is how that trading approach works. If you do it a different way, it won't work.

(If you want some information on scale trading see American Scale Trading .com http://www.americanscaletrader.com/ )

------------

Here is a comparison of the current market bottom to the 1938 market bottom. Do you see at the bottom the two up gaps and then the market holding above those up gaps? That is what I was hoping for last week. Instead, we fell back down and are back near the lows, did lower lows on the NDX and other indicators. Now it looks more like an area a week or two before the low than the low.



Here is the 1929 bottom. Do you see the same reasoning as I explained in the 1938 bottom? We moved too far back down already. I expect another slide to another panic low.




Here is the 1987 bottom and there the market held on the retest. Since, however it wasn't a clean "leave it in the dust" bottom, so it was sloppy for weeks and retested later.




My point is a good bottom gives the buyers a a free pass and never gives them any pressure. Right now we have pressure on the bottom and reasonable trading buyers are already out of the market.

------

Please understand this is the way to works at MAJOR BOTTOMS, not intermediate bottoms. Intermediate bottoms in a trend are different because it is not threatening the major multiyear lows on a new trading low and forcing panic selling from long term positions.

We are now looking for a MAJOR BOTTOM, and since we are retesting I expect us to slide through to lower lows.

Unfortunately, the slide through may look real bad. I expect we will have a week of downtrend days and then a combined 20 billion share day climax, maybe before the end of the month!

BOTTOM LINE?

Strap yourself in and get ready for the ride of the century! It's gonna look so bad that the dismal forecast above of the next four years of a chop between Dow 6,000 and Dow 10,000 isn't going to look so bad after all.

Did I say 6,000! Yeah, that's 62% back to the 1974 low. I HOPE we hold the 50% back level of the 7,200 year 2002 low. But if that doesn't hold we could go further. We will see if it happens, maybe in the next few weeks.

Looking Good Billy Ray

Feeling good, Louis...

Reuters
Lahde, who bet versus subprimes, quits hedge funds
by Jennifer Ablan
Fri Oct 17, 2008 5:15pm EDT

NEW YORK, Oct 17 (Reuters) - Andrew Lahde, the hedge fund founder who shot to fame with his small fund that soared 870 percent last year on bets against U.S. subprime home loans, has called it quits, thanking "stupid" traders for making him rich. (and the beat goes on - Jesse)

In a biting, but humorous letter to investors posted on the website of Portfolio magazine on Friday, Lahde told investors last month he will no longer manage money because his bank counterparties had become too risky.

Lahde ripped his profession in the letter. He noted another hedge-fund manager who recently closed shop and was quoted in The Wall Street Journal as saying: "What I have learned about the hedge fund business is that I hate it." To which Lahde responded, "I could not agree more with that statement.

"The low-hanging fruit, i.e. idiots whose parents paid for prep school, Yale and then the Harvard MBA, was there for the taking," said Lahde, who according to the website birthdates.com is 37.

"These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America."

Lahde, whose Lahde Capital's Short Credit Fund returned 886 percent in 2007, said he didn't have a strong opinion about any market other than to comment, "Things will continue to get worse for some time, probably years."

But while he will no longer manage money for high-net worth individuals or institutions, he will continue to manage the wealth he has amassed.

"Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest," he said. "I am content with my rewards. Moreover, I will let others try to amass nine-, 10- or 11-figure net worths. Meanwhile, their lives suck." (Newsflash - lots of people living from paycheck to paycheck have lives that suck too - Jesse)

Last autumn, the Financial Times reported that Lahde had launched a fund to bet against commercial real estate -- which made 42 percent in its first two months.

"I now have time to repair my health, which was destroyed by the stress I layered onto myself over the past two years, as well as my entire life -- where I had to compete for spaces in universities and graduate schools, jobs and assets under management -- with those who had all the advantages (rich parents) that I did not," Lahde said.

(In his letter on the web, Andrew drifts into a heavy fugue state, and recommends a think tank to be funded by George Soros to design a new government, and that our economy could be based on hemp. Don't bogart that dream, Andrew. - Jesse)

Andrew Lahde's Farewell Letter:

Today I write not to gloat. Given the pain that nearly everyone is experiencing, that would be entirely inappropriate. Nor am I writing to make further predictions, as most of my forecasts in previous letters have unfolded or are in the process of unfolding. Instead, I am writing to say goodbye.

Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, "What I have learned about the hedge fund business is that I hate it." I could not agree more with that statement. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

There are far too many people for me to sincerely thank for my success. However, I do not want to sound like a Hollywood actor accepting an award. The money was reward enough. Furthermore, the endless list those deserving thanks know who they are.

I will no longer manage money for other people or institutions. I have enough of my own wealth to manage. Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck.

Appointments back to back, booked solid for the next three months, they look forward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? They will all be forgotten in fifty years anyway. Steve Balmer, Steven Cohen, and Larry Ellison will all be forgotten. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life.

So this is it. With all due respect, I am dropping out. Please do not expect any type of reply to emails or voicemails within normal time frames or at all. Andy Springer and his company will be handling the dissolution of the fund. And don't worry about my employees, they were always employed by Mr. Springer's company and only one (who has been well-rewarded) will lose his job.

I have no interest in any deals in which anyone would like me to participate. I truly do not have a strong opinion about any market right now, other than to say that things will continue to get worse for some time, probably years. I am content sitting on the sidelines and waiting. After all, sitting and waiting is how we made money from the subprime debacle. I now have time to repair my health, which was destroyed by the stress I layered onto myself over the past two years, as well as my entire life -- where I had to compete for spaces in universities and graduate schools, jobs and assets under management -- with those who had all the advantages (rich parents) that I did not. May meritocracy be part of a new form of government, which needs to be established.

On the issue of the U.S. Government, I would like to make a modest proposal. First, I point out the obvious flaws, whereby legislation was repeatedly brought forth to Congress over the past eight years, which would have reigned in the predatory lending practices of now mostly defunct institutions. These institutions regularly filled the coffers of both parties in return for voting down all of this legislation designed to protect the common citizen. This is an outrage, yet no one seems to know or care about it.

Since Thomas Jefferson and Adam Smith passed, I would argue that there has been a dearth of worthy philosophers in this country, at least ones focused on improving government. Capitalism worked for two hundred years, but times change, and systems become corrupt.

George Soros, a man of staggering wealth, has stated that he would like to be remembered as a philosopher. My suggestion is that this great man start and sponsor a forum for great minds to come together to create a new system of government that truly represents the common man's interest, while at the same time creating rewards great enough to attract the best and brightest minds to serve in government roles without having to rely on corruption to further their interests or lifestyles. (We'd like to give the Constitution another try - Jesse)

This forum could be similar to the one used to create the operating system, Linux, which competes with Microsoft's near monopoly. I believe there is an answer, but for now the system is clearly broken.

Lastly, while I still have an audience, I would like to bring attention to an alternative food and energy source. You won't see it included in BP's, "Feel good. We are working on sustainable solutions," television commercials, nor is it mentioned in ADM's similar commercials.

But hemp has been used for at least 5,000 years for cloth and food, as well as just about everything that is produced from petroleum products. Hemp is not marijuana and vice versa. Hemp is the male plant and it grows like a weed, hence the slang term. The original American flag was made of hemp fiber and our Constitution was printed on paper made of hemp. It was used as recently as World War II by the U.S. Government, and then promptly made illegal after the war was won.

At a time when rhetoric is flying about becoming more self-sufficient in terms of energy, why is it illegal to grow this plant in this country? Ah, the female. The evil female plant -- marijuana. It gets you high, it makes you laugh, it does not produce a hangover. Unlike alcohol, it does not result in bar fights or wife beating. So, why is this innocuous plant illegal? Is it a gateway drug? No, that would be alcohol, which is so heavily advertised in this country. My only conclusion as to why it is illegal, is that Corporate America, which owns Congress, would rather sell you Paxil, Zoloft, Xanax and other additive drugs, than allow you to grow a plant in your home without some of the profits going into their coffers. This policy is ludicrous. It has surely contributed to our dependency on foreign energy sources.

Our policies have other countries literally laughing at our stupidity, most notably Canada, as well as several European nations (both Eastern and Western). You would not know this by paying attention to U.S. media sources though, as they tend not to elaborate on who is laughing at the United States this week. Please people, let's stop the rhetoric and start thinking about how we can truly become self-sufficient.

With that I say good-bye and good luck.

All the best, - Andrew Lahde

Treasury to Rework Bailout Plan So Future Bank Profits Will Not Be Impaired

The amount of capital that it will require to repair the system as it is today will most likely be in excess of $4 Trillion.

We will all know more when the fresh losses start coming out of the closet and from under the bed and off the balance sheet. You might be amazed at the shamelessness.

The Wall Street banks are like an illness that will consume us, change us, preoccupy the best part of our lives and our thoughts, for many years to come.

Unless we insist on serious reform of the financial system and the fiscal management of our country.

Our choice.

American Banker
Recapitalization Plan Getting Revamp
By Steven Sloan and Stacy Kaper
Friday, October 17, 2008

WASHINGTON — Regulators and the Bush administration were working Friday to fix technical problems with their plan to recapitalize the banking industry.

Chief among them was a fear that the government's plan to take warrants in banks could pose accounting problems, sources said. At issue is a determination by many bank executives that the warrants, which would be issued in return for a capital injection, are treated as liabilities under generally accepted accounting principles. That would have earnings implications for banks and could dent regulatory capital - the exact opposite of what the administration is hoping to accomplish.

It appeared that at least two options were on the table Friday afternoon. The Securities and Exchange Commission could waive GAAP rules on the warrants. Treasury could also rewrite the provisions of the existing contracts over the weekend to address the concern.

Separately, banking regulators were expected to release a clarification soon saying banks can include Treasury equity stakes in Tier 1 capital. The Federal Reserve Board issued an interim final rule on the issue late Thursday to "immediately provide guidance to bank holding companies concerning the regulatory treatment of the stock."

Banking regulators have said a new rule for individual institutions is not necessary, though they are moving to clarify the situation to avoid any confusion.

Treasury officials were also working to solidify how banks would apply to receive the remaining $125 billion in capital injections available to institutions. An initial infusion of $125 billion has already been granted to the top nine institutions.

In a round of conference calls with the banking industry on Friday afternoon, Neel Kashkari, the interim assistant secretary of financial stability in charge of running Treasury's emergency rescue program, released a few new details.

He said banks would apply for capital through their primary regulator, who would conduct a review and make a recommendation to Treasury to decide, according to those briefed on the plan. Details on how to apply are expected to come out next week.

Foreign banks and insurance companies are excluded from the capital program, but the criteria for large and small banks will be the same, according to sources.

Under the terms, banks could apply for a capital injection equal to a maximum of 3% of risk-based assets. The total $250 billion being dispensed in capital is based on providing enough capital to cover 3% of all banks risk-based assets, Mr. Kashkari told industry representatives. (How much did Goldman and Morgan receive - 3%? - Jesse)

"That means there won't be any rationing," said Wayne Abernathy, assistant secretary for financial institutions at the American Bankers Association. "There will be enough for any bank that wants to participate. There's not going to be a need for any kind of Oklahoma land rush."

Capital will be made available to healthy institutions only — though that has yet to be defined — but healthy institutions could use the government's capital to buy a weak bank. (Will they be as healthy as Goldman and Morgan Stanley? - Jesse)

Treasury has said the capital is meant to provide opportunities for new lending, not to fill in holes caused by losses.

"They see it as a stimulus. If it works that way it could dwarf any of the stimulus projects that are being contemplated on Capitol Hill," said Mr. Abernathy. "We are talking about capital and every dollar of capital usually results in about $10 of lending, so if they can get all $250 billion placed that's about $2.5 trillion of new financial activity." (Trying to reflate this bubble without structural changes is like trying to reload Pandora's box - Jesse)

Charts in the Babson Style for the Week Ending 17 October

Bear Raids and Economic Warfare on a Global Scale

The lawmakers and regulators may wish to look into the quiet but devastating run on the hedge funds that is occurring right now, that is going to cut that industry in half, and distort the markets until the end of the year.

This will affect key commodities in addition to certain industries, and may temporarily impair some national economies.

The Prime Brokers have a rough idea where the hedge funds, their clients, have their major holdings, and are leading bear raids on them as the funds have to raise liquidity because of redemptions. They are publicly identifying those positions to other players in the industry. A conflict of interest of the first order it appears at first blush. Perhaps not illegal, but certainly destructive and 'feeding the fire.'

These bear raids on key positions generate more panic and losses for the hedge funds, which in turn generates more forced selling and losses.

The irony of course is that the Prime Brokers are also the biggest banks, and are being bankrolled by the US Treasury and the Fed by about 400 billions per day in rolling capital. They appear to be at a loss so to speak with regard to productive investment opportunities. Thus they turn to speculation.

In addition to the hedge funds, many banks with their own small trading desks are being caught in the cross fire.

We do not think of this as a conspiracy but clearly the unintended consequence of poorly thought out but well intentioned actions taken in haste.

The lawmakers and regulators must create a firebeak to stop the cycle of destruction. They could require any bank accepting Federal funds to adhere to some simple guidelines about the potentially predatory use of those funds, especially banks that are more like large hedge funds themselves in their composition.

This cycle of destruction of assets is exactly why the Congress enacted Glass-Steagall in the 1930's. Some of the Washington and Fed whiz kids might wish to go back and revisit the raison d'etre for that legislation.

Some likely measures would be an immediate limit on the expansion of short positions in all commodities, with limits based on market size, and the enforcement of laws against naked short selling on all equities immediately.

There should also be disclosure from all recipients of taxpayer money of all net positions to the SEC on a daily and weekly basis. We would also approve of a ban against short selling over certain limits of the size of a market or the shares outstanding by players over a certain size, and all those receiving Fed subsidies.

But this will probably not happen, which is why we may have a political crisis next year.

To put a very fine point on this so no one can miss it, it is not the hedge funds themselves that we care about, or the 'qualified investors' that put money into them. What concerns us are the unintended consequences, the malinvestment, the market distortions, the polarization of wealth, and the political blowback that come from interfering with markets and other people's business for a protracted period of time, and in a big way. The actions being taking by our banks, our 'national champions,' is ours because we are funding them and regulating them. And in this world, if you break it, you bought it, whether it was intended or not.

This is starting to look like economic warfare from some perspectives. The blowback may not be attractive.

Short Term Treasury Debt Issuance Goes Parabolic

Derivatives Losses Hit French Depositor Bank Caisse d'Epargne

"You are told that your ONLY job is take as much money from your customer's pocket as you can and put it in your pocket. Then they give you all the crappy little accounts and you hit the phones hard and convince them to buy the stuff all the bigger accounts which are "desk" accounts are trying to sell. You move up to "desk" accounts when you prove that you can sell freezers to eskimoes. Aggressive rookies in derivatives beat the bushes globally to find any smaller unloved accounts and they plug them full of exotic derivatives that were designed to have huge yields and no downside - until the markets become very volatile, that is. Before this is over, we will see that just about every financial firm around the globe is loaded with highly questionable derivatives."
Confessions of a Wall Street Bond Trader

Caisse d'Epargne Had EU600 Million Derivatives Loss
By Fabio Benedetti-Valentini
October 17, 2008 08:07 EDT

Oct. 17 (Bloomberg) -- Groupe Caisse d'Epargne, the French customer-owned bank in merger talks with Groupe Banque Populaire, reported a 600 million-euro ($807 million) loss on equity derivatives after stock markets plunged last week.

The loss occurred at the proprietary-trading unit of Caisse Nationale des Caisses d'Epargne, the lender's holding company, the Paris-based bank said today. The team of about half a dozen people exceeded trading limits in terms of size and risk, said an official at Caisse d'Epargne. (Rogue traders again, les joueurs compulsifs - Jesse)

European stocks last week slid 22 percent, driving the Dow Jones Stoxx 600 Index to its worst week on record, on concern the deepening credit crisis will push the economy into a recession. The equity derivatives losses don't affect the ``financial solidity'' of Caisse d'Epargne, which has more than 20 billion euros of shareholders' equity, the company said. The stock market plunge may have led to losses at other banks.

``Everyone will have incurred big losses because of market volatility,'' said Bahadour Moussa, a consultant specializing in derivatives recruitment at London-based Pelham International. ``A lot of the banks will have positions they can't unwind or shift and that are losing money, and when the time's up, they'll have to publish losses.'' (Everyone was doing it, Maman - Jesse)

Bank Rescue Plan

Banks in Europe and the U.S. are also grappling with the impact of the global credit crisis. The French government this week announced plans to loan as much as 320 billion euros to banks to unlock lending and to spend as much as 40 billion euros on equity stakes in financial companies, if needed.

Caisse d'Epargne and Banque Populaire started merger talks last week, with the encouragement of the French state, as the financial crisis put pressure on banks to combine. The banks are the main shareholders of Natixis SA, the Paris-based investment bank that piled up about 3.9 billion of writedowns tied to the U.S. subprime mortgage market collapse by June 30.

The loss doesn't affect the merger plan between the holding companies of Caisse d'Epargne and Banque Populaire, the official said. A deputy of Julien Carmona, Caisse d'Epargne's head of finance and risk management, has been suspended because of the loss and the bank is pursuing ``sanctions'' against the members of the proprietary-trading desk, he said.

Lagarde Calls for Inquiry

French Finance Minister Christine Lagarde, in a statement, said the losses don't threaten the financial strength of Caisse d'Epargne. She asked the French banking commission to carry out an inquiry into the trades, and to ensure that French banks are complying with market controls.

The announcement comes about nine months after Societe Generale SA, France's second-largest bank by market value, reported a 4.9 billion-euro trading loss because of unauthorized bets by Jerome Kerviel. (Le Rogue Trader prototype - Jesse)

Caisse d'Epargne and Banque Populaire formed Paris-based Natixis in 2006 by merging their investment-banking and asset- management businesses. They own about 34.5 percent each in Natixis and agreed on Sept. 29 that they may raise their holdings by as much as 2 percent each.

Natixis said in July that it plans a ``strong reduction'' of its proprietary-trading business as it cuts 850 jobs and trims costs by 400 million euros in 2009 to restore profitability. French banks had at least 18 billion euros of writedowns and provisions so far stemming from the collapse of U.S. mortgages. (Bonjour, mon nom est Guillaume, et je suis un 'derivatives trader' - Jesse)

Caisse d'Epargne, formed by 21 member banks, is France's third-largest consumer banking network by branches, with 4,770 agencies. Caisse d'Epargne had 358 billion euros of savings and deposits at the end of 2007.

Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.

Neither a Borrower nor a Lender Be: Banks Getting their Daily Fix from the Fed

Oh yes. This will surely work.

Keeping the insolvent Morgan Stanley and Goldman Sachs on life support, and paralyzing an entire economy and its banking system to cover their embarrassment.

Reuters
Banks borrow record $437.5 billion per day from Fed
Thu Oct 16, 2008 5:14pm EDT

NEW YORK (Reuters) - Financial institutions ran to their lender of last resort for record amounts of cash in the latest week, under extreme pressure from the worst global financial crisis in a generation, Federal Reserve data showed on Thursday.

Banks and dealers' overall direct borrowings from the Fed averaged a record $437.53 billion per day in the week ended October 15, topping the previous week's $420.16 billion per day.

Some analysts are concerned that banks' dependence on Fed lending might become long term and difficult to change.

"The banking system is going to become addicted to this very cheap money. Unwinding it will be very difficult," said Howard Simons, strategist with Bianco Research in Chicago.

"We have effectively allowed the central banks to disintermediate the banking system. Why would I want to borrow from you if I could do it with the central bank, because they can always print it up and say 'here'...and they are in the business now of making sure I stay in business," Simons said.

Primary credit discount window borrowings averaged a record $99.66 billion per day in the latest week, up from $75.0 billion per day the previous week.

Primary dealer and other broker dealer borrowings were $133.87 billion as of October 15, versus $122.94 billion on October 8.

"Other credit extensions", mostly reflecting loans to insurer AIG, were $82.86 billion as of October 15, versus $70.30 billion as of October 8.

The Fed's lending to banks to enable them to purchase asset-backed commercial paper from money market mutual funds was $122.76 billion as of October 15, versus $139.48 billion on October 8.

Proceeds from the U.S. Treasury's sales of Treasury bills in the Fed's supplementary financing account, which are helping to fund the Fed's support of financial institutions, were $499.13 billion as of October 15, versus $459.25 billion as of October 8.

Spreads Between the Central Commodity Markets and Market Prices Continue to Widen

One of the hallmarks of the centrally-planned economy is a discrepancy between prices on paper, and prices in the marketplace. The examples of this are all too familiar to students of the economy of the former Soviet Union.

For whatever reasons, the US is beginning to go down that path, and perhaps shockingly so. We think a great deal of this is a temporary market dislocation overall as funds unwind positions under duress.

However, in the case of silver, the huge short positions by three banks suggest this is central planning and price fixing, not price discovery tied to market demand.

Silver: Gap Between Paper and Physical Prices Widening Daily



The logical question is "why don't these large dealers simply purchase contracts on the COMEX and stand for delivery?"

One factor is the incremental cost of fabricating the large bars from COMEX into forms more palatable to the retail market, ie. 100 oz, 10 oz bar and 1 oz rounds.

Another could be the anecdotal stories of COMEX reluctance to settle in delivery, and pressuring traders to accept 'cash.'

A potentially explosive situation worth keeping an eye on, for sure.

We wonder in what other markets this condition might repeat. Gold looks likely. Oil? Housing?

Where does statism end once it becomes comfortable with setting market prices, as in the Wage and Price Controls of the 1970's which so many have forgotten about today.

Are the large commodity producing nations allowing the bank cartel to set the prices at which they can sell their goods? Strange, and shame on them if they do.

Its a Brave New World, with many vestiges of the all too familiar.

Charts in the Babson Style for the Morning of 16 October

The LAST hour of trading is proving to be the most important of the day.

The hedge funds are in a massive unwinding of positions.

The Paulson plan does nothing in the short term to help the economy or the markets.

It is more like an outsized 'perk' than an economic 'plan' with a narrow and somewhat selective list of recipients.

"Those entrapped by the herd instinct are drowned in the deluges of history. But there are always the few who observe, reason, and take precautions, and thus escape the flood." Antony C. Sutton

Net Asset Value of Certain Precious Metal Funds and Trusts

Why do CEF and GTU carry such a premium over Net Asset Value?

Because this is the premium people are willing to pay for what they perceive to be 'real bullion' versus 'paper bullion.'

GLD tends to have a negative premium because it is a vehicle for traders, and particularly short sellers.

Deviations from NAV in themselves mean little, if the deviation is steady. It is in the fluctuations that information, and opportunities, are discovered.

The US "Trickle Down" Bailout Will Not Work

The bailout of the banks is just that: a bailout of the banks, designed by bankers, for bankers. It will not help repair the economy. It will not inspire confidence. Most of the money will be lost to insider dealing and narrow-minded favoritism.

This is yet another Bush Administration classic.

Joseph Stiglitz voices the hope that we have been expressing since the beginning of this year:

"Hopefully, our democracies are strong enough to overcome the power of money and special interests, and we will prove able to build the new regulatory system that the world needs if we are to have a prosperous and stable global economy in the 21st century."

We can start by voting this November, by overcoming our fears and our confusion, and throwing every Republican and the Democratic leadership out of public office. The message has to be clear, loud and unequivocal.

The Guardian
Paulson tries again
Joseph Stiglitz
Thursday October 16 2008

Unlike the UK plan, the revamped American bail-out puts banks first and taxpayers second

Gordon Brown has won plaudits over recent days for inspiring the turnaround in Hank Paulson's thinking that saw him progress from his "cash for trash" plan - derided by almost every economist, and many respected financiers - to a capital injection approach. The international pressure brought to bear on America may indeed have contributed to Paulson's volte-face. But Paulson figured he could reshape the UK approach in a way that was even better for America's banks than his original cash strategy. The fact that US taxpayers might get trashed in the process is simply part of the collateral damage that has been a hallmark of the Bush administration.

Will this bail-out be enough? We don't know. The banks have engaged in such non-transparency that not even they really know the shape they are in. Every day there are more foreclosures - Paulson's plan did little about that. That means new holes in the balance sheets are being opened up as old holes get filled. There is a consensus that our economic downturn will get worse, much worse; and in every economic downturn, bankruptcies go up. So even if the banks had exercised prudent lending - and we know that many didn't - they would be faced with more losses.

Britain showed at least that it still believed in some sort of system of accountability: heads of banks resigned. Nothing like this in the US. Britain understood that it made no sense to pour money into banks and have them pour out money to shareholders. The US only restricted the banks from increasing their dividends. The Treasury has sought to create a picture for the public of toughness, yet behind the scenes it is busy reassuring the banks not to worry, that it's all part of a show to keep voters and Congress placated. What is clear is that we will not have voting shares. Wall Street will have our money, but we will not have a full say in what should be done with it. A glance at the banks' recent track record of managing risk gives taxpayers every reason to be concerned.

For all the show of toughness, the details suggest the US taxpayer got a raw deal.

There is no comparison with the terms that Warren Buffett secured when he provided capital to Goldman Sachs. Buffett got a warrant - the right to buy in the future at a price that was even below the depressed price at the time. Paulson got for the US a warrant to buy in the future - at whatever the prevailing price at the time. The whole point of the warrant is so we participate in some of the upside, as the economy recovers from the crisis, and as the financial system starts to work.

The Paulson plan responded to Congress's demand to have something like a warrant, but as a matter of form, not substance. Buffett got warrants equal to 100% of the value of what he put in. America's taxpayers got just 15%. Moreover, as George Soros has pointed out, in a few years time, when the economy is recovered, the banks shouldn't need to turn to the government for capital. The government should have issued convertible shares that gave the right to the government to automatically share in the gain in share price.

Whether we were cheated or not, the banks now have our money. The next Congress will have two major tasks ahead. The first is to make sure that if the taxpayer loses on the deal, financial markets pay. The second is designing new regulations and a new regulatory system. Many in Wall Street have said that this should be postponed to a later date. We have a leaky boat, some argue, we need to fix that first. True, but we also know that there are really problems in the steering mechanism (and the captains who steer it) - if we don't fix those, we will crash on some other rocks before getting into port. Why should anyone have confidence in a banking system which has failed so badly, when nothing is being done to affect incentives? Many of those who urge postponing dealing with the reform of regulations really hope that, once the crisis is passed, business will return to usual, and nothing will be done. That's what happened after the last global financial crisis.

There is a hope: the last financial crisis happened in distant regions of the world. Then it was the taxpayers in Thailand, Korea and Indonesia who had to pick up the tab for the financial markets' bad lending; this time it is taxpayers in the US and Europe. They are angry, and well they should be. Hopefully, our democracies are strong enough to overcome the power of money and special interests, and we will prove able to build the new regulatory system that the world needs if we are to have a prosperous and stable global economy in the 21st century.

Joseph E Stiglitz is university professor at Columbia University and recipient of the Nobel memorial prize in economic science in 2001. He was chief economist at the World Bank at the time of the last global financial crisis.

Redemptions and Losses Expected to Hammer US Hedge Funds

"The chief executive of a leading alternative investment manager said he expected the hedge fund industry to shrink by 50 per cent in coming months – with half the decline coming from withdrawals and half coming from investment losses"

"The industry, which manages close to $2,000 bn, has experienced outflows during only a handful of months previously, including a small outflow in April of this year."

The Financial Times
US hedge fund withdrawals hit $43bn in September
By Deborah Brewster and Henny Sender in New York
October 16 2008 00:16

Investors pulled at least $43bn from US hedge funds in September as market turmoil led to unprecedented withdrawals, an analysis by a leading research house shows.

The data from TrimTabs Investment Research – which was to be sent to clients late on Wednesday – come as hedge funds are working to prevent far bigger redemptions by the end of the year, when many funds give investors a chance to take out money. (Calling all bagholders - Jesse)

Withdrawals can lead to a vicious circle in the markets, as funds sell holdings to return money to clients, depressing prices and prompting further redemptions.

To prevent such an outcome, some hedge funds had offered to suspend fees if investors kept their money in until March, said Marc Freed, of Lyster Watson, which invests in hedge funds on behalf of institutional and private clients. (Oh yeah that sounds great considering they are getting decimated by the worst bear market since the Great Depression - Jesse)

“Every investor fears other investors will pull their money and so they worry they will be at the back of the line if they don’t also pull,” Mr Freed said. (If you are going to panic, be sure to panic first. - Jesse)

“Nobody will invest in anything illiquid because they think they may not survive long enough to see them rise in value.”

A fundraiser for a major hedge fund said the period “between now and December 1 is a sort of death march” for the industry.

The chief executive of a leading alternative investment manager said he expected the hedge fund industry to shrink by 50 per cent in coming months – with half the decline coming from withdrawals and half coming from investment losses.

Conrad Gunn, chief operating officer of TrimTabs, said the $43bn in September withdrawals would mark “the beginning of what we expect to be a series of outflows for the remainder of the year. We expect October outflows to be larger”.

Mr Gunn said the September outflows were based on an analysis of preliminary data and that the final tally would probably be higher because funds with heavy redemptions tended to report data later.

The industry, which manages close to $2,000bn, has experienced outflows during only a handful of months previously, including a small outflow in April of this year.

JPMorgan Chase has estimated that hedge fund outflows could total up to $150bn over the coming year. As investors take their money out of hedge funds, the funds have to sell assets.

But because they use so much borrowed money, the amount of potential asset sales is far larger. For example, JPMorgan expects that an outflow of $150bn will lead to sales of about $400bn.

(The JPM estimates seems a little light. 150 billion in total redemptions based on 43 billion in September alone, with October to be larger, and a 'death march' to year end? They seem to be assuming blue skies by Christmas. Hey, no fees if you hold on until the flesh falls from your bones. - Jesse)

UBS Über Alles

Lose so much in your own trading book that people become afraid and seek your advice for their private wealth management. Nice corporate strategy.

Hubris? Or would it be just a case of "prétention démesurée?"

UBS says crisis vindicates own bank model
Wed Oct 15, 2008 4:33pm EDT

GENEVA (Reuters) - Switzerland's UBS the world's largest wealth manager, said its advice-driven, global banking business model will be a winner as others failed or were rescued by governments during the global financial turmoil.

UBS was hit early on in the crisis and has announced more write-downs on toxic assets than any other European bank.

"It's never been more obvious to clients that they need advice. This is going to be the proof to our business model," Juergen Zeltner, who heads UBS' wealth management operations in North, Central and Eastern Europe, told the Reuters Wealth Management Summit.
UBS has not given up on investment banking despite huge losses on the business and instead has divided its operations into three separate divisions -- wealth management, investment banking and asset management -- to boost transparency.

Banks which heavily relied on investment banking revenues, such as Lehman Brothers, have either gone bust or needed rescues via forced mergers or government aid.

"I strongly feel that the transparency that we put in place was well appreciated," Zeltner said.

Still, Zeltner said the damage to UBS' reputation from the huge losses in its investment banking division was obvious and had resulted in client outflows. The bank will report third quarter results on November 4.

"We lost trust. We do know that there was substantial damage and that will take years to rebuild," he said.

UBS recapitalized itself earlier than any other bank, before the deepening of the crisis in September, and is now in a position to exploit opportunities in markets where other players have failed, such as the United States, he said. (You'll have to compete with our 'national champions' who are getting their subordinated distress funding from the US Treasury - Jesse)
"The crisis gives us unique opportunities in the United States," Zeltner said.

"We want to grow and build market share."

The Practical Risk in the Fed and Treasury's 'Trickle Down" Approach

The 'trickle down' approach being taken by the Fed is in danger of not only failing to sustain the economy, but may precipitate a significant political crisis.

The current plan is to flood a few relatively large banks with public liquidity, without substantially changing their management, their charters, and their regulatory constraints.

What if these banks defer on lending to others as their primary objective, preferring instead to buy up valuable and productive non-financial assets on the cheap for their own speculative purposes? Or to provide the liquidity for their associated off-balance-sheet corporations to do the same, rather than funding organic growth?

Why would the banks limit themselves to commercial banking when they can still act like hedge funds buying assets and investing for their own tradebook and investment portfolios?

The short answer is that they always and everywhere have acted with their own interests first and foremost.

The obvious firms to watch are Goldman Sachs and Morgan Stanley. Why the Fed does not see this obvious moral hazard is astonishing. What is even more astonishing is that no one is calling out Paulson on this, who has a yawning conflict of interest with Goldman Sachs.

The inherent weakness in a centrally planned economy is that it invariably leads in distortion, corruption, and advantageous manipulation by insiders. To expect anything else is to ignore human nature and history.

The banks, our 'national champions,' must be constrained again as they were in the 1930's after their reckless speculation and credit expansion had financially decimated the nation's economy and the great majority of the public.

Gold, Oil, MZM, Credit and the Short Term Liquidity Contraction

MZM is the Fed's broadest measure of liquidity. Although gold is not as 'immediate' as cash due to the need to convert it to currency, nevertheless it is a liquid store of wealth in that there are no time constraints on it such as on Certificates of Deposit or other time constrained instruments.

Stocks are also a liquid store of wealth, but with a larger beta or 'riskier valuation' with respect to their expected growth and earnings. As an aside, some day we hope to see a return to the notion of a risk premium for equities versus debt.

As we have shown before, the correlation between the growth of MZM and the price of gold in dollars is remarkable. There are a few other factors in the regression we are tracking which are not shown here, such as fear-driven volatility as measured by VIX.



Note that in the chart below in the same time period M2, a broad money supply measure, but less liquid than MZM, has shown a sharp spike higher along with its associate, Total Bank Credit.
We think this is a clear indication that we are in a liquidity crunch, but not a deflationary contraction in the the broader money supply.

In other words, funds and individuals are raising 'cash' by selling liquid assets to meet margin calls and support investment assets and short term obligations.


On a cautionary note, the growth in a dollar of Bank Credit is showing less ability to produce a dollar of M2. Again, this is not deflation but the transfer of wealth from one asset class to another, with lags and amongst individuals, and the inefficiency of the ability of an economic system based on wealth transfers and specultation to produce incremental productive savings.


This is not to say that a true deflation is not possible. Quite to the contrary. Deflation is a policy decision, normally caused by an adherence to some non-synchronized external standard, such as gold or the US dollar, ignoring the short term needs of the domestic marketplace.

Does this mean that there is no manipulation in the gold market? No, the price manipulation there is obvious, and we will take the central banks at their word that they wish to discourage gold as an alternative store of liquid wealth, because it is beyond their control and a competitor to their desired fiat regimes. Statists dislike anything that provides competition to their power.

What we do wish to show is that the banks are not fighting the gold trend as much as some might think because of the short term liquidity contraction. When this changes, the move in gold will obtain explosive momentum from which a major rally leg will occur as the banks lose control.

We also believe the same set of conditions applies to Crude Oil based on our current data which we will not include here for the sake of brevity. The price declines in crude oil are not wholly related to a diminished demand or 'speculation' as some would contend. Rather, oil has been serving as a global store of liquid wealth against a declining dollar and increasing dollar inflation. Oil has many of the aspects of 'money' for global trade. Demand and supply for crude oil will prove to be much less elastic than many assume.



We do not hold the same view for all commodities because we have not looked closely at them, but not all have the same "monetary component" as gold and oil.

Interestingly enough, the eurodollar spread (TED) is artificially wide because of the eurodollar assets and liabilities as we have shown before. We wonder what this will do to the euro and its associated currencies in the longer term, since the artificial short squeeze in the dollar is causing some havoc short term with European money supply policy despite the central banks attempts to sterilize the effects.

We expect a sharp rally in gold, oil and the euro once the short term liquidity constraints are overcome with a corresponding sharp decline in the US dollar.

The Fed will likely have to raise interest rates, and perhaps sharply, to counteract this, unless they can rely on foreign central banks once again to 'bail them out.'

A Credit Bubble of Historic Proportions

"What is crooked cannot be made straight, and what is lacking cannot be counted." Ecclesiastes

Hmmm, let's see. How about injecting billions of capital in the banks crippled by reckless speculation and fraudulent lending, and obscenely high pay and bonuses to the people who ran them.

And then we can beg the banks to start making loans to us with our money to get the credit expansion back on the upswing.

That should fix the problem, right?

This is a Ponzi scheme reaching parabolic heights. It has to retrace at least fifty percent, and the US economy must get back into some sort of sustainable structure, period.

The alternative is for the majority of Americans and British to accept debt peonage or "go into service," and most of the world's economies to adopt the dollar and sign their people up for a neo-colonial, centrally-managed political structure.

Welcome to the new Anglo-American Empire, founded not on supremacy of the seas, but of the financial markets.

The most probable outcome is that the looting of the Treasury will continue until the current crew in Washington leaves town, and they dump the problem hard into 2009 which will be the year from hell. Then they will wind up their spin machine about low taxes and trickle down economics and blame it all on the new Administration.

Off Balance Sheet Lending Factors - Cumberland Advisors pdf

Fed Releases a Flood of Dollars Part Deux

Here is the latest version of the Bloomberg story about the Fed and its 'flood of dollars.' It has its own link now here.

Interesting twist, on the Bloomberg News headline page here, the subject title has become "Fed Lets Europe Central Banks Offer Unlimited Dollars, Removes Swap Limits"

Don't mind us, we're just getting a chuckle out of the Bloomberg's editorial changes trying to strike a politically correct description of what the Fed is doing.

We think its the right thing to do by the way, since it will relieve the highly artificial short squeeze in dollar over in Europe because of their regulatory failures.

We will be much more impressed if, after they relieve the short term credit squeeze, they actually do something about it besides setting more useless standards that remain unenforced. The failure of the European Union banking regime is breathtakingly ironic given the hubris they had been proudly wearing as late as three or four weeks ago.

And listen up, cats and kittens, no matter what Paulson and his global crew of merry pranksters do in the short term, the US economy is in an absolute mess. A stronger dollar is going to strangle exports, but continue to strengthen the financial sector. That is not a prescription for change, but rather more of the same malinvestment and destructive wealth transfers with less stability.

Whoever become the President next year will get to start with a $2 Trillion deficit, largely wasted on consumption, profitless war, and golden parachutes for Wall Street.


Fed Releases Flood of Dollars, Market Rates Fall (update 3)
By John Fraher and Simon Kennedy

Oct. 13 (Bloomberg) -- The Federal Reserve led an unprecedented push by central banks to flood the financial system with as many dollars as banks want, backing up government efforts to revive confidence and helping to reduce money-market rates.

The European Central Bank, the Bank of England and the Swiss National Bank will offer European banks unlimited dollar funds with maturities of seven, 28 and 84 days at fixed interest rates against ``appropriate collateral,'' the Washington-based Fed said today. The Fed had capped at $380 billion the currency it would swap with the three central banks.

Global economic leaders have redoubled efforts to unfreeze credit markets and avert the worst worldwide recession in thirty years after last week's 20 percent slide in the MSCI World Index. Policy makers from the Group of Seven nations are committed to taking ``all necessary steps'' to stem a market panic, and European and U.S. governments today outlined plans to avoid banks failing.

``Like high waves that have gathered tremendous pace, global policy initiatives are coming to crash on the markets' shores,'' said Alex Patelis, chief international economist at Merrill Lynch & Co. in London. ``A turning point could be reached.'' (What is going to crash on our shores are a wave of dollars and Treasuries as the world realizes that there is a penalty in carrying an excess of our currency. But that step is yet to come, when the Treasuries plunge as we have said before. - Jesse)

The cost of borrowing in dollars for three months today fell to 4.75 percent from 4.82 percent, the highest this year. The rate for euros over the same timeframe declined to 5.32 percent from 5.38 percent...

The First Victim in an Economic Crisis is Truth

Yves Smith over at Naked Capitalism first picked up on this story from Bloomberg and blogged it here.

The reason for the short term need for US dollar overseas is explained here.

Bloomberg seems to have subsequently pulled this story and replaced it with an optimistic statement from George W. Bush here.

We do appreciate the little touch of irony but the frontpage of Bloomberg still carries the old headline over this new news story. Shoddy work at the Ministry to say the least.

To the experienced eye, there are other unmistakable efforts this morning to calm the markets with a false enthusiasm and the somewhat heavy handed management of key market signals.

When the going gets weird, the weird become ..... weirder.


Fed Leads Unprecedented Push by Central Banks to Flood Market With Dollars

Oct. 13 (Bloomberg) -- The Federal Reserve led an unprecedented push by central banks to flood the financial system with dollars, backing up government efforts to restore confidence and helping to drive down money-market rates.

The ECB, the Bank of England and the Swiss central bank will auction unlimited dollar funds with maturities of seven days, 28 days and 84 days at a fixed interest rate, the Washington-based Fed said today. All of the previous dollar swap arrangements between the Fed and other central banks were capped.

``By providing unlimited dollar funds they are acting on the back of the G-7 plan to ensure the system is fully liquidized,'' said Lena Komileva, an economist at Tullett Prebon Plc in London. ``We're going to see even more liquidity provided and more aggressive rate cuts are coming.''

Leaders of the world economy have redoubled efforts to unfreeze credit markets and avert the worst global recession in thirty years after last week's 20 percent slide in the MSCI World Index. Policy makers from the Group of Seven nations pledged at the weekend to take ``all necessary steps'' to stem a market panic and European governments are today announcing plans to avert a banking collapse across the region.

The cost of borrowing in dollars for three months today fell to 4.75 percent from 4.82 percent, the highest this year. The rate for euros over the same timeframe declined to 5.32 percent from 5.38 percent.....

``Taken together, the latest moves increase the chances that we will begin to see some relaxation of the intense funding stresses,'' Dominic Wilson and other economists at Goldman Sachs Group Inc. wrote in a note today. ``This is because bank solvency risk should decline as the government offers protection.''

As well as slashing interest rates in concert last week, global central banks are expanding their toolkits to push down money-market rates. The Fed on Oct. 7 said it will create a special fund to buy U.S. commercial paper and the ECB last week said it would offer financial firms unlimited euro funds. The Bank of England is scheduled to revamp its own money-market operations later this week.

Charts in the Babson Style for 13 October 2008

A technical bounce is overdue at this point, and we are likely going to get it today on Monday.

Getting long stocks here is only for short term traders.

Long Term DJIA Adjusted for Inflation - Quo Vademus?

Updated forecast from Steve Williams at CyclePro.

Keep in mind that these figures are adjusted for inflation.

Another way to look at this is through the Dow-Gold ratio. Our own forecast is that this measure reverts to the longer term support level of 3.66. Whether this is at Dow 3,660 or 36,660 will help to answer the question: inflation or deflation?

A return to 1.9 for a period of time is also possible.

Austrian Public in a Quiet Rush to Gold

If you are going to seek safety, seek it early while you can still get there.

Remember the lessons of history.

""There can be no other criterion, no other standard than gold. Yes, gold which never changes, which can be shaped into ingots, bars, coins, which has no nationality and which is eternally and universally accepted as the unalterable fiduciary value par excellence."
Charles De Gaulle

Austria witnesses new gold rush
By Bethany Bell
BBC News, Vienna

There's a new gold rush.

The financial crisis is prompting people to look for safer forms of investment than stocks and shares.

The interest in gold coins is so great that many of the world's major mints are struggling to keep up with demand, including the Austrian Mint, which produces the Vienna Philharmonic - one of the best-selling bullion coins worldwide.

Sales of Vienna Philharmonic gold coins have gone up by more than 230% since last year.

Kerry Tattersall, the director of marketing at the mint, says production has gone into overdrive.

"We are running at present something like three shifts on all of the machines, on the presses, producing both gold and the silver bullion coins.

"We've actually got delays in delivering orders in silver. With gold, we are just about keeping pace, but it is a bit of a struggle."

In September alone, the mint sold 100,000 ounces in gold coins - in normal times it would take three to four months to sell that much.

Mr Tattersall says people are looking for security.

"We are seeing a lot of panic buying at the moment. People are losing confidence in the economy - whether that is justified or unjustified is a matter of opinion. But we are seeing a lot of people looking for a safe haven."

King's ransom

In the mint, chunks of gold are melted down in a fiery furnace. Then a stream of molten metal is formed into a thin strip of gold, out of which the blank coins are cut. Later the blanks are struck with the design of violins and musical instruments.

The Austrian mint, in the heart of Vienna, was founded more than 800 years ago to make coins out of the silver ransom paid for King Richard the Lionheart, who was taken prisoner in Austria on his way home from the Crusades.

It is a sign of the importance people have attached to precious metals over the centuries.

But there is no such thing as a completely safe investment.

Gold, like all commodities, is vulnerable to fluctuations in price.

Prices tumbled in 1999 when Gordon Brown announced a decision to sell off some of the Bank of England's gold reserves.

Robert Stoeffele, an analyst at Austria's Erste Bank, says until recently there was less interest in gold as an investment.

"We forgot the appeal of gold in the last 28 years because we had a bear market in gold. But within the last few years we have seen a huge fundamental bull market for gold.

"Gold is like a thermometer for the financial markets. I'd say we've got fever," he said.

Life savings

But rising demand for gold is not just a phenomenon of global finance.

Ordinary Austrians, shocked by the precipitous falls in their own stock market - which was suspended this week for the first time ever - are also looking for a more solid store of wealth.

The shop at the Austrian Mint usually specialises in selling collectors' coins. But these days, a number of customers are buying bullion there - in bulk.

I saw one middle-aged couple handing over thousands of euros in cash, in exchange for dozens of 1oz Vienna Philharmonic gold coins.

A little later, a Viennese pensioner took a thick wad of 500-euro notes out of her handbag, and gave it to the sales assistant. He sold her a large gold bar, which looked as though it weighed a kilo.

"I have taken one piece of gold," she told me.

"You see, I am old, and I have earned money all my life and now I have the money in the bank and I am afraid of the financial situation, that it will disappear. Gold is safe, I think."

LIBOR is in Backwardation and Significantly Divergent from Effective Fed Funds

LIBOR has ceased to function as a reliable benchmark suitable for commercial and residential loans in terms of US dollars.

It is in backwardation with an inverted yield curve, and has significantly diverged from the Effective Fed Funds rate.

This is most likely because of the Eurodollar 'short squeeze,' as shown by the record TED spread, and the inappropriately small sample size of LIBOR reporting banks.

This is all a symptom of the greater issue of the US dollar, which is no longer suitable as the reserve currency for global central banking.

The Federal Reserve is no longer able manage the dollar to simulate the stability of an external standard, given their decision to ignore nominal money supply growth. Their current mandate instead focuses them on purely domestic economic metrics that may be inappropriate for the changing state and requirements of exogenous economic systems, unless those systems are willing to subordinate their fiscal and monetary discretion.


What is LIBOR?

The London InterBank Offered Rate, or LIBOR, is the average interest rate charged when banks in the London interbank market borrow unsecured funds from each other.

There are different LIBOR rates for numerous currencies, including U.S. dollars.

The world banking system has adopted the LIBOR as a benchmark for short-term, interbank loans.

The LIBOR rates are now internationally recognized indices used for pricing many types of consumer and corporate loans, debt instruments and debt securities across the globe, and is the reference for many loans including the vast majority of Interest-Only Loans in The United States.

LIBOR rates are fixed every UK business day by the British Bankers' Association BBA.

The Fed Funds Target Rate, America's benchmark interest rate, and the U.S. Prime Rate are managed by America's central bank: the Federal Reserve.

The LIBOR rates, however, are fixed by a relatively small group of large private international banks themselves

The Bank of America
JP Morgan Chase
Citibank, NA
Bank of Tokyo-Mitsubishi UFJ Ltd
Barclays Bank plc
Credit Suisse
Deutsche Bank AG
HBOS
HSBC
Lloyds TSB Bank plc
Rabobank
Royal Bank of Canada
The Norinchukin Bank
The Royal Bank of Scotland Group
UBS AG
West LB AG


Is LIBOR a stable benchmark of short term money rates?

There is a case to be made that LIBOR is an inappropriate reference to be used for commercial short term rates because it is subject to distortions given the relatively selective sample size of the reporting banks. One or two troubled banks can significantly impact average LIBOR.

The spreads between the highest and lowest quoted rates in an efficient measure should be narrow and convergent. Recently the spreads among the LIBOR quoting banks have become shockingly wide, reflecting the non-competitive nature of the short term interbank loans given the massive intervention by the central banks as they flood the markets with loans designed to recapitalize the banking system.




Here is the detail of the composition of the 3 Month LIBOR. One might expect this to be a scorecard of default risk amongst the reporting banks from the perspective of their peers.





How does LIBOR compare to a short term rate measure such as Effective Fed Funds?

There has been a strong correlation between the Effective Funds Rate and LIBOR dollar rate as one might expect.



However, recently there is a growing divergence between LIBOR $US rates and the Effective Fed Funds Rate. This is a symptom of distress in the banking system and shows the inappropriate character of LIBOR for use as a benchmark for the commercial and residential loans markets.




And perhaps most surprisingly, the LIBOR dollar rate curve is now inverted.


How can LIBOR be Inverted when the Effective Fed Funds Rate is steepening?

This is most likely a symptom of fear of risk of capital return in interbank lending. It may also be a sign that the current eurodollar short squeeze is expected to dissipate, as it will as the capital markets revert to the means and efficient operation.



One might also pointedly ask what the G7 will be doing to address the distortions being introduced into the European banking system by the US dollar and its shortages due to the precipitous deterioration of US dollar debt assets held by European banks, as the solution for this seems to be eluding the bureaucrats in Brussels.

As a hint, the US dollar, like LIBOR, is being used inappropriately and the basis for international trade must change to a more stable measure.

Wall Street Bailouts Push 2009 Budget Deficit Estimates to a Record 12.5% of GDP

The new welfare queens, the Wall Street bankers, put all other non-military government programs to shame.

All holders of US dollars are going to be paying for this.

Taxation without representation is ... crony capitalism and dollar hegemony.

Cost of U.S. Crisis Action Grows, Along With Debt
By Matthew Benjamin

Oct. 10 (Bloomberg) -- The global financial crisis is turning into a bigger drain on the U.S. federal budget than experts estimated two weeks ago, ballooning the deficit toward $2 trillion.

Bailouts of American International Group, Fannie Mae and Freddie Mac likely will be more expensive than expected. States are turning to Washington for fiscal help. The Federal Reserve said this week it will begin buying commercial paper, the short- term loans companies used to conduct day-to-day business, further increasing costs. And analysts now say the $700 billion bank- rescue plan passed by Congress last week may have to be significantly larger. (You are not really surprised at this are you? - Jesse)

``I always assumed they would be asking for more money along the way if it was necessary, and it looks like it's going to be necessary,'' said Stan Collender, a former analyst for the House and Senate budget committees, now at Qorvis Communications in Washington. ``At the moment, there's nothing happening here that's positive for the budget. Nothing.''

The 2009 budget deficit could be close to $2 trillion, or 12.5 percent of gross domestic product, more than twice the record of 6 percent set in 1983, according to David Greenlaw, Morgan Stanley's chief economist. Two weeks ago, budget analysts said the measures might push deficit to as much as $1.5 trillion.

Yields to Rise

That means a lot more borrowing by Treasury, which will push up interest rates, said Greenlaw. ``The Treasury's going to be ramping up supply dramatically over the course of coming months to meet this enormous federal budget obligation,'' Greenlaw told Bloomberg this week. ``The supply will trigger some elevation in yields.''

Treasuries have fallen the past four days even as stocks sank, a sign investors are preparing for bigger U.S. government borrowing. Benchmark 10-year note yields rose to 3.82 percent at 7:49 a.m. in New York, from a close of 3.45 percent Oct. 6.

Payments the government allocated to keep vital companies solvent are beginning to look insufficient.

AIG, the giant insurance company that was taken over by the government in mid-September, said this week it may access $37.8 billion from the Federal Reserve Bank of New York, in addition to the $85 billion the government already loaned it to stave off bankruptcy.

``You're in for a dime, you're in for a dollar on this one,'' said David Havens, a credit analyst at UBS AG. (And boy don't these jokers know it - Jesse)

The financial health and earnings prospects of Fannie Mae and Freddie Mac -- seized by the government on Sept. 7 to prevent them from failing -- worsened in the second and third quarters, the companies' government regulator said this week.

Price Declines

The companies and regulators are recalculating the value of all of their assets to factor in price erosion. That may mean the government will have to spend more to keep the firms solvent.

Earlier this week the Fed announced it will create a special fund to buy commercial paper, the credit that businesses use to finance payrolls and other ongoing expenses. The Treasury will deposit money into the Fed's New York district bank to help set up the new unit. A Fed official said Treasury funding for the program could be ``substantial.''

California, Alabama and Massachusetts are urging the Fed and Treasury to include their securities in rescue plans designed for banks and businesses. The $2.66 trillion U.S. market for state and city bonds has been all but frozen since Lehman Brothers Holdings Inc., weighed down by losses in mortgage-backed bonds, declared history's largest bankruptcy on Sept. 15.

California has said it needs to sell as much as $7 billion in notes to maintain its schools, health system and other public services. The Bush administration said it is reviewing the states' financial positions.

Plan for Banks

Meanwhile, Treasury Secretary Henry Paulson indicated two days ago that he is considering buying stakes in a wide range of banks in coming weeks to help recapitalize them.

Such a move is allowed under the $700 billion bailout package Congress passed last week. Edmund Phelps, winner of the 2006 Nobel Prize for economics and a professor at Columbia University, said such action is necessary -- and will likely turn out to increase the measure's cost. Spending beyond the amount set in last week's bill would require further Congressional approval.

``We have to recapitalize the banks,'' Phelps told Bloomberg Television this week. ``I don't imagine that there's enough money in the first Paulson plan to be able to do all that needs to be done in that direction.''

The additional borrowing could push the national debt well past 70 percent of GDP, the highest since the immediate aftermath of World War II, when the U.S. was still paying off war debt....

SP Long Term Charts and the Reckless Adventurism of the Greenspan Federal Reserve

This chart shows the extreme effects of the Greenspan Federal Reserve on the stock market as a representation of its profound impact on the US economy, if not that of the world. Reckless adventurism may be too kind a description.

Two asset bubbles, back to back, were caused by the irresponsible expansion of credit and the lack of regulatory oversight of the banking system. This fostered malinvestment and a terrific destruction and reallocation of wealth.

This is what happens when the Fed takes its eye off the growth of money supply and credit, and instead focuses on exotic metrics and statistical rubbish, to the cacaphony and flourishes of pseudo-scientific oratory that confounds common sense.

There will be significant human dislocation and misery to come as the economy readjusts to more sustainable growth patterns and capital allocation.

Near term support levels are more obvious when looking at this chart below.

What we have are two neatly nested Head and Shoulders tops, at least.

Lehman Auction Sets up Largest CDS Settlement of $270 Billion

Bloomberg
Lehman Credit-Swap Auction Sets Payout of 91.38 Cents
By Shannon D. Harrington and Neil Unmack

Oct. 10 -- Sellers of credit-default protection on bankrupt Lehman Brothers Holdings Inc. will have to pay holders 91.375 cents on the dollar, setting up the biggest-ever payout in the $55 trillion market.

An auction to determine the size of the settlement on Lehman credit-default swaps set a value of 8.625 cents on the dollar for the debt, according to Creditfixings.com, a Web site run by auction administrators Creditex Group Inc. and Markit Group Ltd. The auction may lead to payments of more than $270 billion, BNP Paribas SA strategist Andrea Cicione in London said.

While the potential payout is higher than 87 cents on the dollar suggested by trading in Lehman's bonds yesterday, sellers of protection have probably written down their positions and put up most of the collateral required, said Robert Pickel, head of the International Swaps and Derivatives Association. More than 350 banks and investors signed up to settle credit-default swaps tied to Lehman. No one knows exactly who has what at stake because there's no central exchange or system for reporting trades.

``I don't think it buries anybody,'' said Brian Yelvington, a strategist at CreditSights Inc., a bond research firm in New York.

Sellers are required to post collateral, or pledge assets, to the buyer of protection, known as the counterparty, on the other side of the trade if the value of their positions declines. Because Lehman's bonds had already fallen, that collateral has probably been posted, Yelvington said.

Pimco, Citadel

The list of participants in the auction includes Newport Beach, California-based Pacific Investment Management Co., manager of the world's largest bond fund, Chicago-based hedge fund manager Citadel Investment Group LLC and American International Group Inc., the New York-based insurer taken over by the government, according to the International Swaps and Derivatives Association in New York.

Hedge funds, insurance companies and banks typically buy and sell credit protection, which is used either to insure a bond against default or as a bet against the company's ability to pay its debt.

The payments ``are insignificant when put into the context of the trillions of dollars of payments that are made through settlement systems each and every day,'' Pickel said on a conference call with reporters today.

Fears `Overblown'

Some funds may be forced to dump assets to meet the payment demands if they haven't hedged, BNP Paribas's Cicione said.

``Banks can go to the Federal Reserve, or use the commercial paper market where it is still functioning'' to meet protection payments, said Cicione, who said a 9.75 cent recovery rate would lead to payments of about $270 billion. ``But fund managers or hedge funds, once they've used their cash, have only one option: to sell assets.....''

Stand and Deliver - Significant Fails in the US Treasury Market

This is the worst 'failure to deliver' Treasuries that we've seen since we started tracking this on a weekly basis in 2003.

An explanation of the Settlement Failures from the Federal Reserve is listed below.

There was no corresponding spike in Agencies, MBS, or Corporates in the data.

Fails data reflect cumulative "fails to receive" and "fails to deliver" over the course of a week for the primary dealer community only. The cumulative weekly totals are calculated by summing the fails outstanding on each business day of the reporting week.1 These totals include both fails that started during the reporting week as well as fails that started in prior weeks and have not yet been resolved. The aggregate fails data include fails associated with both outright transactions and financing transactions.

Fails data are reported for four distinct categories: Treasury Securities, Agency Securities, Mortgage-Backed Securities and Corporate Securities. Mortgage-backed securities include those issued and insured by government sponsored enterprises. Privately issued mortgage-backed securities are categorized as corporate securities. The FRBNY has collected aggregated fails data in this form since July 1990 for Treasury, Agency and Mortgage-Backed securities, and since July 2001 for Corporate securities.

Reported fails numbers sometimes can reach elevated levels due to so-called "daisy chains" and "round robins" in which an initial delivery failure causes a chain of subsequent fails as the party expecting to receive the security in the initial transaction fails to deliver to its counterpart in the second transaction, and so on. Daisy chains and round robins are ultimately not the cause of fails. Fails, at root, are caused by the core short positions of cash and repo market participants.

As described in the primer below, there are many factors that can create an initial delivery failure. Once a significant volume of fails occurs, lenders of collateral sometimes also withhold collateral because they are concerned that existing fails diminish the likelihood of that collateral being returned to them. Such withholding can be self-fulfilling because withholding scarce collateral can increase the incidence of fails in and of itself.

The importance of delivery chains and the potential for feedback effects from changes in the withholding behavior of collateral lenders also imply that relatively small amounts of collateral can settle a larger volume of failed transactions: an increase in collateral can be delivered from one party to the next to clear up a chain of failed trades and the resolution of failed trades may, in turn, make collateral lenders more willing to lend securities that had been in short supply.

Reasons for Settlement Fails

Fails occur for a variety of reasons. One source of fails is miscommunication. Despite their best efforts to agree on terms, a buyer and seller may sometimes not identify to their respective operations departments the same details for a given transaction. On the settlement date the seller may deliver what it believes is the correct quantity of the correct security and claim what it believes is the correct payment, but the buyer will reject the delivery if it has a different understanding of the transaction. If the rejection occurs late in the day there may not be enough time for the parties to resolve the misunderstanding.

In some cases a seller or a seller’s custodian may be unable to deliver securities because of operational problems. An extreme example is the September 11 catastrophe that destroyed broker offices and records, impaired telecommunications links between market participants, and damaged other critical infrastructure. Less extreme operational problems can also precipitate settlement fails, and are not uncommon.

Finally, a seller may be unable to deliver a security because of a failure to receive the same security in settlement of an unrelated purchase. This can lead to a “daisy chain” of fails; where A’s failure to deliver bonds to B causes B to fail on a sale of the same bonds to C, causing C to fail on a similar sale to D, and so on. A daisy chain becomes a “round robin” if the last participant in the chain is itself failing to the first participant.

Fails also occur “naturally” when special collateral repo rates approach or reach zero. In general, a market participant would be better off borrowing securities to avoid a fail even if the interest on the money lent in the specials market is below the general collateral repo rate, because (as explained below) the alternative is forgoing interest altogether.3 However, this incentive becomes less compelling as a specials rate approaches zero. A specials rate will approach zero if there is unusually strong demand to borrow a security, e.g. following heavy short selling by hedgers, or if holders are unusually reluctant to lend the security.

Source: Federal Reserve Bank

Is This a 'Deflationary Moment?'

In short, no.

This is what is called a short term liquidity crunch, where traders, in this case most likely hedge funds and small speculators, go into panic selling to address margin calls and short term cash obligations. It is the unwinding of leveraged positions under extreme short term duress. There is some talk that the CDS situation is causing this, and rumours that the banks are forcing the selling by raising short term margin and issuing margin calls, perhaps to an excess.

It is possible to turn this into a deflation, given time and a tightening of the money supply relative to economic growth. The word 'moment' is the tipoff here. There are no 'moments' in a real inflation or a real deflation. They are trends of weeks and months and sometimes years. Short term events, whether due to a storm, the collapse of a company, a panic, are just that: events.

What we are seeing today, almost across the board, is hedge funds selling almost everything to raise cash to meet their obligations. We suspect that the Lehman CDS settlement today may be a precipitant. We are also seeing banks continuing to tighten their lending even to the funds.

It will reach a climax and then things will begin to normalize. VIX is at crash levels today.

For this to become a true 'deflation' would require the world's central banks to start tightening credit, raising interest rates, tightening government budgets. Lets see if they do that. Merely doing nothing would probably not even be enough, since the market would just find a level at which it could clear and then normalize. It takes serious government meddling to create problems like a hyperinflation or a true deflation.

Its important to keep these things square in our minds. Cooler heads prevail, given a little time, and panicking is never a wise strategy, unless you panic first. We're probably beyond that point..


Gold Falls as Dollar Gains, Investors Sell Metal to Raise Cash
By Pham-Duy Nguyen
October 10, 2008 13:09 EDT

Oct. 10 (Bloomberg) -- Gold tumbled from the highest since July as the dollar strengthened and investors sold the metal to cover losses in equity markets. Silver plunged 11 percent.

The dollar headed for the second consecutive weekly gain against a weighted basket of six major currencies. Earlier, gold reached $936.30 an ounce, the highest since July 29, on demand for a haven amid plunging global equity markets.

``Investors are selling gold to raise dollars,'' said Frank McGhee, the head dealer at Integrated Brokerage Services LLC in Chicago. ``It's fear versus dollar strength, and dollar strength is winning...''

Margin Call, Gentlemen?

This is something going around the trading desks. Suddenly tightening margin credit is a precipitant to artificially steep market declines as those students of the Crash of 1929 will well remember. That is something one does on the upside of a potential asset bubble, not in the decline.

If this is true, then there is an obvious need for the Fed to step in and provide credit relief even if on high rates, moreso than propping up a few banks by buying their worthless assets at above market prices.

Forced margin selling because of arbitrary private bank policies is going to create a major problem in the financial markets, leading to a greater concentration of wealth, and the ultimate descent into a loss of freedoms.

The selling has reached historic proportions. There literally is a "run on the market," as investors worldwide are dumping stocks.

It seems that the major catalyst for this selling is the fact that the newest large banks primarily J. P. Morgan, Goldman Sachs, and possibly Morgan Stanley as well -- have issued massive margin calls to hedge funds and other professional traders who use these banks as prime brokers.

These calls were not issued because of market losses, but more because the banks arbitrarily decided that they wanted their customers to use less leverage. Margin rates as low as 15% for broker dealers were raised to 35%; hedge funds who had been used to operating on high leverage were told that they had to bring accounts up to a much larger percentage of equity.

In this illiquid environment, where all manor of exotic securities literally have no bids, the only place to raise the cash to meet margin calls was to sell stock. That is what really set this market over the edge -- as the first notice of these calls were issued on October 2nd and 3rd.

There was something of a grace period to meet the calls, but funds realized they weren't going to be able to meet them other than by selling stock. There are rumors that the most massive of the calls are due Monday (October 13th). If so, this market could continue to decline through then.

Losses on Lehman Brothers Credit Default Swaps Approaching 92 Cents on the Dollar

Lehman default swaps may recover 9.75 pct area
By Karen Brettell
Fri Oct 10, 2008 10:45am EDT

NEW YORK, Oct 10 (Reuters) - Banks, hedge funds and other sellers of protection on Lehman Brothers are facing losses in the area of 91.25 percent of the insurance they sold, based on the initial results of an auction on Friday to determine the value of the credit default swaps.

There are also substantially more sellers than buyers of the debt in the auction, indicating that the final price of the swaps may be even lower than the initial recovery levels of 9.75 percent, according to results published by auction administrators Creditex and Markit.

The net open interest to sell the debt is $4.92 billion, they said.

The auction to settle Lehman's credit default swaps will be one of the largest settlements of contracts in the $55 trillion market, with around $400 billion in contract volumes estimated on Lehman's debt.

Lehman's bankruptcy filing last month sent its bond values plunging as the majority of the investment banking assets that had supported the debt were purchased by Barclays Bank, leaving debt holders at the abandoned holding company with little to reclaim.

Lehman's bonds were trading in the 11 cent on the dollar area on Friday, compared to around 12-to-13 cents on Thursday, according to MarketAxess.

Relative Performance of the SP 500, FTSE and DAX

Dow Plunges 697 Points On the Open

The Dow Jones Industrial Average plunged almost 700 points on the market open in some of the most extreme volatilty yet seen. Prices have since rallied back to even, and a little bit of green, due no doubt to wild swings.

President Bush will be speaking this morning most likely to serve up a few more meaningless platitudes.

Intraday swings mean little if we judge by what has happened so far this week.

It will be all about the last hour of trading.

Canada Rated World's Soundest Banking System

In our recollection Canada's banking system was also fairly sound during the Great Depression.

Canada rated world's soundest bank system
By Rob Taylor
Thu Oct 9, 2008 2:41pm EDT

CANBERRA (Reuters) - Canada has the world's soundest banking system, closely followed by Sweden, Luxembourg and Australia, a survey by the World Economic Forum has found as financial crisis and bank failures shake world markets.

But Britain, which once ranked in the top five, has slipped to 44th place behind El Salvador and Peru, after a 50 billion pound ($86.5 billion) pledge this week by the government to bolster bank balance sheets.

The United States, where some of Wall Street's biggest financial names have collapsed in recent weeks, rated only 40, just behind Germany at 39, and smaller states such as Barbados, Estonia and even Namibia, in southern Africa.

The United States was on Thursday considering buying a slice of debt-laden banks to inject trust back into lending between financial institutions now too wary of one another to lend.

The World Economic Forum's Global Competitiveness Report based its findings on opinions of executives, and handed banks a score between 1.0 (insolvent and possibly requiring a government bailout) and 7.0 (healthy, with sound balance sheets).

Canadian banks received 6.8, just ahead of Sweden (6.7), Luxembourg (6.7), Australia (6.7) and Denmark (6.7).

UK banks collectively scored 6.0, narrowly behind the United States, Germany and Botswana, all with 6.1. France, in 19th place, scored 6.5 for soundness, while Switzerland's banking system scored the same in 16th place, as did Singapore (13th).

The ranking index was released as central banks in Europe, the United States, China, Canada, Sweden and Switzerland slashed interest rates in a bid to end to panic selling on markets and restore trust in the shaken banking system.

The Netherlands (6.7), Belgium (6.6), New Zealand (6.6), Malta (6.6) rounded out the WEF's banking top 10 with Ireland, whose government unilaterally pledged last week to guarantee personal and corporate deposits at its six major banks.

Also scoring well were Chile (6.5, 18th) and Spain, South Africa, Norway, Hong Kong and Finland all ending up in the top 20.

At the bottom of the list was Algeria in 134th place, with its banks scoring 3.9 to be just below Libya (4.0), Lesotho (4.1), the Kyrgyz Republic (4.1) and both Argentina and East Timor (4.2).

World Economic Forum Global Competitiveness Report

RANKINGS

1. Canada
2. Sweden
3. Luxembourg
4. Australia
5. Denmark
6. Netherlands
7. Belgium
8. New Zealand
9. Ireland
10. Malta
11. Hong Kong
12. Finland
13. Singapore
14. Norway
15. South Africa
16. Switzerland
17. Namibia
18. Chile
19. France
20. Spain

The Progress of the Dollar Rally in Context and the Stock Market Crash

This is a simple update of the chart which was posted on this blog on 8 September Dollar Musings and the Potential for a Significant Stock Market Decline.

We will take a minute to note this detail from that September 8 blog entry:

We think that there is a heightened chance of a significant stock market decline that will start in the next thirty days. As we have previously said we are watching for a 'failed rally' hall mark in our model, We are almost there.

A likely target for clarification will be around the week of this month's option expiration on 20 September.

The clarification was a market decline that started on 19 September and has shaved around thirty percent off the major US stock market indices.

The dollar did drop back into the 70's and then has rallied sharply back up to resistance around 82.

All of our charting indicates that the dollar will not significantly top the 61.8 fibo level of 84.37 if it does surmount the resistance at 82.

If it does, then we need to reconsider this as something other than a bear market rally.

Charts - 9 October 2007 - Jeudi Noir

"Those that wish to be wealthy beyond their labor fall into temptation and a tangled web, and many errors and lusts,
foolish and hurtful, that sink them and their kinsmen into ruin and destruction." 1 Timothy 6

This cascading waterfall decline has been remarkably quiet and orderly, with few rallies and significant drops into the closing hour each day.

Few realize that one year ago the US equity markets hit their all time highs. They are now down from thirty to forty percent.

This last leg since September 19 has taken from 25 to 30 percent off the major indices and may be remembered as 'the crash' depending on where we form a bottom and how the bounce occurs.

What we are doing is unwinding the reflation that Greenspan created after the Crash of 2000-2003. The efforts to stop the decline are not working because they selective bailouts of the wealthy and a few select banks.

The economy will not recover until broader efforts are undertaken to provide jobs and wage growth to the people, rather than rebuilding the artifice of crony capitalism and the politics of privilege.

The impact of this financial destruction will be felt for the next several years. The worst is yet to come.

TED Spread, the US Dollar, and the Independent Functioning of the European Capital Markets

An earlier essay The Dollar Rally and Deflationary Imbalances in the US Dollar Holdings of Overseas Banks demonstrates that a significant dollar demand has been created overseas by the deterioration of dodgy, if not fraudulent, US debt assets and dollar deposits.

There is something ironic if not pathetic in the EU coming hat in hand to the Federal Reserve to beg for additional supplies of dollars at higher prices after taking heavy losses from US debt instruments that were founded on deception and false premises.

One obvious solution is for Europe to "go off the dollar standard" as Roosevelt went off the gold standard in 1933 within the US.

For example, for those covenants that are payable in dollars only, the EU can declare that the obligations may be settled in euros at prevailing exchange rates.
As it says on the US dollar, "This note is legal tender for all debts, public and private."

Dollars ought not to be required to settle primarily domestic accounts, as gold was no longer required to settle debts within the US after 1933. Dollar transactions should be treated as forex transactions.

The gold standard was superior to the dollar standard as gold could not be created or destroyed at will by private US banking manipulation.

The US will object strenuously, as will US private companies. After all, there should be little doubt that the bankers are using the current dollar hegemony to their advantage. If Europe is content to subsidize American extravagance then they should continue to do nothing about it. But they need to be prepared for a descent into a kind of debt peonage.

It should be almost embarrassingly obvious to everyone that the Dollar no longer deserves to be treated as the singular reserve currency and as a universal monetary standard, especially not for primarily domestic transactions.

Charts in the Babson Style for Miércoles Matado 8 October 2008

Gulf State Central Banks to Increase Gold Reserves

Gulf News
Gulf central banks look to gold as uncertainty rises
By Cleofe Maceda, Staff Reporter
October 07, 2008, 23:26

Dubai: Central banks in the Gulf and elsewhere in the world will likely turn to gold as the global banking crisis boosts the metal's appeal as a buffer against dire economic conditions, industry sources said on Tuesday.

With bank shares across the world plunging and the US dollar still unstable, central banks have no better option but to diversify their reserves into gold, considered the only alternative to the US dollar and euro.

Analysts said demand from banks will likely affect gold prices, and retail consumers will resort to investing in bullion as well, particularly in exchange traded funds (ETFs), coins and small bars.

"Gold will definitely see a revival as a reserve asset for central banks. The main purpose for the central banks when investing is not to generate the highest possible returns, but to provide a safe and sound financial basis for the currency and the economy built on it," Rolf Schneebeli, former head of the World Gold Council, told Gulf News.

Schneebeli said suitable central bank assets must be universally recognised and must provide a liquid market that is deep enough to absorb major transactions. However, he noted, there are not many currencies that can be used as possible assets.

Earlier this year, the US dollar plummeted against the euro. Although it has started to strengthen recently, doubts remain over its outlook.

"The only alternative to the US dollar is the euro. The pound sterling is probably not strong enough anymore. The yen and the Swiss franc, both strong currencies, do not have enough depth ... Hence, gold is really the only alternative to the dollar and euro," Schneebeli added.

Another advantage of investing in gold, Schneebeli said, is that the precious metal is "nobody's liability."

"This means one is not at the mercy of other governments. After all, governments might use the financial system to exercise pressure on other governments. In the case of gold, this is quite difficult," he said.

K.P. Baiju, managing dir-ector and chief executive officer of Buz Consulting, said gold demand from banks "will impact the prices and will help sustain the current levels for the time being".

Baiju noted that demand from consumers will continue to increase as well, because "gold is considered a good means of small-time savings."

"Gold prices are currently ranging around $825 to $850 an ounce, which was last year's fourth quarter level and the consumers know that this is a good time to buy," Baiju told Gulf News.

Among UAE consumers, Schneebeli sees an increase in demand for ETFs, coins and gold stocks.

Shhhhhh! Here is a Secret Worth Remembering.

The Treasury is going to devalue the US dollar by 30 to 40 percent, or more, from here.

Why?

Because they have no choice. Its what you must do when you cannot selectively default by creditor and you can't pay your debt service with additional debt.

The devaluation will be coated with a minty flavored shell of verbage and G7 misdirection and government programs with lots of letters in the names.

But isn't everyone else is in the same boat?

Actually they aren't. Take a look at the current account deficits and debt service payments growth. That will tell you who is in what boat.

Remember, its a secret. Don't tell the Chinese, foreign holders of US debt, and especially the US middle class whose life savings are going to be wiped out.

Isn't monetary deflation the natural outcome of a country's failure to maintain their credit and grow their debts?

Tell it to Iceland. Want to buy some krona?

But what about Japan? I think we are going to be in a deflation where our money is worth more as we print more of it, while producing less goods in return, and our financial paper is increasingly discredited and worth less.

Excellent. Someone has to hold the bag. Welcome to the team. Have a koolaid and a cookie and take a seat over there while you wait for further processing and creative destruction.

You may also be interviewed for an upcoming documentary to be titled "Cargo Cult Economics."

P.S. Have a nice day

Paulson to Host G7 Press Briefing Today at 3 PM

Just in time to catch the market close.

Postscript: Oops, guess that didn't work.

Central Bankers in Coordinated Rate Cuts

``What's troubling the market'' is concern about ``the solvency and losses of major institutions. The market is uneasy because it doesn't have a lot of information on what the depth of those losses will be."

Bloomberg
Fed, ECB, Central Banks Cut Rates in Coordinated Move
By Scott Lanman

Oct. 8 (Bloomberg) -- The Federal Reserve, European Central Bank and four other central banks lowered interest rates in an unprecedented coordinated effort to ease the economic effects of the worst financial crisis since the Great Depression.

The Fed, ECB, Bank of England, Bank of Canada and Sweden's Riksbank each cut their benchmark rates by half a percentage point. The Bank of Japan, which didn't participate in the move, said it supported the action. Switzerland also took part. Separately, China's central bank lowered its key one-year lending rate by 0.27 percentage point.

Today's decision follows a global meltdown that sent U.S. stock indexes heading for their biggest annual decline since 1937; Japan's benchmark today had the worst drop in two decades. Policy makers are also aiming to unfreeze credit markets after the premium on the three-month London interbank offered rate over the Fed's main rate doubled in two weeks to a record.

``They are throwing the kitchen sink in to try to find stability,'' said Gregory Miller, chief economist at SunTrust Banks Inc. in Atlanta. ``They are clearly trying to get the transmission started again'' after a freeze-up of money markets.

The Fed reduced its benchmark rate to 1.5 percent. The ECB's main rate is now 3.75 percent; Canada's fell to 2.5 percent; the U.K.'s rate dropped to 4.5 percent; and Sweden's rate declined to 4.25 percent. China cut interest rates for the second time in three weeks, reducing the main rate to 6.93 percent.

Official Statement

``The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability,'' according to a joint statement by the central banks. ``Some easing of global monetary conditions is therefore warranted.'' ...

In more typical market conditions, stocks rally when a Fed chief indicates he'll reduce rates. Now, Bernanke's message may have less power because traders already anticipated for weeks that policy makers would need to make that move, and because of rising concern even rate cuts may do little to immediately help banks scrambling to reduce their vulnerability to loan losses.

``In normal times, a rate cut would have a positive effect,'' Gary Schlossberg, senior economist at Wells Capital Management in San Francisco, said yesterday. ``What's troubling the market'' is concern about ``the solvency and losses of major institutions. The market is uneasy because it doesn't have a lot of information on what the depth of those losses will be.''

Charts in the Babson Style for Mardi Sanglant 7 October 2008

The US Dollar Long Term Chart and Four Scenarios

Current Situation


Scenario 1: Failure at the Neckline with a backtest and swift decline


Scenario 2: Complex Double Top at Neckline


Scenario 3: A High that Stresses the 83 Pivot Point.


Scenario 4: The Pivot is Exceeded and 84 is Taken Out With at Least Two Weekly Closes

The Fed Signals Rate Cut; Remains In Close Contact with Treasury as Banking Crisis Deepens

The Fed is trying to use all the tools at their disposal to ensure the safety of the banking system.

A rate cut at this point does nothing in particular and is largely cosmetic given the special facilites and the new rate cut 'floor' from the payment of interest on reserves.

However, Ben is going to keep throwing junk at the market until it calms down. Or breaks down.

Bernanke Signals Fed May Cut Rates as Crisis Deepens
By Scott Lanman

Oct. 7 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke signaled policy makers are ready to lower interest rates as the credit freeze poses an escalating danger to the economy.

The world financial system is under ``extraordinary stress'' and history shows that severe instability ``can take a heavy toll on the broader economy if left unchecked,'' Bernanke said in a speech in Washington. ``The Federal Reserve will need to consider whether the current stance of policy remains appropriate.''

Today's remarks indicate the central bank's record loans to unblock credit markets are insufficient to prevent a deeper economic downturn. Investors increased bets the Fed will cut its main rate by as much as three-quarters of a point this month after stock indexes slumped to four-year lows and premiums on loans between banks climbed to a record.

``They are going to cut interest rates,'' said Mark Vitner, a senior economist at Wachovia Corp. in Charlotte, North Carolina. ``It does not make sense to wait.''

Stocks slid after Bernanke's remarks failed to assuage investors' concerns about deteriorating financial markets, with the Standard & Poor's 500 Stock Index losing 3.6 percent to 1,019.34 at 3:30 p.m. in New York.

Minutes of the Federal Open Market Committee's Sept. 16 meeting, released in Washington today, showed that some officials then saw a need for a rate cut should there be a ``significant worsening of the growth outlook...''

Wall Street's Shadow Market: "Criminal Neglect and Incompetence"

A twelve minute video segment in which Steve Kroft of 60 Minutes looks at some of the arcane Wall Street financial instruments that have magnified the economic crisis.

"Criminal neglect and incompetence" says Jim Grant.

"Just another wash and rinse from the Other People's Money crowd" says Jesse. "Being a narcissistic sociopath means never having to say you're sorry."

Gold May Double in Price as Paper Gold Trade Collapses

Within the gold complex, there is a disparity between the paper market and the physical market, notes Jurg Kiener, CEO of Swiss Asia Capital. He tells CNBC's Maura Fogarty & Rebecca Meehan that if the paper market collapses, gold prices may double very quickly.

Gold Prices May Spike as Paper Gold Market Collapses - CNBC

Not With a Bang But a CPFF: Fed to Buy Unsecured Commercial Paper

One way to clear the sewer pipe is to buy the waste and toxic sludge and back your currency with it.

Weimariffic.

Federal Reserve Bank Press Release
October 7, 2008 9:00 a.m. EDT

The Federal Reserve Board on Tuesday announced the creation of the Commercial Paper Funding Facility (CPFF), a facility that will complement the Federal Reserve's existing credit facilities to help provide liquidity to term funding markets. The CPFF will provide a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle (SPV) that will purchase three-month unsecured and asset-backed commercial paper directly from eligible issuers.

The Federal Reserve will provide financing to the SPV under the CPFF and will be secured by all of the assets of the SPV and, in the case of commercial paper that is not asset-backed commercial paper, by the retention of up-front fees paid by the issuers or by other forms of security acceptable to the Federal Reserve in consultation with market participants. The Treasury believes this facility is necessary to prevent substantial disruptions to the financial markets and the economy and will make a special deposit at the Federal Reserve Bank of New York in support of this facility.

The commercial paper market has been under considerable strain in recent weeks as money market mutual funds and other investors, themselves often facing liquidity pressures, have become increasingly reluctant to purchase commercial paper, especially at longer-dated maturities. As a result, the volume of outstanding commercial paper has shrunk, interest rates on longer-term commercial paper have increased significantly, and an increasingly high percentage of outstanding paper must now be refinanced each day.

A large share of outstanding commercial paper is issued or sponsored by financial intermediaries, and their difficulties placing commercial paper have made it more difficult for those intermediaries to play their vital role in meeting the credit needs of businesses and households.

By eliminating much of the risk that eligible issuers will not be able to repay investors by rolling over their maturing commercial paper obligations, this facility should encourage investors to once again engage in term lending in the commercial paper market. Added investor demand should lower commercial paper rates from their current elevated levels and foster issuance of longer-term commercial paper. An improved commercial paper market will enhance the ability of financial intermediaries to accommodate the credit needs of businesses and households.

Another G8 Moves to Deploy Troops Domestically

Hot on the heels of the domestic deployment of the US military for potential humanitarian purposes, Germany joins in with a move to change its constitution and deploy its military domestically 'just in case.'

Perhaps if they gave the military a more pleasing uniform for domestic deployment. An earth color would be good, a crowd-pleasing shade of brown.

Germany to allow domestic military deployment
By DAVID RISING
October 6, 2008

BERLIN (AP) — Germany's governing coalition partners want to change the constitution to allow for military deployment within the country if needed to combat terrorism, officials said Monday.

The proposal would allow use of the military only if police are overwhelmed and cannot properly respond to a situation themselves.

"It is not to be used generally, but only in very specific cases," Interior Ministry spokeswoman Daniela-Alexandra Pietsch said.

The center-left Social Democratic Party — which makes up half of Chancellor Angela Merkel's coalition — had been opposed to the proposal but agreed late Sunday after working out an agreement that includes strict guidelines for domestic deployment.

"We're talking only about emergency help," Social Democrat parliamentary leader Peter Struck said. For example, the navy could be called to help in a situation where police maritime patrols were not sufficient, he said.

The proposal will now go to Merkel's Cabinet and then to parliament for approval.

Given Germany's militaristic past, many are hesitant to expand the role of soldiers domestically. Currently, the German military can be deployed within the country only in times of war, or to help with emergencies or natural disasters.

Following the announcement of the new proposal, opposition Left Party lawmaker Petra Pau accused the government of seeking to violate a constitutionally dictated division "between army, police and secret services."

"The military has no role domestically for historic, political, legal and professional reasons," Pau said.

Germany used Tornado fighter jets to secure airspace during last year's Group of Eight summit, while troops helped provide support to police controlling demonstrations.

Merkel's government at the time defended the deployment as necessary to secure the area and provide technical and logistical support for police. But the opposition Greens party criticized it as "a creeping breach of the constitution."

Unbridled Monetization - We're All at the Discount Window Now

In 1972 Richard Nixon took the US off the gold standard. It appears that Bush, Paulson and Bernanke are going to take us off the full faith and credit standard.

Why not? After all, our money is only a piece of paper, like the Constitution.

Full faith and credit?

We have lost our faith in the markets and freedom, and our credibility is in a shambles.

Oh, does that seem too severe? Watch, and be amazed.

NY Times
October 7, 2008
Fed Considers Plan to Buy Companies’ Unsecured Debt
By EDMUND L. ANDREWS and MICHAEL M. GRYNBAUM

WASHINGTON — As pressure built in the credit markets and stocks spiraled lower around the world on Monday, the Federal Reserve was considering a radical new plan to jump-start the engine of the financial system.

Under a proposal being discussed with the Treasury Department, the Fed could buy vast amounts of the unsecured short-term debt that companies rely on to finance their day-to-day activities, according to officials familiar with the discussions. If this were to happen, the central bank would come closer than ever to lending directly to businesses.

While the move would put more taxpayer dollars at risk, it underscores the growing sense of urgency felt by policy makers in a climate where lending has virtually dried up.

The plan was being formulated amid cascading losses in global stock markets, as the banking crisis spread across Europe and investors feared dire consequences for the world economy. The Dow Jones industrial average fell as much as 800 points before a late recovery, finishing down 369.88, below 10,000 points for the first time since 2004.

Even before bankers on Wall Street reached their desks, European stocks were plunging. The Russian stock market dropped 19.1 percent, the biggest decline since the fall of the Soviet Union. Major indexes in London and Frankfurt lost more than 7 percent; stocks in Paris fell by 9 percent. Stocks in Latin America and other emerging economies took their worst collective tumble in a decade.

Volatility reached the highest level in two decades, and oil prices fell below $90 for the first time since February.

The contagion showed no signs of stopping when Asian markets opened Tuesday morning as the Nikkei index of Japanese stocks fell 3 percent and the Hang Seng index of stocks in Hong Kong fell 5 percent.

“There is a growing recognition that not only has the credit crunch refused to be contained, it continues to spread,” said Ed Yardeni, an investment strategist. “It’s gone truly global.”

Investors are worried about what the evaporation of credit will do to an already-weakened global economy.

In the United States, consumers appear to be significantly curbing spending; last month, employers cut more jobs than any month in five years. The $6 decline in oil prices, which settled at $87.81 a barrel, stemmed in part from fears that demand will slacken in the face of a deteriorating economy.

The Fed plan is intended to renew the flow of credit on which the economy depends. Under its plan, the central bank would buy unsecured commercial paper, essentially short-term i.o.u.’s issued by banks, businesses and municipalities.

The market for that kind of debt has all but shut down in the last week, with many major corporations unable to borrow for longer than a day at a time, as banks become more fearful of giving out cash. The volume of such debt totaled about $1.6 trillion as of Oct. 1, down 11 percent from three weeks earlier.

These credit fears persisted over the weekend despite the $700 billion bailout package that Congress approved last week.

The cost of borrowing from banks and corporations remained high on Monday, increased in part by a series of high-profile bank bailouts in Europe, where governments scrambled to save several major lenders from collapse.

The United States government appears to be pressing ahead with other radical efforts to shore up the financial system, even wading into corners of the markets where it has rarely interfered.

Buying commercial paper could open the Fed to difficult conflicts of interest, because it would be juggling the goals of protecting its investment portfolio with its traditional goals of promoting stable prices and low unemployment.

“The Federal Reserve really would become the buyer of last resort, trying to jump-start the commercial paper market by taking on credit risk,” said Vincent Reinhart, a former top Fed official who worked under Alan Greenspan, a former Fed chairman, and Ben S. Bernanke, the chairman now.

The Federal Reserve has already stretched its resources to the limit by providing hundreds of billions of dollars in short-term loans to banks, Wall Street firms and money market funds.

On Monday, the Fed announced that it would once again redouble one of its key emergency lending programs, increasing the size of its Term Auction Facility to $600 billion, from $300 billion. On top of that, the central bank plans to provide an additional $300 billion to banks to meet their end-of-the-year cash needs.

To pay for its burgeoning responsibilities, the Fed has no choice but to keep printing more money. To prevent that flood of new money from reducing the central bank’s overnight interest rate to zero, the Fed also announced on Monday that it would start paying interest on the excess reserves that banks keep on deposit at the Fed.

Paying interest on reserves allows the central bank to set a floor on interest rates and retain at least some control over monetary policy.

In its announcement on Monday, the Fed said it would pay an interest rate of 1.25 percent —three-quarters of a point below its target of 2 percent for the overnight Federal funds rate.

But the possibility of propping up the vast market for commercial paper could represent an undertaking even broader than the Treasury Department’s plan to buy as much as $700 billion in mortgage-backed securities.

In statements on Monday morning, the Federal Reserve and the Treasury said they were “consulting with market participants on ways to provide additional support for term unsecured funding markets.”

By referring to “unsecured funding markets,” policy makers signaled that they wanted to intervene directly in the credit markets. Officials said on Monday evening that they wanted to finish a plan as quickly as possible, perhaps as early as Tuesday.

But the effort is fraught with legal complexities. Though the Federal Reserve has sweeping power to create money and lend it out, experts said it was normally prohibited from buying assets that could lose money.

One way around that legal limitation would be to provide money to a separate legal entity that would do the buying and investing on the Fed’s behalf. That would be similar to Maiden Lane Funding L.L.C., a special-purpose entity that officials created last spring to hold $29 billion in hard-to-sell securities from Bear Stearns.

But so far, the myriad efforts by government regulators to shore up confidence have seemed to yield little relief among investors, some of whom believed the actions have taken on a haphazard air.

“People are slowly but surely coming to the realization that playing ‘Whack-a-Mole’ with each of these issues as they arise, on an ad hoc basis, doesn’t get the job done,” said Max Bublitz, chief strategist at SCM Advisors, an investment firm in San Francisco...

The sharp slide on Monday came despite assurances from President Bush that it would “take a while to restore confidence to the financial system.”

“We don’t want to rush into this situation and have the program not be effective.”

Will the Fed Cut Rates by 75 Basis Points? They May Already Have.

Bloomberg
Fed Sets Floor Below Rate Target, Engineering `Stealth' Cut
By Scott Lanman

Oct. 6 (Bloomberg) -- The Federal Reserve may have cut borrowing costs today without actually saying so.

The central bank used authority granted under last week's financial-rescue legislation to effectively set a floor under its main interest rate that's lower than the 2 percent target set by policy makers last month. The Fed may now pay interest on bank reserves while it floods financial markets with liquidity, pushing down the overnight lending rate by about 0.75 percentage point to 1.25 percent.

``Absolutely, it's a stealth easing,'' said John Ryding, founder and chief economist of RDQ Economics LLC in New York and a former Fed researcher.

The announcement, and a Fed decision to double the auction of cash to banks to as much as $900 billion, failed to avert a 3.9 percent decline today in the Standard & Poor's 500 Index. The index has tumbled 28 percent this year even as the central bank has expanded credit more than at any time in seven decades, including a 3.25 percentage-point cut in the main rate during the past 13 months.

``The problem is it's an easing that's trying to offset a massive tightening in the market. Net-net, are we easier in policy? In some sense the answer is no,'' Ryding said.

By paying interest on reserves, the Fed can pump more cash into the financial system without worrying the overnight lending rate will drop to zero at the end of each day as banks withdraw excess reserves. The move doesn't preclude a further reduction in the target rate by the Federal Open Market Committee.

Biggest Surprise

The 0.75-point spread, announced today, was the biggest surprise in the Fed's moves to implement its authority under the financial-rescue legislation, economists said. The Fed set the new rate Oct. 3, the same day the House approved the bill and President George W. Bush signed it into law.

The FOMC, composed of the Washington-based governors and 12 Fed regional-bank presidents, meets about every six weeks to set a target for the overnight lending rate, which the New York Fed tries to achieve by buying and selling Treasury securities from bond dealers.

The Fed requires banks to keep a level of reserves at the central bank. On those funds, the Fed will pay a higher rate equal to the average target rate over a one or two-week period less 0.10 percentage point. For excess reserves, the rate is the lowest FOMC target over a period less 0.75 percentage point.

The Fed said it would raise or lower the spread so the New York Fed trading desk can keep the federal funds rate near policy makers' target ``based on experience and in response to evolving market conditions.''

The central bank didn't set a meeting schedule for discussing the reserve-interest rate.

Channeling Cash

The federal funds rate will probably trade below the FOMC's target as long as the Fed is channeling cash into the banking system, thereby prompting financial institutions to park their funds with the central bank each day. The rate may trade closer to the policy target when the credit crisis eases and the Fed begins to withdraw its emergency lending.

Still, a ``soft federal funds rate does not provide a perfect substitute for a cut in the target,'' former Fed Governor Laurence Meyer and former Fed researcher Brian Sack, now with Macroeconomic Advisers LLC in Washington, said in a research note to clients.

The Fed said today ``the rate on excess balances should be set sufficiently low to provide an incentive for eligible institutions to trade funds in excess of required reserve balances and clearing balances in the federal funds market.'' The rate should also discourage banks from trading funds ``far below'' the federal funds rate.

The interest payments begin Oct. 9.

Start Lending

A higher rate on payments may give banks too much of an incentive to keep funds at the central bank, said Peter Hooper, chief U.S. economist at Deutsche Bank Securities Inc. in New York and a former Fed official. ``The whole objective here is to get banks to start lending again, and the more you pay them to hold on to their reserves, the less likely they'll be willing to lend.''

Even if the funds rate trades below the 2 percent target, it doesn't mean the FOMC is deploying a new policy tool by paying interest on reserves, said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. ``I doubt the FOMC will want to give up their Fed funds rate target as the key indicator of monetary policy.''

Plus ça change, plus c'est la même chose

Charts for Bloody Monday 6 October 2008

The Bear Market of 2007 - 2008 To Date

The Gold Spread Widens

Its hard to miss the disconnect between 'spot gold' prices, which are based off the gold futures front month adjusted for time, and the market prices for physical gold in any reasonable quantity and form.

What does this imply?

First, there must be forced selling of paper gold probably in hedge funds being attacked by bear raids from the other large hedge funds and bank trading desks as we noted in story about Goldman Sachs last week.

Secondly, the central banks are known to be selling and leasing gold into rallies, by the data and by their own admission on numerous occasion, to hold down the price of gold. Why? Because in their own words it is a signal of fear, and so the theory goes, by turning off the signals of fear you prevent the fear from becoming unmanageable.

But that is primarily a rationale, an excuse that ordinarily reasonable and lawful men use to justify unreasonable and unlawful actions to themselves and to a court of review in some imaginary future they play out in their minds.

So as such the spread between the price of paper and physical gold is a measure of the level of public confidence, or a lack thereof, in the ability of the world's central bankers to make a silk purse out of a sow's ear, and to keep the world marvelling at its craftsmanship and desirability of their rainments, as they prance naked through the streets.

"We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore, at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The U.S. Fed was very active in getting the gold price down. So was the U.K."
Eddie George, Bank of England, September 1999

Or as the great stock market bear Daniel Drew once said in another context:

He who sells what isn't his'n
Must buy it back, or go to prison.

Hope to see you and your friends at some future financial Nuremburg, Sir Alan and Herr Doktor Bernanke.

Panic Selling Hits the World Markets

VIX jumped to record levels, although it is important to note that VIX is a 'replacement indicator' and has only an 18 year history. VXO, its predecessor, jumpt to 172 the day after the Crash of 1987.

Typically a VIX at these levels signals at least a short term capitulation by the bulls and a short term bottom is made.

The move lower is often exaggerated by margin calls and stop loss selling. Keeping an eye on the various trend charts helps one to maintain their bearings during a selling storm.

Its on the bounce if it comes where we see the character of the market. A dead cat bounce will take the SP futures back up to 1055, and a firm technical bounce is to the top of the short term trend channel which is around 1100. An important midpoint resistance is 1068.

Preserving capital is the order of the day, so try not to overtrade or outguess the market. The trend is still down until we see the market tell us otherwise.

VIX Jumps to Record, Topping 50, on Concern About Global Growth
By Jeff Kearns

Oct. 6 (Bloomberg) -- The benchmark index for U.S. stock options jumped to the highest in its 18-year history on concern that the global economic slowdown will continue on further credit-market losses.

The VIX, as the Chicago Board Options Exchange Volatility Index is known, rose 13 percent to 50.93 at 10:09 a.m. in New York. The index measures the cost of using options as insurance against declines in the Standard & Poor's 500 Index, which declined 3.6 percent to a four-year low of 1,060.15.

``It's scary the way the market is reacting,'' said Bud Haslett, director of option analytics at Miller Tabak & Co. in New York. ``The downturn in equity prices is broad-based, it has big repercussions for our economy and it's being experienced worldwide.''

The most-active contracts tied to the VIX were October 35 calls, which rose 30 percent to $5.18. The index has averaged 24.36 this year. November VIX futures rose 1.5 percent to 32.65.

The index eclipsed last week's record close of 46.72 on Sept. 29 when Congress voted against the Bush administration's bailout for financial companies, sending stock benchmarks down the most in two decades.

Before last week the VIX had topped 40 during four prior periods: the aftermath of WorldCom Inc.'s bankruptcy in 2002, the September 2001 terrorist attacks, Long-Term Capital Management's collapse in 1998 and the Asian financial crisis in 1997. The record intraday high of 49.53 for the VIX, whose history extends back to 1990, was set on Oct. 8, 1998.

Calls give the right to buy a security for a certain amount, the strike price, by a given date. Puts convey the right to sell. Investors use options to guard against fluctuations in the price of securities they own, speculate on share-price moves or bet that volatility, or stock swings, will increase or decrease.

The VXO Volatility Index, a predecessor to the VIX that reflects the price of using options on the S&P 100, jumped to the highest since the days following the 1987 crash, adding percent 57.65. That index peaked at 172.79 a day after the crash.

6 Oktober: Blutzeuge

Bankenputsch

Bloomberg
German Government Leads Hypo Real Estate Rescue Talks
By Hellmuth Tromm and Oliver Suess

Oct. 5 (Bloomberg) -- The German government led talks to salvage a 35 billion-euro ($49 billion) bailout plan for Hypo Real Estate Holding AG after the ailing property lender said commercial banks withdrew their support late yesterday.

``I'm pretty shocked that this bank's management has revealed another liquidity gap of an unforeseen size,'' German Finance Minister Peer Steinbrueck said in Berlin today in comments broadcast by ARD television. ``We will have to start over again from last weekend's meetings. Hypo Real Estate has to be stabilized otherwise the damage would be unpredictable.''

The government and the Bundesbank have repeatedly said that Hypo Real Estate, the nation's second-biggest property lender, is too big to fail. The negotiations to save it occur as the Belgian government is attempting to rescue Fortis, that nation's largest financial-services company, after a previous bailout also went awry amid the intensifying global credit crunch.

Steinbrueck's comments ``indicate that in the end it will boil down to a bailout,'' said Kerstin Vitvar, a Munich-based analyst at UniCredit SpA who has a ``sell'' rating on the shares. ``Shareholders will end up almost empty-handed.''

The government won't raise the size of its pledged guarantee, newswire Deutsche Presse-Agentur reported, citing Volker Kauder, parliamentary chairman of Chancellor Angela Merkel's Christian Democrats. Private banks promised to contribute their share to a rescue today, he added, without elaborating, DPA said.

Government Guarantee

The German government offered today to fully guarantee personal savings accounts in a bid to ease concerns about the stability of the nation's banking system amid the global credit crunch. Until now, private savings accounts, including the accounts of small, privately held companies, have been guaranteed by 180 banks in Germany. This covers 90 percent of an account's balance to a maximum of 20,000 euros.

Hypo Real Estate's shares have declined 79 percent this year, valuing the Munich-based company at 1.6 billion euros.

Hypo Real Estate's financing needs exceeded the bailout plan guarantee, German newspaper Die Welt reported yesterday, citing unidentified people in the finance industry. It will need 20 billion euros by the end of next week and 50 billion euros by the end of the year, according to the newspaper. As much as 100 billion euros may be needed to shore up the bank's finances by the end of 2009, Die Welt said.

`Absurd' Report?

``A financing need of 100 billion euros as reported by Die Welt is absurd from today's perspective,'' Hypo Real Estate spokesman Hans Obermeier said in a telephone interview today.

Heiner Herkenhoff, a spokesman for the German BDB banking association, declined to comment on the figures. Bundesbank spokesman Christian Burckhardt said Bundesbank President Axel Weber is participating as an adviser to the government in the discussions.

``The financing situation has further deteriorated over the past week because of the speculation about a possible wind-down of the company,'' Obermeier said.

In the failed rescue plan, the Bundesbank planned to help contribute 20 billion euros to a credit line for Hypo Real Estate, while a group of unidentified banks agreed to provide another 15 billion euros. The plan called for Hypo Real Estate to use 42 billion euros in assets, mostly debt owed by government borrowers, as collateral.

Funding Squeeze

The lender sought the lifeline after its Dublin-based Depfa Bank Plc unit, which specializes in government lending and depends on now-closed money markets for funding, failed to get short-term funding amid the credit crunch.

Failure to provide the rescue package ``may have triggered unpredictable consequences for the German financial and economic system similar to those of the collapse of U.S. financial group Lehman Brothers,'' the Bundesbank and BaFin said in a joint letter dated Sept. 29 and addressed to Finance Minister Steinbrueck.

``If we had not acted, the bank's crisis wouldn't have just hurt the financial sector, but its network of business would have hurt the real economy, in Germany and beyond,'' Steinbrueck said the same day.

Hypo Real Estate, run by Chief Executive Officer Georg Funke, 53, since it was spun off from HVB Group in 2003, reported a surprise 390 million-euro writedown on collateralized debt obligations on Jan. 15. The company said Aug. 13 that second- quarter pretax profit plunged 95 percent because of further markdowns on debt-related investments...

SEC Says Short Selling Ban Ends Wednesday Evening 8 October

Reuters
SEC short-selling ban to expire Wednesday night
Fri Oct 3, 2008 5:34pm EDT

WASHINGTON (Reuters) - The U.S. Securities and Exchange Commission announced on Friday its ban on financial stock short-selling will expire at 11:59 p.m. ET on Wednesday, October 8.

Earlier in the week, the SEC said the ban would expire three business days after a $700 billion federal bailout bill was enacted by Congress. The emergency ban was part of a series of government measures designed to restore confidence in battered markets and the ailing financial system.

Charts in the Babson Style for the Week Ending 3 October 2008

Gangs of New York

Edmund Burke "Among a people generally corrupt liberty cannot long exist."

Hedge funds acting in a predatory manner towards other funds is like a dog bites man story.

However there are a few new things in this story worth pointing out.

According to this report Goldman Sachs is disclosing the most largely held positions of some hedge funds and distributing the list to others with the objective of fomenting a group effort in shorting them, artificially driving down the price, creating more forced redemptions and losses for the fund investors.

Can you imagine if some other company was doing that? With the financial stocks?

Think the elimination of the uptick rule and the widespread toleration of naked shorting is an accident?

The second point of interest is the targeting of specific sectors such as emerging markets, mining, and energy stocks.

What this will accomplish, beside the obvious short term racketeering, is to exaggerate the downward move in some prior favorites, setting up some potentially lucrative short covering rallies when the stocks reach ridiculous valuations on the forced selling and targeted shorting, after the trading banks cover their shorts and buy in for pennies on the dollar.

And don't think for a minute that Goldman and their ilk does not have a 'most shorted' list that it is circulating around to its own select group of traders to target those buys.

We still wonder if some of the Wall Street banks are using their privileged information to short squeeze the European banks who they loaded up with fraudulent debt and are now in dire need of short term dollar liquidity. This is a classic rip-their-face-off after you kick them maneuver.

Its like setting a fire in a crowded theatre after having charged high admission prices for a musical production that did not exist, and then having thugs at all the exits to charge even stiffer fees to leave the building.

And watch to see who benefits the most from this bailout plan and what they do with your money.

The Financial Times
Hedge funds prey on rivals
By Henny Sender in New York
October 2 2008 23:34

Hedge funds are embracing trading strategies designed to profit from the unwinding of large positions by their competitors, market participants say.

The increasingly cannibalistic activity stems from the wave of redemptions hitting hedge funds.

Because so many firms hold similar positions, forced selling by one in response to redemptions can have ripple effects, forcing other funds to sell.

More nimble hedge funds have sought to profit from the dynamic by taking short positions in securities known to be widely held by rivals. Goldman Sachs publishes a list of 50 “very important” hedge fund positions.

In its Wednesday update Goldman said: “Forced selling to cover redemptions and deleveraging . . . has put downward pressure on selected stocks.”

A favourite strategy of hedge fund managers during the bull market – mimicking the positions of others – has been turned on its head, Goldman said. “Buying the most concentrated stocks . . . has been a poor strategy during the current bear market.”

The announcement last month that Ospraie Management was winding down its flagship fund encouraged predatory activity.

One Hong Kong-based manager sent a note urging friends to short emerging and mining shares favoured by Ospraie.

Some hedge fund managers say they have been monitoring the positions held by Ospraie, if only to be ready if other funds with the same positions are forced to liquidate their holdings.

“I certainly wouldn’t want to be long any of these companies,” said one. “I want to lock up six-month borrowing on these shares and short them.”

Ospraie’s founder, Dwight Anderson, told investors on September 4 that 60 per cent of its losses in July and August stemmed from equities, mainly in energy and mining.

Its largest position was in Xto Energy, which had dropped from $73.74 in June to just under $43 and was among the 20 most widely held stocks by hedge funds, according to Goldman, Mr Anderson said.

Firms are also monitoring Deutsche Bourse because of a big position in its shares held by Atticus, which has told investors in its main hedge fund it is down 25 per cent so far this year.

Greenlight Capital, the hedge fund run by David Einhorn, told investors in a letter on Wednesday it was down 17 per cent so far this year, in part because “investors have been unwinding trades that they otherwise believe make sense”.

Greenlight said it would “try to be opportunistic” in response.

Waves of Credit Default Swaps Incoming

Have you wondered why the Treasury asked for a $700 Bn emergency package with the full force of the Fed behind them, and gave the Congress less than a week to deliver it?

Either these fellows have lost their nerve or the markets are riding to a fall, and it could be terrific.

We've been looking for some event, something that would have created such an extraordinary set of actions as we have seen in the past few days.

This just might be it. Special thanks to Yves Smith for flagging it.

Time to start settling those Credit Default Swaps for Fannie and Freddie (Oct. 6), Lehman Brothers (Oct. 10) and Lehman Brothers (Oct 23).

LIBOR is eight standard deviations from the norm, because the banks don't know who is holding what in their cards, but there might be some Aces and Eights in there. The TED spread is at an all time record high.

An insurance company is said to be heavily exposed.

Do you need to buy a vowel? Let's hope we get lucky.

Brace for impact.

Postscript 4 October - Given that the Congress has now passed the 'Economic Stabilization Act' and Hank and Ben have a fresh roll of walking around money, we'd like to think that a crisis can be averted on Monday. Obviously they have seen this coming and have not only a plan, the willing cooperation of the holders of the swaps, but also now sufficient taxpayer money to persuade certain institutions to accept settlements that are 'reasonable.'

Let's watch carefully how the Treasury acts this week, as best we can, for it will speak volumes.


The Financial Times
Settlement day approaches for derivatives
By Aline van Duyn in New York
October 1 2008 03:00

The $54,000bn credit derivatives market faces its biggest test this month as billions of dollars worth of contracts on now-defaulted derivatives on Fannie Mae, Freddie Mac, Lehman Brothers and Washington Mutual are settled.

Because of the opacity of this market, it is still not clear how many contracts have to be settled and whether payouts on the defaulted contracts, which could reach billions of dollars, are concentrated with any particular institutions.

According to dealers, insurance companies and investors such as sovereign wealth funds, which are widely believed to have written large amounts of credit protection through credit default swaps on financial institutions, could have to pay out huge amounts.

"There is a lot at stake," said an executive at one big dealer. "This is a crisis time, and if these auctions do not go well, or if the amounts investors and dealers have to pay is seen as not being fair, it could have further negative repercussions on the CDS market."

The "auction season" starts tomorrow, when the International Swaps and Derivatives Association has scheduled an auction for Tembec, a Canadian forest products company. This is followed by Fannie Mae and Freddie Mac auctions on October 6. Then, Lehman is settled on October 10, and Washington Mutual is scheduled for October 23.

Even though it is possible that some participants in the credit derivatives market will have to make large payouts, the flipside is there could also be big winners. For every loss in credit derivatives, there is a gain.

The amount of contracts outstanding that reference Fannie Mae and Freddie Mac alone is estimated to be up to $500bn. The default was triggered under the terms of derivatives contracts by the US government's seizure of the mortgage groups, even though the underlying debt is strong after the explicit government guarantee.

The CDS contract settlement could result in billions of dollars of losses for insurance companies and banks that offered credit insurance in recent months. The recovery value will be set by auction. Usually, the bond that is eligible for the auction that trades at the lowest price - the so-called cheapest-to-deliver - is the one that sets the overall recovery value for the credit derivatives.

In the Lehman case, numerous banks and investors have already made losses due to exposure to Lehman as a counterparty on numerous derivatives trades. The auctions next week are for credit derivatives which have Lehman as a reference entity. There are likely to be fewer contracts outstanding than for Fannie Mae and Freddie Mac because Lehman was not included in many of the benchmark credit derivatives. However, exposure remains unclear, which is one concern that regulators now have about the credit derivatives market.

Lehman's bonds have been trading between 15 and 19 cents on the dollar, meaning investors who wrote protection on a Lehman default will have to pay out between 81 and 85 cents on the dollar, a relatively high pay-out.

The previous biggest default in credit derivatives was for Delphi, the US car parts maker that went bankrupt in 2005 and which had about $25bn of CDS.

TED Spread Soars to a New Record - Symptom of the EuroDollar Squeeze?

There is a real possibility that the TED Spread blowout is not an artifact of risk per se, but a symptom of the US dollar squeeze in Europe.

US Dollar Rally and Deflationary Imbalances Overseas

TED is an acronym for Treasury and EuroDollar. A Spread is just the difference or 'distance' between one thing and another.

Eurodollars are bank deposits denominated in U.S. dollars but held at locations outside of the U.S.

Initially, the term only referred to dollar deposits in London but has been expanded to include dollar deposits at any offshore location.

T bills are US Treasury debt of short duration are considered to be risk free.

TED Spread = Yield on Eurodollar deposits - Yield on T Bills

The TED Spread is the difference between U.S. Treasury bill yields and yields for Euro deposit contracts of the same maturity, generally three months.

Demystifying the TED Spread

The Dollar Rally and Deflationary Imbalances in the US Dollar Holdings of Overseas Banks

Dollar Assets and Liabilities in the International Banking System

In reading the Assets and Liabilities reports of the Bank for International Settlements (BIS), we have been examining the holdings of the reporting banks with respect to the changes in US dollar denominated assets and liabilities.

The Eurodollar had been a component of M3 and was discontinued by the Fed in 2006.



When a multinational company deposits US dollar receipts from an export business in their domestic banks those deposits are frequently held in dollars. Think of it as a short term Certificate of Deposit denominated in US dollars.

Overseas banks may take those customer dollar deposits (liabilities) and place them in dollar assets such as CDO tranches and interest yielding debt instruments which are held as dollar assets on their books.

If those dollar assets decline because of a financial event as we are seeing today, the depositors may choose to withdraw their dollar deposit from the bank as they mature.

This places the bank in an awkward position since the corresponding assets have deteriorated in value, but the nominal value of the certificate of deposit liability remains the same with the requisite interest accrual.

As a result, a demand for dollars can be generated in the foreign country that is artificial but very real in terms of day to day banking operations.

This is the 'artificial dollar short' and monetary deflation about which so many have spoken. It is specific to Europe in this case because the ECB cannot print dollars, it can only obtain them from the Federal Reserve.

It has more of the characteristics of a supply disruption or a liquidity crunch in that demand is temporarily exceeding supply because of an exogenous event.



The central banks arrange swap operations, such as between the Fed and the ECB, to exchange Euros and Dollars to maintain the liquidity of their domestic operations.

If handled inefficiently or under event duress this could have the effect of creating a short term currency imbalance, increasing the cost of euro-dollar swaps, and driving the 'price' of the dollar higher in the short term, and perhaps quite sharply if the event is of sufficient magnitude.

As the imbalances are resolved the 'fundamentals' should reassert and relative values among currencies revert to the mean.

But in the short term a significant amount of dislocation and distress could occur in the arbitrage and banking markets.

We believe that we are in such an occasion now, as the European banks had been slow to markdown their degraded US assets, and had relied on swaps written by companies such as AIG which have failed, leaving the banks a day late and literally 'a dollar short.'

The resulting sharp rally in the US dollar is therefore likely to be an anomaly which will correct, and perhaps quite sharply, once the effect of the short term imbalances dissipates.



We do not have access to a Bloomberg terminal but would speculate that EUR.USD swaps have risen higher recently as the withdrawal pressures in the European banking system increased. This has little to nothing to do with the relative prospects for the fundamentals, but are what we like to refer to as 'the technical trade.' Real enough to the trader, but transitory.

Have you missed the exquisite irony that it was the US banks that sold the foul debt assets to the overseas banks that are now driving the demand for US dollars. And the US banks are quite possibly squeezing their foreign countrparts in the process?

We wonder if the ECB and other Central Banks agree with this and therefore understand that decreasing the value of the US dollar relative to their currency might be an effective policy response to some liquidity problems in their domestic banking system.

They may already be attempting to accomplish this, given the recent increases in the Fed swaplines with their foreign central bank counterparts. But they may also be getting squeezed by some multinational trading banks and funds.

Although we have been discussing this using the Euro as an example, the situation would apply to any national banking system which has been long deteriorating US debt and the monetary dollar fruits of the US current account deficit and their own mercantilism.

Don't confidence men generally rely on the gullibility and greed of their marks? We doubt the economic hit men are missing this opportunity to profit from a position of relative advantage.

No wonder some nations are complaining that they need a new basis for international trade not based on the dollar.

"It's good to be the King."

'Time of Dominance of One Economy, One Currency is Over'

The Economic Times of Asia
'Time of dominance of one economy, one currency is over'
3 Oct, 2008, 0417 hrs IST, PTI

MOSCOW: Apparently referring to the US, Russian President Dmitry Medvedev on Thursday said the time of dominance of "one economy and one currency" is over and called for collective steps to cope with the current financial crisis caused by "financial egoism".

"The problems caused by the global financial crisis have demonstrated that the time of dominance by one economy and one currency has irreversibly become a matter of past," Medvedev said addressing the Russian-German 'St. Petersburg Dialogue' in Russia's former imperial capital.

With German Chancellor Angela Merkel sitting by his side, Medvedev declared that a today not a single nation could alone play the role of a "mega regulator" of the global financial system.

For resolving the current financial crisis, which to a great extent is the product of financial egoism (of the US), there is a need for collective measures," Medvedev said.

Prime Minister Vladimir Putin, battling to insulate the former Communist nation's nascent economy from the global financial crisis, had yesterday blamed the US for showing "irresponsibility".

"We see an inability to take appropriate decisions. This isn't the irresponsibility of particular individuals, it is the irresponsibility of a system that as we know had claims to leadership," Putin said in his televised remarks at the Cabinet meeting yesterday.

Putin, who as the country's chief financial and economic executive has taken several steps to ease the credit crunch by releasing 1.5 trillion roubles and earmarking another 500 million roubles to buy securities to prop bourses, said that Russia could no longer remain unaffected by the "infection" originating from the US.

Discount Window Lending Soars to Another Record

American Banker
Discount Window Borrowing Hits Another Record
By Steven Sloan
October 3, 2008

WASHINGTON — For the third consecutive week, lending through the Federal Reserve Board's discount window continued to soar, hitting a new record on Wednesday when total borrowing reached $409.5 billion.

The new high underscores the industry's struggle to regain its footing during the past week amid a financial crisis that toppled Washington Mutual Inc. and caused regulators to facilitate the sale of Wachovia Corp.

Much of the lending was concentrated in the Fed's backstop for money market mutual funds and the primary dealer credit facility. The Fed said it distributed $152.1 billion — more than twice the level a week earlier — through a program announced last month that lends against asset backed commercial paper held by the funds.

Meanwhile, borrowing through the primary dealer credit facility, established in March to lend to investment banks, jumped 38.7%, to $146.6 billion. Though major standalone investment banks no longer exist on Wall Street, the facility helps Goldman Sachs and Morgan Stanley, which are now bank holding companies, and the investment bank units of commercial institutions.

Traditional lending in the form of primary credit to commercial banks also reached a new high on Wednesday, when borrowing increased 26%, to $49.5 billion.

The Fed also said American International Group Inc., which the central bank bailed out last month, had tapped $61.3 billion of its $85 billion loan. A week ago, the insurance giant had borrowed $44.6 billion of the loan.

For the first time in three weeks, there was no lending to weak banks in the form of secondary credit and the remaining $42 million was in the form of seasonal credit to support banks in rural or resort regions.

The Fed's loans are carrying increasingly longer maturity terms. While the vast majority — $213.7 billion — will mature within 15 days, $61.3 billion will come due within one to five years. Another $21.3 billion matures between 91 days and one year while the remaining $113.2 billion will be paid within 16 to 90 days.

The Fed continues to expand its balance sheet to accommodate the growing demand at the discount window. Total assets jumped 23.5% in the past week, to $1.5 trillion.

KfW Dismisses Managers Responsible for Lehman Transfer

Too bad these herren did not work in the States for an American bank. They would have received huge bonuses and golden parachutes.

Reuters
KFW fires two board members over Lehman transfer
by Philipp Halstrick
Mon Sep 29, 2008 5:43am EDT

BERLIN, Sept 29 (Reuters) - German state lender KfW has fired two board members over the transfer of around 300 million euros to Lehman Brothers on the day the U.S. bank filed for bankruptcy, the finance and economy ministries said on Monday.

KfW's board of supervisory directors decided that Peter Fleischer and Detlef Leinberger would have to leave their posts with immediate effect, the ministries said in a statement. The two board members had already been suspended.

KfW has said it mistakenly transferred the funds to Lehman to unwind a swap agreement, in which two counterparties agree to exchange one stream of cashflow against another stream. (The "funds" were €319 million or about US$466 million - Jesse)

The case made front-page news in Germany, with one newspaper calling KfW "Germany's dumbest bank".

It also put pressure on Economy Minister Michael Glos, chairman of KfW's board of supervisory directors, and Finance Minister Peer Steinbrueck, who is deputy chairman. (Der Scheisse rolls downhill also in Germany - Jesse)

The ministries said the board backed management plans to examine KfW's risk management and business processes thoroughly.

"The supervisory board reiterates that Germany needs a strong development bank and thus supports the KfW board and all staff in the aim of steering KfW back into calmer waters as soon as possible so it can focus on core duties again," they said.

Sources have said the German lender's total exposure to Lehman was 536 million euros, including the Lehman transfer.

KfW had already taken a hit from liquidity lines given to business lender IKB the country's biggest casualty of the subprime crisis.

The Mother Bubble

The US Long Bond.

Or as the New York bondtraders used to say, "Big Daddy."

A picture or two are worth a thousand words.

It can go on indefinitely right?

Don't most man-made things continue on endlessly in this world even when they stop making sense?

Special thanks to Brian at ContraryInvestor.com

Primary bagholders. We'd like to think the Brits are acting as agents for others.

FDIC to Have Access to "Unlimited Amounts" from Treasury - Vote Set for 7:30 PM

The Weather Report says rough seas ahead, mates.

Wall Street Journal
OCTOBER 2, 2008
Revised Bill Lets FDIC Borrow Without Limits

The Senate financial market rescue bill would temporarily allow the Federal Deposit Insurance Corp. to borrow unlimited amounts of money from the Treasury Department in connection with the larger government deposit coverage that would extend until the end of next year.

This is important because it would increase the backstop that the FDIC has to make sure that insured depositors can be repaid if their bank fails.

U.S. President George W. Bush will speak with lawmakers to bolster backing for the Senate's $700 billion market-rescue bill. The vote most likely will come after 7:30 p.m. EDT, according to an aide in Senate Majority Leader Harry Reid's office. The vote is being held after sunset in observance of the Jewish holiday Rosh Hashanah.

The vote most likely will come after 7:30 p.m. EDT, according to an aide in Senate Majority Leader Harry Reid's office...Senate lawmakers decided to take off the cap completely, authorizing the FDIC to request from the Treasury "a loan or loans in an amount or amounts necessary… without regard to limitations."

ISM Manufacturing Index Plunges - Government Remains Clueless - Economists Bewildered

The real economy is falling apart, but the panglossian pundits won't EVEN say the recession word yet.

Yes, politicians lie, but that is supposed to be a cynical observation, not a performance objective.

Things were just fine last week, if we don't give the largest non-military grant in history to the banks tomorrow at the latest, no questions asked or terms discussed, we will immediately plunge into the Great Depression. But we've been jerked around about the Alternative Minimum Tax adjustment, Social Security, Campaign Reform, and Predatory Lending and Usury for the last eight years.

And politicians and pundits wonder why the public is angry? Most people are just busy, not completely stupid.

Let's make a deal. Stop lying so much and so often, stop taking money and soft bribes, and do your job. Then we might start to believe you again.

If our system is all about confidence then this government is in trouble and needs to be replaced with people who are not moral mutants. Hey, next month is November. How convenient.

As a former legislator and government official is said to have observed:

You can fool some of the people all of the time,
and all of the people some of the time,
but you can not fool all of the people all of the time.

U.S. Sept. ISM manufacturing index plunges to 43.5%
By Greg Robb
10:06 a.m. EDT Oct. 1, 2008

WASHINGTON (MarketWatch) - The nation's manufacturers cut back production at a much faster pace than expected in September, the Institute for Supply Management reported Wednesday. This is the lowest level since October 2001. The ISM index plunged to 43.5% in September from 49.9% in August.

This is the biggest drop in the index since 1984. The drop surprised economists. (The law of gravity surprises some economists on a nearly daily basis if it suits their hypothesis. - Jesse)

The consensus forecast of estimates collected by Marketwatch was for the index to slip only a bit to 49.6%. Readings below 50 indicate contraction. The ISM index has been holding near 50 since the summer. The previous low this year was 48.3 in February.

Economists said the ISM index was near recessionary levels. (We are in a recession and have been for some time. Government fiddling with statistics can only mask the reality of our troubles for the short term. And economists appear to be aspiring to displace lawyers from the top of the most despised profession list. - Jesse)

Why Europe's Banks Are in Trouble

Here is an eye opening set of data by way of Paul Kedrosky at Infectious Greed and the sibylline Yves Smith at Naked Capitalism:

The European banks were levered up like the wilder investment banks on Wall Street.

But the AIG case shows the importance of another link across financial markets, namely massive regulatory arbitrage. The K-10 annex of AIG’s last annual report reveals that AIG had written coverage for over US$ 300 billion of credit insurance for European banks. The comment by AIG itself on these positions is: “…. for the purpose of providing them with regulatory capital relief rather than risk mitigation in exchange for a minimum guaranteed fee”. AIG thus helped to organise regulatory arbitrage on a gigantic scale. A formal default of AIG would have had a devastating impact on banks in Europe. This explains why AIG’s problems had sent shock waves through the share prices of European banks. For the time being the US Treasury has saved, inter alia, the European banking system, but given that AIG is to be liquidated European banks now have to scramble to find other ways of obtaining the ‘regulatory capital relief’ they appear to need urgently.

No wonder the European banks are scrambling so hard for liquidity. And a good part of that demand is for dollars given the markdowns they are being forced to take on their dollar assets being held for customers.

Europe seems to be much further behind the curve in dealing with its problems than the US, as bad as both of them are.

We wonder now how much of the pressure on the Congress is coming not only from Wall Street but also from Europe. This also helps one to understand Section 112 in the plan that calls for Treasury payments to non-US banks.

When push comes to shove, it appears that even Willem Buiter is not completely above the fray, and talking his figurative book:

Those whom the gods would destroy, they first make mad. The US House of Representatives has voted to reject the Emergency Economic Stabilization Act - the $700bn Treasury-funded facility for purchasing and managing toxic assets held by the US banking system.

Opposition to the proposal came from two different sources. A few remaining libertarians and believers in unfettered free enterprise voted against. Even when they recognise the risk that a calamitous collapse in economic activity may result, they view this as a form of creative destruction that is an integral part of a Darwinian market economy... Those who genuinely hold these views are mad, but honest and principled. I wish them a good depression...

A larger body of nay-voters consists of populist rabble-rousers or, worse, politicians who know better but follow the whims, fancies and passions of their constituents, even when this means that before long the real economy risks falling off a cliff...

Sorry for the delay Willem. The bailout check for your banks is in the mail.

"Hundreds of billions of dollars are going to bail out foreign investors. They know it, they demanded it, and the bill has been carefully written to make sure that can happen." - Brad Sherman , D-California"

Wealthy Buying Gold in Unprecedented Amounts Creating Shortages - Financial Times

And so it begins...

The Financial Times
Wealthy investors hoard bullion
By Javier Blas in Kyoto
September 30 2008 19:00

Investors in gold are demanding “unprecedented” amounts of bullion bars and coins and moving them into their own vaults as fears about the health of the global financial system deepen.

Industry executives and bankers at the London Bullion Market Association annual meeting said the extent of the move into physical gold was unseen and driven by the very rich.

“There is an enormous pick-up in investment demand. I have never seen a market like this in my 33-year career,” said Jeremy Charles, chairman of the LBMA. “The gold refineries cannot produce enough bars.”

The move comes as fears grow among investors over the losses at investment vehicles previously considered almost risk-free, such as money funds.

Philip Clewes-Garner, associate director of precious metals at HSBC, added that investors were not flying into gold simply because they saw it as a haven amid Wall Street’s woes. “It is a flight into gold because it is a physical asset,” he said.

“Vault staff are also doing overtime,” another banker at the LBMA meeting said, adding that investors in some countries were paying premiums of up to $25 an ounce above the London spot price to secure scarce gold bars.

Spot gold prices in London on Tuesday traded at about $900 an ounce, more than 25 per cent above the level before Lehman Brothers’ collapse. Although some traders said the rush into physical gold could boost prices, others cautioned that prices were depressing jewellery demand, capping any price gain. Industry executives said gold refineries and government mints were working at full throttle to keep up with investor demand, but acknowledged they were suffering from shortages, particularly on coins.

Johan Botha, a spokesman for the Rand Refinery in South Africa, which manufactures the Krugerrand, the world’s most popular gold coin, said the plant was now running at full capacity seven days a week. “Even so, now and then we have shortages,” he said.

The Austrian mint, which manufactures the Vienna Philharmonic, a popular gold coin in Europe, said it had extended work to the weekends to accommodate soaring demand.

Last week, the US mint suspended the sale of its American Buffalo coin after it ran out of stocks.

Kill the Bill v. 2 - Contact Your Elected Representatives and Let Them Know Your Thoughts

The Senate is expected to vote on their own version of the Bailout Bill tomorrow afternoon.

We hear the Senate bill will finally raise the FDIC protection for ordinary depositors to $250,000. For one year.


Contact Your Elected Officials by Email

The lobbyists are putting high pressure on the key Congressmen.

Financial companies are asking their employees to call and write their Congressmen to support the Bill.

Let them know what you think, whatever that might be.

And come this November, vote.

Under Section 112 of the draft Bill non-US financial institutions will be eligible for assistance if they lent to US banks or home borrowers.

SEC. 112. COORDINATION WITH FOREIGN AUTHORITIES AND CENTRAL BANKS.

The Secretary shall coordinate, as appropriate, with foreign financial authorities and central banks to work toward the establishment of similar programs by such authorities and central banks. To the extent that such foreign financial authorities or banks hold troubled assets as a result of extending financing to financial institutions that have failed or defaulted on such financing, such troubled assets qualify for purchase under section 101.