Citigroup Memo Points to Gold as a Safe Haven

"Gold has tripled in value over the last seven years, vastly outperforming Wall Street and European bourses."

This is perhaps the gem in this article, the reminder that gold has proven to be one of the best stores of value through the turmoil of the turn of the century. People tend to lose sight of this, being preoccupied with the short term up and down of markets.

And it is most probable that it will continue to be an excellent store of value, a safe haven for wealth, over the next twenty or more years, as it has been over the past twenty or more centuries.

Why is this? Because although governments may seek to control it, prohibit it, monopolize it, disdain or disfavor it, they cannot create it, or prevent it from being valued by independent minds throughout recorded history as genuine wealth.

UK Telegraph
Citigroup says gold could rise above $2,000 next year as world unravels
By Ambrose Evans-Pritchard
7:29AM GMT 27 Nov 2008

Gold is poised for a dramatic surge and could blast through $2,000 an ounce by the end of next year as central banks flood the world's monetary system with liquidity, according to an internal client note from the US bank Citigroup.

The bank said the damage caused by the financial excesses of the last quarter century was forcing the world's authorities to take steps that had never been tried before.

This gamble was likely to end in one of two extreme ways: with either a resurgence of inflation; or a downward spiral into depression, civil disorder, and possibly wars. Both outcomes will cause a rush for gold. (A resurgence of inflation is hardly an extreme outcome, being more like the norm for the past 90 years. And we have had civil disorder and wars throughout the period of fiat inflation. - Jesse)

"They are throwing the kitchen sink at this," said Tom Fitzpatrick, the bank's chief technical strategist.

"The world is not going back to normal after the magnitude of what they have done. When the dust settles this will either work, and the money they have pushed into the system will feed though into an inflation shock.

"Or it will not work because too much damage has already been done, and we will see continued financial deterioration, causing further economic deterioration, with the risk of a feedback loop. We don't think this is the more likely outcome, but as each week and month passes, there is a growing danger of vicious circle as confidence erodes," he said.

"This will lead to political instability. We are already seeing countries on the periphery of Europe under severe stress. Some leaders are now at record levels of unpopularity. There is a risk of domestic unrest, starting with strikes because people are feeling disenfranchised." (President Bush set record lows for popularity, and he did not require deflation to do it. Deflation is being held up as a boogeyman in this note. - Jesse)

"What happens if there is a meltdown in a country like Pakistan, which is a nuclear power. People react when they have their backs to the wall. We're already seeing doubts emerge about the sovereign debts of developed AAA-rated countries, which is not something you can ignore," he said. (We have not read the original note, but the questions of sovereign debt are related to default and inflation, not deflation. This is an awfully muddled set of ideas. - Jesse)

Gold traders are playing close attention to reports from Beijing that the China is thinking of boosting its gold reserves from 600 tonnes to nearer 4,000 tonnes to diversify away from paper currencies. "If true, this is a very material change," he said. (True and it would be an extremely intelligent move if they were to do so. - Jesse)

Mr Fitzpatrick said Britain had made a mistake selling off half its gold at the bottom of the market between 1999 to 2002. "People have started to question the value of government debt," he said. (Government debt has always been devalued and defaulted upon throughout history without exception. - Jesse)

Citigroup said the blast-off was likely to occur within two years, and possibly as soon as 2009. Gold was trading yesterday at $812 an ounce. It is well off its all-time peak of $1,030 in February but has held up much better than other commodities over the last few months – reverting to is historical role as a safe-haven store of value and a de facto currency. (This is not much of a prediction to be frank. Gold was bouncing along the 1000 level on the last leg up, and is now consolidating. A target of 2000 over the next two years seems a bit tame. - Jesse)

Gold has tripled in value over the last seven years, vastly outperforming Wall Street and European bourses.

Money Supply, Paul Krugman, and the Great Depression

We like Paul Krugman and enjoy reading his columns. But every so often he writes a column that is so off his normal standards that it makes us wonder if he is on vacation and the task of producing the column has been delegated to a graduate assistant.

Here is one such example.

NY Times
Was the Great Depression a monetary phenomenon?
By Paul Krugman
November 28, 2008, 1:47 pm



Has anyone else noticed that the current crisis sheds light on one of the great controversies of economic history?

A central theme of Keynes’s General Theory was the impotence of monetary policy in depression-type conditions. But Milton Friedman and Anna Schwartz, in their magisterial monetary history of the United States, claimed that the Fed could have prevented the Great Depression — a claim that in later, popular writings, including those of Friedman himself, was transmuted into the claim that the Fed caused the Depression.

Now, what the Fed really controlled was the monetary base — currency plus bank reserves. As the figure shows, the base actually rose during the great slump, which is why it’s hard to make the case that the Fed caused the Depression. But arguably the Depression could have been prevented if the Fed had done more — if it had expanded the monetary base faster and done more to rescue banks in trouble.

So here we are, facing a new crisis reminiscent of the 1930s. And this time the Fed has been spectacularly aggressive about expanding the monetary base:



And guess what — it doesn’t seem to be working.

I think the thesis of the Monetary History has just taken a hit.

We have mixed emotions on this one since we think the monetarist approach is a too one-dimensional to explain what happened then and now, and agree with Keynes that monetary policy alone is incapable of dealing with a complex economic event such as we are now facing. We also do not believe that the Fed 'caused' the Great Depression.

However, to try and make the case that the Fed can "only" control reserves and the currency base, the monetary base, is an old canard trotted out by the likes of Greenspan and his ilk when they wish to make the case that things are happening, like enormous bubbles, that are beyond the Fed's control. This is a Clintonian use of the word 'control' and is always and everywhere rubbish.

The Fed's power, its influence, is profound, and ever moreso in this era of aggressive financial engineering. Krugman uses the narrow argument of literal control to point to the Adjusted Monetary Base as his sole metric and say, "See the monetary base went up in the Depression in his Chart 1, just as it is today in Chart 2. Therefore there was no error from the Fed at that time because it was all that they could do."

Here are two other charts that help to provide a better view of what really happened.



Please note in the above chart that after the British abandoned the gold standard, the Federal Reserve RAISED the discount rate for US banks in the spring of 1931 from 1.5 to 3.5 percent, or 200 basis points.



To emphasize the policy error look at this estimate of real interest rates leading into the bottom of the Great Depression in 1933. Nine out of ten economists might notice that, relative to the price deflation which was obviously occurring, that the increase in Discount Rate was motivated by other than monetary and domestic considerations.

Finally, let's take a look at a broader money supply for the period, M1, against the change in GDP.



Please notice the decline in M1 tracking the changes in GDP.

So, what might the Fed had done differently?

It is obvious that devaluing the dollar was the right thing to do. To that end, the Fed might have cut the discount rate to less than one percent, instead of raising it, which was likely in response to the movement of the British pound and the Bank of England's abandonment of the gold standard. They also might have lent in size to any bank requiring deposits, so that there would be no more bank failures for banks that were in otherwise reasonably good shape, that is, because of depositor runs.

And this is where we do part company with Mr. Friedman and Ms. Schwarz and join Lord Keynes in his observation that it requires fiscal and legislative actions to repair an economic shock such as the country was experiencing in the early 1930's.



Notice that Government Purchase drop, and rather sharply, into the trough of 1933, along with aggregate demand. This would have been the point where Keynes would have likely observed that supply money was not enough, but was only a first step in stabilizing the system. The 'real cure' was to get people working again, to provide wages and gainful employment, to encourage consumption and economic activity.

As an aside, notice that net exports were negative and remained so throughout the period of 1929 through 1933. Much has been made of the Smoot-Hawley tariff, and indeed exports did nominally decrease. But the proportion of decline to imports makes it clear that protectionism was rampant throughout the rest of the world, and had not been caused by anything the United States was doing per se.

We don't have the chart at hand, and will continue to look for it, but the United States was one of the last of the developed nations to emerge from the Depression with positive GDP growth. We think that this was caused by exactly the phenomenon that Keynes observed, which was a lack of government fiscal and legislative activity to promote economic activity, as well as a relatively open market for imports and a "business first" bias, to the disadvantage of the unemployed working people.

In conclusion we would say that contrary to what Mr. Krugman asserts it is apparent that the Fed made a significant policy error in raising the discount rate in early 1931. It is less clear what latitude they might have had to do more to stem the tide of bank failures because of depositor fears, but they clearly could have done more to react to the contracting money supply. We have heard that they only were able to think in termed of the monetary base and had no statistics beyond that with which to guide their efforts.

We think that this is a weak rationale at best for their failure as bankers to respond to the obviously dire situation of the economy which evident in and of itself. We would not accuse them of lacking imagination, inventiveness, determination, and a spirit of pragmatic activism. In fact, they strike us as 'clubbable men' acting for their club.

We shall see this time perhaps if monetary activism alone is sufficient, especially if the Republicans and corporate banking interests have their way. But it does not appear to be the case since making money available to lend does not solve the problem of helping to create an economic environment in which profits might be made.

Indeed, we can imagine an outcome in which misbegotten monetary policy results in an oligopoly of corporate interests and an economy that is permanently frozen in a series of de facto monopolies based on central planning, not all that dissimilar to the experience of the Soviet Union prior to its dissolution and some countries in which a hundred or so powerful families control the government and its economy in a state of permanent corruption and malaise.

Second Largest UK Bank RBS to be Nationalized

If you watch Bloomberg television you may have seen the Royal Bank of Scotland commercial advertisements which display some of the worst corporate hubris imaginable.

RBS is the second largest UK bank by assets, following HSBC. It is being taken over by the British government. Their bailout plan involves the dividend being cancelled, and top management losing their bonuses and jobs, among other things.

AP
RBS to be taken over by British government
By Emily Flynn Vencat
Friday November 28, 12:51 pm ET

Royal Bank of Scotland says British government will buy majority stake in bank

LONDON (AP) - The British government will take over Royal Bank of Scotland Group PLC with a majority stake of almost 60 percent after the shareholders of the nation's second-largest bank shunned an emergency share issue.

The 20 billion pound ($31 billion) rescue takeover, the result of a plan announced last month, means that dividends on common shares will be scrapped and top executives' bonuses will be canceled. Chief Executive Fred Goodwin has resigned and Chairman Tom McKillop, who last week personally apologized to shareholders for the 85 percent fall in the bank's share value, has said he will retire next year.

RBS's 1.8 trillion pounds in assets are topped among U.K. banks only by those of HSBC. Its operations around the world include Citizens Financial Group, a commercial bank holding company headquartered in Providence, R.I., and Greenwich Capital Markets, based in Greenwich, Conn.

Fears about the solvency of RBS intensified this year as the global credit crisis contributed to it writing off 5.9 billion pounds ($9.2 billion) in bad loans. A third of that was due to last year's ill-timed euro14 billion acquisition of part of Dutch bank ABN Amro.

The government's shares will be held by a company called UK Financial Investments LTD. Its charge is to maximize value for taxpayers and prevent politicians from making business decisions about the bank.

"The investment will be managed at an arm's length from government," the Treasury spokesman said.

The bank, which has indicated it could post its first ever annual loss this year, was forced to resort last month to the British government's bailout plan, which offered as much as 37 billion pounds to prop up RBS and two other U.K.-based banks, Lloyds TSB Group PLC and HBOS PLC. In all three cases, the government guaranteed to buy any shares not purchased by investors.

At the government's request, RBS announced a share issue a month ago at 65.5 pence a share. But because its share price has fallen by almost a quarter since then, investors knew the government, in its role as guarantor of the issue, would end up having to shoulder the full amount when the deadline expired Friday. The result is an immediate $5 billion pound paper loss for taxpayers.

Only 0.2 percent of the shares were taken up by investors, leaving the state with the balance and boosting its ownership stake to 57.9 percent. Three-quarters of Friday's 20 billion-pound government investment was in ordinary shares and the remainder was preference shares.

Shares in RBS fell 2.4 percent to 53.7 pence on the London Stock Exchange Friday as investors braced for dividend payments to be cut.

As long as the government owns preferential shares, its restrictions on dividends and bonuses will be enforced. The bank had already scrapped a cash dividend for the first half of the fiscal year 2008, paying instead a dividend in shares.

A Treasury spokesman, who declined to be named because of government policy, called the government's imminent purchase of the stake in RBS "the next step" in "a process that supports financial stability, protects ordinary savers, depositors, businesses and borrowers; while safeguarding the interests of the taxpayer."

The drastic fundraising plan comes on top of a 12 billion pounds rights issue by RBS earlier this year -- at the time the biggest ever rights issue in Europe.

RBS shares were above 380 pence last December, and above 200 pence as recently as Sept. 26.

The Wages of Irrational Greed

The actual costs of several of the items can be debated, especially in the case of warfare and its soft and collateral costs. Joe Stiglitz has estimated the cost of the total Iraq war to three trillion dollars when all the expenses are considered.

One can quibble with the details, and even make the case that any expenditures financed by debt are of equal economic value, that there is no difference between pure consumption and greed, and productive investment in infrastructure. That there exists no good or evil and that justice has no penalty or value.

But one has to ask what could have been accomplished, what great achievements could we have endowed to posterity, if we had only restrained the greed of Wall Street and the corruption of the world's economy through the US dollar as its reserve currency which permitted the almost unrestrained creation of debt by a succession of narcissists and sociopaths?

If this chart is not shocking, does not sicken you at heart, repulse you, fill you with righteous anger, make you feel ashamed, then you may be emotionally a child, or perhaps no longer human.

An Itemized Breakdown of the 8.5 Trillion Bailout to Date

Ecuador to Selectively Default on Foreign Debt as "Illegitimate"

Opening salvo in a restructuring negotiation no doubt, but it will be interesting if this becomes a trend amongst those who perceive themselves in debt peonage to the corrupting schemes and usury of economic hitmen.

Alter.net
As Crisis Mounts, Ecuador Declares Foreign Debt Illegitimate and Illegal
By Daniel Denvir
November 26, 2008.

A special debt audit commission released a report charging that much of Ecuador's foreign debt was illegitimate or illegal.

Amidst the spreading global financial crisis, a special debt audit commission released a report charging that much of Ecuador's foreign debt was illegitimate or illegal. The commission recommended that Ecuador default on $3.9 billion in foreign commercial debts--Global Bonds 2012, 2015 and 2030--the result of debts restructured in 2000 after the country's 1999 default.

Although Ecuador currently has the capacity to pay, dropping oil prices and squeezed credit markets are putting President Rafael Correa's plans to boost spending on education and health care in jeopardy. Correa has pledged to prioritize the "social debt" over debt to foreign creditors.

The commission accused Salomon Smith Barney, now part of Citigroup Inc., of handling the 2000 restructuring without Ecuador's authorization, leading to the application of 10 and 12 percent interest rates. The commission evaluated all commercial, multilateral, government-to-government and domestic debt from 1976-2006.

Commercial debt, or debt to private banks, made up 44% of Ecuador's interest payments in 2007, considerably more than the 27% paid to multilateral institutions such as the International Monetary Fund (IMF). But the report also lambasted multilateral debt, saying that many IMF and World Bank loans were used to advance the interests of transnational corporations. Ecuador's military dictatorship (1974-1979) was the first government to lead the country into indebtedness.

The commission found that usurious interest rates were applied for many bonds and that past Ecuadorian governments illegally took other loans on. Debt restructurings consistently forced Ecuador to take on more foreign debt to pay outstanding debt, and often at much higher interest rates. The commission also charged that the U.S. Federal Reserve's late 1970's interest rate hikes constituted a "unilateral" increase in global rates, compounding Ecuador's indebtedness.

If President Rafael Correa follows the commission's recommendations--which is far from a certainty--Ecuador could default on some portion of its foreign debt, becoming the first Latin American country to do so since Argentina in 2001.

But despite all the hints at a default, it seems likely that Ecuador will use the commission's report as leverage for restructuring the country's debt. Commission president Ricardo Patiño indicated as much to Bloomberg News, but said that Ecuador would not settle for a 60% reduction, a number that had earlier been mentioned.

Ecuador announced that it would delay paying $30.6 million in interest on the Global Bonus 2012, taking advantage of a month-long grace period. The announcement sent the global financial universe into a panic, with Standard and Poor's cutting Ecuador's risk rating to CCC-.

Social movements have long alleged that corrupt former governments illegally negotiated loans for their own personal financial gain.

Significantly, the commission singled out foreign debt for being "illegitimate" rather than simply illegal. Social movements have long declared most foreign debt to be illegitimate, but Ecuador's use of legitimacy as a legal argument for defaulting would set a major precedent; indeed, the mere formation of a debt auditing commission does so. Osvaldo Leon, of the Latin American Information Agency (ALAI), says that it remains to be seen if other countries in Latin America will follow suit.

Ecuador's findings could set an important precedent for the poorest of indebted countries, whose debt burden has long been criticized as inhumane...

Chicago PMI Worst Report Since 1982

It may seem counterintuitive that US stocks are resilient after a morning of some of the bloodiest economic numbers to date.

Talking heads were on the financial channels proclaiming "Priced In!" and "a bottom is at hand."

It should be noted that this is a holiday-shortened week, heading into the November weekend close. Many financial institutions end their fiscal year in November.

The nation will not recover until the financial sector is brought back into a balance with the real economy.

Increasingly the public is not believing the usual lies and deceptions. A bottom may be in for the willing acceptance of fraud and a tolerance of white collar crime. The backlash could be terrific.

Dollar briefly extends declines vs yen after Chicago PMI
Wed Nov 26, 2008 9:58am EST

NEW YORK, Nov 26 (Reuters) - The U.S. dollar briefly extended declines versus the Japanese yen on Wednesday after a report on business activity in the Midwest fell more than expected...

The Institute for Supply Management-Chicago said its index of Midwest business activity fell in November to 33.8 from 37.8 in October. Economists polled by Reuters had forecast a drop to 36.7.

"The Chicago PMI is the worst number since Feb. 1982 and the numbers continue to show that the economy is still deteriorating," said Andrew Bekoff, chief investment officer at LPB Capital LLC in Doylestown, Pennsylvania.

AIG Under Investigation for Fraud

Rogue executive in a rogue company.

Tainting the purity of Wall Street insiders most likely.

Looks like AIG might have to take a hit for the team.


Ex-AIG exec under probe by U.S. prosecutors
Wed Nov 26, 2008 1:35am EST

NEW YORK (Reuters) - Former American International Group Inc executive Joseph Cassano is under investigation by U.S. prosecutors for possibly misleading auditors and investors about subprime mortgage-related losses, according to a Bloomberg report citing people familiar with the probe.

The report said investigators are asking auditors at PricewaterhouseCoopers about memos they wrote last fall on how Cassano and other AIG executives valued contracts protecting $62 billion in mortgage-backed securities.

The U.S. government is also investigating AIG's reliance on valuations that have been questioned by auditors and banks, according to the report.

Cassano previously led AIG Financial Products, the source of billions of dollars of losses which led to the insurance company needing to be rescued by the U.S. government in a $85 billion deal in September.

In October, U.S. lawmakers criticized AIG for giving Cassano a $1 million-a-month consulting contract after he retired in March.

Having Trouble With This Market? Highest Volatility in a Century at Least

Can't seem to hold a position, make a decent return, keep from getting whipsawed, find a trend?

No wonder, because this is one of the most volatile markets in the past century.

Our opinion, for what it is worth, is that the volatility is being turbocharged by the injections of Fed liquidity into the Wall Street banks, who have few options for higher returns than Treasuries. So their trading desks are churning the markets to hammer the hedge funds and skin the small specs who are loss sensitive and unsophisticated in their use of leverage and hedging.

The financial sector needs to be reformed badly. The economy will not recover until real wages start advancing again so consumption and savings can resume. Look for the well-heeled elites to fight that every step of the way, and appeal to the worst in our character as part of a campaign to do it.

If you are not an experienced trader now is a good time to sit in cash and add some precious metals on weakness, and above all, learn to live within your means.

Russian Expert Says US Headed for Collapse

Are we going to allow the Russians to have the last laugh?

No way.

So get out there and buy some stocks, rubes, and help to fully fund our oligarchs so they do not fall behind the elite that divided up Russia's wealth after its collapse.

We cannot afford to have an oligarch gap.

If you are not sure what fraudulent stocks to buy, just put your money in the long bond, and the Treasury and Fed will manage the distribution for you.

UPI
Russian expert: U.S. headed for collapse
Nov. 24, 2008 at 7:58 PM

MOSCOW, Nov. 24 -- The United States is heading for collapse amid its financial crisis, a leading political analyst in Russia says.

Igor Panarin, a professor at the Diplomatic Academy of the Russian Ministry for Foreign Affairs, said in an interview with Izvestia, published Monday, that the U.S. economy is in dire straits, RIA Novosti reported.

"The dollar is not secured by anything. The country's foreign debt has grown like an avalanche, even though in the early 1980s there was no debt. By 1998, when I first made my prediction, it had exceeded $2 trillion. This is a pyramid that can only collapse," he said.

Asked when the U.S. economy would collapse, Panarin said the process has already begun.

"It is already collapsing. Due to the financial crisis, three of the largest and oldest five banks on Wall Street have already ceased to exist, and two are barely surviving," he said. "Their losses are the biggest in history. Now what we will see is a change in the regulatory system on a global financial scale: America will no longer be the world's financial regulator."

The Buck Slumps to Support as Stocks Rally Up to Resistance

The dollar showed weakness today as US equities ran the shorts on vaporous hopes of bailouts for the banks.

Notice though that Bucko has not broken any serious support levels so it is too soon to send flowers. So far this is a normal consolidation in a parabolic short squeeze and flight to safety.

We took profits on our long positions today, and went slightly net short when the SP 500 futures hit our intraday target of 866. This rally has a lot of air in it, but this is a light week, with the US markets closing for the Thanksgiving holiday on Thursday.

We are far from a recovery, and will likely go back down and test those lows again, but first things first, and we may see more rally in US stock indices up to the 62% retracement levels.

US Treasury Default Swaps Soar to Records

Reuters
U.S. Treasury CDS Hit Record Wide Levels
By Richard Leong and George Matlock in London
Mon Nov 24, 2008 11:21am EST

NEW YORK, Nov 24 - The spread or risk premium on 10-year U.S. Treasury credit default swaps hit record wide levels on Monday, prompted by worries about how the cost of rescuing banks and carmakers would affect U.S. creditworthiness, CMA DataVision said.

As the global financial crisis worsened in recent weeks, traders increased their bets on the bigger toll of the U.S. government's array of programs to help these ailing industries.

Ten-year U.S. Treasury CDS edged out to 49.8 basis points from 49.3 basis points at Friday's close, according to the credit data company.

Five-year Treasury CDS grew to 43.5 basis points versus 43.0 basis points late Friday, it said.

The risk premiums have nearly doubled from levels seen two months ago after the collapse of Lehman Brothers.

Prior to the financial crisis, default risk premiums on U.S. government debt had been running in the low-to-mid single digits.

CNBC Scores Major Exclusive Interview with Alaweed Bin Talal

Federal Reserve and Treasury Offer Half of US GDP to the Wall Street Banks

Our motto used to be "millions for defense, but not one cent for tribute."

That has changed to "Trillions for the banks, but a few dollars loaned at interest for the real economy."

Hey there all you big strong men,
Time to serve your Uncle Ben,
Don't give up, you must be bold,
Get out there and short some gold.
The Treasury's stash is almost dry,
Oops, the Buck is going to die.

And its one, two, three who are we working for,
Hey hey we know who to thank,
So give your all to Uncle Hank.
And its five, six, seven, don't you dare be late,
Well, there ain't no time to ask them why,
But the Buck is gonna die.

Fed Pledges Top $7.4 Trillion to Ease Frozen Credit
By Mark Pittman and Bob Ivry

Nov. 24 (Bloomberg) -- The U.S. government is prepared to lend more than $7.4 trillion on behalf of American taxpayers, or half the value of everything produced in the nation last year, to rescue the financial system since the credit markets seized up 15 months ago. (But there is no money for Social Security, for Medical programs, for real industry, for people - Jesse)

The unprecedented pledge of funds includes $2.8 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the only plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis. (This isn't the New Deal, its the Raw Deal for the people and the Sweet Deal for the banks that caused our problems through their reckless greed - Jesse)

When Congress approved the TARP on Oct. 3, Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson acknowledged the need for transparency and oversight. Now, as regulators commit far more money while refusing to disclose loan recipients or reveal the collateral they are taking in return, some Congress members are calling for the Fed to be reined in. (That's nothing compared to what the public is calling to be done to the Fed and the Bush Treasury - Jesse)

“Whether it’s lending or spending, it’s tax dollars that are going out the window and we end up holding collateral we don’t know anything about,” said Congressman Scott Garrett, a New Jersey Republican who serves on the House Financial Services Committee. “The time has come that we consider what sort of limitations we should be placing on the Fed so that authority returns to elected officials as opposed to appointed ones...”

‘Snookered’

Regulators hope the rescue will contain the damage and keep banks providing the credit that is the lifeblood of the U.S. economy.

Most of the spending programs are run out of the New York Fed, whose president, Timothy Geithner, is said to be President- elect Barack Obama’s choice to be Treasury Secretary.

The money that’s been pledged is equivalent to $24,000 for every man, woman and child in the country. It’s nine times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office figures. It could pay off more than half the country’s mortgages.

“It’s unprecedented,” said Bob Eisenbeis, chief monetary economist at Vineland, New Jersey-based Cumberland Advisors Inc. and an economist for the Atlanta Fed for 10 years until January. “The backlash has begun already. Congress is taking a lot of hits from their constituents because they got snookered on the TARP big time. There’s a lot of supposedly smart people who look to be totally incompetent and it’s all going to fall on the taxpayer...”

$4.4 Trillion

Bernanke’s Fed is responsible for $4.4 trillion of pledges, or 60 percent of the total commitment of $7.4 trillion, based on data compiled by Bloomberg concerning U.S. bailout steps started a year ago.

“Too often the public is focused on the wrong piece of that number, the $700 billion that Congress approved,” said J.D. Foster, a former staff member of the Council of Economic Advisers who is now a senior fellow at the Heritage Foundation in Washington. “The other areas are quite a bit larger.”

The Fed’s rescue attempts began last December with the creation of the Term Auction Facility to allow lending to dealers for collateral. After Bear Stearns’s collapse in March, the central bank started making direct loans to securities firms at the same discount rate it charges commercial banks, which take customer deposits.

In the three years before the crisis, such average weekly borrowing by banks was $48 million, according to the central bank. Last week it was $91.5 billion.

Lehman Failure

The failure of a second securities firm, Lehman Brothers Holdings Inc., in September, led to the creation of the Commercial Paper Funding Facility and the Money Market Investor Funding Facility, or MMIFF. The two programs, which have pledged $2.3 trillion, are designed to restore calm in the money markets, which deal in certificates of deposit, commercial paper and Treasury bills.

“Money markets seized up after Lehman failed,” said Neal Soss, chief economist at Credit Suisse Group in New York and a former aide to Fed chief Paul Volcker. “Lehman failing made a lot of subsequent actions necessary.”

The FDIC, chaired by Sheila Bair, is contributing 20 percent of total rescue commitments. The FDIC’s $1.4 trillion in guarantees will amount to a bank subsidy of as much as $54 billion over three years, or $18 billion a year, because borrowers will pay a lower interest rate than they would on the open market, according to Raghu Sundurum and Viral Acharya of New York University and the London Business School.

Bank Subsidy

Congress and the Treasury have ponied up $892 billion in TARP and other funding, or 12 percent.

The Federal Housing Administration, overseen by Department of Housing and Urban Development Secretary Steven Preston, was given the authority to guarantee $300 billion of mortgages, or about 4 percent of the total commitment, with its Hope for Homeowners program, designed to keep distressed borrowers from foreclosure.

Most of the federal guarantees reduce interest rates on loans to banks and securities firms, which would create a subsidy of at least $6.6 billion annually for the financial industry, according to data compiled by Bloomberg comparing rates charged by the Fed against market interest currently paid by banks.

Not included in the calculation of pledged funds is an FDIC proposal to prevent foreclosures by guaranteeing modifications on $444 billion in mortgages at an expected cost of $24.4 billion to be paid from the TARP, according to FDIC spokesman David Barr. The Treasury Department hasn’t approved the program.

Automakers

Bernanke and Paulson, former chief executive officer of Goldman Sachs, have also promised as much as $200 billion to shore up nationalized mortgage finance companies Fannie Mae and Freddie Mac. The FDIC arranged for $139 billion in loan guarantees for General Electric Co.’s finance unit.

The tally doesn’t include money to General Motors Corp., Ford Motor Co. and Chrysler LLC. Obama has said he favors financial assistance to keep them from collapse.

Paulson told the House Financial Services Committee Nov. 18 that the $250 billion already allocated to banks through the TARP is an investment, not an expenditure.

“I think it would be extraordinarily unusual if the government did not get that money back and more,” Paulson said.

‘We Haircut It’

In his Nov. 18 testimony, Bernanke told the House Financial Services Committee that the central bank wouldn’t lose money.

“We take collateral, we haircut it, it is a short-term loan, it is very safe, we have never lost a penny in these various lending programs,” he said.

A haircut refers to the practice of lending less money than the collateral’s current market value.

Requiring the Fed to disclose loan recipients might set off panic, said David Tobin, principal of New York-based loan-sale consultants and investment bank Mission Capital Advisors LLC.

“If you mark to market today, the banking system is bankrupt,” Tobin said. “So what do you do? You try to keep it going as best you can.” (Please take note holders of dollars and Treasuries. If the banking system is bankrupt, guess what is next - Jesse)

“Mark to market” means adjusting the value of an asset, such as a mortgage-backed security, to reflect current prices.

US Takes a $20 Billion Stake and Guarantees $306 Billion of Risky Loans for Citigroup

And the hits just keep on coming.

International Herald Tribune
U.S. to inject $20 billion into Citigroup
The Associated Press
Sunday, November 23, 2008

WASHINGTON: The U.S. government unveiled a plan Sunday to rescue Citigroup, including taking a $20 billion stake in the firm, whose stock has been hammered on worries about its financial health.

In addition, the government will guarantee as much as $306 billion of risky loans and securities backed by commercial and residential mortgages.

The announcement was made by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp.

Citigroup in Emergency Talks with Government for Cash

Here we are, behind financial lines, huddled over our shortwave radios, waiting to hear about the true state of of our economy from the BBC... LOL.

BBC News
Citigroup seeks 'emergency cash'
15:54 GMT, Sunday, 23 November 2008

Executives of Citigroup, one of the biggest banks in the US, are in emergency talks with the US Treasury to gain much-needed funding, reports say.

The bank is also said to have contacted certain shareholders to assess their interest in increasing their stakes as as it faces an uncertain future.

Citigroup stock ended 20% lower on Friday as its board members met.

Last week the company announced 52,000 job losses worldwide on top of 23,000 job cuts previously announced.

No one from Citigroup was immediately available for comment.

There are fears that without further funding the bank might not be able to survive. Any money would be in addition to the $25bn injection it received in October from the US Treasury.

Options being discussed included a government cash injection as well as Citigroup selling some of its business, reported The Sunday Times. (Remember you heard about all of this here first - Jesse)

Chief executive Vikram Pandit told employees on Friday that the firm did not want to change its business model, Reuters reported, citing two employees.

He also reiterated that the firm had a robust capital position. (That seems to be financial CEO-speak for "we are on the brink, mates, and its been good to know you "- Jesse)

But Sean Egan, analyst at ratings agency Egan-Jones Ratings, said, "Citigroup needs a deep-pocketed investor that is ready, willing, and able to step up in the next few days." (Prince Alwaleed has a hole in his pocket? - Jesse)

"The only one who comes to mind is the government," he said, adding that $50bn might ne needed. (ROFLMAO, you can't make this stuff up. Hmmm, I'm thinking of a bigger fool, and a bigger number.... - Jesse)

In a bid to reassure investors, Citigroup is running advertisements in US and international newspapers on Sunday underlining its stability. (NY global bank with gaping holes in balance sheet desparately seeking a deep-pocketed investor 'just in case' we wish to re-open on Monday - Jesse)

It is widely expected that Citigroup will issue a statement on Monday before the US markets open. (They just said they had a robust cash position and that everything was fine. What are they going to say now, that they expect a cash surge from the Bush Administration to turn the tide? - Jesse)

This Bear Market Is One for the Record Books Part II

Here is a chart of the major bear markets since 1900 that shows the impact of the Great Crash of 1929 as a solitary event, and then again as the prelude included in the bear market of the Great Depression of 1929 - 1932.

We were bothered a little on the first version of this chart that the Great Crash did not show its full impact. Imagine the decline we have seen over the past year, but with more intensity, occurring in less than two months!




Special thanks to our friend Elvis_Knows for the chart update, and for all his many contributions and charts over the past year.

Robert Rubin's Role in the Bubble that Broke the World

Is it premature to speak of the failure of Citigroup?

No, the bank is finished. The only question is the nature of its demise.

The Fed and FDIC may cut off a few of the more gangrenous pieces, stuff it full of paper, bolt on a prosthetic or two, perhaps apply enough cosmetics to give it some semblance of an afterlife, but the hard fact is the bank has collapsed, and would not open its doors again without extraordinary measures to maintain the appearance of existence.

How did this happen? Although this article does not mention the chief architect, Sanford Weil and another member of the supporting cast Larry Summers, it does pay tribute to Robert Rubin who, with Alan Greenspan, helped to create one of the greatest financial bubbles in history.

The New York Times
Citigroup Pays for a Rush to Risk
November 22, 2008

...The bank’s downfall was years in the making and involved many in its hierarchy, particularly Mr. Prince and Robert E. Rubin, an influential director and senior adviser.

Citigroup insiders and analysts say that Mr. Prince and Mr. Rubin played pivotal roles in the bank’s current woes, by drafting and blessing a strategy that involved taking greater trading risks to expand its business and reap higher profits. Mr. Prince and Mr. Rubin both declined to comment for this article.

When he was Treasury secretary during the Clinton administration, Mr. Rubin helped loosen Depression-era banking regulations that made the creation of Citigroup possible by allowing banks to expand far beyond their traditional role as lenders and permitting them to profit from a variety of financial activities. During the same period he helped beat back tighter oversight of exotic financial products, a development he had previously said he was helpless to prevent.

And since joining Citigroup in 1999 as a trusted adviser to the bank’s senior executives, Mr. Rubin, who is an economic adviser on the transition team of President-elect Barack Obama, has sat atop a bank that has been roiled by one financial miscue after another.

Citigroup was ensnared in murky financial dealings with the defunct energy company Enron, which drew the attention of federal investigators; it was criticized by law enforcement officials for the role one of its prominent research analysts played during the telecom bubble several years ago; and it found itself in the middle of regulatory violations in Britain and Japan....As it built up that business, it used accounting maneuvers to move billions of dollars of the troubled assets off its books, freeing capital so the bank could grow even larger....

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

PBS Frontline: Mr. Weill Goes to Washington


Time Magazine February 15, 1999

E*Trade on the Brink - Seeks $800 Million from TARP to Stay Solvent

Battered E*Trade banking on government funds
Fri Nov 21, 2008 5:15pm EST
By Jonathan Spicer

NEW YORK (Reuters) - The troubles at E*Trade Financial Corp have worsened and now hinge on whether it can secure U.S. government funds that would bring some relief to its book of bad mortgage loans.

Shares of the discount brokerage tumbled below $1 to its lowest price ever this week, indicating that investors think chances are slim it will secure the $800 million it applied for under the Troubled Asset Relief Program (TARP) rescue program.

Competitors, including Charles Schwab Corp and TD Ameritrade Holding Corp have said they are loath to bid for the smaller and now very cheap company, but have made no secret they covet E*Trade's brokerage business, which has kept it afloat despite the drag of its mortgage business.

Roger Freeman, a Barclays Capital analyst attending a business update hosted by Schwab this week, said E*Trade's existence "depends on whether it gets the TARP."

E*Trade's survival probably hinges more on whether its customers continue to drive growth, according to analysts. But after a string of quarterly losses, the TARP funding is vital for the near term. But there are serious doubts the company will qualify alongside larger banks whose collapse could further shake a weakened U.S. economy.

"The way the stock is trading now, it appears as though a lot of investors don't expect them to get the TARP funding," said one analyst, who did not want to be named due to E*Trade's delicate situation. E*Trade Bank offers credit cards, savings and checking accounts, and mortgage and home equity loans and hash about $28 billion in deposits.

About 5 percent, or $1.4 billion, of the customer deposits are not insured by the Federal Deposit Insurance Corp, according to the company.

The purpose of the government's TARP program is to capitalize struggling financial institutions so they can resume lending. Some analysts said it is unlikely that E*Trade, in crisis mode, will be able to lend.

"Inherently, it seems to go against the spirit of the TARP program," the analyst said of E*Trade's application.

The company's argument for public funds focuses on the fact that TARP is partly intended to support those institutions that facilitate liquidity in the market.

E*Trade has said it is confident it will secure the funding and expects to make an announcement later this month. The company has $665 million in cash available to increase the capital of its banking arm if necessary.

Last month, E*Trade's daily trading and new client accounts both jumped from September, due largely to the volatile market selloff. "Customers have been consistently supportive of our business," said company spokeswoman Pam Erickson.

WORST-CASE SCENARIO

Overall, discount brokers are enjoying a spike in trading revenues, but they face the worst-case prospect of a lengthy bear market during which individual investors could exit in droves.

"Despite the reasonably healthy trends in the core brokerage franchise, we believe continued credit headwinds, a lack of earnings visibility and a limited capital cushion for common shareholders gives us no reason to become more constructive on E*Trade shares at current levels," Credit Suisse analyst Howard Chen wrote to clients this week.

The analyst added that because few details on the TARP application have been provided, he has not factored that into earnings estimates.

Shares fell 7 cents to 87 cents on Nasdaq on Friday.

The company spokeswoman declined to comment on the stock price.

E*Trade has absorbed a series of price and ratings downgrades since the last quarterly update, when it boosted its provision for loan losses by 62 percent and warned that charges in its home equity portfolio would be higher than expected.

The company had $26.4 billion in total loans -- including consumer, mortgages and home equity -- on its books at the end of September, with about 3 percent, or about $792 million, considered "nonperforming".

TELEBANC ACQUISITION

E*Trade, a high flyer in the 1990s technology boom, entered the mortgage business with its 2000 acquisition of Internet bank Telebanc.

The deal helped E*Trade weather the tech-market crash that followed, but also hurt when the mortgage market started to crack last year.

As recently as July, 2007, E*Trade shares were worth more than the stock of both Schwab and Ameritrade. But they plunged as the mortgage portfolio soured, and now the larger rivals are eyeing the healthy segments of E*Trade's business.

If E*Trade fails, some 4.4 million retail accounts would be exposed, opening the door to a possible government-sponsored takeover intended to protect clients, analysts said.

"We have an interest in the brokerage accounts of any of our competitors in the brokerage business," Schwab Chief Executive Walter Bettinger said this week. But he added: "We do not have any interest in taking on a complex balance sheet issue, a complex set of loans or securities that will require ... massive work-outs, writedowns and impairments."

E*Trade had $119.4 billion in total assets at the end of October, of which $16.4 billion was brokerage-related cash.

E*Trade has "a very good brokerage operation," Toronto-Dominion Bank (TD.TO: Quote, Profile, Research, Stock Buzz) CEO Ed Clark -- who also sits on Ameritrade's board -- said in an interview this week.

"But they are associated with very bad assets, and so we're not interested to take asset risk in order to buy E*Trade."

Is the Gold Bull Over? The Price of Gold From Various Global Perspectives

A similar question to ask would be, has the US dollar topped out yet as measured against a basket of currencies such as the DX Index?

It is important to note that this is the price of gold in US dollars.




According to this chart we are still in a downtrend, bouncing off the bottom of the decline. Americans tend to forget this since the US is such a large, almost homogenous country with its own currency and language, but with a growing element of Spanish.

Most Americans do not own passports and do not have any experience with a foreign currency excepting visits to Canada and Mexico.

Let's take a look at the price of gold in a few other world currencies.

It is a challenge to describe the color of the sky, of the trees, to people who have been wearing rose coloured glasses since birth.

"But what creates the most intense surprise
His soul looks out through renovated eyes."
John Keats, Ode to Apollo

The US Stock Markets Have Now Declined More than 50% - Intermediate Target Hit Today

Remember this chart from October?



Here's another view of the big picture.

Alwaleed bin Talal Increases Stake in Citi

Alwaleed Plans to Increase His Stake in Citigroup Back to 5%
By Steve Dickson

Nov. 20 (Bloomberg) -- Saudi billionaire Prince Alwaleed bin Talal plans to increase his stake in Citigroup Inc. to 5 percent after the U.S. bank lost almost a quarter of its value yesterday.

``Prince Alwaleed began buying Citi shares, as he strongly believes that they are dramatically undervalued,'' he said today in a statement.

In addition to his princely duties, the multi-talented Alwaleed is also the gossip columnist and rock critic for the Vatican newspaper L'Osservatore Romano under the pen name Guido Sarducci.

An Historic Divergence on the Long End of the Yield Curves

Original Chart from Econompic Data

European Union to Unveil €130 Billion Stimulus Plan

We can only hope that Europe follows the US model and gives the funds to a small group of bankers who, without independent oversight and accountability, can allocate the €130 Billion economic stimulus package to their industry friends and associates for executive pay and bonuses, dividends, and exclusive corporate resorts.

Economic Times
EU plans 130-billion-euro stimulus plan: Germany
20 Nov, 2008, 0359 hrs IST

BERLIN: The European Commission is planning a 130-billion-euro (163-billion-dollar) economic stimulus programme, a spokeswoman for the German economy ministry said Wednesday.

"That represents one percent of gross domestic product for each member state," she told AFP.
"For Germany, that means 25 billion euros."

German news weekly Der Spiegel reported earlier that the Commission would also set aside some of its own funds to arrive at the 130-billion-euro sum.

The Commission is due to present proposals to grapple with the impact of the global financial crisis on November 26.

Commission spokesman Johannes Laitenberger said no decision had been taken on the stimulus package.

"It is premature to talk about the size and specific orientation of the package because the preparatory work is still underway and there has not yet been a definitive political decision," Laitenberger told reporters.

German government spokesman Ulrich Wilhelm stressed that Berlin had just committed 32 billion euros over the next two years to its own economic jumpstart plan and expected that to figure in Brussels' calculations.

"It is unimaginable that our own programme would not be taken into account" by the EU Commission, he told the daily Financial Times Deutschland in an article to appear in its Thursday issue.

Other member states have cried poverty amid calls for a continent-wide growth plan and the European Commission is likely to seek to redirect funds committed to other efforts to the new package.

The 15-nation eurozone confirmed last week it had fallen into recession for the first time ever, with gross domestic product in the economies using the euro falling by 0.2 percent in the third quarter after a similar drop in the second quarter

Trading Note. Approaching our SP Futures Target of 810

We were looking for 810 to the downside and have been riding Index doubler shorts down since yesterday afternoon in our trading portfolios. We make changes to our investment portfolio only a few times each year.

Now we are buying some long positions to offset those shorts since we approach a possible support area.

The longs are individual stocks, precious metal miners and oil producers with strong cashflows and/or dividends, and some of the long index funds.

Please note that these longs are MORE than offset by the remaining short positions. This is a hedged play to take some short profits off the table without necessarily selling them. If we get a rally from here it will be relatively easy to reduce the three short positions. The longs are more diversified so obviously there are many more positions, but less in total dollar and leverage value. We are trading without margin.

We'll have to see how we close and what happens as we approach 800 if we do. If we go lower tomorrow we can adjust the long-short balance in the portfolio to take advantage of the decline.

Recall that we are in an option expiry week, and we have expiry in some of the commodity futures as well.

We offer the occasional example of how we might be trading a market not for specific examples or 'calls' but rather to reflect the style and money management we are using to match the character of a particular market. This one needs a whip and chair. Use of uni-directional positions and leverage are particularly dangerous since even in a bear downtrend, there is room for enormous swings even intraday.

Today did seem a little 'climactic' but it is too soon to tell.

Have a pleasant evening.

What Happened When They Pulled the TARP Out from Under the Mortgage Asset Markets?

The mortgage markets are imploding.

This is not the sort of action we might have expected given the panic story that Hank and Ben presented to Congress when they originally asked for the emergency $750 Billion to immediately buy troubled assets to 'save the system.' Well, from the looks of these charts those assets have become a lot more 'troubled.'

On the surface it appears as though they have washed their hands of the larger financial system, particularly the mortgage markets, after they supplied a select group of banks with no-strings equity investments.

Paulson and Bernanke need someone with experience in crisis management on their team. At this point the broader market can trust nothing that they say since it is inconsistent, opaque, and without principle to the point of seeming arbitrary. Suspicion of favoritism and insider dealing is clouding all that they do.

Bill Poole Thinks the Fed is Confusing the Markets with a Lack of Transparency and Clarity of Intent

The ABX indices are based on credit default swaps (CDS) for tranches of subprime mortgage-backed securities(MBS).

The CMBX is a Commercial Mortgage-Backed Securities credit default index. CMBX is quoted as credit spreads, whereas ABX is quoted as bond prices.

The Dollar Trap Part II: Mutually Assured Financial Destruction

The current structure of the remnants of the Bretton Woods agreement with the US dollar as the dominant reserve currency is not sustainable unless the rest of the world is willing to accept a form of neo-colonialism.

The developed nations are holding approximately 70% of their reserves in US dollars.

The rest of the world knows it must find an acceptable substitute for the dollar as the reserve currency.

The US does not wish to change the status quo for several reasons.

First, it provides an automatic funding mechanism for incredibly large budget deficits that would collapse without this mechanism.

Additionally, the US economy has become badly distorted, with an outsized financial sector as a percent of GDP created to manage its artificial reserve construct.

Change will be painful for all. Yet change must and will come, even as the US resists that change and uses a type of Mutually Assured Financial Destruction policy to maintain its hegemony.

No one wishes to make the 'first move' to the exit, since it will cause a severe depreciation of their dollar reserves, and possibly provoke clandestine and military action by the world's sole superpower.

And yet, the inching to the exits is underway, and the world holds its breath in case a shift occurs that will precipitously unravel 37 years of financial imbalance in a global economic earthquake.

The dollar will either be saved with a new formal structure, with more fiscal and political overtones to support an otherwise unstable monetary regime, or it will be decimated.

It would be naive to think that the US financial planners do not see this and are not using it to their advantage.

One can always count on a reversion to the mean. We just cannot know when it will happen, or how, or in what period of time.

When it comes it will come quickly like a lightning strike, with a terrific thunderclap heard around the world.

US Debt has grown to be about ten percent of World GDP (excluding the US) which is without historic precedent.



Approximately thirty percent of US debt is being held by non-US entities, in particular foreign central banks.



The Developed Countries are holding approximately 70% of their reserves in US Dollars. The Developing Nations have less exposure on a percentage basis.

Above Charts from "Is the US Too Big to Fail?" by the Reinharts at VoxEU


Total US Dollar Credit Market Debt Now Stands at 350% of GDP. This cannot be sustained. Certainly a certain portion of credit will be written off in defaults. But notice that the strategy of the US is not to make structural reforms but to try and restart the debt creation engine. This will require continued subsidies from foreign sources with waning appetites for US debt that can never be repaid.



Above chart courtesy of Ned Davis Research.

Mark Cuban Responds to the SEC

This looks like it might be an interesting case.

If he is guilty, the conversation between Mark Cuban and the CEO of Momma.com will be absolutely pivotal, especially the source of the record of it. Secondly, the nature of the large sale of stock that Mr. Cuban made will be equally important. Was it previously planned and committed to without question? (and something more than altered notations on scrap paper as in the case of Martha Stewart).

Another issue is whether or not this was polticial payback for Mr. Cuban's participation in criticism of the Bush Administration and his involvement in the movie "Loose Change." Is the 'enemies list' another of the artifacts of the Nixon Administration that turned up in Bush II? There were many.

It will take a 'smoking gun' and a witness such as John Dean to bring that level of government misdeeds to light. That requires a confluence of events that cannot be predicted in advance. But the elements of secrecy, contempt for the laws, hubris, and a willingness to do 'whatever it takes' were all there.

This is a sideshow for now, and we cannot help but believe that Mr. Cuban's attorneys are urging him to shut up, take the fine, and settle. Judging from this he has not yet internalized their advice.

Let's see what happens.

The SEC
Mark Cuban's Blog
Nov 17th 2008 1:20PM

I wish I could say more, but I will have to leave it to this, and let the judicial process do its job.

November 17, 2008
RE: SEC Civil Action in the United States District

for the Northern District of Texas, Dallas Division

Mark Cuban today responded to a civil complaint filed by the United States Securities and Exchange Commission in the United States District for the Northern District of Texas, Dallas Division. In its complaint, the Commission charges that Mr. Cuban engaged in violations of the federal securities laws in connection with transactions in the securities of Mamma.com Inc.

This matter, which has been pending before the Commission for nearly two years, has no merit and is a product of gross abuse of prosecutorial discretion. Mr. Cuban intends to contest the allegations and to demonstrate that the Commission’s claims are infected by the misconduct of the staff of its Enforcement Division.

Mr. Cuban stated, “I am disappointed that the Commission chose to bring this case based upon its Enforcement staff’s win-at-any-cost ambitions. The staff’s process was result-oriented, facts be damned. The government’s claims are false and they will be proven to be so.”

Tall Paul Delivers a Dismal Diagnosis for the US Economy

As much as we admire Paul Volcker, we can't help but notice that he, like so many others, did not have all that much to say while Greenspan and his merry banksters were running around setting fire to the economy while President Zero fiddled.

Also, he is not offering much in the way of innovation or suggestions for the incoming administration, at least so far.

Perhaps they should trigger a nasty inflation and then they can roll Volcker out to fix it. Hmmm, that seems to be in the works.

The 1930's script says that we have a Republican minority and a conservative Supreme court that block the many attempts of an incoming Democratic president to help the general public survive a devastating economic downturn, after a decade of seriously greasing the elites' monetary skids, pushing us to the brink of domestic insurrection, until it takes a world war to pull us out.

Wow, déjà vu!

UK Telegraph
Volcker issues dire warning on slump
By Ambrose Evans-Pritchard
10:39 PM GMT 17 Nov 2008

Paul Volcker, the former chairman of the US Federal Reserve, has warned that the economic slump has begun to metastasise after a shocking collapse in output over the past two months, threatening to overwhelm the incoming Obama administration as it struggles to restore confidence.

"What this crisis reveals is a broken financial system like no other in my lifetime," he told a conference at Lombard Street Research in London.

"Normal monetary policy is not able to get money flowing. The trouble is that, even with all this [government] protection, the market is not moving again. The only other time we have seen the US economy drop as suddenly as this was when the Carter administration imposed credit controls, which was artificial."

His comments come as the blizzard of dire data in the US continues to crush spirits. The Empire State index of manufacturing dropped to minus 24.6 in October, the lowest ever recorded. Paul Ashworth, US economist at Capital Economics, said business spending was now going into "meltdown", compounding the collapse in consumer spending that is already under way.

Mr Volcker, an adviser to President-Elect Barack Obama and a short-list candidate for Treasury Secretary, warned that it is already too late to avoid a severe downturn even if the credit markets stabilise over coming months. "I don't think anybody thinks we're going to get through this recession in a hurry," he said. (Perhaps Paul needs to send a postcard update to the talking heads at CNBC and Bloomberg - Jesse)

He advised Mr Obama to tread a fine line, embarking on bold action with a "compelling economic logic" rather than scattering fiscal stimulus or resorting to a wholesale bail-out of Detroit. "He can't just throw money at the auto industry."

Mr Volcker is a towering figure in the US, praised for taming the great inflation of the late 1970s with unpopular monetary rigour. He is no friend of Alan Greenspan, who replaced him at the Fed and presided over credit excess that pushed private debt to 300pc of GDP. (Funny how Greenspan has so few friends now, but was so widely lionized by the corporate support structure while he was helping to destroy the economy - Jesse)

"There has been leveraging in the economy beyond imagination, and nobody was saying we need to do something," he said. "There are cycles in human nature and it is up to regulators to moderate these excesses. Alan was not a big regulator." (There were quite a few people warning about a credit bubble but they were largely shouted down, ignored, and dismissed by the cognoscenti, largely fueled by conservative think tanks and corporate funding - Jesse)

Even so, he said the arch-culprit was the bonus system that allowed bankers to draw forward "tremendous rewards" before the disastrous consequences of their actions became clear, as well as the new means of credit alchemy that let them slice and dice mortgage debt into packages that disguised risk. (So let's make sure we try to prolong that system by handing them billions of dollars in taxpayer money without conditions or serious reform - Jesse)

The Dollar Trap: Michael Hudson's Incisive Characterization of Our Global Economic Dilemma

Bretton Woods has not worked well for a long time, despite the best efforts of the world's bankers to pretend that it has. As the charade continues, the economy of the United States and the composition of international trade has grown increasingly artificial and unsustainable.

The dilemma facing us now is what happens when the dollar hegemony finally breaks down and falls apart? Which countries will break ranks and begin offloading their dollar reserves in size into more tangible and less arbitrary stores of value, risking the value of their remaining reserves, in a classic Prisoner's Dilemma? Be assured that this is happening quietly behind the scenes, despite some of the recent financial engineering that has caused a dollar short squeeze, primarily in Europe.

More on this later. But first, here is a major plank in our construct so very well expressed by the classical economist Michael Hudson. What we are approaching is the failure of the Bretton Woods arrangement. How this is accomplished, how it unfolds, will shape at least next several decades of history and the fortunes of our generation.

"What happens in practice is that foreign central banks recycle the dollars that
their exporters and asset sellers receive because their currencies would rise if
they failed to do this. That would price their exports out of world markets,
leading to unemployment. Foreign countries thus are in a dollar trap.
They send their savings to finance the domestic U.S. Government budget deficit
instead of helping their own domestic economics, because they have not been able
to create an alternative to the dollar."

Our Trash for Your Cash
Bankers Shake Down Congress and the G-20
By MICHAEL HUDSON

The financial press has been negligent in reporting how last week’s two top financial stories are linked: first, the testimony by Treasury Secretary Henry Paulson and his evasive Interim Assistant Secretary Neel Kashkari defending why they followed a completely different giveaway plan to the banks (their own Wall Street constituency) than what Congress authorized; and second, the G-20 standoff among the world’s leading finance ministers this weekend.

The dollar glut is one of the key factors that has aggravated the junk-mortgage problem in recent years. Looking forward, if foreign countries are no longer to invest their dollar inflows in Fannie Mae, Freddie Mac and toxic packaged mortgage derivatives, what are they to do with these dollars? The U.S. Government refuses to let foreign government funds acquire anything but financial junk such as the plunging Citibank shares that Arab oil sheikhs have bought.

Here’s the problem that faced global finance ministers this weekend: The U.S. payments deficit has been pumping excess dollars into foreign economies, whose recipients have turned them over to their central banks. These central banks have saved their currencies from rising (and thus losing foreign markets by making their exports more expensive) by buying Treasury bonds so as to support the dollar’s exchange rate by recycling their dollar inflows back to the United States – enough to finance most of our federal budget deficit, and indeed much of Fannie Mae’s mortgage lending as well.

Mr. Bush for his part would like to shape the global financial system so that foreign economies continue giving the United States a free lunch. U.S. officials control the International Monetary Fund and World Bank and use these institutions to impose neoliberal privatization policies on foreign countries, thereby destroying the post-Soviet economies, Australia and New Zealand since the 1990s, just as they destroyed Third World economies from the 1960s through the ’80s.

That’s why, until last month, the IMF had lost its clients and was almost universally shunned. French President Nicolas Sarkozy led foreign calls for a “new Bretton Woods,” by which he meant not just an upgrading of U.S. dollar hegemony but a different world order – more regulated with a fairer quid pro quo. And as the Financial Times reported: “Spain’s governing Socialist party summed up the heady mood in some parts of Europe in an internal document, seen by El Mundo, that identified the summit as a moment of historic change. ‘The origins of this crisis lie in neoliberal and neoconservative ideology,’ it said.”

Mr. Paulson and other U.S. officials have long been promising foreign finance ministers that Fannie Mae and Freddie Mac securities are as good as U.S. Treasury bonds while yielding higher interest. The resulting investment in these two mortgage-packaging agencies was a major factor in their $200 billion bailout. Letting their securities go under would have ended Dollar Hegemony for good. So getting foreign acquiescence in financing future U.S. balance-of-payments deficit is inextricably bound up with how to resolve the U.S. financial and real estate bubble.

Its bursting has prompted Congress to authorize $700 billion supposedly to re-inflate the property market. The Troubled Asset Relief Program (TARP) gives Wall Street money in the hope that it will lend enough to start inflating asset prices again, enable borrowers to get rich by going into debt again – “wealth creation” Alan Greenspan-style. It is as if the neoliberal bubble years 2002-07 were a golden age to be recovered, not the road to financial perdition. In doing this, Mr. Paulson is using junk economics to cope with the junk mortgage problem that in turn was based on junk mathematical models. His problem is to keep the fantasy going.

Congress has caught onto the game being played. Now that the bailout looks like a last-minute giveaway to insiders while the giving is good, Congress held hearings last week to ask why the Treasury abandoned its plan to buy the “troubled assets” (junk mortgages) that Mr. Paulson had originally said was the problem. Why has the Treasury bought $250 billion of ersatz “preferred common stock” in banks at prices far above what private investors such as Warren Buffett paid?

Drawing a picture of a just-pretend world to rationalize Wall Street’s free lunch, Mr. Paulson sought to deflect the issue by postulating a series of “ifs.” The Treasury’s $250 billion in bank stock would give lenders money that might be used to re-inflate the credit supply if banks chose to re-enter the commercial paper market and provide more mortgages on easier terms. This trickle-down patter talk is what passes for neoliberal economic theory these days. The fantasy is for banks to restore “balance” by granting more credit, increasing the indebtedness of bank customers so as to restore the housing market to its former degree of unaffordability.

Congressional interrogators pointed out that banks were not lending more money. Mortgage interest rates have risen, not fallen, even though the Fed is supplying banks with credit at only a quarter of a percentage point (an average of about 0.30 per cent last week). Credit standards (understandably) have been tightened to require prospective buyers to put up more of their own money. Foreclosures and evictions are up and real estate prices continue to plunge. Also plunging almost straight down has been the Dow Jones Industrial Average, sinking below the 8000 mark last week to the lowest levels in years. Nothing is working out the way Mr. Paulson promised.

The word being used most by Treasury officials these days is “unexpected.” At his subcommittee hearing on Friday, Nov. 14, Dennis Kucinich asked Mr. Paulson’s sidekick, Neel Kashkari, whether the Treasury’s lack of realistic foresight was an innocent error or a case of bait and switch. Mr. Kashkari stonewalled by repeating a “talking point” loop-tape claiming that giveaways were the way to get the economy “moving” again. The banks would use their newfound power to help customers run back into debt even more deeply, presumably at the exponential rates needed to re-inflate property and stock prices

Republican Congressman Darrill Issa asked just when the Treasury decided to dump the law as written and pursue an alternative giveaway to Wall Street rather than help defaulting homeowners. Why hasn’t it done what the law that Mr. Paulson himself insisted that Congress agree to – arrange orderly debt write-downs by using the promised $50 billion of public money to buy mortgages headed for foreclosure, and re-set unrealistically high mortgages to reflect current price levels? Renegotiating bad mortgages down to this price for existing owner-occupants – or selling the property to a buyer who could afford fair terms – would avert the distress sales that are poisoning local property markets Isn’t this what the Congressional plan called for, after all?

Mr. Kashkeri kept trying to run out the time clock by explaining rote Treasury procedure. He assured the committee that he worried each night about the fate of homeowners, and said that Mr. Paulson also was wringing his hands in empathy, but they had found it much better to give money to the banks in the hope that they would show similarc concern for their customers. The committee members simply gave up when it became apparent that the Treasury officials were stonewalling, just as the Fed has stonewalled Congress by refusing to give any details of the $850 billion giveaway it’s been conducting under its own cash-for-trash program. On November 12, Mr. Paulson gave his excuse: “We changed our strategy when the facts changed.”

What were these facts? For starters, the Federal Reserve found that it was able to pump an even larger amount into the “cash for trash” program than the Treasury originally was to have provided. The Treasury plan would have obliged the banks to take a loss by selling their “troubled assets” (junk mortgages) at today’s post-bubble prices. Bankers don’t like to take losses. That’s what the government is supposed to do. The Fed can do anything it wants in order to “stabilize markets,” under an umbrella clause inserted into its Act for just such purposes. Applying the “privatize the profits, socialize the losses” rationale that bank lobbyists have polished over the past century, it has decided that the best way to “stabilize the economy” is to swap Treasury bonds for high-risk junk assets at face value, saving the banks from having to take a loss.

The more wealth that is concentrated at the top of the economic pyramid and the more banks that can be consolidated into just a market-setting few, the more “stable” markets will be. This is the neoliberal economic doctrine used to justify the Fed’s purchase of junk mortgages, junk bonds and the bad gambles in insuring derivatives that A.I.G. had drawn up. One can only conclude that Mr. Paulson was knowingly deceptive when he told Congress on November 12 that the government has found a better way for the giveaway to trickle down from the banks to the credit markets than to buy their bad loans. It has indeed been doing just this, but via the Fed at full price and in secret, away from the prying eyes of Congress rather than through the Treasury program that Congress authorized under more current market-oriented terms intended to protect “taxpayer interests.” The Fed values junk mortgages at the high fantasy prices that banks, A.I.G. and other companies had bought them for, saving them from having to take a loss. Hedge funds and speculators who had bought junk-insurance from A.I.G. were made whole, and A.I.G. stockholders were saved by the infusion of government capital so that players would not have to take losses in the Wall Street casino.

Now that the Fed is doing this, the Treasury can turn to its own form of giveaway: buying bank stocks at far above their market price (that is, the price paid by investors such as Warren Buffett for Goldman Sachs stock), on terms that permit the banks to turn around and use the money to buy other banks, pay out as dividends to shareholders or pay high executive salaries rather than helping mortgage debtors. “I don’t think the government should put money into failing institutions,” Mr. Kashkari assured Congress, explaining that the bailout of A.I.G., Fannie Mae and Freddie Mac would be in vain without yet further government bailouts. Rep. Kucinich’s final remark to Mr. Kashkari was: “That statement that you just made, you will hear about for the rest of your career.

The internal contradiction here is that why the Republican logic of breaking up Fannie Mae and Freddie Mac into smaller companies does not apply to the commercial banking system. Rather than consolidating the banking system in the hands of New York and East Coast banks, why shouldn’t the government break up financial institutions “too big to fail?" Instead, the Treasury is simply investing in stocks of banks, leaving existing stockholders in place rather than wiping them out.

Mr. Paulson under George Bush in 2008 is looking like the U.S. counterpart to Anatoly Chubais under Boris Yeltsin in 1996. Just as Russian neoliberals led by Chubais were promoted by Clinton Treasury Secretary Robert Rubin of Goldman Sachs, today’s Wall Street power grab to replace the government as the economy’s central planner is being orchestrated by another Treasury Secretary from Goldman Sachs, empowered to decide which kleptocrats are to receive what public resources and on what terms, aided by “Helicopter” Ben Bernanke at the Federal Reserve. Mr. Bernanke’s famous quip about helicopters dropping money to get the economy moving seems to be limited to Wall Street for use in buying financial assets, not real goods and services for the population at large.

The road to G-20

Speaking on Thursday, November 13, before the Manhattan Institute, a lobbying organization for finance and real estate, President Bush repeated the myth that foreign countries recycle so many dollars to America because of our “strong economy” and free markets.

The reality is quite different. There is no such thing as a “free market.” For a few days after announcement of the $700 billion giveaway, some knee-jerk opponents of government spending accused this of being “socialism,” but they quickly discovered that not all government spending is socialist. Regardless of what economic system is followed, all markets are planned, and have been ever since calendars were developed back in the Ice Age. Most market structures throughout history have been organized in a way that provides the vested interests with a free lunch. This remains the essence of post-feudal capitalism – or as some have expressed it, corporativism.

What happens in practice is that foreign central banks recycle the dollars that their exporters and asset sellers receive because (as noted above) their currencies would rise if they failed to do this. That would price their exports out of world markets, leading to unemployment. Foreign countries thus are in a dollar trap. They send their savings to finance the domestic U.S. Government budget deficit instead of helping their own domestic economics, because they have not been able to create an alternative to the dollar.

Next to Treasury debt, real estate mortgages are the only category large enough to absorb the excess dollars being thrown off by the U.S. payments deficit – thrown off, that is, by U.S. military spending abroad, consumer spending to swell the trade deficit, and investment outflows as investors here and abroad diversified their holdings outside of the United States. The upshot is that world monetary reserves have come to consist of central bank loans to finance the U.S. bubble economy. But the knee-jerk deregulatory philosophy of the Clinton and Bush eras has killed the U.S. investment market.

What makes this dynamic unstable is that U.S. exports become even less competitive as higher housing costs and debt-service charges push up the cost of living and doing business. The more dollars foreign countries recycle, the less the U.S. economy will be able to work off its debts by exporting more. So the dynamic is guaranteed to be a losing game for foreign governments – unless anyone can explain how the United States can generate the $4 trillion to repay its debt to the world’s central banks. To make matters worse, the dollar’s downward drift against the euro and sterling obliges foreign creditors to take a loss on their dollar holdings as denominated in their own currencies.

Nobody has found a “market-oriented” solution to this problem. That is what doomed the G-20 meetings this weekend to failure, just as there could be no agreement at the G7 meetings a few weeks ago. In the face of U.S. Treasury dreams of re-inflating the mortgage market, Europe is trying to draw the line at financing a losing proposition.

But now that gold no longer is the means of settling balance-of-payments deficits, foreign central banks lack an alternative to the U.S. dollar to hold their monetary reserves. This leaves them with (1) U.S. Treasury securities, and (2) U.S. mortgage securities. Recent years have seen a further diversification via “sovereign wealth funds” into (3) direct ownership of mineral resources, industrial companies, privatized national infrastructure and other equity investment rather than debt. But rather than welcoming this, the U.S. Government seeks to limit foreign central banks to buying junk mortgages, junk bonds and other financial garbage. To call this “market equilibrium” is to indulge in the feel-good argot that fogs today’s international financial dialogue.

To put matters bluntly, the issue at the G-20 meetings is mistrust of the unregulated U.S. banking system and, behind it, government “regulators” who refuse to regulate. China and other foreign dollar recipients have been treating the dollar like a hot potato, trying to spend it on buying foreign minerals, fuels and other assets from any country that will accept payment in dollars. Most of the takers are third world countries still committed to paying the heavy dollarized debts owed to the World Bank and other global creditors. The price of their remaining in the Bretton Woods system is to sacrifice their public domain in a kind of pre-bankruptcy sale rather than repudiating their debts under the “odious debt” and “fraudulent conveyance” escape valves. What is needed is not to “reform” the World Bank and IMF, but to replace them. But that is another story, one that other countries dared not even bring up at the November 15-16 meetings.

Euroland is officially in a recession for the first time since the birth of the single currency. Part of the reason is that its member countries have felt obliged to use their monetary surpluses to support the dollar – and hence, the U.S. Treasury’s budget deficit – instead of supporting their own domestic economies. Just before flying to America this weekend, French President Nicolas Sarkozy announced his position: “‘The dollar, which at the end of World War II was the only world currency, can no longer claim to be the sole world currency … What was true in 1945 can no longer be true today.’” Stating this fact was not a matter of ‘courage,’ but ‘good sense.’” Italian Prime Minister Silvio Berlusconi made a point of defending Russia, criticizing the US for “provoking” Moscow with its missile defense shield. But Mr. Paulson insisted that the global financial crisis was “no nation’s fault.”

U.S. officials chose to brazen it out, including a new wave of American protectionism for the auto industry in what may be a foretaste of economic nationalism to come. “Bankers complain that the financial rescue plans put in place in many countries distort competition because they operate on very different terms while others say that the bail-outs under consideration for U.S. carmakers represent a classic effort to protect national champions that could inspire copycat efforts elsewhere.”. So wrote Krishna Goha in the Financial Times, describing why, when G-20 finance ministers reaffirmed their support for free trade, they were talking largely at cross-purposes.

The past eight years have demonstrated the folly of imagining that the stock market and real estate can provide steady rates of return that compound into exponential increases in savings sufficient to pay retirement income and make homeowners and small investors rich without really having to work. Money managers advertise “Let your money work for you,” but only people actually work. Financial returns are paid in the form of command over labor power – workers “doing time.” What banks do provide is debt, and this remains in place after the force of asset-price inflation is spent and market prices fall below liabilities to cause Negative Equity. That is how economic bubbles operate. But to hear Wall Street’s neoliberals tell the story, it is not necessary to pay retirees out of what is produced. Finance capitalism can replace industrial capitalism without a “real” economic base at all.

Who Really Gets the “Free Lunch”?

So much for the material conditions of production! We can all live free as financial engineering replaces industrial engineering. The Treasury is now reported to be discussing bailouts for credit card issuers by taking over their bad debts. The banks presumably would even be able to charge the government for the accumulation of exorbitant penalty fees.

The banks and Wall Street are threatening to wreck the economy by “going on strike” and creating a credit squeeze forcing foreclosures and economic collapse, if Congress and the Federal Reserve don’t save them from taking a loss on their bad loans and financial derivatives. Foreigners also must play a subordinate role in this game, or the international financial system itself will be collapsed. Financial customers must absorb the loss.

The most reasonable response to this brazen stance may be to return the Federal Reserve’s monetary functions to the U.S. Treasury. This is where they were conducted with great success prior to 1913. Back in the 1930s the “Chicago Plan,” put forth in the wreckage of the banking system’s and Wall Street misbehavior that aggravated the Great Depression, proposed to turn commercial banking into classic-style savings banks with 100 per cent reserves. A modernized version is put forth in the American Monetary Institute’s proposed Monetary Reform Act as an alternative to the dysfunctional high finance that Wall Street lobbyists have created as a Frankenstein debt-selling machine. The U.S. economy has been living on a combination of foreign dollar recycling and bank credit that has been used simply to “create wealth” by inflating asset prices, not by financing new capital formation.

As matters have turned out, the banks have gone broke doing this. The Treasury has given them trillions of dollars of aid, and even more as special tax favoritism, loan and deposit insurance guarantees. This can only continue as long as banks can make the inevitable collapse of compound interest schemes appear to be unthinkable. That attempt is what doomed the G-20 meetings this weekend, and it will doom any future U.S. administration that tries to follow in its footsteps.

Head of IMF Requires $1.2 Trillion for Global Bailouts and Stimulus

Recommendations and coordination are always accepted.

But its bad enough the Congress gave the Bush Administration $750 billlion to hand out to their favorite banks.

No way should the money be given to the IMF to actually distribute for fiscal stimulus. That is one step closer to world government.

Economic Times
IMF requires $1.2 trillion to boost world economy
18 Nov, 2008, 0139 hrs IST, AGENCIES

TRIPOLI: Up to two percent of the world's income, or 1.2 trillion dollars, should be spent on reviving the global economy, the head of the International Monetary Fund said in Tripoli on Monday.

Dominique Strauss-Kahn, the fund's managing director, called for "massive" and coordinated use of budgetary policy to overcome the crisis.

"It is time to use all instruments," he said at the opening of a conference on economic integration in the Maghreb region, urging a budgetary "push" of two percent of countries' gross domestic product.

On a world scale, this would add up to 1.2 trillion dollars.

"A coordinated budgetary policy sharply increases the effect of the policy," Strauss-Kahn said.

He indicated that he would favour a further interest rate cut by the European Central Bank.

SEC Sues Mark Cuban for Insider Trading

If this is accurate the evidence seems damning against Mark Cuban, who only says "stay tuned."

The question is all about the source of the record of the call between Cuban and the Momma.com CEO. Was it a recollection, a transcription, or a recording? It seems very detailed and incriminating. Was the sale already in the works, and did Mark go ahead with it on advice on counsel? Stay tuned indeed.

Bloomberg
Mavericks' Cuban Sued by SEC for 2004 Insider Trading
By David Scheer

Nov. 17 - Billionaire Mark Cuban, the owner of the Dallas Mavericks basketball team, was sued by U.S. regulators over claims he made illegal insider trades four years ago in shares of Internet search company Mamma.com Inc.

Cuban, 50, an investor in Mamma.com for four months, became ``very upset and angry'' in 2004 after the company told him in confidence it planned to sell stock below its trading price, the Securities and Exchange Commission said in a civil suit today at federal court in Dallas. Less than four hours later, he sold his 6.3 percent stake, avoiding more than $750,000 in losses after the company's share sale was announced, the SEC said.

``It is fundamentally unfair for someone to use access to nonpublic information to improperly gain an edge on the market,'' Scott Friestad, the SEC enforcement official overseeing the case, said in a statement.

Cuban was at the American Airlines Center in Dallas, home of the Mavericks, in late June 2004 when he got an e-mail from Mamma.com's chief executive officer, asking that he call as soon as possible, the SEC said. During an almost nine-minute call, Cuban promised to keep the information secret before learning the company planned a private investment in public equity offering, known as a PIPE.

``Cuban became very upset and angry during the conversation, and said, among other things, that he did not like PIPEs because they dilute the existing shareholders,'' driving down the value of their stock, the SEC wrote in its complaint. At the end of the call, Cuban told the CEO, ``Well, now I'm screwed. I can't sell,'' the SEC said.

Fines, Confiscate Gains

The agency's suit seeks to impose unspecified fines and confiscate gains from the trades.

Reached via e-mail for comment, Cuban responded ``stay tuned.'' His attorneys, Ralph Ferrara of Dewey & LeBoeuf LLP and Paul Coggins of Fish & Richardson LLP, didn't return calls.

Montreal-based Mamma.com changed its name to Copernic Inc. in 2007, according to the SEC. Copernic Chief Executive Officer Marc Ferland also didn't return a call seeking comment.

Cuban, owner of the HDNet high-definition television channel and the Landmark Theater chain, is among initial bidders this year for Major League Baseball's Chicago Cubs, the team's Wrigley Field home and a stake in a TV network. Sam Zell's Tribune Co. is trying to sell the assets by year-end to help pay off $11.8 billion of debt. A deal requires MLB owners' approval.

The SEC's suit ``will put a cloud'' over whether Cuban will buy the team, said sports banker Robert Tilliss of Inner Circle Sports in New York, who isn't involved in the sale. ``This will definitely put some doubts in people's minds about him being an approvable bidder.''

Broadcast.com

Baseball spokesman Pat Courtney declined to immediately comment. Tribune spokesman Gary Weitman didn't return an e-mail for comment. Zell's spokeswoman Terry Holt didn't return voice- mail or e-mail messages for comment.

Cuban made his fortune through the sale of Broadcast.com, the multimedia Web service he co-founded and which Yahoo! Inc. bought for $4.7 billion in 1999.

The next year Cuban purchased the Mavericks from Ross Perot Jr. for $280 million, a record at the time for a National Basketball Association team. The Mavericks became a championship contender under Cuban's control, ending a 10-year drought in his first full season by reaching the NBA playoffs in 2006.

Cuban, who often watches the Mavericks from courtside wearing a T-shirt and jeans, has racked up more than $1.3 million in fines for his criticism of basketball officials.

Goldman Sachs Target of Naked Short-Selling and Price Manipulation Complaints in High Yield Loan Markets

The charge is that as an agent bank Goldman Sachs has access to private information that gives it an advantage in the opaque market of high risk debt, and they have been using that information to target certain portions of the market with naked short selling to drive down prices and reap large profits for themselves at the expense of their clients and other market participants.

This is the template for potential market fraud that we described previously on several occasions. The banks have privileged information and access to funds that precludes a level playing field with other market participants. The uneven enforcement of the rules by the SEC and CFTC and lack of transparency in other markets is another significant factor.

We should note that the fails in this end of the markets are relative small change when compared to the fails in the Treasuries markets as we have previously shown, overseen by the Fed.

Now that Goldman is trading with public funds from the Treasury granted without oversight or restrictions by their former chairman the situation becomes even more outrageous, almost incredible.

Perhaps there is no explicitly legal wrong-doing. And we are only using this allegation against Goldman Sachs as an example. But even a simple top down examination of the market structures shows the weakness of our regulatory process, and the failure of crony capitalism and laissez-faire self-regulation to create markets that are transparent and worthy of trust and confidence for all participants. They more closely resemble dishonest poker games.

Until the financial system is reformed there can be no sustainable recovery.

Bring back Glass-Steagall and honest, responsive, and transparent regulation of the markets.


Bloomberg
Goldman Targeted by Investor Complaints of Naked Short-Selling
By Pierre Paulden and Caroline Salas

Nov. 17 (Bloomberg) -- Investors in the $591 billion high- yield, high-risk loan market are accusing Goldman Sachs Group Inc. of naked short selling to profit from record price declines.

At least two fund managers complained verbally to officials of the Loan Syndications and Trading Association, saying they believe Goldman helped drive down prices by using the technique, according to people with knowledge of the objections. New York- based Goldman is acting against its clients by trying to profit at their expense, the investors said.

A $171 billion drop in the value of the loans in the past year is pitting banks against investing clients on assets once considered so safe they typically traded at par. The drop exposed flaws in an unregulated market where trades can take from several days to months to settle and banks may have information unavailable to investors. In a naked-short transaction, a firm would sell debt it didn’t already own, betting the price will fall before it purchases the loan and delivers it to the buyer.

“The LSTA is closely monitoring issues of naked short selling,” Alicia Sansone, head of communications, marketing and education at the New York-based industry association, said in an e-mail.

The group, comprising banks and money management firms that trade the debt, plans to tighten rules to ensure transactions are settled more quickly and prices reported accurately, Sansone said. She wouldn’t elaborate or discuss the claims against Goldman....

Most Aggressive

The bank was seen as the most aggressive in recent months in selling loans at prices below other dealers’ offers and taking longer than the LSTA’s recommended seven days to settle the deals, according to the investors complaining to the trade group.

There’s no rule preventing naked short selling of loans. The U.S. Securities and Exchange Commission this year banned the practice for 19 stocks including Lehman Brothers Holdings Inc. and Fannie Mae and Freddie Mac from July 21 to Aug. 12 as share prices plunged. New York-based Lehman, once the fourth-biggest securities firm, eventually went bankrupt and Fannie and Freddie, the two largest mortgage-finance providers, were brought under government conservatorship. (Excuse us but isn't naked short selling of stocks illegal in the US? The SEC just does not enforce the law and the list of 19 was just a declaration of vigilant enforcement for a select group of 'special companies.' - Jesse)/em>

The slump in loan prices during the global seizure in credit markets is causing particular disruption in the loan market because the debt typically trades close to 100 cents on the dollar. Prices never were below 90 cents until February this year. By October they had fallen to a record low of 71 cents, according to data compiled by Standard & Poor’s. The decline, which S&P said equated to losses of about $171 billion, helped drive the complaints from fund managers.

‘Shell-Shocked’

“Investors are shell-shocked” by the decline, said Christopher Garman, chief executive officer of debt-research firm Garman Research LLC in Orinda, California. “In many ways they’re all but wiped out.”

Because prices were so stable, short sales of loans were unheard of until now, Elliot Ganz, general counsel of the LSTA, said at the group’s annual conference in New York last month.

“No one ever shorted loans,” Ganz said. “Prices never went down.”

High-yield, or leveraged, loans are given to companies with below-investment grade ratings, or less than Baa3 at Moody’s Investors Service and under BBB- at S&P. Banks typically form a group to arrange the financing. They then find other investors to take pieces of the debt, helping spread the risk.

Those loan parts can trade through private negotiations between banks and hedge funds or mutual funds. One of the lenders involved in the initial deal remains the so-called agent bank, which keeps track of who owns what piece. Unlike bonds and stocks, the debt doesn’t trade on an exchange and has no central clearinghouse.

Agent Banks

When a loan changes hands, the agent bank must sign off on the transaction, meaning it knows exactly who is buying and who is selling. The rest of the market is in the dark. Getting an agent to sign off, also can delay settlement.

“An agent will have a bird’s-eye view of who owns what and when,” said John Jay, a senior analyst at Aite Group LLC, a research firm that specializes in technology and regulatory issues in Boston. “They have information that no one else has....”

Three Days

In the bond market, the standard settlement time is three days following the trade. In a bond short sale, a trader acquires debt by borrowing the security in a deal known as a repurchase contract. The two sides specify how long the bond will be borrowed with the right to renew the pact. Because loans can’t be borrowed through such agreements, any short seller would have to go naked.

While the LSTA doesn’t track the amount of loans currently unsettled, at least 700 trades made by Lehman Brothers Holdings Inc. before it filed for bankruptcy hadn’t cleared, Ganz told last month’s conference....

Saudi Arabia Spends $3.5 Billion to Buy Gold in the Past Two Weeks

Gulf News
Gold demand rises in Saudi Arabia
By Mariam Al Hakeem, Correspondent
November 12, 2008, 23:42

Riyadh: There has been an unprecedented demand for gold in the Saudi market recently, with over 13 billion Saudi riyals (equivalent to US $3,466,667,946) (Dh12.75 billion) being spent on the yellow metal during the last two weeks.

Demand is expected to rise still higher as more investors turn to gold as a safe haven in the midst of the global financial crisis, according to market sources.

Sami Al Mohna, an expert on the gold market, said the trend had resulted in a substantial rise in the gold reserves of Saudi investors....

Hartford Insurance Becomes a Savings and Loan and Taps Uncle Sugar's CPP

There seems to be a bias to do whatever it takes to support big bonus and dividend paying financial companies, even one as diverse as GE, but to continue to let the manufacturing sector and blue collar jobs go to hell in a handbasket for the sake of global competitiveness and lower wages.

Yesterday the talking heads on Bloomberg and CNBC were ripping US manufacturing for its bad management practices, and blue collar workers for their extravagant wages, while praising the use of public money to generously subsidize the financial sector that caused this mess.

It was a truly Orwellian moment. What a collection of shameless, self-serving parasites!

Hartford's stock jumped 25% on the news, and helped to buoy the market. This did not last as the markets sold off heavily in the last half of hour trading. This Administration's economic policies are as bankrupt as they have left the Treasury.

The Hartford Announces Agreement To Acquire Federal Trust Bank
And Application To U.S. Treasury Capital Purchase Program
Friday November 14, 3:20 pm ET

HARTFORD, Conn. - The Hartford Financial Services Group, Inc. (NYSE: HIG) today announced that it has applied to the Office of Thrift Supervision (OTS) to become a savings and loan holding company and has applied to participate in the U.S. Treasury Department’s Capital Purchase Program (CPP).

In conjunction with these applications, The Hartford has signed a merger agreement to acquire the parent company of Federal Trust Bank for approximately $10 million and will also provide an additional amount to recapitalize the bank. Federal Trust Bank, a federally chartered, FDIC-insured savings bank is owned by Federal Trust Corporation, a unitary thrift holding company headquartered in Sanford, Fla. The completion of this acquisition will satisfy a key eligibility requirement for participation in CPP.

“We are taking these actions as a strong and well-capitalized financial institution looking for maximum flexibility and stability,” said Ramani Ayer, The Hartford’s chairman and chief executive officer. “Securing capital at the terms available through the Capital Purchase Program could be a prudent course in this market environment and would allow us to further supplement our existing capital resources.”

The Hartford’s purchase of Federal Trust Corporation is contingent on Treasury’s approval of The Hartford’s participation in the CPP, approval of the acquisition by the shareholders of Federal Trust Corporation, and the Office of Thrift Supervision’s approval of The Hartford’s application to become a savings and loan holding company. The Hartford estimates that it would be eligible for a capital purchase of between $1.1 billion and $3.4 billion under existing Treasury guidelines. The final amount of capital request will be determined following approval by Treasury.

About Federal Trust Corporation

Federal Trust Corporation is a unitary thrift holding company and is the parent company of Federal Trust Bank, a federally-chartered, FDIC-insured savings bank. Federal Trust Bank operates 11 full-service offices in Seminole, Orange, Volusia, Lake and Flagler Counties, Florida. The company's executive and administrative offices are located in Sanford, in Seminole County, Florida.

China Expected to Shift Reserves into Commodities and Gold

"Beijing's reserves could easily go up to 3,000 to 4,000 tonnes..."


The Standard - Hong Kong
Gold rush
By Benjamin Scent
Friday, November 14, 2008

The mainland is seriously considering a plan to diversify more of its massive foreign-exchange reserves into gold, a person familiar with the situation told The Standard.

Beijing is considering changing its asset allocations during the financial tsunami in order to build up gold reserves "in a big way," the source said.

China's fears about the long-term viability of parking most of its reserves in US government bonds were triggered by Treasury Secretary Henry Paulson's US$700 billion (HK$5.46 trillion) bailout plan, which may make the US budget deficit balloon to well over US$1 trillion this fiscal year.

The US government will fund the bailout by printing new money or issuing huge amounts of new debt, either of which will put severe pressure on the value of the greenback and on government bond yields. (Is it odd that almost everyone in the world EXCEPT Americans can see this coming? - Jesse)

The United States holds 8,133.5 tonnes of gold reserves valued at US$188.23 billion. China holds gold reserves of just 600 tonnes, worth only US$13.89 billion.

Beijing's reserves could easily go up to 3,000 to 4,000 tonnes, Tanrich Futures senior vice president Colleen Chow Yin-shan said.

Until now, the United States has had little choice but to issue massive amounts of debt to fund its deficits, and China has had little choice but to purchase it, as there are not many markets deep enough to absorb the mainland's US$30 billion to US$40 billion in monthly capital inflows.

Government officials involved in the management of China's reserves are beginning to see gold as an attractive place to park some of these funds. They see it as a real, tangible asset that will not lose its value over time - in stark contrast to the greenback, which is becoming more disconnected from economic realities as more bills are printed.

"It's the right time to increase the gold reserves, as the price is about US$710 to US$720 per ounce," said Wan Guoli, vice secretary general of the China Gold Association.

The International Monetary Fund has made reducing global payment imbalances one of its priorities in the aftermath of the financial tsunami.

"I think China probably will expand its strategic reserves into commodities during this downturn," said a Hong Kong-based strategist.

"China will continue to buy treasuries ... otherwise the system would get distorted," he said.

"But I think China will diversify its reserves."

"The Dollar Will Be Devalued By a Large Margin" - The Economic Times of India

"We must...have a genuine international currency as the international reserve currency... As a one-time measure, the dollar will be devalued by a large margin..."

Asia seems to be growing increasingly impatient with Ben Bernanke and His Merry Banksters.

The Economic Times
Be Bold Enough to Fight the System from Within
By Ramgopal Agarwala
14 Nov, 2008, 0126 hrs IST

The ongoing global financial tsunami that originated in the US poses a serious threat to the stability of world economy. Already the financial crisis has spread from the US to Europe, Japan and major emerging economies.

The loss of wealth due to decline in share prices alone is in scores of trillions of dollars. Similar trillions are being lost in wealth in real estate. The crisis has spread from the Wall Street to the Main Street with a serious recession in the US which is sure to have a contagion effect across the globe.

Even worse is the scenario of the future of the US dollar. The US is pumping more and more dollars into the world economy, seriously aggravating the burden of its external debt, which is already over $20 trillion. If the confidence in the US dollar is shaken and the dollar goes into a free fall, we may well have what has been called ‘mother of all monetary crises.’

Faced with appreciation of their currencies in relation to dollar and fall in exports, major economies may well embark on competitive devaluations and protectionism, leading to a downward cobweb of production and employment in the world. The Great Depression of the 1930s may well repeat. We must not let that happen. We must make dispassionate analysis of the causes of the crisis and devise corrective measures however bitter they may seem.

While analysing the current US financial crisis, it has become conventional wisdom to blame the ‘greed’ of financial players on the Wall Street. But what else do we expect from the financial players? Profit maximisation is their job, their religion, if you like. It is the job of the regulators to make them work within the rules, which prevent greed turning into macro-economic imprudence. The real failure of the US system lies in its lax regulations that originated from a failed doctrine of self-regulating markets.

Along with the lax regulations, the spending spree in the US was fully supported, nay, encouraged by the authorities in order to prevent recession in the economy, in the wake of dotcom crisis and 9/11. Federal funds rate was brought down from 6.24% in 2000 to 1.35% in 2004 and remained below the 2000 level in 2007. Federal budget balance was changed from a surplus of $236 billion in 2000 to a deficit of $413 billion in 2004 and these may exceed $1 trillion in 2008/9.

In a normal economy, such domestic excesses will be prevented by the need to balance the external account. Unfortunately, the world has been on a US dollar reserve system, and there was no international regulatory mechanism to enforce discipline on the US spending. The world was flooded in the red ink flowing from international deficit financing by the US. Between 2000 and the third quarter of 2007, the US ran a current account deficit of $4.6 trillion!

But now the world must act. There could be a three-pronged strategy.

First, the countries holding US dollars must come forward to recapitalise the financial system of the US (in the US and abroad) by buying up equities of the US companies at the current low—and attractive—prices. In other words, rescue of the US financial system will have to come from the use of dollars in the system that created the problem in the first place rather than pumping more dollars into the system. What the sage of Omaha, Warren Buffet, is doing in billions needs to be done in trillions. Like Buffet, the lenders have to drive a hard bargain and these investments could be prudent over the long term as Warren Buffet’s probably are.

Second, we must go back to the wisdom of Keynes and have a genuine international currency as the international reserve currency. An internationally accepted bancor (as Keynes called it) should be created and exchanged for unwanted dollars. This programme will have a provision for systematic redemption of US dollars over time along with structural adjustment in the US economy. (Who will manage the rate of increase in the world currency, the 'bancor?' - Jesse)

As a one-time measure, the dollar will be devalued by a large margin to help US reduce its net imports and relative stability in real exchange rates will be maintained among major currencies through a system of managed floats. Speculative movements of short-term flows will be discouraged through regulations and taxes. In general, we may have to revive some features of exchange rate management in Bretton Woods agreement.

Third, a coordinated effort will be made to create alternative sources of demand in the world economy as the US net imports decline inevitably. Net additions of bancors needed (which could be more than a hundred billion dollar equivalent) could be used to fund global public goods.

The upcoming G20 summit in Washington DC could be a venue for considering these matters. Unfortunately, as indicated by the White House press release, the US seems to be putting the summit in the framework only of “reform of the regulatory and institutional regimes for the world’s financial sectors” and “strengthen(ing) the underpinnings of capitalism” by discussing how the summit leaders can “enhance their commitment to open competitive economies, as well as trade and investment liberalisation”!

Given the US veto power in Bretton Woods institutions, it can prevent the much-needed restructuring of global financial infrastructure. In that case, Asia should proceed with its own ‘Bretton Woods’ conference to set up a regional financial architecture that will pool its excess foreign exchange reserves in a regional sovereign wealth fund, create its own Asian currency unit as a parallel currency and use the seigniorage provided by the regional currency to fund the urgently needed physical and social infrastructure as well as measures to fight climate change.

This is an ambitious programme, but with a global economic calamity looming large, nothing less will do.

The author is with RIS, Delhi

Central Banks Shun the US Long Bond Auction - "Too Many Unknowns"

"Indirect bidders, a class of investors that includes foreign central banks, bought 18 percent of the securities offered, down from 43 percent at the last sale"

U.S. Treasuries Fall After Investors Shun 30-Year Bond Auction
By Cordell Eddings and Sandra Hernandez

Nov. 13 (Bloomberg) -- Treasuries fell, led by 30-year bonds, after investors shunned the government's $10 billion sale of the securities amid concern that U.S. debt sales will grow...

``The 30-year is not a central bank product, and there's no real interest from pension funds'' at a yield below 4.5 percent, said Andrew Brenner, co-head of structured products in New York at MF Global Ltd., the world's largest broker of exchange-traded futures and options contracts. ``There's just no interest in it...''

``In the current market environment there are still too many unknowns,'' said William Larkin, a portfolio manager at Cabot Money Management in Salem, Massachusetts, which manages about $500 million in assets. ``People are looking for the safety of the shorter-term securities....''

Indirect bidders, a class of investors that includes foreign central banks, bought 18 percent of the securities offered, down from 43 percent at the last sale....

Futures on the Chicago Board of Trade show an 80 percent chance the Fed will lower its 1 percent target rate for overnight bank lending by a half-percentage point at its Dec. 16 meeting. The odds were 58 percent a week ago.

The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, was 1.96 percentage points, compared with 4.57 percentage points a month ago.

The federal budget deficit in October, the first month of fiscal 2009, climbed to a record $237.2 billion, spurred by U.S. purchases of stakes in some of the country's largest banks. It exceeded the budget shortfall for President George W. Bush's first full year in office...

Congressman Asks Fed to Stop Ignoring Requests for Transparency

Bloomberg
Boehner Demands Fed Identify Recipients of Loans
By Laura Litvan

Nov. 12 - House Republican leader John Boehner called for the Federal Reserve to disclose the recipients of almost $2 trillion of emergency loans from American taxpayers and the troubled assets the central bank is accepting as collateral.

Boehner, in a prepared statement, also asked the Federal Reserve to comply with a Freedom of Information Act request seeking details about the loans.

The Fed ``should comply with this Freedom of Information Act request, and in the interest of full and fair disclosure, they must begin providing lawmakers and taxpayers all information about how they are using federal tax dollars,'' Boehner said.

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn't require approval by Congress, there is little disclosure about how the programs are being implemented.

Bloomberg News requested details of the Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit Nov. 7 seeking to force disclosure.

A spokesman for the Federal Reserve didn't immediately respond to requests for comment.

`Oversight, Transparency'

Boehner said he is increasingly concerned that the government's actions to add stability to financial markets is moving into areas that were not the stated intention when Congress approved $700 billion for a Treasury-administered program to bail out the financial sector that is being weighed down by the housing crisis.

``During the bipartisan negotiations between Congress and the administration, members of both parties made clear that Congress must have meaningful oversight over the use of taxpayer dollars,'' Boehner said. ``Transparency is even more important now, given that the program appears to have been implemented in some ways that were given little to no discussion as Congress was being urged to pass the rescue plan.''

Senator John Cornyn of Texas, a member of the Republican leadership, said the lack of disclosure ``should trouble taxpayers and policymakers alike.''

``There cannot be accountability in government and in our financial institutions without transparency,'' he said. ``Many of the financial problems we are facing today are the direct result of too much secrecy and too little accountability.''

Representative Scott Garrett, a New Jersey Republican who serves on both the Financial Services and Banking committees, said ``it's impossible to get to the bottom of where we are because we don't have transparency.''

Charts in the Babson Style for MidWeek 12 November

GE Receives FDIC Backing for its Debt

Do you get the feeling that the financial sector is in a hostile takeover of the country?

AP
FDIC to back GE Capital debt
November 12, 3:45 pm ET

FDIC to guarantee up to $139 billion of debt issued by GE's financing arm

HARTFORD, Conn. (AP) -- General Electric Co. says its massive finance business, hard hit by turmoil in the credit markets, is now eligible for federal backing of up to $139 billion of its debt.

GE says the Federal Deposit Insurance Corp. approved GE Capital Corp. to participate in the Temporary Liquidity Guarantee Program.

Russell Wilkerson, a spokesman for Fairfield, Conn.-based GE, says up to $139 billion in short- and long-term debt is guaranteed. He says GE will now be on the same footing as competitors who also have federal backing.

Nearly half of GE's earnings are from its finance business, with the remainder from its industrial business that makes everything from locomotives to water treatment plants, and from NBC-Universal.

Tech Is No Safe Haven in This Recession

Bloomberg
Qualcomm Shuts Down Hiring After `Dramatic' Order Contraction
By Ian King

Nov. 12 - Qualcomm Inc. Chief Executive Officer Paul Jacobs said he's stopped hiring and is eliminating some research projects after a ``dramatic'' contraction in chip orders from mobile-phone makers.

``We have basically shut off our new hiring growth,'' Jacobs said in an interview in New York today. ``Before it was, `let's let a thousand flowers bloom,' now we're going to do a bit of pruning. We've shut down some projects.''

Jacobs, who heads the biggest maker of mobile-phone chips, said orders dropped off in October because handset manufacturers cut back on their stockpiles of unused parts, a reduction that will last for about two quarters. Consumer demand for mobile phones with Qualcomm chips is holding up, he said. (Holding up what? Bonuses? - Jesse)

``The end market, while it's slowing a little bit, isn't that dramatic,'' said Jacobs, 46. Still, there is ``some uncertainty'' in the company's earnings projections. (If the manufacturers are slashing production you can bet their channels are stuff and crying "enough" - Jesse)

Revenue this quarter may fall as much as 6 percent from a year earlier, the first decline in seven years, Qualcomm said last week. Annual sales increased 22 percent on average in the past six years as Qualcomm benefited from increasing use of its chips in mobile phones that provide high-speed Internet access...

Nailing our Thesis on Inflation and Deflation to the Door

Apparently some people who divide the world into Inflationistas and Deflationistas took exception to the blog from yesterday which showed most of the usual money measures and noted that we are not seeing any real contraction yet, merely a slowing in growth in some measures.

We should add that we prefer to address inflation and deflation from a money supply perspective, fully acknowledging that there is a dimension called 'aggregate demand.' There is a qualitative difference between a general deflation caused by slack demand versus one caused by a contracting money supply, and vice versa for a general inflation.

It was particularly amusing to see the Adjusted Monetary Base attacked as a standard of the Inflationistas. It was included in our set of charts only because some of those promoting the deflation argument pointed to it as a sign of hoarding, and therefore having a negating affect on the other money supply figures. So we took a look at it both short term and long term. It is in the bounds of normality.

It is the hallmark of a dogmatic or fundamentalist mindset when the same data is used to both attack and defend the same proposition from completely opposite directions.

In a purely fiat regime, a monetary inflation or deflation is a policy decision. That decision may involve restrictions and limitations on the creation of money, a set of artificial boundaries, but that is the extent of it. It is a matter of resourcefulness and will.

You can't make the banks lend. Like hell I couldn't. They would lend or dry up if you used the right policy tools, and they know it. Its all of a choice. Its intent. Lending involves risk, and if you can make decent returns without risk and the policy wonks give you that choice you will take it.

Without a binding external standard the size of the money supply is bound only by the acceptability of one's currency by those with real goods to exchange for it.

Now, just because deflation in the money supply has not yet shown up does not mean it won't. Fiat decisions cut in both directions. As we stated, we know how to cause a deflation with some reliability.

Additionally the alternatives are not between deflation and hyperinflation. The opposite of hyperinflation is a hyper-deflation in which there is an undersized money money, most of it being held by a small oligarchy and is used to control the broader public.

There is a wide middle ground between these two alternatives that is much more probable.

To complicate things there are a number of exogenous events that may significantly impact the dollar in particular. Right now the US dollar is the world's reserve currency and many international trade arrangements, notably oil, are predominantly priced in dollars. This creates an artificial support and demand for the dollar. If this were to disappear, the demand for dollars would likely subside, placing a downward pressure on the optimal money supply levels. But keep in mind that exogenous events can cut both ways, for and against.

By definition exogenous means not able to predict reliably from the model. But this is one of those things we are watching and closely. Will there be a new formal Bretton Woods II? Will the key world players continue accept the Fed as its global currency administrator? One can speculate the possible outcomes and their implications, but not with certainty until something happens.

Having said all that, it would be less than straightforward not to note that inflation is the natural and most probable outcome for a fiat currency unconstrained by an external standard.

What tosses so many is the example of Japan and their persistent deflation following a real estate bubble. The cause of this is a series of continuing policy decisions. Discouragement of consumption, encouragement of exports, a static and aging population that is racially homogeneous and discouraging of immigration. A strong emphasis on savings at low rates. It has been and will continue to be a policy decision determined by one of the most powerful and entrenched bureaucracies in the developed world with a strong commitment to industrial policy and central planning.

We do not wish to be a deflationist or an inflationist: we want to be on the right side of the market as it unfolds. There are people we respect on both sides of the discussion from a theoretical perspective including the more extreme hyperinflation. Roubini and John Williams are at polar extremes for example. What does one do? Look at the data, the arguments and sort them out objectively. Even the great Roubini puts his pants on one leg at a time.

So, we'll try our best to stay out of the religious debates, long on rhetoric and short on thought. Its hard to be an agnostic amongst fundamentalists but its where the scientific method leads us for now.

Some comments from earlier this year on hyperinflation: Hyperinflationary Depression in the US in 2010 - John Williams

Is the Money Supply Contracting?

The bottom line is that although growth is slowing in MZM which is our preferred broad liquidity indicator, there is no indication that money supply growth is cntracting (e.g.negative).

Theories abound. We like to look at the data.

There are various interpretations and we look into almost all of them.

But we like to keep an eye on the data, and skip arguments that are long on rhetorical flourishes and short of hard analysis.

A monetary deflation is possible. A price deflation in response to slack aggregate demand is not only possible it is happening. We are in a recession. Demand is decreasing. And money supply growth should be decreasing in sympathy with that.

We could even tell you how to cause a monetary deflation, and are confident we could do it. Raising short term interest rates to 20 percent would probably do the trick pretty handily. Right now they are a negative number, however.

There are also theories that the banks are hoarding cash and the money supply figures are no longer valid. The money is flowing to Europe and not into the US economy.

Well, we can look into this, but it does not seem to be borne out by anything we have looked at in more than one dimension yet. We have an open mind.

But we're short on economic creationism and long on hard data and analysis in our book.

Thinking the Unthinkable: Are the Markets Warning of a US Debt Default?

As we have previously stated, right now the US is on the path to a devaluation and a selective default on its debt and currency. No one can say 'how and when' with certainty. But surely it seems probable that there is a stop and a stumble in the growth of this mother of credit bubbles somewhere ahead.

Perhaps it may be more credible if one reads a similar speculation in the financial magazine Barron's.

Some have suggested that devaluation no longer has meaning, preferring depreciation. Why? Because what would one devalue the dollar against, as it is tied to no external standard? The Dollar is its own standard as the reserve currency of the word.

A bit of a technical nuance perhaps, a holdover from when money was related to independent stores of value. But we think the dollar can be devalued against the expectation of the marketplace that the growth of the money supply will keep pace with the net productive output of the US, and real relative purchasing power, and represent a store of value with some small variance for inflation.

It is always a mistake to assume that there are no external standards, no dissenting views, that things are merely what we say they are and should be, for everyone.

The standard is the 'full faith and credit of the United States.' And if that confidence is broken, the reversion to fundamental 'external' values may be impressive.

Unthinkable? Every currency that has ever been has eventually been destroyed and undergone a transformation. Even the US dollar has undergone evolutions and incarnations.

But few things are inevitable. The world may choose to create a one world currency, under the control of the Fed and the Central Banks, which is a prelude to One World Government. This would be one way to extend the existence of a fiat regime. Kill off all the alternatives, by force. A regime of the will to last a thousand years.

In the short term we may again see rallies in the bonds and dollar because of a flight to quality and a short squeeze on dollars, particularly in Europe. This is due to lags in the effects of a credit cycle decline on its various components.

Demand for dollars spikes in a flight to quality and debt payment squeezes such as that being experienced by some European banks, and then declines more slowly than the supply of dollars can ramp up in a declining credit cycle, leading to a 'liquidity crunch.'

This is particularly confusing to most casual thinking on economics. It helps if you really think about what a dollar represents, what money really is, to someone outside the system holding 'real goods' for sale.

At some point the ramp up of dollars meets and exceeds demand, and the cycle of inflation begins again. If the situation is particularly dire, the currency may be devalued to speed its supply as the US did in 1933. But without a new Bretton Woods type currency fix an inflation alone is much more likely.

As an aside, we think the Europeans should declare a force majeure and allow all non-euro debts, even in private contracts, to be settled in euros as part of a formal rejection of the US dollar as the world's reserve currency.

But these are all exogenous developments. For now, within a degree of probability, the US is on the road to a significant failure of its currency and debt, most likely through a nasty bout of inflation, selective bankruptcies, and ultimately the reissue of a new currency.

Searching for relative safe havens of value for wealth, as it had been in the 1970's, may be the premiere investment theme for the rest of this decade, and some part of the next.

Barron's
UP AND DOWN WALL STREET DAILY
Uncle Sam's Credit Line Running Out?
By RANDALL W. FORSYTH
NOVEMBER 11, 2008

The yield curve and credit default swaps tell the same story: the U.S. can't borrow trillions without paying a price.

WHAT ONCE WAS UNTHINKABLE has come to pass this year: massive bailouts by the Treasury and the Federal Reserve, with the extension of billions of the taxpayers' and the central bank's credit in so many new and untested schemes that you can't tell your acronyms or abbreviations without a scorecard.

Even more unbelievable is that some of the recipients of staggering sums are coming back for a second round. Or that the queue of petitioners grows by the day.

But what happens if the requests begin to strain the credit line of the world's most creditworthy borrower, the U.S. government itself? Unthinkable?

American International Group which originally had to borrow what was a stunning $85 billion from the Fed to keep it from cratering in September, upped the total Sunday to $150 billion.

Monday, Fannie Mae reported a $29 billion third-quarter loss, far in excess of forecasts, raising the specter that the mortgage giant may need more money after the Treasury pledged to inject $100 billion in preferred stock financing in September.

Meanwhile, American Express received Fed approval to convert to a bank holding company, joining the likes of Morgan Stanley and Goldman Sachs, that have a direct pipeline to borrow from the Fed or the Treasury's TARP, the $700 billion Troubled Assets Relief Fund.

And, of course, Detroit is looking for a credit line from Washington. General Motors (GM) Friday warned it could run out of cash next year without a government loan. GM plunged another 23% Monday, to 3.36, as several analysts helpfully recommended selling shares of the beleaguered automaker that already had lost more than 85% of their value.

Visiting the White House Monday, President-elect Obama pressed President Bush to support emergency aid for GM and other automakers. The prospect for federal aid for GM ironically weighed on its shares as one bearish analyst said the price of the bailout could be a wipeout of common holders.

Be that as it may, it's all adding up. If the late Sen. Everett Dirkson were around today, he might comment that a trillion here, a trillion there and pretty soon you're talking about real money.

Trillions are no hyperbole. The Treasury is set to borrow $550 billion in the current quarter alone and $368 billion in the first quarter of 2009. "Near-term pressures on Treasury finances are much more intense than we had thought," Goldman Sachs economists commented when the government announced its borrowing projections last week.

It may finally be catching up with Uncle Sam. That's what the yield curve may be whispering. But some economists are too deaf, or dumb, to get it.

The yield curve simply is the graph of Treasury yields of increasing maturities, starting from one-month bills to 30-year bonds. The slope of the line typically is ascending -- positive in math terms -- because investors would want more to tie up their money for longer periods, all else being equal. Which it never is.

If they expect yields to rise in the future, they'll want a bigger premium to commit to longer maturities. Otherwise, they'd rather stay short and wait for more generous yields later on. Conversely, if they think rates will fall, investors will want to lock in today's yields for a longer period.

The Treasury yield curve -- from two to 10 years, which is how the bond market tracks it -- has rarely been steeper. The spread is up to 250 basis points (2.5 percentage points, a level matched only in the past quarter century in 2002 and 1992, at the trough of economic cycles.

Based on a simplistic reading of that history and the Cliff Notes version of theory, one economist whose main area of expertise is to get quoted by reporters even less knowledgeable than he, asserts such a steep yield curve typically reflects investors' anticipation of economic recovery. (LOL, nicely phrased - Jesse)

Never mind that the yield curve has steepened as the economy has worsened and prospects for recovery have diminished. Like the Bourbons, the French royal family up to the Revolution, he learns nothing and forgets nothing.

As with so much other things, something else is happening this year.

The steepening of the Treasury yield curve has been accompanied by an increase in the cost of insuring against default by the U.S. Treasury. It may come as a shock, but there are credit default swaps on the U.S. government and they have become more expensive -- in tandem with an increase in the spread between two- and 10-year notes.

This link has been brought to light by Tim Backshall, the chief analyst of Credit Derivatives Research. The attraction of investors to the short end of the Treasury market is "juxtaposed with the massive oversupply and inflationary expectations of the longer end," he writes.

Backshall is not alone in this dire assessment. Scott Minerd, the chief investment officer for fixed income at Guggenheim Partners, a Los

Angeles money manager, estimates that total Treasury borrowing for fiscal 2009 will total $1.5 trillion-$2 trillion. That was based on $700 billion for TARP, a $500 billion-$750 billion "cyclical deficit," an additional $500 billion stimulus program and some uncertain amount for the Federal Deposit Insurance Corp.

Minerd doubts that private savings in the U.S. and foreign purchases of Treasury debt will be sufficient to meet those government cash. That leaves the Fed to take up the slack; that is, monetization of the debt.

However it comes about, Backshall's charts of the yield curve and the spread on U.S. Treasury CDS paint a dramatic picture. Both the yield spread and the cost of insuring debt moved up sharply together starting in September.

Let's recall what happened that month: the Fannie Mae-Freddie Mac bailouts, the AIG bailout and the Lehman Brothers failure. The two lines continued their parallel ascent with the announcement and ultimate passage of the TARP last month. And evidence mounted of an accelerating slide in growth.

Cutting through the technical jargon, the yield curve and the credit-default swaps market both indicate the markets are exacting a greater cost to lend to Uncle Sam. And it's not because of anticipated recovery, which would reduce, not increase, the cost of insuring Treasury debt against default.

All of which suggests America's credit line has its limits.

At the beginning of the Clinton Administration in the early 1990s, adviser James Carville was stunned at the power the bond market had over the government. If he came back, Carville said he would want to come back as the bond market so he could scare everybody.

President-elect Obama may come to think Clinton had it easy by comparison.

AMEX: We Are All Banks Now

November 11, 2008
American Express to Be Bank Holding Company
By THE ASSOCIATED PRESS

WASHINGTON — The Federal Reserve on Monday granted a request by the credit card giant, American Express, to become a bank holding company, giving it access to low-cost financing from the Fed.

The Fed said it had approved the application for American Express and a related company, American Express Travel Related Services, to become bank holding companies.

The approval represented the latest reshaping of the financial services industry, which is undergoing its worst credit crisis in decades.

In announcing the action, the Fed cited “emergency conditions.”

The Fed’s approval for American Express was similar to the decision it made in September to transform the country’s two biggest investment banks, Goldman Sachs Group and Morgan Stanley, into bank holding companies.

That move bolstered the two institutions after the collapse of another investment bank Lehman Brothers, which became the largest bankruptcy filing in history. Goldman and Morgan Stanley gained the ability to borrow federal money and build a stable base of deposits in hopes of reassuring investors and other banks.

AmEx last month reported that its profit fell 24 percent in the third quarter as cardholders restrained their spending and had more trouble paying off debt.

Meredith Whitney on the Banks

11-5-08 Meredith Whitney Interview on CNBC with Maria Bartiromo (video)
(Thanks to Mr. Mortgage for the transcript below)

Maria: What changes with an Obama Presidency for the banks?

Whitney: Financials and the economy are so far off the tracks its hard to see anything helping right now. One thing they talked about was mortgage modifications - trying to get money to consumer.

None of this makes banks have a higher appetite for risk so you don’t see a lot of money coming into system aside from govt subsidies. So the banks will make less if they modify your loan. They will be siting on sludgier assets. That doesn’t create new capital to get back into the system.

Higher taxes are assoc with Dem’s but there it less to tax…one good thing about all of this.

Maria: You were the first to point out the upset in financial industry - please tell us where we are in cycle?

Whitney: We are in a new part of cycle. We have digested the fact that the securitization is not coming back. Securitization made up 85% of mortgages and 50% of credit cards. Market is not coming back. Contraction of capital is one thing. But what happens going forward is contraction of the overall mortgage market - this has never happened before.

Banks are not lending. Originations are down big in Q3. Loan balances getting smaller. Credit cards make up over $2 trillion in available credit lines being pulled out of system. Credit is being taken away form those that got credit in the past 15 years. Never in America had we seen this before. This is a more destructive market for consumer. This is not factored into market.

An economy that has already been impacted by market and unemployment going to double digit levels is another wild card for banks.

Banks just will not make a lot of money and the street is still expecting them to make a lot more money. My estimates are 30-70% below the street and i think I am too high.

Maria: 70% below the street - oh my. Its going to be tough to make those up - the street still expects them to make lot?

Whitney: Banks asset base gets smaller so revenue gets smaller. They can’t cut costs fast enough to keep up with declining revenue. Credit costs increase and you are running faster to collect on loans. So you just have a protracted period of negative operating leverage.

Many of the banks, especially the two brokers, expense structure grew so fast over the past several years that their expense structure is built for a 06-07 revenue environment and their revenue will be like 01-02 revenue environment.

Maria: How much of this is priced in how much will this be a surprise? stocks are down so significantly.

Whitney: Citi, UBS, Wells Fargo, JP Morgan and BofA at all these levels est are coming down dramatically. Nobody is immune. Believe it or not, analysts think losses will be more milder than they really will be.

One difference between my estimates and the rest of the street has been a higher loss curve estimates for losses than others. But my loss estimates are actually lower than the reported numbers. I think we are in for a rude awakening. That may result in a slow grind down in these stocks.(When the financials bottom, the stock markets will be at a bottom and not before. We have much further to go. This is going to look like the post 1930 grind down to a bottom, at about 70-80% of the peak in real terms. Expect 10 to 20% kickback rallies every few months. The wild card is how successfully the Fed and Treasury can create inflation to mask it. - Jesse)

I don’t think you will see massive capital destruction like we saw with huge write downs but I will bet a lot of money banks will come back for a lot more money on the next 9-months again so you will be diluted further. Now, from Obama you will see more regulation. They are a highly regulated utility with less dividend. You should expect Citi and others to cut dividend.

Citi already cut but nobody is allowed to raise under TARP. But earns will be so much lower alot of companies will not be able to support dividends so yes they will cut again.

Maria: How significant of a fall will be see in these stocks?

Whitney: I think Citi goes to the single digits. (Good bellwether - Jesse)

Maria: Who is best position and will go higher?

Whitney: There are many I like and I hope they can hold onto being independent, but stock prices are far too high.

I think you know JPM and BAC survives. There are alot of attractive companies.

Wells Fargo at $20 is attractive. They have a $20 billion offering in the works and that stock is still hovering near $30! That stock still has a ways down to go. (We were thinking more like 10 - Jesse)

Wells Fargo is gonna be a great company and will be a survivor but consensus estimates are on Pluto. They will have a (equity) supply jam in terms of extra capital into the market and you will see a great chance to buy a great stock you want and at much lower prices. (If we hit a bottom we would rather have commodity companies like oil and mining with good cash flows to support high yields - Jesse)

Charts in the Babson Style for the Week Ending 7 November

Myron Scholes Takes Another Hedge Fund to the Brink

Bloomberg
Scholes's Platinum Grove Fund Halts Withdrawals After Losses
By Saijel Kishan

Nov. 6 (Bloomberg) -- Platinum Grove Asset Management LP, the hedge-fund firm co-founded by Nobel laureate Myron Scholes, temporarily stopped investor withdrawals from its biggest fund after it lost 29 percent in the first half of October.

The decline left Platinum Grove Contingent Master fund with a 38 percent loss this year through Oct. 15, according to investors. Funds employing a similar approach of exploiting differences in the value of related securities fell 14 percent last month and 30 percent this year, according to data compiled by Chicago-based Hedge Fund Research Inc.

``The suspension is necessary given current market conditions,'' Rye Brook, New York-based Platinum Grove said in an e-mailed statement today. ``Platinum Grove will use this period to consult with its investors and counterparties, determine their future intentions and manage the assets of the fund accordingly.''

Hedge funds are reeling from the worst financial crisis since the Great Depression, losing an average of 20 percent this year, according to Hedge Fund Research. A surge of investor redemptions forced firms such as Blue Mountain Capital Management LLC and Deephaven Capital Management LLC to freeze funds to stem the tide of withdrawals.

Scholes, 67, winner of the 1997 Nobel Prize in economics, was a founding partner in Long-Term Capital Management LP, the hedge fund that lost $4 billion a decade ago after a debt default by Russia. He started Platinum Grove in 1999 with Chi-fu Huang, Ayman Hindy, Tong-sheng Sun, and Lawrence Ng, who had all worked at Long-Term Capital...

Weekly Dollar DX Chart with Commitments of Traders and Dollar VIX

As shown by our proprietary Dollar VIX indicator, currency trading recently has not been for the weak of heart, if ever.

The funds are still net long, but are also holding the smallest short position since we started tracking this number in January 2004.

General Motors is on the Brink of Default and Bankruptcy

Right at the close of trading Fitch and the other rating agencies cut General Motors debt ratings. In particular Fitch was quite specific that GM will either be bailed out or will be forced to default and restructure.

"Given the current liquidity level of $16.2 billion and the pace of negative cash flows, Fitch expects that GM will require direct federal assistance over the next quarter and the forbearance of trade creditors in order to avoid default."

In addition, and perhaps unrelated, AIG has moved its 3Q 08 financial results from after the close of trading on Monday to 6 AM, before the Bell.

Another late Sunday night before the start of Asia trading?

Fitch Places GM's 'CCC' IDR on Rating Watch Negative
07 Nov 2008 3:57 PM (EST)

Fitch Ratings-New York- Fitch Ratings has placed the Issuer Default Rating (IDR) of General Motors (GM) on Rating Watch Negative as a result of the company's rapidly diminishing liquidity position.

Given the current liquidity level of $16.2 billion and the pace of negative cash flows, Fitch expects that GM will require direct federal assistance over the next quarter and the forbearance of trade creditors in order to avoid default.

With virtually no further access to external capital and little potential for material asset sales, cash holdings are expected to shortly reach minimum required operating levels.

GM remains dependent on the capacity and willingness of its suppliers to continue extending trade credit, as the company does not have sufficient resources to finance ongoing operations in the event that trade credit is curtailed.

Over the intermediate term, GM's expanded debt load and debt service costs, when combined with significantly reduced earnings capacity, indicate that material improvement in the balance sheet is unlikely absent a restructuring of the balance sheet. This could eventually take place through a distressed debt exchange.

Fitch believes that direct federal aid is highly likely to be forthcoming, although the amount, timing, structure and term remain uncertain. Without material federal assistance in the short term, Fitch would review the rating for a potential downgrade to 'CC', which indicates that default is probable.

Given the extended cash drains expected through at least 2009 and the need for balance sheet restructuring, provision of federal assistance may not preclude a downgrade to 'CC'.

Deteriorating macroeconomic conditions and the effects of the credit crisis continue to ratchet down retail sales volumes and to expand negative cash flows.

Restructuring costs, other one-off items, and working capital outflows have exacerbated operating losses, factors that will continue to hamper any recovery in the near term. The rationing of retail financing highlights the tremendous capital advantage held by transplant manufacturers, further impairing near-term volume and pricing potential.

In addition, Fitch has placed the following on Rating Watch Negative:

--Senior secured at 'B/RR1';
--Senior unsecured at 'CCC-/RR5'.

General Motors of Canada Ltd.
--Long term IDR 'CCC';
--Senior unsecured at 'CCC-/RR5'.

The Recession Started in June at the Latest and is Deepening: Non-farm Payrolls

The most important chart is the 12 month moving average of the changes in US non-farm payrolls directly below.

It should have been apparent to any economist, as it was to us, that the US was falling into recession at the end of 2007. The actual start of the recession is a formality, but no dating for the start past June 2008 seems justifiable, especially when all the other coincident non-jobs indicators are consulted.

The primary argument for a later dating to September 2008 is based on 'real GDP' number which in our view is distorted by a significantly understated rate of inflation. The traditional coincident indicators do not agree with that dating as well.



The headline or seasonally adjusted payroll number turning negative does not necessarily imply a recession in and of itself. It could be a response to a transitory exogenous shock. However, when one looks at the longer term trend as we show in the chart above, and the many other coincident indication as we have been pointing out this year, the implications of an endogenous recession is obvious.



Much is made of the Birth-Death Model, which the BLS uses to account for the jobs created by small business that are not in its survey. As you can see, every year the pattern repeats with some regularity and revision. The numbers are added to the payroll number from the surveys, to the actual number, which is then seasonally adjusted to create the 'headline number.'



We hope it is obvious that the seasonal adjustment factor is large, and often far more significant than the birth death model. This is why they choose to 'adjust' the birth death model lower during periods of extreme seasonal adjustment. It does seem to be statistically useless at best, and at best a tool for very short term data manipulation at the worst. It can have an effect in months where seasonality is slight.



It should be noted that this are the numbers that the BLS shows in its database today. They have been revised, and sometimes significantly so, from their original introduction to the public in the Wall Street headlines.

The economic luddite will ask, "What good does this do to me now? Of course I know that the US is in recession!"

The answer of course is that this is the same conclusion we presented as early as February, when it was more easily ignored.

The better question now is, how deep will the recession go, and when will the recession end? Questions with answers not so obvious as of yet without some informed insight. Common historic averages are just that: common, average and old.

The Gold Bull in Context

One of the most difficult things to determine is a trend change, from a bull market to a bear market, and vice versa. The market needs a wall of worry to climb, and a slope of hope to decline.

Historical data shows that the prevailing climate in corrections in a bull market reach conditions that are bleak and worrisome, with the majority of investors bearish and pessimistic before the next upleg is taken.

This is what makes it so difficult to separate a trend change from a correction; sentiment is often a misleading indicator, and people will self-select soft indicators to suit their bias.

But sometimes a trend DOES change. So how can we tell the difference?

This is where technical analysis becomes an indispensable companion to the fundamental perspective. While the trend is intact it remains in control of the market, until it is broken.

Credit Card Bond Sales Zero As the Credit Markets and Consumption Engines Stalls

Approaching our economic problems through crony capitalist bailouts of a few large banks (speculative investment banks by any other name) without reform is a policy error of the first order. Attempting to maintain the same unworkable status quo while doing nothing for the wage earners and the bulk of consumers is the curse of ideology and a financial sickness unto death.

Bloomberg
Credit Card Bond Sales at Zero, First Time Since 1993
By Sarah Mulholland

Nov. 5 -- Credit card companies were shut out of the market for bonds backed by customer payments in October for the first time in more than 15 years, as investors shunned the debt amid the global credit freeze.

A weakening job market and a looming recession are making it harder for consumers to make monthly payments, eroding confidence among investors about the safety of credit-card-backed bonds. It's the first month since April 1993 that there have been no sales, according to Wachovia Corp. data. Issuers sold $17.1 billion of the debt in October 2007, the data show.

``Nobody is eager to put money to work given the uncertainty in the market,'' said James Grady, a managing director at Deutsche Bank AG's asset management unit. ``When you think it can't get worse, it continues to get worse. There is not a demand'' for these bonds.

Top-rated credit card-backed securities maturing in three years traded at a gap, or spread, of 475 basis points over the London interbank offered rate, or Libor, during the week ended Oct. 30, JPMorgan Chase & Co. data show, 25 basis points higher than the previous week. The debt was trading at 50 basis points more than Libor in January.

The higher cost to sell the bonds makes it more expensive for banks and credit card companies to fund loans to customers. New York-based American Express Co. paid 160 basis points more than Libor at a Sept. 11 sale of the securities compared with 30 basis points over the benchmark at a similar sale in October 2007, Bloomberg data show.

Non-Farm Payrolls Report Tomorrow Could Move the Markets

We were starting to turn the crank on our projections for tomorrow's Non-Farm Payrolls report when we spotted this update.

The 'imaginary jobs' component will be in play, but in particular it is the 'seasonal adjustment' factor that gives the bureaucrats at the BLS an enormous ability to massage the headline numbers from the actuals.

We suspect the market will strike a level today and then gyrate around it to burn out the daytraders while the pros wait to see how the Jobs number gets spun tomorrow.

We see 926 as support on the SP futures with 918 below that. It would be a breakdown below 910 that would cause us to change our current hedged positions weighting. On the upside there is strong resistance at 954 and 978 with a few stumbling blocks around 960-968.

This is a thin market with a predilection to being pushed around by the Wall Street wiseguys. To use a 'poker analogy' they like to see the funds and specs take positional wagers with leverage, and then use their superior bankrolls and advantaged table insight to 'raise them' out of their bets and pocket the difference. This is one of the issues that must be addressed if the house banks are going to be sitting with the other players at the table, with the backing of the Treasury and slack regulation.

JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS
FLASH UPDATE
November 6, 2008

October Employment Conditions Should Show Marked Deterioration

Jobs and Unemployment Due for Big Hits. With both the October manufacturing and nonmanufacturing purchasing managers surveys showing their employment measures falling deep into recession territory, with September help-wanted advertising holding at its historic low and online advertising still tumbling year-to-year, and with a new claims for unemployment insurance continuing to rise sharply year-to-year, October payrolls should have dropped by over 200,000, along with a continued sharp rise in the unemployment rate.

The October report is due for release tomorrow morning (November 7th). Consensus expectations are running at roughly a 200,000 payroll loss and a 0.2% increase in the unemployment rate to 6.3%, per briefing.com. They are not unreasonable, but still appear to be somewhat shy of reality. Election pressures are gone, but financial market pressures for rigged data remain. With the markets still far from stable conditions, a slightly better than expected payroll number might be a fair bet.

Marc Faber Sees Bankruptcy for the US

MINA
Swiss Finance Guru sees bankruptcy for the U.S
Thursday, 06 November 2008


Swiss financial guru Marc Faber tells swissinfo he sees hard times ahead for the world's stock exchanges and even state bankruptcy for the United States.

He also believes that stock exchanges will stay at low levels for a long time.

Faber, otherwise known as Dr Doom for his contrarian views on the economy, has lived in Asia for the past 35 years.

He is a jack-of-all-trades: investment adviser, financier, best-selling author and the compiler of a monthly economic publication called The Gloom Boom and Doom Report.

Faber sits on various boards of directors and investment committees.

swissinfo: You prophesied the stock market crash of 1987 and the Asia crisis and became a celebrity as a result. Did you see this crisis coming too?

Marc Faber: It was quite clear we had a credit bubble. I had been warning about that for years and not only in the mortgage sector. But what surprised even me was that [US insurer] AIG would almost disappear and that UBS shares would fall under $17.20.

swissinfo: How did it come to such a situation?

M.F.: A credit bubble has been growing for 25 years. We've seen, in particular over the past seven years, an unbelievable credit growth, which fuelled economic development. Then there were structural changes in the economy, for example the sinking saving ratios that have had an effect on consumption and growth rates.

The situation worsened in 2001 in the United States when the central bank lowered the interest rate from 6.5 per cent to an unheard of one per cent in 2003. This ultra-expansive monetary policy led to a credit growth that was five times higher than growth of the economy. A bubble growth and later the crash were the logical consequences.

swissinfo: Have we reached rock bottom?

M.F.: I think we're near it. But I also think we'll stick at this low point for a long time. Anyone who thinks that everything will soon be rosy again is naive. It's quite possible that worldwide stock exchanges will experience a similar development to that witnessed in Japan over the past two decades [the Nikkei index has fallen from 39,000 points to under 8,000].

Japan also shows that the large amount of money injected to stimulate the markets didn't have the desired effect – but it did produce huge holes in the state coffers.

swissinfo: You are known for swimming against the tide of conventional wisdom. But you are right in line with the prevailing pessimism.

M.F.: Not quite. I'm even more pessimistic than most (laughs). Look at it like this, between 1980 and 2007 people saved from their capital gains and not their income, as their income was spent. That was fine while property and shares increased in value every year. Today these people are highly indebted and are only beginning to save more by putting the brake on their consumption.

That's how every economy goes to the dogs – with or without injection of capital by governments. With the best of wills, I do not see a single catalyst that could lead to a new bull market in the world. At the moment, everything has gone down the drain.

swissinfo: How does the present crisis differ from previous ones?

M.F.: In the past few years everything went up – shares, commodities, consumer goods, real estate values, art and even bonds. Such a combination is extremely unusual. We saw the biggest investment bubble in the history of humanity. The current situation is possibly worse than the global economic crisis of 1929. And that is thanks to Alan Greenspan and Ben Bernanke [the former and current US Federal Reserve Board chairmen]. These two gentlemen must account for massive errors.

swissinfo: Governments are offering guarantees and are pumping thousands of billions into the markets. Is that a mistake?

M.F.: Yes. The losses are there and someone has to bear them. There are two possibilities. Banks go under and the stakeholders are left with nothing, as is the case with Lehman Brothers, or governments pump money into the financial system so that the incompetent financial clowns in Bahnhofstrasse [Zurich's financial centre] and Wall Street can continue to eat in fancy restaurants.

I am clearly in favour of the first because the consequences of these state interventions are massive budget deficits. To finance these, governments have to acquire money. For that they have to borrow money, which makes state debt and interest payments soar. US economists have come to the conclusion from the trends that there will be a US state bankruptcy. (That's not a very widely held view Herr Faber, and we're feeling a little isolated in that view - for now - Jesse)

swissinfo: Do you share that view?

M.F.: One hundred per cent. The US government will in future have new debts of at least $1,000 billion (SFr1,165 billion). That's on top of the current state debt of $10,000 billion. And that doesn't take into account state programmes to stimulate the economy. The government will have no other choice than to print money, which in the long term will lead to inflation.

swissinfo: How do you see the near future?

M.F.: More positively. The markets are totally undervalued so I reckon on a short-term recovery of easily 20 to 30 per cent. (LOL. Stocks are absolutely not undervalued, but a technical bounce of 20% is very possible. There was a 60% bounce after the Great Crash of 1929, before the markets turned lower again, eventually giving up 89% of their peak values into the market bottom of 1933. Bear markets often get 20-30% short covering rallies before starting a next leg down. This is what makes them so difficult to trade. You cannot hold anything, which is how most investors have been conditioned by the preceding bull market. The use of leverage is deadly for core positions. - Jesse)

swissinfo: When?

M.F.: In the next two to three weeks. (After we make a bottom. Use that rally to discard any remaining dollar financial holdings and get liquid, buy gold and silver. - Jesse)

swissinfo: That's not exactly very much in view of the massive losses.

M.F.: No. If you drop a tennis ball with only a little air in it, it doesn't bounce very high!

swissinfo: Are you calling into question the concept of making money from shares?

M.F.: No. The idea is still valid but you have to be realistic. Adjusted for inflation and with a long-term perspective you could earn on average three per cent with US shares. The long-term promises of eight per cent made by bankers and pseudo investment advisers to lure their customers are absolute rubbish. (Can't fault that logic - Jesse)

swissinfo: It looked for a long time as though Switzerland would get away with just a black eye. What is your view? (What the Swiss government and central bank have done to their economy and finances is a disgrace. We hold no Swiss francs any longer. The Swiss people have been treated badly. - Jesse)

M.F.: The export industry will be extremely hard hit. People in Switzerland will have to accustom themselves to bankruptcies, particularly in the machine industry (They will devalue the franc inevitably. The savings of the people will be destroyed. The Swiss bank has sold off its gold. The large banks are functionally insolvent. Shameful - Jesse)

DTCC Report Omits A Significant Amount of Credit Default Swap Exposure

In a nutshell, the DTCC Report failed to include the Credit Default Swaps that cover the CDO's. This is because the DTCC only captures 'commonly traded contracts and not privately negotiated derivatives such as those on collateralized debt obligations (CDOs).

This is a key gap in the report since the market for these customer derivatives is quite large, and it is the failures of the CDOs that are in the process of failing, and bringing down banks and other financial institutions with them.

It is not surprising that the DTCC omits the custom, or privately written, derivatives. Because each one has variations, placing these on an electronic exchange seems a daunting task indeed.

But it represents an important caveat to anyone looking at the DTCC report and then attempting to draw conclusions about the overall swaps market net exposures.

Bloomberg
Credit-Default Swap Disclosure Hides Truth on Risk at Banks
By Shannon D. Harrington and Abigail Moses

Nov. 6 -- The most comprehensive report on unregulated credit-default swaps didn't disclose bets in the section of the more than $47 trillion market that helped destroy American International Group Inc., once the world's biggest insurer.

A study by the Depository Trust and Clearing Corp. fails to include privately negotiated credit swaps that insurers such as AIG, MBIA Inc. and Ambac Financial Group Inc. sold to guarantee securities known as collateralized debt obligations, according to analysts including Andrea Cicione at BNP Paribas in London.

New York-based DTCC's report, released on its Web site Nov. 4, showed a total $33.6 trillion of transactions on governments, companies and asset-backed securities worldwide, based on gross numbers. While designed to ease concerns about the amount of risk banks and investors amassed on borrowers from companies to homeowners, the study may have missed as much as 40 percent of the trades outstanding in the market, Ciccone said. (Oops, lol - Jesse)

The data are ``likely to underestimate the amount of net CDS exposure,'' he said in an interview.

Trading of credit derivatives soared 100-fold the past decade as banks, hedge funds, insurance companies and other investors used the contracts to protect against losses or speculate on debt they didn't own.

Banks worldwide have taken $693 billion in writedowns and losses on loans, CDOs and other investments since the start of 2007, according to data compiled by Bloomberg...

Commonly Traded Contracts

Because the DTCC registry captures only commonly traded contracts that can be confirmed over electronic systems, not every swap trade is in the company's report, spokeswoman Judy Inosanto said. Among those not included are credit-default swaps on CDOs, she said...

Obama's Priorities

If history teaches us anything, it is that the assumptions, promises and priorities one makes before taking a new position are quickly adjusted to hard realities once the job is obtained.

New data is made available, things change, some priorities give way to practicalities.

Nevertheless we can often pick out key themes from a prospective candidate and hammer out general 'intentions.'

Obama is a more statist than libertarian, and young, and oriented to the public and service organizations than to corporations. He is a consensus builder, but chooses among the alternatives available against his own priorities and principles when the going gets tough. This is often the basis of a self-made man whose character has been hammered and tempered by adversity.

He is a strong organizer and knows how to play the game. His first obstacle is to discover what the game is at the level on which he will be playing. He thinks he knows it, but he doesn't, not yet. He is about to get a deep look into the darkness of the human heart, the abyss, and it will change him.

He faces a daunting task and expectations are high. He must prioritize heavily and reset expectations to what can be done first, and what can be attempted over time. There will be window-dressing, and genuinely effective efforts.

He is extremely intelligent, a quick study, and will benefit from a sincere alarm among highly capable men and women concerning the state of the country, which is more dire than most realize.

The vultures are swarming, and promises of kingdoms on earth are being whispered in his ear.

Those too lazy to think will retreat into cynicism, surmise, sarcasm and rumour, as they always do.

There will be a brief period of good will and allowance, and then the examination of Obama will be harsher, and more critical, and often probably unrealistic.

Watch his selection of Treasury Secretary to see how the first 100 days will be, and who is handling him, influencing him.

There will be a strong minority that will be quick to condemn and attempt to block all change. They would like him to fail, and badly, to justify their own prejudice and self-interest.

He will disappoint many, in many ways, including Le Propriétaire here at the Cafe. How can it be otherwise? He is only a man, facing some of the toughest choices presented to a new president taking office in war and economic crisis. Truman and FDR rose to the task. So did another Illinois Senator with only one term under his belt when he took office: Abraham Lincoln.

He could fail, he could succumb to partisan corruption, he could not only disappoint but fail to deliver on the promise of change for any number of reasons. John F. Kennedy was the fist Catholic ever elected president. Most now have forgotten the concern and a general fear this caused among the same groups and the elite that also fear Obama. Kennedy and his brother took on an embedded element of corruption that was pervasive in the country, and they both paid for it with the greatest sacrifice.

We cannot know what will happen, we do not know if and how he might rise to this terrible occasion, but we do know that we will not agree with everything he does, and may even become as bitterly disappointed with him as we were with George W. Bush after his first term in office. We hope not, for his failure will be our collective misfortune.

But for our own sake and those of the people of the US, we do sincerely wish him well, and would do anything to help to secure our national welfare from the dangers we now face, and those which are yet to appear.

So, taken in that context, here are the priorities in the president-elect's own words.

"Let us remember that if the financial crisis has taught us anything, it’s that we cannot have a thriving Wall Street while Main Street suffers,” he said in his speech Tuesday night. “In this country, we rise or fall as one nation, as one people.”

Obama from his debate transcript: "We're going to have to prioritize, just like a family has to prioritize. Now, I've listed the things that I think have to be at the top of the list.

Energy we have to deal with today, because you're paying $3.80 here in Nashville for gasoline, and it could go up. And it's a strain on your family budget, but it's also bad for our national security, because countries like Russia and Venezuela and, you know, in some cases, countries like Iran, are benefiting from higher oil prices.

So we've got to deal with that right away. That's why I've called for an investment of $15 billion a year over 10 years. Our goal should be, in 10 year's time, we are free of dependence on Middle Eastern oil.

And we can do it. Now, when JFK said we're going to the Moon in 10 years, nobody was sure how to do it, but we understood that, if the American people make a decision to do something, it gets done. So that would be priority number one.

Health care is priority number two, because that broken health care system is bad not only for families, but it's making our businesses less competitive.

And, number three, we've got to deal with education so that our young people are competitive in a global economy.

But just one point I want to make, Tom. Sen. McCain mentioned looking at our records. We do need to look at our records.

Sen. McCain likes to talk about earmarks a lot. And that's important. I want to go line by line through every item in the federal budget and eliminate programs that don't work and make sure that those that do work, work better and cheaper.

But understand this: We also have to look at where some of our tax revenues are going. So when Sen. McCain proposes a $300 billion tax cut, a continuation not only of the Bush tax cuts, but an additional $200 billion that he's going to give to big corporations, including big oil companies, $4 billion worth, that's money out of the system.

And so we've got to prioritize both our spending side and our tax policies to make sure that they're working for you."

"The deepest, the only theme of human history, compared to which all others are of subordinate importance, is the conflict of skepticism with faith." J. W. von Goethe

And, we might add, the conflict between the obligation of duty and a retreat into self-absorption and despair.

ADP Report Shows Worse Jobs Losses Ahead of Friday's Non-Farm Payrolls Report

We are at the end of the beginning, with much more to follow.

Bloomberg
ADP Says U.S. Companies Reduced Payrolls by 157,000
By Bob Willis

Nov. 5 -- Companies in the U.S. cut an estimated 157,000 jobs in October, the most in almost six years, a private report based on payroll data showed today.

The drop was larger than forecast and followed a revised 26,000 decrease in September that was bigger than previously estimated, ADP Employer Services said. The decline in employment was the biggest since November 2002, when the U.S. was emerging from a recession... (Unemployment tends to peak near the end of a recession. Does this imply that we might be near the end of this recession? Dream on. The recession of 2002 was a thunderstorm compared to this deluge. - Jesse)

The ADP report was forecast to show a decline of 102,000 jobs, after an originally reported drop of 8,000 in September, according to the median estimate of 28 economists in a Bloomberg News survey. Projections ranged from decreases of 245,000 to 70,000.

ADP includes only private employment and does not take into account hiring by government agencies, which is included in the monthly payroll report. Macroeconomic Advisers LLC in St. Louis produces the report jointly with ADP.

Payroll Forecast

The government's Nov. 7 report may show total payrolls fell by 200,000 last month, and the unemployment rate rose to a five- year high of 6.3 percent, according to the Bloomberg survey median. The economy has lost 760,000 jobs in the first nine months of the year.

Private payrolls dropped by an average 108,000 a month from January through September, according to the Labor Department. The ADP estimate shows average private employment gains of 2,300 in the first nine months of the year.

Job cuts announced by U.S. employers jumped 79 percent in October from a year earlier as the credit crunch rippled through the economy, a report from Chicago-based Challenger, Gray & Christmas Inc. said today. Firing announcements rose to 112,884, the highest level in almost five years, from 63,114 in October 2007.

Today's ADP report showed a decrease of 126,000 jobs in goods-producing industries including manufacturers and construction companies. Service providers cut 31,000 workers. Employment in construction fell by 45,000.

Declines Throughout

Companies employing more than 499 workers shrank their workforce by 41,000 jobs. Medium-sized businesses, with 50 to 499 employees, down 91,000 jobs and small companies decreased payrolls by 25,000.

The report did not reflect the strike by about 27,000 machinists at Boeing Co. that was resolved earlier this month, ADP said.

The ADP report is based on data from 399,000 businesses with about 24 million workers on payrolls....

Top 20 Credit Default Swaps Exposure Net Notional Basis

Thanks to Paul Kedrosky at Infectious Greed for putting this together from the DTCC Report.

Never Fear, BIS is Here...

The Irish gnome checks in from Heidi-land:

…and these are the guys supposedly supervising the whole Global Casino!

Monetary and financial stability implications of capital flows in Latin America and the Caribbean
BIS Papers No 43
November 2008

Central Bank participants at the BIS 2008 Open Economies Meeting in Punta del Este, Uruguay, discussed trends in capital flows since 2003 and their monetary and financial stability implications.

Capital flows appear to be more benign today than in the past, partly because of a greater share of foreign direct investment and reduced reliance on foreign financing that has contributed to improvements in international investment positions (IIPs).

Participants held the view that the economies in the region had become more resilient. For instance, although currency and maturity mismatches are still a concern in some countries, they appear to be less relevant today than in the past.

The recent shift in the global financial environment and its regional implications were also discussed. Notwithstanding continuing concerns about risks, the impact of the financial turmoil at the time of the meeting was still limited. Indeed, there was more concern with the risks of a global slowdown than with direct financial contagion.

What would it take to shake these bureaucrats up? A direct meteor impact on their refreshments table? Or a downgrade to economy class?

How Important Is the Yen Carry Trade?

Fairly significant, at least for US equity markets.

We show the relationship of the SP 500 in our Yen chart every night.
But we like this format from our friends at The ContraryInvestor.com
who are true masters of the pictorial display.

This does not imply cause and effect per se. As equities decline, the trade goes off, and as equities rally the trade is on.

Is this use of international currency exchange rates arbitrage the types of thing that one had in mind when discussing competitive advantage and global trade?

Did Michael Porter fail to consider the sheer amount of gambling that can overtake markets?

Are the currency market relationships reflecting international trade balances, soundness of national economics, and relative returns based on ... Forex Roulette?

As you may recall in the short term markets given over to speculation may have little or no relationship to fundamentals, which assert themselves in the long term trends.

In the short run, the market is a voting machine but in the long run it is a weighing machine.

This is how equity markets can shake themselves apart. We had always looked to the bond and currency markets as better and more stable indicators of values. Certainly with large short term moves, but always showing more sense when the equity market punters were frothing.

Those trying to conduct productive business with 'real things' in this environment must feel like they are trying to play a game of chess on a roller coaster.

We appear to be in times of general speculation, with wide reversions to the means creating resonances that might shake the world. These are the types of markets that give rise to new powers and great fortunes, test the fabric of relationships, and bring down old institutions.

Is the tail wagging the dog? Again? It appears to be.

The Next Bubble: Treasury Borrowing for Quarter to be $408 Billion More Than Expected

A tsunami of reserve currency debt issuance, coming soon to an economy near you.


MarketWatch
Treasury expects to borrow record $550 billion
By Rex Nutting
3:00 p.m. EST Nov. 3, 2008

WASHINGTON -- The U.S. government is expected to borrow a record $550 billion in the current quarter, including $260 billion in special funding for the Federal Reserve's extraordinary liquidity programs, the Treasury Department said Monday.

The borrowing estimate is $408 billion more than estimated three months ago. For the first three months of 2009, the government is expected to borrow $368 billion, the government said.

In the three months ending September, the government borrowed $530 billion. The Treasury will announce on Wednesday the sizes and terms of its quarterly refunding auction.

AP
$900 billion in gov't borrowing seen through March
Goverment, raising cash for rescue, projects borrowing of more than $900 billion through March
November 03, 2008: 6:23 PM EST

NEW YORK (Associated Press) - The government, raising cash to pay for the array of financial rescue packages, said Monday it plans to borrow $550 billion in the last three months of this year --- and that's just a down payment.

Treasury Department officials also projected the government would need to borrow $368 billion more in the first three months of 2009, meaning the next president will confront an ocean of red ink.

The nonpartisan Committee for a Responsible Budget estimates all the government economic and rescue initiatives, starting with the $168 billion in stimulus checks issued earlier this year, total even more -- an eye-popping $2.6 trillion.

One day before voters set out to elect the 44th president, new economic reports brought more bad news...

In addition to the borrowing numbers, Treasury released estimates by major Wall Street bond firms projecting that total borrowing for this budget year, which began Oct. 1, will total $1.4 trillion, nearly double the previous record.

Major Wall Street firms were equally pessimistic about the size of the federal deficit this year. They projected it will hit $988 billion for the current budget year, more than twice the record. In July, the administration projected a deficit for this year of $482 billion, but that was before the financial crisis erupted in September.

Supporters of the government rescue packages argue that the ultimate cost to taxpayers should end up being a lot smaller, partly because the Federal Reserve is extending loans to banks that should be paid back.

And in the case of the $700 billion rescue package, the government is buying assets - either bank stock or distressed mortgage-backed assets _ that it hopes will rebound in value once the crisis has passed.

But the government still needs to borrow massive amounts to buy the assets, an effort that has driven up borrowing costs to levels never before contemplated....

On Economics and the Crisis with James K. Galbraith

James K. Galbraith teaches economics at the University of Texas at Austin.

"There are thousands of economists. Most of them teach. And most of them teach a theoretical framework that has been shown to be fundamentally useless."

That could prove to be a real ice-breaker in the faculty lounge.

"Bush simply turned over regulatory authority to his friends. It enabled all the shady operators and card sharks in the system to come to dominate how we finance."

None dare call it tenure.

NY Times
Questions for James K. Galbraith
The Populist
Interview by DEBORAH SOLOMON
October 31, 2008

Do you find it odd that so few economists foresaw the current credit disaster?
Some did. The person with the most serious claim for seeing it coming is Dean Baker, the Washington economist. I saw it coming in general terms.

But there are at least 15,000 professional economists in this country, and you’re saying only two or three of them foresaw the mortgage crisis?
Ten or 12 would be closer than two or three.

What does that say about the field of economics, which claims to be a science?
It’s an enormous blot on the reputation of the profession. There are thousands of economists. Most of them teach. And most of them teach a theoretical framework that has been shown to be fundamentally useless.

You’re referring to the Washington-based conservative philosophy that rejects government regulation in favor of free-market worship?
Reagan’s economists worshiped the market, but Bush didn’t worship the market. Bush simply turned over regulatory authority to his friends. It enabled all the shady operators and card sharks in the system to come to dominate how we finance.

So you claim in your recent book, “The Predator State,” but will President Bush actually be leaving Washington a richer man?
Presidents don’t make money in office; they do so afterward. In his case, I hope he won’t. Maybe his friends will abandon him.

What do you think the future holds for Vice President Cheney?
I suspect that Cheney will spend much of his life fending off legal challenges, but that is a different area. I’m quite sure that the human rights issues will follow him for the rest of his life.

Any thoughts on Treasury Secretary Henry Paulson, who engineered the bailout?
He is clearly not a superman. This is the guy who had the financial crisis on his plate for a year, and when it finally became so pervasive that he couldn’t handle it on a case-by-case basis, the best he could do was send Congress a bill that was three pages long.

What’s wrong with that? Maybe he’s pithy.
It shows he wasn’t adequately prepared. The bill did not contain protections for the public that Congress had to put in.

Regulation is the new mantra, and even Alan Greenspan in his mea culpa before Congress seemed to regret he hadn’t used more of it.
I would say a day late and a dollar short. Greenspan blotted his copybook disastrously with his support of deregulated finance. This is a follower of Ayn Rand, an old Objectivist. His belief was you can’t really regulate and discipline the market and you shouldn’t try. I think Greenspan bears a high, high degree of responsibility for what has happened....

China and Russia Moving Away from the US Dollar?

The headline of this news piece greatly overstates the extent of any deal between Russia and China to stop using dollars. It seems to be a bilateral trading agreement. But it is credible since Russia and China have mutual trading interests that do not involve dollars; Russia is rich in resources and China is strong in manufacturing. Choosing to trade in the rouble makes sense, especially as China remains under currency controls.

It would be even more interesting if they chose some neutral currency such as the euro or even gold and silver since that would invite other countries to join in more readily, especially in the mideast and AsiaPac. We recall that both Russia and China have significant supplies of each of the metals. They might even fix a ratio of value between them, perhaps 16:1? There seems to be an historical precedent.

The problem becomes what should the value of any external standard be to the dollar? In the case of gold and silver, their prices are obviously far too low if they were to assume their roles as international trading currencies again. And the adjustment might prove painful for the three or four western banks that have been dominated the prices of several commodities, including the precious metals, at least on paper. It would be almost as if they had tied a noose around their necks and sold it to their rivals. But they would likely be made whole in cash dollar settlements.

Russia and China are not renouncing dollars overall. But watch for this to become a trend as the US continues to prove that it is no longer capable of managing the world's reserve currency on its own.

The month of November following an October dislocation in the financial markets such as we have just experienced has often proven to be filled with interesting developments.

Global Research
China, Russia, Belarus Renounce the US Dollar?
by Anatoly Gorev
RIA Novosti - 2008-10-30

The recent meeting between Russian Prime Minister Vladimir Putin and his Chinese counterpart, Wen Jiabao, created a financial sensation. Wen said that the two nations could withstand the global financial crisis if they joined forces; Putin urged him to go farther and stop using U.S. dollars in Russian-Chinese settlements.

This idea is nothing new. Russia and China reached a "framework" agreement in November 2007, which was followed by China's similar agreement with Belarus.

Earlier this year, Iranian President Mahmoud Ahmadinejad and Venezuelan leader Hugo Chavez turned against the dollar as well when they asked their OPEC partners to stop using the dollar for oil settlements. They argued that the "green" currency was no longer reliable and it was high time they look for a more stable and predictable alternative. (No one has followed them yet it should be noted, and the dollar has strengthened remarkably - Jesse)

Curiously, unlike the Ahmadinejad and Chavez appeal, Putin's proposal came as the dollar was on the rebound and even began pushing the euro. Economists even started talking in terms of a reversal of the global currency trends, rather than the temporary appreciation of the dollar.

Analysts predict that the dollar will regain its value in the next few months. They do not see anything which could hinder its steady growth.

Yet, Putin proposed that Russia and China stop using it as a settlement instrument. What is it - lack of confidence in the dollar's prospects or a political move? (The dollar has proven to be unstable, and the US preoccupied with its own internal troubles. The dollar is not a substitute for an external standard - Jesse)

Experts differ on this count. Igor Nikolayev, chief strategic analyst at FBK private auditing firm, sounded skeptical: "I think it was a political statement rather than an economic decision. There is a dominant public sentiment that the United States is the source of all evil, so let's stop using the dollar," he explained. (It was political, but it is also a warning and a preface to the November 15 meeting in Washington - Jesse)

One has to bear in mind, though, that some other currency will need to be found to replace the dollar for international settlements. China is unlikely to use the ruble, and Russia would be equally reluctant to accept the yuan. (The rouble would be more viable if it was backed by gold - Jesse)

"They could opt for the euro, but its future is uncertain, especially considering current developments on global financial markets. It is also unclear whether China would be happy to start using the euro while most of its international reserves are held in dollars," he added. (The euro has the same drawbacks as the dollar; it is too vulnerable to domestic policy priorities - Jesse)

There are more questions than answers here, Nikolayev concluded.

To be objective, one has to admit that other analysts are not as skeptical about the possibility of using other currency units between Russian and Chinese companies. (The use of gold and silver between these two countries seems logical if the trade can be 'balanced.' - Jesse)

Andrei Marinchenko, director general of the Kalita-Finance company, said the idea was quite realistic. Moreover, he thinks that the ruble stands a good chance of being selected as a reserve currency, primarily because the Chinese are disappointed in the dollar but aren't yet accustomed to the euro. (Yes but the rouble has a limited reach among other countries that do not wish to trade one empire for another - Jesse)

Only time will show who is right. But to stop using the dollar in Russian-Chinese settlements is too important a decision to make for purely political reasons - that much is obvious. (We're shocked it lasted as long as it did. It makes absolutely no sense to cede that much power to someone whose interests are not aligned with your own - Jesse)

Suppose we do it; what will be the implications for Russian businesses, how will the new financial and political reality affect their incomes and savings?

Marinchenko is convinced of a beneficial impact. According to Marinchenko, once the ruble is recognized as a settlement unit, it will enjoy growing demand with Chinese companies and individuals. The Russian currency will consequently grow stronger and more influential globally. (Its nice to dream, but there is an obvious flaw that needs to be resolved as we noted. Russia is no more stable nor trustworthy than the US for certain Physical gold and silver are beyond the control of a single country. - Jesse)

Russia will also become immune to many shocks from stock market meltdowns and won't have to fear future devaluation or revaluation of the ruble. It will happen because the role of the U.S. dollar, which has earned a reputation as an unstable and unreliable currency lately, will be much less important. (They are not able to do that now for certain. This highlights the risks of a single currency as the world's reserve currency. It is amazing that it has held together for as long as it has. - Jesse)

ISM Manufacturing Index for October at Lowest Since 2001

The ISM Manufacturing Index came in at 38.9 versus an expect 43.0, declining from a prior reading in September of 43.5. This reading is lower than the lowest readings seen in the prior two recessions.

Manufacturing is falling at its fastest rate since the recession of 1982.

There should be no doubt, even for the most diehard panglossians, that the US is in a significant recession already, despite heavily managed government numbers such as GDP.

This is an economic and event heavy week, with the national elections tomorrow and the Jobs Report for October coming out on Friday October 7.

As corporate America runs out of accounting tricks look for their reports to start reflecting a grimmer reality which is now only selectively disclosed from the financial sector and a few companies.

This is made worse by the masking of the seriousness of the situation by statistical reporting that leaves so many unsuspecting and unprepared, and in the grip of a rapacious financial system.

The culture of deception and greed must be restrained, and balance with transparency restored to our economy and our governance.

Goldman Set to Payout All of Its US Bailout in Bonuses

bra·zen adj.
1. Marked by flagrant and insolent audacity.
2. Impudent, immodest, or shameless.
3. Unrestrained by convention or propriety.

Daily Mail Online
Goldman Sachs ready to hand out £7bn salary and bonus package... after its £6bn bail-out
By Simon Duke
8:55 AM on 30th October 2008

Goldman Sachs is on course to pay its top City bankers multimillion-pound bonuses - despite asking the U.S. government for an emergency bail-out.

The struggling Wall Street bank has set aside £7 billion for salaries and 2008 year-end bonuses, it emerged yesterday.

Each of the firm's 443 partners is on course to pocket an average Christmas bonus of more than £3 million.

The size of the pay pool comfortably dwarfs the £6.1 billion lifeline which the U.S. government is throwing to Goldman as part of its £430 billion bail-out.

As Washington pours money into the bank, the cash will immediately be channelled to Goldman's already well-heeled employees.

News of the firm's largesse will revive the anger over the 'rewards for failure' culture endemic in the world of high finance.

The same bankers who have brought the global economy to its knees seem to pocketing the same kind of rewards they got during the boom years.

Gordon Brown has vowed to crack down on the culture of greed in the City as part of his £500billion bail-out of the UK banking industry.

But that won't affect the estimated 100 London partners working at Goldman Sachs's London headquarters.

The firm - known as Golden Sacks for the bumper bonuses it pay its top bankers - is expected to cut the payouts by a third this year. However, profits are falling much faster. Earnings have plunged 47 per cent so far this year amid the worst financial crisis since the Great Depression.

This has wiped more than 50 per cent off the company's market value.

The news comes after it was revealed that even bankers working for collapsed Wall Street giant, Lehman Brothers, could receive huge payouts.

Its 10,000 U.S. staff are expected to share a £1.5billion bonus pool. The payouts were agreed as part of the rescue takeover of Lehman's American arm by Barclays last month.

The blockbuster handouts caused consternation among London employees of the firm, many of whom have now lost their jobs.

Even workers at the nationalised Northern Rock will scoop bonuses worth up to £50million over the next three years.

The extraordinary handouts include more than £400,000 for Rock's boss, Gary Hoffman, who is likely to become Britain's best-paid public sector worker.

The majority of Northern Rock's 4,000 workers will receive four separate bonus payments - the first of which will be made next March. Staff will get an extra 10 per cent on top of their basic salary.

Lloyds TSB also intends to pay its employees bonuses despite taking a £5.5 billion emergency cash injection from the taxpayer.

News of Goldman's bonus plan came as the firm promoted 92 of its bankers to partner level. A quarter are based in Fleet Street, London.

Partnership is the holy grail of the investment banking world as the exclusive club shares around a fifth of the firm's total bonus pool.

New York Attorney General Andrew Cuomo last night warned that Wall Street firms taking government-money risk breaking the law if they hand the cash straight back to employees.

Cash-strapped workers are being penalised by pay rises which are far below the soaring cost of living, research reveals today.

Despite inflation soaring to a 16-year-high of 5.2 per cent, the average worker got a pay rise of just 3.8 per cent in September.

The research, from the pay specialists Incomes Data Services, highlights the financial problems facing millions of workers.

Most of their household bills, particularly food and fuel, are rocketing by up to 35 per cent. However, their meagre pay rise does not begin to cover the extra cost.

The majority of the 50 pay settlements investigated by IDS were in the private sector covering around 1.1million employees.

They range from just 2 per cent for workers at the BBC to 5.3 per cent for workers at a firm of dockyard workers.

Incomes Data Services warned pay rises are likely to fall even further over the coming year as inflation is expected to drop sharply.

Economists predict inflation will fall below the Government's 2 per cent target next year.