Notes from Underground

This is a composite of chatter and 'gossip' and anecdotes picked up from multiple sources, some that could be considered reasonably informed, formally regarded as hearsay.

Treat it as rumour as none of it can be guaranteed authentic. More of it is coming from Europe than the US. There can be no verification in such opaque conditions without investigative staff and the power of subpoena.

Verify it for yourself; it is not a bad starting point to use as a skeleton upon which to hang events as we go forward. Sometimes you hear enough of the same thing from different sources, things that make sense and ring true, and the dots connected, even if in a rough way.

There was more of a struggle in deciding to allow the speculative portion of this out than you might imagine. The 'history' part seems consistent and valid, but probably a selective caricature. It could all be the overreaction of frightened people who merely do not see the next step yet. But since we started acting on it this week, not in terms of investments, but in bringing capital back to safer harbors, it did not seem right to ignore it.

The whole outlook could change next week, and for the better. Anything is possible, if one does not know what is true and what is not, even if it does not seem probable. And we never trade on rumours, only the charts which tell us things known only to the markets.

It seems as if the government is downplaying the seriousness of the situation a bit while they work to find a way forward. That is natural and expected. What might seem today like a radical solution may be adopted eventually but the people are not ready to hear it yet, and it is not clear that this will be required, so why do it?

No one wants to make the first moves ahead of an unfolding crisis, especially with the Republicans playing hardball politics and the blame game. The pressure is on from the moneyed interests, but there is a growing concern about the public mood.

In the meantime, people's favorite ideas for solutions are getting play because no one can agree on a comprehensive plan. Obama brought in an impressive array of experienced people who know where the levers are. The problem is that they are philosophically at odds with one another, and sometimes poles apart from the president and his inner circle. There are the natural start up problems, but there is a more serious lack of cohesion of vision that is going to be resolved. Obama seems capable of doing this.

There is an air of quiet desperation as the situation grows progressively worse, and there is intense debate on when and how to break it to the public. They are not even sure what exactly to break because the situation is so fluid. No one wishes to be the messenger and possibly be blamed for inciting a loss of confidence.

Wall Street and the banking system has been every bit as irresponsible and out of control as we thought in our worst moments, perhaps more. A group of twenty somethings with little or no adult supervision developed ideas for 'financial products' with the same care and planning that their counterparts perform extreme stunts on Youtube.

They did it because they could. They tested the system for boundaries and didn't find any.

You want leverage? Imagine a 20 billion dollar portfolio of mortgage backed securities with a capital base of $10k, literally 2 million-fold leverage. Imagine the shock of the inventor as he watches as his successors expand similar portfolios up to $900 billion.

After running out of gullible Japanese bankers these young cowboys began trolling for other pools of gullible buyers: hedge funds, pension funds, and University endowments sufficed. They even found some local suckers. Anything to make a sale and keep the money machine turning.

How did we go so far off the tracks?

The guys initially putting these packages together had some sense that they were crazy, that they made no sense, but nobody said stop, and they didn't care. It was a good time to make money and then move along.

Government regulators being paid $100k couldn't tell connected guys making $20 million what to do. They also had their marching orders from above. Don't get in the way of financial progress on Wall Street. The US has to be competitive. The senior managers loved the money flows.

A sea of cubicles were staffed with engineers, chemists, physicists, and mathematicians from the best colleges in the country with no knowledge of the history of financial markets, fat tails, and past human follies. But they knew how to turn the crank on financial engineering.

The average career age in the business is about 7 years. A twenty year veteran is a very old man. The creators of these innovative financial products understood the toxicity at some level. As they retired, however, the next generation of twenty somethings came in and had zero sense of risk. They were simply told which button to push and which lever to pull to make money. Nobody was really driving the bus.

The Street looked from one market to the next to find and angle and make money. Enron was only the tip of the iceberg. And when they found a market that was vulnerable they swarmed on it like a pack of wolves.

The money overwhelmed the system. The money pushed all regulations aside. It bought deregulation, politicians, and anything else necessary to keep the money machine growing. Nobody dared yell stop because so damned much money was being made.

Greenspan became a believer--he lost consciousness of what he was there to do. The reason he turned a blind eye and allowed the damage to accumulate remains unanswered.

So where are we now, and where are we heading?

Our financial system is infected by flesh eating bacteria. Every day looks more dire than the previous day. The solutions being proposed look feeble, and the Fed looks both powerless and confused.

TARP is throwing money down a rathole. That is why there is such a mood of abandon on the Street. They know this is just an exercise.

One of the so-called model banks is on a don't ask/don't tell policy; the Fed simply cannot handle another mega-catastrophe while they wrestle with the fully-insolvent among the top five. (Note: think derivatives). The word on the Street is to keep everything bad off the radar to buy time.

There are rumours swirling that there will be a bank holiday in the UK, and they will be particularly hard pressed because of the high percentage of their GDP that financial services represent. The pound is heading to parity with the dollar. The good news is that it will probably not be as bad as Iceland.

The problem with Germany, and by inference continental Europe, is that their regulators refuse to acknowledge their errors and deal with the problems. They are the polar opposite of the Fed which acts first and plans later. The problem is that the Germans cannot seem to get beyond the planning stage because they cannot believe that their regulations and safeguards failed so badly. It has shaken their confidence. Additionally, the failed German bond auction was deemed catastrophic in its implications and has them fearful of policy error.

There is no way out of this mess without serious pain. Despite a deflationary bias today, most insiders see inflation and spiking interest rates as the risk going forward, probably early 2010 or sooner depending on how fast things start moving.

Are We Ready to Try Market Capitalism?

'When I use a word,' Humpty Dumpty said, in rather a scornful tone, `it means just what I choose it to mean -- neither more nor less.'

`The question is,' said Alice, `whether you can make words mean so many different things.'

`The question is,' said Humpty Dumpty, `to be master -- that's all.'

The refrain from Wall Street these days is "I worked hard for that bonus."

Lots of people work hard. Most of the people we know, probably many of the readers of this blog, could give lessons in working hard to these Wall Street whizkids.

A waiter or waitress works hard, very hard. But they don't get huge tips when they dump hot soup in the customer's lap.

You don't get paid for how hard you work, you get paid for how much value you add for your customers and your shareholders. If you work on commission and bonus your pay is intended to vary with performance, not by how much you can grab off the table before the police arrive.

The pay structure on Wall Street looks less like a profit based enterprise and more like organized crime.

What starts as a valuable component, a method of efficiently allocating capital for a small fee, becomes an oversized drain on the process it is intended to serve.

There is nothing wrong with capitalism and competitive markets and a healthy meritocracy. It is probably the most efficient and effective means of creating wealth and managing businesses.

We should try that system now that the cult of pay for privilege, interconnected frauds, rule by empty suits, and crony capitalism has failed.

Economic Times
For CEOs, thirst for bonuses may be in their DNA
31 Jan 2009, 1151 hrs IST

NEW YORK: Why do CEOs need extravagant perks even when they are firing staff and pleading for taxpayer bailouts? It may just be in their makeup, experts say.

It takes arrogance and narcissism to become leader of a Fortune 500 company. Those same traits, however, have become their undoing during the deepest recession in decades. (If their narcissism is particularly acute they might become a Senator instead - Jesse)

U.S. President Barack Obama has noticed, telling reporters on Thursday he was outraged by a New York State report that $18.4 billion in Wall Street bonuses were paid in 2008 as taxpayers rescued the crumbling financial system.

"That is the height of irresponsibility. It is shameful," Obama said. (And as recent denizen of Congress he has a refined palate for shameful irresponsibility, which has been the primary product from Washington DC in recent years. - Jesse)

New York State Attorney General Andrew Cuomo, who is investigating Wall Street bonuses, welcomed Obama's comments.

"While Wall Street melted down, top executives believed that, unlike the rest of the country, they still deserved huge bonuses," Cuomo said. (And Congress took increasing pay raises, and a private pension system, and superior healthcare, while the median wage stagnated and the middle class dwindled - Jesse)

For Bob Monks, a former executive who has written nine books on corporate governance, the reason is that the rich and powerful simply love their toys.

"It's a boy thing. Sort of, 'Mine's bigger than yours.' It's really childish," said Monks, a shareholder rights activist and the subject of a book called "A Traitor to His Class." (It is not childish, for that is a slander on children. It is pathological. It is an addiction, a compulsion, a sickness that transcends the occasional petulance of childhood - Jesse)

Monks related a story about flying on someone's corporate jet. The host was devastated when, upon landing, he saw that while he planned for a limo to be waiting at the airport another captain of industry had a helicopter take him to town.

"I thought my guy was going to die. ... It's entirely about people's self-image." (It is about a sense of personal worthlessness. Some people have a huge hole in the center of their being, and and a compulsion to fill it up with things and people, to try to make themselves feel whole, but it can never satisfies, and they are ravening - Jesse)

Longtime advocates of shareholder rights were handed a gift in November when Detroit auto executives flew to Washington on corporate jets to ask for billions of dollars in taxpayer money, sparking a public outrage.

More recently, it became known that former Merrill Lynch CEO John Thain spent $1.2 million remodeling his office last year, including $1,405 for a trash can. Merrill Lynch is owned by Bank of America, which consumed $45 billion of taxpayer money through bailouts.

Then on Tuesday, Citigroup canceled plans to buy a $50 million executive jet after a White House rebuke.

"People don't become head of Merrill Lynch without having a certain sense of self-importance. Once they arrive at that position, they have all kinds of toadies tell them what geniuses they are, then of course they begin to feel their lifelong feelings of self-importance have been confirmed," said Charles Goodstein, a psychoanalyst and professor at New York University School of Medicine.

Defenders of executive perks say generous compensation is needed to retain talent. (Generous, not extravagant. There is a direct proportion between the emptiness of the suit and the extravagance of the trappings. There are only a few Steve Jobs; most of the others are verbally adept, highly cunning, political animals. For the most part it is the myth of the "Great Man." A surprisingly large number of them are frauds. The problem is the system does not manage them, eliminate them. It pays for the office, not for the performance. - Jesse)

Sometimes it's jets but can also include home security systems, country club memberships, sports tickets and financial advice. The value of these benefits is considered income, so CEOs also sometimes get another perk: company help in paying their taxes. (Set the tax rates so bloody high that they might consider competing on something more useful, like the performance of their companies - Jesse)

"I was CEO of a bank once and it's not rocket science. You need the same skill set as somebody running a hardware store in a medium-sized town," Monks said. (For many corporate managers the most difficult of the job is protecting the business from overpaid corporate goons with nothing better to do than to subvert the good of the business to their own personal ends in some of the most imaginative ways possible. And in high tech startups, the most intractable problem is trying to keep the VCs from destroying the company with their clumsy attempts at stealing the business. - Jesse)

Steve Thel, a former lawyer with the Securities and Exchange Commission and now a professor at Fordham Law School, blames compliant board members who often come from the same privileged world and can get paid hundreds of thousands of dollars for attending a few meetings each year. (The Boards are bastions of the fraternity of empty suits and the brotherhood of professional courtesy -Jesse)

"It's endemic to the system. The last administration didn't think there was any structural flaw. Now across the political spectrum people feel that Wall Street executive compensation is out of control," Thel said. (The former president is the epitome of a thin veneer of privileged arrogance covering a deep well of incompetence. - Jesse)

He predicted Congress would pass legislation granting minority shareholders more say on pay and possibly introduce higher taxes on some parts of executive compensation.

"A year ago it was absolutely unthinkable that this would be heard in Congress," Thel said.

Three Banks Closed on Friday, One With No Willing Acquirer

Utah's MagnetBank closed without an acquirer

MarketWatch
FDIC shuts down three banks in one day amid ongoing credit crisis
By John Letzing

Federal regulators closed three banks in a single day Friday, as the ongoing credit crisis showed no signs of abating.

Utah's MagnetBank became the fourth bank failure of the year, and the Federal Deposit Insurance Corp. was forced to directly refund depositors after being unable to find another institution willing to take over its operations.

That marked the first time the FDIC has been unable to find an acquirer for a failed bank in nearly five years, according to FDIC spokesman David Barr. "This bank did not have an attractive franchise value, and not many retail deposits or core deposits," Barr said. The FDIC had conducted an extensive marketing process for the bank's assets, he said.

Salt Lake City-based MagnetBank had total assets of $292.9 million as of Dec. 2, and $282.8 million in total deposits. "It is estimated that the bank did not have any uninsured funds," the FDIC said in a statement.

The FDIC later said it has also closed Maryland-based Suburban Federal Savings Bank, and Florida's Ocala National Bank.

Suburban Federal had total assets of roughly $360 million as of Sep. 30, and total deposits of $302 million, the FDIC said in a statement. Tappahannock, Va.-based Bank of Essex agreed to assume all of the failed bank's deposits, the FDIC said.

Ocala National had $223.5 million in total assets as of Dec. 31, and $205.2 million in total deposits, the FDIC said. Winter Haven, Fla.-based CenterState Bank has agreed to assume all of the failed bank's deposits.

The closures mark the fourth, fifth and sixth bank failures of 2009, bringing the total to 31 since the start of the credit crisis.

US Dollar Long Term Chart with Commitments of Traders

The divergence of gold from traditional relationships with the euro, dollar and oil suggest that it is becoming an alternative reserve currency, primarily at the expense of the euro.

The last thing the real economy needs right now is a stronger Dollar. Other nations are already weakening their currenices competitively. It will be interesting to see how gold reacts in this type of environment with the fiat currencies being manipulated lower in sympathy with one another.

Oil will not recover in price while the House of Saud has our back. But at some point even they will concede to market forces, or some exogenous event, and then we will have the appearance of inflation. This may not occur until late 2009 or early 2010 when we expect the economy to begin to show signs of recoverery, at least relatively speaking. Until then the resurgence of gold is almost entirely a monetary phenomenon.

We believe that the stimulus is too backend loaded and unimaginative to affect anything sooner. Adding liquidity to the banks is as useful as filling the tank of a car wrapped around a telephone pole. Who are the banks going to lend to? And increased spending on health care, with the highest and least efficient per capita cost in the world, is like giving the driver of that car a bottle of vodka to ease their pain.

The consumer is insolvent, and until the median wage turns around will not be inclined to borrow for consumption again, as they should not. The nation must shake off the legacy of the Greenspan era and the economic cargo cult of the Chicago School.

It could be a long, hot summer.

SP Futures Hourly Chart at 3:30

Postscript After the Close:
The Dow Jones Industrial Average finished January down 8.84% on the month. Previously, the worst January for the Dow had been that of 1916, when it fell 8.64%. Friday, the Dow dropped 148.15 points to 8000.86 after briefly dipping below the 8000 mark. The Dow has fallen five straight months and in 12 of the last 15.

Today is the last trading day for January. If we go out near the current lows of the day, this will be the worst January for US equities in the last 92 years.

There will be no sustained recovery in the economy until the median wage improves. Allowing the banks to lend again to support consumption is a complete waste of capital. The purpose of not allowing bank failures, as in the 1930's, is not to save the banks, but to preserve the funds of private savers.

We should back the pensions and the savings of individuals one hundred percent. Government support should not be given to banks that are insolvent. They should be restructured first, and then recapitalized.

Are We Ready to Change the System?

"The general spread of the light of science has already laid open to every view the palpable truth, that the mass of mankind has not been born with saddles on their backs, nor a favored few, booted and spurred, ready to ride them..."
Thomas Jefferson

It is time to begin serious, and significant, systemic reforms in the financial system.

Maintaining the status quo will be fruitless because the system is broken. Trying to keep it from becoming 'more broken' is a nice short term fix, but we are beyond that now. This has been a long time in the works.

There has been a recent increase in noise from the Congress about changing a system which promotes excessive pay, and encourages the virtual looting of companies, by overpaid management and a corrupt financial system.

Rather than strike at the branches, and call a few individuals up before Congress for their ten minutes of tut-tutting, how about some serious change that cuts to the roots of the crisis?

One potential solution would be to institute a marginal income tax rate of, let's say, 80% at the 30 million dollar level of aggregate income in the AMT, with a significant raising of the minimum levels of income that trigger the AMT to about 4 million in aggregate income. It can graduate from 50% to 80% from the minimum to the maximum. The AMT was always intended to be a safeguard against loopholes for the highest income brackets. We can permit five year income averaging to allow the incredibly lucky to keep a bigger share. But rewarding luck encourages gambling and gaming the system, which is an open door to white collar crime and fraud.

And we have to ask, just how much is enough. Do you really think that having a 30 million dollar per year income is 'not enough?' Are we insane? Yes, allowing people to 'keep what they kill' is ingrained in our psyche by the last 100 years of a steady stream of propaganda, but its time to start thinking about social interaction and the protection of the innocent as well as the glorification of greed.

Yes, this will alarm the "Joe the Plumbers" out there who wish to fantasize about the looting of the system, or have pretensions of being the next American Idol, with a Pavlovian impulse to consider realistic expectations and a middle class life as socialism.

The top 1% of the wealthy Americans do not need additional incentive to take. They are, for the most part excepting the lucky and the idle heirs, psychologically driven to acquire beyond all rational need. What they need is restraint. And they will absolutely hate it.

But since most wannabe billionaires are delusional why let them drag us down under the bus with them? Let's stop legislating for the .1% probability, leaving the garden gate open for the pigs to come in.

We cannot continue to build and maintain this country if the most rewarding pursuits are gambling, gaming the system, fraud, and white collar crime. That game is over. We're done.

Reform the accounting rules for acquisitions and goodwill, inventory writedown with subsequent earnings effects. "Earnings management" is a tool of the price manipulation for stock option bonuses that is a source of market distortion.

Bring back Glass-Steagall. Let Goldman and Morgan get into the conventional banking business after passing through receivership. The point is to be solvent first BEFORE you get government support. And if you are not solvent we will help you become so through liquidation.

Back up the individuals, the savers and pensions, to the hilt, 100%, and put the financial institutions through the wringer, if not a meat-grinder. Stop beating this 'trickle down' approach in curing our problems by throwing money at the uber-wealthy and corporations. It does not work. It will not work. It is destroying our country.

Oh no, we cannot let honest people be limited in acquiring enormous wealth. Well, there probably aren't many completely honest people pulling down over 30 million per year in income. The criminal prosecution system is also horribly compromised, and we can fix it AFTER we stop the looting, and then the rules can be relaxed.

Direct the FBI and Justice Department to conduct a serious investigation of naked short selling and price manipulation. That aspect of the market is an open sore.

Institute aggregate position limits in commodities, and make them high enough so that they do not bother any legitimate speculators.

Refuse to admit any nation into the favored nation status unless their currency is open for trading on the world markets, free of pegs.

Stop the system of legalized bribery of the Congress and the Executive by lobbyists. That requires campaign funding reform, then let's do it now.

Stop selling this country short for the sake of 'competitiveness' and a perverted image of the "American Dream." If the Founding Fathers came back they would not be able to stop throwing up at what we now call 'freedom' and what we have done with their legacy for which they pledged their lives and sacred honor.

Europe needs to tell the Brits and the Yanks to piss off, fix the euro, take an enormous dose of humility, reform their financial system, and don't play the fool again so easily. Asia needs to take care of its own and grow a middle class, and stop treating its people as coolies. Australia needs to go walkabout with Europe. The Mideast is its own worst enemy. Africa is the shame of our world.

Too radical? Then you're not ready yet for the changes that are required to end this cycle of boom, loot and bust.

It is time to begin serious, and significant, systemic reforms in the financial system. It is preferable to the historically likely alternatives.

The Price of Gold and the Growth of the Money Supply

We have seen comparisons of the price of gold to the adjusted monetary base and to M1. Based on intense study and reasoning about the current trends in money supply we are convinced that this comparison of growth in MZM with a lag to the change in the price of gold is significantly much more valid than any other we have been able to produce, if one only considers the correlation of the graphs. And it makes logical sense.

MZM is the most valid measure of broad 'liquid' money in the system. We formerly used M3 but this has not been available, with any published certainty, since 2006.

It would make sense that in a free market, the growth trend of a broad measure of 'liquid money,' as opposed to credit or potential money, would be statistically valid with the price of an alternative currency, or wealth asset, like gold over the longer term.



Speaking wonkishly, our preferred comparison would be to be able to measure the difference in growth between real GDP and the growth in broad money supply, and then trend and compare that with the growth in the price of gold.

Since we have no honest measure of price inflation that task is difficult. Our second preference would be to make a similar comparison per capita the economically active rather than real GDP. Is there an accurate measure of job population growth fluctuations with the ebb and flow of the illegals? We are not sure, but are looking into it.

Goldman Sachs Says the Banks Now Need At Least $4 Trillion in Bailouts

Can we get an estimate that assumes we nationalize Goldman Sachs, Morgan Stanley, Citigroup, and J.P. Morgan, place them in receivership, selectively default on their derivatives, sell all their assets, and criminally prosecute their executive management from the year 2000 under the RICO statutes?

Reuters
Bank Bailout Could Cost Up to $4 Trillion: Economists
29 Jan 2009 04:35 PM

The cost of restoring confidence in U.S. financial firms may reach $4 trillion if President Barack Obama moves ahead with a "bad bank" that buys up souring assets.

The figure far exceeds even the most pessimistic estimates of how great the loan losses might be because there is so much uncertainty about default rates, which means the government may need to take on a bigger chunk of bank debt to ease concerns.

Goldman Sachs economists said ideally the public sector would step in to remove the hardest-to-value assets, which would alleviate nagging worries about future losses and hopefully help get lending going again.

"Unfortunately, with an unprecedented meltdown in mortgage credit and a deep recession in the broader economy, there is a great deal of uncertainty about the value of almost every asset," they wrote in a note to clients.

Obama and his economic advisers are expected to lay out their policy plan as early as next week. One idea that seems to be gaining traction is setting up an entity to buy troubled assets and hold them until they mature or resell them.

The hope is that once banks get rid of those bad loans, they can attract private investors, get back to the business of lending, and help revive the economy.

Vice President Joe Biden said Thursday that Treasury Secretary Timothy Geithner was considering all options to restart normal lending, but that no decisions had been made.

Goldman Sachs estimated that it would take on the order of $4 trillion to buy troubled mortgage and consumer debt. That number could shrink if the program were limited to only certain loans or banks, but it could also grow if other asset classes such as commercial real estate loans were included. (How much would it cost if we put Goldman and Morgan Stanley into receivership - Jesse)

New York Sen. Charles Schumer has said that a number of experts thought that up to $4 trillion may be needed to buy the bad assets, an estimate that a Senate aide said was based on informal conversations with people in the industry.

The Wall Street Journal said government officials had discussed spending $1 trillion to $2 trillion to help restore banks to health, citing people familiar with the matter.

At $4 trillion, that would be the equivalent of nearly 1/3 of U.S. gross domestic product. If the government had to fund that amount by issuing additional debt, it would intensify investor concerns about massive supply scaring off demand.

Depending on how the plan is structured, the government may not have to put up the full amount, and since the majority of people are still paying their mortgages and credit card bills, there is a reasonable expectation that taxpayers would recoup a substantial portion of the cost.

However, the potential loss is huge, and if more public money is needed to boost capital even after the bad assets are removed, the total would undoubtedly climb.

The International Monetary Fund said Wednesday that worldwide losses on U.S.-originated loans may hit $2.2 trillion, well above its October estimate of $1.4 trillion. It said banks in the United States, Europe and elsewhere probably needed to raise $500 billion to cover losses coming this year and next.

Cutting Out a Zero

For U.S. lawmakers who are already taking grief from voters over a $700 billion bailout approved last fall, passing another big spending measure carries significant political risk.

At the same time, Obama's team wants to take action that is bold enough to fix the problem once and for all, hoping to avoid the sort of ad hoc approach that has been criticized for adding to investor uncertainty.

Time is not on Obama's side. The more the economy weakens, the longer the list of potentially dodgy debt grows. That is why he faces enormous pressure from Wall Street to act fast.

The government would not necessarily have to spend the full $4 trillion to buy the assets. If it follows the model used in a Federal Reserve program to support consumer and small business loans, the government could potentially put up just 10 percent of the total.

Spending $400 billion would certainly be more palatable to Congress than $4 trillion. It may not even require that much additional funding. Economists estimate that perhaps $250 billion of what remains in the $700 billion bailout fund could be devoted to the "bad bank."

That money could buy bad assets, which would then be repackaged and sold to investors to raise more money which could then by recycled to buy more assets.

Stephen Stanley, chief economist at RBS Greenwich Capital, said although that sounds similar to the sort of financial engineering that spawned the credit crisis in the first place, it would be structured so that the central bank or whichever agency oversees the program is last in line to take losses.

"If things turn out so bad that the Fed ends up on the hook for $1 trillion in losses, then the financial sector, the economy, and everything else will be dead anyway," he said.

US 4Q '08 GDP Advance Number Out Tomorrow Morning

The US will release its Advanced Estimate of GDP for the fourth quarter of 2008 tomorrow morning at 8:30 AM.

The consensus of economists is for -5.4% which is a quarter number, non-annualized to put this into comparison with other countries which annualize their numbers.

A low end print of -6.0% is the whisper with the "Yikes!" number at -7.0%

It is thought by some that the Obama Administration release a conservative advance estimate to help shock the Senate into acting on their stimulus package. Who can tell about such things?

Keep an eye on the Chain Deflator which is estimated to come in at 0.6%.

In addition to GDP, the Chicago PMI and Revised Michigan Sentiment for January will also be released at 9:45 and 9:55 respectively.

When the Incoming Tide Turns to Tsunami

Not a matter of if, but when.

The Times
Gold price could treble if China divests dollars, warns mining boss
Jenny Booth
January 29, 2009

The gold price is likely to hit record highs in dollar terms as fears grow about the stability of the US currency, the chairman of Barrick Gold said today at the World Economic Forum (WEF) in Davos.

The founder of the world’s largest goldmining company said that there was even a possibility that central banks, including China’s, might start to switch from dollar holdings to gold, which could cause the price of the metal to treble.

“Gold is at record levels in every currency except dollars," Peter Munk told Reuters at the WEF meeting.

"Even within dollar terms it is within a few percentage points of an all-time high, at a time when all the other major commodities are falling.”

Mr Munk said: “Whether it’s the currency effect or a reaction to a feeling of uncertainty, gold, in my opinion, is more likely to go up than down.”

The gold price was up today, trading at about $890 at 1500GM. At present the record high is $1,030.80 an ounce, achieved in March last year.

Mr Munk emphasised that he was merely weighing the odds.

“It would be stupid to assume commodities prices can only go one way,” he said, adding that physical demand for gold jewellery was not high during the economic downturn.

Gold has been one of the best-performing assets of recent months, rising in value by nearly 17 per cent since late October even as the price of other commodities, such as oil and copper, has dropped sharply. (This is because gold is more monetary than commodity. Silver is a more even mix but it is still monetary as well as industrial. - Jesse)

Investors have bought heavily into physical bullion in the form of coins and bars, and physically backed assets, such as exchange-traded funds, as a safe store of value at a time of increased volatility in other asset prices.

Mr Munk said that downward pressure on the dollar, partly due to massive US spending and printing money to stimulate the economy, would increase gold’s attractions as an investment even further.

Gold usually moves in the opposite direction to the dollar, as it is often bought as a hedge against weakness in the US currency. (Gold has been moving with the dollar as foreigner flee out of other currencies and begin to treat gold as a safe haven alternative with, not in lieu of, the dollar - Jesse)

“My personal feeling is that with the rescue packages calling for trillions, not billions ... the value of the [US] currency has to go down,” Mr Munk said.

He said that there was a possibility that central banks, including that of China, a major dollar asset holder, might start buying gold. (Rumour is that the physical market is so tight they have been calling quietly around looking to lock in major sources of supply - Jesse)

“If they decide to diversify, we assume into gold, then we start to talk about a trebling or quadrupling of the gold price," he said. "It could be followed by Russia or Kuwait." (They could just be jawboning Tim Geithner back with a credible threat as well - Jesse)

“I don’t think it’s likely, but it’s more likely. I would not have said it two years ago — I’m not a gold bug — but it’s more likely than it was two years ago.”

He added that his company did not now hedge its output — meaning use derivatives to insure against a fall in price — and relied on the price climbing.

In the past its successful hedging allowed it to make key acquisitions.

“It would be dumb to hedge,” Mr Munk said. (Bill Murphy told you that when gold was at $300 per ounce, and he was right - Jesse)

SP Futures Hourly Chart Update at Noon

The SP futures failed at the resistance target and have rolled over to near support at 850.

We are still in the end of the month tape painting but earnings are deteriorating badly, causing some of the major players to start edging towards the exits, taking their profits from this double bottom rally off the table.

As an interesting change, there is a groundswell of interest among the wealthy to own physical gold bullion: not paper, not miners, not ETFs, but the actual gold. This was even referenced several times today on Bloomberg Television and in interviews from Davos. There are also fresh examples of delivery problems from Comex, and in particular with regard to 1000 oz. bars of silver which is something new. Previous shortages from commercial sources had been reported in the smaller unit bars only, with the Comex seen as a steady source of the big bars.

Part of this seems to be a swirl of talk coming out of London that there is going to be a bank holiday, and a major government action to shore up the financial system.

We do NOT have any particular insight into what is driving this and the specific short term timeframe. Rumours are easy to ignore since in the short term the technicals on the chart are most important to us, and specific news events. The macro events are on our 'radar screen' and are looking for any specific data or potential trigger events.

As a reminder, GDP for 4Q comes out tomorrow. Wall Street is bracing for the worst print since the Great Depression, on the order of -6%. Given the lags, and the monkey business that the Government plays with the numbers, we're not willing to bet on 4Q, although it does serve their purposes to come out badly, justifying the stimulus program.

"The wind blows where it will, and you hear the sound of it, but you do not know whence it comes or whither it goes"

SP Futures Hourly Chart Update for Market Close

There was a picture perfect breakout, at the intersection of our horizontal breakout resistance and the outer bound of the big downtrending diagonal channel.

So what next? While the futures remain in this tight channel a trader will not fight the tape, and no new shorts should be put on.

Now having said that we sold most of our straight up index longs into the close and did buy selective shorts into our hedge. Our bias is now short for a pullback potential off that touch on the big resistance at 875 which is now a very key level.

Trade this with care as the situation remains volatile. But as a rule of thumb when we see such a nice straight ramping pattern in the SP futures we assume that some big banking players are walking the index higher into a short squeeze. Its hard to miss as the will clearly signal their intention to the market.

Volatility remains high. The most important change is that this breakout has shifted the bias of the market from the bears to the bulls, and so now we are in rally mode until it fails. The failure points are obvious on the chart, at least for now.

The Fed Statement

Good News! The Fed stands ready to buy Treasuries, but not yet so don't worry about monetization. Will they or won't they?

Oh by the way:

The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant.

As you may recall, the foreign central banks have been dumping Agency debt en masse and using the proceeds to buy Treasuries, generally in the five to ten year duration of the curve.

So the Fed is buying those Agencies, but not buying Treasuries which would be monetization right? But somehow buying Agency debt is not monetization if it is the foreign central banks who are buying the Treasuries, right?

If the Fed uses its Balance Sheet to buy financial assets at above market prices, essentially providing a subsidy to the holders of those assets, this is not inflationary since that debt already existed, right? Oh, as long as it is at a loss, because as everyone can figure out buying them at 1000 times more than they are worth or marked on the holder's books would surely be inflationary, right? If the Fed buys my stamp collection at 1000 times it true value, that would be inflationary unless they sterilized the transaction. Is the Fed sterilizing all their transactions? Hah!

Will they or won't they indeed. They already are, indirectly. More misdirection from the transparent Fed.

From Tinker, to Evers, to Chance.


Press Release
Release Date: January 28, 2009

For immediate release

The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.

In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level.

The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant.

The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets.

The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Committee will continue to monitor carefully the size and composition of the Federal Reserve's balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Dennis P. Lockhart; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred to expand the monetary base at this time by purchasing U.S. Treasury securities rather than through targeted credit programs.

Inflationists vs. Deflationists: Economics as Bread and Circuses

In a purely fiat currency regime, a sustained inflation or deflation is a policy decision.

Since few systems in this world are pure, one has to account for exogenous factors and endogenous lags.

But it remains, deflation or inflation are the result of policy decisions in a fiat regime. If one does not understand that, then there is a fundamental misunderstanding of how things work in a modern monetary system which operates free from a hard external standard.

It is not an idle point, by the way, to understand that in a fiat regime there is a significantly greater latitude in policy decision than otherwise.

That is why central banks wish to maintain a fiat regime, and not to be encumbered by an external standard such as gold.

Once one realizes that it is a policy decision, one realizes that this 'inflation versus deflation" is not about some deterministic outcome based on market forces, but rather on a policy decision, what the governance thinks "should" be done.

Granted the Fed does not have perfect latitude. There are the restraints of law and the Congress, and the necessary cooperation of the Treasury and the banking system.

However, the most legitimate, the least endogenous limitation in a fiat system is the value of the bond and the dollar to external market actors. This is the tradeoff that the Fed and Treasury must make in weighing the outcome of their actions.

All this backslapping and scoring of points between the inflation and deflation 'camps' is particularly obtuse because this monetary chess match is most heatedly being argued about by people who think they are watching a game of ping pong.

Yes we will likely see a deflationary episode in the short term, certainly in prices as the aggregate demand contracts, as the Fed fights the credit collapse. We briefly saw deflation at the trough in 2002, depending on how one chooses to define deflation.

But, make no mistake, the Fed can print money and monetize Treasury debt until the cows come home. Bernanke was not lying when he put his cards on the table in his famous helicopter speech some years ago. He wasn't just trying to fool us as some would hypothesize.

They will monetize debt and 'print money' covertly and quietly because they do not wish to trash the Bond and Dollar, since this is the fuel of their machine.

Economic cargo cultists frequently resort to imaginary restrictions on the Fed, such as they can't do this or they can't do that. Growth in money supply must come from the lending of the private banking system. The Fed "only controls the monetary base" and "doesn't set interest rates."

That is all bollocks. It is playing with words, parsing the truth, Clintonesque.

First, there are some gray areas in the statutes that prohibit the Fed from DIRECTLY buying debt from the Treasury without subjecting it to the discipline of the marketplace, ie. taking through a public auction first. The law is soft on this point, but one might contend it is not necessary to change it if the Fed has one or two banks that are policy captives. We believe they do.

Second, growth in the money supply has to come from the lending of banks, the creation of new debt, only when you have run out of 'old debt' and prior obligations to spending.

Does ANYONE who has been following the fiscal discussions in the US believe that we will run out of debt in our lifetimes? The lending of the banks, the creation of new debt, is a measure of economic vitality in some dimensions yes. But growth by debt creation is NOT the only way for an economic system to function, and it may indeed may not be the best. But regardless, it is not necessary while there is debt that can be monetized, and certainly we have a surfeit of that.

The only limitation on the Fed and Treasury are the Congress and the acceptance of the dollar and the Bond in a fiat regime. Period.

Unless there is some greater conspiratorial policy reason, any net debtor that chooses deflation rather than inflation of the means of the repayment of their debt should have their head examined.

There are those who believe that the US "creditor class" will seek to encourage liquidationism and deflation to protect their private fortunes, created during the bubble period.

This is not actually a bad theory, except that the real creditor class lives in China, Japan, and Saudi Arabia. Since two of them are virtual client states of the US and the third is bound to its industrial policy the status quo seems to have some momentum, despite the best attempts of Zimbabwe Ben and His Merry Banksters to denigrate our currency and their customers' sovereign wealth.

One might suspect that the domestically wealthy (note the distinction between that and 'creditor class') would like to channel the bulk of the inflationary effort into their own pockets and benefits for the bulk of the effort before it stops short of hyperinflation, and then cut off the spending.

Hey, we're already doing that! Isn't it nice to see how things work?

People forget that in many ways this is a replay of the Great Depression, wherein a Republican minority in the Congress, and ultimately the Republican appointees on the Supreme Court, fought the New Deal tooth and nail, to the point of class warfare and a suspected plan to take the country into fascism in sympathy with the industrialists of Germany and Italy.

It was interesting to see the "Chicago School" A Dark Age of Economics making arguments against fiscal stimulus that would be worthy of freshmen economics students. One can make the case that these mighty brains are so highly specialized that they have forgotten the basics. An alternative reason might be a willingness to declare that 2+2=5 if it suits your ideological bias and those who must be obeyed. It was just a tiny bit satisfying to see Krugman and DeLong administer and intellectual beating to these luminaries.

So, as you may have noticed, Jesse is cranky today, and not merely because he was rousted from a warm bed to clear a snow-covered driveway. It is also because this country is in a dangerous, potentially fatal, situation and is suffering from an absolutely incredible, ongoing lack of adult supervision and serious discussion about the basic issues. Deception and spin is no longer an exception, but standard operating procedure.

Right now we are still in a 'credit crunch' which is a predictable (and we did predict it last year and even earlier than that) result of a collapsing bubble. In the very short term it was a liquidity problem, as the system seized, but as that was addressed the true problem is exposed as a solvency, not a liquidity, problem. And that problem exists because those that should take the hit for the writeoffs to resolve their insolvency want desperately to pass it on to someone else, eg. the public. There is still an enormous amount of accounting legerdemain (or would that be "ledgerdemain?")

There is not a shortage of liquidity; there is a scarcity of trustworthy market information in terms of value and risk that is causing a seizure in credit growth from fear. Why take 5% from someone who may already be bankrupt when you can accept a relatively no-risk 2% from the Fed? As the waters reced in this recession one would think the nakedness would be more apparent, except that the Treasury and Fed have been supplying portable cabanas to their favorite emperors, to spare their tender sensitivies and enormous bonuses.

We allow that a deflation can occur. If the Fed raised short term rates to 20% tomorrow and started draining, and raised reserve requirements to 50%, we would see a true monetary deflation in short order. But with regards to the here and now, as opposed to some alternate hypothetical universe, currently The Fed Is Monetizing Debt and Inflating the Money Supply.

We would like to see an intelligent examination of the series of policy errors that created the one decent example of a contemporaneous deflation in a fiat regime, that of modern Japan. Because it would then help people to get beyond it, and consider the other twenty or more examples of countries facing serious inflation or even hyperinflation since World War II. But let's just suffice to say that the problems in Japan were somewhat particular to their situation and it was a genuine policy choice which they made.

We might also make the same errors, or even repeat the errors of the Fed in the 1930 of withdrawing liquidity too precipitously because of a misplaced fear of inflation. But with a Democratic administration and a more knowledgable, almost complacent Fed in place this does not seem probable to us at all.

The country is still drunk on easy money and hubris and preoccupied with bread-and-circuses debate between political and financial strategists masquerading as policy experts, while insiders loot the country.

All this noise serves to do is to distract the nation from a identifying the causes of the current crisis and instituting meaningful reforms to keep us from throwing a quick fix at our latest disaster and setting up another cycle of bubble, boom and bust again.

There can be no sustained recovery in the economy until there is financial reform, and a revival of the individual consumer through an increase in the median wage. Right now consumers are attempting to repair their balance sheets by defaulting on debt. This is not productive in the longer term. And it is a bit of an ironic exercise as well, since the debt is being tacked right back on to the taxpayers through the public balance sheet in the government bailouts.

Why is every solution being addressed to and through the unreformed corporate sector? Is it because the best way to deal with a scandal which you caused is to put your own people in charge of investigating it, and setting the agenda for the discussion of potential reactions to maintain the status quo? Anyone who has been in a large corporation should be well familiar with such an obvious tactic. This is likely a reflection of our distorted economic and public policy infrastructure.

A proper examination of relative value and risk cannot be expected yet until we sober up. Let's hope that happens soon, and not as the result of critically damaging economic and social pain.

GE, GECC's Rating May Be Cut by Moody's

* Moody's places GE's long-term credit ratings on review

* GE sees no 'major operational impacts' if downgraded

* Shares fall 5 pct after the closing bell


Reuters
Moody's says could cut GE's triple-A credit rating
By Scott Malone
Tue Jan 27, 2009 5:45pm EST

BOSTON, Jan 27 (Reuters) - Moody's Investors Service said on Tuesday it was reviewing General Electric Co's (GE.N) triple-A credit ratings, which could lead to a downgrade, and its shares fell as much as 5 percent in extended trade.

The move raises the risk that GE, which has a hefty finance business, could lose the long-term triple-A rating that has been a cornerstone of its GE Capital finance business.

On Monday, Standard & Poor's -- which has already warned that it could cut GE's triple-A rating -- said its view would not be affected by disappointing fourth quarter results, but warned it believed it would be "increasingly challenging" for GE Capital to meet its earnings targets.

The U.S. conglomerate has been working to reduce its reliance on GE Capital, as the credit crunch has hurt that unit over the past year and weighed on its earnings.

"Moody's is concerned that deepening global economic weakness could further compromise (GE Capital's) asset quality, potentially jeopardizing its ability to meet earnings objectives while also maintaining high earnings quality," the rating agency said. [ID:nWNA4886]

Many on Wall Street believe the world's largest maker of jet engines and electric turbines may have to sacrifice either the triple-A rating or its $1.24 per share annual dividend as it copes with falling profit in a brutal economy....

A Fresh Breeze of Reform Blows Through Foggy Bottom

"The very word 'secrecy' is repugnant in a free and open society; and we are as a people inherently and historically opposed to secret societies, to secret oaths, and to secret proceedings... A nation that is afraid to let its people judge the truth and falsehood in an open market is a nation that is afraid of its people."
John F. Kennedy

This is a change for the better, a step in the right direction.

"The way to make government responsible is to hold it accountable. And the way
to make government accountable is to make it transparent so that the American
people can know exactly what decisions are being made, how they're being made,
and whether their interests are being well served.

The directives I am
giving my administration today on how to interpret the Freedom of Information
Act will do just that. For a long time now, there's been too much secrecy in
this city. The old rules said that if there was a defensible argument for not
disclosing something to the American people then, it should not be disclosed.

That era is now over. Starting today, every agency and department should
know that this administration stands on the side not of those who seek to
withhold information but those who seek to make it known."

President
Barack H. Obama

Weekly and Daily Gold Charts

Gold is in a potential breakout formation with a minimum upside measuring objective of 1200. A consolidation here that does not violate 800 to the downside is within the bounds of this formation and will be considered a right shoulder.

Such a correction is not necessary to the formation.





Gold is still in a bull market. There will be corrections, some of them quite challenging. This is the very nature of a bull market, to shake the resolve of the bulls, and continually entice and confound the bears, who struggle to hold their pessimism from one line in the sand to the next.

Some day the bull market in gold will end. But not yet.

SP Futures Hourly Chart at 3:30 PM

The theme for this week is Fed Watch for Wednesday afternoon, and an advance look at 4Q GDP on Friday, with earnings before and after the bell all week.

The bulls are working that bottom formation and it will run if they get the breakout. Notice the failure of a similar pattern about a week ago.

This can go either way. It may not give a clear signal until after the FOMC decision, unless 'something happens.'

Is Money Supply a Relative Absolute?

There has been discussion over the weekend regarding an intriguing blog entry from friend Cassandra Inflation v. Deflation with regard to the Fed's monetization of debt. The principle assertion seems to be that if the Fed is merely replacing existing credit dollar for dollar as it is written off, then the result is not inflationary.

If the original wholesale money market borrowing and lending was not inflationary, then why should its substitute be inflationary? Indeed, the real question is whether the expansion of the Fed's balance sheet is keeping pace with the contraction of money market credit more generally. If not, then the consequence may be deflationary.

Implicit in this of course are two conditions. The first, that the level of wholesale borrowing and lending had not been and would have continued not to be inflationary, and secondly, that the expansion of the Fed's balance sheet is equivalent dollar for dollar with the debt it is said to be replacing.

These distinctions will be lost on most, but they are quite important, and we urge to reader not to gloss over them in preparing a rebuttal to support their bias du jour.

Let's consider an hypothesis someone put to us some time ago. They claimed that the appropriate rate of growth for any money supply is zero, which they considered 'neutral.'

To this we put the question, "If one holds the money supply static for a long period of time in a country whose population is growing at 10% per annum, and GDP is growing at 10% as well, is this a neutral money supply growth rate?

The answer of course is no. Money supply that remains static in a growth situation, whether one measures it in a ratio to economic growth or per capita, is obviously on a deflationary trend because supply is not growing at a rate equivalent to the increase in demand.

Seems obvious in this perspective right? We are not saying it is good or bad, appropriate or not. It is what it is, a growth in money supply that is lagging the growth in demand for money.

Conversely, if money supply is kept static in a country where the population is decreasing, and economic growth contracting, is it neutral? No it is inflationary, since the growth rate of money supply (zero) is greater than the growth rate of the demand for money, which is in decline presumably.

Now, one can imagine all sorts of possible scenarios as exceptions because there are lags in all economic cause and effect. To complicate matters there is no instantaneously correct rate of money supply growth without a context since reality is inherently in a state of flux.

However, though, it is clear that a static money supply is not necessarily neutral compared to the state of the growth of the money supply in a different economic context.

Secondly, we will postulate something we are not quite ready to prove yet, and that is that credit is not the same as money supply. We offer a piece instead that was blogged some time ago in which the various components of money supply are discussed.

Money Supply: a Primer

Its something to consider, and has received too little attention in our opinion.

If you have one thousand dollars in cash, in your pocket, is it completely equivalent to one thousand dollars worth of honey which you have at home in your pantry, in terms of its affect on inflation or deflation?

Forgiving the pun, the honey is decidedly less liquid than the cash.

What if you have one thousand dollars in cash, and another thousand is owed to you by an acquaintance in a distant city who promised to pay it back on demand the last time you spoke to them a year ago. Are those equivalent dollars?

Does it matter who is holding the money? What if the bulk of the money being added to to the economy is being given to gamblers in Las Vegas, rather than lets say farmers in Pennsylvania. Is there a difference in that money's effect on inflation or deflation? Yes there are few differences in the very long run, but sometimes the run becomes so long that it is irrelevant to the policy questions at hand.

This essay does not seek to provide answer to these questions at this time, since this is basis for a new perspective in economics. And unfortunately the discussion is premature. It is rather like a room full of well seasoned drunks, after a week long binge, gathering to attend a lecture on sober thought. We have so utterly lost the conception and relationship of value and risk that we must sober up a bit before we can even think about it once again.

Rather, the purpose of this essay is to cast doubt on the certainty that what we call money is always and everywhere equivalent in force and power and influence as an economic actor no matter where and how it is held.

Having said all that, it is obvious that the Money Supply as measured by the means at our disposal is growing at a rate more significant than economic growth, and that difference is now even greater as the economy slows and contracts. As an engineer and an operational business unit manager we always tend to fall back on what can be measured, what is real and knowable, when theory fails and the bosses are lost in flights of fancy.

The Fed is Monetizing Debt and Inflating the Money Supply

As water is added to the ecosphere, it flows and pools in many places. Money as water in the econosphere is evaporating through debt retirement, but perhaps not through debt destruction, or at least not in the same way. Someone must lose if a debt is written off right? What if that loss is booked at the Fed, and they realize that loss by simply 'making it go away' at least as far as the real economy is concerned? Is there a contraction in the money supply anywhere?

There are all questions worth considering, and we will have much more data as the results of Mr. Bernanke's experiments produce additional data.

But one thing is certain in our minds, and that is certainty in this situation is an illusion. We do not think that even the Fed knows exactly what they are doing. Rather, they are feeling their way through uncharted waters, projecting perhaps a confidence, but this is primarily for effect, not as a genuine state of mind.

And based on first principles, deflation, while possible, is never a certainty in a fiat regime where there is a central monetary authority that holds the power to monetize debt. The only boundary on their power is the acceptability, or value, of the money they produce, and that is also known as inflation.

Obviously the Fed may do a poor job or an outstanding job of managing the nation's money supply and economy. We will not really know until after the fact given the lags in these sorts of machinations.

But what is different, what is dangerous, is that the Fed has grasped the reins of a highly complex system, that is now more global than at any time before, and is trying to pull it in a certain direction, without immediate feedback on what it is that is happening. The last five or six times in which the Fed has done this something 'unexpected' has occurred.

Another factor most do not consider which is of some importance is the potential for systemic reform in the economy that is the context for the actions of the money supply. Without serious financial reform we most likely will take spin on the wheel of boom and bust again, with a greater disparity of wealth and a greater loss of democratic freedoms.

Either state is possible, make no mistake, but the probability is highest that the loss of control will be an inflation, with the key metric being 'how bad' and 'how difficult to subdue once it is unleashed.' Why? Because inflation is the default condition of a fiat currency that becomes uncontrolled. Deflation requires a sustained effort for whatever reasons, generally policy error or a conflict in desired outcomes.

A softer, much more judgemental reason, is that those who are now telling us that inflation is not an issue are the very ones who have been acutely wrong, for whatever reason, since this crisis began, if not years before that. They speak their book, and shamelessly. But that is no determinant, merely a confirmation of sorts.

What concerns us most is that the Fed is quite confident, in their own words, that they know how to deal with inflation after Volcker. That reminds us too much of hubris, and the classical myth of Phaëton who confidently took the reins of the chariot of the Sun from the golden Apollo, and very nearly burned down the world in the process.

Bernanke's Gamble on the Dollar

There are several things of interest this week. The first and foremost is the Fed's FOMC two day meeting with their announcement on Wednesday at 2:15.

It is important despite the fact that rates are effectively at zero, and the Fed has declared for 'quantitative easing.'

How does the Fed intend to implement this quantitative easing? Another way to ask this is to say, "What is the next bubble?"

Quantitative easing implies market distortion, and traders will be keen to understand where and how that distortion will play, because they are still geared for supercharged returns in an environment where fewer and fewer opportunities exist.

The Treasuries seem like a safer place, because lower interest rates are to the economy's benefit. Foreign entities may not like the monetization aspect, but we wonder how many real 'investors' are left in the bonds? Most in there are domestic parties seeking safe havens with any sort of return, and foreign central banks supporting political and industrial agendas.

So the focus will be on the wording of the Fed's statement once again, looking for clues with regard to the Fed's easing implementation and potential distortions that provide market inefficiencies.


Bloomberg
Bernanke Risks "Very Unstable" Markets as He Weighs Buying Bonds
By Rich Miller
January 25, 2009 19:01 EST

Jan. 26 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke and his colleagues may try once again to cure the aftermath of a bubble in one kind of asset by overheating the market for another.

Fed policy makers meeting tomorrow and the day after are exploring the purchase of longer-dated Treasury securities in an effort to push up their price and bring down their yield. Behind the potential move: a desire to reduce long-term borrowing costs at a time when the Fed can’t lower short-term interest rates any further because they are effectively at zero.

The risk is that central bankers will end up distorting the Treasury market, triggering wild swings in prices -- and long-term interest rates -- as investors react to what they say and do. “It sets forth a speculative dynamic that is very unstable,” says William Poole, former president of the Federal Reserve Bank of St. Louis and now a senior fellow at the Cato Institute in Washington....

Inflated Prices

Recent history shows the economic danger of inflating asset prices. After a stock-market bubble burst in 2000, the Fed slashed interest rates to as low as 1 percent and in the process helped inflate the housing market. The collapse of that bubble is what eventually helped drive the U.S. into the current recession, the worst in a generation.

Faced with the danger of a deflationary decline in output, prices and wages, the Fed is considering steps to revive the moribund economy. On the table besides bond purchases: firming up a pledge to keep short-term interest rates low for an extended period and adopting some type of inflation target to underscore the Fed’s determination to avoid deflation.

The central bank has been buying long-term Treasury debt off and on for years as part of its day-to-day management of reserves in the banking system. Yet it has always gone out of its way to avoid influencing prices. What it’s discussing now, says former Fed Governor Laurence Meyer, is deliberately trying to push long rates below where they otherwise might be.

Fed Purchases

Bernanke raised this possibility in a speech on Dec. 1. While he didn’t specify what maturities the Fed might buy, in the past he has suggested that purchases might include securities with three- to six-year terms. (This is around the sweet spot for foreign Central Banks - Jesse)

Investors immediately took notice, with the yield on the 10-year note falling to 2.73 percent from 2.92 percent the day before. Yields fell further on Dec. 16, dropping to 2.26 percent from 2.51 percent the previous day, after the central bank’s policy-making Federal Open Market Committee said it was studying the issue....

Yields have since risen, with the 10-year note ending last week at 2.62 percent. Behind the reversal: expectations of massive fresh supplies of Treasuries as the government is forced to finance an $825 billion economic-stimulus package and a possible new bank-bailout plan. This week alone, the Treasury is scheduled to auction $135 billion worth of securities.

Jump in Yields

David Rosenberg, chief North American economist for Merrill Lynch in New York, says the jump in yields may prompt the Fed to go ahead with Treasury purchases.

This isn’t the first time Bernanke and the Fed have discussed buying longer-dated securities and ended up roiling the market. Bernanke touted the idea as a tool to fight deflation in speeches in November 2002 and May 2003.

Egged on by his comments -- and later remarks by then-Fed Chairman Alan Greenspan that the central bank needed to build a “firewall” against deflation -- many investors became convinced the central bank was poised to buy bonds. The yield on the 10-year Treasury note fell to 3.11 percent in June 2003 from 3.81 percent at the start of the year.

Traders quickly reversed course as it became clear the Fed had no such intentions, sending the 10-year Treasury yield soaring to 4.6 percent just three months later, on Sept. 2.

‘Miscommunication’

Poole, who was then at the St. Louis Fed, was critical at the time of what he called the central bank’s “miscommunication.” He now sees the Fed making the same mistake with its latest suggestions that it might buy longer- dated securities.

“If they do it, it’s going to be disruptive to the market,” says Poole, who is a contributor to Bloomberg News. “If they don’t do it, it will impair the Fed’s credibility and erode the confidence the market has in the statements that the Fed makes.”

Meyer, now vice chairman of St. Louis-based Macroeconomic Advisers, says the Fed should, and probably will, go ahead with purchases as a way to lower borrowing costs. “The story is stop talking and start buying,” he says.

Still, he notes that not everyone at the Fed is enthusiastic about the idea. One concern: Foreign central banks and sovereign-wealth funds, which are big holders of Treasuries, might cool to buying many more if they believe prices are artificially high. (The buyers of our debt now are supporting their own industrial policy we would hope. Any other reason borders on mismanagement of funds while anyone in their country is hungry or unemployed - Jesse)

Undermine the Dollar

That may undermine the dollar. “There’s no guarantee that international investors would switch to other dollar- denominated debt if flushed from the Treasury market,” says Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.

Tony Crescenzi, chief bond-market strategist at Miller Tabak & Co. in New York, says foreign investors might also get spooked if they conclude that the Fed is monetizing the government’s debt -- in effect, printing money -- by buying Treasuries. (They already are, and they already are - Jesse)

Bernanke himself, in his 2003 speech, said monetization of the debt risked faster inflation -- something bond investors, foreign or domestic, wouldn’t like.

Some economists argue the Fed would help the economy more if it bought other types of debt. (Such as corporate bond - Jesse) Even after their recent rise, 10-year Treasury yields are still well below the 4.02 percent level at the start of last year....

Hawks at the Fed wouldn’t welcome such purchases. They are already uneasy that some of the central bank’s programs are effectively allocating credit to one part of the economy rather than others. Case in point: the Fed’s ongoing program to buy $500 billion of mortgage-backed securities, which Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, has called “credit policy” rather than monetary policy. (Its nice to see that someone else is noticing that the Fed has crossed the Rubicon from central bank to central economic planner in the worst sense of the description - Jesse)

US Treasury Department Official Allegedly Aided and Abetted Banking Fraud (Again)

Darrell Dochow earns $230,000 per year at Treasury in banking regulation. He reportedly gave Indymac some suggestions on cooking their books, and then allowed the exception to the rules to accomplish it. It appears to have been a blatant and obvious accounting fraud.

Mr. Dochow is also the official who presided over the Lincoln Savings and Loan scandal. Having looked into Charles Keating's eyes and seeing him a good man, he reportedly overrode the protests and findings of fraud from the banking experts. After his S&L debacle he was apparently demoted, but brought back into a position of importance under the Bush Administration. All the details on this have not yet been made public.

Mr. Dochow is unlikely to do any prison time, but may lose his job. That is because this is 'criminal with a small c' according to this news report.

When this sort of behaviour becomes criminal with a 'capital C' and when people like Dochow find themselves on the business end of FBI probes and Justice Department indictments at least as serious as the one mounted against Eliot Spitzer and his hooker, we might make some approach to honesty and reform in this country.

Ok, Obama Administration, the buck is on your desk now. Time to take meaningful action to back up the rhetoric.


ABC News, New York
Government regulators aided IndyMac coverup, maybe others
By Brian Ross, Justin Rood, and Joseph Rhee
Friday, January 16, 2009

A brewing fraud scandal at the Treasury Department may be worse than officials originally thought.

Investigators probing how Treasury regulators allowed a bank to falsify financial records hiding its ill health have found at least three other instances of similar apparent fraud, sources tell ABC News.

In at least one instance, investigators say, banking regulators actually approached the bank with the suggestion of falsifying deposit dates to satisfy banking rules -- even if it disguised the bank's health to the public.

Treasury Department Inspector General Eric Thorson announced in November his office would probe how a Savings and Loan overseer allowed the IndyMac bank to essentially cook its books, making it appear in government filings that the bank had more deposits than it really did. But Thorson's aides now say IndyMac wasn't the only institution to get such cozy assistance from the official who should have been the cop on the beat.

The federal government took over IndyMac in July, after the bank's stock price plummeted to just pennies a share when it was revealed the bank had financial troubles due to defaulted mortgages and subprime loans, costing taxpayers over $9 billion.

Darrel Dochow, the West Coast regional director at the Office of Thrift Supervision who allowed IndyMac to backdate its deposits, has been removed from his position but he remains on the government payroll while the Inspector General's Office investigates the allegations against him. Investigators say Dochow, who reportedly earns $230,000 a year, allowed IndyMac to register an $18 million capital injection it received in May in a report describing the bank's financial condition in the end of March.

"They [IndyMac] were able to maintain their well-capitalized threshold and continue to use broker deposits to make loans," said Marla Freedman, an assistant inspector general at Treasury. "Basically, while the institution was having financial difficulty, it kept the public from knowing earlier than it otherwise should have or would have."

In order to backdate the filings, IndyMac sought and received permission from Dochow, according to Freedman.

"That struck us as very unusual," said Freedman. "Typically transactions are to be recorded in the period in which they occur, not afterwards. So it was very unusual."

One former regulator says Dochow's actions illustrate the cozy relationship between banks and government regulators.

"He did nothing to protect taxpayers in losses," former federal bank regulator William Black told ABC News. "Instead of correcting it [Dochow] made it worse by increasing the accounting fraud."

Meanwhile, IndyMac customers who lost their savings are demanding answers and are further infuriated after learning Dochow was also the regulator in 1989 who oversaw the failed Lincoln Savings and Loan, a scandal that sent its CEO Charles Keating to prison.

"He's the person who claimed that he looked into Charles Keating's eyes and knew that Keating was a good guy and therefore ignored all of the professional staff that told him that Keating was a fraud, and he produced the worst failure of the Savings and Loan Crisis at $3.4 billion. Now he's managed more than triple that," said Black, now an economics professor at the University of Missouri in Kansas City, Missouri.

Following the Lincoln scandal, Dochow was demoted and placed into a relatively obscure office, but later, inexplicably was brought back into the Office of Thrift Supervision.

Dochow declined to answer questions from ABC News.

After Ronnie Lopez was killed in Iraq, his mother Elaine invested the life insurance proceeds at IndyMac. She lost $37,000 of it.

"I was hysterical," she told ABC News. "I literally thought I was going to kill myself that day, because I felt so bad that I had let him down. I remember going to his grave and telling him "don't worry, I'm going to get that money back,' and I feel like he was saying, 'Hey, Mom, don't let them take that. I did the ultimate for that.'"

A group of angry investors has started a website, demanding answers on the extent of Dochow's actions.

"It's just the strife and anger," said IndyMac customer Lisa Marshall. "That this Dochow person is still employed. It's unbelievable, it's shocking."

While Dochow could end up losing his job, neither he nor his colleagues are expected to go to prison.

"This is criminal with the small 'c,'" said Black. "No one within the regulatory ranks may go to jail, but they have done the worst possible disservice to the taxpayers of America."

The Other US Border Fence - To Keep Your Wealth In

This is a special guest blog from a US ex-pat acquaintance who currently resides in central Europe. It represents the author's personal research and experience.

The Other US Border Fence

What most Americans don't realize is that construction of a legal fence to prevent US taxpayers from escaping from the IRS's controlled pastures is progressing on schedule. Congress has been expanding and strengthening this fence for decades, and the Heart Heroes Earning and Assistance Relief Act was only the latest nail in the soon to be tightly sealed coffin.

The US is the only country besides Libya that taxes the world wide income of it's non-resident citizens, and the HEART act has made expatriation much more difficult, and much more expensive.

Since the passage of HEART in June 17, 2008, any person seeking a green card, long term visa, or US citizenship should carefully consider whether they want to open their entire world wide finances to the IRS's thereafter eternally prying eyes, because of the Hotel California Problem.

Meanwhile, the IRS has been busy revising the 2001 Qualified Intermediary (QI) Agreement. A QI is a foreign financial institution that has agreed with the IRS to undertake certain U.S. withholding and reporting responsibilities and has agreed to audits by an external auditor. This is the agreement with the IRS that all international banks that allow accounts from US citizens have to sign.

The QI noose (er, agreement) will be tightened on December 31, 2009 in the following ways:

1) It forces the QI to identify parties responsible for QI enforcement to the auditors, and would open these parties to prosecution (a la Raoul Weil from UBS).

2) Allow the auditor to probe non-US bank accounts to see if they have characteristics of a US citizen controlled account. This would surely violate Swiss bank secrecy laws.

3) Requires Audit oversight and review by a US auditor.

These three points dramatically increase the costs for smaller banks to have US account holders and maintain status as a QI. This new QI agreement is forcing numerous Swiss banks to refuse to open new bank accounts for US citizens, and it is also forcing these banks to chase away their current US constomers. As we know UBS has left 19,000 US customers in a pinch and is forcing them to find new banks. No bank in Switzerland will accept these accused "tax fugatives" any more. It has long been impossible for a US citizen to legally open an account with any of Europe's discount brokers like Swissquotes or Internaxx, and now US citizens are having to search for financial services in a rapidy drying up pool of international offerers.

On January 15, the Taskforce on Financial Integrity and Economic Development met in Washington. Under the guise of chasing tax evaders and cracking down on tax havens, we will soon see new measures that will further restrict your financial freedom. Americans just don't understand the benefits of financial privacy, and the IRS and Congress have been working for years to convince citizens that this right to privacy is trivial compared to the necessity of taxing all wealth of people holding US citizenship papers wherever it may be held.

Some think that "high net worth individuals" will be the low hanging fruit for the tax collectors in the looming budgetary crisis. These not-sufficiently-rich-to-bribe-a-congressman-or-hire-a-team-of-lawyers type people have been corralled by the IRS, and when the time comes they will be easy picking.

United Kingdom and the British Pound Are in Serious Trouble

The United Kingdom has been in trouble for some time, and a great deal of it is due to the actions of self-serving financiers and elites which are leading the much photographed general populace into debt peonage, a modern day form of serfdom.

There are several ways out of this dilemma, if the Brits have the political will, but it will not be easy as they do not have the world's reserve currency at their disposal. Gordon Brown is not the type of leader that they will require, as he is inherently part of the problem.

It is an interesting speculation to consider that the bravehearts of Scotland may choose once again to go their own way, and to repair the carnage caused them by the Royal Bank of Scotland among others.

(Postscript: It is not clear that the UK GDP situation is all that dissimilar from the US situation based on the numbers, and we will know more about this at the end of the upcoming week when the US reports 4Q GDP. The point of this essay is that the UK is in a poorer position to deal with the problem and this blogger tends to agree, for some slightly different reasons.)


UK Telegraph
Britain on the brink of an economic depression, say experts
By Edmund Conway, Economics Editor
8:22AM GMT 24 Jan 2009

Britain is heading for economic depression for the first time since the 1930s, economists have warned.

Families must brace themselves for a slump of far greater severity and longevity than the recessions of the 1980s and 1990s, they warned. They said the current crisis will be of a scale to rival the biggest peace-time crisis in modern history — the Great Depression.

The warning was delivered by economists and politicians after the Office for National Statistics revealed that the economy shrank by 1.5 per cent in the final three months of 2008 alone.

The contraction follows a 0.6 per cent fall in gross domestic product (GDP) — the most comprehensive measure of Britain’s wealth generation — during the previous three months. This means Britain fulfils the criteria for a technical recession — two successive quarters of negative output.

The news sent the pound sliding to its lowest level since 1985. Sterling dropped more than three quarters of a cent to $1.3688 as investors speculated that the Bank of England may be forced to cut interest rates towards zero in response to the recession.

John McFall, the Labour chairman of the Treasury select committee, sounded a more optimistic note. He said: "We know that 2009 is going to be really tough for many people. There is a determination in Britain and across Europe to keep people in work, to avoid unemployment, so people’s contribution will not be lost."

Confirmation that the economy has entered recession capped a week in which Gordon Brown was forced to announce a new £350 billion bank rescue plan. Unemployment has almost reached two million. President Barack Obama discussed the financial crisis with the Prime Minister on the telephone yesterday, his first call to a European leader.

The fall in GDP is the sharpest since 1980, when Britain was mired in its most severe post-war recession. The news is an embarrassment for Mr Brown, who pledged as Chancellor not to return Britain to "boom and bust".

Britain is likely to suffer more than other economies due to its heavy reliance on the financial services sector, which has all but imploded in the wake of the economic crisis, experts said.

Others raised the spectre of an outright economic depression, often defined by experts as a peak-to-trough economic contraction of 10 per cent. Aside from the demobilisation periods following the First and Second World Wars, this kind of contraction has never taken place — not even in the 1930s’ Great Depression.

Roger Bootle, the managing director of Capital Economics, said: "I think there’s a very good chance this recession will be the worst since the 1930s. I suspect the economy could shrink by 6 per cent from last year to the end of next year — and that might not be the end.

The plight facing Britain is uncannily similar to the 1930s, since prices of many assets —from shares to house prices — are falling at record rates, but the value of the debt against which they are held remains unchanged.

This “debt deflation” is among the most painful of all economic phenomena, since it means the amount families owe increases each year even if they borrow no more.

Albert Edwards, a strategist at Société Générale, likened the British economy to a Ponzi scheme — a fraudulent debt mountain like that allegedly used by the New York hedge fund manager Bernard Madoff.

“What I find amazing is that people aren’t really nailing Gordon Brown and [Bank of England Governor] Mervyn King for this,” he said. “At least in the US they had the excuse of the arrival of sub-prime — a new sector of the market. We didn’t really have anything similar but we ended up with a bigger national Ponzi scheme than the US.”

Tension on the Tape

There is a link to the McClellan Oscillator from StockCharts among the daily charts presented in the Chart Updates section on the sidebar to the left.

It is worth looking at more closely, as we are now at a key juncture according to several measures, and are obviously winding up for a sharp move.

The bias in the odds is to the downside, but a wise trader remains open to possibilities of a trend change here, as support is building around 800 on the SP. A breakdown could move quickly if optimism turns to ashes.

The January Barometer to Date

US Dollar Long Term Chart with Commitments of Traders

The theme for this year, besides a collapsing credit bubble, will be the contest for the reserve currency to the world. The dollar currently wears the crown, but is looking a bit haggard after years of rough trade.

The euro, while looking like a perky runner up candidate at times, is failing the talent contest. The Swiss franc was nicked for soliciting to perform inflatio and was disqualified from the hard currency club on grounds of capital turpitude.

The yen is the dollar's homely BFF so its a local favorite primarily with mom and dad. Everyone knows the Renminbi moves in a very exclusive and private circle of admirers, preferring not to leave the house, much less wear a revealing bikini for the judges.

Hence the advance of that purest of beauties, gold.

SP Futures Hourly Chart at 3:30 PM

All scenarios are still on the table.

Trendline has moderated a bit, making a more symmetrical triangle pattern that has not yet resolved either way. Guilty until proven innocent.

Keep one eye on the VIX. There is a choppy tension on the tape.

A good indicator of stock market price dislocations is often referred to by traders as "tension on the tape." What they are actually referring to is a type of volatility that moves the market in rapid intraday extremes or very tight trading ranges. As we have seen recently, the market can open up or down 50-100 points or more and then seemingly reverse instantly to the same extent.

Big data out next week with an FOMC meeting (jawbone opportunity), Chicago PMI, and Q4 Advance GDP on Friday. The figures are always revised and economists expect -5.2% so be wary of a 'better-than-expected' print.

Merrill Lynch Execs Paid Themselves $15 Billion on $21.5 Billion in Losses in 2008

No wonder John Thain was sacked. On the surface it appears that he and his management were 'hiding' or at best unaware of enormous losses that were only revealed after they were purchased by the Bank of America, and the recipient of enormous amounts of government funds.

And to make matters worse, they continued to pay themselves huge salaries and bonuses for the year despite those losses.

It will be interesting to see if there is any meaningful investigation of this. We doubt it very much. The Democratic leadership have shown themselves to be a lot of noise and little meaningful action so far, and almost all the Republicans are outrageous hypocrites. Such is the state of the deep capture of the government.

The problem with Wall Street is that there is reward without commensurate risk, pervasive fraud and the misstatement of numbers without the appropriate discovery and deterrence, and a lack of responsible accountability and disclosure to the American people.

Any 'solutions' from the government that fail to address these fundamental problems are not only doomed to failure, but probably represent a looting of public funds by powerful special interests.

If you are holding US dollars and financial assets you are paying for this with an indirect tax on your wealth.


The Wall Street Journal
Merrill paid employee bonuses before sale to Bank of America
LiveMint.com
Thu, Jan 22 2009. 5:30 PM IST

Despite Merrill reporting a massive loss of $21.5 billion in the fourth quarter of 2008, the report noted that the company had “set aside $15 billion for 2008 compensation

London: Collapsed banking entity Merrill Lynch accelerated the payment of bonuses to employees just days before closing its acquisition by the Bank of America, says a media report.

“Merrill Lynch took the unusual step of accelerating bonus payments by a month last year, doling out billions of dollars to employees just three days before the closing of its sale to Bank of America,” the Financial Times has reported.

The daily pointed out that the timing is notable because the money was paid as Merrill’s losses were mounting and Ken Lewis, BofA’s Chief Executive, was seeking additional funds from the government’s troubled asset recovery programme to help close the deal.

Last week, the US Federal government had pumped in another $20 billion into Bank of America mainly to absorb losses incurred from the buyout of Merrill.

This is in addition to $25 billion which it ploughed each into Bank of America and Merrill last year, respectively.

Despite Merrill reporting a massive loss of $21.5 billion in the fourth quarter of 2008, the report noted that the company had “set aside $15 billion for 2008 compensation, a sum that was only 6% lower than the total in 2007, when the investment bank’s losses were smaller”.

“The bulk of 15 billion dollars compensation was paid out as salary and benefits throughout the course of the year,” the report said. Further, attributing to a person familiar with the matter, the report said that an estimated $3 to $4 billion dollars was paid out in bonuses in December.

Merrill and the Bank of America shareholders had approved the takeover on 5 December. “Three days later, Merrill’s compensation committee approved the bonuses, which were paid on 29 December,” it added.

SP Futures Hourly Chart at 3:30 PM Update

The SP failed at overhead support today, and is now winding withing a symmetrical triangle within the downtrend.

The news of Microsoft layoffs dampened the bubbly froth over AAPL overnight.

The market at this point is guilty until proven innocent and so we continue to ride our hedge to the much shorter side after the failure at 844.

We're not riding a pure short because the bulls keep trying to find a footing and we have not seen the failure yet at 805. We'll also look for confirmation on techs.

Gold and silver are consolidating gains as the T Bond shows continued weakness.

Google out with earnings after the bell. Keep an eye out for the GE news and outlook tomorrow morning.

John Thain: Sacked! or Sach'd?

As reported earlier by Yves Smith at Naked Capitalism, it has recently been revealed that Merrill Lynch and John Thain accelerated the payment of substantial executive bonuses just prior to the company's crash, and their acquisition by BofA.

Merril Lynch: Infamia!

Perhaps the disclosure of substantial undisclosed losses was the last straw (18 billion versus 2 billion expected). You can take big bonuses, but not with big losses, unless you are at the-former-investment-bank-which-must-not-be-named, whose SIV is the Federal Reserve.

Bloomberg
Ex-Merrill Lynch CEO Thain Agrees to Leave Bank of America
By Josh Fineman and David Mildenberg

Jan. 22 (Bloomberg) -- Former Merrill Lynch & Co. Chief Executive Officer John Thain agreed to leave Bank of America Corp., a spokesman said.

Thain, who in September negotiated the sale of Merrill with Bank of America CEO Kenneth Lewis, “agreed his situation was not working out and that he should resign,” said Robert Stickler, a Bank of America spokesman, in an e-mail.

Trading chief Tom Montag will also leave the firm, CNBC reported.

Thain, 53, lost his job after Merrill’s unexpectedly large $15.4 billion fourth-quarter loss forced Bank of America to return to the U.S. government for a new funding package. Thain this year spent $1.2 million to redecorate his office at New York-based Merrill, CNBC reported today.

Thain had headed Bank of America’s wealth management and corporate and investment banking divisions. Senior Merrill executives Robert McCann and Greg Fleming resigned less than a week after the transaction was completed on Jan. 1.

A Sad Day for the Swiss Franc

"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." 6 November 2008 Le Café Américain

We warned some time ago that the Swiss franc, long a beacon of monetary stability through the world, has been horribly compromised by a central bank with policies little different from those of the Fed, and other central banks using competitive devaluation to promote industrial policy.

If you are a Swiss exporter or a Bank you might be content.

If you are Swiss and you wish to preserve your wealth, buy gold.

"…the national bank will continue to act decisively to fight the impact of the economic contraction… a central bank can always increase the absolute amount of its own currency in circulation... the national bank could sell Swiss francs against other currencies without limits. In an extreme case, it could commit itself to buying foreign currencies at a fixed rate."
Philipp Hildebrand, Vice Chairman, Swiss National Bank

Hildebrand Says SNB Can Intervene in Franc Market
By Joshua Gallu and Simone Meier

Jan. 22 (Bloomberg) -- Swiss National Bank Vice-President Philipp Hildebrand said policy makers are prepared to intervene in currency markets at fixed exchange rates if necessary to prevent a “renewed appreciation” of the franc...

The franc has risen around 6 percent against the euro since October as the global financial crisis forced the Swiss central bank to cut its benchmark rate by 225 basis points, taking it to 0.5 percent. That’s smothering inflation and hurting exports, which make up more than half of Swiss gross domestic product. (And the other half is dominated by banks which are largely insolvent through mismanagement and various forms of fraud - Jesse)

“With short-term rates of practically zero, the SNB can’t prevent a further appreciation in the Swiss franc through a rate cut,” Hildebrand said in a speech in St. Gallen, Switzerland late yesterday. “The SNB is able to sell unlimited Swiss francs versus another currency. In an extreme case, it can commit itself at the same time to buying unlimited currencies at a fixed- exchange rate.”

The franc dropped after the remarks and extended its decline today. As of 7:51 a.m. in Zurich, it was at 1.5093 per euro from 1.5022 yesterday. It reached a record high of 1.4315 versus the euro on Oct. 27. Against the dollar, the franc was at 1.1562, having fallen late yesterday to 1.1616, the weakest since Dec. 15.

“The central bank can and will continue to provide liquidity, as much and for as long as needed,” Hildebrand said. “The SNB will continue to act in a decisive way in order to counter the effects of the economic contraction.”

Merrill Lynch: Infamia!

Apologies for the lapse into Italian, but it is a remnant of my childhood. My father had a remarkable talent for expressing strong emotion in this language as in no other way.

Until serious reforms are made in the banking system, and the accounts are squared with those who brought us to this misfortune, there can be no recovery, and no sustained return to individual liberty.

So, what would we like to do about this latest outrage?


Merrill Execs Pay Selves Bonuses Ahead of Schedule (and
Before BofA Closing)
Naked Capitalism

Playing fast and loose seems to be the theme of the evening... now we have the eleventh hour stealing of the silver by Merrill's top executives as one of the firm's final acts.

Let us remember the fact set: Merrill managed to get Bank of America to agree to buy it in September, elbowing aside Lehman. The deal is subject to shareholder approval, however. BofA, realizing it has acquired a garbage barge, threatens to scuttle the deal unless Uncle Sam lends a helping hand. Negotiations proceed behind closed doors (and neither Merrill nor BofA shareholders are told prior to the shareholder vote that BofA has agreed to do the deal subject to some form of government support).

Now we learn that after it was evident that the US taxpayer was going to subsidize the Merrill acquisition, the Merrill compensation committee accelerated bonus payments by a month to make sure they were paid out before the BofA deal closed.

Efforts are being made to minimize the amount involved (it is claimed to be only $3-$4 billion, but the fact is amounts were reserved in prior quarters that are excessive in light of full year performance. So the fact that some of the amounts were allowed for in previous quarters is misleading).

Were Merrill bankrupt, the bonus payments could be deemed fraudulent conveyance and clawed back. But we don't do either financial firm bankruptcies or clawbacks in this country...

Is Gold and the Balance of Power Shifting from the West to the East?

Here is an interesting set of charts, and a unique conclusion to match, from Moneyweek.

As we recall, the folks at GATA have been showing this sort of market analysis for some time now, to a cooler reception than a Madoff whistleblower at the Chris Cox retirement party.

We'd be open to hearing of other serious interpretations of this phenomenon. But be forewarned; to say it is just nonsense is, well, nonsense. It is a statistically valid hypothesis, albeit an unexplained and a bit odd, at least for the moment.

Can a money machine really exist in free and efficient markets? Economic theory says it cannot, that it must be due to some flaw or inefficiency, or an artificial scheme such as the regular returns from the Madoff Fund.

We might agree with the surmise that it involves the steady selling of leased gold from the West into the gold markets, but that could only be confirmed by an audit, and an admission from some large central bank that they have been obligating increasingly large amounts of their inventory into the public markets in a previously undisclosed manner.

The transaction costs are a problem if you are standing at the retail counter, we fear, so don't get any ideas about playing this trade. Its a sinecure for the big boys only, who can take advantage of market inefficiencies by trading in large, ever increasing volumes, like the whiz kids at LTCM did until they blew their trade book up.

Oddly enough, the data from the Office of the Comptroller of the Currency report on Derivates shows that only two banks, JPM and HSBC, are holding almost $124,000,000,000 in gold derivatives between them, approximately 98% of all gold derivatives in the world.

At $850 per ounce, that represents about 145,882,353 ounces of gold.

As the tides of monetary bubbles recede, curiosities are turning up on the beach every day.

MoneyWeek
Gold is shifting from West to East – along with the balance of power
By Dominic Frisby
Jan 21, 2009

Twice a day – at 10:30AM and 3PM - the price of gold is set on the London market by the five members of the London Gold Pool (HSBC, SocGen, Deutsche Bank, Scotia-Mocata and Barclays). This is known as the London fix and it's used as the benchmark to price gold, gold products and derivatives in markets around the world.

I've been looking at some charts and an astonishing pattern has become apparent. It's a pattern which, if you'd traded it methodically, would have earned you 1% a week over a period of 24 years. That compounds to a staggering 24,720,000%!

What is this spectacular strategy? Read on…

The astonishing pattern in London gold fixing

The strategy is really quite simple. You buy gold at the London PM fix (3PM), as the American markets have just opened for trading, and you sell your gold the following morning at the London AM fix (10:30AM), as the Asian markets are closing.

My thanks, as always, to Tom Fischer of Herriot Watt University for the charts below. The first demonstrates the weekly 1% gain that would have been yours since 1985 (the green line).



...What is more astonishing is how this pattern has accelerated since 2007. Sell gold in the morning, buy it back in the afternoon, and a cool 1.78% weekly profit will be yours:


Why would anyone want to manipulate the gold price?

What other free market shows such a consistent behaviour over time? Unless, of course, it's not a free market and the invisible hand of Big Brother is getting involved. Many of you will have read about manipulation of the gold price, and heard that there is a deliberate conspiracy to suppress the price of gold....

Rest of the story at MoneyWeek

SP Futures Hourly Chart at 3:30

The Nasdaq is in a similar pattern.

Note the long end of the Treasuries was down again as money came out looking for βeta. Quite often it comes out looking for risk and is consumed on these technical bounces. The dollar eased as well, and the yen is moving. We like our thought that the Pound is heading for parity with the euro, and may be with the dollar before Buck takes a dive.

We were net long for the day, but are flattening out and taking some profits, including a big Long Bond short, into the close, leaving a slight edge on to the short side of financials and long tech.

Dollar down gold up but nothing of substance. Watch to see if any of these moves extend. We're believers in the January full month indicator so obviously the action this week is important.

We may break out, so be aware of the resistance. We could see a short squeeze if we do.

AAPL and EBAY after the close. They may give us a better read on tech, now that IBM has become an accounting black box.

The word for the day is: FROSTY. Let the market show us the way short term.

The Geithner Nomination: The Wrong Man for the Job

"Summers was his mentor, but other sources call him a Rubin protégé."

The questions and testimony in the Tim Geithner nomination hearings this morning are interesting.

The topics discussed early on are billions more needed for the banks (or else), and reform is badly needed to control the deficit.

And of course the need to restore 'confidence.' Confidence is a touchstone word like 911. Fear and security. The carrot and the stick.

The reforms discussed were reducing Social Security and Medicaid, and lowering corporate income taxes.

It is the banks that have caused the current deficit problems, and banking reform was never even breached as a topic.

Now, having worked in the political circles, we know that there is little of substance to be discussed seriously at a nomination hearing such as this. Senators float out ideas important to their backers, and the nominee agrees that there is a problem, and that they will be open to those ideas.

But we thought it was interesting.

By the way, Geithner did avoid some substantial taxes, and in a most egregious way. Not only that, but once he found out that he had erred, he did not make good on prior errors, until he became the nominee.

This is not a 'reform' candidate. This is a Mr. Fixit, a son of TARP, a three page proposal presented under duress.

Tim Geithner is primarily a political operative with a grounding in international economics. He is not a banker, a financier. Yes, he held the important post of NY Fed Chief, and he made a botch of it. If anything he would be more of an asset at State, but not in the key role at Treasury. Is the Obama bench this weak that they had to resort to a tainted nominee as their first choice?

This is a vignette about what is wrong in this country: democracy is under continuing assault by corporatism.

It is also amusing to watch the Republican senators, still flush from a long orgy of deficit spending, favoritism, no-bid contracts, lies and corruption, to be newly born as the vestal virgins of thrift and public virtue.

Tim Geithner was widely traveled as a child, living overseas with his father who was an administrator fo the Ford Foundation. He attended Dartmouth College, graduating with a A.B. in government and Asian studies in 1983. He earned an M.A. in international economics and East Asian studies from Johns Hopkins University's School of Advanced International Studies in 1985. He has studied Chinese and Japanese.

After completing his studies, Geithner worked for Kissinger and Associates in Washington, D.C., for three years and then joined the International Affairs division of the U.S. Treasury Department in 1988. He went on to serve as an attache at the US Embassy in Tokyo. He was deputy assistant secretary for international monetary and financial policy (1995–1996), senior deputy assistant secretary for international affairs (1996-1997), assistant secretary for international affairs (1997–1998).He was Under Secretary of the Treasury for International Affairs (1998–2001) under Treasury Secretaries Robert Rubin and Lawrence Summers. Summers was his mentor, but other sources call him a Rubin protégé.

Tim Geithner: Too Close to Goldman Sachs to Be Treasury Secretary, Critic Says
by Aaron Task
Jan 21, 2009 12:22pm EST

Tim Geithner apologized for not paying his taxes and some Republicans criticized his involvement in the TARP program at today's hearing, but Barack Obama's nominee for Treasury Secretary appears on track for confirmation.

Congress is "all in a panic" and "really clueless" about this all-important member of Obama's cabinet, says Christopher Whalen, managing director and co-founder of Institutional Risk Analytics. "I'm just not sure Tim Geithner is the guy we should have driving the bus."

Beyond his tax gaffe, which will mainly serve to politically weaken Obama's pick, Whalen says Geithner is the wrong many for the job because of his decision-making as President of the New York Fed.

"I believe Tim Geithner only represents part of Wall Street - Goldman Sachs," he says, suggesting Goldman was the "primary beneficiary of the AIG bailout" and notes Goldman alum Stephen Friedman serves on the board of the NY Fed. (Hank Paulson and Robert Rubin, with whom Geithner had frequent meetings in the past year, are also Goldman alum.)...

How's Your Confidence In US Business?

Not very strong, apparently, if you are a CEO of a US business, as measured by the folks at the Conference Board.

Perhaps they should survey the Chief Market Strategists appearing on the extended infomercials that pass for financial news reporting in the States instead.

State Street Bank: Hammered

Today is an especially interesting day.

US equities, led by the financials, are getting absolutely hammered, the longer Treasury bonds are down, dollar and gold and oil are up. The dollar strength may be more of a sign of euro weakness.

Royal Bank of Scotland and State Street Bank seem to have shaken up the confidence of the Asian and Mideast investors, and pehaps the continental Europeans.

We'll know more as the week progresses.


Bloomberg
State Street Falls Most Since 1984 on Bond Losses
By Christopher Condon

Jan. 20 (Bloomberg) -- State Street Corp., the world’s largest money manager for institutions, fell the most since 1984 in New York trading after unrealized bond losses almost doubled and analysts said the company may have to raise capital.

Unrealized losses on State Street’s fixed-income investments rose to $6.3 billion at Dec. 31 from $3.3 billion at Sept. 30, the result of falling values throughout the credit markets, the company said today in a statement. State Street also incurred $528 million in costs to prop up money funds and write down the value of investments on its portfolio...

Unrealized losses on assets held in conduits increased to $3.6 billion from $2.2 billion. The filing also revealed that the company had purchased $2.5 billion securities from the stable-asset funds...

State Street said that the net asset value of another group of unregistered funds had fallen as low as 91 cents a share on Dec. 31. These funds, which invest cash collateral that State Street customers receive in return for lending out their securities, also seek to maintain a net asset value of $1 a share, though they are not required to do so.

The average value of these funds at Dec. 31 was 95.5 cents a share, State Street said in the filing, with a substantial portion of the decline occurring during the fourth quarter. Total assets in the affected funds have fallen to $113 billion on Dec. 31, from $178 billion a year earlier.

State Street has continued to sell and redeem shares of these funds at $1 a share, it said in the filing. The funds can wait until the securities mature and they receive full face value from the borrower, rather than selling the holdings in the market at a loss.

The Jan. 16 filing said that continuing to sell and redeem shares at $1 may prevent State Street from passing on the losses later to shareholders if the value of the securities in the fund don’t recover.

The company also set aside $200 million to cover losses stemming from indemnification obligations on $1 billion in repurchase agreements that State Street clients purchased from Lehman Brothers Holdings Inc. The investment bank filed for bankruptcy protection Sept. 15.

Strong Gold, Strong Dollar

"Because the Dollar Index (DX) is an outmoded and artificial measure of dollar strength, containing nothing to account for the Chinese renminbi for example, it may not be a true reflection of the progress of this inflation."
The Fed Is Monetizing Debt and Inflating the Money Supply

A number of people have remarked about the strong dollar and strong upmove in gold today. It does seem counterintuitive.

The euro is weak because of the solvency situtations in Ireland and Spain. This is taking the euro down and the dollar higher.

At the same time there is a flight to safety occurring into gold, but not into commodities in general.

It is not a flight from inflation, it is a flight from risk to relative safety. At least for today.

But by the way, keep an eye on the Treasuries, particularly the longer end of the curve, as we have previously advised.

There is 'the tell.'

Some Thoughts on the Debt Disaster in the US and UK and Possible Alternatives

This is a rather important essay in that it nicely frames up the problem that we face, and the constraints on the remedies at our disposal.

We will be speaking more about that in the near term, but for now here is a framework by which to understand the boundaries, the 'lay of the land.'

The key point is that the debt to GDP ratio has become unsustainable. The way to correct this is to lower it to a level that is manageable and to work it down.

It will likely require a combination of inflation and debt reduction by bankruptcies and writedowns in order to restore the economy to something which can be used to achieve a balance.

Liquidationism is a trap because it reduces GDP and cripples the productive economy as it reduces debt. It is similar to poisoning a patient to treat an infection. It is favored only by those who believe that they can insulate themselves and profit by it.

Without serious systemic reforms, any remedies will not obtain traction, merely provide a new step function for a repetition of the cycle of debt expansion, as was done in the series of credit bubbles under Alan Greenspan and Bush-Clinton.

The impact will be felt around the globe because of the interconnectedness of the world economy and finance, but the heart of the problem is in the US and the UK.


Economic Times
US and UK on brink of debt disaster
20 Jan, 2009, 0419 hrs IST

LONDON: The United States and the United Kingdom stand on the brink of the largest debt crisis in history.

While both governments experiment with quantitative easing, bad banks to absorb non-performing loans, and state guarantees to restart bank lending, the only real way out is some combination of widespread corporate default, debt write-downs and inflation to reduce the burden of debt to more manageable levels. Everything else is window-dressing. (Quantitative easing, bad banks, and state guarantees are the instruments of inflation. The amount of inflation that the West can manage will greatly affect the amount of these more draconian measures - Jesse)

To understand the scale of the problem, and why it leaves so few options for policymakers, which shows the growth in the real economy (measured by nominal GDP) and the financial sector (measured by total credit market instruments outstanding) since 1952.

In 1952, the United States was emerging from the Second World War and the conflict in Korea with a strong economy, and fairly low debt, split between a relatively large government debt (amounting to 68 percent of GDP) and a relatively small private sector one (just 60 percent of GDP).

Over the next 23 years, the volume of debt increased, but the rise was broadly in line with growth in the rest of the economy, so the overall ratio of total debts to GDP changed little, from 128 percent in 1952 to 155 percent in 1975.

The only real change was in the composition. Private debts increased (7.8 times) more rapidly than public ones (1.5 times). As a result, there was a marked shift in the debt stock from public debt (just 37 percent of GDP in 1975) toward private sector obligations (117 percent). But this was not unusual. It should be seen as a return to more normal patterns of debt issuance after the wartime period in which the government commandeered resources for the war effort and rationed borrowing by the private sector.

From the 1970s onward, however, the economy has undergone two profound structural shifts. First, the economy as a whole has become much more indebted. Output rose eight times between 1975 and 2007. But the total volume of debt rose a staggering 20 times, more than twice as fast. The total debt-to-GDP ratio surged from 155 percent to 355 percent.

Second, almost all this extra debt has come from the private sector. Despite acres of newsprint devoted to the federal budget deficit over the last thirty years, public debt at all levels has risen only 11.5 times since 1975. This is slightly faster than the eight-fold increase in nominal GDP over the same period, but government debt has still only risen from 37 percent of GDP to 52 percent.

Instead, the real debt explosion has come from the private sector. Private debt outstanding has risen an enormous 22 times, three times faster than the economy as a whole, and fast enough to take the ratio of private debt to GDP from 117 percent to 303 percent in a little over thirty years.

For the most part, policymakers have been comfortable with rising private debt levels. Officials have cited a wide range of reasons why the economy can safely operate with much higher levels of debt than before, including improvements in macroeconomic management that have muted the business cycle and led to lower inflation and interest rates. But there is a suspicion that tolerance for private rather than public sector debt simply reflected an ideological preference.

THE DEBT MOUNTAIN

The data makes clear the rise in private sector debt had become unsustainable. In the 1960s and 1970s, total debt was rising at roughly the same rate as nominal GDP. By 2000-2007, total debt was rising almost twice as fast as output, with the rapid issuance all coming from the private sector, as well as state and local governments.

This created a dangerous interdependence between GDP growth (which could only be sustained by massive borrowing and rapid increases in the volume of debt) and the debt stock (which could only be serviced if the economy continued its swift and uninterrupted expansion).

The resulting debt was only sustainable so long as economic conditions remained extremely favorable. The sheer volume of private-sector obligations the economy was carrying implied an increasing vulnerability to any shock that changed the terms on which financing was available, or altered the underlying GDP cash flows.

The proximate trigger of the debt crisis was the deterioration in lending standards and rise in default rates on subprime mortgage loans. But the widening divergence revealed in the charts suggests a crisis had become inevitable sooner or later. If not subprime lending, there would have been some other trigger.

WRONGHEADED POLICIES

The charts strongly suggest the necessary condition for resolving the debt crisis is a reduction in the outstanding volume of debt, an increase in nominal GDP, or some combination of the two, to reduce the debt-to-GDP ratio to a more sustainable level.

From this perspective, it is clear many of the existing policies being pursued in the United States and the United Kingdom will not resolve the crisis because they do not lower the debt ratio.

In particular, having governments buy distressed assets from the banks, or provide loan guarantees, is not an effective solution. It does not reduce the volume of debt, or force recognition of losses. It merely re-denominates private sector obligations to be met by households and firms as public ones to be met by the taxpayer.

This type of debt swap would make sense if the problem was liquidity rather than solvency. But in current circumstances, taxpayers are being asked to shoulder some or all of the cost of defaults, rather than provide a temporarily liquidity bridge.

In some ways, government is better placed to absorb losses than individual banks and investors, because it can spread them across a larger base of taxpayers. But in the current crisis, the volume of debts that potentially need to be refinanced is so large it will stretch even the tax and debt-raising resources of the state, and risks crowding out other spending.

Trying to cut debt by reducing consumption and investment, lowering wages, boosting saving and paying down debt out of current income is unlikely to be effective either. The resulting retrenchment would lead to sharp falls in both real output and the price level, depressing nominal GDP. Government retrenchment simply intensified the depression during the early 1930s. Private sector retrenchment and wage cuts will do the same in the 2000s.

BANKRUPTCY OR INFLATION

The solution must be some combination of policies to reduce the level of debt or raise nominal GDP. The simplest way to reduce debt is through bankruptcy, in which some or all of debts are deemed unrecoverable and are simply extinguished, ceasing to exist.

Bankruptcy would ensure the cost of resolving the debt crisis falls where it belongs. Investor portfolios and pension funds would take a severe but one-time hit. Healthy businesses would survive, minus the encumbrance of debt.

But widespread bankruptcies are probably socially and politically unacceptable. The alternative is some mechanism for refinancing debt on terms which are more favorable to borrowers (replacing short term debt at higher rates with longer-dated paper at lower ones).

The final option is to raise nominal GDP so it becomes easier to finance debt payments from augmented cashflow. But counter-cyclical policies to sustain GDP will not be enough. Governments in both the United States and the United Kingdom need to raise nominal GDP and debt-service capacity, not simply sustain it.

There is not much government can do to accelerate the real rate of growth. The remaining option is to tolerate, even encourage, a faster rate of inflation to improve debt-service capacity. Even more than debt nationalization, inflation is the ultimate way to spread the costs of debt workout across the widest possible section of the population.

The need to work down real debt and boost cash flow provides the motive, while the massive liquidity injections into the financial system provide the means. The stage is set for a long period of slow growth as debts are worked down and a rise in inflation in the medium term.

Murkiness in the NYMEX Pits As the Banks Hoard Oil

"Morgan Stanley hired an oil tanker to store crude oil in the Gulf of Mexico, joining Citigroup Inc. and Royal Dutch Shell Plc in trying to profit from the contango, two shipbrokers said in reports earlier today."

There is a sharp contango in the near months in the NYMEX oil pit, and it will get sharper as the attempts to suppress the price near term, most likely to punish Russia, Venezuela and Iran, falter. Then it will flatten as market adjusts prices to normalcy.

Let's see if Bloomberg gives us a more coherent update. But its funny that Citigroup, Morgan Stanley, and probably other banks are buying oil now to store in tankers and deliver later when the paper chase falters. Nice use of the bailout money. Why lend when you can speculate on market inefficiency which you help to create?

Bloomberg
Goldman Sees ‘Swift, Violent’ Oil Rally Later in Year
By Grant Smith

Jan. 19 (Bloomberg) -- Goldman Sachs Group Inc. commodity analyst Jeffrey Currie said he expects a “swift and violent rebound” in energy prices in the second half of the year.

Oil prices may have reached their lowest point already, after falling to $32.40 in mid-December, and are expected to rise to $65 by the end of this year, the analyst said. There is scope for a “new bull market” in oil, Currie said. (The December '09 futures are trading around there already - Jesse)

World oil demand is likely to fall by about 1.6 million barrels a day this year, the Goldman analyst said today at a conference in London. That’s bigger than the reduction expected by the International Energy Agency, which last week forecast a decrease of about 500,000 barrels a day, or 0.6 percent, this year.

A recent tactic of using supertankers to store crude oil to take advantage of higher prices later this year is “difficult” to profit from and is “near the end of this process” anyway, the Goldman analyst said. (We can only use the NYMEX 'front month' to punish Iran, Venezuela, and Russia for so long - Jesse)

New York crude futures for delivery in December, trading near $56 a barrel, currently cost some $15 a barrel more than March futures, a market situation known as contango, where prices are higher for later delivery. (This is poorly worded at best - Jesse)

The contango is likely to flatten as supply cuts by OPEC and other producers take effect, reducing the availability of oil for immediate delivery, Currie said. (Contango is when the future months are higher in price. This is the case for the futures. But December delivery, according to this article, is in backwardation, where true 'spot' is higher than paper prices, and a sure sign of price manipulation. - Jesse)

The Organization of Petroleum Exporting Countries started another round of supply cutbacks at the start of this month. The group’s compliance with its overall efforts to cut production will probably peak at 75 percent, or a reduction of about 3 million barrels a day out of an announced aim of 4.2 million barrels a day, Goldman Sachs said.

In several steps, 10 OPEC members have pledged to reduce production to 24.845 million barrels a day, a cut of 4.2 million barrels a day from September’s level.

Morgan Stanley hired an oil tanker to store crude oil in the Gulf of Mexico, joining Citigroup Inc. and Royal Dutch Shell Plc in trying to profit from the contango, two shipbrokers said in reports earlier today.

West Texas Intermediate Benchmark Diverging Widely from World Oil Prices

If there indeed is a glut of oil in the US at a bottleneck, as NYMEX appears to contend, then world prices should diverge, and more oil would be flowing to other venues.

Interestingly enough, there is also a huge difference in price between the February contract at 36.51 for WTI and the March contract at 42.57.

So let's see how this short term oil glut in Oklahoma gets squared away. Sure to be interesting. It would be a shame if the NYMEX loses some of its credibility as a price discovery mechanism.


Reuters
Signs of shift away from WTI
By Javier Blas in London
January 18 2009

Oil traders are quietly pricing some of their deals away from the West Texas Intermediate contract, traditionally the world’s most important oil benchmark, as it is being distorted by record inventories at its landlocked delivery point.

The move is a setback for the benchmark that since the launch of the Nymex WTI futures in the early 1980s has dominated physical and financial oil markets.

The surge in oil inventories in Cushing, Oklahoma, where WTI is delivered into America’s pipeline system, has depressed its value not only against other global benchmarks, such as Brent, but also against other domestic US crudes.

Julius Walker, an oil market analyst at the International Energy Agency in Paris, said there was “anecdotal evidence” of traders moving away from WTI and “doing deals based on other US oil benchmarks”.

The IEA monthly report said Brent was now “arguably more reflective of global oil market sentiment”. However, Bob Levin, managing director of market research at Nymex said that the WTI contract was performing “transparently”, reflecting a “loss in oil demand and sharply rising inventories”.

“WTI is better reflecting global oil fundamentals than Brent,” Mr Levin said. “The oil industry has not abandoned the WTI contract and it has confidence in it.”

Nevertheless, traders in London, New York and Houston confirmed a small number of transactions away from WTI after its price plunged last week to record discounts against other global and domestic benchmarks. The traders cautioned that the move could reverse if the WTI situation normalised. Lawrence Eagles, at JPMorgan, said any move away from WTI would face “strong resistance as none of the other US benchmarks have the price transparency of an exchange market”.

Highlighting the price disconnection with the global market, WTI, which usually trades at a premium of $1-$2 a barrel to Brent, last week plunged to an all-time discount of $11.73. The detachment hit the US market too, where Light Louisiana Sweet, jumped to a $9.50 premium, the highest in 18 years.

Brent ended last week at $46.18 a barrel, well above WTI at $36.

Walter Lukken, outgoing chairman of the Commodities Futures Trading Commission, told the FT the regulator was following “very closely” the WTI disconnection.

This is not the first time WTI has diverged from other benchmarks, but the discrepancy is far more severe this time.

Royal Bank of Scotland to Report $37 Billion in Losses and Goodwill Writedowns

RBS
RBS to unveil up to $37 billion of losses
By Adrian Croft
18/01/09

LONDON (Reuters) - Royal Bank of Scotland will unveil up to 25 billion pounds ($37.30 billion) of losses for 2008 on Monday due to bad debts and writing off goodwill on its acquisition of ABN AMRO, a British newspaper said on Monday.

RBS will say it incurred about 7 billion pounds of losses in 2008 and that it is taking a goodwill writedown of between 15 billion and 20 billion pounds, The Daily Telegraph reported, calling it the "biggest loss in UK history."

RBS declined to comment on the report.

Britain is set to throw its banks another multi-billion pound lifeline on Monday by allowing them to insure against steep losses and guaranteeing their debt to stop the credit crunch pushing the economy into a deep slump.

The British government will swap up to 5 billion pounds of preference shares in Royal Bank of Scotland for ordinary shares, increasing its stake in the British bankL, a person familiar with the matter said on Sunday.

The move aims to remove pressure on RBS -- whose shares fell 13 percent on Friday -- to pay 12 percent annual interest on the preference shares.

The government owns 58 percent of RBS after buying 15 billion pounds of ordinary shares last November. The stake could rise to near 70 percent if all the preference shares are converted. RBS again declined to comment.

RBS, once Britain's second-biggest bank, was left short of capital as a result of hefty write-offs against debt-backed securities. The 2007 acquisition of parts of Dutch rival ABN AMRO put further strain on its capital reserves.

The Fed is Monetizing Debt and Inflating the Money Supply

Here are the latest figures on the growth of the various money supply measures.

See Money Supply: A Primer for a review of measures and their differences.

The charts indicate that the growth in the money supply is due to a significant monetization of debt by the Fed in expanding its balance sheet and deficit spending by the Treasury, rather than organic growth from credit expansion from commercial sources and economic activity. The negative GDP figures confirm this.

You could imagine this as a tug of war if you wish. On one side is the deflationary force of bad debt and falling aggregate demand. On the other is the Treasury, the Fed, and the Congress, using the triple threat of deficit spending, monetization of debt, and stimulus programs. The limits of the power of the Feds are the value of the dollar and the acceptability of Treasury debt.

There is no lack of debt that can be monetized. To think otherwise is fantasy. But there are limitations about how much the dollar can bear, which is why the banks and moneyed interests have shoved their way to the front of the line, and are gorging themselves now with a little help from their friends in the Treasury and the Fed. When the time comes they intend to throw the public agenda under the bus. Its an old script, many times performed with minor enhancements.

If the current trend continues, it will have an inflationary effect on certain financial assets and commodities, and a negative impact on the dollar. There are lags in the appearance of this, but it will come.

Because the Dollar Index (DX) is an outmoded and artificial measure of dollar strength, containing nothing to account for the Chinese renminbi for example, it may not be a true reflection of the progress of this inflation. Time will tell.

A similar case might be made for certain strategic commodities, gold and oil, which are the instrument of government policy. Although it is much less important, silver may be one of the first commodities to break out because the government maintains no significant physical inventory of it as it does for gold and oil.

The huge short interest in silver may be an ignored scandal on the order of the Madoff Ponzi fund, not in dollar magnitude, but likely in terms of regulatory lapse and deep capture.



M1 has become a much less useful measure of the money supply these days because of changes in banking rules and technology. However, M1 is a good intermediate measure of the impact of the growth in the Fed's balance sheet as it feeds through the system.





Growth in MZM frequently results in financial asset expansion once it gains traction.



The US Dollar does not generally react well to aggressive growth in MZM.



The growth of credit, organic growth from economic activity, is sluggish.



The growth in the Monetary Base due to Fed inflationary activity has been nothing short of spectacular, without equal in US monetary history. This makes all Money Multiplier measures that use the AMB in the denominator meaningless for now.



The spike in Treasury settlement failures is one measure of the stress in the financial system. It seems to be quieter now, after spiking in response to seizures in the bonds trading. We will maintain a watch on this.

The Plot to Overthrow FDR - The History Channel

The beginnings of the Great Depression, and the conflicts that tested the Republic to its foundations, and the commitment to freedom around the world.


Video Documentary The History Channel

The Plot to Overthrow FDR



The American Liberty League


Responses to the Great Depression 1929-1939

Charts in the Babson Style for the Week Ending 16 January

As a reminder, all US markets will be closed on Monday for a national holiday.

Congressional Budget Offices Estimate TARP Losses at $64 Billion

Congressional Budget Office
Troubled Asset Relief Program (TARP) Report

CBO is required by law to report semiannually on OMB’s assessment of expenditures under the Troubled Assets Relief Program (TARP). Today, CBO released the first of these reports. (For more on the TARP program, this blog post from October includes CBO’s analysis of the financial rescue legislation).

Through December 31, 2008, the Treasury disbursed $247 billion to acquire assets under that program. CBO valued those assets using discounted present-value calculations similar to those generally applied to federal loans and loan guarantees, but adjusting for market risk as specified in the legislation that established the TARP.

On that basis, CBO estimates that the net cost of the TARP’s transactions (broadly speaking, the difference between what the Treasury paid for the investments or lent to the firms and the market value of those transactions) amounts to $64 billion—that is, measured in 2008 dollars, we expect the government to recover about three quarters of its initial investment.

The Office of Management and Budget’s (OMB’s) report on the TARP, issued in early December, only addressed the first $115 billion distributed under the program. CBO and OMB do not differ significantly in their assessments of the net cost of those transactions (between $21 billion and $26 billion), but they vary in their judgments as to how the transactions should be reported in the federal budget.

Thus far, the Administration is accounting for capital purchases made under the TARP on a cash basis rather than on such a present-value basis—that is, the Administration is recording the full amount of the cash outlays up front and will record future recoveries in the year in which they occur. That treatment will show more outlays for the TARP this year and then show receipts in future years.

Weekend Listening: The White House Coup of 1933 - BBC4

This is an interesting topic, not because we believe in a plot by the wealthy and powerful Americans to throw in their lot with the more pro-business Hitler and Mussolini, but because it helps to portray the early days of the Great Depression in a more realistic light.

They were not a time of dignified suffering and widespread acts of kindness and compassion. They were often mean-spirited, violent, fraught with scams and snares for the weak, a particularly dangerous time in America with the rise of demagogues from both the Left and Right.

This was a difficult period in our history, poorly understood and insufficiently studied in our schools. Here is one aspect of it of which you may never have heard. It tends to upset people, because it disturbs the conventional view of history. This is not particular to the US.

There is no smoking gun in this program. There was a plot. It was investigated and the details of the investigation were not disclosed An American military hero, Smedley Butler, exposed it. This much we do know.

BBC4 does a reasonably even handed job of presenting facts, and surmise, and differentiating them.

Our friend Bart, at NowandFutures.com, has converted the radio broadcast to MP3 and has made it available here:

The White House Coup of 1933


Additional Reading:

The Business Plot of 1933 - Wikipedia

Smedley Butler - Wikipedia

American Liberty League - Wikipedia

Where is Bernie's Trade Book? Who Were His Partners?

FINRA has found no evidence of trades by Bernie Madoff on behalf of his private investment fund through Bernard L. Madoff Investment Securities, a commercial brokerage founded in 1960.

This appears to be a brick in the wall of 'rogue trader' status. He could do it himself because he made no trades at all.

However this was not Bernie's only commercial operation in the securities business, in addition to his now nefarious private fund.

Primex was registered as Primex Holdings, L.L.C. in NYS in October of 1998. Primex is a joint venture involving a digital trading auction which operates out of Bernie's 18th floor office at 885 Third Ave.

Madoff's business partners in the Primex Exchange were Citigroup, Morgan Stanley, Goldman Sachs, and Merrill Lynch.

Did Bernie give any business to this joint venture? Did any of the above brokers have any investments or losses with the Madoff Fund? If not why not? It was one of the most successful funds, on paper, on the Street?

More questions than answers. Let's hope this one does not disappear down a black hole like the enormous put option positions placed on the airline stocks just prior to 9/11.


Madoff's fund may not have made a single trade
By Jason Szep
Fri Jan 16, 2009 6:55am EST

BOSTON (Reuters) - Bernie Madoff's investment fund may never have executed a single trade, industry officials say, suggesting detailed statements mailed to investors each month may have been an elaborate mirage in a $50 billion fraud.

An industry-run regulator for brokerage firms said on Thursday there was no record of Madoff's investment fund placing trades through his brokerage operation.

That means Madoff either placed trades through other brokerage firms, a move industry officials consider unlikely, or he was not executing trades at all.

"Our exams showed no evidence of trading on behalf of the investment advisor, no evidence of any customer statements being generated by the broker-dealer," said Herb Perone, spokesman for the Financial Industry Regulatory Authority.

Madoff's broker-dealer operation, Bernard L. Madoff Investment Securities, underwent routine examinations by FINRA and its predecessor, the National Association of Securities Dealers, every two years since it opened in 1960, Perone said.

Madoff, a former chairman of the Nasdaq Stock Market who was a force on Wall Street for nearly 50 years, allegedly confessed to his sons the firm's investment-advisory business was "basically a giant Ponzi scheme" and "one big lie," according to court documents.

He estimated losses of at least $50 billion from the Ponzi scheme, which uses money from new investors to pay distributions and redemptions to existing investors. Such schemes typically collapse when new funds dry up.

Each month, Madoff sent out elaborate statements of trades conducted by his broker-dealer. Last November, for example, he issued a statement to one investor showing he bought shares of Merck & Co Inc, Microsoft Corp, Exxon Mobil Corp and Amgen Inc among others.

It also showed transactions in Fidelity Investments' Spartan Fund. But Fidelity, the world's biggest mutual fund company, has no record of Madoff or his company making any investments in its funds.

DISCREPANCIES

"We are not aware of any investments by Madoff in our funds on behalf of his clients," Fidelity spokeswoman Anne Crowley said in an e-mail to Reuters.

Neither Madoff nor his firm was a client of Fidelity's Institutional Wealth Services business, their clearing firm National Financial or a financial intermediary client of its institutional services arm, she said.

"Consequently, his firm did not work with our intermediary businesses through which firms invest their clients' money in Fidelity funds," she added.

There also appear to be discrepancies between monthly statements sent to investors and the actual prices at which the stocks traded on Wall Street.

For example, his November statement showed he bought software maker Apple Inc's securities at $100.78 each on November 12, about a month before his arrest. But Apple's stock on that day never traded above $93.24. The statement also showed he bought chip maker Intel Corp at $14.51 on November 12, but Intel's highest price on that day was $13.97.

"You could print up any statements you want on the computer and send it out to a client and the chances are the client wouldn't know, because they are getting a statement," said Neil Hackman, president and chief executive of Oak Financial Group, a Stamford, Connecticut-based investment advisory firm.

To some, the numbers did not add up.

About 10 years ago, Harry Markopolos, then chief investment officer at Rampart Investment Management Co in Boston, asked risk management consultant Daniel diBartolomeo to run Madoff's numbers after Markopolos tried to emulate Madoff's strategy.

DiBartolomeo ran regression analyses and various calculations, but failed to reconcile them. For a decade, Markopolos raised the issue with the U.S. Securities and Exchange Commission, which has come under fire in Congress in recent weeks for failing to act on Markopolos's warnings.

Bank of America to Receive Additional $138 Billion in Government Assistance

The situation must have been rather dire indeed. They did not even wait for the weekend.

Its a nice amount of government aid for a single company. Too bad GM is not a bank.

Some animals are more equal than others.


Bloomberg
U.S. Gives Bank of America $138 Billion Lifeline
By Scott Lanman and Craig Torres

Jan. 16 (Bloomberg) -- The U.S. government agreed to invest $20 billion more in Bank of America Corp. and backstop $118 billion of its assets to help the lender absorb Merrill Lynch & Co. and prevent the financial crisis from deepening.

The government agreed to the rescue “as part of its commitment to support financial market stability,” the Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. said today in a e-mailed joint statement.

Hours earlier, the U.S. Senate voted to allow the release of $350 billion in financial rescue funds, the second half of the $700 billion Troubled Asset Relief Program enacted Oct. 3 by President George W. Bush.

The U.S. already had injected $15 billion into Bank of America, the country’s biggest lender, and another $10 billion to Merrill to bolster the combined company against the global credit crunch.

Bank of America will absorb the first $10 billion of losses in the pool, of which the “large majority” of assets were assumed by the company in the Merrill purchase, the government said. The Treasury and FDIC will share the next $10 billion of losses.

The Fed will backstop assets with a loan after the government’s first $10 billion in losses, the agencies said.

Future Losses

The asset pool includes cash assets with a current book value of as much as $37 billion and derivatives with maximum potential future losses of as much as $81 billion, according to the term sheet provided by the government.

Separately, the FDIC said it plans to propose changing its bond-guarantee program for banks to cover debt as long as 10 years, from the current three-year maturity. The FDIC will soon propose rule changes to the Temporary Liquidity Guarantee Program, today’s statement said.

“The U.S. government will continue to use all of our resources to preserve the strength of our banking institutions and promote the process of repair and recovery and to manage risks,” the joint statement said.

Shares of Bank of America plunged 18 percent yesterday, sliding to $1.88 to $8.32 in New York Stock Exchange composite trading after hitting $7.35, its lowest level since February 1991.

The bank moved up its fourth-quarter report to today at 7 a.m. New York time.

Bank of America Requires Significantly More Government Aid, Gives New Life to Nationalisation Rumours

Apparently some of the rumours and early reports may be true, at least with regard to the troubles at the Bank of America.

Just off the Bloomberg wire at 3:30 EST, Bank of America is formally requesting financial assistance and guarantees from the government to complete its acquisition of Merrill Lynch, according to 'people familiar with the matter.'

A later report on CNBC cites the amount of $200 billion to be requested in a new bailout tranche.

Los Angeles Times
Nationalization rumors slam Citigroup, Bank of America
By Tom Petruno
11:09 AM PST, January 15, 2009

The hottest rumor on Wall Street today was that the government was planning to effectively nationalize Citigroup Inc. and Bank of America Corp., perhaps as early as this weekend.

That talk has devastated many financial stocks, and hammered the broader market for a second straight session -- although buyers have been returning in the last half-hour.

The nationalization rumors were put to Federal Deposit Insurance Corp. Chairwoman Sheila Bair at an appearance in New York today, and her non-denial answer wasn’t likely to make investors feel better.

"I’d be very surprised if that happened," she said, according to Bloomberg News.

Some investors weren't sticking around to find out if the rumor was true: Citigroup fell as low as $3.36 early in the session and about 11 a.m. PST was off 43 cents to $4.10.

Bank of America fell as low as $7.35 and was off $1.56 to $8.64 about 11 a.m PST.

The Dow Jones industrial average was off as much as 205 points but has pared that to a loss of 43 points at 8,156.

The Dow’s closing low in the fall market collapse was 7,552, reached on Nov. 20.

The latest dive in the financials began early this week on fears that some of the biggest players have become bottomless pits for government capital, as bad loans continue to mount.

Those fears soared late Wednesday on news reports that Bank of America, which got $25 billion under the financial-system bailout Congress approved in October, was negotiating another capital infusion from the Treasury.

Ryan Larson, head trader at Voyageur Asset Management in Chicago, said the rumor today was that the government would take control of Citigroup and Bank of America via a "nationalization in AIG style" -- referring to insurance giant American International Group. The government took a 79.9% stake in AIG last fall in return for loans and capital injections to keep the company afloat.

AIG shares now trade for about $1.40.

The nationalization rumors may just be so much hysteria, but they show how faith in the financial system has again frayed badly. The average big-bank stock has plunged 24% just since Dec. 31.

GM Cuts 2009 US Sales Outlook to 27 Year Low - Wall Street Rallies

A grim outlook from General Motors today as it continues to attempt to wring concessions and donations from anyone and everyone.

The market rallied after this news. If this is confusing, read this blog entry from earlier today on the technical state of the SP500 futures.

Its reassuring to see that the economic carnage has not made the banks and hedge funds too glum to engage in the usual option expiry market manipulation. They'll never learn. Keep your powder dry because there are some rough seas dead ahead.

"As a dog returns to its vomit, so a fool returns to his folly. " Proverbs 26:11

Bloomberg
GM Says U.S. Auto Sales May Tumble to 27-Year Low on Economy
By Jeff Green

Jan. 15 (Bloomberg) -- General Motors Corp. cut its estimate for 2009 U.S. industrywide auto sales to 10.5 million units, a total that would be the lowest in 27 years, as a worsening economy crimps demand.

The new outlook replaces a projected range of 10.5 million to 12 million vehicles, GM said in slides for a Deutsche Bank AG conference today in Detroit. Global sales will fall to 57.5 million autos from 67.1 million last year, GM said.

GM is using the sales estimates to craft a proposal to cut costs, revamp operations and show it can repay $13.4 billion in Treasury Department loans. A weakening economy may force the biggest U.S. automaker to seek additional government funding after it completes the viability plan due March 31.

“We’re on track,” Chief Executive Officer Rick Wagoner told analysts. “We’re confident GM will come through this a stronger company.”

Wagoner said this week that the loans were sufficient for now and that he would review GM’s needs at the end of this quarter. He joined Chief Operating Officer Fritz Henderson and Chief Financial Officer Ray Young at the Deutsche Bank meeting.

GM gained 5 cents, or 1.3 percent, to $3.90 at 2:32 p.m. in New York Stock Exchange composite trading.

Global economic growth may slow to 0.5 percent this year from 2.3 percent, GM said today.

The U.S. recession is ravaging consumers’ auto purchases, sending deliveries plummeting to 13.2 million vehicles in 2008 after an average of about 16 million annually during the past decade. U.S. job losses last year were the worst since 1945.

Industrywide sales of 10.5 million vehicles in the world’s biggest auto market would be the lowest level since the 10.36 million units of 1982, according to research firm Autodata Corp. of Woodcliff Lake, New Jersey. The total in 1981 was 10.6 million.

Union Workers, Bondholders

GM is seeking concessions from its largest union and is chopping debt in half because the government can call the loans unless the company shows progress in reshaping itself by the March deadline. The Detroit-based automaker plans to drop or de- emphasize half of its brands and seeks to cull 1,700 dealers from its total of 6,400.

It’s premature to discuss how GM might work with bondholders to win their assent in reducing debt, Wagoner said this week. Government loan conditions require GM to cut its unsecured public debt by at least two thirds in an exchange with bondholders for equity or other methods.

The debt exchange is designed to pare $27.5 billion in unsecured debt to about $9.2 billion in a swap for equity, Young said.

Health-Fund Costs

GM also needs to reduce its obligations to a union retiree health fund to $10.2 billion, a 50 percent trim, in a separate equity swap, Young said. About $14.1 billion in other debt won’t be affected.

After saying it would run short of operating cash by the end of 2008 without an infusion of financial aid, GM received the first $4 billion in loans on Dec. 31 from the Troubled Asset Relief Program. The money is being used to pay bills, mostly to the automaker’s 3,000 suppliers.

An additional $5.4 billion is due this month. Should Congress agree to release a second $350 billion in TARP funds, GM will get $4 billion more in February. An initial progress report must be presented to the Treasury Department by Feb. 17.

The loans are secured by almost all of GM’s available unsecured assets and as a secondary lien against other assets already secured, Young said today. GM also plans to draw $1 billion in Treasury loans granted to the automaker as part of a $6 billion bailout of the GMAC LLC finance unit.

SP Futures At Key Support on the Hourly Chart

Even if you trade on fundamentals, it is a good idea to keep an eye on the charts to select your entry and exit points.

If we break down out of the short term trend (the hourly chart) then we would look to the SP daily and weekly charts to see where support might be found. Although things may seem obvious, they are rarely certain.

Keep in mind tomorrow is stock options expiry and the put buyers have been active. We are also going into a three day weekend in the States as Monday is a national holiday. There is significant worry about the Citi earnings report due out tomorrow.

Here is a snapshot of the SP500 emini futures at 10:30 AM.

The Worst Is Yet to Come (But We Beat the Numbers) - J. P. Morgan

Interesting quotes from Jamie Dimon, CEO of J.P. Morgan, the Fed's instrument of policy, their house bank, king of the derivatives pyramid, as the world is amazed that they beat the EPS numbers again this morning, at least on paper.

The problem is not so much the banking system and a lack of confidence in it. They do not deserve any. Our financial system has become a shell game, an extended accounting fraud, that permeates and selectively destroys whole segments of the real economy.

The problem is that the average consumer in the United States is a wage earner, and their real wages have been stagnating for the past twenty or more years, despite a rosier-than-reality set of CPI figures from the last two administrations.

The fact that most in New York and Washington have not quite realized yet is that the average American consumer is exhausted, tapped out, broke.

Providing easier credit terms, new sources of debt to feed the machine, may stretch this out a bit longer, may cushion the impact as the overloaded and imbalanced economy hits the wall, butit will do nothing to create sustainable growth.

Unless and until something is done to address the real median wage, to provide sources of income, rather than fresh sources of debt, to the middle class, there will be no recovery other than more monetary bubbles, that will be increasingly fragile and destructive in their collapse, ultimately testing the foundations of democracy.

The economic, and then the political, situation in the United States will deteriorate, perhaps much more rapidly than most would expect or even allow, unless something is done to break this cycle of debt and wealth transference, this illusion of vitality and stability.


AFP
JPMorgan chief says worst of the crisis still to come
Wed Jan 14, 10:13 pm ET

LONDON (AFP) – The chief executive of US bank JPMorgan Chase, Jamie Dimon, told the Financial Times on Thursday that the worst of the economic crisis still lay ahead as hard-hit consumers default on their loans.

"The worst of the economic situation is not yet behind us. It looks as if it will continue to deteriorate for most of 2009," he told the business daily.

"In terms of our sector, we expect consumer loans and credit cards to continue to get worse."

Dimon said the bank -- which bought rivals Bear Stearns and Washington Mutual last year -- was prepared for a deterioration in consumer-orientated businesses but if things were worse than expected, it would have to cut costs further.

The interview was published after a fresh wave of selling hit US and European stock markets Wednesday, as an unrelenting flow of bad economic and corporate news sparked fears of a deepening global downturn.


Bloomberg
JPMorgan Profit Drops 76 Percent, Less Than Analysts Estimated
By Elizabeth Hester

Jan. 15 (Bloomberg) -- JPMorgan Chase & Co., the second- largest U.S. bank by assets, said profit fell 76 percent, beating analysts’ estimates, as the company navigates the credit crisis with more success than most of its peers.

Fourth-quarter net income was $702 million, or 7 cents a share, compared with $2.97 billion, or 86 cents, a year earlier, the New York-based bank said today in a statement. Fourteen analysts surveyed by Bloomberg had an average earnings estimate of 1 cent a share.

JPMorgan’s $20.5 billion of writedowns, losses and credit provisions through the third quarter were less than a third of those at Citigroup Inc., which was forced to sell control of its Smith Barney brokerage to Morgan Stanley for $2.7 billion this week. Chief Executive Officer Jamie Dimon has used JPMorgan’s relative strength to acquire troubled rivals, including Bear Stearns Cos. in March and Washington Mutual Inc. in September.

“JPM is better positioned against deteriorating loan portfolios than many of its peers given its strong loan-loss reserves,” KBW Inc. analyst David Konrad wrote in a Jan. 14 research note.

JPMorgan, which moved up its earnings announcement by six days, is the first of the largest U.S. banks to disclose fourth- quarter figures. New York-based Citigroup reports tomorrow, and Bank of America Corp., which bought Merrill Lynch & Co. two weeks ago, is scheduled to release results on Jan. 20. San Francisco- based Wells Fargo & Co. will follow on Jan. 28 as it works to absorb Wachovia Corp.

...Federal Reserve officials and President-elect Barack Obama have said more government help will be needed to shore up the U.S. financial system.

Fed Chairman Ben S. Bernanke said Jan. 13 that banks’ holdings of hard-to-sell investments raise questions about the companies’ underlying value, and called for the government to take on or insure the assets. Obama is deciding how to use the remaining $350 billion of the $700 billion Troubled Asset Relief Program that Congress approved in October, with some Democrats saying the plan should favor homeowners and community banks over larger financial-services companies.

Its Official - Obama Fatigue

Well this time we didn't even make it to the Inauguration before becoming disenchanted with a candidate. That beats our record set by ... wait for it ... Bill Clinton.

The straw that broke the camel's back, at least for us, was Obama's nomination of Eric Holder as his Attorney General.

After suffering through that continuing assault on the Constitution known as Alberto Gonzales, one might have expected the President-elect to appoint someone with a sterling reputation for upholding the rule of law, and not performing as a compliant tool to a particular Administration.

As the Deputy to Janet Reno from 1997, Eric Holder was intimately involved in many of the more controversial actions in the twilight of the Clinton Administration, including a key role in the infamous pardon of financial fraudster, Marc Rich.

Obama has spent much of his goodwill now with a series of highly cynical appointments of Clinton insiders, with virtually no signs of any type of a reform government.

He still has all our best wishes of course, but a healthy skepticism has already replaced much of the initial optimism. The honeymoon is over before it got started.

Bush II did not lose this voter's support until it was proven, at least to our satisfaction, that he systematically lied to the nation about something important, the case for the Iraq war.

The same criteria will apply to this President as well. But the goodwill has been spent.

Charts in the Babson Style for Midweek January 14

As a reminder, this Friday January 16 is options expiration.

Also, US markets will be closed on Monday January 19 for the Martin Luther King national holiday.

The markets will be open on Tuesday January 20 which is the Inauguration Day for the incoming President Barack Obama.

US Military Warns on 'Sudden Collapse' of Mexico and Pakistan

It is easy to accept that Pakistan is risky, and nuclear, but Mexico seems more like a toss up with Detroit.

There may be an Amero in Mexico's future.

El Paso Times
U.S. military report warns 'sudden collapse' of Mexico is possible
By Diana Washington Valdez
01/13/2009 03:49:34 PM MST

EL PASO - Mexico is one of two countries that "bear consideration for a rapid and sudden collapse," according to a report by the U.S. Joint Forces Command on worldwide security threats.

The command's "Joint Operating Environment (JOE 2008)" report, which contains projections of global threats and potential next wars, puts Pakistan on the same level as Mexico. "In terms of worse-case scenarios for the Joint Force and indeed the world, two large and important states bear consideration for a rapid and sudden collapse: Pakistan and Mexico.

"The Mexican possibility may seem less likely, but the government, its politicians, police and judicial infrastructure are all under sustained assault and press by criminal gangs and drug cartels. How that internal conflict turns out over the next several years will have a major impact on the stability of the Mexican state. Any descent by Mexico into chaos would demand an American response based on the serious implications for homeland security alone."

The U.S. Joint Forces Command, based in Norfolk, Va., is one of the Defense Departments combat commands that includes members of the different military service branches, active and reserves, as well as civilian and contract employees. One of its key roles is to help transform the U.S. military's capabilities.

In the foreword, Marine Gen. J.N. Mattis, the USJFC commander, said "Predictions about the future are always risky ... Regardless, if we do not try to forecast the future, there is no doubt that we will be caught off guard as we strive to protect this experiment in democracy that we call America."

The report is one in a series focusing on Mexico's internal security problems, mostly stemming from drug violence and drug corruption. In recent weeks, the Department of Homeland Security and former U.S. drug czar Barry McCaffrey issued similar alerts about Mexico.

Despite such reports, El Pasoan Veronica Callaghan, a border business leader, said she keeps running into people in the region who "are in denial about what is happening in Mexico."

Last week, Mexican President Felipe Calderon instructed his embassy and consular officials to promote a positive image of Mexico.

The U.S. military report, which also analyzed economic situations in other countries, also noted that China has increased its influence in places where oil fields are present.

ECB to Consider Rate Cut at its Thursday Meeting

The European Central Bank will be meeting tomorrow to consider a change in the Euro interest rate target.

The market widely expects a 50 basis point cut from 2.5% to 2.0%, which is still at a substantial premium to the US interest rate range of 0 to .25%.

Yesterday rumours of a deeper 100 basis point rate cut swept the trading desks and roiled the Euro/Dollar cross taking it down below support at 1.32. This provided a lift to the euro-heavy Dollar DX Index.

There is key support for the euro at 1.30. If Trichet holds the line at 50 basis points and does not signal rate cuts commensurate with the aggressive quantitative easing of the US Fed we would expect the euro to a few more sparks for the week, in addition to the JPM and Citi earnings reports.


Wall Street Journal Europe
ECB Expected to Cut Rates as Inflation Worries Ease
By NINA KOEPPEN
JANUARY 13, 2009, 6:15 P.M.

FRANKFURT -- Most economists say they believe the European Central Bank will continue with its monetary easing campaign and cut interest rates by half a percentage point Thursday to stem the risk of a deepening recession in the euro zone, although policy makers have given no clear signal about their decision.

Thirty-four of 42 private-sector banks polled by Dow Jones Newswires expect the ECB to cut the key policy rate to 2% from 2.5% currently. The ECB has already lowered interest rates by 175 basis points ...

Citi and JPM Move Their Earnings Reports to This Week

On Tuesday J. P. Morgan surprised the market by moving its earnings release from January 21 to tomorrow, January 15th, the day before the options expiration.

Today Citi announced that it is moving its own earnings release to this week, on Friday.

Is there a significance to this?

Perhaps. One likely reason is that they did not wish to put their earnings out at the same time as an historic event with the inauguration of Barack Obama on Tuesday January 20, with what is likely to be considered bad news.

There is also a likelihood that Citi and JPM wished to 'throw their cards on the table' ahead of the initial decision by Congress with regard to the disposition of TARP funds which is likely to occur next week. Economic blackmail is de rigeur for Wall Street when it is back on its heels.

Whatever does happen, we are certainly in for an interesting month of January.


Citi Fourth Quarter and Full-Year 2008 Earnings Review - Revised Date

NEW YORK -- (Business Wire) --

Citi announced it will review fourth quarter and full-year 2008 results on Friday, January 16, 2009, at 8:00 AM (EST), instead of January 22. Fourth quarter results will be issued via press release at approximately 6:00 AM (EST) on January 16, 2009.

A live webcast of the presentation, as well as financial results and presentation materials, will be available at http://www.citigroup.com/citigroup/fin. A replay of the webcast will be available at http://www.citigroup.com/citigroup/fin/pres.htm.

Corporate and US Treasury Yields from 1926 to 1934

The Bonds held up much better than one might have expected, and the spreads between corporates and longer dated Treasuries was remarkably uniform.

Bear in mind that these are yields on this chart, and the value of the underlying bonds moves in the opposite direction to the yield.

The Fed's Game Plan: What Ben Bernanke Is Thinking

Bernanke's game plan is becoming more apparent. Based on a reading of his papers and his public statements, here is a distilled view of what we think is his game plan.

1. Grow the money supply quickly and abundantly

2. Stabilize the Banking System to avoid destructive banking failures

3. Do not withdraw the monetary stimulus prematurely to fight inflation.

4. Manage 'confidence' aggressively to dampen the expectation of inflation later, and a panic liquidation now.

Each of these legs of his policy is a reaction to lessons he believes the Fed learned from the Great Depression.

As you consider the specific things he is doing, it is likely that they will fit very nicely into this framework.

He is obviously fighting the 'last war,' the last great battle that the Fed is known to have waged, and lost. For it did lose, as there was no lasting recovery until the world suffered through the Second World War.

Whether he will be successful or not remains to be seen. It is important to bear in mind that the Fed is absolutely confident that they know how to stop inflation once it gets started, even if it becomes rather serious.

The over-arching theme is that this is an emergency, and so long term niceties like moral hazard and systemic reform will be left for later: the ends justify the means.

William Poole says that this is a dangerous approach, because longer term consequences like inflation appear with a one to two year lag after a significant monetary stimulus such as we have just seen.

The timing of the Fed's dampening of inflation will be critical, and perhaps constrained by the real economy. How can the Fed tighten sufficiently if the real economy remains sluggish?

Bernanke is determined to err on the side of too much stimulus, given the trauma of the Fed's experience in the Great Depression. Coupled with the Fed's confidence in their ability to stop any monetary inflation, this raises a higher level of probability in the most likely outcome of the Fed's latest and greatest monetary experiment.

We cannot help but wonder what he thinks the Fed will be doing this time that will be different than 2003-2007 when they reflated the financial system after a market crash the last time without meaningful reforms, resulting in the stock market and housing bubbles.

Whatever happens, it will certainly provide the raw material for economic papers yet unwritten.

Serious Instances of Inflation Since World War II

Presented here is a summary of the major instances of inflation post World War II.

Although each country had its particular set of conditions and triggers for their painful experience of monetary inflation, the most common thread seems to be unpayable debts due to war or civil and societal dislocation.

Particularly strong labor union movements or protectionist policies against offshoring and imports do not appear to be common factors.

An expanded list with additional countries including the pre WWII era can be found at Wikipedia.

Inflation is the common condition of a fiat monetary system. Less probable outcomes are hyperinflation and deflation, with a serious inflation and disinflation nearer the norm.

Hyperinflation is normally associated with some outlier event in the political sphere and/or a series of policy errors by the monetary authority. Hyperinflation is more common when associated with an external monetary standard, but this is not a prerequisite.

Although not uncommon for a short term (less than one year) after unusual and intense monetary expansion, normally referred to as deleveraging or disinflation, a true deflation is a relatively rare phenomenon, especially in fiat currency regimes, usually attributable to a protracted series of policy errors or intentional actions to contract the money supply by a nation's monetary authority. The most familiar instances of a significant deflation are the Great Depression, particularly in the United States, and Japan during the 1990's.


Angola

Angola went through its worst inflation from 1991 to 1995.

In early 1991, the highest denomination was 50,000 kwanzas. By 1994, it was 500,000 kwanzas. In the 1995 currency reform, 1 kwanza reajustado was exchanged for 1,000 kwanzas. The highest denomination in 1995 was 5,000,000 kwanzas reajustados. In the 1999 currency reform, 1 new kwanza was exchanged for 1,000,000 kwanzas reajustados. The overall impact of hyperinflation: 1 new kwanza = 1,000,000,000 pre 1991 kwanzas.

Argentina

Argentina went through steady inflation from 1975 to 1991.

At the beginning of 1975, the highest denomination was 1,000 pesos. In late 1976, the highest denomination was 5,000 pesos. In early 1979, the highest denomination was 10,000 pesos. By the end of 1981, the highest denomination was 1,000,000 pesos. In the 1983 currency reform, 1 Peso argentino was exchanged for 10,000 pesos. In the 1985 currency reform, 1 austral was exchanged for 1,000 pesos argentinos. In the 1992 currency reform, 1 new peso was exchanged for 10,000 australes. The overall impact of hyperinflation: 1 (1992) peso = 100,000,000,000 pre-1983 pesos.

Belarus

Belarus went through steady inflation from 1994 to 2002.

In 1993, the highest denomination was 5,000 rublei. By 1999, it was 5,000,000 rublei. In the 2000 currency reform, the ruble was replaced by the new ruble at an exchange rate of 1 new ruble = 1,000 old rublei. The highest denomination in 2008 was 100,000 rublei, equal to 100,000,000 pre-2000 rublei.

Bolivia

Bolivia went through its worst inflation between 1984 and 1986.

Before 1984, the highest denomination was 1,000 pesos bolivianos. By 1985, the highest denomination was 10 Million pesos bolivianos. In 1985, a Bolivian note for 1 million pesos was worth 55 cents in US dollars, one-thousandth of its exchange value of $5,000 less than three years previously. In the 1987 currency reform, the Peso Boliviano was replaced by the Boliviano at a rate of 1,000,000 : 1.

Bosnia-Herzegovina

Bosnia-Hezegovina went through its worst inflation in 1993.

In 1992, the highest denomination was 1,000 dinara. By 1993, the highest denomination was 100,000,000 dinara. In the Republika Srpska, the highest denomination was 10,000 dinara in 1992 and 10,000,000,000 dinara in 1993. 50,000,000,000 dinara notes were also printed in 1993 but never issued.

Brazil

From 1986 to 1994, the base currency unit was shifted three times to adjust for inflation in the final years of the Brazilian military dictatorship era. A 1967 cruzeiro was, in 1994, worth less than one trillionth of a US cent, after adjusting for multiple devaluations and note changes. A new currency called real was adopted in 1994, and hyperinflation was eventually brought under control. The real was also the currency in use until 1942; 1 (current) real is the equivalent of 2,750,000,000,000,000,000 of those old reals

Chile

Beginning in 1971, during the presidency of Salvador Allende, Chilean inflation began to rise and reached peaks of 1,200% in 1973. As a result of the hyperinflation, food became scarce and overpriced. A 1973 coup d'état deposed Allende and installed a military government led by Augusto Pinochet. Pinochet's free-market economic policy ended the inflation and except for an economic depression in 1981 the economy has recovered. Overall impact of the inflation: 1 current Chilean Peso = 1,000 Escudos.

China

The Republic of China went through the worst inflation 1948-49.

In 1947, the highest denomination was 50,000 yuan. By mid-1948, the highest denomination was 180,000,000 yuan. The 1948 currency reform replaced the yuan by the gold yuan at an exchange rate of 1 gold yuan = 3,000,000 yuan. In less than 1 year, the highest denomination was 10,000,000 gold yuan. In the final days of the civil war, the Silver Yuan was briefly introduced at the rate of 500,000,000 Gold Yuan. Meanwhile the highest denomination issued by a regional bank was 6,000,000,000 yuan (issued by XinJiang Provincial Bank in 1949). After the renminbi was instituted by the new communist government, hyperinflation ceased with a revaluation of 1:10,000 old Renminbi in 1955.

Georgia

Georgia went through its worst inflation in 1994.

In 1993, the highest denomination was 100,000 coupons [kuponi]. By 1994, the highest denomination was 1,000,000 coupons. In the 1995 currency reform, a new currency lari was introduced with 1 lari exchanged for 1,000,000 coupons.

Israel

Inflation accelerated in the 1970s, rising steadily from 13% in 1971 to 111% in 1979. From 133% in 1980, it leaped to 191% in 1983 and then to 445% in 1984, threatening to become a four-digit figure within a year or two. In 1985 Israel froze all prices by law. That same year, inflation more than halved, to 185%. Within a few months, the authorities began to lift the price freeze on some items; in other cases it took almost a year. By 1986, inflation was down to 19%.

Madagascar

The Malagasy franc had a turbulent time in 2004, losing nearly half its value and sparking rampant inflation.

On 1 January 2005 the Malagasy ariary replaced the previous currency at a rate of one ariary for five Malagsy francs. In May 2005 there were riots over rising inflation, although falling prices have since calmed the situation.

Nicaragua

Nicaragua went through the worst inflation from 1987 to 1990.

From 1943 to April 1971, one US dollar equalled 7 córdobas. From April 1971 to early 1978, one US dollar was worth 10 córdobas. In early 1986, the highest denomination was 10,000 córdobas. By 1987, it was 1,000,000 córdobas. In the 1988 currency reform, 1 new córdoba was exchanged for 10,000 old córdobas. The highest denomination in 1990 was 100,000,000 new córdobas. In the 1991 currency reform, 1 new córdoba was exchanged for 5,000,000 old córdobas. The overall impact of hyperinflation: 1 (1991) córdoba = 50,000,000,000 pre-1988 córdobas.

Peru

Peru went through its worst inflation from 1988 to 1990.

In the 1985 currency reform, 1 inti was exchanged for 1,000 soles. In 1986, the highest denomination was 1,000 intis. But in September 1988, monthly inflation went to 132%. In August 1990, monthly inflation was 397%. The highest denomination was 10,000,000 intis by 1991. In the 1991 currency reform, 1 nuevo sol was exchanged for 1,000,000 intis. The overall impact of hyperinflation: 1 nuevo sol = 1,000,000,000 (old) soles.

Poland

Poland went through its worst inflation between 1990 and 1993.

The highest denomination in 1989 was 200,000 zlotych. It was 1,000,000 zlotych in 1991 and 2,000,000 zlotych in 1992. In the 1994 currency reform, 1 new zloty was exchanged for 10,000 old zlotych.

Romania

Romania is still working through steady inflation.

The highest denomination in 1998 was 100,000 lei. By 2000 it was 500,000 lei. In early 2005 it was 1,000,000 lei. In July 2005 the leu was replaced by the new leu at 10,000 old lei = 1 new leu. Inflation in 2005 was 9%. In 2006 the highest denomination is 500 lei (= 5,000,000 old lei).

Russia

In 1992, the first year of post-Soviet economic reform, inflation was 2,520%, the major cause being the decontrol of most prices in January. In 1993 the annual rate was 840%, and in 1994, 224%. The ruble devalued from about 40 r/$ in 1991 to about 30,000 r/$ in 1999.

Turkey

Throughout the 1990s Turkey dealt with severe inflation rates that finally crippled the economy into a recession in 2001. The highest denomination in 1995 was 1,000,000 lira. By 2005 it was 50,000,000 lira. Recently Turkey has achieved single digit inflation for the first time in decades, and in the 2005 currency reform, introduced the New Turkish Lira; 1 was exchanged for 1,000,000 old lira.

Ukraine

Ukraine went through its worst inflation between 1993 and 1995.

In 1992, the Ukrainian karbovanets was introduced, which was exchanged with the defunct Soviet ruble at a rate of 1 UAK = 1 SUR. Before 1993, the highest denomination was 1,000 karbovantsiv. By 1995, it was 1,000,000 karbovantsiv. In 1996, during the transition to the Hryvnya and the subsequent phase out of the karbovanets, the exchange rate was 100,000 UAK = 1 UAH. This translates to a hyperinflation rate of approximately 1,400% per month. And to this day Ukraine holds the world record for most inflation in one calendar year, which was set in 1993.

Yugoslavia

Yugoslavia went through a period of hyperinflation and subsequent currency reforms from 1989 to 1994.

The highest denomination in 1988 was 50,000 dinars. By 1989 it was 2,000,000 dinars. In the 1990 currency reform, 1 new dinar was exchanged for 10,000 old dinars. In the 1992 currency reform, 1 new dinar was exchanged for 10 old dinars. The highest denomination in 1992 was 50,000 dinars. By 1993, it was 10,000,000,000 dinars. In the 1993 currency reform, 1 new dinar was exchanged for 1,000,000 old dinars. But before the year was over, the highest denomination was 500,000,000,000 dinars. In the 1994 currency reform, 1 new dinar was exchanged for 1,000,000,000 old dinars. In another currency reform a month later, 1 novi dinar was exchanged for 13 million dinars (1 novi dinar = 1 German mark at the time of exchange). The overall impact of hyperinflation: 1 novi dinar = 1027 pre 1990 dinars. Yugoslavia's rate of inflation hit 5 × 1015 percent cumalative inflation over the time period 1 October 1993 and 24 January 1994.

Zaire (now the Democratic Republic of the Congo)

Zaire went through a period of inflation between 1989 and 1996.

In 1988, the highest denomination was 5,000 zaires. By 1992, it was 5,000,000 zaires. In the 1993 currency reform, 1 nouveau zaire was exchanged for 3,000,000 old zaires. The highest denomination in 1996 was 1,000,000 nouveaux zaires. In 1997, Zaire was renamed the Congo Democratic Republic and changed its currency to francs. 1 franc was exchanged for 100,000 nouveaux zaires. The overall impact of hyperinflation: 1 franc = 3 × 1011 pre 1989 zaires.

Zimbabwe

At Independence in 1980, the Zimbabwe dollar was worth about USD 1.25. Since then, rampant inflation and the collapse of the economy have severely devalued the currency, causing many organisations to favour using the US dollar or South African rand instead.

In Defense of Economics

Yves Smith at Naked Capitalism has an interesting essay on her site Why So Little Self-recrimination Among Economists? which we would urge you to read if you are interested at all in this topic, as it is sincerely well thought and written, for which we her readers are always grateful.

It is difficult to assess the quality of an unfamiliar game if one does not know the rules, and even more if one does not understand the objectives. What is the 'goal' of the economics game which we all have been observing with greater than usual interest these past few years?

For the past twenty five years at least modern economics has not been seeking objective truth and the advancement of learning as much as the rationalization of policy positions in pursuit of power, awards, grants, and influence. This is not to say that there was a utopia before this, but rather that the less admirable aspects of the profession were in the minority, and not so widely accepted and tolerated and respected.

Our society on the whole does not value the truth as it had done before, but worships money and power and cleverness. That is both the long and short of it. We obtain the politicians and economists and news commentators that we encourage according to the character of the age.

Economics is a social science, with somewhat murky experimental methods, more like redacted statistical vignettes, and difficult to measure theories with grading periods too widely interspersed to be meaningful. This introduces a strong element of peer pressure and factionalism, of quack theories and nostrums hiding in the safe harbors of ambiguity and plausible error.

Granted, the academics are protected by tenure, but tenure is a weak consolation to the ambitious. It can be at worst a kind of exile, a quiet humiliation. And professors are weak in their resources as compared to the think tanks who have no qualms about pursuing their desired objectives. There is a power to the lie that can overwhelm those who stumble about in pursuit of the truth, or at least a better approximation of it.

Economics is not a purely objective science, because its theories are not readily verifiable through controlled experimentation, even allowing for the work of some of the behaviourists.

In this economics is not alone among the sciences, not at all, especially to those in the leading edge of some disciplines like theoretical physics, where experimentation is difficult, and grading periods are also interspersed widely. We often hear of courageous minds who hold out through years of isolated persistence to be eventually vindicated by new discoveries from experimentation and observation.

But is economics so much the problem? We would suggest that its condition, its character, merely makes it vulnerable, a thing to be encouraged and protected, but not to be relied upon as a bulwark against adverse societal influences.

If anything, economics is guilty of pretension, of having more influence and authority than its knowledge would allow. Was there anything so artfully disingenuous as the Congressional testimony of Alan Greenspan regarding critical policy decisions? Or more craven than the way in which many of the Congressmen sought to gain cover for their action under his prevarication?

How can there be self-recrimination where there is no outrage in general? Where is the objective analysis of what went wrong, and proposals to change things to correct this?

Most academics are notorious followers, trodding the well worn and well marked paths, no matter where they might lead. It is only the exceptional, both in mind and spirit, that dare to blaze new trails. Tenure is no armor for the ego, and there are no politics more vicious and petty than those of academia, excepting perhaps the fashion industry.

We ought not to blame economics, beyond its pretensions to administer advice from some position of authority because of superior knowledge. That has been shown to be hollow, false, a totemism. The pseudo-religious aspects of the extreme elements of some economic schools of thought is apparent, almost hysterically funny, when viewed from a distance.

We ought not to single out economists for not being virtuous because there were too few virtuous people on the whole both then and now, if one defines 'virtuous' as one who tells the truth, come what may, as the facts and their analysis leads them even in their lack of certainty.

This is not to say there is no blame to be attached, no criminality to be assessed, that 'society is to blame.' The problem is that there is so much of it that we can spend years striking at the branches, the scapegoats, without approaching the root.

The remedy is the law, and to affect this we must take back the rule of law from those who have corrupted it.

The Federal Reserve raised an enormous debt bubble to lift the economy out of the slump of 2002, and for this trouble we were rewarded with a housing and stock market bubble, and remarkable imbalances that are just now being unwound. This is what happens when one liberally applies monetary and Keynesian stimulus without reform. And we are doing it again.

Things will change for the study of economics, and probably for the better. There are more extreme examples of professions which were co-opted by the political world, like psychology in the Soviet Union and medicine in the Third Reich, sciences subjected to what some might call deep capture.

How can a society which defines its first principle, the ultimate good, as greed be anything but what it is? Cruel, self-absorbed, shallow, unjust, delusional and imbalanced. Nothing made this more apparent than the spectacle of the outgoing President's press conference today. And, we might add, the actions of his predecessor in that office.

Fear is the tool of a tyranny, and greed is a horse to be harnessed, not the measure of policy or an administrator of justice to run maximized, or even unchecked.

Why the lack of self-recrimination among the economists? Because they are no different than anyone else who failed to exercise their stewardship and basic human obligation to protect the innocent and to stand for justice, and uphold the standards of their profession. In this they are no different than politicians and lawyers and accountants and the mainstream media, although we foolishly expected more.

Economics will recover eventually from this lapse, as the majority of economists look back in quiet horror at the carnage that was inflicted on the world, accommodated by their silence. There were many who spoke out. There were even some who took the time and trouble to go to places where economists frequently discuss things, and caution that their silence would discredit the profession.

What is the next step? Forward, off the beaten path.

US Dollar Weekly Chart with Commitments of Traders

Citi Unloading Robert Rubin and Salomon Smith Barney

We hope that Teflon Bob will not be finding a position with the Obama Administration. If he does they might have to drop the 'reform' label on that Administration. This is starting to look more like the shift change at the Rogues Gallery.

Citi is also said to be shopping (trying to unload) its Salomon Smith Barney brokerage division. They are said to be in talks with Morgan Stanley. Apparently MS is finding its current life as a bank holding company a bit timesome, coming in at 10 and out on the links by 3.

How fast time flies on the Street. It seems like only yesterday that little Philbro was in short pants, and then its first pair of white shoes. Then they grow up and rig the Treasury market and help set up the dotcom bubble, those little scamps.

Both Citi and JP Morgan continue to be plagued by rumours of large undisclosed losses and troubled positions.

Since Bob Rubin was on Sandy's and Vikram's A team, one has to wonder. As Pliny the Elder observed, "Ruinis inminentibus musculi praemigrant:" When collapse is imminent, the little rodents flee.

Wall Street Journal
Rubin to Leave Citigroup
By DAVID ENRICH

Robert Rubin, the former Treasury secretary who has been sharply criticized over his role in the financial turmoil at Citigroup Inc., is leaving the bank.

Mr. Rubin is senior counselor and a director at the New York company, which has suffered $20 billion in losses over the past year and got a government bailout of at least $45 billion. Citigroup's troubles cast an awkward spotlight on Mr. Rubin, who received $115 million in pay since 1999, excluding stock options.

Citi said in a statement that Mr. Rubin retired decided to retire as senior counselor effective Friday and decided not to stand for re-election as a director at the company's next annual meeting.

"Since joining Citi nearly 10 years ago, Bob has made invaluable contributions to the company," said Vikram Pandit, Chief Executive Officer of Citi.

While Mr. Rubin has defended his performance since joining Citigroup in 1999, insisting that the bank's problems were due to wider turmoil in the financial system, not failures by Citigroup, he is "tired of it," a person familiar with the matter said. Mr. Rubin now wants to focus instead on his non-profit work and other outside interests.

The exit of Mr. Rubin likely will do little to ease the questions swirling around Citigroup, now just the fifth-largest U.S.-based bank as measured in stock-market value. Since late 2006, Citigroup's share price has plunged nearly 90%. On Friday, the stock was down more than 5% in recent New York Stock Exchange composite trading.
Besides an initial $25 billion injection as part of a broad rescue of financial firms, the government agreed in November to put in $20 billion more and vowed to protect Citigroup against most losses on $306 billion of its assets.

The second infusion, which the government as the bank's largest shareholder, with a 7.8% stake, coincided with federal regulators putting Citigroup on a tighter regulatory leash, according to people familiar with the situation said.

Federal banking regulators have toughened their scrutiny of Citigroup, becoming involved in internal discussions about the company's strategic direction and discouraging executives from pursuing certain acquisitions.

In an interview with The Wall Street Journal in late November, Mr. Rubin said risk-management executives are responsible for navigating around problems like those now battering Citigroup. "The board can't run the risk book of a company," he said in the interview. "The board as a whole is not going to have a granular knowledge" of operations.

Still, Mr. Rubin was deeply involved in a decision in late 2004 and early 2005 to take on more risk to boost flagging profit growth, according to people familiar with the discussions.

Mr. Rubin also played a major role in getting Mr. Pandit appointed as Citigroup's chief executive in December 2007, following the resignation of Charles O. Prince.
In the Journal interview, Mr. Rubin said Mr. Pandit was doing a good job and would prosper in its current structure once the financial crisis eases.

Merrill Lynch: The Wealthy Are Turning to Physical Gold for Safety

And so it begins...

Each person has to allow for their own circumstances, and provide for their daily needs as well as their longer term investment decisions.

Speculation and leverage are a trap in this market, because it is permeated by abusive practices and a deterioration of the conditions necessary to free markets.

It is truly amazing that the world continues to allow New York, Chicago and London to set the short term prices for their goods and labor.

The status quo will do all in its power to perpetuate itself, and hold the line on meaningful change and reforms for a variety of all too human motivations. This, we believe, is what has been causing this series of bubbles, booms and busts. Bernanke is fighting the last economic crisis.

As we can, provisions should be made for the troubles to come. We did not get where we are overnight, and we will not repair ourselves in a year either.


UK Telegraph
Merrill Lynch says rich turning to gold bars for safety
By Ambrose Evans-Pritchard
Last Updated: 10:32AM GMT 09 Jan 2009

Merrill Lynch has revealed that some of its richest clients are so alarmed by the state of the financial system and signs of political instability around the world that they are now insisting on the purchase of gold bars, shunning derivatives or "paper" proxies.

Gary Dugan, the chief investment officer for the US bank, said there has been a remarkable change in sentiment. "People are genuinely worried about what the world is going to look like in 2009. It is amazing how many clients want physical gold, not ETFs," he said, referring to exchange trade funds listed in London, New York, and other bourses.

"They are so worried they want a portable asset in their house. I never thought I would be getting calls from clients saying they want a box of krugerrands," he said.

Merrill predicted that gold would soon blast through its all time-high of $1,030 an ounce, and would hit $1,150 by June.

The metal should do well whatever happens. If deflation sets in and rocks the economic system it will serve as a safe-haven, but if massive monetary stimulus gains traction and sets off inflation once again it will also come into its own as a store of value. "It's win-win either way," said Mr Dugan.

He added that deflation may prove the greater risk in coming months. "It's very difficult to get the deflation psychology out of the human brain once prices start falling. People stop buying things because they think it will be cheaper if they wait."

Merrill expects global inflation to hover near zero, with rates of minus 1pc in the industrial economies. This means that yields on AAA sovereign bonds now at 3pc will offer a real return of 4pc a year, which is stellar in this grim climate. "Don't start selling your government bonds," Mr Dugan said, dismissing talk of a bond bubble as misguided. (Government bonds are a safe haven for now on the short tend of the curve, but to say there is no bubble on the long end is remarkable. The only vairable is how long before that bubble bursts. The real question is whether the risk is worth the return for you, and that will vary. It seems insane to hold the long end when you can take the shorter end. - Jesse)

He warned that the eurozone was likely to come under strain this year as slump deepens. "There is going to be friction as governments in the south start talking politically about coming out of the euro.

I don't see the tensions in Greece as a one-off. It is a sign of social strain in countries that have lost competitiveness." (Wait until it really gets rolling in the US, UK, Russia and China. Then there will be headlines - Jesse)

Daily Telegraph
Gold rush erupts over financial crisis
By Nick Gardner
January 10, 2009 12:01am

THE global financial crisis has sparked a new gold rush.

Worried investors seeking a safe home for their money are ploughing billions of dollars into the precious metal in a bid to preserve their wealth.

Demand has now reached such unprecedented levels that the Perth Mint, Australia's biggest wholesaler of gold coins and bars, has been forced to ration its sales.

Perth Mint's bullion sales rose 194 per cent in the December quarter compared with the corresponding period in 2007, while silver bullion sales were up 140 per cent.

The mint has suspended sales of all gold bars and all bullion coins - except its 1oz "Kangaroo" gold bullion coin.

On Monday, after a three-month suspension, it will expand its range of bullion coins for sale but the restrictions remain in place for minted gold bullion bars so the mint can sell some gold to as many customers as possible.

"We are working three shifts a day, six days a week, and still can't keep up with demand," Perth Mint CEO Ed Harbuz said. "I've never known anything like this in the precious metals market.

"We would be working Sundays too but we are having difficulty getting enough staff."

Non-minted gold in the form of cast bars produced by Perth Mint's local refinery can still be bought, although customers who want the bigger bars often have to wait several weeks.

One customer recently bought $500,000 worth of bullion and wanted it delivered so he could hold it personally.

"For very big orders we normally keep the gold in our depository for security reasons," Mr Harbuz said.

"Orders of $10 million or more are not unusual. Often the orders are much larger if we are dealing with pension funds or institutional investors."

The December Non-Farm Payrolls Report: Portrait of a Ponzi Economy

The 'headline number' is the seasonally adjusted net change in jobs. The drop out of the range that was held in the prior years is obvious on this chart.



This is the (in)famous Birth Death Model from the Bureau of Labor Statistics in which they add jobs as a 'plug' to account for new jobs being generated by the economy from smaller business. The trend is very regular as can be seen on this chart. So regular in fact that it is exposed as imaginary, useless. They do not even bother to trend it with the overall economy and jobs market. The only good thing that can be said about it is that it is added to the non-adjusted jobs number first, so its effects are swallowed up by the seasonal adjustment in many months.



This chart shows the drop off in jobs growth was precipitous. We believe that it was much less precipitous ex government fudging. The recessionary decline was masked by the government. Well, its obvious now.



It always good to remind ourselves of the huge swings in jobs numbers before the seasonal adjustments. It is those adjustments, and the huge revisions made to the series both in the prior month and in whole sections of the numbers, that hide a multitude of statistical sins.



This chart shows the peak in the economy, and the beginning of the decline. As one can see it was not the sudden onset of the housing collapse that brought down the economy. Rather, it was the rot underneath the foundations of the economy that triggered the housing collapse, and all the other Ponzi schemes that are now collapsing.

Fixing the 'housing problem' will not fix the rot in the economy, which was papered over by the Fed's reflation starting in 2003. But there is a lot of money to be made by a lot of people in that fix, so we can expect a signficant amount of graft and waste before the real work begins.



Here is another view of the Jobs Trend that nicely demonstrates the rise off the bottom of the economy as a result ofthe Fed reflationary efforts, first under Greenspan and then Bernanke. It was a parabolic bubble which has now collapsed and is declining in a nicely defined parabola. That's a sixth order polynomial describing the trend.

2008 Stock Market Performance by Country

Charts in the Babson Style for Midweek January 7

It looks like a pivotal moment on the charts.

Pivotal: being of crucial importance; central, key. By pivotal is meant a key decision point on the chart.

The rally which we have had so far is within the bounds of a 'technical bounce.'

What the market does tomorrow after the Jobs Report will help us to decide if it was indeed just a technical rally, or if it is something else, up to and including a trend change into a more sustained bear market rally that might be substantial.

The Jobs Report number tomorrow in combination with how the market will react to it, is almost a coin flip at this point with a shading to bearish only because of the trend. The number should be 'bad.' We'd estimate north of 500,000, perhaps higher.

It is our estimate that any number less than 550,000 is discounted in already and will be fuel for a short covering rally with cries of 'bottom.' Any number over 710,000 will be a shock and probably will bring the market lower.

And in between is a gray area. We do not believe for one minute that the recession is at its bottom, and that blue skies are in sight.. But that may mean little when hot, restless money comes off the table, aching for higher returns and risk, eventually to be consumed by beta.

The gambler jumps in, the trader waits. We have only hedged positions on the table as of the market close, not including our long term holdings, none of which are related to equities at this time. Our goal is not to give up any money by overtrading.

Is China Losing Its Taste for US Debt?

International Herald Tribune
U.S. debt is losing its appeal in China
By Keith Bradsher
Thursday, January 8, 2009

HONG KONG: China has bought more than $1 trillion in American debt, but as the global downturn has intensified, Beijing is starting to keep more of its money at home - a shift that could pose some challenges to the U.S. government in the near future but eventually may even produce salutary effects on the world economy.

At first glance, the declining Chinese appetite for U.S. debt - apparent in a series of hints from Chinese policy makers over the past two weeks, with official statistics due for release in the next few days - comes at an inopportune time. On Tuesday, the U.S. president-elect, Barack Obama, said Americans should get used to the prospect of "trillion-dollar deficits for years to come" as he seeks to finance an $800 billion economic stimulus package.

Normally, China would be the most avid taker of the debt required to pay for those deficits, mainly short-term Treasury securities. In the past five years, China has spent as much as one-seventh of its entire economic output on the purchase of foreign debt - largely U.S. Treasury bonds and American mortgage-backed securities.

But now, Beijing is seeking to pay for its own $600 billion economic stimulus - just as tax revenue falls sharply as the Chinese economy slows. Regulators have ordered banks to lend more money to small and midsize enterprises, many of which are struggling with slower exports, and Chinese bankers say they are being instructed to lend more to local governments to allow them to build new roads and other projects as part of the stimulus program.

"All the key drivers of China's Treasury purchases are disappearing," said Ben Simpfendorfer, an economist in the Hong Kong office of the Royal Bank of Scotland. "There's a waning appetite for dollars and a waning appetite for Treasuries. And that complicates the outlook for interest rates." (The reason that China has been buying Treasuries is to sterilize the impact of their dollar trade surplus and to support their industrial exports policy. These are not 'investment.' - Jesse)

Fitch Ratings, the credit rating agency, forecasts that China's foreign reserves will increase by $177 billion this year - a large number, but down sharply from an estimated $415 billion last year.

In the United States, China's voracious demand for American bonds has helped keep interest rates low for borrowers ranging from the government to home buyers. Reduced Chinese enthusiasm for buying those bonds takes away some of this dampening effect. (And China will be under increasing pressue to maintain the peg of the yuan to the dollar at an artificially low rate despite their currency controls - Jesse)

But with U.S. interest rates still at very low levels after recent cuts to stimulate the economy, it is quite cheap for the U.S. Treasury to raise capital now. And there seem to be no shortage of buyers for Treasury bonds and other debt instruments: Prices for U.S. debt have soared as yields have declined. (Buying of the debt is heavily concentrated in safe haven buying domestically and a small number of foreign central banks. It is vulnerable at these prices - Jesse)

The long-term effects of this shift in capital flows - with China keeping more of its money home and the U.S. economy becoming less dependent on one lender - are unclear, but the phenomenon is something economists have said is long overdue. (The result will be few Chinese exports to the US and a stronger renminbi - Jesse)

What is clear is that the effect of the global downturn on China's finances has been drastic. As recently as 2007, tax revenue soared 32 percent, as factories across China ran flat out. But by November, government revenue had actually dropped 3 percent from a year earlier. That prompted Finance Minister Xie Xuren to warn Monday that 2009 would be "a difficult fiscal year." (China must stimulate their domestic economy and raise the median wage to encourage consumption of their own production - Jesse)

A senior central bank official mentioned last month that China's $1.9 trillion in foreign exchange reserves had actually begun to shrink. The reserves - mainly bonds issued by the U.S. Treasury and by Fannie Mae and Freddie Mac, the mortgage finance companies - had been rising quickly ever since the Asian financial crisis in 1998. (There was a massive dumping of Agency debt by the foreign central banks, but a parabolic increase in Treasury purchases as we have previously documents - Jesse)

The strength of the dollar against the euro in the fourth quarter of last year contributed to slower growth in China's foreign reserves, said Fan Gang, an academic adviser to China's central bank, at a conference in Beijing on Tuesday. The central bank keeps track of the total value of its reserves in dollars and a weaker euro means that euro-denominated assets in those reserves are worth less in dollars, decreasing the total value of the reserves.

But the pace of China's accumulation of reserves began slowing in the third quarter along with the slowing of the Chinese economy, and appears to reflect much broader shifts.

China manages its reserves with considerable secrecy, but economists believe about 70 percent is in dollar-denominated assets and most of the rest in euros. The country has bankrolled its huge reserves by effectively requiring its entire banking sector, which is state-controlled, to hand nearly one-fifth of its deposits over to the central bank. The central bank, in turn, has used the money to buy foreign bonds.

Now the central bank is rapidly reducing this requirement and pushing banks to lend more money instead. (Good this is what they must do to encourage real capital investment that does not flee at the first whiff of a crisis - Jesse)

At the same time, three new trends mean that fewer dollars are pouring into China - and as fewer dollars flow into China, the government has fewer dollars to buy American bonds and help finance the U.S. trade and budget deficits.

The first, little-noticed trend is that the monthly pace of foreign direct investment in China has fallen by more than a third since the summer. Multinational companies are hoarding their cash and cutting back on the construction of factories. (FDI cuts and runs quickly in a crisis - Jesse)

The second trend is that the combination of a housing bust and a two-thirds fall in the mainland Chinese stock markets over the past year has resulted in moves by many overseas investors - and even some Chinese - to get money quietly out of the country. They are doing so despite China's fairly stringent currency controls, prompting the director of the State Administration of Foreign Exchange, Hu Xiaolian, to warn in a statement Tuesday of "abnormal" capital flows across China's borders; she provided no statistics.

China's most porous border in terms of money flows is with Hong Kong, a semi-autonomous Chinese territory that has its own internationally convertible currency. So much Chinese money has poured into Hong Kong and been converted into Hong Kong dollars that the territory has had to issue billions of dollars' worth of extra currency in the past two months to meet the demand, shattering its previous records for such issuance.

A third trend that may further slow the flow of dollars into China is the reduction of its huge trade surpluses.

China's trade surplus set another record in November, at $40.1 billion. But because prices of Chinese imports like oil are starting to recover while demand remains weak for Chinese exports like consumer electronics, most economists expect China to run trade surpluses closer to $30 billion a month.

That would give China a sizable sum to invest abroad. But it would be considerably less than $50 billion a month that it poured into international financial markets - mainly U.S. bond markets - during the first half of 2008.

"The pace of foreign currency flows into China has to slow," and therefore the pace of China's reinvestment of that currency in foreign bonds will also slow, said Dariusz Kowalczyk, the chief investment officer at SJS Markets, a Hong Kong securities firm.

For a combination of financial and political reasons, the decline in China's purchases of dollar-denominated assets may be less steep than the overall decline in its purchases of foreign assets. (Their industrial policy of export to the US is the reason - Jesse)

Many mainland Chinese companies are keeping more of their dollar revenues overseas instead of bringing them home and converting them into yuan for deposit in Chinese banks. In essence, they would not show up on the central bank's books. So, overall Chinese demand for dollars would not be falling as much as the government's demand for dollars, said Sherman Chan, an economist in the Sydney office of Moody's Economy.com.

Treasury data from Washington suggest the Chinese government might be allocating a higher proportion of its foreign currency to the dollar in recent weeks and less to the euro. The data also suggest China is buying more Treasuries and fewer bonds from Fannie Mae or Freddie Mac.

Figures from the U.S. Federal Reserve and the Treasury point to a sharp increase in Chinese holdings of Treasury bonds in October. China passed Japan in September as the largest overseas holder of Treasuries, and took a commanding lead in October, with $652.9 billion compared to $585.5 billion for Japan.

But specialists in international money flows caution against relying too heavily on these statistics. They mostly count bonds that the Chinese government has bought directly, and exclude purchases made through banks in London and Hong Kong; with the financial crisis weakening many banks, the Chinese government has a strong incentive to buy more of its bonds directly.

The overall pace of foreign reserve accumulation in China seems to have slowed so much that even if all the remaining purchases were U.S. Treasuries, the Chinese government's overall purchases of dollar-denominated assets will have fallen, economists said.

But China's leadership is likely to avoid any complete halt to purchases of Treasuries for fear of looking like it is torpedoing the chances for a U.S. economic recovery at a vulnerable time, said Paul Tang, the chief economist at the Bank of East Asia here.

"This is a political decision," he said. "This is not purely an investment decision."

India's Enron - Lessons Learned from the West

Snatch the bonus from my hand, grasshopper, and you may be worthy of a seat on the Board.

Reuters
Accounting scandal at Satyam could be India's Enron
By Sumeet Chatterjee
Wed Jan 7, 2009 10:32am EST

BANGALORE (Reuters) - The head of Indian outsourcing firm Satyam Computer Services resigned on Wednesday, disclosing that profits had been falsely inflated for years and sending its shares tumbling nearly 80 percent.

India's biggest corporate scandal in memory threatens future foreign investment flows into Asia's third-largest economy and casts a cloud over growth in its once-booming outsourcing sector.

The news sent Indian equity markets into a tailspin, with Bombay's main benchmark index tumbling 7.3 percent in a firmer session for world markets and the Indian rupee fell.

Ramalinga Raju, founder and chairman of India's fourth-largest software services exporter, said in a statement that Satyam's profits had been massively inflated over recent years but no other board member was aware of the financial irregularities. (Executive incompetency defense. The brown sahibs have learned their lessons well - Jesse)

"If a company's chairman himself says they built fictitious assets, who do you believe here? This has put a question mark on the entire corporate governance system in India," said R.K. Gupta, managing director at Taurus Asset Management in New Delhi. (It questions the integrity India's equity market and government, for certain. They need to hire Chris Cox of the SEC and Hank Paulson of Treasury as consultants to help them reform their regulatory process. - Jesse)

Raju, who founded Satyam more than two decades ago and who took it public in 1991, said about $1 billion or 94 percent of the cash on the company's books was fictitious. (They are holding that many dollars? LOL - Jesse)

The 54-year-old Satyam chairman came under close scrutiny last month after the company's botched attempt to buy two construction firms partly owned by its founders, which Raju said on Wednesday was a final attempt to resolve the problem of the fictitious assets. (A continuing exercise in acquisitions to mask accounting transgressions. Silicon Valley should have patented their accounting techniques. - Jesse)

"It was like riding a tiger, not knowing how to get off without being eaten," Raju, a management graduate from Ohio University, said in his letter, adding he was prepared to face up to the legal consequences. (OU! Top beer drinking school per capita in North America. Keggers par excellence. - Jesse)

Satyam said its managing director and co-founder B. Rama Raju, Raju's brother, had also resigned. It did not give any reason for the resignation. (But he didn't know about it, he was as innocent as the Madoff boys - Jesse)

The company's difficulties multiplied when the World Bank, a major customer, barred Satyam from new business, citing "improper benefits" given to Bank officials. (A little Enron, and a little Tyco - Jesse)

"In a bull market people forgot about it (corporate governance)," said Singapore-based Ashish Goyal, chief investment officer at Prudential Asset Management. "In a bear market chickens are coming home to roost, so it gets highlighted at a time like this." (The Ponzi schemes start collapsing when the easy money dries up and the lack of real growth and profitability is exposed - Jesse)

Just three months ago, Satyam received a Golden Peacock award from a group of Indian directors for excellence in corporate governance. (ROFLMAO! What did he do, twenty consecutive quarters of beating his EPS estimates by a penny? - Jesse)

By close of trade, Satyam's share value slumped to about $550 million from around $7 billion as recently as last June.

New York-listed Satyam specializes in business software and back-office services for clients such as General Electric and Nestle.

INDIA'S "ENRON"

"I think there is no future for this stock. This case for India is similar to what happened to Enron in the U.S.," said Jigar Shah, senior vice-president at Kim Eng Securities.

"It will not stop at Satyam. Many more companies will come into scrutiny like that. There is a strong possibility investments in India will be affected."

The scandal set off a wave of condemnation from Indian market regulators and government officials, and prompted banker Merrill Lynch to terminate its engagement with Satyam. (Yes but did they give back the ring? - Jesse)

"It's going to impact the Indian outsourcing industry. Customers are going to be concerned about offshoring firms in India," said Sudin Apte, country head of Forrester in the western city of Pune.

Satyam said it would go ahead with a planned board meeting on Saturday to consider a share buyback following a rash of broker downgrades even after its acquisitions were called off last month. (OMG, stock buybacks! You can't make this stuff up. Buy back with WHAT? I hope they at least have time for facials at the meeting. apres meeting. - Jesse)

ADP Jobs Report Shows Deep Jobs Losses Across the Economy

This report does not include government employment.

It is considered an indicator of the national Non-Farm Payrolls Report which will be released on Friday morning.

ADP
ADP National Employment Report
Wednesday, January 7, 2009, 8:15 A.M. ET

Nonfarm private employment decreased 693,000 from November to December 2008 on a seasonally adjusted basis, according to the ADP National Employment Report®. This month’s ADP Report incorporates methodological improvements intended to improve the correspondence between the nonfarm private employment estimates shown in the ADP Report and estimates published in the Bureau of Labor Statistics’ Employment Situation Report.

December’s ADP Report estimates nonfarm private employment in the service-providing sector fell by 473,000. Employment in the goods-producing sector declined 220,000, the twenty-third consecutive monthly decline. Employment in the manufacturing sector declined 120,000, marking its twenty seventh decline over the last twenty eight months.

Large businesses, defined as those with 500 or more workers, saw employment decline 91,000, while medium-size businesses with between 50 and 499 workers declined 321,000. Employment among small-size businesses, defined as those with fewer than 50 workers, declined 281,000. (Notice the big hit taken by the smaller businesses, where most jobs had been created in the prior recovery. This is not good, and bodes ill for safe haven aspect of the broader stock equity indices. - Jesse)

Sharply falling employment at medium- and small-size businesses clearly indicates that the recession has now spread well beyond manufacturing and housing-related activities.

In December, construction employment dropped 102,000. This was its twenty-first consecutive monthly decline, and brings the total decline in construction jobs since the peak in January 2007 to 809,000.

A Budget Forecast from President-elect Obama

"Trillion dollar deficits for years to come, even with an economic recovery."

Should we get Bernanke a truss?

Yikes!

Obama Says Deficit Likely to Approach $1 Trillion
By Julianna Goldman and Roger Runningen

Jan. 6 (Bloomberg) -- President-elect Barack Obama said he expects to inherit a $1 trillion budget deficit and that similar shortfalls are in store “for years to come” as the government grapples with a recession and other spending demands.

A “trillion dollar deficit will be here before we even start the next budget,” Obama said after meeting in Washington with his economic advisers, including Peter Orszag, who has been designated as director of the Office of Management and Budget.

“Potentially we’ve got trillion-dollar deficits for years to come, even with the economic recovery we are working on...”

Bill Poole: The Fed is Now Expanding Its Balance Sheet by Printing Money

We have long held Paul Volcker, William Poole and Jerry Jordan in high respect as former Fed governors. When they speak we listen, although Jerry seems to be more reticent, enjoying his retirement these days.

In a discussion with Kathleen Hays this afternoon during her "On the Economy" show on Bloomberg Television, Bill Poole took uncharacteristically sharp exception to the latest decisions by the Bernanke FOMC from their December Meeting minutes.

"The Fed is now expanding its balance sheet by printing money."

He was also visibly perturbed that the FOMC appears to no longer be stepping up to managing the money supply which is its mandate, but rather is allowing the Board of Governors to expand the money supply 'willy-nilly' with no eye to targets, just an uncoordinated roll out of special facilities.

For a minute we had to make sure this was Bill Poole speaking and not Willem Buiter, who delivered a round house commentary at Jackson Hole on the Bernanke Fed.

Yes, this is not the first time you have heard this, that the Fed is now printing money, monetizing the debt, especially if you are a regular reader here.

But it was unmistakable that in Bill Poole's mind the FOMC has now "crossed the Rubicon" and "will greatly regret their recent decisions in the future."

Jimmy Rogers has it right. "Bernanke’s going to keep printing money until they run out of trees."

The Fed is confident that they know how to stop inflation after the Volcker era, this much they have said, and it is clear they are acting on that belief.

A lot of theories are going to be road-tested, and the experiment in monetary and Keynesian economics will be rigorous.

This will be interesting, indeed.

Facilis descensus Averno;
Noctes atque dies patet atri ianua Ditis;
Sed revocare gradum superasque evadere ad auras,
Hoc opus, hic labor est.

Smooth is the descent, the way down below;
Day and night the gates of Hell stand wide open;
But to retrace your steps, and return to clear skies:
This is the task, this is the real work.

Vergil, Aeneid

The Treasury Bubble and the Central Banks: Imbalance à Go Go

The astute observer may notice a trend change in the way that foreign central banks choose to deploy their dollar reserves while supporting their industrial policies.

There should be little doubt why there is a bubble in Treasuries, and why the Federal Reserve is in the market buying mortgage debt.

Willem Buiter Warns of a US Dollar Collapse While China Makes a Move

This UK Telegraph story below is a bit florid in its reporting based on selective quotations from an otherwise phlegmatic column by the Maverecon, Willem Buiter in the Financial Times titled Can the US Economy Afford a Keynesian Stimulus?

Its an interesting essay, and it is hard to argue with his thesis, since it has been the recurrent theme of this blogwriter since 2000. He is directionally correct.

But M. Buiter seems to miss the key placement of pieces in this stage of the game, seeing only one aspect of the play. He sees the weakness of the US, and the corruption and mismanagement of the US financial system, which, somewhat ironically, describes that of Europe as well (and Russia and China). The European banking system has been a house of cards for some time.

He believes that the rest of the world will shun US financial investments based on the broken myth of US financial efficiency. It was an illusion, and it has been dispelled. And we do not think that it was ever really the linchpin of the dollar hegemony.

Many private parties have already fled US financial investments, and in turn a great deal of money has come back to the US from the developing nations. So here we are.

The question is not whether the US can afford a Keynesian stimulus package.

The real question can the rest of the world afford a US Keynesian stimulus package? And if not, what will the world do about replacing the US dollar as the world's reserve currency and the basis for most international trade?

More specifically, how will China, Japan and Saudi Arabia migrate to an industrial policy that is independent of the need to export goods to the United States while maintaining low wages and domestic consumption, and relatively low defense spending?

China, not depending on the US military as a shield, will likely make the first moves, as they are reported to be making tentative steps in this direction, as in this overstated report from AsiaNews.it Chinese Yuan Set to Replace US Dollar. The odds are high that China will play into a US geopolieconomic strategy by attempting to do the obvious, in an obvious way.

This is not to say that there will be no change, ever. There will, since the dollar has not always been the faux gold standard, and will not always be.

But there is a decided lack of original thinking on the matter, and a definite lack of will to do much about it, in the rest of the world.

So until then, it is status quo, and the US can afford anything it wishes. Because it can, and it will.
That is the current position of the pieces on the board.


UK Telegraph
Willem Buiter warns of massive dollar collapse
By Edmund Conway, Economics Editor
05 Jan 2009

Americans must prepare themselves for a massive collapse in the dollar as investors around the world dump their US assets, a former Bank of England policymaker has warned.

The long-held assumption that US assets - particularly government bonds - are a safe haven will soon be overturned as investors lose their patience with the world's biggest economy, according to Willem Buiter.

Professor Buiter, a former Monetary Policy Committee member who is now at the London School of Economics, said this increasing disenchantment would result in an exodus of foreign cash from the US.

The warning comes despite the dollar having strengthened significantly against other major currencies, including sterling and the euro, after hitting historic lows last year. It will reignite fears about the currency's prospects, as well as sparking fears about the sustainability of President-Elect Barack Obama's mooted plans for a Keynesian-style increase in public spending to pull the US out of recession.

Writing on his blog, Prof Buiter said: "There will, before long (my best guess is between two and five years from now) be a global dumping of US dollar assets, including US government assets. Old habits die hard. The US dollar and US Treasury bills and bonds are still viewed as a safe haven by many. But learning takes place."

He said that the dollar had been kept elevated in recent years by what some called "dark matter" or "American alpha" - an assumption that the US could earn more on its overseas investments than foreign investors could make on their American assets. However, this notion had been gradually dismantled in recent years, before being dealt a fatal blow by the current financial crisis, he said.

"The past eight years of imperial overstretch, hubris and domestic and international abuse of power on the part of the Bush administration has left the US materially weakened financially, economically, politically and morally," he said. "Even the most hard-nosed, Guantanamo Bay-indifferent potential foreign investor in the US must recognise that its financial system has collapsed."

He said investors would, rightly, suspect that the US would have to generate major inflation to whittle away its debt and this dollar collapse means that the US has less leeway for major spending plans than politicians realise.

Is the Comex Doing Fractional Reserve Delivery of Gold?

An acquaintance who works for a small precious metals fund sent this to us today, asking if we had ever heard of anything like it.

The short answer is no, but this is not a strong area of specific expertise and recent experience for us, and we never attribute to a bad intent what we can attribute to sheer incompetency, especially when dealing with large organizations.

But when one is promised specific bars with specific serial numbers of a specific size and weight one week, and they are not available the next week when you confirm that you wish to receive them, that brings up the same kind of red flags that have been so notoriously ignored by regulatory agencies in other recent cases. Of course the Comex is no Bernie Madoff.

It does bring into question the integrity of the Comex records and their contracts, and the condition of their audits and inventories. We would have a fit if someone did this to us after an online auction or a personal purchase transaction. Why should the Comex be allowed to sell what it does not have, and then dictate new terms after the fact? Especially when this same customer had been routinely taking delivery off emini contracts from Comex before this.

And it does put a fresh emphasis on the old adage, "When in doubt, take it out."

We accumulated 3 emini gold contracts on CBOT for December delivery and we had been given serial numbers and weights last week for the 3 bars we were to receive.

Today we are informed that Comex is invoking a rule in which they can deny delivery of individual mini bars (roughly 33 ounces) and issue you only a Warehouse Delivery Receipt (WDR) against your mini-contract unless you have 3 WDR's, and then they'll issue you a 100 oz. bar.

Otherwise, if you have only 1 or 2 mini-contracts, you only own a WDR, which you sell by shorting a mini against it. If you own a WDR for a 100 oz., they encourage you to safekeep the gold at the Comex and hold a vault receipt.

CLEARLY, the Comex has run out of the bars that were being delivered to holders of emini contracts. Our back-office guy told us that he's been doing Comex deliveries for 30 years and he's never seen anything like this, and he's never heard of this rule on the mini contract. (update: its in the contract if you read it - Jesse)
Fortunately we have 3 WDR's and we will be getting delivery of a 100 oz. Comex gold bar.

But this whole episode brings into the question the validity of the Comex gold inventory. More importantly, the Comex is now going to issue WDR's, which are paper.

Are they becoming a "fractional" reserve depository, where they can issue several WDR's against the same bar of gold, knowing that some of those people will opt to keep storage on Comex and never require actual physical delivery?"

JP Morgan's Forecast of Commodity Price Changes From Index Rebalancing

You may click on the link as usual for the full story and a detailed breakdown of the analysis.

In summary JP Morgan's forecast of the commodity index rebalancing which will done around January 8-9th is:

...we expect the rebalancing to have the greatest impact in gold, COMEX copper, crude oil, gold, and live cattle. We estimate that the rebalancing of the two indices is expected to result in $877 million of selling in gold, $699 million of buying in COMEX copper, $528 million of selling in live cattle, and $523 million of buying in crude oil.

We would expect the impact of the index rebalancing to be felt this week because of 'frontrunning' of the index changes by the big commodity trading desks. Indeed we may find that by the time the changes are realized, the impact may be significantly discounted.

Financial Times - Alphaville
Beware, commodity index rebalancing ahead
By Izabella Kaminska
Jan 05 15:34

The major commodity indices rebalance their respective asset weightings once a year (or occasionally more) — and with that comes a mass dose of buying and selling. The 2009 rebalancing is expected to start sometime this week.

Luckily, JP Morgan has produced its best guess of how the 2009 reweightings of the DJ AIGCI and the S&P GSCI indices will impact the market.

The weightings for both indices are released ahead of time, but begin to kick in the first few working days of the new year. In the case of the DJ-AIGCI — which JP Morgan estimates has $25bn in funds tracking it — the new weightings come into force during the roll period that begins January 9th. The S&P GSCI index weightings kick-in after its January roll which commences January 8th. JP Morgan estimates about $50 bn of investment into that index...

Paulson Hitting a High Note in Treasury Debt Issuance

One might surmise that Treasury is hitting a hard high note on the Three Year Treasury issuance because this is the preferred duration of the central banks of China, Saudi Arabia and Japan among others, on behalf of their people.

At some point the Ten Year Note may become the favorite product of Mr. Bernanke, our own central banker, as a chaser to the the junk bond cocktails he is chugging down now.

As an aside, check out the action on the long end of the curve today in Big Daddy, the 30 Year Bond.

Across the Curve
Treasury Supply
By John Jansen
January 5th, 2009

Henry Paulson is not following the sage counsel of TS Eliot and is instead going out with a bang rather than Eliot’s whimper.

The Treasury announced today that they will auction $30 billion 3 year notes on Wednesday. The increase in issuance here is stunning. The 3 year was reintroduced in November at $25 billion. In its previous reincarnation it was a quarterly issue.

The US government has a desperate need for cash and in their infinite wisdom the debt managers chose to place this bond on a monthly cycle. In the span of two months they have bumped the total from $25 billion to $30 billion. If we start with the November issue and make the poor assumption that they will not tweak this again, the Treasury will raise an incredible $353 billion the 3 year sector in the year that ends October 31 2009.

The Treasury also announced the reopening of the 10 year note for a second time. Treasury issued $20 billion in November and $16 billion when they reopened it in December.

Prior to November the 10 year auction occurred eight times each year. This is the first announcement of the expanded monthly cycle for that issue and they will sell $16 billion this time. That means that the taxpayers have issued $52 billion to the public of this mega issue.

Previously the Treasury had announced that it would sell $8 billion TIPS tomorrow.

I rarely wade into the bill pit but to make the point I would be remiss if I did not note the supply in that market.

Each Monday since time immemorial Treasury has issued three month bills and six month bills. Today is no different and they will raise in total $53 billion in those auctions.

I do not have the auction dates but the Treasury will also sell $24 billion four week bills and $35 billion special 70 day bulls this week.

Sister Consolata taught me very well in grammar school ( they taught grammar in the 1950s. We would diagram sentences) and the sum of those numbers is $166 billion.

Against that background, I suggest that Hank Paulson is leaving a blazing trail of glory in his wake.

Obama Uses the "S" Word

In a televised interview with House Speaker Nancy Pelosi, president-elect Obama stressed the need to quickly craft an economic recovery plan because "the employment report at the end of this week will be sobering."

The plan to be considered by the new Congress, which will be sworn in tomorrow, is expected to include middle class and small business tax cuts.

A small group of Republicans will continue to oppose any aid not directed at wealthy individuals and large corporations in a histrionic show of newly-discovered indignant fiscal responsibility.

The resultant plan will be a band-aid on a gaping wound. The work of substance is yet to be seen.

Privatized Social Security, Italian Style

Here are a few lessons which can be learned from the Italian experiment with privatized Social Security:

1. The average person does not understand, and is incapable of understanding and accepting, the relationship between higher return and higher risk.

2. The Wall Street bankers and economists apparently do not understand this either, so we ought not to be too hard on the average person for their shortcomings.

3. Higher risk investments are always and everywhere inappropriate choices for a fixed income investment plan with near term payment goals.

4. When the going gets tough, everyone will expect to get bailed out, in shameless geometric proportion to their social standing, influence, and personal income.

5. When it comes to economics the average person will suspend their common sense for as long as is possible.

6. Those in positions of power will promote the suspension of common sense and popular delusions for the sake of confidence. This is why it is called a confidence game.

7. If the fundamentals of an economic plan are 'confusing,' seeming to provide superior returns for extended periods of time with no effort, it is a fraud. (eg. the US dollar.)

8. Whatever pension plans are promoted for the public MUST include all government officials, including the Ministers, Legislators, and Judiciary, to have any hope of success.

9. Whenever the private financiers 'help' the legislators make a troublesome problem disappear the eventual losses are certain to be especially heavy.

10. Despite what this Bloomberg story says the US avoided nothing because of voter outrage; the public and private pension funds are simply being stolen. (See #6 above).

Bloomberg
Italian Pensions Sapped by Private Funds Bush Backed
By Andrew Davis and Alessandra Migliaccio

Jan. 5 (Bloomberg) -- Italy did for retirement financing what President George W. Bush couldn’t do in the U.S.: It privatized part of its social security system. The timing couldn’t have been worse.

The global market meltdown has created losses for those who agreed to shift their contributions from a government severance payment plan to private funds meant to yield higher returns. Anger is rising both at the state, which promoted the change, and money managers such as UniCredit SpA and Arca Previdenza, which stood to profit.

Prime Minister Silvio Berlusconi’s administration is now considering ways to compensate as many as 1.2 million people who made the switch, giving up a fixed return for private plans linked to financial markets. It’s also letting people delay redemptions on retirement funds to avoid losses after Italy’s benchmark stock index fell 50 percent in 2008, destroying 300 billion euros ($423 billion) in wealth.

Italy’s experience shows how difficult it is to solve a problem facing governments from the U.S. to Europe to Japan as populations age and the old system of taxing workers to support retirees becomes unsustainable. Bush failed to persuade Congress to let workers put a portion of their Social Security taxes into privately invested accounts as voter opposition increased.

Standard Plan

For a quarter of a century, employers in Italy have paid about 7 percent of each worker’s annual salary into the severance system, called TFR. Workers received lump-sum payouts whether they retired, were fired or simply changed jobs.

Someone earning 80,000 euros a year would receive more than 200,000 euros in TFR after 35 years on the job and more than 60,000 euros after a decade of work. The fund pays a fixed return that aims to exceed inflation.

The program was a tempting target for a government struggling to meet its pension obligations. Italy spends about 14 percent of gross domestic product on pensions, the most in the European Union. Spain spends 9 percent and the U.K. 7 percent.

Italy has the EU’s lowest birthrate of 1.3 children per woman. By 2050, the country will have fewer than two working-age people for each person over 65, the lowest ratio in the EU, according to Eurostat, the bloc’s statistics agency.

Pensions Cut

Previous governments adopted measures to lower pension payouts and force workers to retire later. Benefits will drop to as little as 30 percent of a worker’s final salary from about 75 percent now, creating an incentive for Italians to seek higher returns by moving severance funds into a complementary plan.

Gaetano Turchetta, a Rome office manager, made the irreversible move to a private plan after a union representative boasted of the potential for 20 percent annual returns. The 43- year-old father of three now says he would sign with “two hands and two feet” if he could switch back.

“What do I want from the government?” he said. “Just not to become a burden on my kids.”

The TFR plan was meant to dent Italy’s risk-averse culture and lure more people to investment funds, said Biagio Masi, head of Banca Sella SpA’s insurance unit, who called the shift a “world-shattering change in mentality.” (Government as debt dealer for the bankers - Jesse)

Low Investment Rate

Eight percent of Italians invested in stocks in 2008, half the level of 2002, according to an Oct. 30 report commissioned by Acri, the country’s savings bank association. About 80 percent favored keeping their savings in the bank and 25 percent have a private pension or life insurance, the report said.

Money managers such as UniCredit, Italy’s largest bank, and Arca Previdenza, the biggest pension fund manager, lobbied customers to make the change, seeing it as an opportunity to kick-start a moribund fund management industry. (Fee Seeking - Jesse)

Funds under management in Italy have shrunk by a quarter in the past seven years, according to the Bank of Italy. The value of pension funds is equal to about 3 percent of GDP, compared with more than 90 percent in the U.S.

Even with full-page newspaper ads, billboards and telephone hotlines spurring Italians to switch, only 1.2 million people, or 10 percent of the eligible private-sector workers, chose to give up the TFR for private plans before the June 2007 deadline, according to fund regulator Covip. Italian lawmakers approved the reform at the end of 2006. It was part of the 2007 budget proposed by former Prime Minister Romano Prodi’s government.

Caveat Emptor - Buyer Beware - In Times of General Corruption

Here are some excerpts from the Op-Ed piece by Michael Lewis and David Einhorn that appeared in the NY Times on Saturday.

It is a portrait of government in partnership with a corrupt financial system, in a remarkably cynical and materialistic age, generally ignored by a frightened and complacent people.

And where was the outrage? Where was the rest of the world? Turning a blind eye to the corruption and enjoying the returns. Like many of Madoff's enablers and investors they thought they were insiders, the smart ones, and saw only the gains, ignoring the rest, and the eventual outcome.

This is not an historical review, as the problems still remain, a little exhausted, but largely uncorrected. No confessions of guilt, just denials, excuses, diversions and coverups.

Caveat Emptor. Buyer beware.


NY Times
The End of the Financial World as We Know It
By MICHAEL LEWIS and DAVID EINHORN
January 3, 2009

AMERICANS enter the New Year in a strange new role: financial lunatics. We’ve been viewed by the wider world with mistrust and suspicion on other matters, but on the subject of money even our harshest critics have been inclined to believe that we knew what we were doing. They watched our investment bankers and emulated them: for a long time now half the planet’s college graduates seemed to want nothing more out of life than a job on Wall Street...

Incredibly, intelligent people the world over remain willing to lend us money and even listen to our advice; they appear not to have realized the full extent of our madness...

Our financial catastrophe, like Bernard Madoff’s pyramid scheme, required all sorts of important, plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today’s financial markets is immense...

Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that’s the problem: there is no longer any serious pressure from outside the market. The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest...

Indeed, one of the great social benefits of the Madoff scandal may be to finally reveal the S.E.C. for what it has become. Created to protect investors from financial predators, the commission has somehow evolved into a mechanism for protecting financial predators with political clout from investors.

The instinct to avoid short-term political heat is part of the problem; anything the S.E.C. does to roil the markets, or reduce the share price of any given company, also roils the careers of the people who run the S.E.C. Thus it seldom penalizes serious corporate and management malfeasance — out of some misguided notion that to do so would cause stock prices to fall, shareholders to suffer and confidence to be undermined. Preserving confidence, even when that confidence is false, has been near the top of the S.E.C.’s agenda.

It's not hard to see why the S.E.C. behaves as it does. If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it...

In the middle of all this, Treasury Secretary Henry M. Paulson Jr. persuaded Congress that he needed $700 billion to buy distressed assets from banks — telling the senators and representatives that if they didn’t give him the money the stock market would collapse. Once handed the money, he abandoned his promised strategy, and instead of buying assets at market prices, began to overpay for preferred stocks in the banks themselves. Which is to say that he essentially began giving away billions of dollars to Citigroup, Morgan Stanley, Goldman Sachs and a few others unnaturally selected for survival...

A New Year's Resolution on US Financial Markets from the Incoming Administration

These are strong, almost startling words from Bart Chilton, part of Obama's incoming administration, currently on the CFTC.

The message is good and to the point. The illustration of the performance of the regulators over the past ten (not eight) years is remarkable, an indictment of the existing Federal regulatory system as a whole.

Actions will speak louder than words. We will all look forward to seeing what happens in Washington over the next few months, and in particular, what is done by the CFTC and the SEC in reforming US financial markets.

Washington
Time to restore mission of regulators
By Bart Chilton
January 1, 2009

In the building that currently houses the president-elect's transition team, there used to be an imposing bronze plaque with the visage of the Securities and Exchange Commission's redoubtable third chairman, William O. Douglas. It was emblazoned with the inspiring legend, "We are the Investor's Advocate."

For many decades, the SEC enjoyed the reputation of living up to the noble standard of public service. The plaque no longer graces the entryway of the SEC's new quarters, and with the recent revelations of failure to detect and prosecute incidents of egregious securities fraud and abuse, both internally and externally, the agency's reputation has been severely tarnished.

These types of disclosures make us as public servants ask some fundamental questions: Why are we here? The Founding Fathers had the answer: We are employed to protect the common wealth and serve the public good. We are not here to serve amorphous philosophical, economic or ideological concepts such as "financial markets" or "economies."

Our task is to serve the public -- those people in the hinterlands, many of whom have recently lost 30 percent or more of their retirement funds and/or home values and who now face losing their jobs. Our "client," our "constituent," is the American consumer and worker, the businessman or woman who generates and uses the products and services that comprise our "markets" and our "economy." If we fail to protect, first and foremost, these individual Americans, we cannot succeed in assuring the strength of our economy, nor in protecting the integrity of our financial market system.

Do we need to have statutes and regulations in place to ensure reliability of the marketplace? Of course we do, but over the past decade "the marketplace" has been exalted to a position perceived as virtually omnipotent and omniscient, while consumer protections have been generally neglected. The consequence lies scattered around us.

By veering too sharply to the right and letting go of the regulatory reins, we provided neither the market nor the consumer a great service. Rather we harmed both, and have a long hike to escape the resulting global economic meltdown. We must be careful not to over-correct -- not to go so far in the other direction that we stifle innovation and market growth. But it is clearly time for federal financial regulators to re-evaluate our current statutes and regulations, and to put "common sense rules of the road," as the president-elect has suggested, in place to protect consumers and bring our economy back into balance.

The SEC isn't the only federal financial regulator to have failed in serving the public. The Treasury Department appears to have lost its way as well, when a $700 billion bailout package, purportedly written to ensure against unconscionable executive compensation was, within weeks after passage, found to have a loophole allowing such compensation.

Federal banking regulators seem to be off course, permitting casino-like buying and selling of trillions of dollars worth of virtually worthless transactions. When gasoline topped $4 a gallon, the Commodity Futures Trading Commission dropped the ball, unable to oversee speculation's uneconomic role in the U.S. commodities markets.

In decades past, the CFTC has been charged with being too tied to the industry, too closely aligned with the regulated, and overly concerned with protecting "markets" rather than consumers. We've made good progress, and there are very fine people in all of these agencies and departments, but we too can and must do much better.

I have advocated a comprehensive legislative reform of the laws governing over-the-counter trading, and requested that authority over these critically important markets be vested in the Commodity Futures Trading Commission. The CFTC, a small agency in comparison to the SEC, has exclusive jurisdiction over risk-management markets in the United States, and has in recent years carved several significant notches in its enforcement belt.

At any one time, this small agency, with one-tenth the enforcement staff of the SEC, is investigating or prosecuting anywhere between 750 and 1,000 individuals or entities for violations of the Commodity Exchange Act. The agency has, just in the past year, tagged bad actors with more than $630 million in fines and settlements, in actions involving fraud, manipulation and other misconduct. Not a bad record for a small agency operating on a shoestring budget -- and we'd be able to do even more if given the authority.

With the collapse of the economy, the transition of government already under way with the new Obama administration, and the appointment of an excellent new federal financial regulatory team, it will soon be time to implement this new legislation, and similar consumer protection initiatives.

Also, we need to restore the clarity of our own mission in government: that we are here to assure financial opportunity and market fairness to the public. We need to regain the public trust.

With a shared vision of our mission and much needed reforms, our duties and responsibilities will flow clearly. Chief among these duties is a strong and aggressive enforcement arm. Markets must be free from fraud and manipulation for them to operate as they should -- for all Americans. This baseline approach to enforcement protects consumers and allows for open and free markets that are able to grow and innovate.

Investor's Advocate: A good legend, apparently forgotten. All federal financial regulators should use a new door sign: Consumers First. Everything else will follow.

Bart Chilton is a commissioner on the Commodity Futures Trading Commission, a Democrat, and a member of the Obama transition team.

The Last Time the Feds Devalued the Dollar to Save the Banks

The Last Time the Feds Devalued the Dollar to Save the Banks
14 January 2009

We dipped once again into the Federal Reserve Bulletin Publication from June, 1934 to take a closer look at the growth of the monetary base, and found an interesting graphic that shows the accounting for the January 1934 devaluation of the dollar and the subsequent result on Bank Reserves in the Federal Reserve System.

As you will recall, the Gold Act, or more properly Executive Order 6102 of April 5, 1933, required Americans to surrender their gold coinage and certificates to the Federal Reserve Banks by May 1, 1933. There were no prosecutions for non-compliance except one benchmark case which was brought voluntarily by a person who wished to challenge the act in court.

After a substantial portion of the gold was turned in by US citizens and taken from their bank based safe deposit boxes, the government officially devalued the dollar from 20.67 to 35.00 per ounce in the Gold Reserve Act of January 31, 1934.

The proceeds from this devaluation were used to provide a significant boost to the Federal Reserve member bank positions as shown in the first chart below.

The inflation visited on the American people because of this action helped to take the CPI as it was then measured up 1200 basis points from about -8% to +4% by the end of 1933. To somewhat offset the monetary inflation the Fed also contracted the Monetary Base which served the nascent recovery in the real economy rather poorly and is viewed widely as one of a series of policy errors.

Considering that the actions did little for the employment situation this was painful medicine indeed to those who were dependent on wages.



Fortunately at the same time FDR was initiating the New Deal programs which, despite continual opposition from a Republican minority in Congress, managed to provide a small measure of relief for the 20+% public that was suffering from unemployment and wage stagnation.

People ask frequently "Will the government seize gold again?"

While there is no certainty involved in anything if a government begins to overturn the law and seize private property, one has to ask for the context and details first to understand what happened and why, to understand the precedent.

Technically, the government did not engage in a pure seize of private property, since at that time the US was on the gold standard, and much of the gold holdings of US citizens were in the form of gold coinage and certificates.

Governments always make the case that the currency is their property and that the user is merely holding it as a medium of exchange. The foundation of the argument was that the government required to recall its gold to strengthen the backing of the US dollar against the net outflows of gold for international trade. The devaluation helped with this as well, since dollars brought less gold for trade balances.

People also ask, "Why didn't the government just revalue the dollar without trying to recall all the gold from the American public?"

The answer would seem to be that this would have been more just, more equitable recompense for the public. The Treasury could have purchased gold from the public to support its foreign trade needs.

But it would have left much less liquidity for the banks.

One can make a better case that the recall of the gold, with the subsequent revaluation to benefit a small segment of the population in the Banks, was a form of seizure of wealth without due compensation. Hence the lack of active prosecutions.

So, will the government take back gold again to save the banks by devaluing the dollar?

Highly unlikely, because they not only do not need to this, since the dollar is no longer backed by gold, and is a form of secular property except perhaps for gold eagles, but they do not have to, because they are devaluing the dollar already to save the banks.

This time the confiscation of wealth to save the banks is called TARP.

If one thinks about it, US Dollars are being created and provided directly to the banks to boost their free reserves significantly, at a scale comparable and beyond to 1933-34.

The confiscation of wealth is being spread among all holders of US dollars and dollar assets, foreign and domestic, in the more subtle form of monetary inflation.

Granted, the government must be more opaque to mask their actions in order to sustain confidence in the dollar while the devaluation occurs, but this is exactly what is happening, and all that is required to happen in a fiat regime.

There is no need to seize widely held exogenous commodities like gold and oil, but merely dampen any bellwether signals that a significant devaluation of the dollar is once gain being perpetrated on the American people in order to save the banks.

Its fascinating to look carefully at this next chart below.



First, notice the big drop in gold in circulation of 9.8 million ounces, or roughly 36% of the measured inventory at the end of 1932. Think someone was front-running the dollar devaluation? We suspect that the order went out to start pulling in the gold stock to the banks.

The reduction in gold in circulation AFTER the announcement of the Gold Act in April would be about 3.9 million ounces, or roughly 22% of the gold remaining in circulation in March 1933.

Considering that all gold coinage held by banks in the vaults was automatically seized, the voluntary compliance rate is not all that impressive. We are not sure how much of this was being held in overseas hands by non-US entities.

But beyond a doubt, there was a unjust, if not illegal, seizure of wealth by requiring citizen to turn in their gold to the banks, which was then revalued at the beginning of 1934 by 69% from 20.67 to 35 dollars.

It would have been much more equitable to devalue the dollar and to change the basis for dollar/gold first, before requiring private citizens to surrender their holdings. But of course, this would have lessened the liquidity available for direct infusion into the Federal Reserve banks.

Chicago Fed Says Take Interest Rates "Below Zero" and Monetize Debt (to Devalue Dollar)

Quantitative easing to mimic interest rates 'below zero' effectively penalizes the buyers of US bonds and dollar savings by providing a negative rate of return after inflation.

Inflation is desirable if you are a net debtor and you control the value of the method of your payment, ie. cheaper dollars to pay off service your debt.

We have to wonder how well negative real interest rates will support the enormous increase in the supply of Treasury debt that is coming to market this year because of a soaring national debt of about two trillion dollars.

The obvious target buyers are the exporting countries such as OPEC, Japan and China. We also suspect the Fed will start buying the yield curve, quietly and indirectly if not transparently.

Other central banks, such as Europe, will be expected to follow suit and devalue their own currencies through lower rates, to decrease the perceived impact of a dollar devaluation, in a group 'ratcheting down' of the developed nations' currencies.

This will require 'management' of the price of real things like commodities. Fortunately the price for most of them is set in London and New York. Life is tough for an exporting nation when you are riding the dollar reserve currency regime and an industrial policy of 'beggar your people' to support it.

The boundary constraint on the Fed in a purely fiat regime is the value of the US dollar and the Treasury debt. Greenspan's Fed managed to inflate its way out of the tech crash of 2000-2 with bubbles in equities and housing prices, a significant dollar devaluation, but an amazingly resilient bond thanks to official buying by a few foreign central banks.

Alan Greenspan famously stated, in a repudiation of his earlier views while responding to Congressman Ron Paul, that a fiat dollar as the reserve currency is viable because "the Federal Reserve does a good job of essentially mimicking a gold standard and...the Fed does not facilitate government expansion and deficit spending."

We expect to see Bernanke and the Congress test the limits of monetary and Keynesian economic theory again this year, and the acceptance of the US dollar and fiat currencies as a faux gold standard, as being of the utmost integrity and impartiality, immutable and nationless.

We tend to remain skeptical of the outcome however, keeping in mind the words of George Bernard Shaw, "You have a choice between the natural stability of gold and the honesty and intelligence of the members of government. And with all due respect for those gentlemen, I advise you, as long as the capitalist system lasts, vote for gold."

The major challenge for the governments of the world for the remainder of this decade, other than blowing us all to pieces, will be to create a viable alternative to the US dollar as the world's reserve currency and a major vehicle for international trade.

This could be one for the record books.



Reuters
Evans says Fed needs to mimic below-zero rates
By Ros Krasny
Sat Jan 3, 2009 8:18pm EST

SAN FRANCISCO (Reuters) - A grim economic outlook highlights the need for the Federal Reserve to step up quantitative measures to boost growth, with official interest rates already effectively at zero, Charles Evans, president of the Chicago Fed, said on Saturday.

Evans said that based on the outlook for rising unemployment, falling industrial production and a wider output gap, economic models suggest rates should be below zero.

"If it were not constrained by zero, those models would want to push it below zero, but that's not possible," Evans told reporters after a panel at the American Economic Association's meeting in San Francisco.

Quantitative easing, a way to flood the banking system with large amounts of money, "is a way to mimic below-zero rates and provide support to the economy," he said. (They would intend to create a monetary inflation to take the 'real rate' below zero. "Quantitative Easing" is Fedspeak for "printing money." - Jesse)

The process often involves buying up large quantities of assets from banks, such as the Fed's latest programs to buy mortgage-backed securities. (This is known as "monetizing debt." - Jesse)

In December, the Federal Open Market Committee, the Fed's policy-setting body, took the surprising step of lowering the federal funds rate to a range of zero to 0.25 percent. Cash fed funds had been trading below the previous 1 percent target rate for several weeks.

In his remarks, Evans, who is a voting member of the FOMC in 2009, said the Fed's various lending programs should help cushion the impact of the year-old U.S. recession but a large traditional fiscal stimulus plan is also needed, even with the problems it could create over the longer term.

"I believe a big stimulus is appropriate," Evans said. "But it is sobering to be deploying large amounts of taxpayer funds at a time when our fiscal balance sheet is already coming under significant stress."

Without the Fed's programs to help unfreeze credit markets and to-the-bone rate cuts, "the downturn -- and its costs to society -- would be even more severe than what we are currently facing," said Evans.

Since the financial market crisis erupted, the Fed has created several new programs aimed at bypassing the traditional banking system and smashing through the credit-market logjam, including the direct purchase of mortgage-backed securities.

Even so, the U.S. jobless rate appears on pace to exceed 8 percent in 2009, from the most recent reading of 6.7 percent in November, Evans said.

Although the current recession started with the collapse of the U.S. housing market, Evans said many non-financial industries now face the risk of "long-term structural impairment." (It was the Fed's reflationary effort after the Crash of 2000-2 that created the housing bubble. - Jesse)

Evans said fiscal programs to support growth "must be large in order to be effective and to instill badly needed confidence" given the severity of the downturn. (We have an intuition that the Congress will meaningfully explore the concept of 'large' government programs - Jesse)

President-elect Barack Obama has said that signing a major economic stimulus package will be his first priority when he takes office on January 20, with a goal of creating 3 million jobs over two years.

Evans also said the market crisis that erupted in 2007 showed huge holes in financial regulation.

"Significant weaknesses have been revealed in our system of financial regulation. ... These failures call for a reassessment of the roles of market discipline and our regulatory structures," he said

US Equities Are Short Term Overbought - Watch Treasuries and VIX for a 'Tell'

With the McClellan Oscillator, although the reading is now at an extreme high, it will be the character of the decline from the extreme that will tell us if we are going to get a sideways consolidation or a serious decline for the first month of the new year.



The Bullish Percent is running in neutral, although the SP is at a high reading in its channel. IF the indicators turn lower and break down then we will see a correction lower, and perhaps a major decline.



There is an abnormally large amount of money hiding in Treasuries. If this starts coming out of the safe havens and into stocks we may see follow through. Keep an eye on the yield curve, especially the longer end.

Corporate profit forecasts have not fully discounted the severity of the recession. On the bullish side, the Fed is pouring money into the economy, as noted in the Adjusted Monetary Base.

If they do manage to trigger a sustained rally it may be sharp. There was a significant rally after the Crash of 1929. However, we don't expect this until later in the first quarter, and it will be met with waves of selling and a new low unless the Fed can do something truly exceptional.

We like ot use the January Indicator if its a down month, because the correlation to a predictable result is higher.

Money Supply: A Primer

You walk into a Merchant and a sign says, "All Items on Sale Today for Cash Only No Credit."

You are interested in purchasing an item. The Merchant, being a crafty sort asks "How much money do you have to spend(in US dollars)?"

How would you answer that if you are being truthful?

You might start by looking into your wallet and pockets, and counting all the cash and coins you have with you at that moment.

M0: Monetary Base

This is equivalent to the monetary base, or M0. It is money you have that is immediately available requiring no change or conversion. There is very little risk to the merchant, unless it happens to be counterfeit which is easily verified.

"Not enough" says the Merchant. "I am sorry, but do you have more?"

M1

Then you remember that in addition to cash, you have your checkbook with a current balance in it, and a debit card to an account you maintain in a local bank, but with no overdraft or lines of credit provisions.

That plus the currency in your pockets is M1. See the difference? You do not have ALL your money in your pockets for immediate presentation, but with a little transactional effort the money is readily available and it is inherently your money, it belongs to you. It is just being held elsewhere besides your pockets and wallet. The merchant assumes a little more risk, but he can quickly call your bank to verify that the funds are available for the check, and the debit card is even more mechanized. More risk, a little more delay, but almost as 'good as cash.'

"I am sorry sir," says the Merchant, "but this is still not enough to exchange for such a valuable object as I have for sale here."

M2

You think about it, and remember that you have a savings account across the street at the bank, and a money market fund at your brokerage office next door, that have more of your money on deposit. You have no cards for those accounts, but it would be an easy thing to walk next door or across the street and obtain the cash.

This is M2. There is a more complex transaction involved, since the transfer is not electronic as in the case of a debit card, and you must leave the store to obtain the money in the form of currency unless they bring it over to you. But it is your money that is available to you on demand. There is a small amount of risk of your bank not being solvent when you need the money, but these are slight inconveniences compared to the safety of not carrying around large sums of money that earn no interest in the form of cash.

"I am so sorry," says the Merchant. "But this item is far too valuable to part with for such a sum as you have offered."

M3

You think about it, and remember that you have a large Certificate of Deposit at the bank across the street that matures in one year. There is a small penalty if you redeem it today to receive your money since you promised it to them for a time in exchange for a specific return, and you must fill out some paperwork, but it is still your money. It involves no sale of an asset or conversion.

That is M3. It involves money that is still yours without borrowing, but has additional conditions set up on it for its retrieval.

One could make the case, and perhaps appropriately so, that while certificates of deposit with a term contract that might effect their value are money, they are not readily available money since the terms of the CD's may differ greatly. They are not 'liquid' and the value before maturity is not always certain due to a penalty.

MZM

If one takes all the things we describe as M2, but takes out the time deposits or certificates of deposit, and includes ALL money market funds, that is what the Fed considers to be the broadest measure of liquid money, or Money of Zero Maturity (MZM). "Zero maturity" means that the money is not tied up for a period of time to mature to its full value.

Are credit cards or loans Money? No,those are all forms of borrowing something that is not yours that you promise to return with conditions. You are receiving money that was not yours.

Credit Is Not Money.

Credit, or debt, is the 'potential' for money, a way of receiving it.

Whether water is held in a canteen, a well, a cistern, or a private lake, it is still water and it is yours if you own it. So too money is still money if it is yours, no matter under what conditions you hold it or save it for your use.

The cloud of credit, or debt depending on your perspective, is the potential for money as it is defined in our economy. It is a source of money. At a given point in time, you either have the money as your property or you do not.

But the source is not the money itself, and the source can be different and can change over time. In our society borrowing is so common and so technologically convenient that there is little difference in most people's mind between credit and money.

But the difference is that if you spend real money, you incur no obligation for it in the future. You receive no payment request from another at the end of the month.

That is what money is, at least in our economy, and the various measure of money as it is held and shifts through the economy and a variety of transactions, where it flows and rest in pools, and moves again. A measure of the money supply is a snapshot in time.

How money increases or decreases, and how it is stored or held, is a significant indicator of economic activity for those who study such things. It is also significantly affected by custom, technology, and the prevailing mood and perception of the public.

The best and broadest measures of money supply are either MZM, or M2, now that M3 is no longer being reported by the Fed. This can easily be seen from the illustrations.

As springs feed into brooks, and brooks streams, and streams into rivers, and rivers into lakes, so the money supply components change in size and shape over time as money flows from its various sources. The speed of the flow is the 'velocity of money' and as one can easily understand that flow will have a different force and speed depending on when you measure it, and whether you are measuring one of the streams or a major river.

People often prefer to jump into discussions and turn them into debates (arguments) with hair-splitting definitions (what is 'control' of the money supply) and red herrings (why does a dollar cross the road?) before defining any terms or facts and setting some boundaries for the analysis, because their goal too often is not understanding, but to promote some theory or point of view. 'Winning the argument' is their objective, not a search for the truth.

Money is the instrument of the official economy. This gives money a certain arbitrariness over time because, after all, it is the product of a committee. Official money is the creation of government, managed by its agents, validated by the people who use it.

Official money rises and falls from favor to disfavor, as do governments. What if you were a citizen of Zimbabwe? Or the US in the 1860's? Or Germany in 1922? How would you feel about your official money then? Why is it different for you now? What would change your opinion?

What is the 'natural growth rate' of the money supply? Zero?

The discussion of how money supply increases, and who or what determines the supply, and what an appropriate level of growth would be is a matter for discussion on another day. So too is the strange phenomenon of 'natural forms of money' that keep turning up in every era and nearly every society.

But for now at least you have the means to understand what money supply is and how it is measured, and how it is different from potential money, or credit, the representations of money, and asset stores of wealth.

Closing the Books on the First Year at Le Café Américain

Opened for business in December 2007, and added a statistical counter in the beginning of February 2008.



This seems to be the 'run rate.'



Thanks for stopping by throughout the year, and a special thanks for those who were kind enough to drop a note to say 'hello.' It is always good to make your acquaintance.