The Bubble In US Treasuries and Its Implications

The Treasury bubble is likely to be much less destructive than the Internet and Housing Bubbles.

The bubble in the US dollar, however, if one wishes to consider it as an adjunct or outcome of the bubble in Treasuries, has the potential to be disruptive and devastating


Reuters
Buffett says U.S. Treasury bubble one for the ages
By Jonathan Stempel
Sat Feb 28, 2009 9:31pm GMT

NEW YORK (Reuters) - Warren Buffett, whose Berkshire Hathaway Inc. sits on $25.54 billion (17.8 billion pounds) of cash, said worried investors are making a costly mistake by buying up U.S. Treasuries that yield almost nothing.

In his widely read annual letter to Berkshire shareholders, the man many consider the world's most revered investor said investors are engulfed by a "paralyzing fear" stemming from the credit crisis and falling housing and stock prices. Treasury prices have benefited as investors flocked to the perceived safety of the "triple-A" rated debt.

But Buffett said that with the U.S. Federal Reserve and Treasury Department going "all in" to jump-start an economy shrinking at the fastest pace since 1982, "once-unthinkable dosages" of stimulus will likely spur an "onslaught" of inflation, an enemy of fixed-income investors.

"The investment world has gone from underpricing risk to overpricing it," Buffett wrote. "Cash is earning close to nothing and will surely find its purchasing power eroded over time."

"When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s," he went on. "But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary."

DISMAY OVER MORTGAGE PRACTICES

Investors' flight to quality followed years of excessive borrowing, especially in housing, and Buffett used his letter to make plain his dismay with a variety of mortgage lenders.

He said many ignored Lending 101 by not checking customers' ability to pay off home loans, or foisting "teaser" rates that reset to higher unaffordable levels.

In contrast, Buffett said, Berkshire's manufactured housing unit Clayton Homes had a 3.6 percent foreclosure rate at year end on loans it made, up from 2.9 percent in 2006, though more than one in three borrowers had "subprime" credit scores. The unit was profitable in 2008, earning $206 million before taxes, though earnings fell 61 percent, Berkshire said.

"The present housing debacle should teach home buyers, lenders, brokers and government some simple lessons that will ensure stability," Buffett wrote. "Home purchases should involve an honest-to-God down payment of at least 10 percent and monthly payments that can be comfortably handled by the borrower's income. That income should be carefully verified."

HSBC Expected to Cut Dividend, Raise Capital in $17 Billion Shares Offering

This could make Monday's trade interesting.

The Economic Times (India)
HSBC plans $17 bn share sale to raise funds
28 Feb 2009, 1100 hrs IST

SINGAPORE: HSBC, Europe's biggest bank, plans to raise more than 12 billion pounds ($17 billion) in a share sale aimed at propping up its capital base in order to cope with the economic crisis, a media report said on Saturday.

The report said the share issue would likely be announced alongside its full-year 2008 results due on Monday.

The report quoted unidentified people involved in the discussions as saying the offer price for the sale had not been set and the deal could still be postponed.

The bank is also expected to announce a cut in its dividend, the report said.

It said the share sale was underwritten by Goldman Sachs and JPMorgan Cazenove and the deal could set a new record in Britain for a rights issue funded by private investors after Royal Bank of Scotland's 12 billion pound share offering last April.

HSBC has traditionally been one of the best capitalised banks in the world and has not raised capital while rivals have scrambled for cash as the credit crisis has deepened.

US Dollar Weekly Chart with Commitments of Traders

GE Slashes Dividend For the First Time Since 1938 to Preserve Capital

GE cut their dividend by a whoppoing 68% to preserve capital in 'uncertain markets.' The company also said that there are no plans to raise additional capital and dilute common shareholders, with the same confidence which they had in January when Jeff Immelt said that they would not cut the dividend in 2009.

Here is a February 5, 2009 video interview with Jeff Immelt:

Immelt Says Important for GE Not to Cut Divident in 2009

The Wall Street Journal interviewer provides an example of an interview from the prior March in which Jeff Immelt was optimistic about earnings and then shortly thereafter "BAM! A big miss. Does this mean you and your guys don't know what's going on?"

Well, BAM again.

Reuters
GE cuts quarterly dividend to protect liquidity
Fri Feb 27, 2009 2:50pm EST

BOSTON (Reuters) - General Electric Co plans to cut its quarterly dividend to 10 cents a share starting in the second half of 2009, a move that it said would provide it with more "flexibility" in the face of a recession.

The U.S. conglomerate said it had no plans to raise additional equity, and that reducing its dividend from 31 cents a share would save it about $9 billion a year.

The news had been widely expected on Wall Street even prior to GE's statement earlier this month that its board would re-evaluate the payout....

"We have determined that reducing the dividend ... is a prudent measure to further enhance our balance sheet and provide us with additional flexibility," said Chief Executive Jeff Immelt in a statement.

As recently as January, Immelt had defended the dividend. In November, the Fairfield, Connecticut-based company said it planned to pay the 31-cent quarterly dividend through 2009.

Still, troubles at its GE Capital finance unit had led some investors to wonder whether keeping the dividend was a good idea....

SP Futures Hourly Chart at 1:30

GDP Number Far Worse Than Expected by Most Economists (But Not Here)

The Fourth Quarter GDP number came in at a negative 6.2% versus the original negative 3.8 percent announcement earlier this year.

That is not a big adjustment. It is a HUGE adjustment. That first number was so obviously cooked by a high side inventories estimate and a lowball chain deflator that it was a knee-slapping howler to anyone who is following this economy closely.

This decline did not happen overnight. It is merely being reported that way.

There should be little doubt in most people's minds that Bernanke, Greenspan, Paulson, and many in the Bush Administration were deceiving us about the state of the economy, for years, almost routinely as a matter of course.

That is important to understand. This was no act of God, no hurricane or meteor strike. And a lot of folks on Wall Street and in Washington playing dumb now knew what was coming. You can decide their motives for yourself, but fear and greed should be high on the top of your list.

The economy has been rotten for a long time, since at least 2001 if not before, and as it worsened more and more money was taken off the table by the Bush Administration and their corporate cronies through no bid contracts and welfare for the wealthy. Coats of paint were slapped over the growing imbalances, market manipulation, malinvestment, fraud and corruption.

Remember that. Don't let it go. Because as sure as the sun will rise, these jokers will be back in business given half the chance. They are shameless, greedy beyond all reason, and persistent. The fiscal responsibility being preached now by the Republican minority is repulsive hypocrisy.

That is why it is so disappointing to see what looks like business as usual from the Obama Administration. Larry Summers appears to be a tragic choice as chief economic advisor. And Tim Geithner, while a capable fellow, is not a thinker, but a doer, an implementer, and a disciple of the fellows that caused this mess.

What to do? Let them know now we expect reform. Don't fall for the same old rhetoric from the 'conservative' think thanks and paid pundits who misled you for the past eight years. They are not conservatives. They are jackals who play on your emotions. And let's not accept a new batch of paid pundits and clever deceivers either. But don't give up and pull over a blanket of cynicism.

Typically Americans will give a new president like Obama 100 days to get his bearings and deal with a tidal wave of problems that he did not create. We do not expect him to fix them, but we want to see a decent start in the right direction. We gave Bush far too much allowance, primarily because of 911 which his handlers played for all it was worth.

So far, with some noted exceptions in non-financials, we the people have not seen what we voted for last November.

President Obama recently said that Wall Street reform is coming, but it will take time.

Mr. President, you may not have the leisure to show us that you know what needs to be done. You are riding a high tide of bipartisan support in the people who voted for you. Once you lose them it will be very difficult to get them back.

We must demand action from the Congress and the Administration who we recently put in place through the elections to clean this mess up and then change the system that delivered it.

Contact the White House

Contact Your Senator

We do not want fewer, bigger banks exacting a fee on every commericial transaction in this country.

1. Bring back Glass-Steagall.

2. Clean up the derivatives market, starting with J.P. Morgan and their 90 Trillion dollar positions.

3. Enforce the various anti-trust laws, enacting new ones where necessary, and break up the media and banking conglomerates.

4. Enact aggregate position limits in all commodity markets and transparency with immediate disclosure of all position over 5% in any market.

5. Effective restrictions and enforcement of naked short selling, price manipulation, reinstatement of the 'uptick rule,' the prohibition of regulated banks from engaging in any speculative markets either for themselves or as agents, and usury laws and regulation of all interstate financial transactions at the national level.

And for the sake of the country, establish a vision, a model, of what the system should look like in accord with the Constitution. And then strike out for it, as painful as that may be, and stop this management by crisis.


Bloomberg
U.S. Economy Shrank 6.2% Last Quarter, Most Since ’82
By Timothy R. Homan

Feb. 27 (Bloomberg) -- The U.S. economy shrank in the fourth quarter at a faster pace than previously estimated as consumer spending plunged, companies cut inventories and exports sank.

Gross domestic product contracted at a 6.2 percent annual pace from October through December, more than economists anticipated and the most since 1982, according to revised figures from the Commerce Department today in Washington. Consumer spending, which comprises about 70 percent of the economy, declined at the fastest pace in almost three decades.

The recession is forecast to persist at least through the first half of this year as job losses mount and purchases plummet. The Obama administration’s attempts to break the grip of the worst financial crisis in 70 years are unlikely to bring immediate relief as companies from General Motors Corp. to JPMorgan Chase & Co. cut payrolls.

“There has been no evidence that the pace of decline is slowing at all, there are other shoes waiting to drop,” Bill Cheney, chief economist at John Hancock Financial Services Inc. in Boston, said in an interview with Bloomberg Television. “There is a chance that the stimulus package will kick in” in the middle of this year, he said.

Jim Rogers On the Economy and the Obama Administration

It was interesting to see Jimmy's gloom being cast into the relatively mainstream media. BusinessWeek is like Time Magazine for those who have discovered that the money fairy does not fill their wallets each evening.

Pithy excerpts only. Clink the link for the full interview and Maria's questions.


BusinessWeek
Jim Rogers Doesn't Mince Words About the Crisis
By Maria Bartiromo

...It's pretty embarrassing for President Obama, who doesn't seem to have a clue what's going on—which would make sense from his background. And he has hired people who are part of the problem. ...These are people [Geithner and Summers] who think the only solution is to save their friends on Wall Street rather than to save 300 million Americans.

...What would I like to see happen? I'd like to see them let these people go bankrupt, let the bankrupt go bankrupt, stop bailing them out. There are plenty of banks in America that saw this coming, that kept their powder dry and have been waiting for the opportunity to go in and take over the assets of the incompetent. Likewise, many, many homeowners didn't go out and buy five homes with no income. Many homeowners have been waiting for this, and now all of a sudden the government is saying: "Well, too bad for you. We don't care if you did it right or not, we're going to bail out the 100,000 or 200,000 who did it wrong." I mean, this is outrageous economics, and it's terrible morality.

...Well, if Long-Term Capital Management had been allowed to fail, Lehman and the rest of them would've lost a huge amount of money, their capital would've been impaired, and it would've put a terrible crimp on Wall Street. It would've slowed them down for years. Instead of losing capital, losing assets, and losing incompetent people, they hired more incompetent people.

... banks and investment banks and insurance companies have been failing for hundreds of years. Yes, we would've had a terrible two years. But you're dragging out the pain. We had 10 years of the worst credit excesses in world history. You don't wipe out something like that in six months or a year by saying: "Oh, now let's wake up and start over again."

...They [Citigroup and the car companies] should be allowed to go bankrupt. Why should American taxpayers put up billions to save a few car companies? They made the mistakes! We didn't make the mistakes! I'm sure they'll give them the money, but I'm telling you, it's a mistake. It's a horrible mistake.

...They [the Wall Street Banks] all took huge, huge profits. Who was the head of Citigroup? Chuck Prince? I mean, how many hundreds of millions of dollars did Prince take out of the company? How many hundreds of millions of dollars did other Citibank execs take out of the company? Wall Street has paid something like $40 billion or $50 billion in bonuses in the past decade. Who was that guy who was the head of Merrill Lynch (MERR)?

.....Stan O'Neal. He got $150 million for leaving, even though he ruined the company. Look at the guy at Fannie Mae (FNM), Franklin Raines. He did worse accounting than Enron. Fannie Mae and Freddie Mac (FRE) alone did nothing but pure fraudulent accounting year after year, and yet that guy's walking around with millions of dollars. What the hell kind of system is this?

...We're going to have social unrest in much of the world. America won't be immune.

...Always in the past, when people have printed huge amounts of money or spent money they didn't have, it has led to higher inflation and higher prices. In my view, that's certainly going to happen again this time. Oil prices are down at the moment, but that's temporary. And you're going to see higher prices, especially of commodities, because the fundamentals of commodities are enhanced by what's happening.

... I really think agriculture is going to be the best place to be. Agriculture's been a horrible business for 30 years. For decades the money shufflers, the paper shufflers, have been the captains of the universe. That is now changing. The people who produce real things [will be on top]. You're going to see stockbrokers driving taxis. The smart ones will learn to drive tractors, because they'll be working for the farmers.

It's going to be the 29-year-old farmers who have the Lamborghinis. So you should find yourself a nice farmer and hook up with him or her, because that's where the money's going to be in the next couple of decades.

Economist Niall Ferguson on the Financial Crisis: "There Will Be Blood"

"The way to make money is to buy when blood is running in the streets."
John D. Rockefeller

Here are excerpts of a lengthy interview with the noted economist Niall Ferguson. The entire interview can be read at the link provided to The Globe and Mail where it appeared.

Niall Ferguson, MA, D.Phil., is Laurence A. Tisch Professor of History at Harvard University and William Ziegler Professor of Business Administration at Harvard Business School. He is also a Senior Research Fellow at Jesus College, Oxford University, and a Senior Fellow at the Hoover Institution, Stanford University.

Who can truly say what will happen? After all, life is a school of probability. But if the trends of hubris and reckless disregard for justice continue we may very well have an opportunity to test John D. Rockefeller's investment advice.

The Globe and Mail
'There will be blood'
By Heather Scoffield
February 23, 2009 at 6:45 PM EST

...Policy makers and forecasters who see a recovery next year are probably lying to boost public confidence, he said. And the crisis will eventually provoke political conflict, albeit not on the scale of a world war, but violent all the same.

"There will be blood."

...And much of today's mess is the fault of central bankers who targeted consumer-price inflation but purposefully turned a blind eye to asset inflation. (The emphasis is not only purposely, but willfully so - Jesse)

....Partly because they can throw so much at it, and they can do it at a lower cost than anybody else, because the U.S. retains the safe-haven status, which makes the world so unfair. Here is the world's biggest economy, which gave us subprime mortgages, rampant securitization, the collateralized debt obligation, Lehmann Brothers, Merrill Lynch. It is, in a sense, the fons et origo of this crisis. And yet, because it retains safe-haven status, in a global crisis, investors want to increase their exposure to the U.S. Hence, the dollar rally. Hence 10-year Treasuries down below 3 per cent yields. It's almost paradoxical that an American crisis ... reinforces the status of the United States as a safe haven.

...As you know, Chimerica – the fusion of China and America – is one of my big ideas. It's really the key to how the global financial system works, and has been now for about a decade. At the end of The Ascent of Money, I speculate about whether or not that relationship will survive. If it breaks down, then all bets are off, for the U.S. and indeed for Asia. I think that's really the key point. Both sides stand to lose from a breakdown of Chimerica, which is why both sides are affirming a commitment to it.”

... “There will be blood, in the sense that a crisis of this magnitude is bound to increase political as well as economic [conflict]. It is bound to destabilize some countries. It will cause civil wars to break out, that have been dormant. It will topple governments that were moderate and bring in governments that are extreme. These things are pretty predictable.

The question is whether the general destabilization, the return of, if you like, political risk, ultimately leads to something really big in the realm of geopolitics. That seems a less certain outcome....

...It's just that I don't see it producing anything comparable with 1914 or 1939. It's kind of hard to envisage a world war. Even when most pessimistic, I struggle to see how that would work, because the U.S., for all its difficulties in the financial world, is so overwhelmingly dominant in the military world.”

....“It's obvious, surely we know by now, that this is something quite different. It's a crisis of excessive debt, the deleveraging process has barely begun, the U.S. consumers are not going to suddenly bounce back and hit the shopping malls just because they get a tax cut. The savings rate is going to continue to rise. These processes have tremendous momentum that quite clearly differentiates them from anything that we've seen, including the early 80s, including 73, 74, 75. Those big crises, the ones that we have lived through, were bad. But seems certain to be deeper, and more protracted.”

...“One possibility is that policy makers are lying in order to encourage people and prevent depression from become a self-fulfilling psychological conditions. That's why it's called a depression … Maybe they don't really believe this, but they're saying it in order to cheer people up, and if they're sufficiently consistent, perhaps people will start to believe it, and then it will magically happen.”

...“August, 2007, was when this crisis began. And if you were really watching the markets carefully, April is when it began, when the various hedge funds started to hemorrhage. The stock markets carried on until October of that year. And in many ways, consumer behaviour in the U.S. did not change until the third quarter of 2008. So there was a massive denial problem. It was like Wile E. Coyote running off a cliff, and they'd run off a cliff and they didn't look down so they didn't start falling. As soon as people realized it was bad, the behaviour switched. Now, people have to try to unscare them before this thing becomes a self-perpetuating downward spiral. I think that's why you have to say ‘growth will return in 2010' with your fingers crossed behind your back.”

...“We kind of have had a bubble in the sense that we've seen such a rally in U.S. government bonds. It's tempting to say that will burst and we'll see yields go back up. Because, you know, $2-trillion worth of debt is going to hit the market this year, maybe more. Supply is exploding just when demand is contracting. You don't need to be a Nobel laureate to see that that has to impact on the price. The difference is there is this thing called the Fed that can step in and start buying the stuff if the foreign demand fades. So it's not completely guaranteed that we'll see bonds sell off in price. (Yes but if the Fed starts overtly monetizing Treasury Debt the limiting factor will be the value of the dollar. It is a 'hinged' constraint, Bonds and Dollar - Jesse)

“There is still this inertia that prevents the dollar from falling off a cliff, that keeps the Treasury market from falling off a cliff. That's really important to bear in mind. I don't think we'll see a bubble distressed assets, because I think the price of these assets has started to fall. Anybody who comes into the market now is essentially paying a premium. There will be better bargains in the middle of this year, and maybe even better bargains later on. If I were in the market to buy distressed assets, I would wait, I would wait a bit longer until they're really desperate. And it might even be better to wait until they're bankrupt.”

...“In the Ascent of Money, I argue that you can't really have a bubble if you don't have a monetary authority that has been excessively generous. From John Law in 1719 to Alan Greenspan in the late 90s, there's always a banker, there's always a central banker making credit too readily available. The second thing is, though, that regulation may not prevent that.”

..."The two great zones of conflict in the 20th century were central and eastern Europe, and a critical part of northeast Asia – Manchuria, Korea. It makes me a little nervous that those are also places that are going to take a very heavy share of the pain. But we're looking at a Great Recession, not a Great Depression. We may be looking at a Lost Decade.

There was a time when if you said the United States was going to suffer a lost decade like Japan did in the 1990s, everybody would have said you were a mad pessimist. That begins to look like quite a good scenario. And I think it's a realistic scenario.

One of the facts is if you subtract mortgage equity withdrawal from the Bush years, the real underlying rate of growth of the U.S. economy was 1 per cent. So much of the consumption has been fuelled by mortgage equity withdrawal. So that seems like a reasonable growth rate for 10 years.

We just don't have an improvement of standard of living of the sort we're grown used to. And indeed if you have a more equitable redistribution through the tax system, which Obama is committed to, it might actually be no discernible downside for middle America and lower-class Americans. So many of the benefits of the boom went to the elites. If you have a lost decade plus redistribution, it may not be that dramatic a change for many, many people. People just have to get over the fact that their wealth wasn't worth what they thought it was in 2006. Whether it's their stock market portfolio or their housing. If we simply go back to where we were, in 2005, that's surely not the worst thing that could happen to us.”

SP and Nasdaq 100 Futures Hourly Chart at 3 PM

Earnings coming out after the close, watch the techs.

How the Economy Was Lost

Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration.

"How long can the US government protect the dollar’s value by leasing its gold to bullion dealers who sell it, thereby holding down the gold price? Given the incompetence in Washington and on Wall Street, our best hope is that the rest of the world is even less competent and even in deeper trouble. In this event, the US dollar might survive as the least valueless of the world’s fiat currencies."

Counterpunch
Doomed by the Myths of Free Trade
How the Economy was Lost
By PAUL CRAIG ROBERTS

The American economy has gone away. It is not coming back until free trade myths are buried six feet under.

America’s 20th century economic success was based on two things. Free trade was not one of them. America’s economic success was based on protectionism, which was ensured by the union victory in the Civil War, and on British indebtedness, which destroyed the British pound as world reserve currency. Following World War II, the US dollar took the role as reserve currency, a privilege that allows the US to pay its international bills in its own currency.

World War II and socialism together ensured that the US economy dominated the world at the mid 20th century. The economies of the rest of the world had been destroyed by war or were stifled by socialism [in terms of the priorities of the capitalist growth model. Editors.]

The ascendant position of the US economy caused the US government to be relaxed about giving away American industries, such as textiles, as bribes to other countries for cooperating with America’s cold war and foreign policies. For example, Turkey’s US textile quotas were increased in exchange for over-flight rights in the Gulf War, making lost US textile jobs an off-budget war expense.

In contrast, countries such as Japan and Germany used industrial policy to plot their comebacks. By the late 1970s, Japanese auto makers had the once dominant American auto industry on the ropes. The first economic act of the “free market” Reagan administration in 1981 was to put quotas on the import of Japanese cars in order to protect Detroit and the United Auto Workers.

Eamonn Fingleton, Pat Choate, and others have described how negligence in Washington DC aided and abetted the erosion of America’s economic position. What we didn’t give away, the United States let be taken away while preaching a “free trade” doctrine at which the rest of the world scoffed.

Fortunately, the U.S.’s adversaries at the time, the Soviet Union and China, had unworkable economic systems that posed no threat to America’s diminishing economic prowess.

This furlough from reality ended when Soviet, Chinese, and Indian socialism surrendered around 1990, to be followed shortly thereafter by the rise of the high speed Internet. Suddenly, American and other first world corporations discovered that a massive supply of foreign labor was available at practically free wages.

To get Wall Street analysts and shareholder advocacy groups off their backs, and to boost shareholder returns and management bonuses, American corporations began moving their production for American markets offshore. Products that were made in Peoria are now made in China.

As offshoring spread, American cities and states lost tax base, and families and communities lost jobs. The replacement jobs, such as selling the offshored products at Wal-Mart, brought home less pay.

“Free market economists” covered up the damage done to the US economy by preaching a New Economy based on services and innovation. But it wasn’t long before corporations discovered that the high speed Internet let them offshore a wide range of professional service jobs. In America, the hardest hit have been software engineers and information technology (IT) workers.

The American corporations quickly learned that by declaring “shortages” of skilled Americans, they could get from Congress H-1b work visas for lower paid foreigners with whom to replace their American work force. Many US corporations are known for forcing their US employees to train their foreign replacements in exchange for severance pay.

Chasing after shareholder return and “performance bonuses,” US corporations deserted their American workforce. The consequences can be seen everywhere. The loss of tax base has threatened the municipal bonds of cities and states and reduced the wealth of individuals who purchased the bonds. The lost jobs with good pay resulted in the expansion of consumer debt in order to maintain consumption. As the offshored goods and services are brought back to America to sell, the US trade deficit has exploded to unimaginable heights, calling into question the US dollar as reserve currency and America’s ability to finance its trade deficit.

As the American economy eroded away bit by bit, “free market” ideologues produced endless reassurances that America had pulled a fast one on China, sending China dirty and grimy manufacturing jobs. Free of these “old economy” jobs, Americans were lulled with promises of riches. In place of dirty fingernails, American efforts would flow into innovation and entrepreneurship. In the meantime, the “service economy” of software and communications would provide a leg up for the work force.

Education was the answer to all challenges. This appeased the academics, and they produced no studies that would contradict the propaganda and, thus, curtail the flow of federal government and corporate grants.

The “free market” economists, who provided the propaganda and disinformation to hide the act of destroying the US economy, were well paid. And as Business Week noted, “outsourcing’s inner circle has deep roots in GE (General Electric) and McKinsey,” a consulting firm. Indeed, one of McKinsey’s main apologists for offshoring of US jobs, Diana Farrell, is now a member of Obama’s White House National Economic Council.

The pressure of jobs offshoring, together with vast imports, has destroyed the economic prospects for all Americans, except the CEOs who receive “performance” bonuses for moving American jobs offshore or giving them to H-1b work visa holders. Lowly paid offshored employees, together with H-1b visas, have curtailed employment for older and more experienced American workers. Older workers traditionally receive higher pay. However, when the determining factor is minimizing labor costs for the sake of shareholder returns and management bonuses, older workers are unaffordable. Doing a good job, providing a good service, is no longer the corporation’s function. Instead, the goal is to minimize labor costs at all cost.

Thus, “free trade” has also destroyed the employment prospects of older workers. Forced out of their careers, they seek employment as shelf stockers for Wal-Mart.

I have read endless tributes to Wal-Mart from “libertarian economists,” who sing Wal-Mart’s praises for bringing low price goods, 70 per cent of which are made in China, to the American consumer. What these “economists” do not factor into their analysis is the diminution of American family incomes and government tax base from the loss of the goods producing jobs to China. Ladders of upward mobility are being dismantled by offshoring, while California issues IOUs to pay its bills. The shift of production offshore reduces US GDP. When the goods and services are brought back to America to be sold, they increase the trade deficit. As the trade deficit is financed by foreigners acquiring ownership of US assets, this means that profits, dividends, capital gains, interest, rents, and tolls leave American pockets for foreign ones.

The demise of America’s productive economy left the US economy dependent on finance, in which the US remained dominant because the dollar is the reserve currency. With the departure of factories, finance went in new directions. Mortgages, which were once held in the portfolios of the issuer, were securitized. Individual mortgage debts were combined into a “security.” The next step was to strip out the interest payments to the mortgages and sell them as derivatives, thus creating a third debt instrument based on the original mortgages.

In pursuit of ever more profits, financial institutions began betting on the success and failure of various debt instruments and by implication on firms. They bought and sold collateral debt swaps. A buyer pays a premium to a seller for a swap to guarantee an asset’s value. If an asset “insured” by a swap falls in value, the seller of the swap is supposed to make the owner of the swap whole. The purchaser of a swap is not required to own the asset in order to contract for a guarantee of its value. Therefore, as many people could purchase as many swaps as they wished on the same asset. Thus, the total value of the swaps greatly exceeds the value of the assets.

The next step is for holders of the swaps to short the asset in order to drive down its value and collect the guarantee. As the issuers of swaps were not required to reserve against them, and as there is no limit to the number of swaps, the payouts could easily exceed the net worth of the issuer.

This was the most shameful and most mindless form of speculation. Gamblers were betting hands that they could not cover. The US regulators fled their posts. The American financial institutions abandoned all integrity. As a consequence, American financial institutions and rating agencies are trusted nowhere on earth...

The Risk in US Treasuries

One of the lunch regulars, Dave the BondMan, notes to our suprise that the Rate for a Credit Default Swap, the cost of insuring against default, on a 5 Year US Treasury Note is now a full 100 basis points.

The cost of credit default insurance is a real world, market assessment of the risk of default of the U.S. Govt, as opposed to the fantastical ratings issued by Moodys and S&P.

The Yield on a 5 Year T Bond is 1.92%.

It now costs more than one half of your return to guarantee a midrange US sovereign debt note.

Now if you take the next step, and view that return on a guaranteed US 5 Year Note as effectively .92%, you would have to believe that the rate of inflation will remain under one percent for the next five years in order for there to be any real return at all (Return on Guaranteed Interest Minus Inflation).

That is probably a 'flight to safety' phenomenon more than anything else, especially if one looks out on the yield curve to the 10+ durations.

That, my friends, represents an extremely dim view of the US economic situation, and a potential bubble in Treasuries.


Source: Markit

As an aside, as someone experienced in evaluating the financing of projects and companies, we wonder what figure companies are using as the basis for their 'riskless' rate of return calculations? Are they using 1.92% or 2.92% for a five year duration?

In other words, are US Treasuries still a risk free asset? Or are they risk free only with an unusually expensive Credit Default Swap? Expensive, that is, for the reserve currecy of the world.

Usually that detail is so small its lost in the noise, but with default risk now at about 50% of nominal return, that is a significant consideration.

SP Hourly Chart - A Closer Look at Today

Yesterday's rally in context with the follow through from today.

Three Fourths of the European Public Blames the Central Banks for the Financial Crisis

This just in from the central-bank-friendly folks over at the Central Bank Publications of the UK.

"Although people still think that commercial and investment bankers are primarily to blame, according to the latest FT/Harris poll of European public opinion 74% of respondents think central bankers were entirely or largely responsible (with less than 60% blaming regulators or governments)."

Our interpretation of the poll is that the European public believes that the financial crisis was caused undoubtedly by the commercial and investment bankers, but that the central bankers promoted the environment that allowed it to occur and had the responsibility for preventing it.

That is rather surprising, because Trichet and his predecessors have been as Jacksonian stalwarts compared to Easy Al and Zimbabwe Ben.

It would have been interesting to see the poll, and to have added a question about monetary policy and a return to 'hard money.'

A similar poll in the States, however, had very different results:

Q: Who is responsible for the financial crisis sweeping the world?

34% Whatever is wrong, Obama will save us.

33% Will they reschedule American Idol because of the President?

11% Sorry I'm in a hurry to buy 'supplies' and apply for a passport

22% Can I have a bite of your sandwich?

One might infer that the Federal Reserve and Wall Street have a much closer relationship with the mainstream media, among other things.

Central Bank News (UK)
The public starts to blame central bankers

Central bankers have had a pretty good crunch so far. Mervyn King came in for a lot of stick for being caught off guard at the beginning, when the Bank of England dropped the ball over Northern Rock, but as the financial tempest has gathered force, engulfing so many of the great names of finance, that episode has faded into relative insignificance.

At the ECB, Jean-Claude Trichet has had a good credit war, appearing to take the cares of the entire world on his shoulders while maintaining his dignity. Ben Bernanke, like the others, has been seen to be innovative in devising innumerable new schemes to support the banking system and the wider economy. All have used whatever instruments are available to them, stretching their legal powers and mandates to the limit. As they had to.

Yet the forces unleashed by the crisis are so powerful all this could change very quickly. Already there is evidence that the general public is ready to pin more of the blame for the crisis on central banks. Although people still think that commercial and investment bankers are primarily to blame, according to the latest FT/Harris poll of European public opinion 74% of respondents think central bankers were entirely or largely responsible (with less than 60% blaming regulators or governments).

With the likelihood that the financial landscape to emerge from this firestorm, once the fog has cleared, will bear very little resemblance to the former one, it seems inevitable that central banks' mandates and modus operandi will also need to be recast. But that can wait.

Four Papa Bear Markets Compared

Four Bear Markets Compared by short.com

Coup d'Etat by Crisis

"Necessity is the plea for every infringement of human freedom. It is the argument of tyrants; it is the creed of slaves." William Pitt (1759-1806)

Quite the dire, almost inflammatory piece from Time Magazine. It certainly paints Bank of America, Citigroup, General Motors, and AIG in a bad, almost villainous light.

It is time to for a real change. It is time to stop allowing the country to be held hostage by a relatively small number of financiers who have gamed the system and corrupted the regulatory and legislative process. It is time to stop allowing those deeply involved with the problem to manage the investigation and the solutions.

Put the money center banks into a managed restructuring, and stop calling it nationalization, which wrongfully suggests the British socialism of the post World War II era. We did not have to use that sort of language or raise these emotional issues when the Savings and Loan scandal was cleared.

Let's get this open sore cleaned, bound and stitched.

But one thing we might wish to keep in mind is that it may not be AIG, BAC, and C that are pulling the strings, that are at the center of this. They look more like patsies than prime motivators.

Transparency would be interesting in this case with regards to the CDS market and the derivatives markets.

Who has the most to gain and lose if Citi, Bank of America, and AIG are put into managed restructuring? Who has the most and biggest bets on their failure?

Let's have transparency of positions now. And we cannot afford to take anyone's word on this.

The real sticking point is not the shareholders or managers of these companies, although they may be making the most noise at this point.

We will be surprised, if transparency is actually provided, and new and independent regulators armed with the full array of investigative tools, dig into this mess to see where the strings lead, if we do not find many of them in the hands of the other major Wall Street banks, media giants, and corporate conglomerates, among others.

We will keep an open mind, but do not expect any light or serious new information to come from these Congressional Committees with their circus, show trial atmosphere.

Time to bring back Glass-Steagall and to enforce the Sherman Anti-Trust laws. Time to compel the three or four banks to unwind their trillions in opaque derivatives. Time to audit the Federal Reserve, and clarify their role in our system to them, and nail a copy of the Constitution to their front door.

We do not need or want fewer, bigger, more powerful banks as a drag on the real economy, taking a tax on each transaction whether it be through credit cards or fees or loans or subsidies.

Time for a real change. Time to remind Congress where the power and legitimacy of their offices resides. Time for the lobbyists, corrupt regulators, corporate princes and the enablers and motivators of this grand theft to find a place in an unemployment line or a witness stand.

We must demand action from the Congress and the Administration who we recently put in place through the elections to clean this mess up and then change the system that delivered it.

Contact the White House

Contact Your Senator

We do not want fewer, bigger banks exacting a fee on every commericial transaction in this country.

1. Bring back Glass-Steagall.

2. Clean up the derivatives mess, starting with J.P. Morgan.

3. Enforce the various anti-trust laws, enacting new ones where necessary, and break up the media and banking conglomerates.

4. Enact aggregate position limits in all commodity markets and transparency with immediate disclosure of all position over 5% in any market.

5. Effective restrictions and enforcement of naked short selling, price manipulation, reinstatement of the 'uptick rule,' the prohibition of regulated banks from engaging in any speculative markets either for themselves or as agents, and usury laws and regulation of all interstate financial transactions at the national level.

And for the sake of the country, establish a vision, a model, of what the system should look like in accord with the Constitution. And then strike out for it, as painful as that may be, and stop this management by crisis, and weaving a shroud for our freedom out of a web of endless fixes, concessions and necessities.

"If there must be trouble, let it be in my day, that my child may have peace." Thomas Paine

Time
AIG's Plan to Bleed the Government Dry
By Douglas A. McIntyre
Tuesday, Feb. 24, 2009

Management at AIG has calculated exactly how much money the Treasury and Fed will have access to after all of the TARP, financial stimulus, and mortgage bailout projects have been funded. The insurance company then plans to ask for whatever is left to fund its deficits so that it can stay in business, effectively making the federal government insolvent.

According to CNBC, AIG is about to post another huge loss. "Sources close to the company said the loss will be near $60 billion due to writedowns on a variety of assets including commercial real estate." The financial channel also reports that the need for capital may be so great that AIG might have to enter Chapter 11, something the government has spent over $130 billion trying to prevent.

Just like Detroit, Bank of America (BAC), and Citigroup (C), AIG is playing a game of chicken with Washington that the government does not feel it can afford to lose. Imagine what it would be like if all of these businesses failed at the same time.

It is actually worth imagining. The government has so many balls in the air between the financial systems and deteriorating parts of the industrial sector that it may not have either the capital or intellectual capacity to go around. The Treasury has just appointed a prominent investment banker to help oversee the mess in Detroit, but it would take an army of financiers to first comprehend and then advise on what should happen to GM (GM) and Chrysler. The period for comprehension is already in the past. The trouble in the auto industry has to be addressed in the next few weeks or its capacity to operate will go up in flames.

The government made noises about taking a larger position in Citigroup (C). Based on the market's reaction, not may analysts and investors believe that the action will solve much. The poison of bad investments is in the blood of the financial system. Quarantining Citigroup will not solve that problem. The Treasury and Fed will have to take a holistic approach which involves healing the entire financial system. It is not clear that can even be done. How it would be done is an even more complicated matter.

The Little Dutch Boy is running out of fingers. The water that threatens to swamp the international financial system is getting closer to breaching the walls and pouring in. A month ago that seemed inconceivable. Now the odds that the government will have to allow large operations like AIG go into bankruptcy are fairly high. The trouble with that is not what will happen to AIG. As the market found out with the Lehman Brothers bankruptcy, many of the firms that are doing business with a very large financial institution when it becomes insolvent can have transactions worth billions of dollars wither voided or devalued.

In the intricate global financial system, there is no such things as one big player going down in a vacuum.

SP Monthly Chart and Short Term Indicators

The SP 500 is on a critical support level.



We're getting very close to the point where we either get a technical bounce, or the stock markets start breaking down dramatically.



Keep an eye out for one more plunge down and then a short covering rally. If that rally fails we could see a continuation down in a crash, albeit one in slow motion.

A technical bounce here is a higher probability but more downside is very possible.

Our Orwellian World: The Language of Looting

What "Nationalize the Banks" and the "Free Market" Really Mean in Today's Looking-Glass World
The Language of Looting
By Michael Hudson

...Exactly what does “a free market” mean? Is it what the classical economists advocated – a market free from monopoly power, business fraud, political insider dealing and special privileges for vested interests – a market protected by the rise in public regulation from the Sherman Anti-Trust law of 1890 to the Glass-Steagall Act and other New Deal legislation?

Or is it a market free for predators to exploit victims without public regulation or economic policemen – the kind of free-for-all market that the Federal Reserve and Security and Exchange Commission (SEC) have created over the past decade or so?

It seems incredible that people should accept today’s neoliberal idea of “market freedom” in the sense of neutering government watchdogs, Alan Greenspan-style, letting Angelo Mozilo at Countrywide, Hank Greenberg at AIG, Bernie Madoff, Citibank, Bear Stearns and Lehman Brothers loot without hindrance or sanction, plunge the economy into crisis and then use Treasury bailout money to pay the highest salaries and bonuses in U.S. history.

Terms that are the antithesis of “free market” also are being turned into the opposite of what they historically have meant. Take today’s discussions about nationalizing the banks. For over a century nationalization has meant public takeover of monopolies or other sectors to operate them in the public interest rather than leaving them so special interests. But when neoliberals use the word “nationalization” they mean a bailout, a government giveaway to the financial interests....

Read the rest of Michael Hudson's essay here.

Nassim Taleb Says "US Financial System Designed to Blow Up"

Nassim Taleb had an extraordinarily good interview on Bloomberg Television today.

It is worth it. The story on Bloomberg does not really capture what he said and how he said it.

Click here to See the Nassim Taleb On Bloomberg Television

The Fed's Balance Sheet Strategy to Support Qualitative Easing: A Synopsis

“They [the Fed's financial crisis programs] all make use of the asset side of
the Federal Reserve’s balance sheet. That is, each involves the Fed’s
authorities to extend credit or purchase securities.”

Ben Bernanke, London School of Economics, January 13, 2009

The Fed's strategy is to expand Balance Sheet and to change the mix of the financial assets it holds to stimulate specific troubled markets.

As you will recall, the Fed's Balance Sheet provides the backing for the US Dollar currency among other things, and traditionally has consisted of gold, US Treasury Debt, and the explicitly guaranteed debt of agencies like Ginnie Mae.

What the Fed is doing is expanding the assets on its Balance Sheet, which is quantitative easing, but is doing it by adding specifically targeted non-traditional assets.

The Bernake Fed distinguishes its own approach from the "quantitative easing" of the Bank of Japan. It is an expansion of the central bank's balance sheet, but in the case of the Fed, with a bias. Bernanke calls it 'credit easing' while we prefer to call it 'qualitative easing.'

The Fed is deciding specifically where and to whom to apply its qualitative easing.

This is the controversial part of the program, because the Fed no longer manages the money supply and interest rates, and the general health of the banking system, but targets specific markets and companies for its monetization efforts.

In effect, one might say that the Fed has begun to assume a central planning role for the economy that decides, with specifics, who fails and who survives to succeed. What is troubling in particular is that so far the Fed has retained the perogative to do this without disclosure of the specifics even to Congress.

Bernanke divides the use of balance sheet assets into three groups:

1. lending to financial institutions,

2. providing liquidity to key credit markets, and

3. purchasing longer-term securities.

What does "Buying Longer Term Securities" mean?

In November 2008, the Federal Reserve announced plans to purchase the direct
obligations of the housing-related government-sponsored enterprises (GSEs),
specifically Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. In
principle, the extra demand for these obligations is designed to increase the
price of the securities and thereby lower rates paid for mortgages.
Additionally, the Fed outlined plans to purchase mortgage-backed securities
backed by Fannie Mae, Freddie Mac, and Ginnie Mae. These actions were designed
to improve the availability of credit for the purchase of houses, therefore
supporting the housing markets and financial markets in general.

Source: The Federal Reserve

Europe to Push Broader Regulatory Agenda at G20

This is interesting because it tees up the European agenda ahead of the G20 meeting, and helps to highlight some points of contention between Europe and the Anglo-American financiers.

The IMF subject is a reflection of Europe's decentralized status. The ECB does not possess the broad powers of the Federal Reserve Bank, and there is a difference of opinion in Europe about its future role, and the centralization of power overall.

This is highly reminiscent of the US debate between the Federalists and the Jeffersonians.

MarketWatch
Europe supports broad financial regulation
By MarketWatch
12:42 p.m. EST Feb. 22, 2009

SAN FRANCISCO (MarketWatch) -- The European leaders of the Group of 20 called Sunday for more transparency and regulation of all financial markets, products and investors, including hedge funds, according to published reports.

Heads of state and finance ministers from France, Germany, Italy, the Netherlands, Spain, the United Kingdom, the Czech Republic and Luxembourg met in Berlin to come up with a European position ahead of the G20 summit in London scheduled for April 2...

Leaders also reportedly proposed increasing to $500 billion the International Monetary Fund's financial resources for crisis management, in light of problems recapitalizing banks in Central and Eastern Europe. The IMF now has $250 billion in resources and already used $50 billion.

The call for increased IMF funding follows remarks from French Finance Minister Christine Lagarde, who said Thursday that euro-zone countries should come to the aid of any troubled member-state and avoid IMF involvement, if a bailout becomes necessary....

SP 500 Still Overvalued by 46% as Dividends Plummet at Record Pace

We have not reached a sustainable bottom yet in US equity prices despite the infomercials and chief strategist's exhortations to buy them while they are cheap on the financial news channels.

Stocks are valued based on their returns, and those returns are based on real cash flow and profits paid out to shareholders as dividends or stock buybacks to boost share prices.

For too many years US companies have essentially robbed Peter to pay Paul, servicing short term profits by offshoring US jobs, manipulating their balance sheets, and appropriating the savings of the world through the US reserve currency mechanism.

We've just about run out of track on that line, and are heading for a hard stop at a much lower level. At some point the market will perceive that the economy is improving and that the outlook for corporate profits is positive. Stocks will reflect this about six months in advance.

But there will be no recovery until the banking system is reformed and restructured, and the median wage begins to increase enough to support both savings and increased consumption.

Making additional debt available first as a cure is nonsensical, because the debt we have cannot be serviced and must be written off. To do so is Ponzi economics, which is what Greenspan was practicing, and why the decline has been so precipitous.

The longer we avoid making the necessary changes, the more we risk an involuntary default.


Bloomberg
Dividends Falling Most Since ’55 Means S&P 500 Still Expensive
By Michael Tsang

Feb. 23 (Bloomberg) -- The fastest reduction in U.S. dividends since 1955 is depriving investors of the only thing that gave stocks an advantage over government bonds in the last century.

U.S. equities returned 6 percent a year on average since 1900, inflation-adjusted data compiled by the London Business School and Credit Suisse Group AG show. Take away dividends and the annual gain drops to 1.7 percent, compared with 2.1 percent for long-term Treasury bonds, according to the data. (And don't bother factoring in anything for that old-fashioned concept called 'risk' - Jesse)

A total of 288 companies cut or suspended payouts last quarter, the most since Standard & Poor’s records began 54 years ago, when Dwight D. Eisenhower was president. While the S&P 500 is trading at the lowest price relative to earnings since 1985 and all 10 Wall Street strategists tracked by Bloomberg forecast a rally this year, predictions based on dividends show shares are overvalued by as much as 46 percent.

“It’s a greater fool theory if we always buy stocks based on earnings and we never get a penny out of it, hoping for someone to buy that stock at a higher price,” said James Swanson, chief investment strategist at MFS Investment Management in Boston, which oversees $134 billion. “Dividends have been a cushion in bad times. If they go to zero it’s a disaster.” (The real disaster is that the US is running out of greater fools. - Jesse)

Twenty-five companies in the S&P 500 saved almost $17 billion by cutting or suspending outlays this year, more than all the reductions from 2003 to 2007, when the index returned 83 percent. On a per-share basis, S&P 500 companies may trim payouts 13 percent this year, the biggest drop since 1942 ...

US Considers a 40% Ownership of Citigroup, Diluting the Common Shares

Citigroup is the prime candidate for receivership.

The only reason to continue this charade, other than to inspire us with confidence in the opaque duplicity of this Administration, is to preserve the shareholders who would almost certainly be wiped out, and the bondholders who would get a high and tight haircut, in the kind of restructuring that Citigroup requires as an insolvent institution.

Larry Summers and Tim Geithner are promoting this crony capitalist approach to preserve the wealth of a few at the expense of the many.

Wall Street Journal
U.S. Eyes Large Stake in Citi
By David Enrich and Monica Langley
February 23, 2009

Taxpayers Could Own Up to 40% of Bank's Common Stock, Diluting Value of Shares

Citigroup Inc. is in talks with federal officials that could result in the U.S. government substantially expanding its ownership of the struggling bank, according to people familiar with the situation.

While the discussions could fall apart, the government could wind up holding as much as 40% of Citigroup's common stock. Bank executives hope the stake will be closer to 25%, these people said.

Any such move would give federal officials far greater influence over one of the world's largest financial institutions. Citigroup has proposed the plan to its regulators. The Obama administration hasn't indicated if it supports the plan, according to people with knowledge of the talks.

When federal officials began pumping capital into U.S. banks last October, few experts would have predicted that the government would soon be wrestling with the possibility of taking voting control of large financial institutions. The potential move at Citigroup would give the government its biggest ownership of a financial-services company since the September bailout of insurer American International Group Inc., which left taxpayers with an 80% stake.

The talks reflect a growing fear that Citigroup and other big U.S. banks could be overwhelmed by losses amid the recession and housing crisis. Last week, Citigroup's share price fell below $2 to an 18-year low. Bank executives increasingly believe that the government needs to take a larger ownership stake in the institution to stop the slide.

Under the scenario being considered, a substantial chunk of the $45 billion in preferred shares held by the government would convert into common stock, people familiar with the matter said. The government obtained those shares, equivalent to a 7.8% stake, in return for pumping capital into Citigroup.

The move wouldn't cost taxpayers additional money, but other Citigroup shareholders would see their stock diluted. A larger ownership stake by the government could fuel speculation that other troubled banks will line up for similar agreements.

Bank of America Corp. said Sunday that it isn't discussing a larger ownership stake for the government. "There are no talks right now over that issue," said Bank of America spokesman Robert Stickler. "We see no reason to do that. We believe the goal of public policy should be to attract private capital into the bank, not to discourage it...."

Why Is This Bubble Different From All Other Bubbles?

This Bubble is different from all other bubbles not because of its size, which is truly enormous, but because home ownership is much more broadly held by the public and more integral to the real economy than all the other bubble components which the lunatic Fed has nutured in the US in the last 100 years.

This is going to leave a mark.

The Word for This Week

Demagoguery refers to a strategy for gaining political power by appealing to the popular prejudices, emotions, fears and expectations of the public — typically via impassioned rhetoric and propaganda, and often using nationalist or populist themes, usually singling out a group or groups.

Also see Demagogue

The word for this week, and likely for this year, and the next.

No, not demagogue or demagogy. The Word for the Week is "them."

Why should we help them.

We are being dragged down by them.

Blaming them feels good. It makes one feel as if they were successful, not part of the problem.

It wasn't us, it was them.

They caused their own problems. They caused our problems. It is unfortunate but they would be better off somewhere else, out of sight, no longer an impairment or competition for scarce resources.

They are the scapegoats, usually singled out by the group or groups that caused the problems, and even those who benefited indirectly, made some money out of the bubble, less deservedly than they might like to imagine.

They are the weak, the poor, the defenseless, the different, the other.

And the circle of the ones that are considered them spreads wider and wider.

Because even those shouting and waving their fists in the crowds against them are also them to someone else higher in the power structure. Useless eaters is a relative objectification of the human.

And then someone will come and take them away, where they do not wish to go.

And then comes the descent into madness and destruction, for all.


One might ask, "But Jesse, you have inveighed against the Bankers on numerous occasions. How is that different? Aren't you a demagogue too, with just a different opinion?

No. All banks are not bad. All who work at banks, even the biggest Wall Street banks, are not bad. Even all those who turned a blind eye to what went on around them are not bad, just weak, distracted, overwhelmed.

But there were prime actors in this tragedy. The first objective is to stop it, to reform the system, to end the imbalances. And it would be disingenuous to not notice that the big Wall Street Banks, and the rating agencies and accounting firms, were at the epicenter of the financial crises for the past ten years. They were the lobbyists, the financial engineers, the architects of fraud, the enablers of many frauds going back to Enron and beyond.

Cui bono? Who benefited the most?

It was not so much the poor slob acting foolishly on bad advice. It was the joker taking millions off the table time after time by gaming the system, and actively promoting the bubble culture and deep capture that knocked out the regulatory process and the rule of law.

And then the law can deal with individual transgressions, and the emphasis here is "individual." Not a lynching of the bystanders. A serious investigation with individual accountability and equal protection.

That is not demagoguery. That is justice, because it is based on law and individual actions.

Volcker's Vision of a Return to Narrow Banking

A return to 'narrow banking' is in the cards. This is the kind of bank which takes depositors funds and originates and services loans to its own customers.

These banks will be separate from investment banks and hedge funds, which will perform the speculation and packaging, and what can loosely be called financial engineering.

But look for much more uniform regulation and transparency to appear in these non-banking operations, and less acceptance for 'dark pools' and opaque market manipulation.

And for those who say we will lose this type of person to less regulated overseas venues, there will be a new attitude to cross border banking and restrictions on the activity of institutions that do not adhere to a uniform set of standards.

It will be an even greater step in the right direction if we can realize that this same sort of regime should prevail in overseas trade as well. There will be little taste for the toleration of sweatshops, child labor, and the virtual slavery that multinational business craves, and justifies with the most venal and shallow of arguments.

AP
Volcker sees crisis leading to global regulation
By Eileen Aj Connelly, AP Business Writer
Friday February 20, 6:29 pm ET

Volcker sees greater international cooperation on regulations growing from economic crisis

NEW YORK (AP) -- "Even the experts don't quite know what's going on."

Speaking to a number of those experts Friday, Paul Volcker, a top economic adviser to President Barack Obama, cited not only the lack of understanding of the global financial meltdown but the "shocking" speed with which it had spread across the world.

"One year ago, we would have said things were tough in the United States, but the rest of the world was holding up," Volcker told a conference featuring Nobel laureates, economists and investors at Columbia University in New York. "The rest of the world has not held up."

In fact, the 81-year-old former chairman of the Federal Reserve said, "I don't remember any time, maybe even the Great Depression, when things went down quite so fast."

He noted that industrial production is falling in countries across the globe faster than in the U.S., one result of the decline caused by the breakdown of unbridled financial markets that operated on a global scale.

"It's broken down in the face of almost all expectation and prediction," he noted.

Volcker didn't offer specifics on how long he thinks the recession will last or what will help start a recovery. But he predicted there will be some lasting lessons from the experience.

"I don't believe it will be forgotten ... and we will revert to the kind of financial system we had before the crisis," he said.

While he assured his audience of his confidence that capitalism will survive, Volcker said stronger regulations are needed to protect the world economy from such future shocks.

And he said he is concerned about the amount of power central banks, treasuries and regulatory agencies have acquired while trying to contain the meltdown.

"It is evident in the United States, and not just in the United States, the central bank is taking on a role that is way beyond what a central bank should be taking," he said.

Volcker stressed the importance of international cooperation in creating a new regulatory framework, particularly for major banks that operate across national boundaries -- the reverse of what's happened in recent years.

"The more international agreement we have on where we want to get to, the better off we'll be," Volcker said.

And while major banks should be more tightly controlled and less able to make the sort of risky bets that led to their current debacle, Volcker said there should also be more oversight of some kind for hedge funds, equity funds and the remaining investment banks.

He scoffed at the notion that those entities must be free to innovate -- stating that financial "innovations" like asset backed securities and credit default swaps have brought few benefits. The most important "innovation" in banking for most people in the last 20 or 30 years, he maintained, is the automatic teller machine.

Charts for Market Close February 20

US Dollar Weekly Chart with Commitments of Traders

Major Banks Will Be Nationalized Eventually: Wall Street's Dirty Little Secret

The dirty little secret that Wall Street does not wish you to understand is that the banking model which the US has had for the past twelve years was unsustainable, it is over and done, and banks must go bank to being banks, and not hedge funds.

Why doesn't the Street wish you to realize this? First and foremost, the days of big bonuses and big earnings are over. Banks will increasingly become, once again, institutions to support savings and lending, with insured depositors accounts as a major source of capital.

The leveraged days and market speculation for the big money center banks is over.

We no longer need big salaries to retain traders in the banks because they won't be doing much trading for their own accounts anymore. That will be left to the brokerages.

They won't be writing insurance, they won't be taking huge short positions in commodities, and they won't be to big to fail, at least not to this degree with single institutions threatening national solvency.

We need to strike a model of what wish to have as a national financial system, and begging to invest towards that, and not try to reflate a bubble that ought never to have existed in the first place.

Nationalization does not mean the banks will be run by the government. It means that they will be taken into receivership, broken up, and made once more into banks. Those which are not nationalized must be constrained by a new "Glass-Steagall" law limiting their ability to imperil the national economy for their own personal gambling interests.

That is the point that is being lost in this opaque analysis and muddled discussion. The Big Money Center Banks will be nationalized one way or the other. The only real variable is how much money they can take out of the system before it happens.


Bloomberg
Dodd Says Short-Term Bank Takeovers May Be Necessary
By Alison Vekshin

Feb. 20 (Bloomberg) -- Senate Banking Committee Chairman Christopher Dodd said banks may have to be nationalized for “a short time” to help lenders including Citigroup Inc. and Bank of America Corp. survive the worst economic slump in 75 years.

“I don’t welcome that at all, but I could see how it’s possible it may happen,” Dodd said on Bloomberg Television’s “Political Capital with Al Hunt” to be broadcast later today. “I’m concerned that we may end up having to do that, at least for a short time.”

Citigroup and Bank of America, which received $90 billion in U.S. aid in the past four months, fell as much as 36 percent today on concern they may be nationalized. Citigroup, based in New York, fell as low as $1.61. Bank of America, based in Charlotte, North Carolina, tumbled as low as $2.53.

President Barack Obama’s administration is resisting the idea of nationalizing banks, said Dodd, a Connecticut Democrat. “They prefer not to go that way for all of the reasons that we’re familiar with in terms of the symbolic notion of nationalization of major lending institutions,” he said.

The Obama administration strongly believes a “privately held banking system is the correct way to go,” White House spokesman Robert Gibbs told reporters at a briefing today. “That’s been our belief for quite some time, and we continue to have that,” Gibbs said.

‘Leeway’ on Compensation

Treasury Secretary Timothy Geithner has “an awful lot of leeway” in interpreting the restrictions on executive compensation included in the economic stimulus bill and opposed by the banking industry, Dodd said today.

Treasury officials are still examining how to implement the new compensation restrictions and have not yet determined whether they will apply to participants in the administration’s rescue plan or only to banks and companies that get cash injections from the Troubled Asset Relief Program.

Compensation consultants including Alan Johnson, founder of Johnson Associates Inc. in New York, said the rules may be “catastrophic” to Wall Street’s talent base. The caps made top- producing employees “nervous,” and those who can find other jobs will probably leave, said James Reda, who heads a compensation firm in New York.

“I’m sort of stunned in a way that some people are reacting the way they are about all of this,” Dodd said. “At a time like this, everyone needs to pull in the same direction.”

Dodd also said he doesn’t want U.S. automakers to go through a prepackaged bankruptcy or a “forced merger.” General Motors Corp., Ford Motor Co. or Chrysler LLC risk liquidation with such actions, Dodd said on the broadcast.

China Invests in Production and Commodities While the US Feeds the Sharks

China is securing long term supplies of oil, aluminum, iron and other hard commodities at 'favorable prices for years to come.'

The United States is investing in increasingly worthless paper, insolvent banks, crony capitalist ponzi schemes, non-productive consumption, and enormous bonuses for Wall Street financiers.

After a visit to China a few years ago, touring their factories with workers quietly hunched over their worktables in fear, working whatever hours were offered in difficult conditions, Bill Gates observed that this was 'his kind of capitalism.'

The choices you make, what you choose to do or not to do, will pay significant returns, either good or ill, for your children and your children's children.

Plus ça change, plus c'est la même chose.


NY Times
With Cash to Spend, China Starts Investing Globally
By David Barboza
February 21, 2009

SHANGHAI — With the world suffering through a tight credit market, China has suddenly gone shopping.

Beijing said on Friday that one of its big state-owned banks, the China Development Bank, agreed to lend the Brazilian oil giant Petrobras $10 billion in exchange for sending China a long-term supply of oil.

That investment came after similar deals were signed this week with Russia and Venezuela, bringing China’s total oil investments this month to $41 billion.

China’s biggest aluminum producer also agreed earlier this month to invest $19.5 billion in Australia’s Rio Tinto, one of the world’s biggest mining companies. And last Monday, the China Minmetals Corporation bid $1.7 billion to acquire Australia’s OZ Minerals, a huge zinc mining company...

China wants reliable supplies of crude oil, to fuel its growing transport sector; it needs iron ore for steel production, and copper and aluminum to build homes and consumer goods...

Analysts say China could continue to make deals for a variety of small oil and gas companies, mineral producers and mining firms.

This week, for instance, shares of the Australian miner Fortescue Metals Group rose after reports the company was in talks with China over a big investment to help the company expand.

In many cases, China has struck deals in countries that have access to large supplies of oil and minerals but where American and European countries are not well-positioned, like parts of Africa and the Middle East.

In one deal this week, China made an alliance with the government of Hugo Chávez, the president of Venezuela, who has denounced American leadership.

While the oil deals announced vary in terms, analysts say they ensure China a steady supply of oil for decades to come, sometimes at favorable prices....

The SP 500 and Short Term Indicators

The short term indicators are getting stretched to the downside, and the other narrower indices are approaching their own support levels.

Perhaps a techinical bounce at some point, but no higher than overhead resistance. A stairstep decline such as this can be quite damaging, and often will continue until it finds strong support, a footing and a V bottom. It may require a plunge, otherwise it just keeps bleeding.



The SP 500 seems likely to test the prior low at 741. We may get a legitimate double bottom. The overhead resistance will cap any purely technical bounces. That is how we will tell them apart.



The McClellan Oscillator is getting overextended to the downside.



This has 'plunge to a bottom' written on it. But we might just continue to slowly bleed.

The US Employment Picture

The official US Unemployment Percentage Rate.



The average number of weeks a job seeker is unemployed.



The percentage of people in the Civilian Labor Force who are working.

This statistic helps to keep track of workers who are 'discouraged' and no longer included in the official unemployment rate.

This statistic shows that there never really was any recovery after 2001, that the appearance of growth was ephemeral, all a bubble spun by the Fed and the Banks and the Bush Administration.



Source: Bureau of Labor Statistics

Gold Reaches New All Time High in India

The rush to physical gold amid devaluing currencies is a world phenomenon largely unnoticed in the US because of the flight to safety in the US dollar and a strong institutional bias among Wall Street which prefers to deal in paper for its higher turnover and richer fees.

If this trend changes, if the dollar loses some of its own safe haven appeal, if the gold shorts are forced to capitulate despite the propping from the Central Banks, then this could be a surprisingly strong market move.

Gold is already proving to be a desirable alternative to the Swiss franc which as we have noted before has become a disgraceful shadow of its former self because of Swiss government mismanagement. Watch the Swiss howl when their interest rates must move higher to accommodate the debasement of their currency to salvage a corrupt banking sector.

The Economic Times (India)
Gold at all-time high of Rs 15,800 per 10 gm in Delhi
19 Feb 2009, 1350 hrs IST

NEW DELHI: Surging gold prices set yet another record of Rs 15,800 per 10 gram in the national capital on Thursday in line with the surging global bullion markets on speculation that the global recession will deepen further.

The precious metal recorded fresh gains of Rs 50 to Rs 15,800, a level never seen before, after poor economic data of Russia and Japan raised concerns of a growing malaise of global recession.

Jewellers and market analysts said the demand of the yellow metal picked up after the global equity and forex markets dropped in the recent past.

They said shaky investors find no other option but to park their funds in the precious metals, while physical buying for the current marriage season declined substantially

We do not see any customers these days as surging gold prices cooled down the demand for jewellery in this marriage season," said a Delhi-based Jeweller Gaurav Anand.

A similar firming trend in other regional bullion markets in the country also dampened trading sentiment to a great extent. In Kolkata, the gold opened at a record high of Rs 15,925 per 10 gram.

Meanwhile, gold in futures trading touched a new high by rising 0.88 per cent to Rs 15,712 per 10 gram at the MCX counter.

China Is Shopping the World for Miners and Commodities

As anyone who has looked into this knows, the producers always lag the commodities in any recovery, and base materials lag precious metals.

China is showing remarkable foresight in using its dollars to secure supplies of key industrial commodities and oil now.

Bloomberg
China Feasts on Miners as ‘Bank of Last Resort,’ as Metal Falls
By Helen Yuan and Rebecca Keenan

Feb. 18 (Bloomberg) -- Wuhan Iron & Steel Group and Jiangsu Shagang Group Co., China’s third- and fifth-largest steelmakers, are shopping for iron ore mining stakes in Australia and Brazil, executives said in interviews.

“We are evaluating and selecting” candidates in Australia and Brazil, said Shen Wenrong, Jiangsu-based Shagang’s chairman. “Going overseas is the government policy, so I believe we will get financing from Chinese banks.” Wuhan spokesman Bai Fang said his company is “looking for opportunities” amid lower acquisition costs for iron ore assets in Australia and “won’t rule out other countries.”

The world’s top metal user, China already has acquired $22 billion worth of commodity assets this year after a 70 percent drop in metal and oil since July ended a six-year boom in raw materials. With U.S. and Australian banks still hesitant to lend, Rio Tinto Group and OZ Minerals Ltd., laboring under combined debt of $40 billion, agreed this month to sell stakes to Aluminum Corp. of China and China Minmetals Corp., respectively.

“China has turned out to be the bank of last resort,” said Glyn Lawcock, head of resources research at UBS AG in Sydney. “China is a net importer of copper, bauxite, alumina, nickel, zircon, uranium. China is looking for ways to secure supply of these raw materials.”

Commodity acquisitions by China would put increasing amounts of the world’s raw materials under control of their biggest consumer and may allow it to influence prices. The investment by Aluminum Corp. of China, or Chinalco as the state-owned entity is known, into Rio may bolster China’s bargaining power to set iron ore prices, China Iron and Steel Association said.

Steel Prices Surge

China’s plan to boost the economy with 4 trillion ($585 billion) yuan in spending on roads, bridges and other infrastructure has pushed up prices for steel and iron ore by as much as 37 percent and the cost of shipping commodities has more than doubled.

State-owned China National Petroleum Corp., the country’s largest oil producer, also is looking overseas in search of oil fields. China this week agreed to provide $25 billion of loans to Russia in return for oil supplies for the next 20 years.

Australia already has signaled concern that China is buying strategic assets on the cheap. Treasurer Wayne Swan last week tightened takeover laws when Chinalco announced its investment in London-based Rio Tinto, the world’s third-largest mining company.

Swan has the power to reject both that deal and Minmetals’ proposition with Melbourne-based OZ Minerals on national interest grounds. When Peter Costello was Australia’s treasurer in 2001, he blocked Royal Dutch Shell Plc’s bid for Woodside Petroleum Ltd. In 2004, Minmetals failed to reach an accord to buy Noranda Inc. amid objections from Canadian politicians.

Currency Reserves

China’s acquisition hunt is happening as the government ponders where to invest its currency reserves, which increased 27 percent in the past year to $1.95 trillion, about 29 percent of the world’s total. The country already owns $696.2 billion in Treasuries, about 12 percent of the U.S.’s outstanding marketable debt and has been stung by losses of more than $5 billion on $10.5 billion invested in Blackstone Group LP and Morgan Stanley in New York and TPG Inc. in Fort Worth, Texas, since mid-2007.

“China has burnt its hands in the past buying liquid assets like Blackstone, but here they have the chance to buy tangible, useful assets,” said Professor Liu Baocheng at the University of International Business & Economics in Beijing. “There’s no point putting money in the bank or in deposits with low returns.”

China consumes over a third of the world’s aluminum output, a quarter of its copper production, almost a tenth of its oil and it accounts for more than half of the trading in iron ore. Last year, China bought $211 billion worth of iron ore, refined copper, crude oil and alumina....

"The Worst Is Yet to Come" With Tim and Larry

Howard Davidowitz is one of the best retail industry analysts available. It is always worth listening to him. His outlook on the broader macro level, based on consumer activity, is depressingly gloomy.

The gloomy long-term Depression outlook becoming so popularly accepted that we find ourselves rebelling against it. Perhaps unjustifiably so.

It will come down to what the Obama Administration does about the Banks. If the big Wall Street banks are allowed to absorb the capital vitality of the economy and limp along as insolvent zombies it is highly possible that we will have our own 'lost decade' like the Japanese experience.

Larry Summers is in command as the economic advisor with young Tim as his minion. We can barely imagine the infighting that must be going on between the practical politicos around Obama, probably led by Rahm Emanuel, who must be simply frothing at the boneheaded policy blunders that Geithner and Summers are creating.

A chart of W's popularity shows a decided peak just after 911, and then a steady decline into political oblivion and one of the worst popularity ratings in modern presidential history. It is now being revealed that there was a feeling in the White House that Cheney and Rumsfeld misled the president and cost him, dearly. W became very cool and detached with Cheney and his circle in the last two years, He ignored personal pleas to pardon Cheney's man, Scooter.

There is a real possibility that Larry Summers and Tim Geithner could be the spoilers for Obama despite the enormous wave of popular support which he enjoys today. Betting on the over/under, we suspect that eventually Rahm will put him in a political body bag, with Larry providing plenty of personal assistance in his own demise. But that's just an opinion and it could be wrong. Their failure is definitely not in the best interests of the country. Here is a similar opinion.

Fool Me Once Geithner, Shame on You, Fool Me Twice...

And now for a stiff dose of reality which is even too gloomy for our tastes but may be correct from Howard Davidowitz:


Howard Davidowitz Video Interview

"Worst Is Yet to Come:" Americans' Standard of Living Permanently Changed
by Aaron Task
Feb 17, 2009 12:53pm EST

There's no question the American consumer is hurting in the face of a burst housing bubble, financial market meltdown and rising unemployment.

But "the worst is yet to come," according to Howard Davidowitz, chairman of Davidowitz & Associates, who believes American's standard of living is undergoing a "permanent change" - and not for the better as a result of:

- An $8 trillion negative wealth effect from declining home values.
- A $10 trillion negative wealth effect from weakened capital markets.
- A $14 trillion consumer debt load amid "exploding unemployment", leading to "exploding bankruptcies."

"The average American used to be able to borrow to buy a home, send their kids to a good school [and] buy a car," Davidowitz says. "A lot of that is gone."

Going forward, the veteran retail industry consultant foresees higher savings rate and people trading down in both the goods and services they buy - as well as their aspirations.

The end of rampant consumerism is ultimately a good thing, he says, but the unraveling of an economy built on debt-fueled spending will be painful for years to come.

The Stock Market is Teetering Around Key Support

We could get a serious leg down if we slip support tomorrow and the measures on this chart are confirmed to the downside. It is most likely we go down to key support and then form the start a technical rally. This is by no means assured however, and if it breaks down it could be quite a plunge down and a test of bully's nerves.

Gold Rises to Record Prices Against European and Asian Currencies

The current global crisis is a direct result of the long Greenspan chairmanship of the Fed, neo-liberal deregulation of the financial markets, and rampant fraud and corruption amongst the financiers controlling the world's reserve currency, from the bankers to the ratings agencies to the regulatory bodies.

"Those entrapped by the herd instinct are drowned in the deluges of history. But there are always the few who observe, reason, and take precautions, and thus escape the flood. For these few gold has been the asset of last resort." Antony C. Sutton

UK Telegraph
Gold hits record against euro on fear of Zimbabwean-style response to bank crisis
By Ambrose Evans-Pritchard
8:49PM GMT 17 Feb 2009

This gold rally is driven by safe-haven fears and has a very different feel from the bull market we've had for the last eight years," said John Reade, chief metals strategist at UBS. "Investors are seeing articles in the press saying governments should deliberately stoke inflation, and they are reacting to it."

Gold jumped to multiple records on Tuesday, triggered by fears that East Europe's banking crisis could set off debt defaults and lead to contagion within the eurozone. It touched €762 an ounce against the euro, £675 against sterling, and 47,783 against India's rupee.

Jewellery demand – usually the mainstay of the industry – has almost entirely dried up and the price is now being driven by investors. They range from the billionaires stashing boxes of krugerrands under the floors of their Swiss chalets (as an emergency fund for total disorder) to the small savers buying the exchange traded funds (ETFs). SPDR Gold Trust has added 200 metric tonnes in the last six weeks. ETF Securities added 62,000 ounces last week alone.

In dollar terms, gold is at a seven-month high of $964. This is below last spring's peak of $1,030 but the circumstances today are radically different. The dollar itself has become a safe haven as the crisis goes from bad to worse – if only because it is the currency of a unified and powerful nation with institutions that have been tested over time. It is not yet clear how well the eurozone's 16-strong bloc of disparate states will respond to extreme stress. The euro dived two cents to $1.26 against the dollar, threatening to break below a 24-year upward trend line.

Crucially, gold has decoupled from oil and base metals, finding once again its ancient role as a store of wealth in dangerous times.

"People can see that the only solution to the credit crisis is to devalue all fiat currencies," said Peter Hambro, chairman of the Anglo-Russian mining group Peter Hambro Gold. "The job of central bankers is to allow this to happen in an orderly fashion through inflation. I'm afraid it is the only way to avoid disaster, but naturally investors are turning to gold as a form of wealth insurance."

One analyst said the spectacle of central banks slashing rates to zero across the world and buying government debt as if there was no tomorrow feels like the "beginning of the 'Zimbabwe-isation' of the global economy".

Gold bugs have been emboldened by news that Russia has accumulated 90 tonnes over the last 15 months.

"We are buying gold," said Alexei Ulyukayev, deputy head of Russia's central bank. The bank is under orders from the Kremlin to raise the gold share of foreign reserves to 10pc.

The trend by central banks and global wealth funds to shift reserves into euro bonds may have peaked as it becomes clear that the European region is tipping into a slump that is as deep – if not deeper – than the US downturn. Germany contracted at an 8.4pc annual rate in the fourth quarter. The severity of the crash in Britain, Ireland, Spain, the Baltics, Hungary, Ukraine and Russia has shifted the epicentre of this crisis across the Atlantic. The latest shock news is the 20pc fall in Russia's industrial production in January. The country is losing half a million jobs a month.

Markets have been rattled this week by warnings from rating agency Moody's that Austrian, Swedish and Italian banks may face downgrades over their heavy exposure to the ex-Soviet bloc. The region has borrowed $1.7 trillion (£1.2 trillion) – mostly from European banks – and must roll over $400bn this year....

St. Louis Fed Chief Says Fed Must Inflate Money Supply More Aggressively

Considering the AMB and the narrow money figures went parabolic, with the greatest increase in Fed history, these are somewhat unusual words from a Fed official.

Best to take him at his word. He is only saying the truth about what the Fed is already doing. This sounds like a classic misdirection.

Let's guess. In order to save us he Fed should give more money to the big money center banks through Fed programs? The Fed should buy bad assets at par from unconventional parties like every large corporation with bad debts? The Fed should more aggressively debase the currency and to transfers the wealth of savers of to those who caused this crisis?

This ought to be fun to watch.


Bloomberg
Fed Should Expand Supply of Money, Bullard Says
By Scott Lanman and Anthony Massucci

Feb. 17 (Bloomberg) - Federal Reserve Bank of St. Louis President James Bullard said the U.S. faces a risk of “sustained deflation” and called on the central bank to avert a decline in prices by expanding the money supply.

The prospect of deflation is a “significant downside risk” and may increase home foreclosures, Bullard said in a speech today in New York. Adopting a target “rapid” growth rate for the monetary base, which includes money in circulation and banks’ reserve deposits with the Fed, should “head off any incipient deflationary threat,” he said.

Bullard is one of a few Fed officials to advocate a new policy tool after the Federal Open Market Committee in December cut its main interest rate almost to zero. The central bank is using money-creation authority to put assets such as home loans on its balance sheet, aiming to unfreeze credit and end the longest recession since 1982.

“By expanding the monetary base at an appropriate rate, the FOMC can signal that it intends to avoid the risk of further deflation and the possibility of a deflation trap,” Bullard said in prepared remarks to the New York Association for Business Economics.

He didn’t propose a specific figure for the target.

The FOMC said in its Jan. 28 statement that there’s “some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.”

Growth Target

The FOMC at its December meeting discussed setting a target for growth in measures of money, such as the monetary base. While a “few” policy makers favored a numerical goal for money growth, most preferred a more open-ended “close cooperation and consultation” with the Fed board on how to expand assets and liabilities, according to minutes of the session.

Bullard’s warning about deflation is stronger than comments by other central bank officials. Chicago Fed President Charles Evans said Feb. 11 that he’s “not tremendously concerned about deflation.”

Bullard told reporters after the speech he supports the adoption of an inflation target to prevent expectations for prices from falling too far. A target for inflation “would be helpful at this time,” he said.

“You have to consult with all players, including Congress,” he said. “If they don’t want to do it, then we don’t do it.”

Culture Shock - CNBC

For some reason Bloomberg Television lost its signal for an extended period today, and in a moment of desperation CNBC looked like an alternative. CNBC doesn't get watched much here.

CNBC is a 'news channel' in name only. Its like the McLaughlin Group with financial overtones.

Its overseas branch operations are not as bad, with the UK show often being reasonably good.

But this Fort Lee operation is abysmal, an extended infomercial, a puppet show for corporate perspectives without fact based reasoning.

Bloomberg has been reaching new lows in reporting standards, but next to CNBC it looks like pure reason, a Pulitzer Prize operation.

Long Term Dow Chart and Forecasts

For some time we have had a downside target of 7200 on the Dow based on classic charting measuring objectives.

Here is an update of that chart showing we have broken down out of the symmetrical triangle and appear to be moving lower towards that objective.

Here is a very long term chart of the Dow showing the obvious importance of the 7200 level to the bulls. If that breaks the next support level on this chart will be around 6400. It will confirm the tentative neckline at 10,300 on the chart above.

When charts done from various perspectives and techniques agree, technically it can be a powerful confirmation of their validity.



These lower forecast numbers could be thrown off IF the government manages to start reflating the money supply and stock prices. They will at some point, its just a matter of timing, but it will obviously impact the nominal stock index numbers.

The Dow gold ratio will likely reach at least 2 and possibly less. This implies that at the bottom gold will be $2700. Gold will likely hit significant resistance around 1250-1300 in the short term and correct and consolidate its gains from there depending on how quickly we arrive at that target and the steepness of the slope of the price increase leading up to it.

If the reflation kicks in then all bets for a gold top are off. Silver is a little harder to forecast because of its industrial component. But we think $100/oz. is a slam dunk in the longer term, but anything can happen.



There is no forecast for the DX US Dollar Index because it will become increasingly irrelevant and detached from reality.

This is a longer term view, probably out to 2011, so the number of things that could impact it are many and significant.

Russia and China Sign Oil Deal for the Next Twenty Years

Look for more deals like this to start happening between non-western nations, that do not involve anglo-american companies and exchanges.

The Economic Times
Russia, China sign $25 billion energy deal
17 Feb 2009, 1721 hrs IST, AGENCIES

MOSCOW: Russia and China signed a $25 billion energy deal in Beijing on Tuesday that will see China secure oil supplies from Russia for the next 20 years in return for loans, Russia's state pipeline monopoly Transneft said.

As part of the broad energy supply deal, China will lend $15 billion to Rosneft, Russia's state-owned oil major, and $10 billion to Transneft, a vital boost for energy companies as they struggle to raise capital amid straitened lending conditions and plunging oil prices.

In return, Russia promised to guarantee annual oil supply of 15 million tons (300,000 barrels per day) for 20 years to its energy-hungry neighbor.

Igor Dyomin, Transneft's press spokesman, confirmed the outline of the deal.

The signing ceremony marks an end to months of talks between the neighbors after negotiations broke down amid disagreements over interest rates and state guarantees.

Russian crude will be supplied through a long-delayed pipeline project agreed to late last year. The pipeline, which extends from western Siberia to the Pacific coast, is to be linked to China from the Siberian city of Skovorodino, 70 kilometers (44 miles) north of the Sino-Russian border.

Wall Street Execs Knew Madoff Was a Fraud Years Ago But Kept Silent

There is no way that the top execs on Wall Street did not know Bernie Madoff was running a scam. No way.

Why? Because once they heard he was pulling down those kinds of returns in all types of markets they would have had their own whiz kids climbing up his company's investment portfolio looking to see how he did it. They would want to do it too. It took Markopolos how many minutes to figure out it wasn't legitimate?

But now you know why so few Wall Street firms lost any money with Madoff despite his 'superior returns.'

Why did they keep quiet? Professional courtesy amongst scumbags is not likely, because there isn't any. More likely Bernie knew about some of their frauds, and that made him untouchable.

If they dig deeply enough they might find the real truth behind the Madoff scam, and it won't be pretty. This is no lone trader operation.

We may never hear the details behind this scam. It might shake our confidence in the system.


NY Post
Madoff Wall of Silence
By James Doran
February 16, 2009

Senior executives at some of Wall Street's biggest firms were convinced Bernard Madoff was a fraud as early as 2005 - yet none alerted authorities, documents filed with the Securities and Exchange Commission reveal.

Leon Gross, the former managing director in charge of worldwide equity derivatives research for Citigroup, told friends and colleagues on Wall Street in 2005 that he thought Madoff was being less than honest about the returns he could make for investors but did nothing to prevent the fraud.

Likewise, Joanne Hill, Goldman Sachs' global head of equity derivatives research, believed there was something wrong with Madoff's investment scheme because the returns he boasted in marketing materials seemed too good to be true.

Like Gross, Hill did not alert her superiors or regulatory authorities. She did, however, tell friends and colleagues about her suspicions.

Bud Haslett, of Write Capital Management, an investment firm, also suspected something fishy. But he told no one of his concerns.

The actions - or inaction - of the bankers is unveiled in a 700-plus-page dossier of e-mails, letters and analysis filed with the SEC by Harry Markopolos, the fraud investigator who tried to blow the whistle on Madoff for eight years.

The silence by the executives is disturbing to some, who claim a second alarm bell could have forced the SEC's hand and brought Madoff's alleged scam to an end sooner.

Markopolos told the SEC, according to the documents in the file, that he had been in contact with Gross, Hill and Haslett and that they would give evidence to the SEC so long as they were never required to speak in an official capacity.

Citigroup confirmed that Gross had been an employee but had left the bank some months ago. The company declined to comment about his views on Madoff.

A source close to Citi said Gross should not be singled out, as his views about Madoff were commonplace on Wall Street, adding that Gross did not spend much time analyzing Madoff's investment strategies.

Goldman Sachs did not return calls seeking comment. Write Capital Management, meanwhile, has not filed records with the SEC since 2006.

Whistleblower: Gordon Brown is Culpable and Should Resign

The UK would do well to force Gordon Brown to resign, and for a new government to be created. Who would take his place? Surely no one among the Tories, as they planted the seeds for this debacle and remain unreformed and unrepentant.

In the US, we have done something emulating this already, using our process of regularly scheduled elections and the repudiation of the Republican party principles (or lack thereof).

However, it remains most unsatisfying and discouraging that Obama continues to put pressure on the Congress to 'just move on' and not investigate any of the abuses of the past eight years, and points of Constitutional excess that led us to this point, or engage in meaningful investigation and reform of the monied interests who are such heavy contributors to the Democratic party.

He looks less like the Lincolnesque figure his admirers assume him to be, and more like a small time dealmaker from the Chicago machine.

He can do better than this. And we the voting public deserve better. Obama needs to grow a principled backbone worthy of his words.

UK Independent
Blame Brown: Revenge of the whistleblower
By Margareta Pagano and Jane Merrick
February 15, 2009

A former HBOS executive says he has documents that prove the Prime Minister must take responsibility for the mess in the markets

The HBOS whistleblower whose revelations led to the resignation of one of the Government's top regulators is about to release a tranche of documents which he says point a direct and accusatory finger at Gordon Brown's responsibility for the banking crisis, and has called on the Prime Minister to resign. In a further blow to Labour, an Independent on Sunday poll showed voter support for the party evaporating, leaving it only a few points ahead of the Lib Dems.

Paul Moore, the former head of risk at HBOS, told the IoS that he has more than 30 potentially incendiary documents which he will send to MPs on the Treasury Select Committee. He says they disprove Mr Brown's claim about the reasons for HBOS's catastrophic losses – now estimated to be nearly £11bn – and show that it was the reckless lending culture, easy credit and failed regulation of the Brown years that led directly to the implosion of British banks.

After Mr Moore's explosive testimony at the MPs' banking hearing, the Prime Minister had denied the former executive's central charges and said that HBOS's difficulties were due to its flawed business model. Mr Moore says his documents refute this and prove the cause of the crisis can be laid at Gordon Brown's feet. He believes Mr Brown's failure to intervene over the reckless lending undertaken by all the banks over the past decade means he should go. "The failure goes right to the heart of the system – to the internal supervisory system and right to the top of government."

Mr Moore told the IoS yesterday: "Brown must go. He cannot remain in office. He has presided over the biggest boom in the history of the country as well as one of the biggest busts. But he promised no more boom and bust. He must be held accountable for his failure to oversee the stability of the country.

(Obama's blocking of congressional investigations of the abuses of prior administration is a kind of professional courtesy among politicians that is not warranted nor serving of the public interest, only of the concept of a class of ruling elite. And his appointment of Larry Summers and other appointments that fail the integrity test is a disgrace. - Jesse)

"Brown presided over a policy based on excessive consumer spending based on excessive consumer credit based on massively increasing property prices, which were caused by excessively easy credit which could only ultimately lead to disaster. But no, in Gordon's mind it was all caused by global events beyond his and anyone else's control...."

(Gordon Brown pales by comparison to the enormity of Alan Greenspan's serial malfeasance and advocacy for ruinous policy errors. - Jesse)

He says the papers – which he has kept from his time in his post as head of risk, from 2002 to 2005 – show that HBOS was involved in a huge sales drive to win market share which ultimately led to its collapse. Mr Moore claims that the "driven sales culture" was led by Sir James, and this, plus the "staggering failure" of the Government to manage the economy, had forced him to speak out. "Brown swaggers around holding himself out as the economic saviour of the world with a level of hubris that defies belief. But does he ever acknowledge that it was he, as Chancellor of the Exchequer, who presided functionally over the economic strategy that got us into this mess in the first place?"

As a trained barrister, Mr Moore stressed that his new evidence being sent to the committee will back up his claims. "I have compiled a meticulous record of my time at the bank. This will show that the version of events given by KPMG, which was brought in to carry out an audit of my claims, is inaccurate," he said. "Key witnesses were not included in the original audit and there are many factual errors. I will only be vindicated when all my allegations are proved by the evidence I have....."

America vs. the Oligarchs

Bill Moyers has an interview with former IMF Chief Economist and MIT professor Simon Johnson that is excerpted and linked below.

Simon Johnson's premise is that the big Wall Street banks represent an oligarchy that is exerting undue influence and control on our government and the economy. They are turning this crisis to their advantage, and circumventing the democratic process.

What we are seeing looks to Simon Johnson like a financial coup d'etat.

Now is the time to break up the big money center banks. Now is the time to reinstate Glass-Steagall. We must demand the reforms for which we elected the Obama Administration.

Watch this interview. Think about it. Let other people know. Write your congressmen.

And be prepared to act on a larger scale in a peaceful way to get the point across that we value our liberty and we will stand for justice. We are not optimistic that the government will do the right thing without more prodding and significant support from the public.

"I think I'm signaling something a little bit shocking to Americans, and to myself, actually. Which is the situation we find ourselves in at this moment, this week, is very strongly reminiscent of the situations we've seen many times in other places.

But they're places we don't like to think of ourselves as being similar to. They're emerging markets. It's Russia or Indonesia or a Thailand type situation, or Korea. That's not comfortable. America is different. America is special. America is rich. And, yet, we've somehow find ourselves in the grip of the same sort of crisis and the same sort of oligarchs...

But, exactly what you said, it's a small group with a lot of power. A lot of wealth. They don't necessarily - they're not necessarily always the names, the household names that spring to mind, in this kind of context. But they are the people who could pull the strings. Who have the influence. Who call the shots...

...the signs that I see this week, the body language, the words, the op-eds, the testimony, the way they're treated by certain Congressional committees, it makes me feel very worried.

I have this feeling in my stomach that I felt in other countries, much poorer countries, countries that were headed into really difficult economic situation. When there's a small group of people who got you into a disaster, and who were still powerful. Disaster even made them more powerful. And you know you need to come in and break that power. And you can't. You're stuck....

The powerful people are the insiders. They're the CEOs of these banks. They're the people who run these banks. They're the people who pay themselves the massive bonuses at the end of the last year. Now, those bonuses are not the essence of the problem, but they are a symptom of an arrogance, and a feeling of invincibility, that tells you a lot about the culture of those organizations, and the attitudes of the people who lead them...

But it really shows you the arrogance, and I think these people think that they've won. They think it's over. They think it's won. They think that we're going to pay out ten or 20 percent of GDP to basically make them whole. It's astonishing....

...these people are throughout the system of government. They are very much at the forefront of the Treasury. The Treasury is apparently calling the shots on their economic policies. This is a decisive moment. Either you break the power or we're stuck for a long time with this arrangement."

Bill Moyer's Journal - Interview with Simon Johnson

Simon Johnson's Web Site Baseline Scenario

European Banks Face Devastating Exposure to Emerging Markets

This view from the City of London is interesting, given the devastation that permeates their own surrounding landscape. The Anglo-Americans seem to be throwing down the gauntlet. What now, Monsieur Trichet?

The European banking system is certainly a mess, and if there was a case to be made for pursuing the 'Swedish option' of nationalizing the banks in a crisis of their own making this is it.

One sentence in this was especially eye-catching.

"We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights."

Problem -> Reaction -> Solution.

There always seem to be some arcane powers at the ready to solve the unexpected crisis.


UK Telegraph
Failure to save East Europe will lead to worldwide meltdown
By Ambrose Evans-Pritchard
11:17PM GMT 14 Feb 2009

If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung.

Austria's finance minister Josef Pröll made frantic efforts last week to put together a €150bn rescue for the ex-Soviet bloc. Well he might. His banks have lent €230bn to the region, equal to 70pc of Austria's GDP.

"A failure rate of 10pc would lead to the collapse of the Austrian financial sector," reported Der Standard in Vienna. Unfortunately, that is about to happen.

The European Bank for Reconstruction and Development (EBRD) says bad debts will top 10pc and may reach 20pc. The Vienna press said Bank Austria and its Italian owner Unicredit face a "monetary Stalingrad" in the East.

Mr Pröll tried to drum up support for his rescue package from EU finance ministers in Brussels last week. The idea was scotched by Germany's Peer Steinbrück. Not our problem, he said. We'll see about that.

Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay – or roll over – $400bn this year, equal to a third of the region's GDP. Good luck. The credit window has slammed shut.

Not even Russia can easily cover the $500bn dollar debts of its oligarchs while oil remains near $33 a barrel. The budget is based on Urals crude at $95. Russia has bled 36pc of its foreign reserves since August defending the rouble.

"This is the largest run on a currency in history," said Mr Jen.

In Poland, 60pc of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly – by lenders and borrowers – it matches America's sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not.

Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. Europeans account for an astonishing 74pc of the entire $4.9 trillion portfolio of loans to emerging markets.

They are five times more exposed to this latest bust than American or Japanese banks, and they are 50pc more leveraged (IMF data).

Spain is up to its neck in Latin America, which has belatedly joined the slump (Mexico's car output fell 51pc in January, and Brazil lost 650,000 jobs in one month). Britain and Switzerland are up to their necks in Asia.

Whether it takes months, or just weeks, the world is going to discover that Europe's financial system is sunk, and that there is no EU Federal Reserve yet ready to act as a lender of last resort or to flood the markets with emergency stimulus.

Under a "Taylor Rule" analysis, the European Central Bank already needs to cut rates to zero and then purchase bonds and Pfandbriefe on a huge scale. It is constrained by geopolitics – a German-Dutch veto – and the Maastricht Treaty.

But I digress. It is East Europe that is blowing up right now. Erik Berglof, EBRD's chief economist, told me the region may need €400bn in help to cover loans and prop up the credit system.

Europe's governments are making matters worse. Some are pressuring their banks to pull back, undercutting subsidiaries in East Europe. Athens has ordered Greek banks to pull out of the Balkans.

The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan – and Turkey next – and is fast exhausting its own $200bn (€155bn) reserve.

We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights.

Its $16bn rescue of Ukraine has unravelled. The country – facing a 12pc contraction in GDP after the collapse of steel prices – is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6bn. Latvia's central bank governor has declared his economy "clinically dead" after it shrank 10.5pc in the fourth quarter. Protesters have smashed the treasury and stormed parliament.

"This is much worse than the East Asia crisis in the 1990s," said Lars Christensen, at Danske Bank.

"There are accidents waiting to happen across the region, but the EU institutions don't have any framework for dealing with this. The day they decide not to save one of these one countries will be the trigger for a massive crisis with contagion spreading into the EU."

Europe is already in deeper trouble than the ECB or EU leaders ever expected. Germany contracted at an annual rate of 8.4pc in the fourth quarter.

If Deutsche Bank is correct, the economy will have shrunk by nearly 9pc before the end of this year. This is the sort of level that stokes popular revolt.

The implications are obvious. Berlin is not going to rescue Ireland, Spain, Greece and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for EU "union bonds" should the debt markets take fright at the rocketing trajectory of Italy's public debt (hitting 112pc of GDP next year, just revised up from 101pc – big change), or rescue Austria from its Habsburg adventurism.

So we watch and wait as the lethal brush fires move closer.

If one spark jumps across the eurozone line, we will have global systemic crisis within days. Are the firemen ready?

Why Is There No Reform?

First the reform of the financial system, and then the stimulus can find a footing. The existing level of debt obligations are too large and unproductive of cash flows to service.

The debt must be written down and the currency devalued to increase the wages of debt payers relative to them. This is an unacceptable alternative at the moment because politically the debt holders and the big money center banks are running the system. The parallels to Japan are remarkable, where the inability to realize their losses caused an entire country to lose its way for a decade.

Until we break up the big money center banks into their parts, and write off their debt obligations, we are pouring money into a Wall Street sinkhole of corruption. This will involve the reinstatement of Glass-Steagalls.

"The United States should emerge from the economic crisis with a two-part financial system that places tighter restrictions on banks, says former Federal Reserve chairman Paul Volcker.

To prevent another banking crisis from undermining the economy, the U.S. financial system must turn back the clock to a time when commercial banks were the core of the credit system, said Mr. Volcker...

The system that Mr. Volcker envisions "looks more like the Canadian system than it does like the American system," he told a Toronto audience last night..."

And there will be no recovery, only increasing pain, until we break the pattern.

“The Government should allow every distressed bank to go bankrupt and set up a fresh banking system under temporary state control rather than cripple the country by propping up a corrupt edifice…

…amounts to swapping taxpayers’ ‘cash for trash,’ Stiglitz said yesterday in a panel discussion at the World Economic Forum in Davos, Switzerland. ‘You shouldn't chase good money after bad. We’re talking about a national debt that’s very hard to manage.'" Joseph Stiglitz

What is the reason then that we are following a path that will fail? Are those who know what is happening afraid to admit it, to tell the truth? Is it simple looting until the harsh medicine is taken? Is it the cowardice of the Democrats? Is it the obstructionism of old line thinkers like Larry Summers and Tim Geithner?

It is most probable that there are still just too many of those who say, "Why can't things just go on as they have done before?" The awareness that the game has changed will penetrate the public consciousness slowly.

It's over. We cannot keep trying to rebuild the unsustainable, because eventually the great forces of probability will crush us and destroy us, all that we have.

But until the people are ready for change, to accept that reforms are necessary, the Administration must tread lightly. As de Tocqueville said, "The most dangerous moment for bad government is when it begins to reform."

Only time will tell. Until then you know what to do.

P.S. An early responder said, "I presume that you mean buying gold" about 'you know what to do.' And then they laid out the reasons and ways in which the government would confiscate it.

Sorry to have been cryptic, and its my fault. Let me give you the more straightforward answer that I gave to them.

"Actually it's "need little, want less, and love more" which is at the bottom of he blog.

But if it does become the kind of government that blatantly confiscates wealth through whatever means, where will you hide? First they came for gold...

Ok don't buy gold. What you will buy? Whatever wealth you do have will be taken eventually. There are no bystanders if a government turns to lawlessness.

Better to get your head screwed on straight now and realize it is not about gold, it is not about the right investments, it is about freedom."

How Cheap Is the PE Ratio When Earnings Are Negative?

Market Watch
S&P heads to first quarter ever of negative earnings
By Kate Gibson
4:29 p.m. EST Feb. 13, 2009

NEW YORK (MarketWatch) -- As Wall Street tracks Washington's moves to help the beleaguered banking sector and push through a massive economic stimulus, nearly 400 of the S&P's 500 companies have weighed in and reported a collective loss, even excluding the financials.

"This is the worst; after the sixth quarter of negative growth, it will be the first quarter ever of negative earnings," said Howard Silverblatt, senior index analyst, at Standard & Poor's.

A sixth quarter of negative growth ties the prior record set when Harry Truman was president, running from the first quarter of 1951 to the second quarter of 1952.

"Next quarter, we're expecting a new record of seven quarters of negative growth," Silverblatt added.

As of the close of business Thursday, Silverblatt calculates S&P earnings per share, on a reported basis, at a loss of $10.44 for the quarter. If financials were taken out of the equation, that deficit would drop to $2.35 a share.

"The majority of it is financials, but the biggest issue to hit as reported -- the worst charge -- was ConocoPhillips (COP) , which accounted for $3.66," said Silverblatt.

Income from continuing operations at the companies in the S&P 500 that already have reported earnings fell $90.8 billion, with financials contributing $70.4 billion of the decline. Conoco accounted for $31.9 billion of the shortfall, said Silverblatt...

The Dow is now "too heavily weighted in financials to accurately reflect the current business mix of this country," said Marc Pado, U.S. market strategist, Cantor Fitzgerald.

With 84.8% of the market value and 390 issues reported, operating earnings, which includes income from products or services and excludes financing and other costs, are down 62% from the fourth quarter of 2007, Silverblatt said...

Balance Sheet Recessions and Japan Redux

Here are a few excerpts from an essay by Axel Leijonhufvud at VoxEU which was brought to my attention by xyphius from Japan.

The essay in particular was quite good, but the introductory comments in the email from xyphius were also quite to the point that we've been making here for some time.

"I've been wondering about the consequences of what Japan did in the lost decade and whether there are any lessons to be learnt from it. I remember asking a (Japanese) friend in the early part of this decade (before Chinese Viagra revived the moribund economy) why after so many years with so little to show from policy there was little pressure for change - his reply: "We aren't hurting enough to want to change."

I take my cue from that answer: Deficit spending was a palliative that bought off demands for political reform, and propping up the banks and by extension their insolvent clients prevented a liquidation in which a meaningful transfer of assets could have occurred. In short, the political, bureaucratic and business oligopoly maintained the status quo ante.

What might become of the cocoon years? A horrible festering mess?!"

It could be something beautiful if Japan embraces reform and becomes a more vibrant, open democracy and breaks up the keiretsu economy and the tyranny by bureaucracy. It is as likely if not moreso that Japan would choose a return to national fascism. But having expended the flower of its youth in the last great War, and with zero population growth, Japan would likely need a more youthful ally. War is an old man's game, but younger men provide the fuel.

The object lesson here for us of course is that the US is going down the same path, with a military-financial complex that resists change, and may subject the country to enough of a economic scourging to set the stage for rescue by a 'great man' as national saviour. Fascism was a rather popular choice the last time the world went through a deflationary depression.

To make it pointedly clear, the US must reform its financial system which requires breaking up the big Wall Street money center banks. Once broken up they may more easily be reintegrated into an organic economy, and stimulus may take root in a real economy.

The point is not to save the banks. The point is to save the depositors, the pension funds, and the good regional banks that are banks, and not vehicles of financial engineering.

The dollar must relinquish its role as the reserve currency of the world, because our hobbits, dwarves, and men have shown themselves incapable of wielding that power gracefully. It is too great a temptation and its misuse will result in our own destruction. But we must also reform the international trade system and prevent the blatant market manipulation of the Asian tigers, China and Japan.

There are those who say, "Why can't things just go on as they have done?" The awareness that things have changed will penetrate the public consciousness slowly. It's over. It's done. Things must go forward, and we can never go back. You cannot keep trying to rebuild the unsustainable, because eventually the great forces of probability will crush you.

Our fate should we fail to reform our system is to change into something more horrible than we can possibly imagine.

And here are the excerpts from the VoxEU essay by Axel Leijonhufvud.

Richard Koo (2003) coined the term “balance sheet recession” to characterise the endless travail of Japan following the collapse of its real estate and stock market bubbles in 1990. The Japanese government did not act to repair the balance sheets of the private sector following the crash. Instead, it chose a policy of keeping bank rate near zero so as to reduce deposit rates and let the banks earn their way back into solvency. At the same time it supported the real sector by repeated large doses of Keynesian deficit spending. It took a decade and a half for these policies to bring the Japanese economy back to reasonable health.

The Swedish policy following the 1992 crisis has been often referred to in recent months. Sweden acted quickly and decisively to close insolvent banks, and to quarantine their bad assets into a special fund. Eventually, all the assets, good and bad, ended up in the private banking sector again. The stockholders in the failed banks lost all their equity while the loss to taxpayers of the bad assets was minimal in the end. The operation was necessary to the recovery but what actually got the economy out of a very sharp and deep recession was the 25-30% devaluation of the krona which produced a long period of strong export-led growth. Needless to say, the US is in no position to emulate this aspect of the Swedish success story.

Why not?

The lesson to be drawn from these two cases is that deficit spending will be absorbed into the financial sinkholes in private sector balance sheets and will not become effective until those holes have been filled. During the years that national income fails to respond, tax receipts will be lower so that the national debt is likely to end up larger than if the banking sector’s losses had been “nationalised” at the outset.

No Ordinary Recession by Axel Leijonhufvud

Lloyd's Bank May Fail, Be Nationalized

This is Lloyd's Bank, one of Britain's largest, but it is not the same as Lloyd's of London, now known as Lloyd's International, the famous insurance firm.


Government may have to take full control of Lloyds
By James Kirkup
6:16PM GMT 13 Feb 2009

Ministers have been warned they will be forced to take full control of Lloyds Banking Group after its shares fell by a third amid huge losses.

Britain's biggest high street bank shocked the City by announcing almost £11 billion of losses last year, more than twice what banking analysts had expected.

The Government already holds a 43 per cent stake in Lloyds after injecting £17 billion into the bank last year.

The bank's shares closed down 32.5 per cent last night. The fall leaves taxpayers with a paper loss of nearly £10 billion on the government's investment.

Lloyds Banking Group was formed by the merger of Lloyds TSB and HBOS last year. In a government-brokered deal, Lloyds agreed to rescue the stricken HBOS after it came close to collapse.

That deal came under fresh scrutiny as it emerged that most of the enlarged bank's losses - some £7 billion - came from HBOS's lending business.

The HBOS loss is more than twice what the bank itself had forecast for 2008 and raised questions about Lloyds' financial health after the merger.

Eric Daniels, the Lloyds chief executive this week admitted to MPs that his bank had done only a fraction of normal "due diligence" analysis of HBOS before agreeing to buy it.

The loss also sparked predictions that the state will eventually have to buy the bank outright.

George Osborne, the Tory shadow chancellor, expressed fears for Lloyds' survival.

He said: "The scale of the losses at HBOS are staggering and now risk dragging down Lloyds too. The taxpayer money pumped in through the first bailout in October is all but wiped out by these losses."

Vince Cable, the Liberal Democrat Treasury spokesman, said Lloyds may no longer be viable as private company.

He said: "It looks increasingly as if Lloyds is being dragged under by the dead weight of HBOS. It looks increasingly as if Lloyds HBOS will now go into majority public ownership, followed inevitably by nationalization."

Mr Daniels insisted that his bank's long term prospects remain healthy.

He said: "Whilst we recognise that the short term outlook is more challenging Lloyds Banking Group has the largest UK financial services franchise with excellent long-term earnings potential."

US Dollar Long Term Chart with Commitments of Traders

SP Futures Hourly Chart at Market Close

The short covering rally from yesterday failed at overhead resistance and fell back in a wobbly day that sold off harder into the close.

The Next Bubble to Implode: Commercial Real Estate

Cartoon courtesy of Giovanni Fontana

The Next Phase: Looting Social Security, 401Ks, IRAs and Whatever Is Left?

After what we have seen in the last eight years in particular, why do we assume that there is any boundary to the venality of powerful men? That there is ever enough?

Crony capitalism gives way to coolie capitalism. The belief in the priority of the privileged few to possess the greatest share of the nation's wealth endures.

Where is the justice? Where is the reform?

"Greed is a fat demon with a small mouth and whatever you feed it is never enough."
Janwillem van de Wetering

“Experience demands that man is the only animal which devours his own kind, for I can apply no milder term to the general prey of the rich on the poor."
Thomas Jefferson

"The more we do to you, the less you seem to believe we are doing it."
Dr. Josef Mengele

The Nation
Looting Social Security
By William Greider
February 11, 2009

Governing elites in Washington and Wall Street have devised a fiendishly clever "grand bargain" they want President Obama to embrace in the name of "fiscal responsibility." The government, they argue, having spent billions on bailing out the banks, can recover its costs by looting the Social Security system. They are also targeting Medicare and Medicaid. The pitch sounds preposterous to millions of ordinary working people anxious about their economic security and worried about their retirement years. But an impressive armada is lined up to push the idea--Washington's leading think tanks, the prestige media, tax-exempt foundations, skillful propagandists posing as economic experts and a self-righteous billionaire spending his fortune to save the nation from the elderly.

These players are promoting a tricky way to whack Social Security benefits, but to do it behind closed doors so the public cannot see what's happening or figure out which politicians to blame. The essential transaction would amount to misappropriating the trillions in Social Security taxes that workers have paid to finance their retirement benefits. This swindle is portrayed as "fiscal reform." In fact, it's the political equivalent of bait-and-switch fraud....

Read the rest of the story here.

Discussion of this topic at Economist's View here.

Congress Removes Provisions to Limit Wall Street Bonuses "Behind Closed Doors"

The Democrats talk a good game, but their record of reform and renewal after winning the Congressional elections and then the Presidency is pathetic.

Nancy Pelosi is useless as House Speaker. Barney Frank is all talk and little action. The Democratic leadership should be replaced along with about half the remaining Republican congressmen.

Ok, Obama how about some transparency on this one. And better yet, can we see a single reform that improves the system, other than firedrills to shore up the status quo?

AP
Congress kills plan to recover Wall Street bonuses
By Matthew Daly
Thursday February 12, 2009, 5:19 pm EST

Congress kills plan, approved in Senate stimulus bill, to recover Wall Street bonuses

WASHINGTON (AP) -- Congressional leaders have killed a plan that would have forced financial institutions to compensate taxpayers if they paid their executives large bonuses after receiving federal bailout money.

The Senate had approved the repayment plan as part of an effort to crack down on Wall Street firms that paid huge bonuses -- some in the millions of dollars -- to their top executives even as they received taxpayer money in the federal bailout last fall.

The provision was removed as House and Senate negotiators hammered out final details of the $789 billion economic stimulus legislation this week.

A spokeswoman for Sen. Ron Wyden, D-Ore., said no one spoke against the amendment when Wyden introduced it on the Senate floor. "Somehow, it got stripped out behind closed doors," said the spokeswoman, Jennifer Hoelzer.

Wyden is looking for an opportunity to offer his amendment again to help taxpayers get their money back, Hoelzer said.

Sen. Olympia Snowe, R-Maine, co-sponsor of the amendment, issued a statement saying the financial bailout Congress approved last fall "left open an escape hatch of golden parachutes for top executives on Wall Street."

Many of the executives who got bonuses were the ones whose mistakes hurt the financial system and forced taxpayers to foot the bill in the first place, Snowe said.

The Wyden-Snowe amendment would have penalized companies that paid bonuses greater than $100,000 to executives after receiving government rescue funds last year. The companies would have had to repay within four months any portion of the bonus above $100,000 or face an excise tax of 35 percent on the portion of the bonus above $100,000.

Lawmakers removed the provision without explanation in closed-door talks this week. Hoelzer said several senators had questioned whether the provision was legal, since Congress had not limited the bonuses in approving the original legislation last October.

But Hoelzer said the measure was appropriate. She cited a letter from the Joint Committee on Taxation saying the measure "presents a strong case for constitutionality since it has only a modest look-back period."

Most of the bonuses in question were paid in the final two months of 2008.

The tax committee estimated that the Wyden-Snowe amendment would have raised as much as $3.2 billion. Financial institutions received more than $274 billion through the bailout program while paying out an estimated $18.4 billion in employee bonuses last year, the committee said.

SP Fututres Hourly at Market Close

The SP futures went down to the forecast support level of 806 and then we went into the last hour of the trading day with a short covering technical rally.

The bulls are not out of the woods yet, and must take that overhead resistance, formerly support, and stick it. It might not be easy to do into a three day holiday weekend.



The Big Picture

Hartford Insurance Loses Access to Government Lending After Ratings Downgrades

This news helped to take the US equity indices down to new lows when it came out.

Reuters
Hartford loses access to U.S. lending facility, shares plunge
Thursday February 12, 2:07 pm ET

NEW YORK (Reuters) - Hartford Financial Services Group Inc lost access to a U.S. commercial paper lending facility after recent debt rating downgrades, it said in a regulatory filing, and shares dropped 11 percent.

In the filing on Thursday with the U.S. Securities and Exchange Commission, Hartford (NYSE:HIG), a large life and property insurer, said it will have to repay the $375 million borrowed under a federal program.

That happened after its commercial paper ratings were downgraded by Moody's Investor Services on February 6, and by Standard & Poor's and Fitch on February 9.

As a result it will have to tap other sources of cash to repay the debt, a potential thorn as its capital had already eroded due to large losses over the past two quarters.

Also Thursday, Hartford said the Connecticut insurance department approved changes to the way it can account for some reserves. The decision effectively boosted its life insurance unit's capital by about $1 billion.

Analysts said the move was not enough to offset bigger capital concerns, and may not protect it from ratings downgrades, which could trigger the need to raise additional capital. Hartford raised $2.5 billion in capital from German insurer Allianz SE last October.

The regulatory relief is "better than nothing, but it doesn't necessarily follow that this will put it (Hartford) in a better position with the rating agencies," said Steven Schwartz, a life insurance analyst at Raymond James.

The Connecticut insurance department's decision to grant Hartford the regulatory relief came after a national group of insurance regulators voted on January 29 not to approve such changes for life insurers nationwide.

U.S. life insurers have lobbied for regulators to ease capital rules after heavy losses on investments, and on sales of variable annuities, a popular retirement product that accounts for much of the sector's business.

Hartford and others have also sought capital injections under the U.S. government's $700 billion financial services rescue plan.

Shares of the Connecticut-based company fell $1.51 to $12.11 in afternoon trade on the New York Stock Exchange. Shares are down more than 80 percent in the last 12 months.

The Stock Index - Gold Ratios and a Brief Aside on Japan

The Stock Index - Gold Ratios are important in gauging significant stock market declines.

Stocks may go nominally lower or gold can increase to make the ratios go lower in their reversion to a more sustainable pre-bubble level. Gold is the anti-bubble which is why it is so detested by the bubblemaniacs.

A key question of course is when did the bubble begin? Many would say almost certainly with the advent of the Greenspan Fed Chairmanship in 1987. There is a case to be made for Reaganomics and supply side experimentation.

Estimates of nominal levels are probably not valid based on pre-1971 examples because of the constraints on monetary policy imposed by the gold standard.

As you know we dislike the facile comparisons with Japan because their recent economic experience was driven by some outrageous policy errors that could only occur in a kereitsu dominated economy with a heavily bureaucratic political structure. Japan has been essentially a one-party electoral system since their adoption of democracy, and remains widely misunderstood in the West, and perhaps even by themselves. Japan is in the process of becoming, which is why we prefer to think of its 'lost decades' as its cocoon years. It will be interesting to see what emerges.

Two Longer Term Charts: Gold and the SP 500

SP Futures Hourly Chart at Market Close

The Bigger Picture of the SP Hourly Chart

Today's Congressional Hearing on the Banks - The 'Joe Pesci' Moment

Ackerman and Sherman were their usual feisty selves, with Sherman doing a nice job of nailing the facts down.

But for sheer catharsis the five minute statement by Michael E. Capuano (D-Mass) was the hands down winner.

I almost dropped my coffee when he said he could not believe the bankers weren't already under indictment, or words to that effect, for their action in SIVs.

When Oliver Stone makes the movie the obvious casting choice is Joe Pesci.

Jamie, John, do I AMUSE you? Get that money out on the streets you mutts!

European Bank Bailouts Could Precipitate a Government Crisis

There is talk that European banks may be sitting on £16.3 trillion of toxic assets and could suffer massive losses.

There is a business decision to be made as well as a policy decision.

The prescription for a cure must include the option to nationalize, liquidate, investigate, and prosecute. And above all to act not out of fear, or of vengance, but with a practical and comprehensive justice.


UK Telegraph
European bank bail-out could push EU into crisis
By Bruno Waterfield in Brussels
3:50PM GMT 11 Feb 2009

A bail-out of the toxic assets held by European banks' could plunge the European Union into crisis, according to a confidential Brussels document.

“Estimates of total expected asset write-downs suggest that the budgetary costs – actual and contingent - of asset relief could be very large both in absolute terms and relative to GDP in member states,” the EC document, seen by The Daily Telegraph, cautioned.

"It is essential that government support through asset relief should not be on a scale that raises concern about over-indebtedness or financing problems.”

The secret 17-page paper was discussed by finance ministers, including the Chancellor Alistair Darling on Tuesday.

National leaders and EU officials share fears that a second bank bail-out in Europe will raise government borrowing at a time when investors - particularly those who lend money to European governments - have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain to pay it back.

The Commission figure is significant because of the role EU officials will play in devising rules to evaluate “toxic” bank assets later this month. New moves to bail out banks will be discussed at an emergency EU summit at the end of February. The EU is deeply worried at widening spreads on bonds sold by different European countries.

In line with the risk, and the weak performance of some EU economies compared to others, investors are demanding increasingly higher interest to lend to countries such as Italy instead of Germany. Ministers and officials fear that the process could lead to vicious spiral that threatens to tear both the euro and the EU apart.

“Such considerations are particularly important in the current context of widening budget deficits, rising public debt levels and challenges in sovereign bond issuance,” the EC paper warned.

The Gold Bull In Retrospect

From The Contrary Investor:

"Last, the short-term strokes. You already knew this anyway. We’re just repeating it for drill. The technical areas of support and resistance are self-apparent. Gold is Mother Nature. Gold is Father Time. Parents who we believe will never let us down."

Nasdaq 100 Futures Hourly Chart

SP Hourly Chart Update II for 10 February

We broke the first level of short term support on the prior SP Futures Hourly chart and dropped quickly to the diagonal trendline around 828 where the bulls are trying to find a footing.

Although we still have some short positions for the 'daytrade' we have hedged them out now and are looking to buy weakness in the metals and oil.

Careful, since if we slip here we go down to test that support around 822 with some intermediate support and possibly the prior lows around 806.

Generally, we think the banks and traders are crabby that Tim didn't give them their fix, and are showing their displeasure. Therefore on 'context' and not the charts we'd look for 820 and even more probably 806 to hold. They are cranky but not yet openly self-destructive.

Do not rule out a snap back rally to stay within the trend, beartrap style.

If the Obama Administration would like to do something constructive in the markets Tim should announce some trading reforms like reinstatement of the uptick rule, a vigorous enforcement of the rules against naked shorting for all stocks, and aggregate position limits on commodities, But that is not the style of the compromiser. Something has to be done to restrain the blatant speculation while the banking system is sorted out and the investment banks die a slow death but are still capable of throwing their weight around. Recall that early in his Administration John F. Kennedy made a point of forcing Big Steel to very publicly roll back their price increases when they tested his resolve.

"They pull a knife, you pull a gun. They send one of yours to the hospital, you send one of theirs to the morgue."

And presumably he would abstain or at least be very discreet with respect to high priced hookers crossing state lines.

Today's Non-Announcement From the Treasury

Unless we are missing something, The Plan (hereafter known as TP) does not disclose how the bad assets will be valued and the procedure by which they will be removed from the various banks' balance sheets.

Today's announcement appeared to be a Public Relations event in which the Obama Administration sought to distance TP from the tainted giveaway program for the banks which it was under Hank Paulson and the Bush Administration.

So again, we will have to wait, and the market has no resolution, and remains 'edgy.'

A noble endeavor perhaps, but this Administration risks being long on appearance and short on substance. We suspect there were no details because they are still being 'discussed' behind the scenes.

Again, from what we hear, it is the 'old guard' of Clintonistas versus the Obama inner circle. Larry Summers can be quite the hammer head, and Tim is just over his head. Perhaps he will grow into the job. Perhaps Larry will be fired (again) because of his political tin ear.

The Look of the SP Futures Hourly Ahead of Turbo Tim

Festina lente. (Make haste slowly.)

In other words, watch for fakeouts and do not be too quick to hit that buy or sell key. This can go either way.

If Timmy has done his homework the Working Group should be prepped to buy if the market doesn't. Hank would have done so.

Sometimes the right thing to do is absolutely nothing until the market tells you which way it will go.

This is one of those times.

It ought not to matter to the Obama Administration how the equity market reacts in the short term. That is like asking a new batch of crack addicts how they like their first week in rehab.

To elaborate in response to a question, I look at multiple markets for confirmations, not simply one chart like the SP futures. The NASDAQ 100 futures are a ctitical component of this mix for example.

UBS Reports Record Loss

Although the financial services sector made up a significant 15-17% of GDP, in recent years prior to the global financial crisis it had been driving almost 50% of Swiss GDP growth according to government reports.

As they have been known to say up Zurich way, "A greedy person and a pauper are practically one and the same."

AP
Swiss bank UBS reports 4Q loss of $7.57 billion
Tuesday February 10, 2:24 am ET

Swiss bank UBS AG reports fourth-quarter loss of $7.57 billion, exceeding analysts' fears

ZURICH (AP) -- Swiss bank UBS AG said Tuesday it lost 8.1 billion Swiss francs ($7.57 billion) in the fourth quarter and announced it would cut a further 2,000 jobs as it refocuses on its home market after a troubled year abroad.

The results exceeded the fears of analysts, who on average had predicted net losses of 6.2 billion francs ($5.79 billion).

A year earlier Switzerland's biggest bank had reported a net profit of 1.33 billion francs. The latest results bring its full-year loss to 19.7 billion francs for 2008.

UBS said it plans to refocus on its core activity in Switzerland, its international wealth management franchise, and its global onshore business. To this end it will create two new business units. Wealth management and Swiss bank will be led by Franco Morra and Juerg Zeltner, while wealth management Americas will be led by Marten Hoekstra.

UBS is also shedding 2,000 jobs at its loss-making investment banking unit, which has been blamed for many of the bad investment choices that have seen the bank write down tens of billions of francs (dollars) since mid-2007.

The Zurich-based bank said net new money outflows from its wealth and asset management businesses reached 85.8 billion francs during the fourth quarter...

US Equity Charts in the Babson Style

The Incontrovertible Truth About Debt, Deleveraging, Devaluation and Recovery

It is incomprehensible that any informed economist does not understand this difference between deflationary deleveraging and a cyclical recession.

And if they do, how could they possibly justify giving trillions of capital to the banks to support them in their excess so that they might freely make loans again, when it was their reckless lending and speculation that brought us to this point?

And the economists also know full well that the real cure lies in devaluing the currency and restoring the balance sheet of the individual households through an increase in the median wage and the debt relief of bankruptcy.

There must be reform, a change in the system that spawned these repeated bubbles and epoch of voodoo economics and malinvestment.

"Basically what happens is that after a period of time, economies go through a long-term debt cycle -- a dynamic that is self-reinforcing, in which people finance their spending by borrowing and debts rise relative to incomes and, more accurately, debt-service payments rise relative to incomes. At cycle peaks, assets are bought on leverage at high-enough prices that the cash flows they produce aren't adequate to service the debt. The incomes aren't adequate to service the debt. Then begins the reversal process, and that becomes self-reinforcing, too. In the simplest sense, the country reaches the point when it needs a debt restructuring. General Motors is a metaphor for the United States.

The process of bankruptcy or restructuring is necessary to its viability. One way or another, General Motors has to be restructured so that it is a self-sustaining, economically viable entity that people want to lend to again.

This has happened in Latin America regularly. Emerging countries default, and then restructure. It is an essential process to get them economically healthy.

We will go through a giant debt-restructuring, because we either have to bring debt-service payments down so they are low relative to incomes -- the cash flows that are being produced to service them -- or we are going to have to raise incomes by printing a lot of money.

It isn't complicated. It is the same as all bankruptcies, but when it happens pervasively to a country, and the country has a lot of foreign debt denominated in its own currency, it is preferable to print money and devalue....

There will be substantial nationalization of banks. It is going on now and it will continue. But the same question will be asked even after nationalization: What will happen to the pile of bad stuff?... (More precisely, who will take the loss? If it is not those that took the profits, then you have injustice, transfer of wealth - Jesse)

The Federal Reserve is going to have to print money. The deficits will be greater than the savings. So you will see the Federal Reserve buy long-term Treasury bonds, as it did in the Great Depression. We are in a position where that will eventually create a problem for currencies and drive assets to gold....

Everything is timing. You print a lot of money, and then you have currency devaluation. The currency devaluation happens before bonds fall. Not much in the way of inflation is produced, because what you are doing actually is negating deflation. So, the first wave of currency depreciation will be very much like England in 1992, with its currency realignment, or the United States during the Great Depression, when they printed money and devalued the dollar a lot. Gold went up a whole lot and the bond market had a hiccup, and then long-term rates continued to decline because people still needed safety and liquidity. While the dollar is bad, it doesn't mean necessarily that the bond market is bad...

From the U.S. point of view, we want a devaluation. A devaluation gets your pricing in line. When there is a deflationary environment, you want your currency to go down. When you have a lot of foreign debt denominated in your currency, you want to create relief by having your currency go down. All major currency devaluations have triggered stock-market rallies throughout the world; one of the best ways to trigger a stock-market rally is to devalue your currency...

Buying equities and taking on those risks in late 2009, or more likely 2010, will be a great move because equities will be much cheaper than now. It is going to be a buying opportunity of the century."

Recession? No, It's a D-process, and It Will Be Long - Ray Dalio - Barrons

SP Futures Hourly Chart at Market Close

Tomorrow appears to be showtime for Turbo Tim, Zimbabwe Ben, and Leisure Suit Larry. The Yes We Can Man probably will get a few more chances if he throws one or all of them to the wolves if the plan fails which it probably will. We'll have to wait to see it.

If it is the "guarantee program" then it is only as good as the price floors of the guarantees. Too high and the banks are welfare queens. And to say that the 'market will set the price' with an implicit price guarantee from Treasury underpinning it sounds like the Son of Fannie and Freddie, and not even a remotely fair price for the taxpayers.

The most serious flaw in the solution, of course, is that bank lending is really not the problem. Easy money for lending was the solution Greenspan used the last five times we reached a point like this, a little worse on each revisit. We have probably reached the limit of the law of diminishing returns of hitting that old easy money for the banks booty call again.

Why? Because the consumers themselves have hit the wall. Years of suppressing the median wage and understating inflation as a matter of government industrial policy have left the consumer flat out busted.

Saving the banks so they can lend more is like fixing the holes and repairing the engines on the Titanic so it can ram the iceberg again. Can we please consider changing course?

How to Resolve the Mortgage Crisis

Chris Whalen, The Institutional Risk Analyst, is making more sense on a rational way of resolving the subprime mortgage crisis than Tim Geithner, Ben Bernanke, and Larry Summers rolled together.

This is a bit of a read. We're looking for a video of his interviews on Bloomberg the past few days, and today in particular. But his common sense approach makes more sense than anything we have heard from the Washington Whiz Kids.

On top of his recommendation, Obama needs to target the stimulus more precisely and concentrate on driving employment and the median wage in the short term with both money and policy changes.

In fact, it is from the policy changes that the greatest gains would be achieved. Obama and crew need to stop putting out fires ad hoc in the manner of Bush and start working on a serious and well thought plan that the market can understand, whether they may like it or not.

Much of the stimulus package looks like payoffs to constituents and special interests, a perennial problem in the Federal government. The Democrats have to stop playing 'Let's Make a Deal' and strike a vision, share it, and then go for it. That is what FDR did in his first hundred days. His crew made errors in implementation, but the vision was coherent.

Obama needs to find his footing and start thinking out of the box. And it is not likely he will obtain that from Geithner or Summers, and does not have time to wait for the Volcker Committee to weigh in with a compromised solution.

Its a tough spot for any manager. Crisis management shows the weakness of his managerial experience. Bush was dying on the vine on his own watch. It tests a person like nothing else.

Its also an opportunity for growth, and Obama has about three months of goodwill capital to spend, and some bright people on deck. Time to stop making deals, and listening to the vested interests of everyone, and get to work striking a vision that his team can implement towards. A good start would be to strike the note of reform and level with the people, and do something about it other than symbolic gestures and fine rhetoric. Its time to tell the truth.

Can We Fix the Banks, Help Homeowners, and Rebuild the Mortgage Markets? Can Do.

"Here's the basic approach:

* The US Treasury would tender for all of the private label CDO/MBS extending between a range of dates, say 2004 forward to year-end 2007, representing trillions of dollars in assets held by investors and banks globally. The pricing on this paper will reflect current market prices, but say the average price was 50% of face value. Only issues that actually have an enforceable legal claim to collateral will be eligible. Derivative structures without collateral will not be eligible.

* Treasury then transfers all of the purchased toxic paper to the FDIC Deposit Insurance Fund, which acting as receiver under 12 USC restructures the trusts that are the legal issuers of the bonds and recovers legal ownership of the underlying collateral. The FDIC arguably has the power to call in all bonds and related investment contracts, and extinguish the claims of those parties which do not respond to the Treasury tender. The legal finality of an FDIC-managed receivership under 12 USC is what is required to end the toxic asset issue once and for all. The bankruptcy courts could be used in a similar fashion, but the unique legal authority of the FDIC suggests to us that this agency should run the process as part of its larger asset sale operations.

* This now "clean" whole loan collateral will then be re-sold to solvent banks in the localities where the property is located, using zip codes and other means to identify eligible buyers, priced at say 90 cents on the dollar, with a full recourse guarantee from the FDIC and financing from the Federal Reserve Bank in the relevant district. The banks will initially be guaranteed a minimum net interest margin and servicing income, and immediately begin to service the loan and manage the credit locally. Indeed, the participating bank must agree to retain and service the loan so long as government financing is used. The bank has the option to repay the financing from Treasury and take full, non-recourse possession of the loan.

We don't pretend that this simple outline is sufficient treatment of this proposal, but we have heard several permutations of this approach from veteran bankers in the loan origination channel all over the US. We see several advantages to this "community bank" approach to the crisis, which might be combined with modest additional capital infusions to solvent community and regional banks like WABC, if they even need it.

* First, it puts the trillions of dollars in now illiquid mortgage loan collateral trapped inside thousands of securitization deals back into strong local hands, who are responsible and incentivized to both manage and service the loan.

* Second, it re-liquefies the balance sheets of the US banking industry and it will vastly improve the prospects for home owners and housing markets around the country. If we are going to further lever the balance sheets of the Treasury and Fed, let's do it for a real reason and with a clear purpose.

* Third, the approach outlined above provides the Obama Administration and the US Treasury with maximum bang for the buck in terms of both addressing the solvency problems facing the banks and also helping the economy and the housing industry.

One downside: This new market paradigm suggests that loan servicing as a standalone business may be at risk. Once community banks begin to accumulate significant local servicing portfolios, they may rediscover the benefits of keeping the credits that they originate. Sorry Wilbur!

And what about valuation? Well, as our friend Kyle Bass of Hayman Capital likes to remind us, all of these assets are valued and traded every day. It's just a matter of organizing the purchase process in a transparent and competent fashion. Starting with our friends at shops like Hayman, Black Rock and RW Pressprich, we know people who know how to trade illiquid assets."

When Will the Wall Street Money Center Banks Be Nationalized?

"Most of the big banks need to be put into some form of bankruptcy and recapitalized, and I think everybody understands that." Ken Rogoff

The major US money center banks will be nationalized. The only questions are when and how.

When is difficult. Rumours abound. A common rumour is for a bank holiday sometime around the President's day holiday in the US on February 16, or later in February.

This may be too early, but no matter. It is coming.

Its the how that is more interesting in terms of meaningful speculation and the impact on any intended recovery.

How will we nationalize the banks? How far will nationalization have to go?

With regard to nationalization the bank toadies and spin doctors say things like "Would you want the government running the banks?" Well, we think this is the usual deceptive rhetoric we get these days instead of serious discussion and hard news.

In a nationalization it is highly unlikely that the government will want to 'run the banks,' although it is hard to see how they could do a job that would be much worse than the overpaid princes of Wall Street who now stand exposed as having ruined the national economy through incredible dereliction of any standard of sound and responsible management.

Rather, there is a range the process which will be called nationalization.

If we hold the current course at some point the government will place enough capital and hold enough preferred stock in the banks to effectively own them, but passively. The problem with that is the mismanagement and losses will continue to deepen, and the government (public) will own the acid core of thirty years of white collar crime, burning a hole in the fabric of the national economy and monetary system.

It will be a financial Vietnam, with Larry Summers playing Robert McNamara and Obama as LBJ. It will be a cascade of corruption and deception and will tear the country apart.

At the other end of the nationalization spectrum, he government will 'take over' the bad banks as they did in the S&L crisis, and restructure them.

There are between five to ten banks in the country that are hopelessly insolvent through mismanagement bordering on fraud. At the moment they are sucking up capital at a ferocious rate through bailouts, and crowding out constructive uses of capital.

They cannot precipitously fail, but they can and should be taken into receivership by the FDIC, their books opened, their assets sold, debts written off, and the remains either buried peacefully or allowed to emerge as new banks with different management if there is enough left to make it respectable.

Who will lend? The regional banks. They are the bulwark of the banking system. It is in the money center banks where the contagion continually spawns.

To attempt to maintain the status quo is no longer possible, no matter how much money and influence and political power that the ten Wall Street banks may wield in Washington.

The shareholders will be effectively zeroed out as they should, the bondholders handed a steep haircut on the order of 40%, the creditors paid 70 cents on the dollar, if that.

Credit default swaps and other bets will be dealt with harshly. If a bank has a heavy interaction with a money center bank in Credit Default Swaps or other 'weapons of mass destruction' to the point where it places it insolvent guess what, it can join the restructuring club.

The depositors will be, MUST be, kept whole, to almost 100% on all private non-corporate deposits. Pensions must be kept whole above and beyond the limits of the Pension Benefit Guaranty Corporation.

If the Congress, and this Administration, continued to bend the fate of this country to the bankers of Wall Street there will come a time when the people will simply say 'enough.' Of this we no longer have any doubt. And the pain from that will be much greater than the short term pain we will receive in restructuring the system now.

And it will be painful. But necessary. We do not have a cold. We do not have the flu or the sniffles, a temporary setback. We have a serious gangrenous infection that must be dealt with before it takes down the body politic.

We can choose to linger, to waste away in our corruption as Japan has done. But we do not think that the US public will accept the chains of servitude gracefully. They are too heavily equipped with options, thanks to the foresight of the founding fathers.

If this seems to harsh, too black and white, too unthinkable, here is a recent interview from Ken Rogoff with BBC Hardtalk to help punctuate the seriousness of the situation.

The simple truth is we no longer have any choice, any options. We elected the Obama Administration to reform Washington and the economic and political system in this country.

Ok guys. Reform.

The deeper we go down this rabbit hole the more difficult it will be to return to the light of day.

You may wish to take the time to listen to Ken Rogoff in this BBC interview on Hardtalk. Mr. Rogoff is a noted economist who is completing an intense study of financial crises.

We obviously do not agree with everything Ken Rogoff says. That would be improbable.

He starts from the assumption that we have free trade in the world today and should maintain it, whereas we believe that free trade went out the window with the devaluation and pegging of the Chinese renminbi in the 1990's, if not before that with aggressive Asian mercantilism supported by US multinationals and Wal-Mart.

But other than that, it sounds like the standard fare served at Le Café Américain for the past two years at least, and it is a happy and humbling experience to see someone express similar ideas with such gravitas.

It is clearly stated, it is well thought, and it is absolutely essential. It is what a substantive news program looks and sounds like. We rarely get anything like it except on the Web and on Public Television.

Rogoff on BBC HardTalk

GM to Invest $1 Billion of its US Rescue Package in Modernization - In Brazil

Here is a nice example of how investing in nationless corporations, without conditions, does very little for your use of capital and your good intentions. Because in fact the US rescue package was not an investment, but a grant. We do not investment our tax receipts in private corporations. We provide relief, grants, subsidization. If the investment was a good commercial arrangement it would not require your public assistance funds.

If General Motors wishes to upgrade its facilities in Brazil, it ought to seek the money from profit-seeking private investment, or from the government of Brazil.

And anyone who believes that General Motors should be able to do whatever they wish with a grant from the public treasury is a either a fool or a fraud. And that same measure applies doubly to the packages for the Wall Street banks which are as much bribe as bailout.

On a related topic, there is a significant amount of 'Smoot Hawley II,' anti-protectionist rubbish talk swilling around the webs. If free trade did exist as the norm then it would be a good thing to uphold it. As it is, rogue players have turned that into a farce.

The problem with the industrial policy of the US is that we do not have one, whereas several other powers do and follow it, aggressively.

We stand for 'free trade' where other countries manipulate their trade policies and currencies to advance mercantilism that happens to be favored by many US corporate powers in search of cheap labor and the circumvention of environmental, health, child labor, and assorted public reform policies.

Inevitably, and this is what the corporate spinmeisters do not wish you to know, is that unrestrained 'free trade' will conflict and be used to undermine domestic policy and civic standards to the lowest common denominator of human misery and exploitation in the world.

We are playing by the rules of soccer in a game of lacrosse.

Follow Up On February 10: GM has subsequently stated that the head of GM in Brazil was misquoted or mistaken, and that the billion dollars is coming from local sources.

GM Says Not Sending Any Money to Brazil

Latin American Herald Tribune
General Motors to Invest $1 Billion in Brazil Operations -- Money to Come from U.S. Rescue Program
By Russ Dallen

SAO PAULO -- General Motors plans to invest $1 billion in Brazil to avoid the kind of problems the U.S. automaker is facing in its home market, said the beleaguered car maker.

According to the president of GM Brazil-Mercosur, Jaime Ardila, the funding will come from the package of financial aid that the manufacturer will receive from the U.S. government and will be used to "complete the renovation of the line of products up to 2012."

"It wouldn't be logical to withdraw the investment from where we're growing, and our goal is to protect investments in emerging markets," he said in a statement published by the business daily Gazeta Mercantil.

Meanwhile, he cut the company's revenue forecast for this year by 14% to $9.5 billion from $11 billion, as the economic crisis began to cause rapid slowdowns in sales.

GM already announced three programs of paid leave, and Ardila added that GM Brazil "is going to wait and see how the market behaves in order to know what decision to take" with regard to possible layoffs.

For Ardila, the injection in Brazil's automobile sector of 8 billion reais ($3.51 billion) recently announced by the federal and state governments of Sao Paulo "has already begun to revive sales," which fell by 12% in October.

The executive said that the company will operate a "conservative" scenario in 2009 with an estimated production of 2.6 million units, and another more "optimistic" that contemplates sales of 2.9 million.

This year sales will reach 2.85 million vehicles, which represents a growth of 15% over last year.

Daily Gold Chart

JP Morgan's Bonuses

This is an interesting essay from the Truth In Options blog. It raises issues of stealth bonuses to the JP Morgan executives and an interesting coincidence in stock price and option grants.

J.P. Morgan's Abusive Executive Bonuses

As readers will recall, J.P. Morgan received the first large bail-out from the New York FED of $55 Billion, guaranteed by Bear Stearns' worthless assets, to prop up its own liquidity position and buy Bear Stearns stock.

J.P. Morgan also recently received another $25 Billion in TARP payments from the Treasury.

This article is about how J.P. Morgan's executives , instead of receiving easy to detect cash bonuses, received very large bonuses in the form of Stock Appreciation Rights (SARs) and Restricted Stock Units. These equity compensation securities are not easy to understand or value by other than experts in the field....

Read the rest of this here: J.P. Morgan's Abusive Executive Bonuses

SP Futures Hourly Chart at Market Close

The Street wants to bring IPOs to market next week so hide your women, children and small pets.

This can either be the top of a trading range, or the neckline of an inverse H&S bottom with a significant upside potential.

The markets will be looking for news on the stimulus package, but even more importantly, on a plan for the banks. There is significant disagreement in the Obama circles with regard to the banking bailout part two. Larry Sommers wants a 'bad bank' and Tim Geithner is promoting 'guarantees' but the crux of the matter is the valuation of the assets.

We are now at about day 20 in the Obama Administration, and there is a decided lack of serious reform backing up the rhetoric.

US Dollar Weekly Chart with Commitments of Traders

Coming Next Week to an Imploding Economy Near You...

Without serious reform we will repeat the cycle of bubble, boom, and bust until the economy is shaken apart into civil disorder and re-emerges in proto-fascism.

A Closer Look at the Revisions to the Non-Farm Payrolls Numbers

"I am a firm believer in the people. If given the truth, they can be depended upon to meet any national crisis. The great point is to bring them the real facts."
--Abraham Lincoln

The 'actual' jobs loss number, before seasonal adjustments are applied, was significantly worse than expected. It was so bad that we had to adjust the lower boundary of the chart by an extra 500,000 jobs lower than the projected chart we showed yesterday. Jobs Number for January Could Be Much Worse than Expected



So why was the 'headline number' after seasonalization relatively benign and better than many had expected, or 'not as bad as feared?' A gas station pricing number that came in at -598,000 just below the psychologically important -600,000? Besides a liberal upgrade from seasonality, the revisions to the prior month, and months as it turns out, were interesting.



Revising job losses from prior months lower 'creates jobs' that can be moved forward on the statistical count. It would be like revising losses in the prior years of your income statement to allow you to show lower losses in the more current periods. Its kind of like shoving job losses around on a plate. Nothing really changes, but the data 'looks better.'

Further, we see the usual "current month - prior month" two-step wherein the current month is shown slightly better than the prior month. Then at the next reporting period, you revise the former current month lower, and show the new current month as slightly better.

We had a business unit direct report who liked to play those kinds of games to show 'better numbers' for their piece of the business. The fix was to lock them into rolling averages for results and not something more short term.

And so it is with the US jobs jockeys. The longer term trend does not lend itself so easily to data manipulation in the revisions and seasonality.

And it shows the economy is in a nose dive. But stocks are rallying today on the expectations that the bad numbers will insure that the Senate will pass the stimulus, and that Turbo Tim will announce a big giveaway for the banks next week.

The Obama Administration is doing nothing new. The Bush Administration's numbers were so hollow that we started calling the US a Potemkin Economy, or perhaps Ponzi Economy because it is built on ever increasingly unredeemable debt. Clinton was no better, merely more effective, more competent, more 'artful.'

This may not be new, but it is not reform either. Meet the new boss, same as the old boss.

Update on New Hampshire HCR 6 - Jeffersonian Principles

Hi Jesse,

Went to Concord today to observe the testimony before the committee regarding the resolution HCR 6.

Quite impressive number of people, at least 60, which I'm told is above average.

The bill's sponsor said as a result of his work, he's aware of six other states moving ahead with similar resolutions designed to send a message to DC on limiting federal government.

Montana may vote this week. The bill's sponsor and co-sponsor are getting much publicity and calls from constituents.

About six state reps testified in favor of adoption. Another half dozen citizens spoke. Some were quite eloquent, they brought up the economic mess, the Federal Reserve, and their own understanding of our history and Constitution.

We will be following the bill's progress and hope they recommend it to the NH Legislature which may be as soon as later next week.

I'll keep you updated---

Bill

SP Futures Hourly Chart

The Congress will be voting on the stimulus package tonight. We think the market has this baked in. The action today *could* have been a front-running of this news, but it had all the look and feel of a simple short squeeze. The specs were getting short ahead of what looks to be a bad Non-Farm Payrolls number tomorrow.

Gross Says Government Stimulus Must Be in Trillions

We watched the interviews at PIMCO on Bloomberg TV.

He may be sincere but there should be little doubt that Bill Gross was 'talking his book.'

Maybe Obama will spike the Jobs Numbers tomorrow to shake loose the money tree. He is a fool if he doesn't because it will not take much to put out a horrific number, especially after the years of pollyanna sand-bagging that had built up under Bush II.


Bloomberg
U.S. Must Spend to Avoid Mini Depression, Bill Gross Says
By Kathleen Hays and Dakin Campbell

Feb. 5 (Bloomberg) -- Bill Gross, co-chief investment officer of Pacific Investment Management Co., said the U.S. may slump into a “mini depression” unless policy makers spend trillions of dollars to spur growth.

“This economy needs support from the government, a check from the government in the trillions,” Gross said today in a Bloomberg Television interview from Pimco’s headquarters in Newport Beach, California. “There is a potential catastrophe if the U.S. government continues to focus on billions of dollars.”

Gross manages the $132 billion Total Return Fund, the world’s biggest bond fund. The fund gained 4.8 percent last year and has outperformed 99 percent of its peers over the past five years, according to data compiled by Bloomberg. The average government and corporate bond fund lost 8 percent in 2008, Bloomberg data show.

Pimco is a unit of Munich-based Allianz SE, Europe’s largest insurer.

The Jobs Number for January Could be Quite Bad, Much Worse than Expected

The non-seasonally adjusted number could come in around -3,400,000 jobs.

Luckily for the BLS January is the worst month for actuals, and therefore has the largest seasonality factor.

The 'imaginary jobs' number will not be a significant factor, since January is also the month in which they adjust out many of the imaginary jobs they added in the last six months that are obviously non-existent.

Our standard projections show the headline number coming in about -650,000+ which is pretty severe, but it could be much higher depending on how they apply the seasonality, or lower depending on how much they choose to adjust the prior months and 'smooth the decline.' An outside number could be -900,000.

So, all in all, there may be a large downward adjustment to December which may help to absorb some of the single month impact, but the consenses loss of 540,000 jobs looks optimistic.

Let's see what happens. We are prepared for the worst. We have some confidence that even 'the reformers' will gild the lily a bit to 'inspire confidence.' All statists fudge the numbers because the individual and the truth are servants of the state and the 'greater good.'

Deutsche Bank Posts First Loss Since WW II

Breitbart
Deutsche Bank posts first loss since WWII, rejects state aid
Feb 5 09:12 AM

Germany's biggest lender, Deutsche Bank, on Thursday posted its first annual loss since World War II after a terrible fourth quarter but said it would survive the global meltdown without state aid.

Chairman Josef Ackermann said the bank did not require government assistance and would pull out of the financial crisis on its own.

Deutsche Bank reported a net loss of 3.9 billion euros (5.0 billion dollars) for 2008 after a massive loss of 4.8 billion euros in the fourth quarter alone. For 2007, Deutsche Bank have posted a record profit of 6.5 billion euros....

Ackermann added that he saw no "dramatic" risks in the bank's accounts.

In a statement earlier, he said "operating conditions in the (fourth) quarter were completely unprecedented and exposed some weaknesses in our business model.

He acknowledged being "very disappointed" at the quarterly figures but said that "since the trust and support of our shareholders is critical for us, we recommend a dividend for the year 2008 of 50 cents per share."

...Ackermann said he remained committed to the bank's business model, which is focused on investment banking, a once lucrative field in which Deutsche Bank is one of the global leaders.

The sector has suffered sustained turmoil since mid-2007 when the US subprime or higher risk home loan market collapsed, undercutting the derivative investment instruments which had been linked to it by the banks...

For the full year 2008, Deutsche Bank revised the total value of its assets lower by 7.0 billion euros, more than three times the 2007 write-downs of 2.3 billion euros.

In the fourth quarter alone, asset write-downs amounted to 5.3 billion euros.

New Hampshire HCR 6 Status - Hearing in Committee Tomorrow

HCR6 Session Year 2009

Bill Text Title: Affirming States' Rights based on Jeffersonian principles.

G-Status: HOUSE
House Status: IN COMMITTEE
Senate Status:

Next/Last Comm: HOUSE STATE-FEDERAL RELATIONS AND VETERANS AFFAIRS
Next/Last Hearing: 02/05/2009 at 01:00 PM LOB 203

New Hampshire HCR 6 Text

SP Futures Hourly Chart at 2:45 PM

Cisco and Visa after the bell.

January Non-Farm Payrolls on Friday.

Goldman Sachs Would Like to Pay Back Their TARP Money ASAP

Apparently this new rule about caps on executive pay was a motivation to choose other venues.

There are plenty of other feedbags from the Fed for a newly christened commercial bank, and the Fed is more tolerant of highly paid management.


Bloomberg
Goldman Sachs Would Like to Pay Back TARP Money, Viniar Says
By Christine Harper

Feb. 4 (Bloomberg) -- Goldman Sachs Group Inc., which took $10 billion from the U.S. Treasury in October, would like to pay back the money from the so-called Troubled Asset Relief Program, or TARP, said David Viniar, the firm’s chief financial officer.

“It would send a very good signal” if the firm could repay the money, he said. The firm would only do so if it got “the blessing” of the Treasury and Federal Reserve, he said at a Credit Suisse conference in Naples, Florida today.

Under current rules, Goldman and other firms that received money under TARP are required to raise common or preferred equity to replace the government funds, Viniar said. The company will consider raising money “if the markets are good,” he said.

The government investment “is not really restricting the way we do business,” Viniar said.

Goldman will also be “very cautious” about considering any acquisitions because there’s a longer record of unsuccessful deals in the financial services industry than successful ones, Viniar said. He said the firm is likely to maintain its current business of focusing on corporate and institutional clients rather than entering the retail business.

“I would not pick up the Wall Street Journal every morning looking for the big Goldman Sachs acquisition because I think you will be disappointed,” he said. “We don’t really like or know the retail business and I don’t expect that to change too much.”

A Modest Proposal from Joe Stiglitz

"..."The government should allow every distressed bank to go bankrupt and set up a fresh banking system under temporary state control rather than cripple the country by propping up a corrupt edifice."

Joseph Stiglitz, the Nobel Prize-winning economist

This is the procedure, that is what we do with insolvent banks. That is what the FDIC is for.

We don't prop up the bad banks. The regulators help them become solvent through a resolution and restructuring of their bad debt, and then either sell them, sell their assets independently, or allow them to re-emerge as good banks once they are solvent

This is precisely what Le Café Américain has had on the menu for the banks over the past seven months, with some detail behind it, including systemic reforms.

We do not burden an entire national economy, we do not cripple an entire banking industry including many regional banks who have done no wrong, in propping up a few insolvent institutions who arrived at that state through outrageous bad management.

There is widespread suspicion that this exercise is designed to protect a handful of large money center banks from realizing their losses - JPM, C, Morgan Stanley, B of A, and Goldman Sachs.

Let the system work. Do not continue to privatize the gains and subsidize the losses.

And then let the criminal and civil investigations of the major actors in this modern tragedy begin, if we ever wish to 'restore confidence' in Wall Street in the public and the rest of the world.

Markopolos Delivers Multiple Bombshells in Congressional Testimony

"Government has coddled, accepted, and ignored white collar crime for too long.

It is time the nation woke up and realized that it's not the armed robbers or drug dealers who cause the most economic harm, it's the white collar criminals living in the most expensive homes who have the most impressive resumes who harm us the most.

They steal our pensions, bankrupt our companies, and destroy thousands of jobs, ruining countless lives."

Harry Markopolos in Congressional Testimony

Henry Markopolos, the Madoff Ponzi scheme whistleblower, is delivering bombshell testimony with few punches pulled before the US Congress this morning.

Among other things:

- There were 14 'feeder funds' operating with Madoff to channel investor to him. Only two have been publicly revealed. There are twelve more. Markopolos is going to be speaking with French and Swiss authorities to reveal others who have not yet acknowledged their role, and their losses.

- There are undisclosed investors in the Madoff scheme among prominent Europeans, and even royalty.

- Markopolos feared for his life because of the involvement of the Russian mob and South American drug cartels involved with Madoff, and because of the stonewall treatment his repeated and detailed disclosures received at the SEC.

- The SEC is overstaffed with young attorneys who do not understand the business they are regulating. They need to hire older hands with direct financial markets experience and accounting backgrounds and incent them.

- The SEC does not wish to pursue 'the big cases.' They prefer to act on small cases.

- The SEC has done little as compared to the State Attorneys General.

- The SEC has a problem described by others as 'deep capture' wherein the regulators look to jobs in their industry after a few years in the agency. Their management protects industry insiders from investigation.

- Madoff did not act alone. There were enablers who were willfully blind, and there were those who were directly involved with him in his deception.

- The SEC does not even have access to Bloomberg terminals or read the WSJ or Barrons

- The new head of the SEC, Mary Shapiro, needs to clean house with 'a wide broom' among the management of her new organization

- Markopolos was offered a job to head up a new super-agency several times by the Congressmen, only half in jest, but he demurred because of family commitments. Too bad because we have a hunch he'd soon be known on Wall Street as the "flagellum Dei" (Latin: "Scourge of God"),

Bad Bank Proposal is Bad Policy and a Symptom of Serious Problems in Obama Administration

Yves Smith nails this one.

Bringing in seasoned professionals has the upside of enabling quick action.

The significant downside is that you bring in old problems, old approaches, old conflict of interest, and old thinking.

As we have said previously, the challenge to Obama and his insiders will be one of leadership, to set coherent policy directives that will bring direction to the old hands consistent with a new reform government.

So far the Obama Administration is not succeeding. We have heard of conflicts of opinion between the old guard, Geithner and Summers, and the new circle under the president. This in part was the cause for the delay in announcing the bad bank this week.

The Obama Administration is still in the 100 day honeymoon period, but the constant stream of old guard appointments, and those with specific questionable personal tax payment records and performance in the Clinton Administration is grooming it for failure. They are spending precious political capital and goodwill senselessly.

We need them to succeed. Badly. They did not create this crisis, but it is their task to find a solution and prevent it from worsening.

But we ought not to kid ourselves or be quiet when they commit the kinds of gaffes which have characterized their first few weeks in office.

"The Obama Administration is as obviously and fully hostage to the interests of the financial services industry as the Bush crowd was.

We have no new thinking, no willingness to take measures that are completely defensible (in fact not doing them takes some creative positioning) like wiping out shareholders at obviously dud banks (Citi is top of the list), forcing bondholder haircuts and/or equity swaps, replacing management, writing off and/or restructuring bad loans, and deciding whether and how to reorganize and restructure the company.

Instead, the banks are now getting the AIG treatment: every demand is being met, no tough questions asked, no probing of the accounts (or more important, the accounting)."

Bad Bank Assets Proposal: Even Worse than You Thought - Naked Capitalism

Very Long Term Dow Jones Industrial Average Chart

Projections are for a longer term bottom between 4900 and 5750.

This will likely set up a new bull market after a period of consolidation and recovery that will have a longer term objective in excess of 20,000 (in inflated dollars.)

There will probably be a false start recovery after the lows that will really be a significant rally followed by a fifty percent pullback before the bull market can start moving higher in a more steady and measured way supported by improving corporate earnings.

There will be significant skewing perhaps as a large number of Dow Index stocks are replaced by other viable companies.

SP Futures Hourly Chart

Here's looking at you, kid.

The Cost of Oil Production By Region and Volume

Data Source is CERA

SP Monthly Chart

If the bulls lose control of 765 we may see a fairly dramatic decline to set an intermediate bottom. There is potential to 545 but that seems rather extreme.

A measuring objective of 605 seems more likely, although it does seem a little early in the cycle for that in the first half of the year.

How Low Are US Home Prices Headed?

Obviously this is going to be a difficult question to answer since the housing markets in the US are not homogeneous. There are significant 'hot spots' on the coasts and in highly overbuilt areas.

Here is a chart based on the Shiller Home Price Index. It shows the geometric mean on US housing back to 1890. It has a growth rate of 3.4%.

So one might estimate that if housing prices revert to that very long term mean, depending on how fast they revert we might see them roll back all the way to 1995 pricing.

We would contend that the trend back to 1890 overlooks the significant price inflation that occurred since the US left the gold standard under Nixon, which is all too painfully evident on the chart.

We have drawn a very simple linear regression of that price change since 1970 rather than 1890 in red.

Based on that, our own estimate is that on average housing prices will revert to the levels which they were at in the year 2000 for a particular home or its comparables, the price at which its value is most likely to stabilize. We would tend to treat 1995 as a 'lower bound' which might be more valid for those areas which had appreciated the parabolic increases from the bubble period.

Here is a chart that shows the major Case-Shiller Home Price Indices since 1993.

There is quite a bit of data, but the point is to show just how unevenly parabolic the housing bubble became, and how it diverged significantly after 2000 when Greenspan unleashed the bubble economy with the repeal of Glass-Steagall.

It was more like a Ponzi scheme with certain areas most vigorously targeted when seen from this vantage point. Therefore we ought not to expect the declines to be of equal percents as well. Some made more, some will lose more.

The Case-Shiller US Housing Indices Since 1993

Life Insurance Companies Braced for Heavy Losses

The easy times, the extended bull market in equities and corporate profits, with a disinflation and an easy money policy, created a lot of very wealthy people who managed other people's money by riding the incoming tide of the Greenspan era and a willingness to use the world's reserve currency to run up incredible levels of debt.

The disparity of wealth in the US from the wealthiest few to the less fortunate many has never been greater since the start of the Great Depression. And if history repeats there will be a tremendous effort to make the public pay for most of it.

Privatize the gains, but socialize the losses. Having the public bad bank buy the bad assets of the big money center banks and financial ponzi schemes and take all the losses is a thinly disguised act of theft and injustice on an almost incomprehensible scale.

There will be no lending until we drive the bad assets out of the insolvent banks. And the way to do this is to restructure the banks and write off their bad debts, and apportion the losses to the shareholders and credit holders, while backing the individual depositors and guaranteed pension funds one hundred percent.

We cannot continue to subsidize a few big money center banks from their losses, and call anything in our government a republican democracy of the people, by the people, and for the people.

"Nationalization" does not mean that the government will run the banks. Nationalization means that a body like the FDIC will take an insolvent bank, liquidate its assets, arrange for the payment of creditors, and either sell the assets to other banks, or allow a solvent bank to emerge from the process. This is what the FDIC does with any bank that fails, that is not a a powerful manipulator of the political process.

A 'bad bank' or a guarantee of private banking assets by the government is the subsidy of private losses by public money. It is a continuance of a fraud.

We either have a free market, with both gain or loss, or we have a managed economy where the Federal Reserve Bankers and ex-bankers decide who succeeds and who fails, who gains and who loses, who commands and who serves.

No matter who pays for it, the party is over.

Bloomberg
Insurers’ Corporate-Bond Losses May Exceed Subprime
By Andrew Frye

Feb. 3 (Bloomberg) -- Corporate debt defaults may cost U.S. life insurers “substantially” more than losses on securities linked to subprime, Alt-A and commercial mortgages, said Eric Berg, an analyst at Barclays Plc.

Corporate defaults are poised for a “significant” increase this year as the recession deepens, Berg, based in New York, said in a research note yesterday. The American Council of Life Insurers estimated the industry, led by MetLife Inc. and Prudential Financial Inc., holds $1 trillion in corporate debt.

“None of the life insurers we studied appear to be doing a particularly good job” of picking bonds backed by companies, Berg said. “Understandably, investors are concerned.”

Life insurers have plummeted in the last year in New York trading as investment losses and guarantees on slumping retirement products sap capital. Hartford Financial Services Group Inc. leads the industry with $7.9 billion in writedowns and unrealized losses tied to the real estate market since 2007, while New York-based MetLife has accumulated $7.2 billion, according to Bloomberg data.

Hartford and Prudential have cut jobs, asked regulators to ease reserve standards and applied for aid from the government’s $700 billion rescue program to replenish funds after reporting net losses in the third quarter. MetLife sold $2.3 billion of stock in October to bolster finances. The Standard & Poor’s Supercomposite Life & Health Insurance Index has declined about 60 percent in the last 12 months...

New Hampshire Throwing Down the Gauntlet to the Federal Government

Here is a copy of House Resolution 6 being discussed by the New Hampshire Legislature.

It certainly sets some limitations on the Presidency and the Congress.

New Hampshire HCR 6

STATE OF NEW HAMPSHIRE

In the Year of Our Lord Two Thousand Nine

A RESOLUTION affirming States’ rights based on Jeffersonian principles...

...That any Act by the Congress of the United States, Executive Order of the President of the United States of America or Judicial Order by the Judicatories of the United States of America which assumes a power not delegated to the government of United States of America by the Constitution for the United States of America and which serves to diminish the liberty of the any of the several States or their citizens shall constitute a nullification of the Constitution for the United States of America by the government of the United States of America. Acts which would cause such a nullification include, but are not limited to:

I. Establishing martial law or a state of emergency within one of the States comprising the United States of America without the consent of the legislature of that State.

II. Requiring involuntary servitude, or governmental service other than a draft during a declared war, or pursuant to, or as an alternative to, incarceration after due process of law.

III. Requiring involuntary servitude or governmental service of persons under the age of 18 other than pursuant to, or as an alternative to, incarceration after due process of law.

IV. Surrendering any power delegated or not delegated to any corporation or foreign government.

V. Any act regarding religion; further limitations on freedom of political speech; or further limitations on freedom of the press.

VI. Further infringements on the right to keep and bear arms including prohibitions of type or quantity of arms or ammunition; and

That should any such act of Congress become law or Executive Order or Judicial Order be put into force, all powers previously delegated to the United States of America by the Constitution for the United States shall revert to the several States individually. Any future government of the United States of America shall require ratification of three quarters of the States seeking to form a government of the United States of America and shall not be binding upon any State not seeking to form such a government...

Inflation v. Deflation and the Yield Curve: Jesse's Lifetime Trading Plan

More on the inflation v. deflation debate. There is a divergence among the pros as you can see from this article in Bloomberg which is worth reading.

Our 'model' is deflation now, at least in prices, with a nasty inflation of probably double digits at least to follow.

There is little advantage in trying to anticipate the progression of these events unless you are looking at the slow accumulation of precious metals and key investments with very long time horizons. Timing will be difficult until things become obvious, which leaves sufficient time to move among relatively liquid assets.

The Fed will be slow to drain, and it is not unlikely that we could see short term rates spike up to 15 to 20 percent with much of the longer yield curve at 12+%. The Fed will feel the need to crush a burgeoning inflationary cycle, especially if there are any exogenous shocks in key commodities.

That will set up a once-more-in-our-lifetime buying opportunity in zero coupons and annuitiies, and very high quality dividend paying utilities with DRIPS. We made that play in the early 1980's and it was a long term winner.

You now have our investment gameplan for what is likely to be the rest of Jesse's life. Let's see how it plays out and allow the market to inform us of the timing, and surprise twists. We see little advantage in anticipating these markets and the preservation of capital is paramount.


Bloomberg
Treasury Real Yield at 16-Month High on Inflation Bet
By Dakin Campbell

Feb. 2 (Bloomberg) -- For the first time since 2007, Treasury investors are betting that inflation will accelerate.

The yield on 10-year notes exceeds the consumer price index by 2.72 percentage points, the most since December 2006. The gap between two- and 10-year rates widened at the fastest pace in a year last month as traders demanded more compensation for longer-term debt. Treasury Inflation Protected Securities that signaled falling prices as recently as Nov. 20 show they will increase in the U.S. this year.

Deflation was the growing concern for investors in 2008 as government bond yields fell to historic lows in December, the Reuters/Jefferies CRB Index of commodities tumbled 53 percent since July and home prices plunged 18 percent amid a deepening recession. Now, the bond market is saying Federal Reserve interest rates at zero percent, President Barack Obama’s $819 billion planned stimulus package and $8.5 trillion of U.S. initiatives to revive credit markets will reignite inflation.

“When the Fed gets finished here they will have an inflation nightmare on their hands,” said Mark MacQueen, who helps oversee $7 billion as co-founder of Sage Advisor Services Ltd. in Austin, Texas. “There is a lot of downside in conservative government bonds.”

MacQueen is selling 30-year Treasuries, which are more sensitive to inflation expectations than shorter-maturity debt.

Rising Yields

The yield on 30-year Treasury bonds climbed 29 basis points, or 0.29 percentage point, to 3.61 percent last week, according to BGCantor Market Data. The price of the 4.5 percent security due in May 2038 declined 5 29/32, or $59.06 per $1,000 face amount, to 116 2/32. For the month, the yield rose 93 basis points, the most since climbing 100 basis points in April 1981.

The yield fell three basis points to 3.57 percent at 8:08 a.m. in New York.

Yields are rising so fast they are already higher than where economists just three weeks ago expected they’d be at year-end. The median estimate of 44 economists, investors and strategists surveyed by Bloomberg News from Jan. 5 to Jan. 12 was for 3.45 percent by 2010.

Investors in 30-year bonds lost 14.6 percent last month, according to Merrill Lynch & Co. index data. January was the worst month for government securities since Merrill Lynch began tracking returns on the securities in 1988. (That was a drop from a record spike high however - Jesse)

Yields on 10-year notes fell to the lowest on record in December as the cost of living dropped 0.7 percent, trimming the annual advance to 0.1 percent, the smallest rise in half a century, according to the Labor Department in Washington.

Crude Oil

Consumer prices fell as crude oil dropped 78 percent to $32.40 a barrel on Dec. 19 after rising to a record $147.27 in July. House prices in 20 cities plunged by more than 18 percent in November from a year earlier, according to the S&P/Case- Shiller index.

At the current sales rate, it would take a record 12.9 months to absorb all the unsold homes on the market. That’s more than twice as much as the five to six months that the National Association of Realtors in Washington says is consistent with a stable market.

“We are in the midst of a deflationary freefall,” said John Brynjolfsson, the chief investment officer at hedge fund Armored Wolf LLC in Aliso Viejo, California. “I don’t anticipate there is anything the Fed can do to prevent that from continuing for the next six to 12 months.”

So-called real yields that measure the difference between Treasuries and the inflation rate turned negative in November 2007 and stayed there until October, dropping as low as negative 1.79 percent in August.

Real Yields

Except for one month in 2005, the last time real yields were negative was 1980, when the Fed raised interest rates to 20 percent to fight inflation that exceeded 14 percent. During that time, real yields were below zero for 23 of 24 months ending December 1980. (The Fed will do this at some point AFTER inflation has become apparent. There will be a significant opportunity to lock in high yields on annuitites, utilities with DRIPS, and the purchase of zero coupons. But that is some years away. It sticks in my mind because I made my parents retirement very comfortable using this strategy in 1980. Timing wil be important.- Jesse)

Policy makers led by Chairman Ben S. Bernanke cut the target rate for overnight loans between banks to a range of zero to 0.25 percent in December to revive lending and stem deflation. Obama’s stimulus plan passed the U.S. House Jan. 28 and went to the Senate for approval.

The current real yield is in line with the average 2.71 percentage points in the past 20 years, showing investors see an increasing threat in inflation. By the fourth quarter, consumer prices will accelerate at a 1.75 percent annual rate, according to the median estimate of 56 economists surveyed by Bloomberg.

Yield Curve

The difference in rates on two- and 10-year notes, known as the yield curve, has steepened from a six-month low of 125 basis points on Dec. 26 to 189 basis points on Jan. 30. That’s more than double the average of 91 basis points over the last two decades. Investors usually demand more compensation on longer- maturity debt when inflation is accelerating, causing the curve to steepen.

“We see the Fed and all the policy action gaining traction and reflating the economy,” said Mihir Worah, who oversees $65 billion in inflation-linked securities for Newport Beach, California-based Pacific Investment Management Co., the manager of the world’s biggest bond fund.

Treasury Inflation Protected Securities, or TIPS, due in 10 years yield 1 percentage point less than notes that aren’t linked to consumer prices. The so-called break-even rate, which reflects traders’ outlook for consumer prices, is up from negative 0.08 percent on Nov. 20.

TIPS pay interest on a principal amount that rises with the Labor Department’s consumer price index. TIPS ended last week at 103 13/32 to yield 1.75 percent.

Inflation concerns are also rising outside the U.S. Charteris Portfolio Managers bought inflation-protected bonds for the first time for its top-performing U.K. gilt fund.

Fed Assets

The City Financial Strategic Gilt Fund started investing in index-linked bonds in November and now holds 65 percent of its assets in the securities, Ian Williams, chief executive officer of Charteris, said in an interview last week in London.

“Government attempts to reflate the economy, especially in the U.S., will ultimately work,” Williams said. “It’s too pessimistic a view to see all this money being pumped into the system and still assume it’s all going to fail.”

The Fed’s assets have grown by $1 trillion over the past year under credit programs ranging from $416 billion in term loans to banks to purchases of $350 billion in commercial paper issued by U.S. corporations. Cash that banks can lend to consumers and business, known as excess reserves, rose to almost $844 billion in the week ended Jan. 14, central bank data shows.

Debt Sales

“We are already seeing a huge expansion of the Fed balance sheet and the multipliers that are implicit there are extraordinary,” said Brynjolfsson at Armored Wolf. “Double- digit inflation is not out of the question in the following decade.”

The corporate bond market offers one sign that the efforts by the Fed to unfreeze credit markets may be working. Companies sold $138 billion of debt last month in the U.S., the most since May, according to data compiled by Bloomberg.

Fed officials suggested that prices are increasing too slowly at last week’s meeting of the Federal Open Market Committee. “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 FOMC said in a Jan. 28 statement.

“The Fed and Treasury will do whatever they can to get the economy going and that is ultimately what will stop deflation,” said Ethan Harris, co-head of U.S. economic research at Barclays Capital Inc. in New York. “It’s clear they will keep their foot on the accelerator until you get real growth.”

Corruption as an Element in the Financial Crisis - Forbes

The only surprising thing about this essay is that it appears in Forbes.

After the demise of Glass-Steagall the gloves came off and corruption became an unusually prominent factor in our financial system. There should be little doubt that the taint reached the highest levels in the US over the past ten years or more, and is still a serious problem.


Forbes
Corruption And The Global Financial Crisis
Daniel Kaufmann
01.27.09, 02:58 PM EST

The financial debacle has many causes and implications, but it would be wrong to underestimate systemic corruption.

It would be very convenient to start this article by stating that corruption is a challenge mainly for public officials in developing countries and that it is unrelated to the current global crisis.

I also wish I could claim that corruption has declined worldwide as a result of the global anti-corruption and awareness-raising campaign, the many effective anti-corruption commissions, and the recognition that poverty and culture are the reasons why corruption prevails.

But none of it is true. For starters, corruption is not unique to developing countries, nor has it declined on average. Some developing countries, such as Chile and Botswana, exhibit lower levels of corruption than some fully industrialized nations. And countries like Colombia and Liberia have made gains in recent years, while others, such as Zimbabwe, have deteriorated. Bribery remains rife in many countries, totaling about $1 trillion globally every year.

In truth, anti corruption commissions, revised laws and awareness-raising campaigns have had limited success. Focus on petty or administrative bribery has been misplaced at the expense of high-level political corruption.

One neglected dimension of political corruption is "state capture," or just "capture." In this scenario, powerful companies (or individuals) bend the regulatory, policy and legal institutions of the nation for their private benefit. This is typically done through high-level bribery, lobbying or influence peddling.

The cost to society of bribing a bureaucrat to obtain a permit to operate a small firm pales in comparison with, say, a telecommunications conglomerate that corrupts a politician to shape the rules of the game granting it monopolistic rights, or an investment bank influencing the regulatory and oversight regime governing them.

As a country becomes industrialized, its governance and corruption challenges do not disappear. They simply morph and become more sophisticated: Transfer of a briefcase stashed with cash is less frequent.

Instead, subtler forms of capture and "legal corruption" exist: an expectation of a future job for a regulator in a lobbying firm, or a campaign contribution with strings attached. In many countries this may be legal, even if unethical. In industrialized nations undue influence is often legally exercised by powerful private interests, which in turn influence the nation's regulations, policies and laws.

This has dire consequences: Witness the various forms of corruption underlying the current global financial crisis that started in the U.S.

There are multiple causes of the financial crisis. But we can not ignore the element of "capture" in the systemic failures of oversight, regulation and disclosure in the financial sector. Concrete examples abound...

(The examples given are Fannie Freddie, AIG, the mortgage lenders, and the Investment Banks)

The new U.S. administration has stated its intention to address the challenges of transparency and accountability in its stimulus plan. The devil will be in the details. Merely creating an oversight institution will not do; system-wide reforms in incentives are required. Deep-seated transparency reforms need to be a cornerstone in the government's plan, and should apply to U.S. public agencies as well as domestic and international financial institutions. Regulations supporting effective disclosure, as well as improved audit, accounting and risk-rating standards, should be preferred to restrictive regulatory controls that block innovation and growth.

Humbly learning from other nations will also go a long way. The situation in the U.S. warrants studying other countries--for instance, Sweden and Chile, which successfully addressed their financial crises long ago. Chile also offers guidance on how to structure less corrupt and effective concessions in infrastructure, where the U.S. is a novice.

In order to restore confidence, citizens, entrepreneurs and bankers need to have renewed trust in the financial system. That way they can be persuaded that it is no longer a giant Ponzi scheme. Transparency is the key.

The Banks Are Making an Offer They Think that the People Cannot Refuse

Better we tie off the bleeding wound now, nationalize the banks, and start again with an honest financial system, than pay one more cent of blackmail tribute to this den of thieves.

They would use our own money to buy us.


Bloomberg
Stiglitz Criticizes Bad Bank Plan as Swapping ‘Cash for Trash’
By Simon Kennedy

Feb. 1 (Bloomberg) -- Nobel laureate Joseph Stiglitz said any decision by President Barack Obama to establish a so-called bad bank to rid financial companies of toxic assets risks swelling the national debt.

Obama’s administration is moving closer to buying the illiquid assets currently clogging bank’s balance sheets and preventing them from boosting lending, people familiar with the matter said this week.

That amounts to swapping taxpayers’ “cash for trash,” Stiglitz said yesterday in a panel discussion at the World Economic Forum in Davos, Switzerland. “You shouldn’t chase good money after bad. We’re talking about a national debt that’s very hard to manage.”

Stiglitz, a professor at Columbia University in New York and a former adviser to President Bill Clinton, says the plan would leave taxpayers paying for years of excess lending by banks. It would also deprive the government of money that would have been better spent shoring up Social Security, he said.

Whether a bad bank would accelerate an end to the financial crisis split delegates attending the Davos talks. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said such an operation would help if “executed well.” Billionaire investor George Soros said in an interview that “it’s not the measure that would turn the situation around and enable banks to lend.”

Obama Plan

Obama said yesterday he’s readying a plan to unlock credit markets and lower mortgage rates. Under the initiative, the government would buy some tainted securities and insure the banks against losses on the rest.

“Soon my Treasury secretary, Timothy Geithner, will announce a new strategy for reviving our financial system that gets credit flowing to businesses and families,” Obama said in his weekly radio address.

Stiglitz drew criticism from panel participant Angel Gurria, head of the Organization for Economic Cooperation and Development, who says a bad bank is necessary for lending to resume.

“I agree about the moral, ethical fallout, but you’ve got to face the music and someone has to take the loss,” said Gurria, Mexico’s former finance minister. “It’s the only way to jumpstart the economy.” (Blackmail. Injustice. Infamy - Jesse)

Bank losses worldwide from toxic U.S.-originated assets may double to $2.2 trillion, the International Monetary Fund said in a report released Jan. 28.

John Monks, general secretary of the European Trade Union Confederation, told the same audience that governments are getting “close to straining the patience of the public and voters” by repeatedly extending lifelines to banks.

Philippines President Gloria Arroyo urged Obama to make a quick decision on his plan.

“We want Americans to do something,” she said at the session, which was called “Rebooting the Global Economy.” “We can discuss what to do but the worst thing is to do nothing.”

US Financial Rescue Plan Delayed to Second Week in February

Did Turbo Tim misplace "The Plan?"

Check Hank's locker. Zimbabwe Ben has a copy.

Or are they just giving the frat boys some extra time to 'arrange their affairs?'


Economic Times
US financial rescue plan delayed a week: Report
1 Feb 2009, 0639 hrs IST

WASHINGTON: The announcement of President Barack Obama's financial rescue plan will be pushed back a week to the second week of February, media reported on Saturday, citing administration sources.

"Administration aides are saying that they want to get the details right, that there are a lot of moving pieces, and so it's going to take an extra week," a news channel said. Administration officials are weighing elements to include in the plan, including whether to restrict executive compensation, how to get credit markets flowing and how to deal with the foreclosure crisis, channel said.

Efforts to get the first installment of the $700 billion bailout initiative were rushed, resulting in difficulties, and the Obama administration believes that "getting these details right might make sense," channel said.

President Barack Obama said earlier in the day the plan would be announced soon and would help lower mortgage costs for homeowners and spur the flow of credit to businesses and households.