Looming Financial Crisis Dampens German Banker's Earnings

We would have to agree that there is another significant wave incoming a from different set of bad loans in this financial crisis.

Contrast Deutsche Bank's actions with those of its Wall Street counterparts and remember this in the fourth quarter when they start queuing up at the trough for bailouts, warning of martial law, food shortages, and a breakdown of the financial system.

The Obama economic team's handling of the banks is disgraceful, serving a few politically connected Wall Street firms at the expense of the nation's interests.

The banks must be restrained, and the system brought back into balance, before there can be a sustained economic recovery.

Bloomberg
Ackermann Says Bad Loans Are ‘Next Wave’ of Crisis
By Elena Logutenkova

July 31 (Bloomberg) -- Rising delinquencies among consumer and corporate borrowers are the “next wave” of the financial crisis and may affect banks that have avoided losses so far, said Deutsche Bank AG Chief Executive Officer Josef Ackermann.

“This crisis has consisted of a series of earthquakes, with changing epicenters,” Ackermann said late yesterday at an event in Zurich. “Bad loans are the next wave. Banks that have fared relatively well so far will also be affected by this.”

Deutsche Bank, Germany’s biggest lender, said this week it set aside 1 billion euros ($1.4 billion) for risky loans in the second quarter. The seven-fold increase in provisions and below- forecast revenue from trading sent the Frankfurt-based bank’s shares to the biggest decline in four months on July 28. (Why don't they just ignore such risks like the American banking system and keep the bonus machine rolling? - Jesse)

“We were struck by the 44 percent increase in problem loans in the quarter,” Morgan Stanley analysts Huw van Steenis and Hubert Lam said in a note today, cutting their rating on Deutsche Bank shares to “equal-weight” from “overweight.”

Deutsche Bank fell 1.30 euros, or 2.8 percent, to 45.39 euros in Frankfurt trading, making it the worst performer on the 63-company Bloomberg Europe Banks and Financial Services Index over the past five days with an 11 percent drop.

‘Crisis Not Over’

“The crisis is not over,” Ackermann said. “When one looks at the developments of global economic growth, then it can be expected that starting in the second half of this year we slowly move into the positive territory. But we’re still moving on a low level.”

Banks that were forced to take government aid and are now encouraged to increase domestic lending may be more in danger from rising loan defaults than companies that can expand internationally and diversify risks, Ackermann said.

Deutsche Bank “intentionally” reduced its balance sheet and risk-taking this year, he said. (No soup for you, Deutsche Bank employees. - Jesse)

“We were disciplined in our considerations about what risks which should take,” Ackermann said. “If we had played it out to the full extent, we could have earned significantly more.” (And if you were front running the DAX with high frequency trades using government funds you would be rolling in profits - Jesse)

NAVs of Certain Precious Metal ETFs and Funds

SP Futures Hourly Chart Updated at 3 PM

See why we put *IF* the neckline is broken on that potential H&S top?

Goldman, Wall Street and their friends in government and the media came out swinging this morning. The SP futures took off from the neckline on some fairly thin rationales, but good enough for an end of month paint job.

This is starting to feel like a real top being formed, with the Wall Street crowd and their demimonde out with the pom poms trying to cheer the institutions and smaller investors with end of month 401k money into the market to buy them out of this anemic rally near a high note.

If you are long or hedged as we are in a paired trade then you are doing all right for a choppy market, and if you are short your timing is probably a little ahead of the market at least, and you are feeding the machine. If you are long and strong, well then, good luck to you.

Be careful. For the longer term this rally appears to be just business as usual into the end of the month with insiders selling vigorously and with a few of the Wall Street crowd front running it with positional and inside information on every turn.

As a reminder watch the VIX and the NDX futures, and perhaps a broader index or two, as well as the SP 500 since those futures are the paintbrush most highly favored by the tape painters.

GDP tomorrow. Who can tell how it will turn out, except to say it will likely be revised. We'll ignore the headline and look more deeply into the numbers.

SP Futures Hourly Chart at 2:30 PM EDT

A potential Head and Shoulders top has formed. It will be a valid formation but the objective will not be activated until and unless the neckline is broken.

Volumes remain light, with lots of technical gamesmanship that contributes to quite a bit of volatility in the short term, aka a 'daytrader's market.'

There is quite a bit of 'tension' in the market ahead of the GDP report tomorrow. The consensus is for growth of 1.5%. We are still a couple of weeks short of the timeframe we have projected for a top and the beginning of a leg down in markets, but some data or exogenous surprise could accelerate this.

There is a de facto partnership between the government and the banks with regard to the financial system and the economy which is spilling over to the equity markets. This is a similar arrangement that brought us the housing bubble and the credit crisis after the tech bubble and crash of 2001, which itself was a reaction to the Asian and Russian currency crisis of the late 1990's.

The financial engineers will likely not abandon their efforts until they either succeed, or finally shake the real economy apart and destroy the US financial system and currency. How they define 'success' is likely to be stability at the price of freedom, a classic oligarchy with 'enlightened despots.' Their financial engineering will require ever greater control over policy and priorities to maintain its artificial equilibrium.

The banks must be restrained, the financial system reformed, and the economy brought back into balance before there can be a sustained recovery.

Janet Yellen Channels Ronald Reagan: "Deficit's Don't Matter"

"You know, Paul, Reagan proved deficits don't matter."Dick Cheney to Paul O'Neill

The mainstream media is reporting that Fed governor Janet Yellen, a noted dove on inflation as Fed governors go, just told a gathering of bankers in Idaho that "deficits do not cause inflation" and summarily dismissed any concerns in that regard.

So, consulting the source material which is included just below, I am struggling to understand what she is saying, and to believe that she said it with a straight face, and was not just jawboning.

What Janet Yellen seems to be saying is:

First, that deficits do not matter unless they are 'structural' and not temporary. It does not matter how much, for example, we give to the banks. When the crisis is over, the deficits will remain, but will not grow larger, and will be offset by higher taxes, that will come from the improved economy.

Secondly, that developing countries have independent central banks that know how to and are willing to fight inflation, as opposed to the central banks of undeveloped countries where the government impedes their ability to fight inflation and to monetize the debt.

Thirdly, monetary inflation only occurs where excess demand for goods and services is generated. Until that point, unless there is this demand, increased money supply does not generate inflation. We might call this the reverse Laffer, in that it is a Demand side view of inflation that tends to discount the supply side completely.

One would not think that the US had recently seen the collapse of an enormous housing bubble, following the collapse of a large but less enormous stock bubble. Janet brushes this off faster than a stock strategist on CNBC.

Although she received her Ph.D. from Yale in 1971, she surely must have subsequently studied the stagflation of the 1970's in the US, where demand remained relatively stable but a supply shock on the oil side, together with the egregious monetary policy of a pliable Fed that had been accommodating Richard Nixon, finally triggered a rather nasty stagflation that the hairy-knuckled resolve of tall Paul Volcker was finally able to overcome.

Janet Yellen is greatly mistaken, but almost emblematic of the thinking in some circles that can see only the demand side of the equation, which is most common in a layperson relating to their common domestic experience. What is frightening in a way is that she is not some blogger out on the net, or a talking head for the extended infomercial that is financial reporting in the US, but is a Fed governor.

And she is no outlier. Her thinking underpins the basis for Bernanke's strategy of packing the banks with liquidity, monetizing their assets, but maintaining control of that added liquidity by having the ability to attract bank reserves into the Fed where they can be managed through the ability to pay interest on those reserves.

Can the Sorcerer's apprentices keep a steady hand on this latest monster from their laboratory? Every time they try this, something unexpected happen, and we go to the brink, to be rescued by another patch, another new experiment, designed to save us from the last one gone wrong.

Her arrogance toward 'developing countries' is absolutely appalling, and sure to come back to haunt her at some later date. If one looks at the performance of the dollar and its long term purchasing power under the Fed, it appears that Janet is a proud member of the subjective idealist school of behavioural economics. What we do not admit to be real cannot exist, and will not hurt us.

So, we can inflate our way to prosperity, provided that we control the perception of the results of our actions. Jigger the CPI so its no longer valid, suppress long term interest rates by buying the curve selectively and suppressing gold (See Gibson's Paradox by Larry Summers), and coerce the world's central banks through various means to support our monetary inflation step for step. After all, everything is relative. Until it is not.

OMG. Our entire financial system is based on the sufferance and good will of potential adversaries to do what is in our best interests because the fragility of our currency frightens them. And well they might be fearful, when they read this from Ms. Yellen, and see how many true believers in the omnipotence of the Fed take it seriously.


Large deficits don't cause inflation: Fed's Yellen
By Greg Robb
Jul 28, 2009, 1:06 p.m. EST

(MarketWatch - Washington) -- Concern that the massive federal budget deficit will cause inflation is misplaced, said Janet Yellen, the president of the San Francisco Federal Reserve on Tuesday. Deficits don't cause inflation, she said. Instead, the worry is that they might cause interest rates to rise. "Right now, private investment spending is extremely weak, so financing for the large federal deficits is readily available. But once private spending recovers, the competition for funds between the government and private sectors could drive interest rates up," Yellen said in a speech to bankers in Idaho.

Jesse here. The relevant quote from Janet Yellen's speech to the bankers in Idaho is excerpted below from the San Francisco Fed's website.

Let me now address another issue that is garnering attention—inflation. This is a subject rife with contradiction. Almost without exception, my business contacts report downward pressure on wages and prices. At the same time, they tell me they worry that the United States is on the threshold of serious inflation. They see large federal budget deficits today and more looming on the horizon. They also note that the Fed has pumped up bank reserves and expanded its balance sheet to fund its financial support programs. They worry that this may amount to financing deficits with money creation. Surely, they say, these things will eventually have to lead to higher inflation.

I’ll begin with budget deficits. The gap in the federal budget for the current and the next fiscal years are projected to exceed $1 trillion, far larger than anything we’ve ever seen before. But a large part of these current deficits are temporary. A portion stems from the impact of the weak economy on the budget. In a recession, tax collections fall and spending on programs such as unemployment insurance rise automatically. A significant portion is due to the fiscal stimulus that has been put in place over the next few years to address the recession. Antirecessionary fiscal policy, in my view, is entirely appropriate. Since that stimulus is temporary by design, the resulting deficits will shrink as the stimulus phases out. But federal deficits will not disappear completely even when the economy has recovered and the stimulus program has phased out. On the contrary, these ongoing or “structural” deficits are anticipated to stretch indefinitely into the future and to escalate over time in a manner that ultimately is not sustainable. The long-term projected structural budget deficit mainly reflects the impact of an aging population and rapidly rising health-care costs on spending for federal entitlement programs, particularly Medicare and Medicaid.

Economists have known, worried, and warned the public about the damaging consequences of escalating long-term budget deficits in the United States for decades. It’s high time for our country to tackle the problem head-on. But the main concern with these deficits relates to productivity and living standards, and not high inflation. Large budget deficits do not cause high inflation automatically. In fact, since World War II, large deficits have been associated with high inflation only in developing countries. That’s because developing countries often have central banks that are under the sway of the government, which sometimes induces them to print money to finance government spending. The connection isn’t found in countries such as ours with advanced financial systems and independent central banks. Remember that, in the 1980s, the United States ran large deficits just as inflation was coming down. And Japan has had huge deficits through much of the past two decades, yet its problem is persistent deflation—precisely the opposite of inflation. The United States and most other industrialized countries have central banks with long traditions of independence and deep-seated support for keeping politics out of monetary policy. In those countries, the monetary authorities generally have stuck to their inflation objectives, even when governments ran large budget deficits.

In advanced countries, the problem isn’t that large deficits cause inflation. Rather it’s that they raise long-term interest rates, thereby crowding out private investment, which holds back advances in productivity and living standards. Right now, private investment spending is extremely weak, so financing for the large federal deficits is readily available. But once private spending recovers, the competition for funds between the government and private sectors could drive interest rates up. A decline in productivity growth is a serious problem—one we should strive to avoid—but it is not the same as inflation.

So what about the Fed’s unprecedented balance sheet expansion? Our strong steps to avert financial and economic meltdown have caused our assets to more than double, from under $900 billion at the start of the recession to over $2 trillion now. This expansion is largely financed by increases in excess reserves that banks deposit with us.

Now we come to the crux of the issue: Will this expansion of credit and bank reserves create high inflation? My answer is no. And the reason again is because of current economic conditions. Monetary policy fosters inflation when it loosens the stance of policy enough to create excess demand for goods and services. Right now, we have exactly the opposite—an excess supply of goods and services. We need more demand—not less—to offset slack in labor and product markets. We have seen a noticeable slowdown in wage growth and reports of wage cuts have become increasingly prevalent. Businesses are cutting prices to boost sales. As a result, core inflation—a measure that excludes volatile food and energy prices—has drifted below 2 percent, a level that I and most of my colleagues consider consistent with price stability. With unemployment already substantial and likely to rise further, and industrial capacity utilization at record low levels, downward pressure on wages and prices isn’t likely to go away soon. I expect core inflation to remain below 2 percent for several more years.

Of course, the economy will eventually recover and we will need to withdraw monetary accommodation. If we were to fail to do so, we would indeed have higher inflation. The Fed is keenly aware of this. We have the tools to tighten policy when the time is right and we have the will to use them. First, many of our emergency programs are already tapering off as market conditions improve. Second, many of the assets that we have accumulated during the crisis—such as Treasury and mortgage-backed agency securities—have ready markets and can be easily sold. Finally, the Fed can push up the federal funds rate and tighten policy by raising the rate of interest paid to banks on the reserves they deposit with us—authority granted by Congress last year. An increase in the interest rate on reserves will induce banks to lend money to us rather than to other banks, thereby pushing up rates in the interbank market and, by extension, other interest rates throughout the economy. This is an important tool because, even if the economy rebounds nicely, the credit crunch might not be fully behind us and some financial markets might still need Fed support. This tool will enable us to tighten credit conditions even if we maintain a large balance sheet for a time. The experience of central banks in Europe, Japan, and Canada suggests that this approach can be effective.

Full Text of Janet Yellen's Speech to the Idaho Bankers here.

Martin Meyer on Credit Default Swaps

The current state of the Credit Default Swaps market represents a risk similar in quality to that of portfolio insurance just prior to the market crash of 1987.

What is alarming that in terms of quantity there is no comparison, as the risks now are probably an order of magnitude greater in that the risk in concentrated at the heart of the US banking system. In 1987 the US was still at least partially protected by Glass-Steagall.


On Credit Default Swaps: Comments at AIER
By Martin Mayer
June 25, 2009

Let me open with a large thought you can carry with you when you leave. Note how we are no longer being told that the chairman of the Federal Reserve is the second most powerful man in America. Why do you think that is true?

One of the truly awful moments of my time in this business was the early evening of December 9, 1982, an incident not in any of the histories but highly revelatory. What happened that evening was that Banco do Brasil failed at CHIPS (the Clearing House Interbank Payments System). Neither National City Bank nor Chemical, which represented Banco d Brasil in New York, was willing to pony up the $300-plus million the Brazilians couldn't find. So they kept the window open until midnight, while the Fed worked its necromancy on its member banks and the money was found.

Subsequent examination revealed that after the Mexican collapse the previous summer, Banco do Brasil had found it increasingly difficult to roll over its loans, and had steadily switched a higher and higher share of its borrowings out of the conventional lending and borrowing market and into the overnight infrastructure market. For more than six months, the Brazilians had increased the size of its overnight position, until somebody at National City noticed and said, No more.

The Treasurer of Chemical was an exceedingly able young man who went on to a great career at AIG, oddly enough. I went to see him to help my understanding of what had happened. Finally, he said, "You have to understand. They were paying an extra eighth." A banker will turn himself absolutely inside out for what looks like a safe extra eighth of a point. The change over the quarter century is that now he will probably do it for five basis points. (And this is why banks must be regulated and their speculation firewalled from the public funds. Why? Because they are human. - Jesse)

Meanwhile, on a less cosmic scale, let us start with the thought that Wall Street gets in its worst trouble not by taking risks but by following false prophets who promise to make finance risk-free. The nomenclature and some of the equations change, but the truth is that there are only six scams, and each of these financial panics is rooted where the others were. (In defense of false prophets, Wall Street and others too often use them as a convenient excuse to do what they are already inclined to do in the first place. - Jesse)

What made the market break of 1987 so sharp and so deep was the widespread adoption of dynamic hedging, a mathematically proven plan to provide portfolio insurance by selling futures contracts on stock indexes if the stocks themselves fell hard. Dumbest idea ever accepted by any substantial part of mankind, said Howard Stein, who then ran the Dreyfus fund. How could anybody believe that everybody could sell at the same time?

It then took twenty years for the magnificently rewarded innovators of the new paradigm in banking to find an even dumber idea that everybody could safely and profitably hedge everybody else's risks through credit default swaps. (Quite so. The resemblance between portfolio insurance and the current state of Credit Default Swaps is apparent, but even worse, because they are so heavily written and held by the major money center banks, with their risk spread to the public compliments in part to Alan Greenspan and Phil Gramm - Jesse)

We make bad policy in this country because we do not inquire about how we got to where we are. There are every few second acts in American finance. Not one in a thousand of the people now commenting on the future or regulation of the CDS knows where the instrument comes from. The truth is that the CDS is one of many of what I shall call GSIs - "Government Supported Instruments" -- that would never have come into existence without dumb ideas from on high.

The Collateralized Debt Obligation or CDO, which came into existence in the late 1980s, is a single instrument expressing a garbage pail of loans and notes and bonds. It is all but impossible to value because it mixes together many disparate risks. Most people who think about it at all come to the conclusion that its not very useful for trading or for investing. In short, it is an excrescence that ought not to exist.

The CDO came about because Bill Seidman, when he was given control of the S&L workout in the late 1980s, wanted to sell whole banks rather than gather the tainted assets in FDIC control and auction them off in the usual FDIC procedure. Instead of taking, say, the real estate loans of six failed S&Ls and lumping them together as an offering on which real estate experts could paste a price, he wanted to take the entire portfolio of one or more failed thrifts and sell it off for what it would bring. (Marty is being a bit hard on Bill Seidman. There was nothing inherently fraudulent in the manner in which they packaged the sales related to the S&L crisis. It took Wall Street and the Rating Agencies to provide the real dose of fraud and larceny in the misrating and intentional mispricing of risk. - Jesse RIP Bill Seidman)

Note that this multiplied the amount of business Wall Street would get from the workout. The way you got people to bid on this sort of package was to give them the right to substitute other assets for assets in the package, or to guarantee the cash flow from the package.

The idea that a bank could be rid of its bad stuff through the device of a bad bank was then picked up by Mike Milken, and carried through with Mellon Bank in Pittsburgh, where the operation was funded through junk bonds. I wrote a piece for Barrons about how intelligent all this was. I spoke with some of the brilliant kids Milken assigned to this project.

The damage these CDS instruments do has not yet been exhausted. The publicized stress tests to which the federal bank examiners recently subjected the 19 largest banks was not really a serious enterprise, because all these banks rely on swaps to protect them against their losses on the toxic legacies they accumulated under the gaze of these same examiners -- and nobody knows whether or not these hedges will pay out if they are needed. (They will only pay out in full with government monies, which is the dirty little secret that the Treasury and Fed are desperate to hide from the public. And when they fail, they will bring down the top four or five banks in the United States. - Jesse)

Swaps, after all, are bilateral contracts, and if the loser under the contract can't pay, the fact that he has theoretically hedged his risk in a separate contract with a third party does not necessarily mean that the winner can collect. Hence the "systemic risk" when AIG or Lehman, signatories to tens of thousands of these contracts, blows up, leaving a paper litter of unimaginable dimensions.

Sixteen years ago, I testified before the House Banking Committee to urge that it should be public policy to discourage over-the-counter derivatives contracts and encourage the use of exchange-traded instruments instead. To assure that losers pay, exchange-traded contracts impose overnight deposits to meet margin requirements rather than collateral that may show up some day. The Treasury Department, after years of fighting on the other side, has now discovered the virtues of settling derivative contracts through clearing houses.

But what Treasury Secretary Timothy Geithner has proposed will not do the trick, because it leaves the actual trading of these instruments in the hands of inter-dealer brokers who do not publish the prices at which they arrange the deals (and may not offer the same prices to all bidders). And because it does not show the way to meeting the legitimate needs that spawned this illegitimate market, the Geithner proposals invite evasion of the rules. (Geither's solution was designed in large part by the banks themselves who do not wish the game to end just yet - Jesse)

The legitimate need is for a place where traders can short bonds.

Shares of stock scan be borrowed (fees for such borrowings are an important source of income for brokers) and delivered to buyers who don' know that what they have bought is borrowed stock. Much publicity has been given to traders who abuse these rules, sell what they have not borrowed and then fail to deliver and suffer no significant punishment for their failure. The SEC had been and remains asleep at the switch when it comes to this issue. And even when stock cannot be borrowed, there is an options market offering puts in a trading context where open interest is public knowledge. No such institutions exist in the bond market.

It was the difficulty of shorting bonds that produced the T-bond contract at the Chicago Board of Trade thirty years ago, permitting participants in the fixed-income markets to protect themselves against interest-rate fluctuations. Interest-rate futures are a legitimate instrument because there is a generic interest-rate risk, expressed in the market-determined yield curve.

It is easy to understand that traders once they have hedged interest-rate risks would seek to insure also against credit risks. But there is no such thing as a generic credit risk that can be traded. Like all instruments with a trigger option, they promote the illiquidity that drives markets out of the patterns the white swan people need.

Hat tip to Institutional Risk Analytics for the article

The Bull Market in Financial Fraud in the US

Does it, should it, surprise us that there is a bull market in financial fraud in the United States, to accompany the bubble economy and the deterioration in government and corporate financial statistics and accounting?

A society where the capital allocation in the bond and equity markets have become the domain of organized manipulation, theft, and insider trading? Where the major media is owned by a handful of corporations dedicated to selectively spinning the truth for their own benefit and point of view? A nation whose very money supply has become a thinly disguised Ponzi scheme?

A wise old hand of many years in government of our acquaintance told us once that he did not think there were more people of questionable virtue in the world today. Rather it is the tolerance of bad behaviour from the top down that emboldens those who are so inclined to lie, cheat, and steal in greater numbers than at other times.

All that is required for society to decline is for good people to do nothing. Those who tolerate or ignore such widespread deceit are enablers. The rest of the world must begin to stand up to the American Wall Street crowd, first in their own countries, their regions, and then in all free economies.

The Economist
Fraud reporting
Jul 21st 2009

The rise in financial crime in America

OVER 730,000 counts of suspected financial wrongdoing were recorded in America last year, according to recent data from the Treasury Department's Financial Crimes Enforcement Network.

Institutions such as banks, insurers and casinos are required by law to report suspicious activities to federal authorities under 20 categories. Financial institutions filed nearly 13% more reports of fraud compared with 2007, accounting for almost half of the increase in total filings.

The number of mortgage frauds alone rose by 23% to almost 65,000. But not all categories saw an increase: incidents suspected terrorist financing fell. Just under half of all filings are related to money laundering, a proportion that is little changed in over a decade.

Hat tip to Tim Dossman for the article.

New York Fed Wants to Hear From Investors (But Not Anyone LIke You)

The New York Fed is creating an 'investor advisory council' and packing it with the outer circle of insiders, the banks being the In Crowd.

Its nice to hear that Pimco will now have greater access to the NY Fed.

Maybe the Fed would like them to explain how they are going to move hundreds of billions in new bond sales in the coming weeks, while propping the equity markets with hot money and no fundamental underpinnings. Is Goldman running out of ideas? Does Ben Bernanke have printer's block? Is Larry Summers already searching for the revolving door? Is Timmy amending his tax returns?

The guy from the Treasury of the State of New Jersey must be there for a fade. I hear most of that state's investments are in overseas accounts. Did the Treasurers of Michigan and California have scheduling conflicts?

The list of appointees are at the end of this press release. In case you were wondering, ZeroHedge, Karl Denninger, GATA's Bill Murphy, Peter Schiff, Eric Janszen, Jon Stewart, and WalStreetPro are NOT included in the list of appointees. If they were, the NY Fed could make money by putting their meetings on Pay Per View or SpikeTV.


New York Fed Announces Creation of the Investor Advisory Committee on Financial Markets
July 24, 2009

New York—The Federal Reserve Bank of New York today announced the establishment of the Investor Advisory Committee on Financial Markets (IACFM). The committee will serve as a forum for informal discussions on financial, economic and public policy issues and help inform New York Fed President William C. Dudley and senior management. The IACFM is currently comprised of 13 prominent leaders in the investment community, and is solely an advisory group with no formal policymaking responsibilities.

The committee will combine the insights of a broad spectrum of investment professionals and strengthen the New York Fed’s relationships with a diverse group of market participants, ensuring policymakers hear a range of views on relevant issues.

Mr. Dudley said, “Since my arrival at the Bank in January 2007, we have expanded our contacts throughout the investment and trading communities. Through such relationships, we can enhance our understanding of how the private sector interacts with Federal Reserve operations, deepen communications between the Fed and market participants, and build confidence in Fed actions through greater transparency. Conferring with members of the IACFM is a natural extension of our work at the Bank.”

The creation of this advisory committee formalizes the ongoing expansion of our contacts and outreach by New York Fed staff. Currently, the New York Fed meets regularly with a variety of economists, representatives from the small business and agriculture sectors, thrift institutions and community banks, as well as leaders from community development organizations committed to assisting the low- and moderate-income communities in our District.

The New York Fed anticipates that committee membership will evolve to ensure additional perspectives are expressed in the committee. At this time, committee members include:

Keith Anderson
CIO, Soros Fund Management LLC

Nicole Arnaboldi
Vice Chairman of Alternative Investments, Credit Suisse Group

Louis Bacon
Chairman, CEO and Founder, Moore Capital Management LLC

William Clark
Director, State of New Jersey Department of the Treasury
Division of Investment

Mohamed El-Erian
CEO and Co-CIO, Pacific Investment Management Company

Garth Friesen
Principal, III Associates

Gary Glynn
President and CIO, US Steel and Carnegie Pension Fund

Joshua Harris
Managing Partner, Apollo Advisors LP

Alan Howard
Director and Co-Founder, Brevan Howard Asset Management LLP

Glenn Hutchins
Co-CEO and Co-Founder, Silver Lake

Sander Levy
Managing Director, Vestar Capital Partners

Morgan Stark
Managing Member, Ramius LLC

Thomas Steyer
Senior Managing Member, Farallon Partners LLC

"Build America Bonds" Paying a Shocking Premium to Corporates

The “Build America Bonds” were created by Bill S.238 called "The Build America Bonds Act of 2009 which provides $50 billion of federal taxpayer funds to subsidize state and local government tax free bonds in support of 'shovel ready' infrastructure projects.

The U.S. Government gives the issuing municipality or state a 35% rebate on the interest that the issuer pays to the bond holders. This is a huge benefit for local governments.

We have not yet found out why, but it is apparently giving a big benefit to the buyers of the bonds who are getting an income stream at well below market prices for comparable issues. In some cases the BAB bonds are pricing at 149 basis points over comparably rated corporate bonds.

Where is the inefficiency coming from in this bond offering? Who is taking the differential, the vigorish, being granted to the state and cities? Who are the underwriters and the market makers? Who are the big market makers besides Pimco? What are the fee structures being charged compared to the overall bond market?

Meredith Whitney, star analyst that she is, was the closest with her $4.65 prediction. She thinks the stock has lots of room to run, notes Fortune. Goldman, in her mind, will surf the economic woes now roiling the country. Goldman is a top underwriter of municipal bonds and the No. 1 underwriter of Build America Bonds. "These are a new type of municipal bond, part of the Obama administration's $787 billion stimulus plan. Cities, states, universities and government entities use BABs, as they're known, to finance infrastructure projects. This is a potential $50 billion annual market, Whitney says, and Goldman currently holds a 25 percent share," reports a Fortune article.

Oh now it all makes sense. Droit de Seigneur.

Bloomberg
Taxpayers Inferior to Shareholders With Obama Bonds
By Michael McDonald and Bryan Keogh

July 22 (Bloomberg) -- State and local governments, forced to close budget gaps by firing workers and shutting schools, may pay at least $4.2 billion more in interest than companies with similar credit ratings on Barack Obama’s Build America Bonds.

The $17.4 billion of Build America Bonds sold since April pay an average yield that’s 0.96 percentage point more than corporate securities with the same ratings, according to data compiled by Bloomberg and based on the 25 largest deals.

“Taxpayers are taking it on the chin,” said G. Joseph McLiney, president of Kansas City, Missouri-based McLiney & Co., a firm that specializes in selling municipal bonds that qualify for federal tax credits. “There should be no spread.”

While Build America Bonds opened credit markets to municipalities after the collapse of Lehman Brothers Holdings Inc., states and cities are being penalized compared with corporations, which are 90 times more likely to default than local governments, according to Moody’s Investors Service....

‘Disserving Their Constituents’

The difference in borrowing costs shows elected and appointed officials are failing taxpayers, said Stanley Langbein, a banking and tax law professor at the University of Miami and former counsel at the U.S. Treasury in Washington.

Issuers are “supposed to get the best rate available,” Langbein said. “To me they’re disserving their constituents. Their responsibility is to get the lowest rate available, which is the corporate rate.”

Congress included the Build America Bonds program in the $787 billion stimulus President Obama signed into law in February, after sales of fixed-rate municipal bonds fell 17 percent last year to $281.1 billion, according to Bloomberg data. Most of the drop followed Lehman’s bankruptcy in September.

The initiative, which expires at the end of next year, provides a federal subsidy for 35 percent of the interest costs on taxable bonds sold by states, local governments and universities to finance capital projects that create jobs. Borrowers say they save money compared with tax-exempt debt because the interest after the federal payments is lower than tax-exempt benchmarks.

‘Priced it Right’

“We feel like we priced it right,” Jennifer Alvey, Indiana’s public finance director, said of the June bond sale. Indiana is paying a rate of 4.28 percent after the subsidy, lower than on tax-exempt bonds, she said. “That’s the difference I care about.”

Investors demand higher rates from municipal borrowers because Build America Bonds are 91 percent smaller than company offerings on average, according to data compiled by Bloomberg.

While California sold $5.23 billion in April, the largest issue so far, Avondale, Arizona, offered $29.8 million on July 6 for sewer and other public improvements. The average par amount for Build America Bonds is $102.5 million, compared with $1.16 billion for the 611 U.S. investment-grade corporate bond offerings this year, according to Bloomberg data.

‘Pricing Power’

Investors also require higher yields because they say the securities may become difficult to trade if the program isn’t extended past 2010, said Natalie Trevithick, a senior vice president at Pacific Investment Management Co. The Newport Beach, California-based firm runs the world’s biggest bond fund, the $161 billion Total Return Fund.

“We do have much more pricing power in these deals,” Trevithick said.

Endowments, foundations and pension funds are overlooking the securities because unlike Pimco, they don’t have expertise to analyze municipalities, said Peter Coffin, president of Boston-based Breckinridge Capital Advisors, which oversees $10 billion in bonds.

“You have a lot of big buyers so there’s less price competitiveness,” said Scott Minerd, the chief investment officer at Santa Monica, California-based Guggenheim Partners, which manages $100 billion.

Alan Krueger, the Treasury’s chief economist in Washington, said Build America Bonds succeeded in reviving the municipal market by lowering debt costs. He said municipal and corporate securities are different, so they are difficult to compare.

‘Good Start’

“Build America Bonds are doing what they were designed to do, which is lower the cost of capital for municipalities and increase access to capital markets,” Krueger said in a July 15 telephone interview. “That’s what Build America Bonds are intended to do, and they’re off to a good start doing that.”

State tax collections fell 11.7 percent to $160 billion in the first quarter compared with the same period in 2008, the largest drop in at least 46 years, the Rockefeller Institute of Government in Albany, said in a July 17 report.

Congress’s Joint Tax Committee estimated in February that the Treasury would spend $9.8 billion through 2019 subsidizing the bonds. Matt Fabian, a managing director at Municipal Market Advisors in Westport, Connecticut, said in a June 22 report that the program’s price tag may reach $27.3 billion by the time all such securities mature in 2044...

The spread is even wider when considering more of the smaller Build America Bond deals, according to Philip Fischer, a strategist in New York at Merrill Lynch & Co., a unit of Charlotte, North Carolina-based Bank of America. He found that on July 15 the average yield on bonds of more than $100 million compared with an index of AA corporate rates was 1.49 percentage point.

“Munis and corporates are apples and oranges in terms of the credit, but does that justify that kind of spread? Not for me,” said Ben Watkins, the director of Florida’s state bond division. Investors in the corporate bond market are “taking advantage of an opportunity.”

SP Futures Hourly Chart at 2:30 EDT

Some short term indicators are flashing that we are nearing at least a short term top. There is also indication of distribution of stock here by insiders to the public, which is also an indication of a possible top. This judgement is based on many charts and indicators not shown here.

Having said that, our discipline will not prompt us to do any seriously non-hedged shorting until the 'trendline' Key Pivot is violated at least on a daily close, and then confirmed by a move lower.

The market is rising on thin volumes, and unless the sellers come back in, it can continue to drift higher on program trading and short squeezes.

We are within two weeks of a potential 'crash window' where a final top will be made, and a selloff with a significant leg lower will be seen into the end of year. The window is a bit wide for now, a six week period starting around August 17th. We will hope to tighten that up by the end of July.

This is only a probability, not a hard forecast. But it has us edgy to be on the long side, even in precious metals miners, without hedging a general market decline. The Cashflow in the market is looking a bit stretched. We may have to wait until later in earnings season for this to shake out.

In sum, the markets seem 'precarious' and unstable to us, but not enough to jump in front of the market to the bear side yet.

As an aside, we are seeing quite an increase in 'screwy fills' on the bid ask level II where fills on the retail side seem to be made 'out of bounds' of the usual bid/ask action.

We do not use market orders normally and would not suggest them here for those that do. The market makers are shaving fills and front running perhaps although that is harder to spot except on the thinly traded stocks where other issues may come into play.

But we are seeing far too many fills BELOW our limit bids on some stocks to believe this market is functioning normally.

The Allure of Outsourcing Financial Regulation

One has to be fascinated with the proposal by the Obama Administration to effectively outsource the regulation of US markets and the protection of consumers to the Federal Reserve, an agency that is owned by the industry which it would be asked to regulate.

It is especially interesting given the recent history of the failure of that organization to do its job properly, failure to engage in open and transparent dialogue about its non-core (non-monetary) operations, and continuing resistance to taking direction from the government in matters related to fiscal and legislative policy that would fall under its regulatory purview while asserting its independence.

Its almost surreal. I cannot believe anyone is taking this proposal seriously.

There are three reasons why the Obama Administration is proposing it and the Congress is giving it serious consideration.

1. The special interests, the banks, who are significant donors to the Democratic and Republican parties would like to have it since they effectively own the Fed, and Wall Street likes no regulation better than self-regulation.

2. Government enjoys outsourcing its responsibilities to outside agencies like the Fed, because when the lapses and failures come, it gives them a great opportunity for finger pointing and hearings to chastise the party that failed, and shift the blame for the responsibility for the failure from themselves to someone outside their organization.

3. Larry Summers wants to be both the chairman of the Federal Reserve and of the SEC and a proposed Financial Consumer Protection Agency to attempt to maximize his ability to manipulate and control the financial system. And Larry does not work for you or your interests.

Would you like to have seen Alan Greenspan as not only the chairman of the Federal Reserve, but also the head of the SEC and the Consumer Protection Agency for financial products?

What is being proposed amounts to a financial Star Chamber. It makes the machinations behind the founding of the Federal Reserve in 1913 look tame by comparison.

Has the US a shred of common sense and regard for democratic principles left?

China Seeks to Lessen Its Reliance on US$ Through Aggressive Acquisition of Real Assets

“Everyone is saying we should go to the western markets to scoop up [underpriced assets],” said Chen Yuan. “I think we should not go to America’s Wall Street, but should look more to places with natural and energy resources.”

Financial Times
China to deploy foreign reserves
By Jamil Anderlini in Beijing
July 21 2009 19:09

Beijing will use its foreign exchange reserves, the largest in the world, to support and accelerate overseas expansion and acquisitions by Chinese companies, Wen Jiabao, the country’s premier, said in comments published on Tuesday.

“We should hasten the implementation of our ‘going out’ strategy and combine the utilisation of foreign exchange reserves with the ‘going out’ of our enterprises,” he told Chinese diplomats late on Monday.

Mr. Wen said Beijing also wanted Chinese companies to increase its share of global exports.

The “going out” strategy is a slogan for encouraging investment and acquisitions abroad, particularly by big state-owned industrial groups such as PetroChina, Chinalco, China Telecom and Bank of China.

Qu Hongbin, chief China economist at HSBC, said: “This is the first time we have heard an official articulation of this policy ... to directly support corporations to buy offshore assets.”

China’s outbound non-financial direct investment rose to $40.7bn last year from just $143m in 2002.

Mr Wen did not elaborate on how much of the $2,132bn of reserves would be channelled to Chinese enterprises but Mr Qu said this was part of a strategy to reduce its reliance on the US dollar as a reserve currency.

“This is reserve diversification in a broader sense. Instead of accumulating foreign exchange reserves and short-term financial assets, the government wants the nation to accumulate more long-term corporate real assets.”

State-owned groups, particularly in the oil and natural resources sectors, have stepped up their hunt for overseas companies and assets on sale because of the global crisis.

China Investment Corp, the $200bn sovereign wealth fund, has been buying stakes in overseas resources companies and has taken a 1.1 per cent stake in Diageo, the British distiller.

In an interview published in state-controlled media, the chairman of China Development Bank said Chinese outbound investment would accelerate but should focus on resource-rich developing economies.

“Everyone is saying we should go to the western markets to scoop up [underpriced assets],” said Chen Yuan. “I think we should not go to America’s Wall Street, but should look more to places with natural and energy resources.”

The Fed's Currency Swaps

Some controversy was triggered over a line of questioning this morning during Ben Bernanke's testimony before Congress, as reported on top financial blog sites Zerohedge and Naked Capitalism. We read them both daily and are often envious of the depth and breadth of their expertise.

Congressman Grayson's line of questioning implied that the Fed was providing loans to foreign companies. Others wondered if the Fed was engaged in propping up the dollar by forcing central banks to buy US dollars in these swaps.

During the current credit crisis the Fed first reacted to market conditions and requests from central banks starting in September 2008 by expanding its currency swap lines with the European Central Bank and the Swiss National Bank, and creating new swaps with the Bank of Japan, Bank of England and the Bank of Canada for $180 billion.

What Is a Currency Swap?

A currency swap is a transaction where two parties exchange an agreed amount of two currencies while at the same time agreeing to unwind the currency exchange at a future date.

The currency swap is executed at a given exchange rate, generally the market rate, in order to provide liquidity in a specific currency to a specific banking jurisdiction. Here is an example of a swap that was conducted with the BOE at the rate of 1.8173.



The reason for the swap is to provide the BOE with additional US dollars to meet the short term needs of its client banks, and the dollar demands of their customers.



In September private banks were reluctant to lend to one another or engage in private swaps because of a prevailing fear in the market of potential bank insolvencies and the counter party risk which that entails.

At the same time there was a 'run' on dollar assets in Europe as customers sought to liquidate their investments, denominated in US dollars, but held by foreign banks. Some of these investments ironically enough were collateralized debt obligations that had been sold by Wall Street. TED Spread Soars to New Record - Symptom of the Eurodollar Squeeze?



Did Wall Street set up their foreign counterparts, and then squeeze them mercilessly when they needed dollar assets? Probably giving the Street too much credit for planning. It is more likely a case of simple misrepresentation, followed by fear when the misrepresentation had been discovered.

The Ted Spread is the difference between the US Dollar LIBOR and the 3 Month US T Bill. It intends to measure the difference in 'price' between dollars in the US and dollars overseas. Nine out of ten people might notice a sharp spike in this spread as the credit crisis hit full fury in September 2008. Demystifying the TED Spread



As one can easily see, the TED Spread began to decline after the Fed and the Central Banks began to provide dollar liquidity where it was required.

There is concern amongst some people that the Fed was engaging in these currency swaps to prop the dollar, as expressed in the US Dollar Index (Dx).

There was no need to do these swaps to support the dollar, as the US dollar was already enjoying a strengthening as the 'flight to safety' currency. The original September tranche created by the Fed grew to 500 billion dollar swaps line as the Central Banks sought to prevent a currency crisis, an artificial dollar shortage in what amounted to a run on foreign banks for dollar holdings, as the credit crunch hit with its full fury.



The DX index is a somewhat imperfect gauge of the dollar value as it is heavily weighted to the Euro and Yen, and has a no exposure to some of the most important developing industrial powers.

More importantly, here is the Euro - Dollar Exchange Rate. Again, the 'jitters' over the state of the European Banking System were causing a steep decline early on and a flight to safety in the US Dollar. The Dollar Rally and the Deflationary Imbalances in the US Dollar Holdings of Overseas Banks



Ben Bernanke is no Alan Greenspan in that his deportment in front of Congress is rarely calm, but I did not find any particular 'tells' in his responses to Mr. Grayson beyond his usual skittishness and unease in the public spotlight.

Quite frankly, my initial take was that Ben was incredulous that the Congressman was asking such naive questions, particularly when the congressman started asking about the source of the Fed's authority to conduct foreign exchange operations.

Personally I wondered if it was a 'red herring' served up by a friendly Democrat. There are much more penetrating questions to be asked of Mr. Bernanke and his Fed, and these are not among them. Ron Paul is much closer to the mark than Congressman Grayson.

The concern about the swaps seemed a bit misplaced and confused. But the obvious opacity of the Fed and its operations does underscore the political naïveté in promoting the Federal Reserve as the uber regulator of the system.

One must wonder who is so politically tone deaf on the President's economic staff? Or is Larry Summers really that arrogant to think that he can be the next Fed chief and chairman of the SEC all rolled into one? Considering Larry's past performances, the answer may very well be yes.

Postscript: The emails show that there are those who observe, somewhat correctly, that if the Fed had done nothing to alleviate the eurodollar short squeeze then the dollar would have most likely appreciated in value, perhaps moreso than it had done.

The proponents of this solution do overlook the problem that the private markets for overnight loans had utterly seized, and to not provide central bank liquidity in this situation would have most likely have caused a cascade of significant failures, and a backlash from the rest of the world that would have been equally impressive.

There is the substantial issue, raised rather stridently by some of the central banks, that it was the US financial institutions and ratings agencies that had caused the problem in the first place by selling large amounts of fraudulent assets to trusting private bankers around the world. You know, those funny foreign folks who the US, as a net debtor with debt load growing mightily, is going to continue to ask to buy its debt and financial instruments now and for the forseeable future, and continue to support the dollar as a reserve currency.

It reminds me of a story an old boss of mine told me about his philosophy of business. He said, "I'm Irish, and the way the Irish compete is to say, Let's race, and then punch the other guy in the face, and start running. What do you think of that?"

My answer was, "I'm part Italian, and my advice is if you do that to an Italian, don't stop running at the finish line."

And so it goes.

Is Change Coming to Japan?

It will be good news for Japan indeed if the opposition Democratic Party in Japan can win their August 30 elections.

The LDP has been in power since 1955!

Can you imagine what kind of corporatocracy the US would have if the Republicans had won every election since Eisenhower? This is what exists today in Japan.

There is an embedded bureaucracy in the Japanese Ministry of International Trade and Industry that is formidable, and that will resist policy change. So there is room for pessimism.

And the election is far from won. Do they use voting machines in Japan?


Bloomberg
Aso Dissolves Japan’s Parliament, Admits Failings
By Sachiko Sakamaki and Takashi Hirokawa

July 21 (Bloomberg) -- Prime Minister Taro Aso dissolved Japan’s parliament, clearing the way for an Aug. 30 election that polls indicate will hand power to the opposition Democratic Party of Japan for the first time.

Lower-House Speaker Yohei Kono announced the dissolution in parliament today to a chorus of cheers. Aso’s ruling Liberal Democratic Party, in power for all but 10 months since 1955, will defend a two-thirds majority in the election.

“The era of one-party dominance is over,” said Gerald Curtis, professor of Japanese politics at Columbia University in New York. “This is the first election since the LDP was formed when just about everybody believes that the chance for a change of the party in power is very real.”

The DPJ plans to encourage consumer spending by providing as much as 5.3 trillion yen ($56 billion) in child support, eliminating road tolls and lowering gasoline taxes. The party also aims to shift tax money from public works spending to strengthen social security, DPJ legislator Tetsuro Fukuyama said in a July 14 interview.

“They are going to increase the purchasing power of the people directly and they are going to fund this by cutting out wasteful spending,” said Jesper Koll, Tokyo-based chief executive officer of hedge fund adviser TRJ Tantallon Research Japan. “That’s a good, sensible economic policy to have.”

Poll Lead

Forty-two percent of respondents in an Asahi newspaper poll published yesterday said they would vote for the DPJ, compared with 19 percent for the LDP. The opposition, which has controlled the less-powerful upper house since 2007, had a public approval rating of 31 percent, compared with 20 percent for the LDP, according to the poll.

Aso, who came to office last September, has resisted calls from within his own party to resign before the election. His administration has been plagued by cabinet scandals and a deepening economic recession.

“I’m sorry my unnecessary remarks damaged credibility in politics,” said Aso in today’s televised press briefing. Since taking power, he has said doctors lack common sense and mothers need discipline more than their children, angering both groups. “I also apologize the LDP’s lack of unity” created public mistrust.

Aso, 68, pledged to revive the world’s second largest economy and improve the financial security of voters with free pre-schools and higher wages for part-time workers....

United States Postal Service Faces October Default Along With...

This is making the rounds, so we thought we might include both this article and its source article, with some commentary.

The postal unions are raising red flags, and using the "D" (default) word to bring attention to a gap in the forward funding of their retirement benefits which they see coming in the autumn.

Most federal agencies pay their retirement costs as they are incurred. The Postal Service pre-funds their projected retirement benefit costs a few years in advance.

The issue here with the unions is a bit bigger than just the September preparyment. The Postal Service has funds set aside for future retirement costs in a way that is similar to Social Security. Indeed, one might think of this system as their version of Social Security.

There is about $32 billion set aside (on paper) for their needs. The unions would like the postal service to get access to that money now. Think of it as taking the Social Security Trust Fund out of the Treasury and making it available for management by some private entity now.

What's the issue? Since the system has been in place for so long, and only now is such a fuss being raised, there is an obvious fear on the part of the Postal Employees of a government default and a devaluation of their pension fund, along with Social Security.

Make sense? I think it does when viewed in that light. Employees close to the government are fearful of a general default at the end of September that will erode the value of their own Pension Trust Fund.

There are other explanations of course. Union Management may wish to take over the management of their $32 billion pension fund to allow some of the Wall Street banks to help them 'improve earnings' and generate hefty fees.

The fear of default driven by rumours circulating amongst Federal employees and their kin makes a bit more sense, but we will not know for certain until the fall.

My Federal Retirement
USPS May Be Unable to Make Payroll in October and Retiree Health Plan Costs, Unions' Letter to White House Says
July 19, 2009

On July 14, unions representing United States Postal Service (USPS) workers wrote the White House with "extreme urgency" asking for a meeting to address lack of funding for both employee payroll in October and health benefits for retired employees.

The letter, which the FederalTimes.com blog provided a scanned copy late last week, says:

"[USPS] top executives are now saying that the USPS will default on a $5.4 billion payment to prefund future retiree health benefits on September 30, 2009. And its government affairs representative are now telling Congressional staff that the Postal Service may not be able to make payroll in October and will be forced to issue IOUs instead."

The letter was co-signed by the presidents of the American Postal Workers Union, National Rural Letter Carriers' Association, National Association of Letter Carriers and National Postal Mailhandlers Union, and sent to White House Deputy Chief of Staff, Jim Messina.

GovExec.com reported more on the letter in this column on July 17 which is included here below:

Postal unions seek White House help on pay, benefits
By Carrie Dann
CongressDaily
July 17, 2009

Four unions representing the nation's postal workers are pleading for a meeting with the White House to address possible funding shortfalls for workers' payroll and retiree health benefits, according to a letter obtained by CongressDaily.

The presidents of the American Postal Workers Union, National Rural Letter Carriers' Association, National Association of Letter Carriers and National Postal Mailhandlers Union co-signed the Tuesday letter to White House Deputy Chief of Staff Jim Messina, warning that the U.S. Postal Service is at risk of defaulting on a $5.4 billion payment to prefund retiree health benefits at the end of September.

The letter alleges that USPS "may not be able to make payroll in October and will be forced to issue IOUs instead."

Yvonne Yoerger, a spokeswoman for USPS, confirmed that the unions wrote the letter but disputed the claim that payroll deadlines will be missed.

"That's not something that's been discussed at all," she said. "We are committed to making payroll."

Yoerger said USPS will continue to work with OMB and the Office of Personnel Management to determine if and how the Postal Service can meet the Sept. 30 deadline to pay forward $5.4 billion in future health liability costs.

The Postal Service is required by law to set aside funds for future retiree health care costs, rather than paying recipients as costs are incurred as other government agencies do. As a result of a $3 billion loss to date this year, the unions wrote, no money is available for those future payments, and regular payroll deadlines may not be met unless other funds are tapped.

"Such a [financial] collapse can be averted without resort to a taxpayer bailout by reforming the retiree health prefunding provisions of the law and [by] giving the Postal Service access to its own resources in the Postal Service Retiree Health Benefits Fund, which now has a balance of $32 billion," the unions wrote.

But that transfer of funds would require congressional approval, and the unions fear that pressure from the White House will be needed to prompt quick action. "We believe that the Obama administration must intervene now to avoid both a political and economic train wreck," they wrote.

Reps. John McHugh, R-N.Y., and Danny Davis, D-Ill., introduced legislation this year that would amend the law to allow USPS to reach deeper into the flush Retiree Health Benefits Fund, but the unions argue the measure would not do enough to fix the financial problems.

CIT Averts Bankruptcy: Another Sunday Night Save (Perhaps)

It is good to hear that the 'well capitalized' CIT may strike an eleventh hour deal with its creditors and financiers to avoid an ugly bankruptcy for now.

Now if only the United States can do the same thing for itself with its bondholders...

Let's see if it is real, and what happens. Remember that what is being discussed here is 'bridge financing' for a company that is in a debt death spiral. The plan for their recovery will be more important than any temporary deal.

Financial Times
CIT seals rescue package
By Henny Sender and Francesco Guerrera in New York
July 20 2009 04:31

CIT on Sunday night clinched a two-year, $3bn rescue financing with its creditors that will enable the troubled US finance group to avoid a bankruptcy filing.

After round-the-clock weekend talks that included the possibility of a Chapter 11 filing, CIT and its main creditors sealed an agreement on the financial lifeline, according to people close to the situation.

“This paves the way for an orderly restructuring of the balance sheet with time and capital,” said one participant in the likely financing. “And it will give CIT’s customers plenty of capital.”

The company, which provides finance to nearly a million small and medium-sized companies in the US, and its creditors had to move quickly to arrest a slide into bankruptcy and prevent its best customers from defecting for fear that the lender could no longer support them. (We had thought the problem was that their customers had no alternative - Jesse)

The group of at least six creditors who are planning to provide the capital comprise a mix of traditional money management firms and hedge funds who bought into the debt at much less than 100 cents on the dollar. They include Baupost, a Boston-based hedge fund, CapRe, hedge fund and private equity firm Centerbridge Partners, Oaktree Capital, Pimco and Silverpoint Partners. Barclays is expected to act as agent on the financing package.

CIT’s board met on Sunday night and approved the financing. If the agreement holds, CIT will have enough time to work out which, if any, assets it should sell. The next step will likely involve cajoling other holders to exchange their debt into equity and then, having demonstrated that CIT has a viable survival plan, to go to the government and ask for help.

Jeff Peek, CIT’s chief executive who led negotiations with creditors, was likely to stay on following the financing, people close to the situation said. The management has been criticised for diversifying into high-risk businesses such as subprime lending and student loans and relying on capital markets to fund CIT’s balance sheet.

CIT’s creditors stepped in after it became clear that the government was not willing to provide any emergency assistance, whether in guaranteeing CIT’s debt, or in accepting assets in exchange for cash from the Federal Reserve or in allowing CIT to transfer more assets into the bank holding company it set up at the end of December.

The rescue financing will come as a relief to the government – had CIT filed for bankruptcy protection, the Treasury would likely have lost the $2.3bn of bailout funds CIT received late last year.

It would also have been a huge embarrassment for the Fed, which had described CIT as adequately capitalised when it approved of its banking application.

The creditor-led rescue of CIT may stave off political criticism of the government’s handling of the crisis. If CIT had gone under, at least some of its smallest customers in the business world would probably have had a hard time finding alternative sources of capital, adding to economic weakness.

New Silver Fund

Silver Bullion Trust, an all silver fund from the CEF/GTU closed-end fund group, has its roadshow going on now.

Initially it will only be available in Canada. It will trade on the TSX to start, then on the AMEX once it has risen to $75 million of assets which is a similar process used in the introduction of GTU.

It will trade in Canada in both U.S. and Canadian dollars.

The initial offering is reported to be for up to $200 million, so the $75 million threshold could be met immediately depending on the bid size of the deal.

It is expected to price at around US $10 (1 share + 1 $10 warrant) by July 29th.

This could be a interesting alternative to SLV and to CEF for those who wish to invest more heavily in silver.

Paper, Scissors, Gold

As you may have heard recently, the Comex has asserted their right under their rules to deliver the equivalent paper interest in Exchange Traded Funds such as GLD in lieu of the delivery of physical bullion for those standing for delivery under the rules of the commodity exchange.

Is GLD really the same as physical bullion?

"...it appears that a lot of investors believe and trust that investing in GLD is the same thing as buying physical gold bullion. A close reading and analysis of the GLD Prospectus, however, reveals that investing in GLD is drastically different from owning gold. This analysis will show why GLD is nothing more than another form of a derivative security which is loaded with counter-party default risk."
Owning GLD Can Be Hazardous to Your Wealth

Here is a recent statement from Dennis Gartman who most often derides those he calls 'goldbugs.'

"To finish, we do agree that recent decisions to allow for the "delivery" of ETF shares in the stead of actual physical gold against a futures position does cause us some concern. Indeed, it causes us some very real concern, for if we stand for delivery of wheat we expect to receive wheat, not paper. The same holds true for delivery processes on the COMEX, and if GATA and the "Bugs" have a complaint it is this new decision by the COMEX. On this, we’ll grant that the "Bugs" have something to complain about." Dennis Gartman in The Gartman Letter

We have often said that when the real crisis of liquidity comes, and the final flight to safety from the credit bubble collapse begins in earnest, the exchanges will alter the rules to allow for cash and paper settlement of claims for bullion, which they cannot or will not be able to deliver at the agreed upon prices.

This is what makes the current structure of the short positions held by a few banks on the precious metals exchanges a 'racket,' a type of Ponzi scheme where the same thing is sold repeatedly with no means of satisfying the aggregate of the claims and ownership.

We are sure the Comex is "well capitalized," and will continue to be so, even as it is rocked by de facto delivery failures and the substitution of more paper to back up the general failure of paper.

The wheels of justice grind slowly but they grind exceedingly fine.

CIT Called "Well-Capitalized" Even As It Teeters on Bankruptcy

This underscores the charade that is the Fed and Treasury stress testing. There is a cloak of accounting fraud covering many US financial institutions, even as their value soars on paper and the public continue to be robbed of their savings.

The Fed and Treasury are using their current position as de facto crisis regulators of US financial insitutions and pseudo-banks to cover up the deep problems of regulatory failure and financial fraud, largely their responsibility as the overseers of US credit and monetary policy and the financial system during the credit bubble.

They seem to have taken on the role of the Ratings Agencies in perverting their stewardship to serve the Wall Street bankers.

The Fed should not and cannot be allowed to obtain any more power over the US regulatory process. That they even resist a fair and honest audit of their lendings of public monies is an insult to our Republic.

Until the banks are restrained, and balance restored to the economy, and the financial system reformed, there can be no sustained recovery.

Bloomberg
CIT Group’s ‘Capital’ Was All Talk, No Trousers
by Jonathan Weil
July 15, 2009 21:00 EDT

July 16 (Bloomberg) -- Even as CIT Group Inc. teetered near collapse this week, neither the company nor its overlords at the Federal Reserve Board ever backed off their official position that the struggling lender was “well capitalized.”

Coming from the world’s most powerful central bank, that designation used to mean something about a company’s financial strength and ability to absorb losses. Not anymore.

Investors watched yesterday as yet another major financial- services company angled for a government bailout -- this time unsuccessfully -- while still sporting U.S. banking regulators’ highest capital rating. It’s a sure thing CIT won’t be the last.

Even the regulators say their capital standards are broken. Just last month, in an 88-page report outlining its regulatory overhaul plans, the U.S. Treasury Department wrote: “Most banks that failed during this crisis were considered well capitalized just prior to their failure.”

It was only last December that the Fed’s board of governors voted unanimously to let CIT become a bank-holding company, making the commercial lender eligible for federal rescue funds and allowing it to borrow from the Fed’s discount window. In doing so, the Fed said CIT would be well capitalized once it received its $2.3 billion of bailout money from the Treasury’s Troubled Assets Relief Program, which CIT got later that month.

CIT’s bosses, led by Chief Executive Officer Jeffrey Peek, had been touting the company’s well-capitalized status repeatedly ever since, in financial filings and investor presentations. In reality, whatever capital CIT possessed existed only in its executives’ heads -- literally.

Accounting Standards

The problem here is with the accounting standards as much as the government’s capital rules. Consider this disclosure from the footnotes to CIT’s latest annual report. As of Dec. 31, CIT said the fair market value of its loans was $8.3 billion less than the value it was using on its balance sheet. Loans at the time were about two-thirds of its $80.4 billion of total assets.

By comparison, New York-based CIT had $7.5 billion of so- called Tier 1 regulatory capital as of Dec. 31, and $8.1 billion of shareholder equity. Take away the inflated loan values, and CIT’s capital and equity would have been less than zero. CIT hasn’t said what its loans’ market values were as of March 31.

The craziest part is that the difference in the loan values came down to nothing more than CIT executives’ state of mind. (And the Fed's and the FASB's tacit endorsement of this accounting fraud on investor - Jesse)

Had CIT classified the loans as “held for sale,” the accounting rules would have required the company to carry them on its balance sheet at their cost or market value, whichever was lower. By labeling almost all its loans as investments instead, CIT got to avoid writing them down to market values.

Say the Word

So, for capital purposes, the only difference between an insolvent CIT and a well-capitalized CIT was a mere utterance by management that it planned to keep holding the loans. No wonder so many zombie banks continue to roam the country. All they have to do is wish away their ruin, and the rules let them.

There is one catch. As CIT said in its annual report, it’s allowed to classify loans as investments only if it “has the ability and intent” to hold them “for the foreseeable future or until maturity.” Otherwise, it must book the market losses.

It’s hard to see how CIT’s management could believe the company still has the ability to keep holding onto its loans now. Not with more than $3 billion of reported losses in the past eight quarters, a looming cash crunch, and its debt trading in the bond market as if the company might fail. A CIT spokesman, Curt Ritter, declined to comment.

Not Making Sense

Think how arbitrary these accounting labels are. A declining asset doesn’t stop falling in value just because its owner intends to keep it. Nor, if you were applying for a loan today, would a bank value your collateral based on what you think it might be worth someday after the economy rebounds. Its value would be what you could sell it for now.

Back on Dec. 22, when it approved CIT’s application to become a bank-holding company, the Fed released a nine-page statement explaining its rationale. While the Fed said its board considered “all facts of record,” nowhere in that document did it discuss the possibility that CIT’s loans might not be worth what the company’s balance sheet said, or that CIT might lack the ability to hold them for as long as it claimed.

The current capital rules “simply did not require banking firms to hold enough capital in light of the risks the firms faced,” the Treasury Department said in its report last month. The financial crisis, it said, “has demonstrated the need for a fundamental review of the regulatory capital framework.”

That review, to be led by the Treasury Department, won’t be completed until the end of this year. Whatever form the new rules take, the report said they must be “credible and enforceable.”

What a welcome change that would be.

(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)

Derivatives Crisis: More Bailouts On Deck?

The derivatives market is about as ugly as it gets, and puts a new edge on 'too big to fail, to big to exist."

The banks want to keep the game going because it suits their current model of taking risks, making huge bonuses, and writing off the losses to the public.

It remains to be seen if the Obama Administration has what it takes to regulate and rein in the banks. While Larry Summers and Tim Geithner are on the team the answer is probably 'no.'

One thing which strikes us as odd in this Bloomberg article is the emphasizing of stimulus as a source of future crisis. All things considered two trillion in stimulus across the globe is a relative drop in the buck-et compared to what the bank bailouts are costing in direct and indirect taxation on the real economy. Bloomberg seems to be crusading against anyone but the bigh banks getting public money, so perhaps it is not surprising.

As you know, CIT is deeply troubled, and most likely heading towards some sort of managed bankruptcy. The company is said to be holding counter party risk with many banks including Goldman Sachs. The rally may be based on strong rumours of an imminent bailout for CIT. The word on the Street is that Geithner and Summers caved again after a few key phone calls.

Let's see how the Obama Administration handles yet another financial institution brought low by bad risk management in pursuit of outsized profit.

Wall Street and their demimonde in the government and the media hate stimulus packages designed to assist the ordinary Joe, even if all it does is ease the pain during a steep downtrend (which was caused by the financial sector). They hate it, unless there is a way to charge fees in its distribution, and turn it into a profit-making venture for them where they derive most if not all of the benefits.

The dollar and the US bond are taking it repeatedly on the chin. As are most of the US public and the holders of its debt.

The timeframe Mr. Mobius has for the next major crisis is way out on the far edge of any projection we think is probable by quite some distance. Its not clear that it really matters, given the significant hurdles facing the economy this year.

Let's see how the Boys handle the burgeoning Commercial Real Estate, Pension, and Stage Government crises. I think they may very well precede the derivatives coup de grace, and several of them are big enough to be show-stoppers, if not triggers for a larger systemic meltdown.

Until the banks are restrained, and the financial system is reformed, and balanced is restored to the economy, there will be no sustained recovery.

The Obama team is incompetent, and probably worse. Its a great disappointment. They are showing all the wrong moves on the economy.

All the charts included here are from our friends at ContraryInvestor.

Bloomberg
Mobius Says Derivatives, Stimulus to Spark New Crisis
By Kevin Hamlin (Beijing)

July 15 (Bloomberg) -- A new financial crisis will develop from the failure to effectively regulate derivatives and the extra global liquidity from stimulus spending, Templeton Asset Management Ltd.’s Mark Mobius said.

“Political pressure from investment banks and all the people that make money in derivatives” will prevent adequate regulation, said Mobius, who oversees $25 billion as executive chairman of Templeton in Singapore. “Definitely we’re going to have another crisis coming down,” he said in a phone interview from Istanbul on July 13.

Derivatives contributed to almost $1.5 trillion in writedowns and losses at the world’s biggest banks, brokers and insurers since the start of 2007, according to data compiled by Bloomberg. Global share markets lost almost half their value last year, shedding $28.7 trillion as investors became risk averse amid a global recession.

The U.S. Justice Department is investigating the market for credit-default swaps, Markit Group Ltd., the data provider majority-owned by Wall Street’s largest banks, said July 13.

Mobius didn’t explain what he thought was needed for effective regulation of derivatives, which are contracts used to hedge against changes in stocks, bonds, currencies, commodities, interest rates and weather. The Bank for International Settlements estimates outstanding derivatives total $592 trillion, about 10 times global gross domestic product.

Looming Crisis

“Banks make so much money with these things that they don’t want transparency because the spreads are so generous when there’s no transparency,” he said.

A “very bad” crisis may emerge within five to seven years as stimulus money adds to financial volatility, Mobius said. Governments have pledged about $2 trillion in stimulus spending.

The Justice Department’s antitrust division sent civil investigative notices this month to banks that own London-based Markit to determine if they have unfair access to price information, according to three people familiar with the matter.

Treasury Secretary Timothy Geithner last week urged Congress to rein in the derivatives market with new U.S. laws that are “difficult to evade.” He said strong capital requirements were the key.

Geithner repeated President Barack Obama’s call to force “standardized” contracts onto exchanges or regulated trading platforms, and regulate all dealers.

Credit Freeze

The plan to regulate the derivatives market is part of a wider overhaul of financial industry rules meant to prevent any possibility of a repeat of last year, when the collapse of Lehman Brothers Holdings Inc. and American International Group Inc. froze credit markets and worsened the global recession.

In the Senate, Agriculture Committee Chairman Tom Harkin, an Iowa Democrat, is pushing for legislation that would require all over-the-counter derivatives trades be traded on regulated exchanges, not just standardized ones as the Obama administration is seeking.

U.K. banks will be forced to curb trading activity that helped cause the global financial crisis, Britain’s top financial regulator said last month, while stopping short of seeking to separate their lending and securities units.

“Banks have lobbied hard against any changes that would make them unable to take the kind of risks they took some time ago,” said Venkatraman Anantha-Nageswaran, global chief investment officer at Bank Julius Baer & Co. in Singapore. “Regulators are not winning the battle yet and I’m not sure if they are making a strong case yet for such changes.”

Mobius also predicted a number of short, “dramatic” corrections in stock markets in the short term, saying that “a 15 to 20 percent correction is nothing when people are nervous.”

Emerging-market stocks “aren’t expensive” and will continue to climb, Mobius said. He said he favors commodities and companies such as London-based Anglo American Plc, which has interests in platinum, gold, diamonds, coal and base metals.

In China and India, Mobius sees value in consumer-oriented stocks and banks, he said.

Spitzer Agonistes Redux

It is too bad Eliot could not have exercised better judgement, knowing that he would be targeted by the powers on Wall Street and Washington when he took them on. See the quote at the top of this blog for the most likely reason.

That he was exposed in his scandal by an intense Federal investigation speaks to the depth of the corruption of Washington under Bush, and even now, by the financial powers.

He is right of course, and everything that the Obama Administration is doing on the economic front is a sham.

There is a 'new regulatory spirit' and the Democrats under the skillful hand of Larry Summers and Barney Frank seek to channel it into irrelevancy.

Spitzer Says Banks Made ‘Bloody Fortune’ on U.S. Aid
By Laura Marcinek

July 14 (Bloomberg) -- Eliot Spitzer, the former New York governor and attorney general, said U.S. banks made a “bloody fortune” while receiving taxpayer money without a proven benefit to the wider economy.

Politicians understand the “populist rage” with excesses in the financial industry and in this case the “public is right,” said Spitzer in a Bloomberg Television interview today. “We have saved financial services, we have not created a single job. We are still bleeding jobs.”

As New York attorney general, Spitzer was known as “the sheriff of Wall Street.” He changed business practices and collected billions of dollars in settlements from financial corporations such as Merrill Lynch & Co., American International Group Inc. and Marsh & McLennan Cos. He later became governor, resigning in March 2008 after he was identified as a client of the Emperors Club VIP, a high-priced prostitution ring.

Spitzer said new rules proposed by President Barack Obama’s administration are irrelevant because regulators failed to enforce existing regulations.

“Regulatory agencies already had the power to do everything they needed to do,” he said. “They just affirmatively chose not to do it.”

“You don’t need new regs to do it, you just need the will to do what they were supposed to do,” he said.

‘Hands Off’

Former Federal Reserve chairman Alan Greenspan had “avowed a theory of hands off” while he oversaw the financial markets and didn’t consider himself a regulator, Spitzer said.

“What we’re seeing now is a new regulatory spirit,” he said.

Spitzer said the lessons of the financial crisis will only be remembered over a short period of time.

“Over and over we fall into the same trap,” he said. “Ten years from now we will have forgotten.”

Weekly Gold Chart

Stocks Rally With Wall Street Banks as King of the Hill

Meredith Whitney made a bull call on Goldman, and the stock market rallied as a result.

There are some important qualifiers in this that the markets seem to be ignoring.

Goldman is positioned as more of a 'one-off' in her forecast, which remains decidedly gloomy for the overall economy, with unemployment as it is under reported by the BLS rising to 13%.

She believes that Goldman will benefit from being in the position to take fees and profits from the heavy government debt issuance to come in the US, especially since it was able to eliminate some long term rivals in Bear Stearns and Lehman Brothers.

Ironically, a richer Goldman does little or nothing for the overall economy since the company pays out about half its profits in bonuses to employees. There is some trickle down to the real economy as they buy their luxury cars, place their children in the finest private schools, and make huge contributions to key politicians, but not much else.

Goldman is not a commercial bank. It has taken on that name to tap into the Government funds, and despite their noises about paying back their TARP, they are huge beneficiaries of the ongoing bailout of AIG with their 100% payouts on Credit Default Swaps.

So, the people give their tax money to Goldman, and in turn a little of it trickles back to those working in the luxury industries, perhaps as servants to great households, and certainly as politicians managing the outlays of public monies to Wall Street.

The debasement of the currency is going to hit the middle class particularly hard, since the monetary inflation is being so heavily targeted to the wealthy few, while little or no quality jobs creation is stimulated. And it is the middle class that is paying for this, in more ways than one.

And economists call gold a barbarous relic.

WSJ
Meredith Whitney Bullish On Goldman,Sees 2Q Above Views
By Ed Welsch

NEW YORK (Dow Jones)--Goldman Sachs Group Inc. (GS) will benefit from being a key player in a "tsunami of debt issuance" by governments as they try to fill gaps in underfunded budgets, financial analyst Meredith Whitney said Monday in an upgrade of Goldman to "buy."

Whitney predicted Goldman Sachs would post second-quarter results Tuesday above Street estimates - she expects earnings of $4.65 a share, compared with the average analyst estimate of $3.48, according to a survey of analysts by Thomson Reuters. She set her 12-month price target on Goldman shares at $186.

Shares of Goldman Sachs rose 2.7% in recent trading to $145.75.

A bullish call from Whitney is rare; she gained renown during the financial crisis for initially unpopular bearish calls on the stocks of large banks that ultimately proved to be correct.

However, Whitney said her bullish view of Goldman is rooted in her overall bearish outlook for the U.S. economy and other U.S. financial companies. While Goldman has made most of its money in the past through a focus on equity markets, Whitney said during the next two years the firm will shift focus to the government debt markets, facilitating new issuance from local, state, federal and sovereign governments as they try to raise money to fill budget gaps.

Whitney raised her earnings estimates for Goldman in 2010 to $19.65, compared to the average analyst expectation of $14.44, and for 2011 to $22.10, compared to the average expectation of $16.75.

She predicted that sovereign and municipal debt markets will grow more than 20% over the next 18 months, and that the state and local municipal debt market could eventually grow more than 50%.

While Whitney predicted U.S. corporate debt will reach about 60% of the levels of the last three years, she said Goldman will get a larger share of that market as well, due to the absence of formerly key players, including Lehman Brothers Holding Inc. (LEH) and Bear Stearns Cos.

Whitney also expects Goldman to take advantage of relatively high capital levels to buy back stock, and by late 2010 could reach the share count level it had before raising capital this year and last.

There Will Be No Recovery...

"The banks must be restrained, and the financial system reformed, and balance
restored to the economy, before there can be any sustained recovery."

Often a closing comment from our blog, essentially this is what Robert Reich is saying in his recent essay on the economy.

The median wage must increase for consumption to resume, and for this to happen the heavy taxes of the financial sector and the oligarchs on the real economy must be lowered significantly.

There is reason for pessimism that this can happen voluntarily. I have come to the conclusion that there is a pathological drive in some small portion of the population to acquire and control and devour rather than consume, even to their own destruction.

The law sets limits on the speed on highways to protect the many from the reckless and willful behaviour of the few. That we ought not to set limits on the banking system is a remarkable bit of speciousness.

There are obvious questions of how best and how far to limit, and how to detect and prevent and prosecute violations, but the comparison is more valid than obtuse. But it is a poor argument to say that we ought not to do it at all because it is difficult, and perpetrators are always trying to find ways to circumvent the system, especially when it is the aspiring criminal element and their demimonde that is making the argument.

The comparison of this latest epidemic of bad economic behaviour is strikingly reminiscent of the Gilded Age at the end of the 19th century and the Roaring 20's. As you may recall both periods were followed by economic dislocation and a world in flames.

Why we allow this sort of bestial behaviour to ravage the many, in the mistaken support of 'free markets,' where nothing these people touch can remain free and effective and efficient for long, is truly an accomplishment of propaganda and those blinded by ideology.

Robert Reich
When Will The Recovery Begin? Never.
Thursday, July 09, 2009

The so-called "green shoots" of recovery are turning brown in the scorching summer sun. In fact, the whole debate about when and how a recovery will begin is wrongly framed. On one side are the V-shapers who look back at prior recessions and conclude that the faster an economy drops, the faster it gets back on track. And because this economy fell off a cliff late last fall, they expect it to roar to life early next year. Hence the V shape.

Unfortunately, V-shapers are looking back at the wrong recessions. Focus on those that started with the bursting of a giant speculative bubble and you see slow recoveries. The reason is asset values at bottom are so low that investor confidence returns only gradually.

That's where the more sober U-shapers come in. They predict a more gradual recovery, as investors slowly tiptoe back into the market.

Personally, I don't buy into either camp. In a recession this deep, recovery doesn't depend on investors. It depends on consumers who, after all, are 70 percent of the U.S. economy. And this time consumers got really whacked. Until consumers start spending again, you can forget any recovery, V or U shaped.

Problem is, consumers won't start spending until they have money in their pockets and feel reasonably secure. But they don't have the money, and it's hard to see where it will come from. They can't borrow. Their homes are worth a fraction of what they were before, so say goodbye to home equity loans and refinancings. One out of ten home owners is under water -- owing more on their homes than their homes are worth. Unemployment continues to rise, and number of hours at work continues to drop. Those who can are saving. Those who can't are hunkering down, as they must.

Eventually consumers will replace cars and appliances and other stuff that wears out, but a recovery can't be built on replacements. Don't expect businesses to invest much more without lots of consumers hankering after lots of new stuff. And don't rely on exports. The global economy is contracting.

My prediction, then? Not a V, not a U. But an X. This economy can't get back on track because the track we were on for years -- featuring flat or declining median wages, mounting consumer debt, and widening insecurity, not to mention increasing carbon in the atmosphere -- simply cannot be sustained.

The X marks a brand new track -- a new economy. What will it look like? Nobody knows. All we know is the current economy can't "recover" because it can't go back to where it was before the crash. So instead of asking when the recovery will start, we should be asking when and how the new economy will begin. More on this to come.

The Net Asset Values of Certain Precious Metals Funds and ETFs

The China Bubble and the Convergence of Oligarchies

This is an interesting story from a source that we will be consulting regularly for their news items and insightful analysis.

Regular readers of this blog will notice that we strike the same recurrent themes.

Some years ago Mr. Bill Gates traveled to China, and liked what he saw. This was the model of capitalism which he favored: a small but powerful elite centrally planning an economy peopled by semi-feudal serfs, and living large on the backs of the many.

With all deference to Jimmy Rogers, China is a bubble. The central government will grow increasingly repressive and manipulative as the people improve in education, health and material means. Propaganda will grow more sophisticated and remain as pervasive as it is today.

When the bubble bursts, the iron fist will be unveiled and there will be popular uprisings, and those who believe they are in elite positions now may then find themselves on the docks piled on their baggage waiting for the next ship to take them to safer destinations.

This is certainly nothing new. After the collapse of the first Federal Reserve credit bubble in the late 1920's, the West turned to Soviet Russia and the fascist countries of Italy and Germany for the answer to the 'failure' of Western free market capitalism. Hitler and Mussolini were heavily favored by Wall Street, having a firm hand to rein in the mob.

On the optimistic side, freedom wanes, but still and in remarkable ways, never seems to die.

The Daily Bell
Chinese bank announces bombshell
Issue 343 • Friday, July 10, 2009

Yesterday on their website, the People's Bank of China announced a shocker. New Chinese bank lending for June was 1.53 trillion yuan ($224 billion), double the lending in May. The total already for the year is an astounding 7.4 trillion yuan when the target for the entire year was 5 trillion.

Putting this in context, total lending this year so far has amounted to 25% of 2008 GDP. As I wrote earlier this week, Chinese regulators are getting concerned that this lending is going towards poor credit and bleeding into commodity market speculation.

As most know, bank lending is high powered monetary stimulus due to its high velocity. This is the key difference between fiscal stimulus vs. monetary stimulus. Actually, monetary stimulus will only work well if the banks receiving the funds lend them out. In the US, this is clearly not happening due to banks loan losses and caution over new lending (expanding balance sheet.) In China, this is not the case and new loans are flowing. - CNBC

Dominant Social Theme: China is heating up.

Free-Market Analysis: We've written about this before. China backed into "capitalism" about 30 years ago and the impetus for where it is now was increased by the problems with Tiananmen Square. The Chinese leaders are not interested in political theory at this point (if they ever were). Their currency is power and the way to maintain power is to create an apolitical system where citizens "can grow rich." Western systems work a good deal better than communist systems in this regard. And thus China has built a facade of a Western system.

Yes, it is really only an imitation of a Western system (from a political and big business perspective anyway) in our opinion, just as its banks are only imitations of Western banks and its stock markets are only imitations as well. In fact, to grow rich by investing in the Chinese stock market one apparently simply has to listen intently to the noises coming from the government as to what companies will grow and what companies will not. (And this is different from the US now in what way? - Jesse)

As far as the banks go, the system is probably even more basic than in the West. The central bank prints as much money as it can, and the commercial banks disseminate it. These banks may act as independent entities, but they still have a foot in state government as do many large companies in China.

It is all fairly well jury rigged. China has incorporated a façade of Westernism but to cast China as the world's financial engine is to understand how desperate the West has become. China's economy grows by 10 and 15 percent a year, and now appears be heating up even more. This is not normal growth but central banking generated growth. The same clique still runs China, but the economy has been supercharged by additional printing.

China is said to be turning inward now, as Western countries cannot afford to buy its products. But whether China will be able to maintain its growth by using its own huge population as a purchasing pool remains to be seen. What will certainly happen sooner or later is that the supercharged money being used by the Chinese will create the same boom-bust cycle as has happened elsewhere. Only when it ends in China after so many years, it will be the mother-of-all blow-offs.

Conclusion: It is difficult to see what Chinese leaders expect to happen once the bubble busts. Maybe they are gambling that they can control the unrest that will come in its wake. Maybe they assume the bubble will not bust for many years. (And this is different from the US now in what way? - Jesse)

But articles like the one excerpted above show us that sooner or later China's overheated and pseudo-Western economy will implode, and likely even more violently than Western economies ever have. And here's a thought: The Chinese in the meantime are said to be big buyers of gold on a government level and also personally. Perhaps what is going to eventually happen is better known in China than the West.

SP Futures Hourly Chart

I think that most would agree that the US equity futures have put in some kind of a top, both in the short and intermediate term which is not shown here.

The question now is, 'Are they in the process of putting in some kind of bottom, or is the trend of the decline merely moderating?'

I have highlighted with horizontal lines a few levels of support and resistance that most traders are watching carefully.

It was not bullish that Alcoa was unable to hold its gains today from its 'good news.'

Goldman Sachs reports next week. That may give some spark to the financial sector, but Goldman is really a 'one-off.' One off what I am not quite sure, but whatever it is I think it says much more about them and their secret trading software and access to information than the economy or anything else.

SP Weekly Chart Updated and Some General Thoughts on Trading and Markets

Today we will take a look at the longer term SP 500 weekly price chart, updating the weekly chart which we published on March 23, 2009.

The rally, although sharp, is well within the bounds of expectations for a rally from a major market bottom off a steep decline. It was more than a technical bounce, but has not yet signalled a 'new bull market' despite the optimism of the Wall Street salespeople. Insiders are still diversifying from equities in record numbers, and the "investment banks" (if we can still speak of such an animal in their traditional commercial bank halloween costume) are spending more time 'gaming' the market than investing in the real economy for the longer term.

The target we set for the rally to the neckline around 960 'worked' which tends to validate it, for now, as a proper neckline.

If in fact this neckline holds, and the SP breaks down through key support, the chart formation sets up an objective of 360 on the weekly SP cash chart.

Here is the SP weekly chart update:



Keep in mind that the chart formation is long term, not immediate, and it must be validated further by a breakdown through key support. If, for example, the Federal Reserve decided to monetize even more aggressively than it has been doing, then it would be likely that the neckline would be broken to the upside, and we have a target showing where we think that will go.

Think of these charts as a 'map' to help us see where we have been, the most likely path, and the terrain, the lay of the land. Charts are not firmly predictive, only probabilistic. Those who make contrary claims for their system have always been shown to be exaggerated and highly selective in their result recording and reporting.

Too often "successful" traders merely exploit weaknesses and minor informational or systemic advantages or inefficiencies in the market and in essence place a 'tax' on the other market participants, usually the naive and inexperienced.

Sorry, but that is the way that it is. This even includes some of the 'too big to fail' boys who have no business exploiting the markets which need to function as efficient capital allocation mechanisms.

There is a tendency to seek to gain unfair advantage. The notion of good and rational markets that can self-regulate with participants who voluntarily obey the rules should be an obvious howler to anyone who has recently driven on a major highway. It is a fallen world, and regulation and enforcement are a sine qua non, and always in need of refreshment and improvement as are all things temporal.

Here is the original March chart.



Some traders are better than others, and some much better. The vast majority of people are in no position to trade, and have no temperament for it, and should leave it alone. They are investors, and enjoy a diversity of lifestyle. Trading is a profession, and needs to be respected as such.

The average person who is even in decent physical condition would hardly think to step into the boxing ring with the world heavyweight champion. And yet this same person thinks nothing of placing leveraged wagers in markets dominated by professionals who do little else for a living, heavily influenced even own the rules boards and help to pick the referees and pay their salaries.
So, what next?

The outlook is rather gloomy for the SP 500 in real terms, decidedly. There is no recovery in the real economy, merely fakes and the push and pull of 'flation. The Federal Reserve and the Obama Economic team are not even beginning to address the issues that will create a sustainable recovery, and are just doing the same thing that has failed before. The recovery from the 2003 market lows was nothing more than a monetary credit bubble, glossed up with statistical and accounting frauds. This is just more of the same, to a more extreme, even more cynically corrupt, degree.

So what next?

Gold still looks like a winning place as a store of value in times of corruption, decline and deception, although nothing is certain.



When the time comes and the economy appears to improve it is likely that silver will decidedly outperform gold on a percentage basis. Silver as well as gold are being heavily manipulated by a few banks who have enormous short positions. If they are ever forced to cover these there will be stretchers taking them out of the pits. But do not hold your breath, remembering who owns the casino, and the casino management. Still, all financial frauds and ponzi schemes come to their inevitable messy end. Bernie Madoff may merely not have as much company in prison as he deserves.

Yes, if you were able to time the market and buy the bottom in stocks, and pick the right ones, and hold on until the top, and then take your profits, and not been caught in the plunging decline of 2007, you have some remarkable gains and I wish you well. You are also gambling. As long as you realize this, and manage your money accordingly, you may keep some or even a good portion of your gain.

Reminder: Reverse Splits in the Triple Leverered Financial ETFs After the Close Today

For all you big money playas.

DIREXION SHARES ETF TRUST

Direxion Daily Financial Bull 3X Shares
Direxion Daily Financial Bear 3X Shares

Supplement dated June 26, 2009

The Board of Trustees of Direxion Shares ETF Trust has approved reverse splits of the issued and outstanding shares of both the Direxion Daily Financial Bull 3X Shares (FAS)(“Financial Bull Fund”) and Direxion Daily Financial Bear 3X Shares (FAZ) (“Financial Bear Fund”).

After the close of the markets on July 8, 2009 (the “Record Date”), the Financial Bull Fund will effect a one for five reverse split of its issued and outstanding shares and the Financial Bear Fund will effect a one for ten reverse split of its issued and outstanding shares. As a result of these reverse splits, every five shares of the Financial Bull Fund will be exchanged for one share and every ten shares of the Financial Bear Fund will be exchanged for one share.

Accordingly, the number of the Financial Bull Fund and Financial Bear Fund’s issued and outstanding shares will decrease by approximately 80% and 90%, respectively. In addition, the per share net asset value (“NAV”) and next day’s opening market price of each the Financial Bull Fund and the Financial Bear Fund will be approximately five-times higher and ten-times higher, respectively. Shareholders of record on the Record Date will participate in the reverse splits. Shares of the Financial Bull and Financial Bear Funds will begin trading on NYSE Arca, Inc. (“NYSE Arca”) on a split-adjusted basis on Thursday, July 9, 2009 (the “Effective Date”).

The next day’s opening market value of the Financial Bull and Financial Bear Funds’ issued and outstanding shares, and thus a shareholder’s investment value, will not be affected by the reverse splits.

John Merriwether to Close Hedge Fund After Heavy Losses

The markets are brutal indeed for speculation, with a few predatory institutions, well supplied with freshly minted central bank liquidity, preying the markets with high frequency programs designed to manipulate prices, squeezing the leverage out of funds and speculators.

The marvel is not that a professional like John Merriwether has failed again, although less spectacularly this time as compared to the great flameout that was LTCM.

The marvel is that people, including the wealthy and presumably sophisticated, continue to give their funds to gamblers and ponzi dealers.

Even more amazing how the people continue to allow their economies to be so thoroughly distorted and perverted by the corrupting influence of a relatively few but powerful market participants from the financial sector.

"While boasting of our noble deeds we're careful to conceal the ugly fact that by an iniquitous money system we have nationalized a system of oppression which, though more refined, is not less cruel than the old system of chattel slavery." Horace Greeley

The banks must be restrained, and the markets reformed, and balance restored to the economy before a sustained recovery can be achieved.

A good first step would be an independent audit of the Federal Reserve. And a second would be aggregate position limits on all commodities and traded financial instruments with disclosure. A third would be the aggressive abolition of naked shorting.


Bloomberg
Meriwether Said to Shut Hedge Fund; London Chief Plans Startup
By Katherine Burton and Saijel Kishan
July 7, 2009 21:41 EDT

July 8 (Bloomberg) -- John Meriwether plans to shut the hedge fund he started after the collapse of his Long-Term Capital Management LP in 1998 roiled global markets, according to a person familiar with the matter.

Long-Term Capital lost more than 90 percent of its $4.8 billion of assets in the weeks following Russia’s currency devaluation and bond default. The Federal Reserve orchestrated a $3.6 billion bailout by the fund’s 14 banks to calm fears that the firm’s lenders and trading partners would be dragged down.

The decline of Meriwether’s current firm, JWM Partners LLC, played out over months, with its main fund losing 44 percent from September 2007 to February 2009. The Relative Value Opportunity II fund, which sought to profit from price differences among related bonds, returned an average of 1.46 percent a year since it began trading Nov. 30, 1999. The Credit Suisse/Tremont Hedge Fixed-Income Arbitrage Index gained 2.4 percent a year in the same period.

“For many investors, John Meriwether is by now just another hedge-fund manager,” said Tammer Kamel, president of Toronto-based Iluka Consulting Group Ltd., which advises clients on investments in the private pools of capital. “LTCM’s infamy was a big story in 1998, but the events of 2008 might finally relegate LTCM and 1998 to footnote status.”

JWM Partners, based in Greenwich, Connecticut, managed about $1 billion at the beginning of 2008. Meriwether, 61, joins hedge-fund veterans Art Samberg, James Pallotta and William von Mueffling in closing funds this year. He didn’t return a telephone call and an e-mail seeking comment.

London Chief Departs

Adrian Eterovic, who ran the JWM Partners’ London office, plans to start his own fund, according to the person, who asked not to be named because the information is private.

Eterovic, 46, ran the quantitative strategies within JWM’s funds, according to the person. Eterovic registered Episteme Capital Partners (U.K.) LLP with the U.K.’s Financial Services Authority, according to the market regulator’s Web site. Calls to Episteme’s offices after business hours weren’t answered.

Long-Term Capital relied on borrowed money to enhance returns. The average leverage at the beginning of 1998 was about $28 for every $1 of net assets. JWM Partners was more conservative, aiming to produce returns of 15 percent a year and borrowing $15 or less for every dollar of net assets.

Before Long-Term Capital, Meriwether worked at Salomon Brothers, where he was vice chairman and built its proprietary trading desk. His team, with at least a half-dozen Ph.D’s, used computer models to make money from small price differences in related bonds. His group was responsible for as much as 60 percent of Salomon’s revenue in some years.

He lost his job at the firm following the 1991 government bond scandal. Regulators ruled that he’d failed to supervise traders who violated bond-auction rules.

India Puts Its Weight Behind Alternatives to the Dollar Reserve Currency

When an alternative to the dollar as reserve currency does occur will this be the most widely telegraphed "black swan surprise" in history?

We would agree that it appears to be an almost classic Prisoner's Dilemma

The exits are likely to be rather crowded when this one finally comes home to roost, unless the nations can agree to a longer term phased in approach. But even then, once the announcement is made, it is beyond all doubt the endgame for the dollar bubble.

The system has not crashed, it is crashing.


Bloomberg
India Joins Russia, China in Questioning U.S. Dollar Dominance
By Mark Deen and Isabelle Mas

July 3 (Bloomberg) -- Suresh Tendulkar, an economic adviser to Indian Prime Minister Manmohan Singh, said he is urging the government to diversify its $264.6 billion foreign-exchange reserves and hold fewer dollars.

“The major part of Indian reserves are in dollars -- that is something that’s a problem for us,” Tendulkar, chairman of the Prime Minister’s Economic Advisory Council, said in an interview today in Aix-en-Provence, France, where he was attending an economic conference.

Singh is preparing to join leaders from the Group of Eight industrialized nations -- the U.S., Japan, Germany, Britain, France, Italy, Canada and Russia -- at a summit in Italy next week which is due to tackle the global economy. China and Brazil will also send representative to the G-8 summit.

As the talks have neared, China and Russia have stepped up calls for a rethink of how global currency reserves are composed and managed, underlining a power shift to emerging markets from the developed nations that spawned the financial crisis.

“There should be a system to maintain the stability of the major reserve currencies,” Former Chinese Vice Premier Zeng Peiyan said in a speech in Beijing today, highlighting the nation’s concerns about a global financial system dominated by the dollar.

Fiscal and current-account deficits must be supervised as “your currency is likely to become my problem,” said Zeng, who is now the head of a research center under the government’s top economic planning agency. The People’s Bank of China said June 26 that the International Monetary Fund should manage more of members’ reserves.

Russian Proposals

Russian President Dmitry Medvedev has repeatedly called for creating a mix of regional reserve currencies as part of the drive to address the global financial crisis, while questioning the dollar’s future as a global reserve currency. Russia’s proposals for the Group of 20 major developed and developing nations summit in London in April included the creation of a supranational currency.

“We will resume” talks on the supranational currency proposal at the G-8 summit in L’Aquila on July 8-10, Medvedev aide Sergei Prikhodko told reporters in Moscow today.

Singh adviser Tendulkar said that big dollar holders face a “prisoner’s dilemma” in terms of managing their holdings. “That’s why I’m telling them to do this,” he said.

He also said that world currencies need to adjust to help unwind trade imbalances that have contributed to the global financial crisis.

“The major imbalances which led to the current situation, the current account surpluses and deficits, have to be addressed,” he said. “Currency adjustment is one thing that suggests itself.”

Emerging-Market Dependence

For all the complaints about the dollar, emerging markets such as India remain dependent on the currency of the U.S., the world’s largest economy and a $2.5 trillion export market. The IMF said June 30 that the share of dollars in global foreign- exchange reserves increased to 65 percent in the first three months of this year, the highest since 2007.

Tendulkar said that the matter needs to be taken up in international talks, and that it emphasizes the need for those talks to go beyond the traditional G-8.

“They can meet if they want to,” he said. “The G-20 has a wider role, has representation of the countries that are likely to lead the recovery process.”

More Banks Fail in "Deepening Financial Crisis"

More green shoots for the fungus collection.

What if they gave a Great Depression but systematically rigged the statistics, manipulated the markets, inflated the currency, and were able to convince the majority that it was not all that bad?

Would it still be a Great Depression? Or a Great Delusion?

How angry would people be when they realized they had been fooled into making very destructive personal financial decisions based on this deception?

Would the perpetrators be able to claim immunity because they were performing a service to the government? This is one defense that Barrick Gold (and JP Morgan) used when they were initially sued for manipulating the price of gold in the New Orleans court case. Barrick Corp Drops Bombshell

"The conscious and intelligent manipulation of the organized habits and opinions of the [public] is an important element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our country." Edward Bernays

“It is the absolute right of the State to supervise the formation of public opinion...If you tell a lie big enough and keep repeating it, people will eventually come to believe it. The lie can be maintained only for such time as the State can shield the people from the political, economic and military consequences of the lie.” Joseph Goebbels

Bloomberg
Seven U.S. Banks Seized in Busiest Year for Closures Since 1992
By Ari Levy and Flynn McRoberts

July 3 (Bloomberg) -- Six banks in Illinois and one in Texas were seized by regulators as the deepening financial crisis pushed the toll of failed U.S. lenders this year to 52, the most since 1992.

Twelve banks have failed this year in Illinois, the most of any state. The seven lenders seized yesterday, with total assets of $1.49 billion and deposits of $1.34 billion, were closed by state or federal regulators and the Federal Deposit Insurance Corp. was named receiver, according to statements from the FDIC. Buyers were named for each of the closed institutions.

The Illinois banks are affiliates of Peotone Bank & Trust Co., in Peotone, Illinois, about 45 miles (72 kilometers) south of Chicago. The failures resulted primarily because of soured loans and losses on investments in collateralized debt obligations, the FDIC said. Illinois, with an unemployment rate above the national average, was one of seven states to begin the fiscal year without a spending plan.

"The six failed Illinois banks are all controlled by one family and followed a similar business model that created concentrated exposure in each institution," the FDIC said. CDOs, which packaged bonds and loans into notes of varying risk and yield, lost money as real estate defaults soared.

Regulators this year have closed the most banks since the savings-and-loan crisis of the 1990s as lenders struggle with mounting losses on mortgages and commercial loans. The total for 2009 is more than double the 25 banks shuttered in 2008 and surpasses the 50 that were closed in 1993. The prior year there were 181 failures or government-assisted transactions.

FDIC Fund

The FDIC estimates yesterday's seizures will cost its insurance fund $314.3 million. The regulator imposed an emergency fee in May to raise $5.6 billion to rebuild the fund, which has deteriorated in the past 18 months. More assessments are possible, the FDIC said.

Illinois Governor Pat Quinn, a Democrat, refused to sign a budget because lawmakers failed to approve raising the income tax. In his original $53 billion budget proposal in March, the governor sought personal and corporate tax increases to help eliminate an $11.6 billion deficit and maintain state services.

Chicago is 280 miles from Detroit, home to General Motors Corp. and Chrysler LLC, which were forced into bankruptcy. Lear Corp., the Southfield, Michigan-based maker of automotive seats, announced plans yesterday to enter bankruptcy. The unemployment rate in Illinois was 10.1 percent in May, compared with 9.4 percent nationally.

A Mess

"This is a mess," said Jack Ablin, who oversees $60 billion as chief investment officer at Harris Private Bank in Chicago. "We're a manufacturing state and in the Midwest, so we're influenced by the autos."

In addition to CDOs, the failed banks were plagued by losses on commercial real estate loans. Founders Bank of Worth, the biggest of the Illinois banks seized yesterday, had $374 million in construction and commercial real estate loans as of March, accounting for 63 percent of the bank's net loans and leases, according to a regulatory report.

Millennium State Bank of Texas, the Dallas-based bank taken over yesterday, had $67.5 million in such loans, or 81 percent of its total loans.

"The common denominator for most of the bank failures so far has been troubled construction loans," said Matthew Anderson of Foresight Analytics, an Oakland, California-based real estate research firm. "There's no easy way out with defaulted construction loans in today's environment..."

Japan Calling: A Little More Local Color on the Japanese System

A friend in Japan is updating me on how things are going there.

Its been about ten years since I have worked in Tokyo personally, but everything he is saying is a logical extension of how things were at that time. I am very familiar with the NTT communication system, which was the basis of some of our early work here in the US. Its convenient sometimes to have a determined bureaucracy with plenty of money and power at your back when its time to get a strategic initiative achieved.

This is useful because people like to make facile comparisons between Japan and the US without really understanding some important differences in the markets, public policy, demographics, and culture.

"There are many things here that make life difficult, but on the other hand, make life much easier, some planned, some dictated by circumstances and by accident. It seems very socialist. Makes it very difficult to compare Japan and the US.

There is national health care here. Due to a focus on disease prevention (they have started to take waist measurements and warn you if your waist is say more than 34 inches), not eating too much meat, getting enough vitamin D from sunlight and getting a little exercise because you have to walk 10 minutes to the train station, you can expect, on average, to be fully functional until about 75 and live into your 80s.

Almost everyone is reimbursed for commute to work, by least expensive route, say bus and train, even if you work in a convenience store. Japanese people have told me that the idea is that everyone who wants to work should be able to work where they want without being deterred by the cost of the commute. At one firm I worked at, the limit for the reimbursement was 800 dollars per month, so a very few people commuted by bullet train from quite a distance away. More exactly, if you go to work 5 days a week, the company will reimburse you for the bus/train pass, which allows unlimited travel, so you can use the train pass to go shopping or do other things on weekends for free.

My pass for a half hour commute each way, about 40 miles round trip, is 120 dollars per month. This is why the public transportation systems work well and have continued to improve. All the trains are continuing in improve, and for example, the bullet train now uses one half the energy it did when it debuted 45 years ago. JR East, beginning with the Yamanote Line, is replacing all its trains with new regenerative braking trains that are lighter and roomier and use half the energy of the earlier models. Advertisements on the trains say it takes 1/10 the energy to go by train than by car, but I think that is for older models.

Which brings us to the biggest advantage: most people do not need a car here, and if they do need one, a household can get by with just one car.

I have long thought of cars as vampires sucking the economic life out of every household in the US. And the risk of death and serious injury from car accidents is about half what it is in the US (although the statistics may not be directly comparable).

In 45 years, only one rider has been killed on the bullet train, and that was because he tried to stick his hand in the door too late and got the sleeve of his jacket caught in the door. While there are commuter train accidents from time to time, they are rare, and I think in Tokyo, the last passenger deaths were about a decade ago when a train derailed. Since the auto fatalities in Japan are about 7,000 per year, whereas in the US they are around 40,000 per year with about double the population, I guess that if the Japanese drove as much as people in the US, there would be about another 10,000 auto fatalities per year here, so over the 20 years I have lived here, there are say 200,000 people walking around who wouldn't otherwise be here. That trumps absolutely all other considerations.

I think it is telling that during the oil price spike last year, the US cut its gasoline consumption by about 5%, whereas in Japan, gasoline consumption was cut by 14%. I said, the Japanese cut their gasoline consumption by 14%... BECAUSE THEY CAN.

Broadband, subsidized and incentivized, has been here for a decade. Around 1999, I picked up a Yahoo Broadband modem, filled out a form, brought it home, and plugged it in. 6 M/sec, 15 dollars a month. Although I didn't understand it at the time, the modem was converting my telephone calls into internet telephony, so calls to the US that were a dollar a minute by NTT were suddenly a flat 3 cents a minute. Around new year, I made a lot of phone calls, and was bracing for a thousand dollar phone bill... and then I realized that I hadn't gotten an NTT bill in months... it was instead a 20 dollar charge tacked on to my credit card.

The Japanese government has been panicking about the oil running out for more than a decade. I noticed Koizumi saying "global warming, global warming" over and over again, and mention of peak oil was conspicuous by its absence. That's when I realized that when he was addressing the captains of industry, what he was really saying was "You idiots, the oil is running out! Get the energy use of everything down!"

Because broadband is widely available, the Japanese government went from wanting 10% of workers to telecommute at least some of the time, to wanting 20% to telecommute by next year, as a means of reducing energy consumption.

Mitsubishi is advertising a split system heat pump air conditioner/heater that runs at about 6 cents per hour (and the electricity rate here is high, about 20 cents a kilowatt hour). My Sharp heat pump is 16 years old and runs for about 10 cents an hour. My total heating/cooling expense for a year is about 300 dollars.

There is a huge panic going on in the US about how bad the electricity grid is. I think there are estimates that unreliable electricity is costing the US 100 billion per year. In Tokyo, there has been only one major blackout in 20 years, and that affected only about a quarter of the city for half a day due to a crane snagging high tension wires. The only outages I have seen myself were when a construction crew accidentally severed a line (one hour) and when a fighter jet crashed into high tension wires (two hours). Quakes do not normally affect electricity, water, or telephone. Gas meters have automatic sensors that turn off gas supply, and then if it seems all clear after an hour, automatically reset. We sometimes have fairly big quakes every day for weeks on end... I'm not joking.

When a quake is detected by sensors, the sensors send signals to a central computer. The computer has models of 100,000 quake scenarios, and it matches the data to a scenario, estimating the surface shaking for each small grid square of Japan. If surface shaking in a particular location is predicted to exceed a certain level, the bullet trains automatically engage emergency braking. All city halls have automatic announcement systems that estimate the shaking and count down to the arrival of the primary wave at their particular location. Nuclear reactors and power generating stations receive advance warnings. Some residential condos also have this. I suppose it will become standard soon.

You can get warnings of a few seconds or minutes depending on how far away the quake is.

(After seeing the Kobe quake first hand, my solution was 1) buy earthquake ground shaking estimate map of Tokyo, 2) see closest station to downtown where risk drops substantially due to granite outcrop getting you off the alluvial plain. Estimates of shaking in downtown Tokyo is 10 times the estimated shaking where I live.)

This is why I think it is so difficult to compare the situations. You cannot walk away from the mortgage. On the other hand, your commute is subsidize and you do not need a car, so it is as if the condo were free."

The Japanese Stagnation

This is interesting, and probably an eye-opener for most Western readers.

Most Japanese mortgages are 'recourse' loans meaning that the borrower still owes the full amount of the loan even in the event of foreclosure. One of the reasons for this is that so many Japanese residential buildings are not intended to outlast the 35 year mortgage and depreciate from the day they are bought.

The Japanese government promoted officially backed mortgage programs to keep the economy going, cutting down payments to zero from the traditional 20 percent. This lured in buyers who really could not afford the houses, and are often the first to have their pay cut in an economic downturn.

Japan uses a semi-annual bonus system as part of its pay structure for employees, the bonus portion of which is more readily sacrificed for the company good.

Please consider these things in the context of the governance of Japan which as we have said is semi-feudal, ruled by a few corporations and the wealthy elite in partnership with essentially a one party government.

This will go a long way in helping to understand the "Japanese disease" of economic stagnation. You start by crippling the middle class through debt indebtedness to a corporate elite.

The Japan Times
The only bonus you'll get this summer is the sun
By Philip Brasor
June 28, 2009

One of the cleverest ideas developed by the Japanese business world is the distribution of semiannual "bonuses" to employees. Usually, a bonus is tied to a company's good fortune or an employee's performance. Japanese workers have always deemed them to be part of their salaries and tend to plan their finances accordingly. Employees and employers look at bonuses differently: The former see them as an entitlement, while the latter use them as a safety valve.

With the onset of the recession, Japanese companies have exercised their option to reduce or even cancel bonuses, and for the past month the media has been buzzing with a new term — June crisis — to describe the situation of workers who may not be able to meet mortgage payments as a result.

June and December are bonus months, and 45 percent of Japanese people with housing loans have contracts that require them to pay larger amounts in these months than they do in other months, in some cases as much as five times.

Publications and TV news shows have been filled with human-interest stories about people suddenly faced with the possibility of losing their homes. The Asahi Shimbun tells of a 40-year-old housewife whose husband did not receive a bonus this month and apparently won't receive one in December either. Even worse, his salary has been cut by 20 percent. They have 20 years left on their 35-year mortgage. They pay only ¥80,000 a month toward the loan, but during each bonus month they pay ¥400,000. With one child in university and another in junior high school, they have saved very little. "When we took out our mortgage," the woman says, "it was unthinkable that my husband's bonus would be zero."

According to the Ministry of Internal Affairs and Communications, homeowners now spend an average of 20.5 percent of their disposable income on housing loans, the highest portion ever. Meanwhile, the Japan Business Federation has reported that total bonus payments this June is 19 percent less than the total for last year, the greatest year-on-year drop since they started compiling statistics in 1959.

In the past, company labor unions would protest to employers when bonuses were cut, calling bonuses "life expenses," but recently they have taken management's side and agreed that bonuses should be tied to company performance. But the roots of the June crisis go deeper. Housing has always been the government's main means of economic stimulation. During the 1990s, when the economy was stagnant, housing was pretty much the only sector keeping the economy going thanks to the Flat 35 scheme, which allowed home buyers to take out loans with only 10 percent down payments instead of the usual 20 percent. The government's new stimulus measures eliminate down payments altogether for Flat 35. These loans are guaranteed by a government entity called the Japan Housing Finance Agency.

A person who wouldn't normally be able to buy a home can more easily buy one, and as we have seen with the subprime loan fiasco in the United States, lowering the bar for home ownership can have disastrous consequences. People who bought homes in the '90s under the Flat 35 scheme with "relaxed" (yutori) interest rates are the ones most affected by the June crisis.

NHK illustrated this tendency on the program "Yudoki Network" with the story of a former taxi driver who received a notice from JHFA saying that since he was delinquent for six months he would have to pay the balance of his loan — more than ¥24 million for a ¥36 million condo he bought in 1998 — or the condo would be auctioned off. The man's situation is worse than it sounds, because if his condo is repossessed, he still has to pay off his loan.

Japanese mortgages are recourse loans, meaning the borrower is still liable even after foreclosure. Depending on the state, most banks in America offer nonrecourse loans, which are secured by collateral, usually the property itself. Once they foreclose, the borrower's debts are gone. If you default on a recourse loan, you're messed up three times: you lose your home, you lose all the money you sunk into it, and you still have debt. Wait, make that four times — your credit rating is garbage.

The taxi driver opted to sell his condo before it went on the block (where it would probably sell for about 80 percent of its market value), but the realtor he hired said she could get, at most, ¥25 million for it. With all the fees involved, he'd still end up ¥3 million in the hole. Fuji TV's "Sakiyomi" profiled an unemployed sushi chef facing foreclosure who still owes ¥9 million on his three-bedroom Chiba Prefecture house. All the realtors he's talked to say his property is worth about ¥5 million but the only offer he's gotten is ¥2.5 million. His family has already left him and he's contemplated suicide. These cases are accompanied by advice from financial planners that boils down to refinancing the loan so that monthly payments are reduced. But that means extending the loan period and, as a result, paying more money in the end for a home that will likely be worth nothing, which they rarely mention. Recourse loans are directly related to Japan's infamous "scrap-and-build" housing policy. Banks can't be expected to lend money for houses that start losing value the moment construction is completed if those houses are used as collateral.

There are more than 6 million vacant houses in Japan. Most will never be sold, because they're pieces of crap that were never meant to outlast their 35-year mortgages. Condominiums are no better. On average, Tokyo "mansions" built in 1990, when land values peaked, were selling for half their original prices by 2004.

Interviewed on NHK Radio, economist Akiko Hagiwara said that people who realistically can't afford homes have been suckered into buying them in order to prop up the economy. People in this income bracket are also typically the first to get laid off or have their bonuses cut. "They're victims of the government," she said.

The June Non-farm Payrolls Report

The headline jobs number came out worse than expected, and the paint peeled off the US stocks tape from its recent run into the end of the second quarter.

The trend herd had been looking at the bounce off the bottom and before today's number had some hopes that the leveling off or even a surprise to the upside would confirm a bottom in the economy. The sharp downturn threw cold water on those happy thoughts.



The actuals came in about as expected, a little lower perhaps, and as you can see there was a strong downward seasonal adjustment.



The "Birth-Death" model was in line with the usual swag that the BLS performs at this time of year. As you know this number is added to the "actual jobs number" before seasonal adjustment, so at this time of year it helps to inflate the headline number slightly.

With this regular repetition of the number without regard to the underlying economic activity over the years, and its feed into the actuals, one has to wonder why they don't just roll this number into their seasonal adjustments? Do they feel the need to justify their tinkering with actual number beyond some limit? The Birth-Death model is certainly no viable rationale, but it does serve to employ a few analysts, and is likely some pet project of a past BLS director.



And here is the only chart worth watching, the long term trend. There has been no bottom yet reached in the jobs lost. This is not so much a reflection on the stimulus because of the lag, and the obvious data showing that consumers tended to use the stimulus to pay down their immediate debt which is a worthwhile endeavor, but does not give a quick boost to jobs.

The issue might be a bit of a red herring, because the economic stimulus pales by comparison with the enormous amount of stimulus provided to the banking sector, which is stimulating some operators like Goldman Sachs to pay their employees, on average, a record $700,000 in annual pay. Now THAT is stimulus, but perhaps one that is counterproductive.



We are on the record in the opinion that the Obama economic team is ineffective, backward-thinking, compromised, and possibly corrupt. They are serving the corporate banks and not the people. They should be replaced starting with Larry Summers who is a Greenspan and Rubin crony and the core of failure on the team. Tim Geithner should follow to find better employment for his talents, possibly as a salesman of men's suits.

China Takes A Big Step Forward in Monetary Policy

This news was largely overlooked by the worse than expected US payrolls report, which dampened hopes of a quick economic recovery, a sentiment encouraged by some but certainly not realistic to anyone looking closely at the numbers. I think that little propaganda sound byte served primarily to apply some primer for the end of quarter paint job in US equities.

Despite its strength today as stocks fall and the boys cash in after their most recent pump operation, the dollar is going to be taken down a peg, so to speak. It is a long term trend that is still well in place despite this bear market rally.

How much further? The DX index is increasingly unsatisfying as a measure, and the manipulation of the gold and silver price by a handful of banks who are unbelievably short the metals on paper renders them less reliable.

But another 20% decline from here is where our charts would indicate the dollar is headed overall against the DX.

China Allows Yuan Trade Settlement, Offers Tax Breaks
By Bob Chen and David Yong
July 2, 2009 09:44 EDT

July 2 (Bloomberg) -- China will allow companies to use the yuan to settle cross-border trade and let them keep their entitlement to export tax rebates, seeking to reduce the reliance of importers and exporters on the U.S. dollar.

The People’s Bank of China will encourage banks to offer yuan settlement services from today, the bank said in the regulations published on its Web site. Transactions inside China will take place in Shanghai and four cities in southern Guangdong province, including Guangzhou and Shenzhen, while those outside China will occur in Hong Kong, Macau and the Association of Southeast Asian Nations, it said.

“It’s China’s first step to make the yuan global,” said Shi Lei, an analyst in Beijing at Bank of China Ltd., the nation’s largest foreign-currency trader. “It will protect exporters from swings in exchange rates and boost the yuan’s role in the world currency system.”

China is promoting greater use of the yuan in international trade and finance after Premier Wen Jiabao in March expressed concern that a weakening dollar will cause losses on the country’s holdings of U.S. assets. A Chinese Foreign Ministry official said today he hoped the U.S. currency would remain stable, while reiterating a call for diversification of the international monetary system.

“Companies in China and neighboring countries are facing relatively huge risks of exchange-rate fluctuations because of big swings in the U.S. dollar, the euro and other major settlement currencies,” today’s central bank statement said.

First Settlement

Asean comprises Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

Hong Kong Monetary Authority Chief Executive Joseph Yam said on June 29 he hopes the first yuan settlement transactions will start this month after signing an agreement with People’s Bank Governor Zhou Xiaochuan. Companies currently have to convert yuan into dollars or other currencies to settle international trade.

“Hong Kong will be the natural place for arranging these transactions,” Yam said in a statement today. “This is the key to the maintenance of the status of Hong Kong as an international finance centre.”

Tax authorities are working on the proposed rebates for exports settled in yuan, the central bank said. Bank of China Ltd. will be the clearing bank in Hong Kong and Macau.

Stability, Convenience

About 50 percent of Hong Kong’s trade with China may be settled in yuan after the program starts, Stanley Wong, deputy general manager at Industrial & Commercial Bank of China (Asia) Ltd., the Hong Kong unit of China’s biggest bank, said in an interview on May 5. Hong Kong companies want to use yuan in trade because it will probably appreciate against the U.S. dollar more than 3 percent every year, he said.

“We hope companies will like to use yuan because of its stable value and convenience,” People’s Bank of China Deputy Governor Su Ning said in an interview with state-owned China National Radio today.

The yuan has strengthened 21 percent against the U.S. currency since a dollar peg was scrapped in 2005. China has limited the yuan’s advance in the past year as a stronger currency makes its goods less competitive overseas at a time when economic growth this year could slow to 7.2 percent from 9 percent in 2008, according to World Bank forecasts.

Currency Swaps

The People’s Bank of China has agreed to provide a total of 650 billion yuan ($95 billion) to Argentina, Belarus, Hong Kong, Indonesia, Malaysia and South Korea through so-called currency- swaps to expand the yuan’s usage. China and Brazil in May began studying a proposal to move away from the dollar for trade settlement and use yuan and reais instead.

Malaysia’s government has been calling for reduced dependence on the dollar for “some years” and now that China is supporting yuan settlement it is worth considering, said Tan King Tai, an executive director at Pensonic Holdings Bhd., a manufacturer of household electrical appliances in the northern Malaysian state of Penang that sources parts from China.

“The dollar has become quite volatile and speculative in some ways,” he said. “If the yuan can be stable, it will help companies with their financial budgeting.”

To contact the reporters on this story: Bob Chen in Hong Kong at bchen45@bloomberg.net

The Banking Bubble Began in 1986, Was Like 'the South Sea Bubble' Says Bank of England Official

In retrospect it should become increasingly clear to most that the Federal Reserve and its associated money center banks were responsible for systematically undermining all regulatory restraint and sound judgement for the sake of their private profits, without regard to the resultant destruction visited upon the public and the larger global economy.

To suggest that the regulatory process should now be concentrated in the hands of the Federal Reserve, still opaque and arrogant, is disgraceful and disqualifies the public officials from service who promote such a travesty of common sense and prudence.

Guardian
Banking system like South Sea bubble, says senior Bank of England official
by Ashley Seager
1 July 2009 13.26 BST

'Banking became the goose laying the golden eggs. There is no period in recent UK financial history which bears comparison,' says executive director for financial stability, Andy Haldane

A senior Bank of England official today compared the banking system over the last 20 years to the South Sea bubble of the early 18th century and said bankers had merely "resorted to the roulette wheel" to keep up with each other.

The Bank's executive director for financial stability, Andy Haldane, said in a speech in Chicago that having been stable over much of the 20th century, returns in the banking system relative to the wider stockmarket shot up after 1986 until 2006.

"Banking became the goose laying the golden eggs. There is no period in recent UK financial history which bears comparison," he said.

He said bankers and policymakers became seduced by the excess returns available: "Banks appeared to have discovered a money machine, albeit one whose workings were sometimes impossible to understand.

"One of the South Sea stocks was memorably 'a company for carrying out an undertaking of great advantage, but nobody to know what it is'. Banking became the 21st-century equivalent."

He said banking returns over the period were magnified by leverage as banks borrowed excessively, he said.

During the golden era, competition simultaneously drove down returns on assets and drove up target returns on equity. Caught in this crossfire, higher leverage became banks' only means of keeping up with the Jones's. Management resorted to the roulette wheel."

He noted that the 80% slump in bank shares since the credit crunch hit meant that returns from the sector were now back in line with their longer-run average (see graphic above). The market capitalisation of global banks has fallen by $3tn (£1.8bn) since the crisis began, he said.

"We should aspire to a financial system where there is greater market and regulatory scrutiny of future such money machines. In achieving this, there is a role for some body – a systemic overseer – which is able to detect incipient bubbles and fads and, as importantly, act to correct them. This role is about removing the punchbowl from future financial sector parties." (We had a group that were responsible for doing this. They were called The Federal Reserve under Alan Greenspan. And Greenspan became the whoremaster of ceremonies for perversion of finance in the bubble economy. - Jesse)

He said that in future there would have to be a greater distinction between management skill, which improves return on assets, and luck, when return on equity can be magnified by leverage.

"Good luck and good management need to be better distinguished. Put differently, returns to investors and managers need to be more accurately risk-adjusted if the right balance between risk and return is to be struck for individual firms and for the financial system as a whole."

A second lesson, he added, was that there would have to be much stricter system-wide limits on leverage, particularly among big banks whose stability is crucial to the whole financial system. (Perhaps some prohibition of the types of activity that banks can engage in like Glass - Steagall? Oh yes, we had that as well and the banks repealed it with the help of the Federal Reserve. Perhaps we should have regulatory reform and place all the oversight responsibility with one group. Like the Federal Reserve? - Jesse)

"For a number of diseases, 20% of the population account for around 80% of the disease spread. The present financial epidemic has broadly mirrored those dynamics," he said, adding that the failure of a core set of large, interconnected institutions such as Fannie Mae, Freddie Mac, Bear Stearns, Lehman Brothers and AIG contributed disproportionately to the spread of financial panic. (In this case there are a few Typhoid Mary's with names like JP Morgan and Goldman Sachs and Morgan Stanley, and they are still hard at work - Jesse)

"Epidemiology provides a second key lesson for financial policymakers – the importance of targeted vaccination of these 'super-spreaders' of financial contagion. Historically, financial regulation has tended not to heed that message." (Vaccination is one approach. Wall Street and the City of London really need a dilation & curretage - Jesse)

He welcomed a recent move by US authorities to bring the trading of credit derivatives, which were at the heart of the crisis, on to exchanges so they could be better understood and controlled. "This is a bold measure and one which deserves international support."

Haldane's speech was part of a growing debate among global policymakers to try to build a better system of regulation and control of the financial system to prevent such crises as the current one from occurring again.

Gold - Weekly Chart

Hasta La Vista Baby

Here's a green shoot for you to chew on in your happy place...

This news item merited a thirty second mention on Bloomberg Television with an immediate resumption of rally jubilation and feel good news. And on the personal interest side, poor Karl Malden has died at age 91.

I wonder if there are credit default swaps on California? Woo hoo. Bring on those records bonuses for the boys in the back room.

Bloomberg Wire.... Governor Arnold Schwarzenegger declares "a state of emergency" for the State of California in its budget crisis.

As of 2007, the gross state product (GSP) is about $1.812 trillion, the largest in the United States. California is responsible for 13 percent of the United States gross domestic product (GDP). As of 2006, California's GDP is larger than all but eight countries in the world.

China Requests Debate on Reserve Currency at G14 Summit

China is proposing a new reserve currency regime less dependent on the dollar, along with other BRIC countries, and the US and its financial allies in the status quo will resist change because it is in their short term interest to do so.

China can take 'pre-emptive' action by diversifying its holdings ahead of any change, and there are some indications that it is doing so already. But while the dollar is the prime medium of international trade, China must buy dollars to support its mercantilist industrial policy. Its own alternative is to boost its domestic consumption and 'grow a middle class' which in some minds erodes the power of the narrow political elite which rules the country.

The US needs to stand firm in some areas, and acquiesce in others. Standing firm with regard to the yuan being free of a peg and currency controls is one area that ought to have been sine qua non when first Clinton and then Bush gave China its openings as a preferred trading partner even while maintaining de facto industrial subsidies through its currency and markets.

The first line of negotiation will be to agree on a dollar substitute, which will probably be the SDR. The US will resist and delay this as long as is possible.

The fallback position then will be the composition of the SDR, and a long phasing of the change in the primacy of the dollar and a few G7 currencies. China will seek more diversity and the inclusion of gold and silver, which is anathema to the Wall Street banking cartel.

The US must change or face more seismic, involuntary dislocations. As Britain surrendered its far flung colonial Empire, so the US must downsize its financial sector, restore balance to its own economy and its place in the world economy, and relinquish the primary reserve currency status which has become a powerful instrument of manipulation by the Wall Street banking cartel.

The dollar is the last, the mother of bubbles. Few understand this even now.

The epic US credit expansion was enabled by the preferred position of US debt instruments as the reserve currency of the world. The bond and the dollar are the absolute foundation of that debt pyramid.

Those days are undeniably over. What comes next and in what order and timing remains open to question for sure, but that substantial change is occurring is not.

The difficulty is that the financial institutions are a powerful influence over many key politicians in Washington and London and thought leaders and media outlets around the country, and in some parts of the world.

The military-industrial complex of which Eisenhower warned has become a real impediment to freedom in the US, but ironically it is not the manufacturing sector but the service, or FIRE sector, which has its grip on US political decision-making.

Obama could have changed this and there was hope that he would, but all that he has does so far appears to demonstrate that he and his advisors are fully compromised by the potent financial interests controlling their country.

What comes next, no one can say. But change is in the wind, and with that change comes the rise and fall of powerful but all too human institutions which many still believe can last for a thousand years, even as they are on the brink of der untergang, their downfall.

Reuters
China requests reserve currency debate at G8
Wed Jul 1, 2009 11:58am EDT

July 1 (Reuters) - China has asked to debate proposals for a new global reserve currency at next week's Group of Eight summit in Italy and the issue could be referred to briefly in the summit statement, G8 sources said on Wednesday.

One G8 source who was involved in the negotiations said China made the request during preparatory talks about a joint statement to be issued on the second day of the summit in L'Aquila by the G8 plus the G5 (Brazil, India, China, Mexico and South Africa) and also Egypt.

This forum, the so-called "G14", meets on July 9 to discuss the financial crisis, trade and climate change and for the first time a G8 summit will also produce a joint G14 statement.

A European source with knowledge of preparations for the summit also said China had raised the subject of a reserve currency debate and that it might be mentioned during the meeting, though the source added: "Any country at the meeting can raise issues they see fit." (China is not just 'any country' these days - Jesse)

"But whether there is a specific mention in the communique remains open," said the European source, adding that sherpas would discuss this further in preparatory talks on Friday.

The debate centres on proposals by some emerging powers that an alternative should be found to the U.S. dollar as the global reserve currency, to reflect the shifting balance of power in the globalised economy.

China's central bank governor said in March the world should consider using the International Monetary Fund's Special Drawing Rights (SDRs) as a super-sovereign currency. The SDR is an international reserve asset allocated to IMF members and its exchange rate is determined by a basket of dollars, euros, sterling and yen. (China also wishes to modify its composition - Jesse)

But the Chinese proposal failed to gain ground after several world leaders, and officials from the IMF, backed the dollar as the global reserve currency. (Reporting by Reuters bureaux)