Peter Schiff on the Surge in Gold; Jesse Weighs in on Inflation and Deflation

Peter Schiff has not always been correct, most notably on the decoupling theory of foreign markets with the US, and the desirability of their equity markets, at least so far.

It is the case, of course, that the US lagged emergence from the Great Depression as compared to a number of overseas economies, for a variety of reasons on which we have speculated in the past.

Will this happen again? Perhaps, we cannot know. But the US is 'ground zero' for the Wall Street debt fraud and bubble economy based on the dollar reserves, and seems utterly incapable of taking action except to print more money and give it to Wall Street.

The decline in the value of the dollar does seem like a very high probability, as well as the rather severe stagflation which this may eventually produce. On this point Mr. Schiff seems most insightful, especially compared to the commentators on financial television.

The discussion which Peter has towards the end is particularly interesting about inflation and deflation. We tend to diverge again a bit from his analysis there however. He references monetary inflation. But this is not the only cause of price change.

There are definite and easily observable deflationary forces at work in the economy today in the form of slack demand, unemployment, and net credit contraction. This is putting severe downward pressure on prices as one would expect.

This will become worse as people realize that our current 'recovery' is a public relations event, and it may even result in a 'credit crunch' once again as it did last year. This is the 'dollar short' phenomenon that we have described, which particularly impacted European banks holding dollar assets.

At the same time, Bernanke has the printing presses running from the Adjusted Monetary Base up, and is pushing on the monetary inflation button, monetizing bad debts of non-traditional sorts, and weakening the dollar.

Foreign holders of US debt are starting to make their first moves in this game of prisoner's dilemma. At some point if confidence breaks, things might start moving much more quickly. Until then it will be a slow grind, an erosion of value and wealth.

The general American public is, in a sense, caught in the middle, with a lack of jobs and income for the working classes, but higher prices in imports and essentials. This is the stagflation outcome which we had feared. One bright spot is that it might be good for exports, if the Asian countries can generate domestic consumption and decide to free up access to their markets.

See Price Demand and Money Supply As They Relate to Inflation and Deflation You might also take a look at Some Common Fallacies About Inflation and Deflation.

Inflation and Deflation are not linear, that is, not straightforward and simple economic functions with a few variables, except at the tails of probability where the power of the extreme crushes the equation into simplicity by overwhelming other factors into insignificance. You print enough dollars, and consumer demand matters much less as an input to inflation.

Approaching the future with one dimensional game plans can be quite risky. But for some reason gold, and to a less extent silver, always appear to work to some degree in the solution mix, hence their continuing rally despite the best efforts of the powers that be to talk them down. As Bernard Baruch famously observed, "Gold has 'worked' down from Alexander's time... When something holds good for two thousand years I do not believe it can be so because of prejudice or mistaken theory."

The lack of coherent financial reform from the Obama Administration, and their ludicrous proposal to create a 'super-regulator' in the privately owned Federal Reserve, after a landslide victory in an election based on change and reform, is an outcome almost too bizarre to be believable. Unless, that is, you accept that Obama and those around him are either incredibly naive or corrupt. We suspect that as in all things it is some of both.

By the way, in case you missed it, Charlie Rangel, in charge of Ways and Means and the major proponent of a new military draft, is being investigated as another tax cheat among the Democratic leadership.

Do these people take us for imbeciles? Do they think that the world does not see their corruption, their greedy, devious nature when it is not masked by a captive media, and is not repelled by it?

In 2005 we forecast this very outcome, that Wall Street and their cronies would push their schemes beyond all reason, like drunk drivers or addicts who cannot quit, until they create a cathartic, catastrophic event which will cause someone to finally take away their keys at the last.

That time is approaching. No one can predict exactly when, but it is there. Make sure you are wearing your seat belts.

"There is precious treasure and oil in the house of the wise, but a fool consumes all that he has and saves none." Proverbs 21:20

(hat tip to Denver Dave for the link)

Stiglitz on the Financial Crisis

Joe Stiglitz describes the current financial crisis and prospective recovery quite well, and the conclusions he draws are remarkably similar to our own which is gratifying.

It's good to hear these things from a distinguished Nobel laureate, and not just from your humble Propriétaire, while puttering over his daily bread.

Bloomberg
Stiglitz Says U.S. Economic Recovery May Not Be ‘Sustainable’
By Michael McKee

Sept. 4 (Bloomberg) -- The U.S. economy faces a “significant chance” of contracting again after emerging from its worst recession since the 1930s, Nobel Prize-winning economist Joseph Stiglitz said.

“It’s not clear that the U.S. is recovering in a sustainable way,” Stiglitz, a Columbia University professor, told reporters yesterday in New York.

Economists and policy makers are expressing concern about the strength of a projected economic recovery, with Treasury Secretary Timothy Geithner saying two days ago that it’s too soon to remove government measures aimed at boosting growth.

Stiglitz said he sees two scenarios for the world’s largest economy in coming months. One is a period of “malaise,” in which consumption lags and private investment is slow to accelerate. The other is a rebound fueled by government stimulus that’s followed by an abrupt downturn -- an occurrence that economists call a “W-shaped’ recovery.

“There’s a significant chance of a W, but I don’t think it’s inevitable,” he said. The economy “could just bounce along the bottom.”

Stiglitz said it’s difficult to predict the economy’s trajectory because “we really are in a different world.” He said the crisis of the past year was made worse by lax regulation that allowed some financial firms to grow so large that the system couldn’t handle a failure of any of them.

Big Banks

“These institutions are not only too big to fail, they are too big to be managed,” he said.

Finance ministers and central bankers from the Group of 20 nations meet in London Sept. 4-5 to lay the groundwork for a summit in Pittsburgh later this month, where leaders will consider measures to overhaul supervision of the financial system...

With so much excess capacity, the American economy faces a short-term threat of disinflation and possibly deflation, Stiglitz said. Wages may even decline, given recent high productivity and the likelihood of an extended period of high unemployment, he said.

Longer term, he said the Fed’s aggressive monetary policy will mean inflation becomes the greater threat. “With the magnitude of the deficits and the balance sheet of the Fed having been blown up, it’s understandable why there are anxieties about inflation,” he said.

While the Fed says it has the tools to deal with it, there are still concerns, Stiglitz said. Because monetary policy takes six to 18 months to have its full effect, the central bank will have to begin withdrawing monetary stimulus on the basis of forecasts.

The Fed’s record on its economic forecasts isn’t enough to reassure investors and, as a result, the U.S. currency may suffer, he said.

Dollar ‘Weakness’

“Whether or not they’re able to do it, the uncertainty today about whether they can do it can contribute to the weakness of the dollar,” Stiglitz said. “That’s one of the reasons there is increasing interest around the world in discussing alternatives to the dollar system.”

Stiglitz, who is a member of a United Nations commission that will study the global financial system and currency regimes, said “the logic is compelling” for a new global currency.

The current system creates instability, weakens global confidence, and is fundamentally unfair to developing countries that are in essence lending the U.S. trillions of dollars and bearing the risk, he said.

“In most quarters, there is a feeling we should move away from the dollar system. The question is do we do it in an orderly way, or a chaotic way,” Stiglitz said. “The size of the deficit and the size of the balance sheet of the Fed have just increased the anxiety and the desire that something be done.”

While some think it would hurt the U.S. to no longer be able to borrow cheaply in dollars, “that era is over,” he said. “We’re moving to a more multi-polar world.”

Between the fall of the Berlin Wall and the collapse of Lehman Brothers was “the short period of American triumphalism, where we dominated the global scene. That period is over,” Stiglitz said.

Five Reasons for the Recent Surge in Gold

1. Seasonality



2. Continuing Risks in the Financial System



3. Moral Hazard: Tipping Point In Confidence From Over a Decade of Monetary and Regulatory Policy Errors






4. Blowback from Banking Frauds on the Rest of World



5. A Failure in Political Leadership to Deliver Essential Reforms

"Let's Just Whack the Oil"

“The markets used to be about capital formation,” said Mr. Quast, the consultant. “Now 80 percent of trading is driven by some form of statistical arbitrage. We are buying into a statistical house of cards that could unravel very quickly.”

Reading the NY Times article excerpted below, one finds that Optiver is a rather small time operation with a wonkish bent operating out of the Netherlands, with profits that barely match a decent US tradering department's annual bonus.

But the method which they are using is similar to the techniques being used by many of the large 'market makers' who are 'providing liquidity' while reaping large and improbably consistent profits by manipulating markets.

The manipulation itself is nothing new. Large Wall Street banks have been using their size to push the markets around for many years, as in the case of Citigroup which was caught manipulating prices in European bond trading. Citigroup Fined Over 'Dr. Evil Bond Strategy

Then of course there was the manipulation of the energy markets by Enron, which held the state of California hostage.

The difference is that in the past the manipulation was implemented using the size of the trades and the deep pockets backing them. Size mattered, and the techiques were not elegant, more like an old-fashioned smash and grab.

Today the bias is towards stealth and speed, and colocation of your trading daemons with the Exchange to obtain an edge on information and execution. Having key regulators and politicians on your payroll is always a plus in any organized criminal activity.

No wonder China is so angry about the derivatives losses being realized by their State Owned Enterpises. The manipulation around key prices and dates in many US markets has been apparent for some time, with a wink and a nod around option expirations for example.

But now this manipulation is getting so blatant and widespread and regular that it is crippling daily market operation, not to mention robbing the general public of millions of dollars every day in their 401K's, pensions, and investment accounts. It has more of the appearance of organized crime than it does of a financial system.

Optiver was guilty of manipulation it appears, but also of being small and Dutch, and a competitor to the larger gangs of New York and London.

It will be more impressive when the CFTC and the SEC finally does something to clean up the markets by taking on the too big to fail banks that are sucking the life out of the US national economy and destroying the integrity of price discovery and the markets around the world.

To accomplish this, the US must dismantle the partnership in profits between Wall Street and the national government, which is morphing into a kind of velvet coup d'etat.

Yes, the markets used to be about capital formation. And capitalism used to involve risk management, with the consequence of profit and loss. But when Robert Rubin, then Treasury Secretary for Bill Clinton decided it was less expensive and more convenient to artificially buy the SP futures market through the Working Group on Markets, and manipulate prices rather than to suffer a messy stock market decline and clean up afterwards, moral hazard was unleashed. And so here we are today

We hope but do not believe that the impetus for reform will come from the US government, or financial industry, or even the voting public which the elites are now ignoring. After all, they don't pay the bills. It will come from the other governments and regulators of the world, who it appears have finally had enough interference and disruption of their economies and markets from US dollar colonialism.


NY Times
Inquiry Stokes Unease Over Trading Firms That Shape Markets
By Landon Thomas Jr.
Published: September 3, 2009

LONDON — Its superfast, supersecret oil trading software was called the Hammer.

And if the Commodity Futures Trading Commission is right, the name fit well with an intricate scheme that allowed commodity traders in Chicago working for Optiver, a little-known company based in Amsterdam, to put their orders first in line and subtly manipulate the price of oil to the company’s advantage.

Transcripts and taped conversations of actions that took place in 2007, included in the commission’s case, reveal the secretive workings of high-frequency trading, a fast-growing Wall Street business that is suddenly drawing scrutiny in Washington. Critics say this high-speed form of computerized trading, which is used in a wide range of financial markets, enables its practitioners to profit at other investors’ expense.

Traders in the Chicago office of Optiver openly talked among themselves of “whacking” and “bullying up” the price of oil. But when called to account by officials of the New York Mercantile Exchange, they described their actions as just “providing liquidity....”

Optiver describes itself as one of the world’s leading liquidity providers, a trading firm that uses its own capital to make markets. It seeks to profit on razor-thin price differences — which can be as small as half a penny — by buying and selling stocks, bonds, futures, options and derivatives. (Derivatives represent about 65 percent of its business, equities 25 percent, and commodities and others make up the remaining 10 percent.)

But the extent to which market making (providing liquidity to markets that need it) and proprietary trading (the pursuit of pure profit with a firm’s own money) can properly coexist has become a thorny question for regulators. They are grappling with an exploding business that makes up as much as half the overall trading in the United States and a growing share in Europe as well...

“These are proprietary trading shops that are masquerading as market makers,” said Tim Quast of Modern IR, a consulting firm that advises corporations on market structure issues.

The Securities and Exchange Commission has opened up an investigation into high-speed-trading practices, in particular the ability of some of the most powerful computers to jump to the head of the trading queue and — in a fraction of a millisecond — capture the evanescent trading spread before the rest of the market does...

Called low-latency trading, this blend of speed and opportunism is the essence of Optiver’s business model.

It deploys a sophisticated software system called F1 that can process information and make a trade in 0.5 milliseconds — using complex algorithms that let its computers think like a trader. And the company is so careful about preserving its secrets that when some traders and engineers left for a rival operation recently, Optiver hired private investigators and subsequently sued the former employees on charges of making off with intellectual property...

Mr. Dowson acknowledges that Optiver was so aggressive in conducting its proprietary trades in some smaller stocks that their activities “were as big as the volume traded on the day.”

It is precisely this — high-powered computers and the swagger of those who operate them — that is causing worries over high-frequency trading’s increasing sway. (No one can touch 'the-bank-that-must-not-be-named' for swagger - Jesse)

“The markets used to be about capital formation,” said Mr. Quast, the consultant. “Now 80 percent of trading is driven by some form of statistical arbitrage. We are buying into a statistical house of cards that could unravel very quickly.”

Hong Kong Bringing Its Gold Home From London

"There is precious treasure and oil in the house of the wise, but a fool consumes all that he has and saves none."
Proverbs 21:20

The People's Republic of China has been urging its citizens to convert some part of their savings into gold and silver, having recently liberalized the procedures by which individuals can obtain it.

Hong Kong has built a new world class bullion vault, and is repatriating its gold reserves from the London Bullion Market Association (LBMA), where some speculate it had been committed for sale many times over. Hong Kong wishes to become its own regional Asia market maker for bullion metals.

The rest of the world will rein in the Wall Street financial establishment, because the bankers have demonstrated an inability to manage their financial affairs honestly, and those of the world.

Strange times indeed, when the hard money capitalists are in Asia, and the fiat money oligarchs and statists are in the Anglo-American West.

Marketwatch
Hong Kong recalls gold reserves, touts high-security vault
By Chris Oliver
Sep 3, 2009, 6:22 a.m. EST

In a challenge to London, Asian states invited to store bullion closer to home

HONG KONG (MarketWatch) -- Hong Kong is pulling all its physical gold holdings from depositories in London, transferring them to a high-security depository newly built at the city's airport, in a move that won praise from local traders Thursday.

The facility, industry professionals said, would support Hong Kong's emergence as a Swiss-style trading hub for bullion and would lessen London's status as a key settlement-and-storage center.

"Having a central government-sponsored vault would create a situation where you could conceivably look at Hong Kong as being a hub, where metal could be traded for the region," said Sunil Kashyap, managing director at Scotia Capital in Hong Kong, adding that the facility was the first with official government backing in the region...

CFTC to Begin Releasing New Commitments of Traders Reports on US Futures Markets

A step in the right direction for sure.

A much needed enhancement would be to report the five largest position holders in key markets, on the long and short side over a certain size limit on a weekly basis.

Release: 5710-09
For Release: September 2, 2009

CFTC Implements New Transparency Efforts to Promote Market Integrity

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that it will begin implementing new transparency efforts outlined in a July 7, 2009, statement by CFTC Chairman Gary Gensler. Starting Friday, September 4, 2009, the CFTC will begin disaggregating the data in its weekly Commitments of Traders (COT) reports and begin releasing, on a quarterly basis, data collected from an ongoing special call on swap dealers and index traders in the futures markets.

“A core mission of the CFTC is to promote market transparency,” CFTC Chairman Gary Gensler said. “Last September, the CFTC recommended disaggregating our weekly Commitments of Traders reports. In July, I announced that we would also periodically release data on index investors’ participation in the commodity futures markets. I am pleased that as of Friday, September 4, we will be able to take these steps toward increased transparency. For the first time, we will break out managed money and swaps in our COT reports and release information on index investment to give the public a better of view of trading activity in the futures markets.”

Commitments of Traders (COT) Reports

For decades, the CFTC has provided the futures industry with COT reports consisting of aggregated large-trader position data to shed light on the changing composition of the markets. The reports are based on a request by Congress for an annual report, upon passage of original enabling legislation in the 1920’s, and have been intensified over time into weekly reports in several formats and a weekly Commodity Index Supplement for 12 agricultural markets, begun in January 2007.

Beginning Friday, September 4, 2009 (for data as of September 1, the CFTC will publish additional COT data for 22 contract markets, including major agriculture, energy and metals markets. The COT reports currently break traders into two broad categories: commercial and noncommercial. The new reports will improve upon the existing reports by breaking the data into four categories of traders: Producer/Merchant/Processor/User; Swap Dealers; Managed Money; and Other Reportables.

The CFTC intends to produce the same disaggregated data on all of the remaining physical commodity markets for which we currently publish COT data. The agency will continue to also release the traditional COT reports for a transition period until at least the end of 2009. This will allow the public to become familiar with the new reports as well as comment to the CFTC as to any further possible enhancements (Comments should be submitted via email to secretary@cftc.gov by October 1, 2009). The CFTC also plans to soon release three years of historical data for the new report.

The CFTC also is working to create a new COT for all of the financial markets in a form that will improve the transparency of those markets. The categories of this new financial COT may be different from those being applied to the physical markets, described above.

The CFTC is concurrently working on improvements to the agency’s Form 40 and other methodologies to improve the accuracy of trader classifications.

See Disaggregated COT Explanatory Notes under Related Documents for additional information.

Index Investment Data

In addition to disaggregating the CFTC’s COT reports, the agency will begin periodically releasing data on index investment in the commodity futures markets. In September, 2008, the CFTC published a Report on Swap Dealers and Index Traders that was based on data received from our special call authority. The CFTC continued this special call and enhanced the information disseminated in the September report. Starting Friday, September 4, the agency will begin releasing the data on a quarterly basis with a goal of eventually releasing this data monthly.

The new data will include both gross long and gross short positions and will update data in the previously released report to include some additional data.

Martin Hennecke: Protecting Your Wealth in Volatile Markets

"Hennecke stressed that investors should go for physical forms of gold and other
precious metals rather than "paper gold investment scheme where there isn't full
backing, where the metal might be leased out or used for derivatives. That's
crucial because there is 80 times more paper gold in the market than actual
physical metal in existence in the planet."

For the most part alternative currency trades remain 'highly specialized' investments, not often seen in the 401k, IRA, or the average brokerage account.

If gold and silver go mainstream, which they often will do in times of crisis of confidence, the rally may be rather impressive on short covering alone. Expect the exchanges to invoke special rules to allow for settlement of delivery obligation in cash or kind rather than bullion, and at artificially low, albeit significantly higher, prices.

But this may not help those who are holding gold in 'custodial accounts' where the same gold has been lent out to the market and sold, or is loosely mingled with multiples of uncertain ownership.

Can't happen? Who would have thought that one of the largest retail commodity brokerages, Refco, could roll over? Counter party risk is always an issue when you are 'off-exchange.'

“The desire of gold is not for gold. It is for the means of freedom."
Ralph Waldo Emerson

Go for Gold and Silver: Strategist
By CNBC
Wednesday, 2 Sep 2009 2:44 AM ET

China's key stock index recovered its poise on Tuesday, rising nearly 0.5 percent after diving 6.7 percent the day amid liquidity concerns and worries that lending growth may slow in the country. In August alone, the Shanghai Composite lost nearly 22 percent, snapping a seven-month winning streak.

If those stock gyrations are hard to stomach, there are other investment options to help ride out the wild swings in China, according to Martin Hennecke, associate director at Tyche.

For one, Hennecke liked convertible bonds in China, saying he is bullish on the Chinese economy given its fundamental strength, compared to Europe and the U.S. (No thank you for now, its a bubble and a bit less than free market environment, even given its bawdy good time with capitalism over the past ten years. - Jesse)

"Valuation is not as cheap anymore compared to the beginning of the year. Hong Kong-listed China companies are slightly cheaper than (those in) Shanghai," Hennecke said on CNBC Asia's "Protect Your Wealth". " One who plays more cautiously -- convertible bonds in China are an option."

Gold and silver ranked among Hennecke's top recommendations, as China, the world's largest gold buyer this year, is likely to buy more of the yellow metal going forward.

"Whether we see a further crisis or a recovery globally, with inflation coming back up again...gold should do quite well and it hasn't risen much this year yet," said Hennecke.

Hennecke stressed that investors should go for physical forms of gold and other precious metals rather than "paper gold investment scheme where there isn't full backing, where the metal might be leased out or used for derivatives. That's crucial because there is 80 times more paper gold in the market than actual physical metal in existence in the planet."

Hennecke also preferred exposure to direct agricultural commodities, as opposed to investing in commodities through equities, where markets have already rallied sharply.

"Agricultural commodity prices are similar to precious metals. (Prices) across board are mostly dropping, apart from sugar and a few items. So direct commodities are quite undervalued and quite cheap now," he explained. "Agricultural prices are likely to rise quite substantially."

Hennecke expected the investment environment to be volatile, as the U.S. will be saddled with a massive debt load over the next ten years.

"It's tricky to see where stock markets are heading, it depends on how fast inflation feeds through as a result of the debt problems." (Precisely correct, except for those who prefer to see what they have already decided *should* happen. They are often wrong, but rarely uncertain. - Jesse)

Russian Professor Panarin Sees US Following the Russian Collapse Model

Forecasts based on social outcomes are an 'iffy' thing because of the enormous amount of exogenous variables.

This particular forecast made some time ago is important, not because this professor may be more right or wrong than any other 'soft forecaster,' but because a signficant portion of America's major creditors, those outside the US, hear this and find it to be credible.

Professor Igor Panarin, whose book The Crash of America is just out, now claims that by November the book will be yesterdays news because the events described in it will have alrady come to pass.

We are not so gloomy or certain in our own outlook, and tend to discount the statements made by authors on book tours. But we do find ourselves drawn to the example of the financial decline of the Soviet Union as more probable for the US than other possible outcomes, such as the lingering malaise of Japan. It would be ironic and instructive if both Cold War behemoths eventually foundered after their many years of epic effort and wasted spending on their military complexes and regional wars.

It has never been more apparent that Obama must show leadership, or like his predecessor Mr. Bush, must find a galvanizing event to bring a badly needed focus to his presidency. One can see his Administration reaching for that one issue to distract from the awful financial problems: health care reform, swine flu preparations, whatever might bring some focus on action to a majority party in disarray with a rookie at the helm.

They had their opportunity with the financial crisis, but were hopelessly put off track by hidden scandal, conflicts of interest, a corrupt campaign contributions process, and of course, too many chiefs of inadequate stature who tended to pull down and smother the seasoned leaders able to have a vision and implement it such as Paul Volcker.

Robert Reich presented a nice apologia for the Democrats on Health Care Reform the other day, and it was credible. He is one of the few members of the Clinton Administration for whom we have enduring respect for his intelligence and integrity. Why he has no position in the current Administration is puzzling indeed.

The problem is that such internal diffusion absolutely cries out for a leader like a Franklin Roosevelt to bring some energy and action to the diversity of ideas.

A scary thought perhaps, given the weighting of alumni of the Clintons and Wall Street in this Administration, absolutely marked by a lack of 'outsiders.'

Obama is approaching his administration like a community organizer, trying to build consensus and look for 'local' leaders to take up the challenge when he leaves. But this is not how a leader functions in moments of crisis.

"A leader is one who knows the way, goes the way, and shows the way."
John C. Maxwell

Perhaps when the autumn television shows begin their debuts, the chief American idol may find his task a little less onerous as distraction and forgetfulness sets in once again at the United States of Amnesia. Wall Street is counting on it, and as only Benmosche has dared to articulate, yearns to tell the Congress, the regulators, and the public to 'shove it.' After all, its a well-established principle on the Street that you get to 'eat what you kill,' and the would be oligarchs are hungry.

Rumour du Jour - a Large US Bank Is In Trouble

As they say on the financial infomercial channels, "US equities appear to be out of favor today."

There are rumours swirling the trading desks that a large US bank is in trouble, and will need some help getting itself re-organized.

The name Wells Fargo has been mentioned, and there is an associated six percent drop in the stock, with a groundswell of put option activity. It does seem like a 'setup' to us. There are also rumours that Cerberus is in trouble (and there is plenty of smoke on that one.)

There is a contrary view that this is a 'setup' to suck in the shorts and help to trigger a massive rally when the Jobs numbers are reported on Friday.

There is a flight to safety into the dollar and treasuries, but interestingly enough also gold and silver, as 'investors' exit US stocks.

So far we are holding a key support level around 995 on the SP futures, and we tend to discount most rumours that make it to bubblevision rather heavily. If there is any real news it should come out in the evening.

Let's see what happens. We're hedged to the short side which is where we have been coming into the day, anticipating a pullback to key support. We're there now.

There was 'good news' today, and the market ignored it and went sharply lower. That may be significant but it is too soon to tell for sure. A breakdown in equities from here would be more significant to our minds.

In sum, this is a highly manipulated market, full of speculation and hot money. The Obama Administration is failing badly to reform the US financial system, and so here we are, trading on hot money and rumours.

Hedge Funds Betting on a Deflationary Market Collapse

The observations herein regarding the nature of this stock market rally are quite in parallel with our own.

Buying the dollar to play the debt deflation trade may also be a good one in the short run, especially if leveraged foreign punters have to quickly raise cash to cover bad bets made in the US markets.

However we would have to add that this scenario assumes no black swans with regards to the heavy overhang of US dollars being held by overseas central banks.

If we were in such a position, we would be selling the rallies, given the huge amount dollars on the books.

Bloomberg
Goldman Sachs Wrong on Economic Recovery, Macro Hedge Funds Say
By Cristina Alesci

Sept. 1 (Bloomberg) -- Paul Tudor Jones, the billionaire hedge-fund manager who outperformed peers last year, is wagering that Goldman Sachs Group Inc. and Morgan Stanley got it wrong in declaring the start of an economic recovery.

Jones’s Tudor Investment Corp., Clarium Capital Management LLC and Horseman Capital Management Ltd. are taking a bearish stand as U.S. stock and bond prices rise, saying that record government spending may be forestalling another slowdown and market selloff. The firms oversee a combined $15 billion in so- called macro funds, which seek to profit from economic trends by trading stocks, bonds, currencies and commodities.

“If we have a recovery at all, it isn’t sustainable,” Kevin Harrington, managing director at Clarium, said in an interview at the firm’s New York offices. “This is more likely a ski-jump recession, with short-term stimulus creating a bump that will ultimately lead to a more precipitous decline later.”

Equity and credit markets have rallied on hopes that government intervention is pulling the U.S. out of the deepest economic slump since the Great Depression. The Standard & Poor’s 500 Index jumped 51 percent from its 12-year low in March through yesterday.

The economy will expand at an annualized rate of 2 percent or more in four straight quarters through June 2010, the first such streak in more than four years, according to the median estimate of at least 53 forecasters in a Bloomberg survey.

Tudor, the Greenwich, Connecticut-based firm started by Jones in the early 1980s, told clients in an Aug. 3 letter that the stock market’s climb was a “bear-market rally.” Weak growth in household income was among the reasons to be dubious about the rebound’s chances of survival, Tudor said.... (aka the growth in the median wage that we have been harping about - Jesse)


A focus on misleading indicators is driving markets, macro managers say. (Are there any other kind coming out of Washigton or Wall Street these days? - Jesse)

Clarium watches the unemployment rate that accounts for discouraged job applicants and those working part-time because they can’t find full-time positions, Harrington said. July joblessness with those adjustments was 16 percent, according to the Department of Labor, rather than the more widely reported 9.4 percent.

The housing data isn’t as rosy as some see it, Harrington said. As existing U.S. home sales rose 7.2 percent in July from the previous month, distressed deals including foreclosures accounted for 31 percent of transactions, according to the National Association of Realtors, a Chicago-based trade group.

A report by the Mortgage Bankers Association, based in Washington, showed the share of home loans with one or more payments overdue rose to a seasonally adjusted 9.24 percent in the second quarter, an all-time high.

Clarium, which oversees about $2 billion, is positioned for an equity bear market through investments in the U.S. dollar, Harrington said. Falling stock prices will strengthen the currency by forcing leveraged investors to sell equities to pay down the dollar-denominated debt they used to finance those trades, he said.... (That's one way to play it, conventionally, if the swans stay white - Jesse)

The Financial Accounting Standards Board voted in April to relax fair-value accounting rules. The change to mark-to-market accounting allowed companies to use “significant” judgment in gauging prices of some investments on their books, including mortgage-backed securities that plunged with the housing market.

Banks are reporting better earnings because they haven’t been forced to account for their losses yet, Clarium’s Harrington said.

“We haven’t fixed the problem,” he said. “We’ve just slowed down the official recognition of it...”

“Despite every effort by government in North America and Europe to avoid deflation,” Horseman wrote, “the current numbers suggest they are losing the battle.”

Chinese State-Owned Companies Object to Face-Rippings, Wall Street Indignant

After one too many face-rippings by the merry Pranksters of Wall Street, China's state-owned companies have run to their government to complain about the fraudulent nature of their derivatives contracts.

The hearty capitalists of Wall Street wouldn't run to their government and whine and complain if the market went against them.

Except of course if they needed several trillion dollars because they lost all their money gambling. Then they would just threaten to hold their breath and wreck the economy until the Great Reformer gave them all the change the country could spare, and then some.

If the US will not put its house in order, the rest of the world will increasingly start to rein in the the US financial institutions.

Reuters
Beijing's derivative default stance rattles banks
Mon Aug 31, 2009 7:42am EDT

For banks that are hoping to sell more derivatives hedges in China, the world's fastest-expanding major economy and top commodities consumer, the danger goes beyond the immediate risk to existing contracts to the longer-term precedent that suggests Chinese companies can simply renege on deals when they like.

The report follows an order from SASAC in July that required all central government-controlled state companies engaged in trading derivatives to make quarterly reports about their investments, including details of holdings and performance.

But the reported letter opened several important questions that could not immediately be answered.

"If we were among the banks receiving that letter, we would be very angry. But now the key is to find out more details on the letter: In whose name the letter was issued, the government or the corporate's? And under what was the reason for defaulting?" said a Singapore-based marketing executive with a foreign bank.

The source, whose bank did not receive a letter, said that Air China, China Eastern and shipping giant COSCO -- among the Chinese companies that have reported huge derivatives losses since last year -- had issued almost identical notices to banks.

"If it's in the name of the government, the impact will be very negative," said the source, who declined to be named.

Beijing-based derivatives lawyers said the so-called "legal letter" has no legal standing -- SASAC as a shareholder has no business relationship with international banks.

"It's like the father suddenly told the creditors of his debt-ridden son that his son won't pay any of his debt," said a lawyer from the derivatives risks committee of the Beijing Lawyers Association. (or perhaps its more like a son who has been cheated by unscrupulous businessmen going to his father who is a Mafia don with big guns, instead of complaining to the Better Business Bureau - Jesse)

It's also unclear why Chinese state firms, which have complained that their foreign banks sometimes did not disclose full information of potential risks when selling them complicated products, did not seek redress through the courts. (or binding arbitration lol. - Jesse

"If that is the case, these firms should seek through legal measures to safeguard their rights, instead of turning to the authorities for political interference," said a different lawyer. (LOL - Jesse)

SASAC took over the job of overseeing SOEs' derivatives trading from the securities regulator in February after several Chinese firms reported huge losses from derivatives....

Five Wall Street Banks Seek to Protect Lucrative OTC Derivatives Market

Gottes Mühlen mahlen langsam, mahlen aber trefflich klein
Ob aus Langmut er sich säumet, bringt mit Schärf' er alles ein*.
Friedrich von Logau

This story about the Wall Street lobby was interesting, particularly since this morning Bill Dudley, friend of Wall Street, Goldman alumnus, and President of the NY Fed, called for the continuing purchase of over a trillion dollars in bad mortgage debt from these banks at above market prices here.

And here the Natinoal Association of Business Economists NABE (the Finanz Freikorps) has recommended that there be no new stimulus packages aimed at the public and consumers, who have had enough. In fact, the government should begin to cut spending on public programs.

But not a word about the subsidy to these money addicts, the banks, who use the opaque derivatives markets to widen the spreads on products, to hoodwink the naive and less sophisticated individuals and small towns.

And so Wall Street once again gathers its forces to persuade (provide many millions in donations and soft bribes) to Congress and the Administration.

Do you get the picture yet?

Bloomberg
Wall Street Stealth Lobby Defends $35 Billion Derivatives Haul
By Christine Harper, Matthew Leising and Shannon Harrington

Aug. 31 (Bloomberg) -- Wall Street is suiting up for a battle to protect one of its richest fiefdoms, the $592 trillion over-the-counter derivatives market that is facing the biggest overhaul since its creation 30 years ago.

Five U.S. commercial banks, including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Bank of America Corp., are on track to earn more than $35 billion this year trading unregulated derivatives contracts. At stake is how much of that business they and other dealers will be able to keep.

“Business models of the larger dealers have such a paucity of opportunities for profit that they have to defend the last great frontier for double-digit, even triple-digit returns,” said Christopher Whalen, managing director of Torrance, California-based Institutional Risk Analytics, which analyzes banks for investors.

The Washington fight, conducted mostly behind closed doors, has been overshadowed by the noisy debate over health care. That’s fine with investment bankers, who for years quietly wielded their financial and lobbying clout on Capitol Hill to kill efforts to regulate derivatives. This time could be different. The reason: widespread public and Congressional anger over the role derivatives such as credit-default swaps played in the worst financial crisis since the Great Depression...

The five biggest derivatives dealers in the U.S. -- JPMorgan, Goldman Sachs, Bank of America, Morgan Stanley and Citigroup Inc. -- held 95 percent of the $291 trillion in notional derivatives value of the country’s 25 largest bank holding companies at the end of the first quarter, according to a report by the Office of the Comptroller of the Currency. More than 90 percent of those derivatives were traded over the counter, the OCC data show...

Obama’s plan deals another blow to banks. It aims to discourage them and their customers from using non-standard, or customized, derivatives that can’t be processed by a clearinghouse or traded on an exchange by requiring that parties to such trades hold more capital to protect themselves against losses. The plan would also require they put up more money, known as margin, to insure they make good on the trades. Both changes would impose added costs on banks and some customers...

The Obama proposals don’t go as far as some people have urged. Hedge fund billionaire George Soros and Berkshire Hathaway Inc. Vice Chairman Charles Munger are among investors who have called for limits on the use of credit-default swaps. Soros wrote in a March 24 Wall Street Journal column that regulators should ban so-called naked swaps, in which the buyer isn’t protecting an existing investment.

Two days later Treasury Secretary Timothy Geithner dismissed such an idea before the House Financial Services Committee, telling members that “my own sense is that banning naked swaps is not necessary and wouldn’t help fundamentally.”

Janet Tavakoli, founder and president of Tavakoli Structured Finance Inc. in Chicago, said in an interview that derivatives have allowed banks to camouflage risk.

“There has been massive widespread abuse of over-the- counter derivatives, which have contributed to transactions that people knew or should have known were overrated and overpriced at the time they came to market,” said Tavakoli, who traded, structured and sold derivatives over more than two decades in the financial industry.

Wall Street is accustomed to getting its way with derivatives legislation. The last major congressional action, in 2000, was designed to exempt over-the-counter derivatives from government oversight...

For Wall Street, the longer it takes to get legislation passed the better. As stock market values and the economy improve, anger at banks is likely to subside...

* "Though the mills of God grind slowly, they grind exceeding fine;
With patience He grinds slowly, with exactness all He finds."

Change Comes to Japan

Most Westerners have not understood the tight grip that the alliance of business and politics has exercised in Japan.

This change in political control in Japan, for the first time in 54 years, has potentially significant implications for the US dollar as a reserve currency.

Change will be slow and deliberate. The new ruling party will not wish to upset the balance of things. But change will occur, and what has been will not, and will no longer be.

Associated Press
Japanese election upends long-ruling party
By Eric Talmadge
Associated Press Writer
August 30, 2009

TOKYO – Japan's ruling party conceded a crushing defeat Sunday after 54 years of nearly unbroken rule as voters were poised to hand the opposition a landslide victory in nationwide elections, driven by economic anxiety and a powerful desire for change.

The left-of-center Democratic Party of Japan was set to win 300 or more of the 480 seats in the lower house of parliament, ousting the Liberal Democrats, who have governed Japan for all but 11 months since 1955, according to exit polls by all major Japanese TV networks.

"These results are very severe," Prime Minister Taro Aso said in a news conference at party headquarters, conceding his party was headed for a big loss. "There has been a deep dissatisfaction with our party."

Aso said he would have to accept responsibility for the results, suggesting that he would resign as party president. Other LDP leaders also said they would step down, though official results were not to be released until early Monday morning.

The loss by the Liberal Democrats — traditionally a pro-business, conservative party — would open the way for the Democratic Party, headed by Yukio Hatoyama, to replace Aso and establish a new Cabinet, possibly within the next few weeks.

The vote was seen as a barometer of frustrations over Japan's worst economic slump since World War II and a loss of confidence in the ruling Liberal Democrats' ability to tackle tough problems such as the rising national debt and rapidly aging population.

The Democrats have embraced a more populist platform, promising handouts for families with children and farmers, a higher minimum wage, and to rebuild the economy.

"The nation is very angry with the ruling party, and we are grateful for their deep support," Hatoyama said after the polls closed. "We will not be arrogant and we will listen to the people."

The Democrats have also said they will seek a more independent relationship with Washington, while forging closer ties with Japan's Asian neighbors, including China. But Hatoyama, who holds a doctorate in engineering from Stanford University, insists he will not seek dramatic change in Japan's foreign policy, saying the U.S.-Japan alliance would "continue to be the cornerstone of Japanese diplomatic policy."

National broadcaster NHK, using projections based on exit polls of roughly 400,000 voters, said the Democratic Party was set to win 300 seats and the Liberal Democrats only about 100 — a third of its strength before the vote.

A Run On the Funds: Majority of Cerberus Investors Want Out -- Now

When investors or depositors ask for the immediate withdrawal of 71% of their money there is only one thing to call it: a run on the bank.

The selling in the markets is still quiet, and overshadowed by some of the visible bubbles in financial assets and rosy headlines. The bank bailouts are working, but only to produce a false Spring to lure in the last of the greater fools.

The economy is not improving fundamentally, the recovery is not sustainable, and the wealthy insiders are increasingly trying to liquidate investment positions to raise cash and diversify their holdings into cash and hard assets.

Risk is once again being spread from the financial sector to the public, which is what Fed Chairman Greenspan had said was one of the objectives of the Fed in their positions on the regulation of complex financial products. We were assured that the markets were sound, no additional regulation was required, the pensions were adequately funded. And finally when disaster struck and the facade fell away, that a generation's ransom was required by the banks, in order to heal themselves and avert disaster.

And then they took the money for themselves.

"He's mad, that trusts in the tameness of a wolf, a horse's health, a boy's love, or a whore's oath." The Fool, King Lear

And so they have made fools of us all.


Reuters
Cerberus clients overwhelmingly want out
Fri Aug 28, 2009 4:21pm

BOSTON (Reuters) - Cerberus Capital Management has been swamped with redemption requests with the Wall Street Journal reporting that investors are asking to pull out $5.5 billion or 71 percent of assets from its hedge funds.

Cerberus last month tried to entice investors into staying with the firm, but found that its clients overwhelmingly wanted to leave, the newspaper reported.

"We have been surprised by this response," Cerberus chief Stephen Feinberg and co-founder William Richter wrote in a letter delivered to clients late on Thursday, according to the newspaper.

A spokesman for the firm was not immediately available for comment.

The bulk of investors elected to put their money into a fund that will liquidate hard-to-sell assets over time.

The news comes as several prominent hedge fund managers have closed their funds and as investors are less willing to leave their money locked up in potentially risky hedge funds.

Last year, when the average hedge fund lost 19 percent, Partners lost 24.5 percent on investments.

US Equity Markets Look Dangerously Wobbly As Insiders Sell In Record Numbers

"Investors Intelligence's latest survey of advisory services showed an impressive 51% bullish and a meager 19% bearish...the spread hasn't been that wide since November 2007." Alan Abelson, Barrons, Aug. 29, 2009

Next week we move into September, the riskiest month of the year for financial markets, with the federals escalating preparations for a flu pandemic, while Congress considers legislation providing a 'kill switch' on the Internet for President Obama to use in the event of 'an emergency.' There are widespread rumours of a bank holiday lasting one week after a market meltdown begins in the US, during which the banks would be restructured.

Risky times indeed, and those in the best position to know what is happening behind the scenes are hitting the exits in record numbers right now, running to cash, and hard assets and currencies.

As TrimTabs reports in the attached news release, insider selling is reaching record levels, even as more speculators borrow to go long stocks. There are some obvious bubbles already formed in certain insolvent financial stocks like AIG, with disinformation rampant in the Wall Street demimonde.

The Obama Economics and Regulatory Team, in conjunction with the Federal Reserve, have accomplished no serious reform of the fiancial system. They have enabled the type of market inefficiency, soft fraud and price manipulation that is undermining global confidence in the integrity of US markets and financial products. And they have advanced a proposal to consolidate a huge amount of regulatory power under the Federal Reserve, a private banking agency that was at the root of our unfolding financial crisis.

The time has passed when Obama could have pointed to the past mistakes of his predecessors as the fault for our problems. Thanks to Tim Geithner, Barney Frank, and Larry Summers he now owns the financial crisis, and the coverups, policy errors, scandals, conflicts of interest and bailouts that have occurred since he has taken office. His reappointment of Ben Bernanke as Federal Reserve chairman most surely tied a bow on his ownership package for the crisis, which is in danger of becoming his 'financial New Orleans.'

Wall Street insiders and their enablers pig out on public money while the nation suffers. This is not change, this is business as usual.

TrimTabs
Insider Trading and Investor Sentiment Signaling U.S. Stock Market Top

Insider Selling in August Soars to 30.6 Times Insider Buying, Highest Level Since TrimTabs Began Tracking in 2004. NYSE Short Interest Plunges 10.3%, While Margin Debt Spikes 5.9%

SAUSALITO, Calif., Aug. 28 /PRNewswire/ -- TrimTabs Investment Research reported that selling by corporate insiders in August has surged to $6.1 billion, the highest amount since May 2008. The ratio of insider selling to insider buying hit 30.6, the highest level since TrimTabs began tracking the data in 2004.

"The best-informed market participants are sending a clear signal that the party on Wall Street is going to end soon," said Charles Biderman, CEO of TrimTabs.

TrimTabs' data on insider transactions is based on daily filings of Form 4, which corporate officers, directors, and major holders are required to file with the Securities and Exchange Commission.

In a research note, TrimTabs explained that insider activity is not the only sign the rally is about to end. The TrimTabs Demand Index, which tracks 18 fund flow and sentiment indicators, has turned very bearish for the first time since March.

For example, short interest on NYSE stocks plummeted by 10.3% in the second half of July and margin debt on all US listed stocks spiked 5.9% in July, while 51.6% of advisors surveyed by Investors Intelligence are bullish, the highest level since December 2007.

"When corporate insiders are bailing, the shorts are covering and investors are borrowing to buy, it generally pays to be a seller rather than a buyer of stock," said Biderman.

TrimTabs also reports that the actions of U.S. public companies have been bearish. In the past four months, companies have been net sellers of a record $105.2 billion in shares.

"Investors who think the U.S. economy is recovering are going to get a big shock this fall," said Biderman. "Companies and corporate insiders are signaling that the economy is in much worse shape than conventional wisdom believes."

TrimTabs Investment Research is the only independent research service that publishes detailed daily coverage of U.S. stock market liquidity--including mutual fund flows and exchange-traded fund flows--as well as weekly withheld income and employment tax collections. Founded by Charles Biderman, TrimTabs has provided institutional investors with trading strategies since 1990. For more information, please visit www.TrimTabs.com.

Where Are the World's Safest Banks?

The primary functions of the Federal Reserve Bank as a regulator is to maintain the integrity of the US banking system. It is also the responsibility of the Federal Open Market Committee to oversee the management of the United States Money Supply.

In this annual list by Global Finance, not one US bank is in the top 30 of the Safest Fifty Banks in the world.

It was the poor regulation of the banking system, and the reckless management of the money supply, that has brought the US, and by extension of the dollar contagion, a greater part of the world, to the financial crisis which threatens the global economy today.

Would this imply that we should give the Fed the latitude to regulate more elements of the US financial sector, elements with which it has little or no experience and certainly no successful track record?

The US must reform its financial system and restore a balance to its economy. The rest of the world must take strong measures to guard against a potentially disastrous currency crisis should the US fail to successfully reform.


Global Finance
The World's 50 Safest Banks

New York, August 25, 2009 — With bank stability still high on corporate and investor agendas,Global Finance publishes its 18th annual list of the world’s safest banks. After two tumultuous years that saw many of the world’s most respected banks drop out of the top-50 safest banks list, the dust appears to be settling. Those banks that kept an iron grip on their risk exposure before the financial crisis blew up have consistently topped the table and maintain their standing among the top echelon in this year’s ranking.

The Top Banks (until you find a US bank) Are:

1. KFW (Germany)
2. Caisse des Depots et Consignations (CDC) (France)
3. Bank Nederlands Gemeenten (BNG) (Netherlands)
4. Landwirtschaftliche Rentenbank (Germany
5. Zuercher Kantonalbank (Switzerland)
6. Rabobank Group (Netherlands)
7. Landeskreditbank Baden-Wuerttemberg-Foerderbank (Germany)
8. NRW. Bank (Germany)
9. BNP Paribas (France)
10. Royal Bank of Canada (Canada)
11. National Australia Bank (Australia)
12. Commonwealth Bank of Australia (Australia)
13. Banco Santander (Spain)
14. Toronto-Dominion Bank (Canada)
15. Australia & New Zealand Banking Group (Australia)
16. Westpac Banking Corporation (Australia)
17. ASB Bank Limited (New Zealand)
18. HSBC Holdings plc (United Kingdom)
19. Credit Agricole S.A. (France)
20. Banco Bilbao Vizcaya Argentaria (BBVA) (Spain)
21. Nordea Bank AB (publ) (Sweden)
22. Scotiabank (Canada)
23. Svenska Handelsbanken (Sweden)
24. DBS Bank (Singapore)
25. Banco Espanol de Credito S.A. (Banesto) (Spain)
26. Caisse centrale Desjardins (Canada)
27. Pohjola Bank (Finland)
28. Deutsche Bank AG (Germany)
29. Intesa Sanpaolo (Italy)
30. Caja de Ahorros y Pensiones de Barcelona (la Caixa) (Spain)
31. Bank of Montreal (Canada)
32. The Bank of New York Mellon Corporation (United States)

You may read the rest of the list, and the method by which safe banks were selected, here.

When at First You Don't Succeed ---- Make It Up

This morning the spokesmodels for Wall Street on Bloomberg Television were touting the 'better than expected' unemployment claims figures.

They came in at 'only 570,000.'

Wait a minute. That does not seem right. Have another cup of coffee and look up the figures.

The consensus of expectations was 565,000. The actual was 570,000. That's better?

Betty Liu went on to explain, 'they are better than expected because they fell from the week before.' The prior week's figures were revised from 576,000 to 580,000.

In her defense, she just says what they put in front of her. I wonder if the same can be said for Obama.

We're not in Kansas anymore.

Fed Official: Real US Unemployment Rate is 16%

Dennis Lockhart may be expressing his own views, but the figure of 16% he quotes is nothing more than the Bureau of Labor Statistics "U-6" measure of unemployment.

U-6 Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons,economic reasons, as a percent of the civilian labor force plus all marginally attached workers.

Here is a chart showing the 'official' U3 measure of unemployment and the U6 alternate measure. The chart also includes the unofficial unemployment rate projection done by John Williams of Shadowstats.com.



It appears that Dennis wanted to take this occasion to say that things were SO bad that there is little use in applying any sort of stimulus to the public, although there is plenty of stimulus required for the banks.

Breitbart
Real US unemployment rate at 16 pct: Fed official
Aug 26 02:25 PM US/Eastern

The real US unemployment rate is 16 percent if persons who have dropped out of the labor pool and those working less than they would like are counted, a Federal Reserve official said Wednesday.

"If one considers the people who would like a job but have stopped looking -- so-called discouraged workers -- and those who are working fewer hours than they want, the unemployment rate would move from the official 9.4 percent to 16 percent, said Atlanta Fed chief Dennis Lockhart.

He underscored that he was expressing his own views, which did "do not necessarily reflect those of my colleagues on the Federal Open Market Committee," the policy-setting body of the central bank.

Lockhart pointed out in a speech to a chamber of commerce in Chattanooga, Tennessee that those two categories of people are not taken into account in the Labor Department's monthly report on the unemployment rate. The official July jobless rate was 9.4 percent.

Lockhart, who heads the Atlanta, Georgia, division of the Fed, is the first central bank official to acknowledge the depth of unemployment amid the worst US recession since the Great Depression.

Lockhart said the US economy was improving but "still fragile," and the beginning stages of a sluggish recovery were underway.

"My forecast for a slow recovery implies a protracted period of high unemployment," he said, adding that it would be difficult to stimulate jobs through additional public spending. (How about Bank bailouts and bonsues? Plenty of room to add more, right? - Jesse)

"Further fiscal stimulus has been mentioned, but the full effects of the first stimulus package are not yet clear, and the concern over adding to the federal deficit and the resulting national debt is warranted," he said.

President Barack Obama's administration has resisted calls for more public spending, arguing that the 787-billion-dollar stimulus passed in February needs time to work its way through the economy.

Lockhart noted that construction and manufacturing had been particularly hard hit in the recession that began in December 2007 and predicted some jobs were gone for good.

Prior to the recession, he said, construction and manufacturing combined accounted for slightly more than 15 percent of employment. But during the recession, their job losses made up more than 40 percent of all US job losses.

"In my view, it is unlikely that we will see a return of jobs lost in certain sectors, such as manufacturing," he said. (Yep that's it. Manufacturing is dead, forever. Never to return. - Jesse)

"In a similar vein, the recession has been so deep in construction that a reallocation of workers is likely to happen -- even if not permanent."

Payroll employment has fallen by 6.7 million since the recession began.

'New Deal for Wall Street' Programs Subsidizing Subprime Lenders

Welfare for Wall Street is just another phase of the 'trickle down' approach that seems to be so popular with the financerati.

If "Cash for Clunkers" had involved subsidized loans for cars administered by the banks it would have been touted as the greatest thing since sliced bread by the coporate media and mainstream infomercials, instead of being slammed on a daily basis as a troubled, pointless giveaway program.

So now we have a new "Cash for Criminals" program from the finance friendly folks at the tarnished Treasury and finagling Fed as outlined in the story below, this time for those overpriced housing loans sold to underpaid, over-indebted consumers.

The housing market needs to clear, the losses need to be realized, and the debt must be written down or taken into default by the banks.

The banks do not wish to foreclose because this will force them to start marking down the toxic assets they still hold on their books.

The Obama Administration is doing a fairly good imitation of Japan Inc.


Washington Post
Subprime Lenders Getting U.S. Subsidies, Report Says
By Renae Merle
Wednesday, August 26, 2009

Many of the lenders eligible to receive billions of dollars from the government's massive foreclosure prevention program helped fuel the housing crisis by issuing risky subprime loans, according to a report to be issued Wednesday by the Center for Public Integrity.

Under the $75 billion program, called Making Home Affordable, lenders are eligible for taxpayer subsidies to lower the mortgage payments of distressed borrowers. Of the top 25 participants in the program, at least 21 specialized in servicing or originating subprime loans, according to the center, a nonprofit investigative reporting group funded largely by charitable foundations.

Much "of this money is going directly to the same financial institutions that helped create the sub-prime mortgage mess in the first place," Bill Buzenberg, executive director of the center, said in a statement.

For example, J.P. Morgan Chase, Wells Fargo and Countrywide, which has been bought by Bank of America, are eligible to receive billions of dollars under the program, according to the report.

The report comes as the Obama administration is prodding lenders to do more to help borrowers. Less than 10 percent of delinquent borrowers eligible for assistance through Make Home Affordable have received help, according to Treasury Department estimates released this month. The administration is aiming to more than double the number of borrowers helped under the program to 500,000 by Nov. 1.

"Mortgage lenders and servicers have been reluctant to participate in foreclosure prevention programs despite their role in creating the subprime debacle. Intense pressure from Congress and the White House hasn't worked, either," the report said. "The stick has not been effective, so the Obama administration is offering a carrot -- billions of dollars in incentive payments to lenders and loan servicers to encourage them to participate..."

Capital Flight: A Plunge in Foreign Capital Inflows Preceded the Break in US Financial Markets

The peak of foreign capital inflows into the US was clearly seen in the second quarter of 2007, just before the crisis in the US that has rocked its banking system and driven it deeply into recession.

Are the two events connected? Had the US become a Ponzi scheme that began to collapse when new investment began to wane, and the growth of returns could not be maintained?

Watch the dollar and the Treasury and Agency Debt auctions for any further signs of capital flight, which is when those net inflows of foreign capital turn negative. And if for some reason the unlikely happens and it gains momentum, the dollar and bonds and stocks can all go lower in unison, and there is no place to hide except perhaps in some foreign currencies and precious metals.

The sad truth is that US collateralized debt packages and their derivatives have become toxic in the minds of the rest of the world, and there is little being done to change that, except an orderly winding down of the bubble, with the remaining assets being divided largely by insiders, and not price discovery and capital allocation mechanisms centered by the 'invisible hand of the markets.'



Unfortunately the Net Inflow Data is quarterly, and subject to revisions. But we have to note that the spectacularly rally off the bottom in the SP 500, not fully depicted above, is not being matched by a return of foreign capital inflows.

If that inflow does not return, if the median wage of Americans does not increase, if the financial system is not reformed, if the economy is not brought back into balance between the service and manufacturing sectors, exports and imports, then there can be no sustained recovery in the real, productive economy.

The rally in the US markets is based on an extreme series of New Deal for Wall Street programs from the Fed and the Treasury, monetization, and the devaluation of the dollar.

The Man Who Exposed Madoff Cites Government Complicity in Fraud

This is only the tip of the iceberg, but even it may never be seen.

We ask now why the economists and regulators and media said little or nothing while the frauds and bubbles were developing, then.

But what are they saying now, about the new frauds, and injustices, and the blatant manipulation of the markets wherein some traders turn in financial results that are improbable to produce without inside information and breaking the rules?

A few heroes speak out, but most of the intellectual leadership cower in the shadows, asking 'Where is the outrage?' And the media baits the crowd with this or that distraction, and inflames them to think whichever way it pleases.

Here is an audio interview with Harry Markopolos in which he gives his views on the Federal Reserve as a regulator, financial reform, and the 'recovery.' Harry Markopolos Interview with King World News

Let us start here, and now, to demand the change required. Let us begin by auditing the Fed, and refusing to tolerate the granting of more regulatory power to an institution spawned in a deception in 1913, and at the heart of so many of our financial crises ever since. The Creature from Jekyll Island: A Second Look - G. Edward Griffin (2007)

As of yet, nothing has changed. The silence is deafening.


AFP Interviews Harry Markopolos

...In May of 2000, he submitted an 8-page report to the Boston Regional Office of the Securities Exchange Commission (SEC) listing red flags and mathematical proof of a major fraud but got no reply. He re-submitted his evidence to the Boston and other SEC offices in 2001, 2005, 2007 and 2008, to no avail. By this time, Markopolos was realizing that Madoff had been operating with protection from the inside.

In late 2008, when the stock market crumbled and investors rushed in to redeem their investments, Madoff ran out of cash, turned himself in to authorities, and pleaded guilty in federal court last March 12th.

Markopolos said that all the members of his team feared for their lives during the long investigation and he for more reason than any of the others because of his visibility. He was the one who was submitting all the complaints each year, and he knew that any leak from the SEC could make him a marked man.

He explained that the “offshore feeder funds” were only one step removed from organized crime. “If organized crime knew that Madoff was stealing their money, he would have been killed. Therefore, if Madoff had ever found out that we had a team tracking him through Europe and North America and that he risked getting exposed, it was a good bet that he would have had several billion reasons to want us silenced first. To compartmentalize the damage, I was the only one who went to the SEC.”

No one there knew Markopolos had an assisting team in the field. But Markopolos has proof that the SEC was culpable, too, and says publicly that he has tremendous anger at the agency and sadness for the victims. He says that there were SEC lawyers who were “in bed with Madoff ” and helped destroy lives.

“Madoff paid people to look the other way,” says Markopolos and reminds us that there is a federal report scheduled to come out by the end of the year. He emphasizes that unless there is a cover-up, “the SEC will cease to exist...”

Next Head of the European Central Bank a Goldman Sachs Alumnus or Buba's Head Boy?

The German patience with the EU is admirable.

And in the States, the patience with the rule of Wall Street and the hagiographic praise of Chairman Ben is ... remarkable.

One might even be tempted to call him 'maestro,' at least until the next bubble collapses.

Central Banking Publications
Weber Aims High
25 August 2009

So far, the front runner to succeed Jean-Claude Trichet as head of the European Central Bank, when his term ends in 2011, has been Mario Draghi, the shrewd current governor of the Banca d'Italia and Goldman Sachs alumnus (don't all boo at once).

But insiders are keeping a close eye on Axel Weber, president of the Bundesbank. If Draghi were to fall under a bus on the Via Nazionale (easily done, by the way), or if he were to give in to the blandishments of those who are urging him to dive into the treacherous waters of Italian politics, then Weber is positioning himself as the clear fall-back choice.

This would not go down well at the Elysée, where the thought of a German running the ECB makes President Sarkozy see red. Yet why not? Isn't it their turn, at last?

The efforts of French diplomats, allied to their enviable higher education and elite training, have ensured that Frenchmen have sat at the top of many of the great official international institutions for far longer than Germans (or indeed Brits). A Frenchman has occupied the post of IMF managing director for a total of 34 years since the founding of the Fund 65 years ago, while a German has been in the job for only four years. A Frenchman has been president of the European Commission for 14 years, while no German has held the post since Walter Hallstein, who retired in 1967. No German has headed up the EBRD in London, while Frenchmen have run it for 15 years. No German has led the OECD, and so on.

It would be understandable if Germans felt it was time to have their own man at the ECB. After all, it is German public opinion that in the end is critical for the long-term success of the euro. If German taxpayers are called on to bailout backsliding countries unable to discipline their economies (like Italy), they would be much more likely to do so with good grace if their own man or woman was seen to be minding the shop. So anybody committed to the success of the euro should be rooting for a German candidate, n'est-ce pas?

Enter politics. To reach the top job at the ECB, Weber needs to be nominated by the chancellor. Angela Merkel is fully expected to win the general election next month, possibly with a greatly increased personal mandate.

Now, observe a curious fact. For an institution known in the past for lambasting governments' deficit spending, the Bundesbank has been remarkably quiescent recently. Its big guns have fallen silent. Indeed, Weber has praised German economic policy. In a recent interview with Die Zeit online, Weber noted that the GDP recovery in the second quarter owed much to the support measures deployed by the government, the support of the state banking sector and the ECB's monetary easing. Meanwhile, Merkel has roundly criticised other central banks, such as the Federal Reserve and the Bank of England, while supporting the Bundesbank. They are both singing from the same hymn sheet.

Meanwhile, Weber has been quietly appointing his own people to several key positions while some Bundesbank board directors of an independent cast of mind appear to be heading for the exit.

The odds are still on Draghi. He is what the Italians call "furbo" – variously translated as smart, cunning or foxy. The French will be cheering him on. But the Italian fox will be on the outlook for a German greyhound coming up on the inside lane.

Saving the Federal Deposit Insurance Corporation

If they declare those payments to be on profit after bonuses they may find a groundswell of support on Wall Street. There is nothing like sticking it to the regional banks to consolidate the power of the few.

Look for another program from the Fed/Treasury to 'save FDIC' as part of the overall effort to maintain confidence and prevent a certain armageddon.

American Banking News
FDIC’s Deposit Fund May Need 25% of U.S. Banking Profit in 2010
August 23rd, 2009

With the 80th bank failure occurring in just the first eight months of 2009, the U.S. banking industry’s fee burden from the FDIC is continuing to be pressured as the Deposit Insurance Fund shrinks. Richard Bove, an analyst with Rochdale Securities, told Reuters in a report that the FDIC’s Insurance Fund may need to collect an amount that would equate to about 25 percent of U.S. bank industry pretax income in 2010 to stay afloat.

In the report Bove predicted another 150 to 200 additional U.S. banks failures before the current banking crisis ends. The FDIC will likely use special assessments against banks in order to raise the extra funds needed to secure the Deposit Insurance Fund’s integrity. Bove believes special assessments in 2010 could reach $11 billion in addition to the regular fees banks already pay.

The FDIC last levied a special assessment in the second quarter of five basis points on each FDIC-insured bank’s assets. The assessment is scheduled for collection on September 30.

When the FDIC released its final statement detailed the second quarter assessment it projected that the Deposit Insurance Fund would remain low, but positive through 2009 and begin to rise in 2010. However, FDIC Chairman Blair Sheila Blair said in that same statement an additional assessment may be required as early as the fourth quarter of 2009.

The Deposit Insurance Fund ended the first quarter of the year with a balance of roughly $13 billion. Since that time the FDIC has had to digest several large bank failures, such as Colonial BancGroup, which cost the fund about $4 billion.

The Deposit Insurance Fund holds a fraction of the $52 billion it had just a year ago, raising the odds of an upcoming special assessment to near certainty.

As seen recently on americanbankingnews.com, the FDIC is exploring its options for brining in investors to buy-up failed banks, thus easing the burden on the insurance fund. Investment from private equity firms has been the showcased proposal so far. The FDIC is set to vote August 26 on a relaxed set of guidelines that would entice private equity firms to invest in failed banks.

Henry Kaufman: The Road to Financial Reformation

Henry Kaufman is giving a very interesting interview with Kathleen Hays regarding his new book, "The Road to Financial Reformation."

Henry Kaufman Interview Regarding Financial Reform - Bloomberg Television 24 August

Or here on Youtube Henry Kaufman Interview Aug 24

Henry will also be presenting his ideas at a public lecture at the Museum of American Finance in NYC on September 22.

Sept. 22 Kaufman Lecture

Our financial crisis: What happened? How did we get here? What needs to be done?

Dr. Henry Kaufman — an esteemed economist and statesman — is one of the most preeminent financial figures of the day, with a history of success from the 1980s, when his firm, Salomon Brothers, ruled the bond markets.

In The Road to Financial Reformation, Dr. Kaufman, who has spent a lifetime entrenched in the world of finance, provides an insightful account of the history and impact of post-World War II financial markets on the economy-what happened, how we got to where we are today, and what needs to be done. Drawing on his vast breadth of knowledge and experience, Kaufman reveals the mistakes that got us into this debacle, the consequences — as they have not been fully realized — and how to put our derailed economy back on track. This book details Dr. Kaufman’s warnings and concerns expressed repeatedly throughout the last quarter century, and shows that what he predicted came to pass.

With his breadth of knowledge and experience, Kaufman details that this crisis was foreseeable (he saw it coming), and how we created this history-making financial crisis. He also explains the consequences still to come, and presents solutions on how we can recover and reform the markets.