Wall Street Excluded from European Government Bond Sales

The Ugly American is a novel that was published in 1958, and was later made into a movie starring Marlon Brando. It tells the story how America was losing the hearts and minds of the people in Asia after its heroic performance in the Second World War by the predatory business practices and exploitation of US multinationals. The book was a bit of a scandal, coming on the heels of Nixon's visit to South America where he was spat upon by angry mobs.

At the time people talked about the way in which US corporations were alienating the developing world (we called it 'third world' then), and how it would create a generation of political difficulties for the US around the world. This was an initial wake up call to the American public, which was lost and forgotten in the fervor of the Go-Go Sixties. What was good for General Bullmoose was good for the USA. Or so we all thought.

Regrettably, once again US corporations, the Wall Street banks, are busy alienating the world against America's interests through their unethical and shockingly predatory business practices. It will be interesting if Asia and South America pick up this theme of banning the Wall Street banks on ethical considerations from doing certain types of business in their regions.

It would be even more significant if US financial assets were to no longer find a place with foreign investors, based on a perception of their somewhat fraudulent taint from the CDO ratings scandals. Little or no reform has yet occurred. Who will then expect anything to have changed?

The imbalances, flaws and conflicts of interest in the US financial markets are a genuine shame, and may yet cripple the economy once again. And the unwillingness of the reform President to do anything about it is even more shocking still. What is he thinking?

Congressman Alan Grayson (D-Fla) recently said , "There is a growing feeling on the part of Democrats that the president is getting bad advice from people who have sold out to Wall Street."

I think far too many people would agree whole-heartedly with him.


Guardian UK
Europe bars Wall Street banks from government bond sales
By Elena Moya
Monday 8 March 2010 21.36 GMT

European countries are blocking Wall Street banks from lucrative deals to sell government debt worth hundreds of billions of euros in retaliation for their role in the credit crunch.

For the first time in five years, no big US investment bank appears among the top nine sovereign bond bookrunners in Europe, according to Dealogic data compiled for the Guardian. Only Morgan Stanley ranks at number 10.

Goldman Sachs doesn't make the table. Goldman made it to number five last year and in 2006, and number eight in 2007, the data shows. JP Morgan was in the top ten last year and in 2007 and 2006 but doesn't appear this year.

"Governments do not have the confidence that the excessive risk-taking culture of the big Wall Street banks has changed and they still cannot be trusted to put the stability of the financial system before profit," said Arlene McCarthy, vice chair of the European parliament's economic and monetary affairs committee. "It is no surprise therefore that governments are reluctant to do business with banks that have failed to learn the lesson of the crisis. The banks need to acknowledge the mistakes that were made and behave in an ethical way to regain the trust and confidence of governments."

European sovereign bond league tables are now dominated by European banks such as Barclays Capital, Deutsche Bank, and Société Générale, the Dealogic table shows. Their business model is usually seen as more relationship-based, while US investment banks have traditionally been focused on immediate deal-making. (A euphemism for customer face-ripping - Jesse)

Being left out of government bond sales means missing out on one of the top fee-earning opportunities this year, given the relative drought in mergers and acquisitions and stock market flotations. Western European governments need to raise an estimated half a trillion dollars this year to refinance debts and pay for bank bailouts and rising unemployment....

Investment banks insist their business areas are separated by confidentiality walls, but countries have been furious about some of their trades appearing to conflict – either on their own books, or on behalf of clients.

Goldman Sachs said its overall position in the European sovereign bond market had improved this quarter once US dollar denominated deals were included. It said its own data showed it ranked fourth in European sovereign bond sales this year...

"The power of big investment banks was a factor in the banking crisis, and it's up to regulators and customers to stand up to them, and not picking them is one of the ways," Augar said...

The EU is also trying to curb US financial power by creating its own monetary fund – a replica of the Washington-based IMF. The need of a European fund has emerged during the Greek crisis, as European politicians have insisted financial troubles should be resolved at home.

US Equities Showing Signs of an "Exhaustion Top" Amidst Rumours, Hype, and Shenanigans

The US stock market seems to be getting rather tired after what can only be described as a remarkable rally on light volumes and program trading.

The market is trying to rise here, with announcements like the Cisco backbone router for carriers and the AIG unit sales being hyped incessantly on financial media. The hype over the Cisco backbone router today is almost embarrassing. The anchors on Bloomberg keep saying that the router can download entire movies in 4 seconds, which is a lot faster than the 10 minutes it takes today. To anyone who knows anything about how networks are provisioned this is a howler of the first order, to say the least. For the consumer, the network is only as fast as the last mile.

It has also been reported by Adam Johnson on Bloomberg television that J.P. Morgan, a major broker dealer, stopped lending shares in AIG and Citi today "on rumours that the US government might ban short selling in stocks in which it has a financial interest." This squeezed the shorts and helped give an artificial boost to financial stocks over all. The company has since stopped this self-imposed ban on loaning shares and stocks are falling off their highs.

Needless to say, the SEC is unlikely to investigate this, or advise market makers not to start arbitrarily constraining the supply of stock based on market rumours, especially when they might be trading these same stocks for their own proprietary portfolios. They ought not be able to institute ad hoc bans on buying or selling by manipulating the supply.

Perhaps another leg up, after some consolidation, but this market is now very vulnerable to a reversal. The volumes are light on the rallies, and tend to increase quite a bit on the declines. Today the volume was a little better, in a consolidation perhaps, or a simple distribution. .

As we reported last week, the cash levels in the mutual funds are near record lows. Stocks do not typically rally unless there is large scale buying. All well and good, but until selling volumes show up, the market can continue to drift higher, especially with the support of the monetary magicians and the Wall Street wiseguys.



Don't get in front, wait for it. But start getting defensive if you have not done so already.

The Ides of March are on the 15th.

Are Traders Demanding US Credit Default Swaps Payable in Gold?

If another author had said this I might not pay it so much attention. Lately some have been given over to a tabloid approach to overstatement and sensational headlines to attract attention. This is a strong temptation as the blogosphere expands, similar to the development and evolution of newspapers as a popular medium in Victorian London for example.

But as you know, I have a great deal of respect and admiration for Janet Tavakoli and her knowledge in this area. If she is seeing a new demand for Credit Default Swaps on the US payable in gold I would credit it since this is her area of expertise and industry connections, but would ask for some particulars, which I have done. This would match up with some things I have heard from other sources, and desire to continue to put the puzzle pieces together without traveling false trails. For now it remains all opaque, speculation, and rumour.

It does make sense, of course, to price a US default in something other than dollars. The question that comes to mind though, is not the suggested method of payment, but the nature and quality of the counter-party who could stand reliably behind such a claim without it being a fraudulent contract by its very nature.

If the US should default, what major financial institutions will be in a position to have written and then uphold the terms of these CDS, payable in anything at all? Surely only a sovereign bank like the US Fed, the Treasury, or the IMF, or some other central bank could be so capable. But what possible motivation could a non-profit-seeking official institution have in writing CDS on a US sovereign default? Perhaps more likely a private bank or GSE, with the buyers thinking it has some sovereign guarantees that would be upheld in extremis.

Truly, remember AIG? It was insolvent when payment was demanded, and acted improperly in paying collateral to Goldman ahead of its inevitable insolvency, and then receiving the support of the Treasury to pay obligations in full, above all others. It ought to have been placed in a receivership and its assets allocated with the previously disposed collateral clawed back. This kind of private arrangement between parties involving the sovereign wealth of nations may be indicative of things to come. The recent example of Iceland comes to mind.

I agree with her that credit default swaps should be curtailed. Indeed, I would tend to severely limit the trading of most if not all naked derivatives and stock sales by requiring capital requirements near 100 percent and secured by good collateral.

But I think the gold aspect of this may be overdone. The US has more gold than any other individual country, and still values it cheaply at a sub-fifty dollar historical price on its books. If a counterparty fails, it will fail, and a settlement will be arranged. The issue of course, is if some encumbrance of the gold in the US has already been accomplished through unfortunate leases to bullion banks who will not be able to return it.

Indeed this horse may already be 'out of the barn' as some evidence indicates that a few banks like JPM are already short more gold and silver than they can possibly deliver under the conditions of the contract without selective default to paper if demanded by their counter-parties.

If there is any sort of government guarantee, it will be payable in dollars, unless some private arrangement is made for the benefit of the recipient. For example, if a bullion bank is caught short of gold, and requires it to avoid a default and 'systemic risk.' The rationale will be to pay the debt in full so as to avoid a collapse, even though there was no guarantee involved. If we did not have such a recent historical example of AIG I would say that such an abuse of the Treasury for the benefit of a few for placing the system at risk was not possible. And yet here we are.

There is another possibility, based only on speculation as far as I can determine, that a major purchaser of US debt is now demanding it be backstopped against ratings downgrades in gold payable CDS. Until now I have given this little credibility. How can such a thing be arranged in secrecy and maintained as such? How could a private bank, even a money center, write such a swap in good faith?

You see, to my knowledge no private corporation has the right to engage in contracts that encumber the US gold reserves, not the Fed nor the Banks, and not even the President or Treasury alone. Only the Congress, with the knowledge of the people, may allocate and distribute such a sovereign asset. If swaps and contracts and leases are being made on the US gold reserves, the people then are the subjects of a monumental theft and fraud. And if the US is writing or guaranteeing CDS in gold, then most likely it is doing so as a means of rescuing those who have already gone hopelessly short the gold market, and need to arrange a 'back-door' bailout.

So the rule at hand would be the epigram of the famous trader, Daniel Drew:

"He who sells what isn't his'n
Must buy it back, or go to prison."

Unless they have good friends at the Fed or the Treasury, or in positions of power in the exchanges perhaps. But does anyone believe that the American people would stand again for another bailout of the very same banks that it has bailed out previously? I would hope that there would not be a Reykjavík on the Potomac in my lifetime.

In short, if the existence of CDS on the default or downgrade of US sovereign debt payable in gold bullion be true, who would be in a position to stand behind these Credit Default Swaps with any reliability, and what buyer would be in a position to make such a demand of a credible source?

The US most likely will resist the banning of credit derivatives because it is in the hands of the Banks, and such derivatives are the source of enormous profits. Further, such a ban might cause the existing bulk of derivatives to fall in value, destabilizing the financial system. Nothing could be more obvious, at least for now. So this situation will continue most likely until it falters, and the entire system is once again placed at risk. But these markets are so opaque, and the intentions of government in them even less apparent, that one can only watch and wonder.

At some point the Banks may seek to make the people yet another offer they cannot refuse. And America will choose. But first I think, the UK will reach this point.

Huffington Post
Washington Must Ban U.S. Credit Derivatives as Traders Demand Gold
By Janet Tavakoli
March 8, 2010

...Remember AIG? When prices moved against AIG on its credit default swap contracts, AIG owed cash (collateral) to its trading partners. AIG paid billions of dollars and owed billions more when U.S. taxpayers bailed it out in September 2008.

U.S. credit default swaps currently trade in euros. After all, if the U.S. defaults, who will want payment in devalued U.S. dollars? The euro recently weakened relative to the dollar, and market participants are calling for contracts that require payment in gold. If they get their way, speculators on the winning side of a price move will demand collateral paid in gold.

The market can create an unlimited number of these contracts very rapidly. The U.S. wouldn't have to ever default to trigger a major disruption in the gold market. Spreads (or prices) on the credit default swaps could simply move based on "news," and demand for gold would soar.

If this speculation drives up the price of gold, and the available gold supply becomes limited, are you willing to post your children as collateral? I am pushing the point so that we put a stop to this before it is too late."

Net Asset Value of Certain Precious Metal Funds and Trusts

US Dollar Charts Still Technically Strong

The US Dollar Daily Chart is showing a continuation pattern, indicating the likelihood that its rally has more room to the upside. This implies more troubles for the Euro, the Pound, and the Yen if in fact the dollar can break out from this formation. There is some probability of failure, but not so great as continuation of the trend higher.

There is also the matter of the 3, 10, and 30 year Treasury auctions this week. The dollar is often dressed up for the occasion. If not with the fundamentals, then by weakening the 'competition' to make it look prettier than them.

If the US stock market cannot move up or hold its ground while the Treasury conducts even modestly successful Treasury auctions, then this is a cautionary indication that Wall Street and the Fed are moving capital in a circle of manipulation to attempt to maintain the illusion of growth, in the manner of a Ponzi scheme.



The Dollar rally is obviously consolidating its recent overbought condition, and has more room to the upside if the trend continues. Keep in mind that the fundamentals work slowly and on the long trends. In the shorter timeframes the price is just a trade, more subject to emotions and fluctuations. Do not try and fight the ticker if you are a trader. If you are a long term investor, then you can ignore what at the end of the day will turn out to be noise. But there are some imperative requirements to do so regarding your cash levels and leverage.

Iceland Voters Reject Bank Bailouts in Crushing Electoral Defeat; Neo-Liberalism In Context

"Voters rejected the bill because ordinary people, farmers and fishermen, taxpayers, doctors, nurses, teachers, are being asked to shoulder through their taxes a burden that was created by irresponsible greedy bankers."

"Is there any reason why the American people should be taxed to guarantee the debts of banks, any more than they should be taxed to guarantee the debts of other institutions, including merchants, the industries, and the mills of the country?" Senator Carter Glass (D-Va), author of the Banking Act of 1933 and of Glass-Steagall

It is interesting that the government of Iceland had already declared the vote of the people as 'obsolete.' One has to wonder when the voters will declare their current government and their representatives as obsolete. One would give the government credit for at least allowing a vote on a referendum, but to then disregard and circumvent it through political devices is seems like a base hypocrisy.

Iceland is a victim of the neo-liberal economic deregulation of the 1990's, in which a few bankers can buy the government, and rack up enormous profits for themselves in Ponzi like leverage, and then attempt to socialize the debt back to the people when their schemes collapse.

Neo-Liberalism is a system of economic thought embracing the efficient markets hypothesis, the inherent good of deregulation and the natural impediment of government regulation, the necessity of free trade and globalization, the supremacy of the corporation over the individual person in the social economy, and supply side economics. It most likely favors a one world currency and consolidation of production into large corporate combinations or 'trusts' under the principle of laissez-faire.

Neo-liberalism may degenerate into crony capitalism, or even corporatism, as its theoretical idealism of perfect rationalism and virtue falters against the reality of human behaviour. In times of financial crisis, for example, neo-liberalism ironically turns to centralized economic planning by allegedly private banks which appropriate public funds and the power of the monetary license to socialize private debts, and, in a strikingly Orwellian twist, eviscerate the discipline of the markets and the individual to preserve their freedom, and the well being of the private corporations. Although now largely repudiated, neo-liberalism has strong roots in the public consciousness, and its adherents hold considerable power in Western governments and among the 'freshwater school' of American economics.

What makes neo-liberalism and neo-conservatism 'neo' or new is their attitude towards the relationship of the individual to the state. Both tend to denigrate and diminish the condition and rights of the inividual as compared to the consideration of the corporate system or the centralized command state.

In the States, the Congress and the President have just ignored the massive protests against their own bank bailouts. The US was able to cloak its own debt assumptions through accounting frauds, claiming that the bailouts were repaid by the banks. The bailouts are wrapped in AIG, Fannie and Freddie, and the Federal Reserve. This is the advantage of owning the currency, the IMF and ratings agencies. And of course your media.

Although Europeans and the markets are looking at the 'PIGS' for the next serious default as the economic hitmen are moving from Iceland to Greece, the real test of globalization in financial markets and the dominant control of the private banks will come in the UK, a sovereign people too proud and strong to go down into feudal servitude and the rule of tyrants easily. Or at least one would hope.

The Relationship of the Condition and Rights of the Individual to the Organized State




Bloomberg
Iceland Rejects Icesave Depositors Bill in Referendum
By Omar R. Valdimarsso

March 7 (Bloomberg) -- Icelanders rejected by a massive majority a bill that would saddle each citizen with $16,400 of debt in protest at U.K. and Dutch demands that they cover losses triggered by the failure of a private bank.

Ninety-three percent voted against the so-called Icesave bill, according to preliminary results on national broadcaster RUV. Final results will be published today.

The bill would have obliged the island to take on $5.3 billion, or 45 percent of last year’s economic output, in loans from the U.K. and the Netherlands to compensate the two countries for depositor losses stemming from the collapse of Landsbanki Islands hf more than a year ago. The island’s political leaders say they’ve already moved on to talks over a new accord.

“The government’s survival doesn’t rest with this Icesave vote,” Prime Minister Johanna Sigurdardottir told RUV after the preliminary count was announced. “The government coalition remains solid,” Finance Minister Steingrimur Sigfusson told RUV.

Failure to reach an agreement on the bill has left Iceland’s International Monetary Fund-led loan in limbo and prompted Fitch Ratings to cut its credit grade to junk. Moody’s Investors Service and Standard & Poor’s have signaled they may follow suit if no settlement is reached.

‘Obsolete’

Iceland’s leaders are trying to negotiate a new deal with the U.K. and the Dutch that focuses on the interest rate payable on the loan, making the bill in yesterday’s vote “obsolete,” Sigurdardottir said on March 4.

Dutch Finance Minister Jan Kees de Jager in a statement posted on the Internet last night said he is “disappointed” the agreement hasn’t yet come into effect. The U.K. was “obviously disappointed,” while “not surprised,” said a Treasury official who declined to be identified in line with departmental policy.

Iceland’s government pointed to “steady progress toward a settlement” in the past three weeks in a statement.

“The British and Dutch Governments have indicated a willingness to accept a solution that will entail a significantly lower cost for Iceland than that envisaged in the prior agreement,” the statement said.

The U.K. and Netherlands have offered an interest rate of the London Interbank Offered Rate plus 2.75 percentage points, according to the U.K. Treasury official. That’s the same as the rate for the loan from the Nordic countries that the Icelandic Government accepted in July 2009. The new offer also gave relief on the first two years of interest for the loan, amounting to 450 million euros.

‘Ordinary People’

The three governments have declared their intention to continue the talks, the Iceland statement said.

Voters rejected the bill because “ordinary people, farmers and fishermen, taxpayers, doctors, nurses, teachers, are being asked to shoulder through their taxes a burden that was created by irresponsible greedy bankers,” said President Olafur R. Grimsson, whose rejection of the bill resulted in the plebiscite, in a Bloomberg Television interview on March 5.

The Icesave deal passed through parliament with a 33 to 30 vote majority. Grimsson blocked it after receiving a petition from a quarter of the population urging him to do so. The government has said it’s determined any new deal must have broader political backing to avoid meeting a similar fate.

Icelanders used the referendum to express their outrage at being asked to take on the obligations of bankers who allowed the island’s financial system to create a debt burden more than 10 times the size of the economy.

Protests

The nation’s three biggest banks, which were placed under state control in October 2008, had enjoyed a decade of market freedoms following the government’s privatizations through the end of the 1990s and the beginning of this decade.

Protesters have gathered every week, with regular numbers swelling to about 2,000, according to police estimates. The last time the island saw demonstrations on a similar scale was before the government of former Prime Minister Geir Haarde was toppled.

Icelanders have thrown red paint over house facades and cars of key employees at the failed banks, Kaupthing Bank hf, Landsbanki and Glitnir Bank hf, to vent their anger. The government has appointed a special commission to investigate financial malpractice and has identified more than 20 cases that will result in prosecution.

Economic Impact

The island’s economy shrank an annual 9.1 percent in the fourth quarter of last year, the statistics office said on March 5, and contracted 6.5 percent in 2009 as a whole.

Household debt with major credit institutions has doubled in the past five years and reached about 1.8 trillion kronur ($14 billion) in 2009, compared with the island’s $12 billion gross domestic product, according to the central bank.

Icelanders, the world’s fifth-richest per capita as recently as 2007, ended 2009 18 percent poorer and will see their disposable incomes decline a further 10 percent this year, the central bank estimates.

Grimsson, who has described his decision to put the depositor bill to a referendum as the “pinnacle of democracy,” says he’s not concerned about the economic fallout of his decision.

“The referendum has drawn back the curtain and people see on the stage the matter in a new perspective,” he said in an interview. “That has strengthened our position and our cause.”

SnowJob: Revising the Non-Farm Payrolls Report

It appears as though the concerns expressed by the Administration about the snow storms and their impact on lost employment was overdone, if not misplaced. The market is pleasantly surprised with this -36,000 jobs number, since the expectations had been calibrated lower so effectively.

In fairness to the Obama Administration, they are only doing what Bush II, Clinton, and Bush I* had been doing right along with almost every statistic that they have issued. It's called 'perception management.' Greece used one method of accounting management in shaping the numbers, and the US uses its own approach to what is essentially a similar problem.

“Propaganda proceeds by psychological manipulations, character modifications, and the creation of stereotypes useful when the time comes.
The two great routes that propaganda takes are the conditioned reflex and the myth.” Jacques Ellul

In addition to the 'better-than-expected' jobs loss announced today for February, the Bureau of Labor Statistics also went back and adjusted the employment numbers from April-July 2009.

"With the release of February data on March 5, 2010, BLS has corrected April-July 2009 establishment survey estimates for all employees and women employees for the federal government series. The changes result from corrections to initial counts for Census temporary and intermittent workers for Census 2010."

This adjustment itself was not so great, certainly not as significant as the benchmark revision done in January for the 12+ months preceding.

I thought it would be an interesting exercise to compare the views of the US employment Seasonally Adjusted "headline numbers" presented by the BLS in December 2009, and the current view that they are showing as the true number today after the two recent sets of revisions.



The net result of the revisions is that jobs were added to the beginning and the end of what will be defined as 'the recession.'

This serves to now make the slump look steeper and more severe, and the recovery to be a little sharper, with plenty of jobs leftover to create a 'flat impression' in 2010 at worst.

In short, jobs were removed from almost every month in the revision during the slump, and shoved into the beginning and into the end.

That looks like a nice picture of a recovery, doesn't it? See, the February 2009 stimulus program and the strategy of massive bank bailouts have worked.

I have seen corporate managers who have come into a new position and inherited a mess jigger the numbers in a similar way. You make the slump look as bad as possible, and shove the excess profits or revenue into the beginning and the end of the problem, to make your efforts look as heroically effective as is possible.

Perhaps this is all just the way things turned out, in revising the numbers so as to make them the most accurate.

Or perhaps the US economy and its monetary system are an increasingly untenable Ponzi scheme, the mother of frauds.

Mr. John Williams of ShadowStats, the must read site for commentary on US government statistics, had this this say this morning about Non-Farm Payrolls:

"With an unchanged unemployment rate and a near-consensus payroll number reported this morning (March 5th) by the Bureau of Labor Statistics (BLS), I certainly misread the nature of Larry Summers’ employment comments, as discussed in yesterday’s Commentary No. 283. Historically, at least with earlier administrations, it has been unusual for individuals in positions such as Mr. Summers’ to offer comments on employment in the week before a pending release, without having a specific political or market-related purpose.

Distortions to economic reporting — in seasonal factors and in other methodologies not designed to handle a protracted and severe economic downturn — appear to be continuing."

I think that Larry Summers did have a definite agenda in his remarks, and said so. My instincts were that Summer's comments were a setup for the stock market bulls, in the spirit of his mentor Robert Rubin, who loves to throw a positive spin to help a market rally through resistance.

The lowball is helping the SP to break out of a trading range, and potentially to help fuel the economic stimulus through monetary and financial asset expansion. All is well. Let's all buy risk assets. Let's see if they can make it stick.

There are no accidents in politics.

Guest Post: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism

"...exposes the mechanism by which one market operator set out to profit from the credit boom, and even more, from the bust...it’s an eye-popping story of vandalism-for-profit."

Richard Smith, a London-based capital markets information technology manager, was kind enough to provide an advance copy of his review for the book ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism by Yves Smith, the author of the well-known financial blog Naked Capitalism.

Mr. Smith (real name, and no relation to Yves) helped in the proofing of the copy and fact searches, so he was already well familiar with the text. Perhaps this makes him a not entirely dispassionate source, given the regard that even copy editors can obtain for their associated works. But I thought it was a very nice summary of many of the salient points, and that you would enjoy having the opportunity to read it.

I intend to read the book in order to both learn something, and to be entertained as well. I love reading accounts of this period of time that are both authoritative and well-written, and understandable by the non-expert. Given the author's performance on her blog, and her detailed industry knowledge and experience, it looks to be a 'must read' for those following the financial crisis and its associated developments.


Reading ECONned
By Richard Smith

The Financial Crisis of 2007-2009 (no-one’s settled on a name yet; we are still too close to the action, and that end date might still need some discreet pushes to the right) has naturally set off a book publishing frenzy. With the first wave of instant histories now spent (the startlingly fast-out-of-the-blocks chronicle “Bailout Nation”, the elephantine “Too Big To Fail” etc, etc), we are now getting a second wave of books, whose authors have had time to dig deeper and reflect more on how we got into this mess. Yves Smith’s offering is the first integrated account of the root causes of the financial crisis, and a compelling one.

For Smith, it turns out to be a matter of bad economic theory, self-serving ideology, and, under cover, plain old rapacity. The author gives us a brisk historical sweep through what sounds like deeply unpromising, but, as it turns out, surprisingly engaging terrain: post- war economic theory, the evolution of the financial services industry and its regulation since the 1970s, modern financial instruments, and the Crisis itself. It’s been a long time a-comin’, this Crisis. It all culminates in a whodunit account of the mechanisms that brought the crisis to its acute phase; an account that respects the complexities, yet grips like a vice. But first of all, it’s about the way a single phrase, “free markets”, was turned into a justification for profoundly destructive behaviour.

Yves Smith (got it yet?) points out that there was always more to Adam Smith’s account of the free market than its modern reduction allows:

“Smith also pointed out that self-interested actions frequently led to injustice or even ruin. He fiercely criticized both how employers colluded with each other to keep wages low, as well as the “savage injustice” that European mercantilist interests had “commit[ted] with impunity” in colonies in Asia and the Americas.”

Yves shows us that little has changed since Adam’s day (last chance!). Running through the book, we will find ever more glaring contrasts between the official slogans: “invisible hand”, “free market” and so on, and what is really going on: scams, rip-offs, increasingly brazen looting. This is sanctioned, in an unwelcome display of bipartisanship, by intellectually bankrupt and venal politicians of all hues.

Chapter 1 is a sort of prelude, a first salvo at officially sanctioned economic theory, highlighting the absurd complacency of mainstream economists’ happy talk in the run up to the Crisis, pointing to just a few of the not insignificant number of people who saw the train coming down the tracks; and giving the lie, of course, to all those claims that its arrival was unpredictable. Officialdom does not get off lightly either: deserved prominence is given to some worthless good cheer emanating circa 2006 from the glossy but clueless Timothy Geithner, then Chairman of the New York Fed, and now, God help us all, US Treasury Secretary. As British Prime Minister Disraeli remarked of another talentless office-holder from an earlier era, “If a traveller were informed that such a man was the leader of the House of Commons, he might begin to comprehend how the Egyptians worshipped an insect.”

Next we are into the meat of the economic theory (Chapters 2-4). Smith briskly takes a sledgehammer to any number of plaster saints cluttering up the edifice of modern economics:

“assumptions that are patently ridiculous: that individuals are rational and utility-maximizing (which has become such a slippery notion as to be meaningless), that buyers and sellers have perfect information, that there are no transaction costs, that capital flows freely”

And then…papers with cooked figures, economists oblivious to speculative factors driving oil prices, travesty versions of Keynes’s ideas that airbrush out its most characteristic features in the name of mathematical tractability.

And then…any number of grand-sounding theoretical constructs: the Arrow-Debreu theorem, the Dynamic Stochastic General Equilibrium model, the Black-Scholes option model, Value at Risk, CAPM, the Gaussian copula, that only work under blatantly unrealistic assumptions that go by high falutin’ names – equilibrium, ergodicity, and so on.

The outcome of this pseudo-scientific botching is an imposing corpus of pretentious quackery that somehow elevates unregulated “free markets” into the sole mechanism for distribution of the spoils of economic activity. We are supposed to believe that by some alchemical process, maximum indulgence of human greed results in maximum prosperity for all. That’s unfair to alchemy: compared with the threadbare scientific underpinnings of this economic dogma, alchemy is a model of rigor. One skeptical insider:

“The result of all this is that we now understand almost less of how actual markets work than did Adam Smith…”

The disdain for actually checking the predictions is disastrous. One skeptic quoted by Smith:

“even though every organ of 1960’s-era orthodoxy is mortally wounded, the entire body strides vigorously forward. That is a prime reason why, despite the labors of so many clever and right-thinking economic theorists, we are in this mess.”

Smith’s coup de grace is the human factor, something else from which economists mostly avert their eyes:

“If people will be foolish, lazy, or cheat, the certainty, the scientific mantle is nothing but the emperor’s new clothes.”

Hitch the spurious certainty that the “free market” defined in its most extreme form knows best, first to the neo-liberal creed (Chapter 4), and then to policy recommendations (this cozying up of economists and politicians is covered in Chapter 5), and you have a prescription for officially sanctioned thievery on an epic scale.

And lo, that is exactly what happened. If Chapters 1 to 5 give us the theory, 6 to 9 give us the practice.

If for some reason you thought the Crisis was anything brand new, Smith has some vivid older examples of the folly, laziness and cheating of modern financial markets. Unfortunately the long-term lessons to be learned from these episodes seem to have accrued to investment banks – they cover their tracks a little better, these days; and they know that the more you stick to unregulated business, the less likely it is that you will have to answer charges in court.

Of course, the failure to rein in abuses years ago set the stage for the Crisis. Over at Morgan Stanley in 1994 they were busy stitching up Mexican banks with swaps that would blow up in the banks’ faces if the peso declined 20%. Smith quotes Partnoy’s account:

“The banks were already at their legal borrowing limits, but the Cetes swaps permitted them to evade these rules by entering into deals that were the economic equivalent but did not have to be disclosed to regulators or the public at large…Once the banks were bloated and could not eat another bite, it would be easy to bat them down. Then, at the appropriate moment one little nudge would cause the entire obese Mexican banking system to topple like Humpty Dumpty.”

The swaps duly blew up and crippled the banks. There was nothing “illegal” about any of this. It is of course instructive to contrast the pious predictions of the rickety theoretical framework delineated in Chapters 1-5 with the dreary reality of this Mexico episode. Oh, and draw a parallel between the modus operandi of MS in 1994 and the current Greek debt crisis, with particular attention to the role of Goldman Sachs. There is nothing new under the sun.

In the balance of Chapter 6, Smith sets out the relationship between deregulation, structural change in the financial services industry, and an accelerating trend towards MS-style predatory behaviour. By 2000 or so, we are in our modern world: investment banking partnerships, relationship banking, and Glass-Steagall are out; publicly quoted investment banks, one-off deal-driven business, and combined commercial banking and investment banking are in; and the unregulated OTC markets are growing ever larger.

Unfortunately, as Chapter 7 shows us, this new structure has one huge perverse incentive built into it, encapsulated here in a paper of Akerlof and Schiller from 1994:

“Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations.”

This is “looting”. Survey the wreckage of Bear Stearns, Lehman, Fannie and Freddie, AIG, and the large-scale taxpayer support still flowing into the near wrecks of BoA/ML and Citigroup. Then consider the massive level of bonus payments to the management and employees of those firms prior to their demise. That was looting. And in early 2010, of course, with the support of the taxpayer more or less formalized for large firms, the surviving firms have the opportunity to carry out still more looting. And as they have witnessed, as a strategy, it works really well, for them. Expect more looting.

Preparing the grand finale of Chapter 9, Chapter 8 moves another piece of the puzzle into place; that piece is asset booms, and the risk it leads to. The mechanism is simple enough – secured lending against assets that have had a speculative price boom looks like great business, to the simple-minded, while prices are on the way up – more and more credit is available, which funds more and more asset purchases. But of course there is an inevitable day of reckoning when an asset price bust, triggered by some shock or other, exposes the no-longer-secured debts. Well we all know that, from countless historical examples. As you might also expect by now, traditional neoclassical economics has nothing whatever to say about such lethal feedback loops. The boom was boosted, Smith suggests, by international capital flows (still controversial, that) and by the notorious Greenspan Put (pretty much conventional wisdom now, judging by the destination of the recent Dynamite Prize award).

And now we are ready for Chapter 9, where all the malign forces described in the rest of the book converge into one mighty foul-up. Exhibit One is the Shadow Banking System, whose components are: securitization, whereby loans turn into assets; repos, whereby assets are used as security for loans (note that we are now into the dangerous territory sketched out in Chapter 8); and finally, Credit Default Swaps, which guarantee the quality of the loans underlying the assets, and thus the resilience of the repo market; and everything in the garden is lovely. There are still other elements of the shadow banking system: the notorious conduits (a zoo of abbreviations: SPEs, OBS vehicles, SIVs, CDOs); the money market funds. These are all just thinly capitalized banks, totally dependent on capital markets to fund their activities.

But it’s really the description of mid-Noughties repo that made the light bulbs go on for me. Via the repo market, real banks came to resemble shadow banks, more and more; and their fortunes became intertwined; which was very dangerous. In the good old days, repos were a respectable mechanism for managing liquidity by securing lending against high class assets – Treasuries; the highest quality assets of all. But various new myths meant that there was a ready way to satisfy the massive demand for short term funding driven by the rise of hedge funds and OTC derivative trading during the Noughties.

Myth 1: the false security of the Credit Default Swap, which simply substituted the creditworthiness of the swap seller for the creditworthiness of the debt issuer; myth 2: the credit rating bought from agencies by the debt peddlers; myth 3: the “haircut”, propagated by the Basel II regulations, by which all manner of securities could be deemed suitable collateral for repos, subject only to a finger in the air discount, the ‘haircut’.

The BIS (originators of Basel II) cleared its throat discreetly in 2001, warning that a collateral shortage would cause

“appreciable substitution into collateral having relatively higher issuer and liquidity risk.”

…but no-one was listening. Estimates are hard to come by, but the claim that the Shadow Banking System was just as big as the regulated one by 2006 seems plausible: that’s $10 Trillion in old fashioned deposit based banking and the same again in Shadow Banking. But note: you would have to put pretty wide error bars on that number; the whole Shadow Banking System was unregulated, quite invisible to outsiders.

Its fragile structure did catch the eye of the looters, though. Chapter 9 exposes the mechanism by which one market operator set out to profit from the credit boom, and even more, from the bust. I’m afraid you will have to buy your own copy of the book to get the full details. Suffice it to say that it’s an eye-popping story of vandalism-for-profit, with elements wholly familiar from earlier chapters: it’s the Mexico story and others, all over again; but lots bigger. The lazy or hurried may prefer Appendix 2 as a short form summary, but it’s worth reading Chapter 9 to get the full flavour.

It is illuminating indeed to see the events of September ’08 and after as a near-cataclysmic run not so much on traditional banks as on the shadow banking system, as the Credit Default Swaps turned out to have been written by companies that couldn’t honor their promises, the loans turned out to be of dreadful quality, panicked investors pulled their money from the repo market, and there was a monstrous loss of liquid funding, with the undercapitalization of the banks hideously exposed.

Repo is at the very core of the near-collapse of the financial system. It is very striking that there have been few efforts to reregulate repo – of course, the low quality repo market packed up altogether during the crash, so maybe it’s completely invisible again to those bind and amnesiac powers that be. Partly, this sudden disappearance was the result of a buyers’ strike (still seemingly in force at the end of February 2010 – “fool me once”, they must be thinking out there); partly, though, the result of the Fed’s frantic efforts to plug the huge funding gap that had suddenly (and one suspects wholly unexpectedly) appeared. Yes, well, that’s the sort of nasty surprise you get when you don’t exercise oversight. Will the whole precarious mechanism all come back again when the Fed’s programs are finally terminated and the yield curve slope is no longer such an obliging source of riskless profit? One hopes not, but fears it will be so.

We know the immediate consequences of the Crisis; by the miracle of doublethink, the most vocal free market advocates suddenly endorsed epic government intervention, in the name of…ahem…free markets. After the nerve tingling highlights of Chapter 9, the most sobering part of the book is Chapter 10, in which the dismal prospects for reform are discussed. Yves had this part written up, as I recall, by September of last year. With the bonus mill now in full swing again, significant actors in the run-up to the catastrophe still firmly ensconced, bank lobbyists all over Congress, and timid reform proposals further diluted or derailed, it is pretty hard to demur from the author’s prescient gloom of six months ago.

For those with a little fire in their bellies, ECONned ought to be a trigger for whatever form of protest is countenanced by their politics. Go on, have a read: and then, do what you can to help put a stop to some very dangerous nonsense, before it’s too late.

Disclosure: The reviewer was a collaborator of the author; he’s read successive versions of some chapters half a dozen times in the last six months, and is not only alive to tell the tale, but remarkably, continued to enjoy perusing the successively tweaked versions. So, be advised – this may not be an entirely impartial review.

Russia Continues to Build Its Gold Reserves Ahead of the SDR Discussions

Thanks to Dave at Golden Truth for this updated chart.



As you know, Russia, India, China and some of the BRIC-like countries will continue to push hard for a gold and silver content in the new formulation of the SDR this year. The US and UK are vehemently opposed.

Europe is still wallowing in confusion and is virtually leaderless, as the most recent financial crisis in Greece shows. This may not be all bad, because it highlights the weaknesses in their union, and gives them the incentive to take it to the next step.

One cannot have a common currency with uncommon fiscal policies and laws. While there is some room for discretion, it is sorely tried in changing economic conditions and social attitudes. America went through a bloody Civil War for this reason.

This is why a one world currency, except for international trade only and at the discretion of trading partners, is so dangerous. One cannot maintain their sovereign freedom when someone else controls the supply of their money: either you cheat or you submit. All serious economists understand this; too few of the voting public do.

What Will the World Currency Become? The Stakes Are Enormous

And the Winner Is...the SDR?

This is the fallacy of the US dollar as the reserve currency for the world. It 'worked' as even Mr. Greenspan noted, as long as the US dollar was able to demonstrate the objective stability of an external gold standard relative to other currencies. That lasted for a few years, and the rest is foreign policy and currency wars. The time for its replacement is long past. The BRIC's understand this, and are playing their hands accordingly.

If one submits to a single world or regional currency for domestic use, they may as well take their constitutions and individual rights and throw them away. And globalization has been serving as a proxy for this, paving the way.

Gold and Economic Freedom: Did Greenspan Know What He Was Doing? - ZeroHedge

The moves here are slow and subtle, since great nations are involved. I get the impression, though, that most traders are playing checkers at a chess match. Well, that works for the daytrade. But only time will tell what will happen, and when. But sometimes events can break free and move quickly. Best to gather those nickles off the freeway before the rush hour commences.

Or as the man behind the .50 cal would say, 'Git some. Come git some.'

Net Asset Value and Premiums for Certain Precious Metals Trusts and Funds

I have added an estimate of the Sprott Physical Gold Fund.

The discounts on GLD and SLV are signalling some short selling going on as they are expanded above the mean.

The premiums on GTU and CEF indicate some optimism.

In addition, the miners are being hit today with profit taking and possible short selling.

Volatility ahead, and will most likely key off tomorrow's US Non-Farm Payrolls Report



I would not limit this quote below from Orwell to political thinking. I believe it motivates and explains most statements from analysts and economists, and of course, the vast majority of postings on the average internet chatboard. Truth is in short supply, and honest governance is an endangered species. We should all be wary of our own vulnerability to self-deception and the subtle temptations of the offered illusions of the unscrupulous.

In other words, grab something solid and hang on. lol.

"All political thinking for years past has been vitiated in the same way. People can foresee the future only when it coincides with their own wishes,
and the most grossly obvious facts can be ignored when they are unwelcome." George Orwell

Sprott Has Purchased About 9 Tonnes of Gold Bullion This Week

The Sprott Physical Bullion Trust (PHYS) is now holding 286,870 ounces of gold, with a market value of $327,003,510. The estimated net proceeds of their IPO are approximately $390,000,000, possibly higher depending on total fees for the IPO and initial bullion purchases.

They have now purchased 8.923 tonnes of gold bullion since last Friday (at 32,150.746 Troy ounces per metric tonne).

The total units outstanding are 40,000,000 for a Net Asset Value of 9.50 including cash and bullion. With the price of the Trust closing at 9.96 today, it is at about 4.85% premium according to their website.

By way of comparison, the Central Gold Trust (GTU) closed at a premium of 8.2%. This is on the high side, reflecting gold's recent run higher, and a flight to safety over recent concerns regarding sovereign debt. Gold has reached record prices in the euro and the British pound.

It will be interesting if we can see identify the drawdowns in the inventories that sourced this gold, wherever they may be. There are those who contend that the supply is coming from the unallocated inventories of bullion banks who are engaging in a kind of 'fractional reserve' gold selling to their customers.
If Your Gold Is at an LBMA Bank, You May Be Just an Unsecured Creditor by Adrian Douglas.

Let's see if the price of spot holds its levels after this unusual level of bullion purchasing in what is reputed to be a tight market.

Mutual Fund Cash Levels Near Historic Lows

The mutual funds, and those who give them their money to invest, look to be about 'all in' with regard to US equities.

As I recall, the bond funds have decent cash levels, and the piling into short term Treasuries at negative interest rates is certainly a phenomenon.

The hypocrisy and venality of the US financial sector knows no bounds, and they seem to have bought off the guardians of he public trust. The US government desperately needs to sustain confidence and the aura of recovery. They do not need a falling stock market to say the least. And yet, they have to continue funding record levels of debt issuance every month.

A lot of demand for funds, and many of the players close to flat busted.

It may be an interesting year.

SP Futures Daily Chart

The SP needs to break out of this resistance, or risk falling into a trading range, with the potential downside of a broadening top that fails and breaks lower.

The unemployment claims and same store sales tomorrow will provide some input, but the eyes of traders will be on the Non-Farm Payrolls report. I have not worked up any forecasts for it yet, but there was some concern since Larry Summers was talking the number down, based on the northeastern US snowstorms.

Was he calibrating the markets view, or setting it up, in the style of Robert Rubin who like to play the markets this way? We will know in a few days.

The pit traders are looking for an upside move to 1130, and it will take some positive jobs data to get it.

But for now the question is if the rally is consolidating its gains, or weakening for a more serious correction, or even a breakdown. Since it reached our trading objective of a 50% retracement of the big decline, the resistance here is highly significant according to any number of technical schools from Richard Russell's Dow Theory to Fibonacci retracement levels.

England to Sell 3 Year Bonds - In US Dollars

“In the eyes of empire builders men are not men but instruments.” Napoleon Bonaparte

Got Gilts?


Bank of England Plans to Sell 3-Year Bonds in Dollars
By Caroline Hyde and Sonja Cheung
March 02, 2010

March 2 (Bloomberg) -- The Bank of England said it plans to sell three-year bonds in dollars to finance its foreign-exchange reserves.

The U.K. central bank hired Barclays Capital, BNP Paribas SA, Goldman Sachs Group Inc. and JPMorgan Chase & Co. to manage the issue, which will be benchmark in size, it said in a statement. The bank paid 106.2 basis points more than Treasuries when it issued $2 billion of three-year notes in March last year, according to data compiled by Bloomberg.

“The notes will likely receive good investor appetite seeing that it’s a AAA rated name,” said Trevor Welsh, a portfolio manager at London-based Aviva Investors, which manages about 10.5 billion pounds ($14 billion) of fixed-income assets. “This bond sale is purely a technical move for the bank’s foreign currency reserves.”

The Bank of England is seeking to raise funds as confidence in the U.K. currency plummets on concern no party will win an outright majority in a forthcoming general election. The pound weakened 7.6 percent against the dollar this year, the worst performer among the 16 major currencies, as traders bet a new administration won’t be strong enough to reduce the nation’s budget deficit of more than 12 percent.

“It will be interesting to see if investors require a slightly higher spread because of sovereign risk,” Welsh said. “But if so, it won’t be more than a couple of basis points.”

The central bank has issued three-year notes in March every year since 2007 to finance foreign-exchange reserves that support its monetary policy objectives, according to the statement.

"Thy glory, O Israel, is slain upon thy high places! how are the mighty fallen!"

What next. Rupees?

Gold Soars to New Record Highs in Sterling and the Euro

"Gold has traditionally been used as a safe haven in times of economic and political uncertainty, as the metal's intrinsic value is not dependent on any paper currency."

And so it begins...

It will not be easy or straightforward.

New York Times
Gold Hits Record High In Euros, Pound
By Michael Taylor and Jan Harvey
Published: March 2, 2010

NEW YORK (Reuters) - Gold rallied to a six-week high in dollar terms and hit record highs versus the pound and the euro on Tuesday, as uncertainty about Greece's debt and Britain's politics lifted demand for bullion as a hard asset.

Uncertainty over plans to tackle Greece's fiscal crisis and over what the next British election may mean for UK debt have heightened volatility in the European currencies, lifting interest in gold as an alternative asset, analysts said.

"Currency volatility is by far the biggest factor supporting gold on Tuesday," said Frank McGhee, head precious metals trader at Chicago-based Integrated Brokerage Services.

Gold has traditionally been used as a safe haven in times of economic and political uncertainty, as the metal's intrinsic value is not dependent on any paper currency...

Euro-denominated gold hit a record high of 836.72 euros an ounce, up from 823.66 euros late on Monday, while gold priced in sterling touched a record 759.86 pounds an ounce, up from 744.85 pounds.

"Gold denominated in euros has definitely outperformed the drop in euro-dollar by almost 1 percent in the last 10 days," said Mitsubishi Corp precious metals strategist Tom Kendall. "That does reflect some nervousness about stability of sovereign debt, and stability of the euro itself."

The euro rebounded from a 9-1/2-month low against the dollar as investors awaited new plans to address Greece's debt crisis.

Greek Prime Minister George Papandreou said his country was fighting for survival against bankruptcy and urged civil servants and pensioners to accept sacrifices to save the debt-burdened nation.

Fears over the fiscal health of peripheral euro zone economies have weighed heavily on the euro so far this year, knocking it down by more than 5.5 percent against the dollar.

STERLING GOLD HITS HIGH

Sterling-denominated gold rose as the British currency was driven lower by fears that the next UK general election could result in a hung parliament.

That could mean an incoming government would struggle to take the action necessary to reduce debt, analysts said.

"Markets fear the UK government will be forced to create more sterling in order to buy their own government bonds and that quantitative easing and debt monetization may continue for longer than expected," and that could lead to further gains in gold, bullion dealer GoldCore said in a note..."

Is the Sprott Physical Gold Trust in the Market Trying to Buy 10 Tonnes of Gold?

Something is powering the spot price of gold higher the past few days. Are the Chinese or some other entity claiming the 191.3 tonnes of IMF gold again?

Perhaps relatedly, Sprott Asset Management is involved with a new physical gold bullion trust now trading in the States with the ticker symbol "PHYS."

The IPO for the fund was last Friday 26 February, with a reported 40 million shares outstanding at 10$Cndn. There is no hard news yet on how much of the IPO was held by underwriters. In fact, most of the news on it is a bit dated.

Here is their website for the Sprott Physical Gold Trust, and the link to their NAV financials. Here is a link to the prospectus. This is a link to the stocks' *indicative value* which appears to be its NAV which they use in their premium calculation from their website.

As you can see, there is still some key information missing. The cash assets less expenses of the trust are not yet listed. I have not seen a detailed release on the results of the IPO yet. And more importantly, the trust lists only 13,686 ounces of gold owned, with a market value of approximately US$15 million.

According to the prospectus, the fund will store its gold in Canada, is established in Ontario and is under that jurisdiction, but will be calculating its NAV in US$. It appears to be a trust where price tracks their NAV, and not an ETF which tracks the price of some external instrument like an stock index or spot commodity prices.

The implication is that they will not be selling and buying bullion in relation to market fluctuations as actively as an ETF pegged to spot for example. So the examination of premiums and discounts to NAV will be an issue.

If the trust has sold all its units listed as outstanding, they are in a cash position of approximately $390 million. Are the underwriters still holding any of this inventory? Their prospectus commits them to holding 97% of their assets in gold bars. No certificates or derivatives. And they are only listing $15 million in current gold assets.

Nine out of ten Americans might notice that the Sprott trust needs to buy about 10 tonnes of gold, the size of most small central bank purchases, if they have not negotiated and secured delivery already. According to the Prospectus, the trust does not traffic in paper certificates and derivatives, but in good bullion only.

I am more familiar with trusts and funds taking an incremental approach in their bullion purchases, and the negotiation for delivery before the units are sold. I am not sure what the case is here. It obviously is worth watching. Spot gold has risen quite a bit since last Friday. There is not enough data to suggest a correlation. However, if the entire IPO was placed, and the current gold holdings on the web site are accurate, they need to acquire almost 10 tonnes of quality physical bullion in a market reported to be tight in deliverable quality supply.

And the purchase is large enough so that we ougbt to be able to see an inventory drawdown somewhere. I have heard the buying will be done in London, and not at the Comex. The last purchases of this size were supplied by the IMF directly.

Above and beyond the short term interest in potential physical gold buying pressure, the Trust has some promising innovations in terms of holdings and transparency as compared to some other similar funds.

What I found personally appealing, subject to additional detail, is the ability for individual unit holders to redeem their shares for delivery in as little as one bar of London bullion, at the NAV but subject to delivery fees. This will obviously have its appeal for those who wish to add bullion for retirement accounts, with an eye to taking physical delivery at some point without incurring storage fees which can be significant over time.

I will leave the detailed analysis of this trust to more capable people who specialize in analyzing ETFs and Trusts. I have to admit that the IPO completely escaped my attention, although I did know it was coming some months ago. I had read enough then to know that it met some of my personal needs, based on my holdings and age. I find it more suitable than GLD for example, which seems to be a speculative trading vehicle. I prefer the Trusts like CEF and GTU for some things, and the redemption policy of PHYS seemed to be advantageous even compared to them. But more details are required.

As always perform your own due diligence and if needed discuss your investments with a qualified investment advisor.

Disclosure: I bought some units yesterday despite not feeling comfortable yet about being able to calculate the NAV for myself, and not having some of the details regarding redemptions and the status of their holdings and the IPO. It was some months ago that I read the prospectus. The NAV was indicated yesterday at 9.49 by the company on their site from Friday, which was less than 2 percent premium at yesterday's market price, which is advantageous and more than reasonable for my purposes.

Fed Vice-Chairman Kohn to Retire

I do not think this is anything like a 'principled resignation' from the Fed which we had seen when Larry Meyer and Jerry Jordan resigned. Meyer was a noted inflation hawk, and Jordan was probably the closest thing to an Austrian economist at the Fed. These resignations occurred in 2002, just before Greenspan began to spear-head the monetary reflation that led to the housing bubble and this latest financial crisis.

After all, Don Kohn has been at the Fed since 1970, although he only joined the Board of Governors in 2002. He is certainly in line for retirement.

As you may recall, Mr. Jordan has occasionally raised his voice in outrage at some of the dicier Fed dealings since then, such as the trading in Goldman stock by the Chairman of the NY Fed, Turbo Timmy's boss, while they were in the process of providing them billions of dollars in public assistance.

By October 26, 2009, Mr. Friedman’s paper profits on the shady trade were $5.4 million, reported Bloomberg News. “It’s an outrage,” said Jerry Jordan, former president of the Cleveland Fed. “He needed to either resign from the Fed board or from Goldman and proceed to sell his stock.” Bloomberg News comments: “suspicions that the fix was in for Goldman Sachs have been fanned by the firm’s political connections.”Wall Street Bailout: History's Largest Theft? - Oct. 28, 2009

Don Kohn has always struck me as more of a 'company man,' coming from the Alan Blinder school of Public Service:

"The last duty of a central banker is to tell the truth to the public."

He tended to pander to Wall Street, and was among the first to attempt to try and take moral hazard off the table as a consideration in bailing out the big banks. Citizen Kohn

It will be interesting to see what kind of a truthteller Mr. Obama will nominate to take his place. Christina Romer's name has been mentioned. Janet Yellen is being groomed for something. With Kohn's departure, Ben remains the only macro-economist, with the remainder of the Governors from the banking profession. This certainly seems to disqualify Mr. Geithner, who is neither economist nor commercial banker, but a kind of bureaucrat.

If it is Timmy, I may not be able to hold down solid food for a few days. I wonder if Larry Summers would take second place. If so, watch your back Ben. If not any of them, then a Chicago crony would be likely. Rahm? Yikes!

A more obscure economist perhaps? Obama is said to be looking for an inflation 'dove.' Brad DeLong has previously stated on his blog that Alan Greenspan never made a policy decision which which he disagreed. Krugman carries more weight, and is also a dove, and certainly his own man.

It is a shame that Robert Reich has no place in this Democratic Administration. He would have been a better Treasury Secretary than Timmy, but again, perhaps less pliable for the banks. My own choice for Governor at least would be a maverick like Janet Tavakoli or Yves Smith. It would be nice to have someone on the board who understands the more innovative aspects of the financial markets from a practical perspective. And of course the meetings would probably be much more interesting given their willingness and ability to ask the right questions.

And we can only wonder what new financial patent medicines wrapped in black boxes that Zimbabwe Ben may have in his cabinet of curiousities.

Reuters
Fed Vice Chairman Kohn to leave in late June
By Mark Felsenthal
March 1, 2010

WASHINGTON, March 1 (Reuters) - Federal Reserve Vice Chairman Donald Kohn, a 40-year veteran of the U.S. central bank, will step down in late June, giving President Barack Obama a chance to reshape the institution.

In a letter to Obama released on Monday, Kohn, who has served as the Fed's No. 2 since June 2006, said he will depart when his current term as vice chairman expires on June 23.

"The Federal Reserve and the country owe a tremendous debt of gratitude to Don Kohn for his invaluable contributions over 40 years of public service," Fed Chairman Ben Bernanke said in a statement.

Kohn, 67, began his career at the Kansas City Federal Reserve Bank in 1970 and rose through the ranks to become one of the more influential vice chairmen in the central bank's history.

He has served on the Fed's Board of Governors since August 2002.

His departure would leave three seats vacant on the normally seven-person Fed board in Washington, giving Obama broad latitude to shape the Fed at a time lawmakers are considering lessening its power after the most damaging financial crisis in generations.

Members of the Fed board are nominated by the president, but subject to confirmation by the U.S. Senate.

Among possible replacements, the president may be considering Christina Romer, a prominent economist who currently heads the White House Council of Economic Advisers.

Another possibility might be Fed Governor Daniel Tarullo, a lawyer and expert on banking regulation appointed by Obama, who could shepherd the bank into a greater focus on financial oversight and consumer protections. (Editing by Chizu Nomiyama)

Pictures of a Market Crash: Beware the Ides of March, And What Follows After

There are a fair number of private and public forecasters with whom I speak that anticipate a significant market decline in March. As you know I tend to agree to some extent, but with the important caveat that we are in a very different monetary landscape than the last time the Fed engaged in quantitative easing, the early 1930's. In short, I may allow for it, but I am not doing anything different about it -- yet.

The biggest difference is the lack of external standards. This introduces an element of policy decision that has been discussed here on several occasions. In other words, the Fed retains the option, albeit with increasing difficulty, to create another bubble, and levitate stock market prices in the face of deteriorating economic fundamentals.

The dollar was formally devalued by around 40% in 1933. We may yet see that done this time, but more gradually and informally. This is what makes gold controversial today; it exposes the financial engineering. So they feel the need to manage it, to denigrate it as an alternative to their paper. They want to have their cake, and eat it too.

Let's review where we are today.

The Bear Market of 2007-2009, marked by the Crash of 2008, has been a massive decline in equity prices precipitated by the bursting of the credit bubble centered around housing prices and packaged debt obligations of highly questionable valuations. The cause of the bubble was easy Fed monetary policy and the loosened regulation of the financial sector, which reopened the door to old frauds with new names.



Even today, I think most people do not appreciate the sheer magnitude of the decline, and the damage it has done to the real economy. This is the result, I believe, of three factors:

1. An extraordinary expansion of the Monetary Base by the Federal Reserve not seen since the aftermath of the Crash of 1929, and a swath of financial sector support programs from the Fed and the Treasury, resulting in a spectacular fifty percent retracement rally from the stock market bottom. This is the narcotic that permits the country to not notice that a leg is missing.

2. A comprehensive program of perception management by the government in conjunction with the financial sector to sustain consumer confidence and reduce the chance of further panic. In other words, a web of well-intentioned deceit, subject to abuse.

3. An understandable preoccupation by the individual with the details of breaking news, and a short term focus on particular events, diversions, and controversies, bread and circuses, without a true appreciation of the 'big picture,' in part because of some very effective public relations campaigns and a natural human reluctance to face hard problems.

This is resulting in a remarkable case of cognitive dissonance in which some of the victims of a spectacular man-made calamity are opposing remedies and aid as too costly and impractical, even as they walk around amongst the bleeding carnage.

For those who read the contemporary literature in the early Thirties, this is nothing new. In the early Thirties there was no sense, except for a few notable exceptions, of the magnitude of what had so recently happened. There was the sense of life goes on which seems almost eerie now to a modern reader. Indeed, Herbert Hoover could dismiss a delegation of concerned citizens with the advice that they were too late, the crisis was past, and all was well. Sound familiar?



The parallels with the Thirties and the Teens (today) are many, and uncanny.

There is the reformer President, elected to redress the extremely pro-business policies of his Republican predecessor. In the Thirties they had FDR who was a decisive and experienced leader. In the Teens the US has a relatively inexperienced community organizer, more influenced by the Wall Street monied interests, and a past history of 'playing safe,' who is trying to manage through indirection and persuasion.

There is a Republican minority in the Congress which opposes all new programs and actions despite giving lip service in order to delay and debilitate. In the Thirties the Republicans were over-ridden by a powerful, activist President, who created a "New Deal" set of legislation, much of which was later overturned by a Supreme Court which had been largely seated by the previous Republican Administrations.

Indeed, the remaining New Deal programs that were successful, the reforms of Glass-Steagall and the safety net of Social Security, are being overturned or are under attack in an almost bucket list fashion.



So what next?

Another leg down in the economy and the financial markets is a high probability.



Although one cannot see it just yet in the fog of corrupted government statistics, the economy is not improving and the US Consumers are flat on their back, scraping by for the most part, except for the upper percentiles who were made fat by the credit bubble, and are still extracting rents from it through officially sanctioned subsidies.

This was no accident; there is a consciousness behind it.

There are far too many otherwise responsible people who are not taking the situation with the high seriousness it deserves. Some would even like to see the US economy collapse, inflicting serious pain and deprivation because it may:

1.suit their investment positions and feed their egos because they think themselves above it all,
2. satisfy their ideological and emotional needs to see punishment administered, almost always to others, for the excesses of the credit bubble, especially if they are relatively weak, unwitting victims, and
3. the sheer nastiness and immaturity of a portion of the population which wallows in stereotypes, childish behaviour, and disappointment with their own lives. They tend to find and follow demagogues that feed their bitter hatreds.

They know not what they do, until they do it, and see the results. It is often a good bet to assume that people will be irrational, almost to the point of idiocy and self-destruction. And some of them never wake up until they are overrun, and then will not admit their error out of a stubborn sense of pride and embarrassment.

It seems likely that there will be a new leg down in financial asset valuations, as reality overcomes often not-so-subtle propaganda and disinformation. It may start in March, or it may be a 'market break' that provides a subtle warning for a large decline that begins in September 2010, with multi year progression to lows that are, as of now, almost unimaginable, at least in real terms. I cannot stress this issue of nominal versus real enough. As inflation comes, it will initially be in a 'stealth' manner, with the backing of the currency eroding slowly but steadily, and largely unrecognized for some time. It is not enough to try and count the dollars; one also has to consider the value behind them, the quality of the wealth, and its vitality. This is the case for stagflation.

The Fed is acting to mask quite a bit of this. One would hope that they would also not re-enact the policy error of their predecessors and raise rates prematurely out of fear of inflation before the structural healing can occur.

The debt incurred during the credit bubble cannot be paid and must be liquidated. So far we have largely seen transference of debt obligations from insiders to the public. Ironically these same insiders are lobbying to maintain these subsidies and transfers, and also to take a hard line against any further remediation of the consequences of the collapse, which they caused, on the public, to have more for themselves. Their greed and hypocrisy know no bounds.

But the policy error might not be caused by the Fed's direct action, but replicated by a governmental failure to stimulate the economy effectively AND to reform the highly inefficient and impractical financial system. The purpose of stimulus is to provide a cushion for structural reform and healing to occur, after an external shock, or even a period of reckless excess and lawlessness. The natural cycle can be disrupted beyond its ability to repair itself. But stimulus without reform is the road to further deterioration and addiction.

As it stands today the global trade system is a farcical construct that favors national elites and multinational corporations. Public policy discussion has been trumped by a handful of economic myths and legends that, even though disproved every day, nevertheless remain resilient in public discussions and reactions. This is because they have become familiar, and because they are the instruments of deception for certain groups of disreputable economists and policy influencers.

A more serious market crash might cause people to recognize the severity of their problems, and the thinness of the arguments of the monied interests for the status quo which is most clearly unsustainable. But a sizable minority of the population is always highly suggestible; demagogues rely on this.

The eventual outcome for the US is difficult to forecast with any precision now because there are multiple paths that events might take at several key decision points. Some of them might be rather disruptive and upsetting to civil tranquility. Game changers.

But as the dust continues to settle, the probabilities will continue to clarify.

"Suffering can strengthen our endurance. Endurance encourages strength of character. Character supports hope and confidence even during hard times and trials. And hope does not disappoint us in the end, because God has given us the Spirit and filled our hearts with His love." Romans 5:3-5

It is right to be cautious, and it is human to be afraid. But let us not allow our fears and trials to turn us from our genuine humanity in God's grace no matter how dire the day, even if it may drive some of the world once again into the jaws of desperation and madness. And if you stumble, gather yourself up and go forward again without turning from the way. For what is the profit to gain and hold some small and temporary advantage in this world, but to lose your self, forever.