Modern Economics: The Money Masters and Modern Economic Theory - Credibility Trap

Yesterday it was Yves Smith who took Paul Krugman to task. And I defended him in that instance in the comments. But now alas it's my turn, and I don't take this up lightly.  So I must think it is important.

And I do.  Because a false premise is being used to justify a false conclusion and by extension a matter of serious public policy in an ongoing debate. And people are in the streets about it.

In a recent op-ed Way Off Base Paul Krugman says:

"I see some commenters reacting to the failure of major inflation to break out by insisting that inflation is defined as an increase in the monetary base — that is, the bank reserves plus currency that are what increases when the Fed “prints money”. As it happens, that’s wrong: very old dictionaries defined inflation as a rise in money and/or credit, but the modern usage is, of course, a rise in prices.

But that’s really a side issue. Nobody would care about the size of the monetary base except for the belief that increasing the base leads to a rise in prices. That’s not a question of definitions, it’s a question of your model of the economy."

For those unfamiliar with measures of money supply and the monetary base, see Money Supply: A Primer.

I don't know who these commenters are, but they *could be* those from the Austrian school, who tend to look to what they call True Money Supply. I would have to read up to find out what the anticipated lag times are between expansion and its aftereffects.  It could also be from those who are forecasting hyperinflation, but those are few and I am not among them.  My forecast has long called for a credit bubble followed by a financial collapse and stagflation as the most like outcome but it is no economic model, more of a judgement call.  The variables are too many and too exogenous for any model that I could possibly devise. . Or the model Paul references could be just a strawman.

Except for the Austrians, and of course perhaps Paul Krugman when it suits him, I don't know of many rational financial people who would look to a very narrow measure of money supply, especially the Monetary Base, and expect a simple causal effect in prices over a short period of time of even a few years, in an ongoing great recession with a very low velocity of money and little lending.  And of course the Fed is taking steps to ring fence their market operations.  And it seems to be working.

I thought the allusion to 'old dictionaries' versus 'new dictionaries' was an appeal to an authority that does not quite work anymore, as if Economics is somehow making steady progress, despite its most recent terrible flop and sometimes scandalous behaviour.   Yes Paul can point to a few timid warnings in old columns, but his models were remarkably silent in predicting the financial credit bubbles and collapse.

The answer of course is-- ta da, better models. And the definition is my shiny new model versus your old outdated model as I choose to define them.  But at the end of the day, the ideal economic model dictates policy with pristine mathematical objectivity.

Adjusted Monetary Base, who could care about it?

Well, the Fed spends quite a bit of time on it, and those who understand anything about economics know that in periods when the financial system breaks down, especially from some excesses promoted by central bank economists, the Fed becomes the 'lender of last resort.' And what they are lending is money they have created by expanding their balance sheet. If they were only providing temporary liquidity the balance sheet would not be expanding in such a parabolic manner and more importantly, remaining there.

In other words, the Fed becomes the 'money creator' and provider of last resort, expending a significant amount of effort to prevent monetary deflation which they find to be against their mandate of what-- a stable money supply and rate of inflation.

The monetary base is a source of money, not broad money in public hands, which the Fed provides under the duress of stressful financial conditions, rather than mere economic cyclical turns.   Which is fine, because that is their job as currently defined. And the Monetary Base is one way of measuring it.

The Monetary Base has a particularly long lead time, or lag as economists call it,  before even large changes appear in the real economy in the form of higher prices and a money supply that is growing in excess of some organic demand.   I am sure Paul is aware of the devaluation of the dollar and the dramatic expansion of the monetary base undertaken in the 1930's by FDR, and the rather dramatic change in trend for consumer prices that followed, albeit not only from that, but other price support programs.

There is definitely a kernel of truth in what Paul says. "By contrast, the model of an economy in a liquidity trap, in which big increases in the monetary base don’t matter, comes through just fine."  And Ben and the Fed are managing their activity with an eye to targeting it to the banking system, and taking steps to keep it from moving into the broader money supplies too quickly.

Adding liquidity from the monetary base in the face of sagging aggregate demand is not having a profound effect on broad prices in the relatively short term. I mean, duh. If the model suggested this it is right.

But that does not imply that some connection is not there, that it is meaningless.  What it means is that so far at least, the Fed is managing their quantitative easing reasonably well.  Unfortunately so well that it is not having the desired effect on the real economy or the banking system for that matter, except that the zombies are still standing.  Just because something is not yet a smoking ruin does not bring cause for celebration.

The Fed is 'bottling up' the expansion of the monetary base in the banks, and quite a bit more of it than we had suspected as eurodollars, money provided to banks overseas.  And they stopped measuring eurodollars a few years ago in one of the broadest money measures, M3. 

The Fed, and I assume Paul Krugman know all this, but believe that they will have the tools, and knowledge, and the latitude to reduce their balance sheet when the time is appropriate and the real economy and banking system recovers. 'Volcker did it.' And so can we, because the models say so.

What the Fed and Paul Krugman are really saying is "Trust us."  And our models.  And don't think that the BLS and the government are tinkering with the econometric measures.  Are you kidding me?   It takes a willful blindness to ignore some of the more egregious tinkering that the government is doing in the name of perception management.

As for the comment about 'printing money,' it was Ben himself that said, 'the Fed owns a printing press.' And he was telling the truth.

I am not a believer in True Money Supply and greatly prefer broader money supply measures. And I know what the Fed is doing is providing an inflation risk that they believe that they know how to handle when the time is right.

And I also know that inflation is starting to pop up in certain sectors and items. And why it is not a broad increase yet, which is what we might call inflation. With most of the increase in money supply flowing to a very few in the form of income, well, this is all understandable.

So what was the point of Paul bringing all this up? It was this.

"Here are the data — I’ve included commodity prices (IMF index) as well as consumer prices for the people who believe that the BLS is hiding true inflation (which it isn’t)"

Let's see. The BLS is not distorting inflation measures because the model is working, and we know the model is working because of the BLS inflation measures.  That seems a little shaky to me.  Especially in light of the other data that shows that certain price sensitive assets are rising in price, and sharply, in response to negative real interest rates, as some other models and theories would hold.

Yes the US is in a liquidity trap.  And yes, the actions of the Fed so far have not triggered a broad monetary inflation because of the slack demand, and the consequent lack of lending and real economic growth.

And yes some well targeted stimulus could help to break this self-perpetuating situation. 

And anything that does not agree with my model is a bubble, and anomaly, or someone else's fault.

The root causes of the problems in the real economy have not yet been changed, and the system has not been reformed.  And the model which Paul points to is really only one correlation in a broader model that has failed, and badly, because it is an abstraction that only has a tenuous relationship with reality.

It is not so much that Paul Krugman is wrong.  There are others who are much, much worse, the purveyors of austerity, and efficient market based deregulation, and supply side economics.  

But Krugman is swinging open the door for the Modern Monetary Theory crowd whether he realizes it or not, by going a bridge too far in his misplaced conclusions and triumphalism.  Extremism in defense of stimulus is no vice, but it is an offense to reason. 

Hey, we haven't blown up the economy lately, so why worry?

Don't get me wrong.  I wish Keynes was still alive, so Keynesian economics could evolve based on new data, which I am quite sure it would.  In response to new data, JMK changed his mind.  And I am sure he would do so again.  I find myself at odds with almost every economic school because I am not an economist by training, and their dogmas and models grate on rational minds.

I liked Roosevelt, because as a non-economist he was open to trying things, but changing them if they didn't work.  If he would have had a model, he would have beaten the country to death with it.  That was the difference between Hoover and Roosevelt, the lack of intellectual pretension.

Well, if we only had more stimulus it would have worked.  Yes that is a thought, except the system is BROKEN.  The only thing we are stimulating is more money for the wealthy, more jobs for China, and more debt for the people.  Yes I think there is some short term benefit for those in the most distress in some of the programs, and that is a good thing.   But pouring stimulus into a broken system is only going to mask the rot, and hasten the final reckoning.  I thought this is what Greenspan tried after the tech bubble collapse.  And here we are again.

Better for the Fed and the economists to proceed in fear and trembling, showing their work clearly, and engaging in honest and open discussion, than risk the final, utter and total repudiation of their profession when 'trust us' fails again.

And I think it is incredibly naive to make that case that since the Fed has not blown the economy up yet, that all is well, and that printing money in whatever amounts has no significant consequences.  No one believes that except a few economists who frighten me in their slavery to their models, and I would hope that you are not one of them.

Perhaps the most useful thing that Paul Krugman could do is go join Occupy Wall Street, and demand the Congress and the President take some serious action in reforming the system, because that is the only thing that is going to provide a sustainable recovery.

"Economic models are no more, or less, than potentially illuminating abstractions...The belief that models are not just useful tools but also are capable of yielding comprehensive and universal descriptions of the world has blinded its proponents to realities that have been staring them in the face. That blindness was an element in our present crisis, and conditions our still ineffectual responses.

Economists – in government agencies as well as universities – were obsessively playing Grand Theft Auto while the world around them was falling apart."

John Kay, An Essay on the State of Economics

and the associated essay of mine, The Seduction of Science in the Service of Power

Paul Krugman has been good at calling Obama and his advisors on their financial policy errors, and was roundly and unjustly criticized for it. I link to his columns frequently, because he is good at what he does, and he often speaks his mind with honest authority.  And compared to many others in his profession he has been a paragon of virtue. But when it comes to their models, most economists have a fatal attraction that leads them astray.

As in all discredited professions, even if it has been due to the actions of a minority, the others must be beyond reproach, and take special care in choosing their words and their arguments.  I am sorry to say that is the case with other professions now, and it is also the case with economists.

As a great economist once said, "Economics is extremely useful as a form of employment for economists." As for the rest of it, well, they have their place. They just get giddy sometimes, especially when exposed to real power, and fawn all over it.

But don't most people. They just do it with a little more humility, and with more sense of uncertainty and attention to the downsides of risk, the so-called 'black swans' that economists' models do not describe or permit, and sometimes do not even acknowledge until face meets dirt.

Obama is failing, but the alternatives are worse. Small consolation. I think the US can do better.

A great leader in a similar crisis said,

"Confidence...thrives on honesty, on honor, on the sacredness of obligations, on faithful protection and on unselfish performance. Without them it cannot live."

If most leaders in Congress and the Administration stood up and said that today, the audience would be rolling in the aisles with laughter. And if anyone from the financial sector said that, well, I would not wish to be in the radius of a lightning strike, God's work notwithstanding.

And that points to the heart of the problem. We are caught in a credibility trap, in which the leaders are so complicit in the abuse and corruption of the system that they cannot even begin to speak to it honestly and plainly, with their pockets weighted down with corporate money.   And they are teaching the rest of us by their example.

October 7, 2011, 3:15 pm
Way Off Base
By Paul Krugman

I see some commenters reacting to the failure of major inflation to break out by insisting that inflation is defined as an increase in the monetary base — that is, the bank reserves plus currency that are what increases when the Fed “prints money”. As it happens, that’s wrong: very old dictionaries defined inflation as a rise in money and/or credit, but the modern usage is, of course, a rise in prices.

But that’s really a side issue. Nobody would care about the size of the monetary base except for the belief that increasing the base leads to a rise in prices. That’s not a question of definitions, it’s a question of your model of the economy. The underlying belief of all the people accusing Ben Bernanke of doing something dastardly is that “printing money” has caused or will cause high inflation in the ordinary sense.

The thing is, of course, that the past three years — the post-Lehman era during which the Fed presided over a tripling of the monetary base — have been an excellent test of that model, which has failed with flying colors. Here are the data — I’ve included commodity prices (IMF index) as well as consumer prices for the people who believe that the BLS is hiding true inflation (which it isn’t):

A couple of notes: for the commodity prices it matters which month you start, because they dropped sharply between August and September 2008. I use the IMF index for convenience– easy to download. (Thomson Reuters I use when I just want to snatch a picture from Bloomberg). But none of this should matter: when you triple the monetary base, the resulting inflation shouldn’t be something that depends on the fine details — unless the model is completely wrong.

And the model is completely wrong. You don’t get more conclusive tests than this in economics. By contrast, the model of an economy in a liquidity trap, in which big increases in the monetary base don’t matter, comes through just fine.

And this in turn tells you something about the people pushing this stuff. They had a model; it made predictions; the predictions were utterly, totally wrong; and they have just dug in further.

I do not know who 'the people pushing this stuff' are, but that last sentence applies to almost every economist and financial pundit that I can think of, with only a few notable exceptions.

A great economist would come up with something new from this, some variation on a theme, would have LEARNED something. The original thinkers are often geniuses, but their adherents are too often true believers and interpreters of doctrine. My graduate academic experience with economists of some years ago is that they lag reality, and especially the sea changes, by quite a few years, always making plans for the last war and crushing the data to fit their abstractions.

And this sadly is what may have brought the Austrian, Classical, Marxist and Keynesian schools into a type of relative stagnation, with a lack of original thought and an adherence to learned models and learned dogma.  Monetarism seems to be waning as well into an American obsession with statistics, often for hire.   Each of the schools have something to contribute.  I have long been convinced however, that out of this new experience we are having that a new school of economic thought would rise out of the ashes.    So far it is not apparent, just attempts to revive the old ideas.

Perhaps this 'digging in' is the natural reaction to a crisis. Who has the presence of mind to 'think differently.' But it is killing off the ability of the country to move forward, especially given the media's penchant for airing an issue for the public by bringing out two professional 'strategists' who throw lies and distortions and cartoon examples at one another for ten minutes, and then call it a discussion. Ok, time to vote.

No wonder the people are confused and afraid. And beginning to take to the streets. And I shudder to forecast the outcome.

By the way, Robert Reich has a nice description that touches on the credibility trap in Occupiers of Wall Street and the Democratic Party.

And Michael Hudson does a fine job describing the heart of the Occupy Wall Street phenomenon and their desire for reform and their resistance to being used and diverted as has happened to the Tea Party. As he goes into his own economic prescriptions, I obviously do not agree with all his views, but he certainly makes some interesting points.

The system is broken. It needs to be reformed. People are tired of being used and lied to. They voted for change and were ignored when they expressed their views and quite strongly. And when they complain, they are ridiculed. And now they are getting really angry. And the powers-that-be are trying to figure out how to play them for their own ends.

As Dr. Zoidberg would say, 'Wow, the President is gagging on my gas bladder. What an honor.'

Gold Daily and Silver Weekly Charts - Anglo-American Bullion Banking Cartel at Risk

"Get ready for the Pan Asian Gold Exchange, scheduled to open in June, 2012 in Kunming City, Yunman Province...Pan Asian will allow Chinese to speculate in gold futures contracts or buy physical gold through an account with a bank or broker. All 320 million customers of the giant Agricultural Bank of China will simply be able to use their Renminbi, the Chinese currency, from their bank accounts to trade gold. Sounds bloody dangerous doesn’t it.

It means the spot market in gold could be headed for China, and away from London’s Metals Exchange or the Comex in New York. I’d like to know who is going to oversee and regulate all this action. For example, when the Comex raises margin requirements to dampen speculative fervor– will China be governed by that? I doubt it very much..."

Robert Lenzner, The Chinese Mean to Control the Global Gold Market, Forbes

I assume the author, who is the national editor for Forbes, is satirizing some of the silly statements about gold recently appearing in certain other financial journals, all given by Very Serious People (VSP) who say even the most patently absurd things with self important weight, if not decorum.

About twenty years ago Steve Forbes explained his abiding fondness for the gold standard one evening over hors d' oeuvres during a break in a business conference about southeast Asia as I recall. He has promoted it several times since then including during a brief run for president many years ago, and this year predicted a return to a gold standard in the US within five years.

As you may recall I do not recommend such a rigorous standard at this time, given the debilitated nature of the US financial system. But I do think some other countries might consider giving it at least partial consideration and serious thought in their longer term currency plans, along with silver. It is one antidote, even if imperfect, against banker manipulation and financial excess.

And this is why the Anglo-American bullion bank cartel fears any discussion of gold that is not managed carefully, since certain people might get ideas.  Here is a news flash for them.  They already have those ideas, and you are whistling past your nearly empty vaults.  A hideaway home near Lake Lucerne or vacation ranch in Paraguay may be an advisable alternative.

The charts are obviously at a decision point and they may be pushed by the headlines from Europe.

Have a pleasant weekend.

SP 500 and NDX Futures Daily Charts - Plus ça change...

The markets were under three primary influences today.

An FDIC memorandum concerning the details of the Volcker Rule which will be voted on next week was leaked, and it has some strong prohibitions about insured banks engaging in proprietary trading. The bank lobbyists were on full alert, and the politicos will be buzzing in the Capital this weekend. Try the steak and lobster at The Palm with peas and pearl onions with an apertif of soft money bribes.

The Non Farm Payrolls Report came in a little stronger than expected albeit because of a one time addition of 45,000 returning strikers. The recovery is there, but fragile, awaiting only a stiff dose of austerity to bring it crashing down, for the sake of short term political gains. Cloudy today with a chance of more economic hostage threats tomorrow.

Fitch issued downgrades of European debt (Spain and Italy) during the day, which had a marked negative effect on risk perception. The credit agencies have suddenly become fearless international macroeconomic forecasters. And you wondered why Ben and Timmy kept them around.

The equity markets are a nearing key resistance, and VIX is near the bottom of its intermediate trading range. The financials remain very sensitive to risk because they are, after all, the court officials of the credit bubble hive, right after the queen bee Treasury.

Have a pleasant weekend.

The State of Economics: On the Seduction of Science in the Service of Power

"Tyranny is always better organized than freedom."

Charles Peguy

This essay by John Kay excerpted below is a nice summary of the problem we have in modern economics. It may be a bit dry for the layman, but it touches on the distortions that crept in to economic thought and their intellectual sources, and in particular the operational rather than political means.

I do not think it was unintentional.  Economics has served to distort public policy and blind people to their unfolding reality. Investments in think tanks and universities encouraged and paid for misleading reports and studies, draping propaganda in the faux garments of respectable academia and science.

This is certainly not the first time this sort of thing has happened. Medicine has a rather checkered history in service to power. These types of distortions can of course cut both ways, and science has been used to justify abuses from all ends of the political spectrum.

Economics and other sciences are no fair substitutes for a priori objectives in the creation of sound public policy. Policy is not an outcome of economic science, but rather, policy is set and renewed from first principles, a commitment to certain ideals and common objectives. Economics and other sciences play a role in shaping the details of implementation. But we must revisit and determine the effect which those details have on the achievement of first principles which are the sine qua non.

In other words, economics does not dictate anything.  It suggests differences and forecasts outcomes.  But there is no economic principle that says that we must disregard the role of regulation and the fostering of well being in society because the market dictates that it must be done.  This is sophistry and rubbish.

Unfortunately we must sift all the opinions and inputs to policy decisions with care, and especially the assumptions on which they are based, because the professions have shown a willingness to misrepresent, distort, and even lie for money and power.

One must always come back to first principles, to some notion of what they, and by extension their community, wish to be. Is the first principle of the US the maximizing of profit? By what measures, and to whom? Or is it something else again.

This philosophical notion that the end of all human activity is the maximization of profit is one of the most pernicious assumptions in all history.  It is the antithesis of all that is human.

This is the question that the protesters of Occupy Wall Street are asking in their own inarticulated way. People of the status quo say, 'What do they want? What is their desire?' No, it is the protesters who are asking the question of those comfortable people in their power. 'Where are we going?'  If they have any statement to make, it is that 'The Emperor has no clothes.'

And since the modern day Emperors do not wish to, or cannot, answer the people plainly and honestly, having only their tired old lies, they become uncomfortable and afraid. Instead they ignore, ridicule, and silence the question, offering new lies and scapegoats, claiming that all is well. And it is, at least for them.

If the people are ignored and abused long enough they will stop asking questions and begin to make demands and push them forward, and then it may be too late as these sort of social movements tend to obtain their own momentum.

Economics is a discredited science at the moment. A few practitioners sold its soul and honor to a small group of wealthy ideologues while the great majority remained silent. But certainly no more discredited than the doctors who served the policies of euthanasia or the Russian abuse of psychiatric wards. It is sad but true, that when the destroyers of civilization appear on the horizon, the quantitative sciences and their purveyors are often seen swimming out to meet the boats.

Those who promoted false theories and dreadfully ineffective policies in return for power and money  are still at work, and the results of their betrayal of conscience will be measured in piles of dead bodies, and a mass of broken dreams.

The answer is not to turn away from knowledge, and embrace a hatred of science like a new crop of passionate know-nothings.  Science has its proper place. But it is not at the top, dictating outcomes in the social world like the answers to irrefutable equations. And it is especially good that we remember this when science is abused, and used to justify cruelty, selfishness, and plunder.

"The preposterous claim that deviations from market efficiency were not only irrelevant to the recent crisis but could never be relevant is the product of an environment in which deduction has driven out induction and ideology has taken over from observation.

The belief that models are not just useful tools but also are capable of yielding comprehensive and universal descriptions of the world has blinded its proponents to realities that have been staring them in the face. That blindness was an element in our present crisis, and conditions our still ineffectual responses.

Economists – in government agencies as well as universities – were obsessively playing Grand Theft Auto while the world around them was falling apart."

John Kay, An Essay on the State of Economics

This intellectual and financial decline traces back perhaps to the closing of the gold window by Nixon, and the rise of the willful relativism of value with fiat money.  But more important is the subsequent rise of the financialization industry, under the flag of efficient markets and deregulation and globalization.

The country once again became gripped by a preoccupation with aggregating wealth from the real economy by manipulating paper. Not only were there real direct effects, but there were profound long term effects through the malinvestment and diversion of strategic resources.   And the absolute worst of it has come from the  most powerful corporations and those who serve them.

As Satyajit Das puts it in a book interview:

"The best and brightest went into finance because... it paid better than every other profession. So we had this whole generation of people — who would have been great scientists, great doctors, great creators of other things — attracted to a business which ultimately only provided, to a substantial degree, toxic waste. And that is the tragedy of our time. ... It was this diversion of enormous amounts of talent."

People can point to select innovations like Facebook and the iPod, but in fact America's technical and physical infrastructure has been distorted, and has languished, because public policy unleashed the financiers, the money magicians, and then became captive to them. And they have willfully led the country into a lingering period of decline.

I hope to have no illusions.  Those who give themselves over to the dark impulses of their imagination often prove more impervious to reason with each victory. 

No one knows how this will turn out yet. There is always hope against forces that seem far too powerful at the moment. And tyranny is always better organized than freedom.

Some inquiring student may read this little morsel of thought, and if his mind is provoked, a flickering light of truth will be struck from that spark, about the corruptibility of even the best, about the dark hearts of predators who walk among us, and about the danger of too much power in too few hands.

If not now, then perhaps in some better tomorrow. Nothing is ever wasted in God's economy.

The US September Non-Farm Payrolls Report in Pictures

A remarkably 'clean' report with the only anomalies being a lower than normal Birth-Death imaginary jobs adjustment from the BLS, which subtracted 43,000 jobs, and a seasonality adjustment that appeared a little on the high side.

An exogenous factor was the addition of 45,000 striking telecommunication workers who returned to their jobs. So the organic jobs growth was weak.

"Nonfarm payroll employment edged up by 103,000 in September, and the unemployment rate held at 9.1 percent, the U.S. Bureau of Labor Statistics reported today. The increase in employment partially reflected the return to payrolls of about 45,000 telecommunications workers who had been on strike in August. Government employment continued to trend down."

The jobs recovery is there, but very nascent and probably fragile. GDP will tell us much more.

Jon Stewart: Mainstream Media Coverage of 'Occupy Wall Street'

The next two years will be a bonanza for satirists.

I have concluded from my reading of history that the greatest periods of change, the turning points, are best marked by and most notable for the remarkable inability, and sometimes tragic failure, of contemporary observers to understand them.

They do not see their causes, and fail to mark their progress and direction, in the time at which they happen. The big moments in history are written with letters so immense that they are perceptible only to the most ingenious minds of the day, and by the rest at a much more considerable distance, if even then.

Commercial first, then enjoy the show.

In a similar vein, here is a video interview about financial reform and Occupy Wall Street with with Chris Hedges on the CBC

Gold Daily and Silver Weekly Charts

"When nothing seems to help, I go and look at a stonecutter hammering away at his rock, perhaps a hundred times without as much as a crack showing in it. Yet at the hundred and first blow it will split in two, and I know it was not that blow that did it, but all that had gone before."

Jacob Riis

Gold had another up day with stocks, as it was 'risk on' with renewed hopes for fresh infusions of liquidity as we saw from the Bank of England.

I tended to view this action as more 'technical' than fundamental.

I don't like the headline correlation between stocks and the metals like gold and silver which would normally function as a safe haven in a time of increased risk.

Notice the new lines of broad support and resistance levels on the gold chart. We have not yet broken to the upside, so caution is advised.

SP 500 and NDX Futures Daily Charts - Third Up Day in a Row

"Heroes are not giant statues framed against a red sky. They are people who say: This is my community, and it is my responsibility to make it better. Interweave all these communities and you really have an America that is back on its feet again. I really think we are gonna have to reassess what constitutes a 'hero.'"

Studs Terkel

Big up day, third in a row, ahead of the Non Farm Payrolls report.

It was 'risk on' today. Let's see if it can hold through the weekend.

Time for a Financial Transaction Tax Designed to Fund Financial Industry Regulation

I would like to see a flat financial transaction tax enacted, applicable to any exchange. The tax would be $1 (or £1 or €1 or ¥100 for example) for any trade on any exchange public or private, for any registered security including derivatives, without regard to the size of the trade. I would even consider a lesser amount, say $.25 for example, based on better tax revenue estimates.

The real economy is being slowly strangled by an outsized financial sector that has purchased a politically sanctioned franchise for outsized fees and public subsidies.

The financial transactions tax would be paid on the buy side. No exemptions. None. Zip. Not even for 'wholesale' traders or banks, or those who own 'seats' on the exchange. It is a cost of doing business. You buy, you pay $1 for each purchase.

The purpose of the tax would be to fund the regulation of the financial industry and the Consumer Protection in the financial industry.

The tax 'burden' would fall most heavily on those engaged in High Frequency Trading. It would not halt the phony 'bid stuffing' phenomenon which would have to be dealt with in other ways. But it would help.

The money would be 'earmarked' for the Regulatory bodies. The government would not be able to divert it to other uses. This is similar in concept to the gasoline tax in the US which is a flat rate per gallon of gasoline, which is used to expand and maintain their Interstate Highway System.

The most common objection is that it would make the domestic exchanges less competitive, and that people would find ways to 'cheat.'

If this rule were to drive more fruitless speculation out of country, then perhaps one might add some incentives for these speculative companies to leave, and take more of their white collar con men with them. Let them see how they fare in Asian countries when they are caught in a fraud. Perhaps their could be a pay per view for the punishments.

Liquidity objections are a red herring, a joke. HFT adds no liquidity, it amplifies short term movements. It is not the same as the specialist system, not at all.

As for cheating, with a more fully funded set of regulatory bodies with professional career employees with an in depth understanding of the industry and continuity in position, not these revolving door suits who can't wait to work again for the industry companies they regulate, the cheating might become more manageable.

By the way, and in an somewhat unrelated discussion, I would use these funds to immediate tighten the regulations and enforcement against naked short selling, especially in the US and Canada.

Next up, reform of the transfer pricing abuses that allow international corporations to realize revenues in the country of their choice.

As for personal taxes, significantly raising the income triggers a flat 25% AMT to let's say $400,000 but tightening the exemptions until they include any 'income' of any sort from any source would be a good place to start. That is quickly achievable. We might also consider a modest AMT for corporations based not on 'income' but on reported revenues from whatever sources.

Businesses do not 'create jobs' like benificent gods. They respond to market opportunity and consumer demand for products and services. Incenting business in the face of failing demand cause by stagnant median wages and high unemployment is just a variation of the trickle down economic theory.

Create sustainable demand, and independent businesses will rush to fill it. The problem lies with the inefficient businesses, the zombie cartels, monopolies, and rentiers who have 'purchased' public franchises to take fees by buying politicians and favorable legislation.

These reforms would be almost easy to achieve, given a functioning political system responsive to the voters, compared to the biggest and most intractable problem facing the US, which is campaign finance reform, and the crowding out of the individual from the political process.

Never happen you say? I would agree that any proposals along these lines would be ignored, and if they gained notice, ridiculed and shouted down. It would be fun and informative to watch who screams the most, and who they do it for.

Well, all right then, but do not expect there to be any sustainable economic recovery.

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

As Hermann Hesse oberved, "When the suffering become acute enough, one moves forward."

Net Asset Value of Certain Precious Metal Trusts and Funds

A nice bounce in the metals with gold up to key resistance.

The trusts and funds are responding as well as the mining companies, ahead of tomorrow's important September Non-Farm Payrolls report.

One notable variant in this is the unusually large premium being given to the Central Gold Trust. This is almost certainly due to a short squeeze as it is one of the least 'liquid' of the closed end funds with only 16.6 million units. The premium on PSLV is expansive but it is usually so.

I have done some redrawing of the daily Gold chart which will be released this evening.

Steve Jobs, February 24, 1955 – October 5, 2011

"...the unforgiven
Fire which Prometheus filch'd for us from heaven."

Lord Byron, Don Juan, Canto I.

"So we went to Atari and said, 'Hey, we've got this amazing thing, even built with some of your parts, and what do you think about funding us? Or we'll give it to you. We just want to do it. Pay our salary, we'll come work for you.' And they said, 'No.' So then we went to Hewlett-Packard, and they said, 'Hey, we don't need you. You haven't got through college yet.'"

"Innovation has nothing to do with how many R&D dollars you have. When Apple came up with the Mac, IBM was spending at least 100 times more on R&D. It’s not about money. It’s about the people you have, how you’re led, and how much you get it."

“Innovation distinguishes between a leader and a follower.”

“I didn’t see it then, but it turned out that getting fired from Apple was the best thing that could have ever happened to me. The heaviness of being successful was replaced by the lightness of being a beginner again, less sure about everything. It freed me to enter one of the most creative periods of my life.”

"The cure for Apple is not cost-cutting. The cure for Apple is to innovate its way out of its current predicament.” (1999)

"Almost everything -- all external expectations, all pride, all fear of embarrassment or failure -- these things just fall away in the face of death, leaving only what is truly important. Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose. You are already naked. There is no reason not to follow your heart."

“Do you want to spend the rest of your life selling sugared water, or do you want a chance to change the world?”

Steve Jobs

Gold Daily and Silver Weekly Charts - Currency Wars - The European Overhang - YE $2,000?

"The U.S. and Europe have always suppressed the rising price of gold. They intend to weaken gold's function as an international reserve currency. They don't want to see other countries turning to gold reserves instead of the U.S. dollar or Euro.

Therefore, suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar's role as the international reserve currency. China's increased gold reserves will thus act as a model and lead other countries towards reserving more gold."

China World News Journal, Shijie Xinwenbao, 04/28/2009

The market rallied today again on headline hopes of an orderly resolution to the Greek default.

There is likely to be a Greek debt default and restructuring. What the market does not yet understand is how it will be packaged and the extent of the damage to the debtholders, in particular some of the European banks.

According to Bloomberg the Europeans are running new bank stress tests based on a range of scenarios. I think the biggest variable is a haircut on the debt ranging from 21 to 50 percent.

What is a bit disappointing is that gold and silver continue to move with stocks, in the 'risk on risk off' trade. It would be better if gold were to rise as a risk aversion flight to safety trade. But of course there is quite a bit of perception management going on.

Non-farm payrolls coming up, and it may remind the markets of other risks. Be careful. The downtrend is not yet broken.

I tend to view 1540 to 1580 as key support for the gold futures based on the third chart.

Depending on how they wrap the rescue I am still thinking that a rally and some spikes will take gold back into a track to hit $2000 by year end. But let's not get ahead of ourselves.

Another low is possible at the supports indicated. And there is significant risk yet in the year end target. But once the ball gets rolling a $150 up day could break the usual pattern of capping rallies at 2%. The western central banks have used quite a bit of their reserves in this latest beat down of bullion.

And I still think the silver Comex market will resolve into a de facto default with forced cash settlements. I am not sure how they will justify this travesty. I think a case could be made that we are already there with so many deliveries being pushed into paper settlements with GLD and SLV.

But let's allow this to play out to the almost inevitable bitter end. There will be a story, and there will have to be some provision to head off an avalanche of litigation.

SP 500 and NDX Futures Daily Charts - Headlines and Emotions

Greece is going to default, one way or the other.

The real question is how they will package it, and how big the haircut will be to the debt holders, anywhere from 21 to 50 percent.

Europe is running 'stress tests' again on the banks, obviously to see how they will fare against a range of scenarios.

I think they might buy the news if the haircut is below 50 percent and no banks are taken down with it. But this *could* be a secondary reaction depending on how they spin the deal.

Currency Wars: European Debt Crisis and the Next Phase of Global Finance

"The wealthy, not only by private fraud but also by common laws, do every day pluck and snatch away from the people some part of their daily living. Therefore, when I consider and weigh in my mind these commonwealths which nowadays do flourish, I perceive nothing but a certain conspiracy of rich men in procuring their own commodities under the name and authority of the commonwealth.

They invent and devise all means and crafts, first how to keep safely without fear of losing that which they have unjustly gathered together, and next how to hire and abuse the work and labor of the people for as little money and effort as possible."

Thomas More, Utopia

No chart updates tonight as I have out of pocket on personal business most of the day.

Here is a simple description of what is driving the markets. It is basically a counter party risk situation involving the biggest banks in the Western financial system.

If you keep this in mind most of the things that are happening will be more clear, even though the mind of the status quo rebels against it. People will believe what is in their best interests, long perhaps after it is beyond repair.

I think the endgame is well underway, and the outcome is not saving the public, but managing the transition to a new system, while hopefully keeping the same ruling class. That will not be disclosed while 'the players' jockey for advantage and position, 'turf' and the privilege of rents, if you will, well ahead of the crowd.

The European Central Bank and the Federal Reserve will bail out the banks again, and seek an 'orderly resolution' to the Greek situation. This will involve either an overt or de facto devaluation of the Euro and the Dollar. Make no mistake, the Dollar will not be allowed to appreciate dramatically for the same reasons that all the other currencies wish to avoid such an outcome.

The Dollar and the Euro are the relativistic value expressions of the financial system. They have no substance otherwise, no permanence except for the will of keepers of the system. The DXY is only an expression of the Euro and Yen and a few other fiat currencies. They are created at will.

And so in advance of the coming devaluation, gold is hit hard in order to maintain the confidence in the fiat system, with the clumsy propaganda pieces in the compliant mainstream media, and so that when bullion rises in reaction to the currency devaluations it will be easier to control, as Paul Volcker had suggested.

"That day the U.S. announced that the dollar would be devalued by 10 percent. By switching the yen to a floating exchange rate, the Japanese currency appreciated, and a sufficient realignment in exchange rates was realized. Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake."

Paul Volcker, Nikkei Weekly 2004

And this is why some European countries are already taking action to throttle demand, and to prevent a 'run on the central bank.'

Asia sees what is happening and is already trying to prepare for the next phase in the currency wars. The western nations leave the ordinary person relatively defenseless, almost as if by design.

This would all have been simpler and less destructive if the Western nations had conceived the will to nationalize the big banks when the system began to deteriorate as a result of their recklessness, and to administer their restructuring or dissolution, and reform the system, as they had done in the S&L crisis. But that would have required genuine investigation, prosecution, and disclosure.

So now the developed nations are caught in a credibility trap, and the real economy is being drained to fill the gaping hole in the wealth amassed in the credit bubble, largely held by the monied interests, which Citi had referred to in 2005 as the 'plutonomy.'

Follow the Money: Behind Europe’s Debt Crisis Lurks Another Giant Bailout of Wall Street
By Robert Reich
Tuesday, October 4, 2011

...The Street has lent only about $7 billion to Greece, as of the end of last year, according to the Bank for International Settlements. That’s no big deal.

But a default by Greece or any other of Europe’s debt-burdened nations could easily pummel German and French banks, which have lent Greece (and the other wobbly European countries) far more.

That’s where Wall Street comes in. Big Wall Street banks have lent German and French banks a bundle.

The Street’s total exposure to the euro zone totals about $2.7 trillion. Its exposure to to France and Germany accounts for nearly half the total.

And it’s not just Wall Street’s loans to German and French banks that are worrisome. Wall Street has also insured or bet on all sorts of derivatives emanating from Europe – on energy, currency, interest rates, and foreign exchange swaps. If a German or French bank goes down, the ripple effects are incalculable.

Get it? Follow the money: If Greece goes down, investors start fleeing Ireland, Spain, Italy, and Portugal as well. All of this sends big French and German banks reeling. If one of these banks collapses, or show signs of major strain, Wall Street is in big trouble. Possibly even bigger trouble than it was in after Lehman Brothers went down.

That’s why shares of the biggest U.S. banks have been falling for the past month. Morgan Stanley closed Monday at its lowest since December 2008 – and the cost of insuring Morgan’s debt has jumped to levels not seen since November 2008.

It’s rumored that Morgan could lose as much as $30 billion if some French and German banks fail. (That’s from Federal Financial Institutions Examination Council, which tracks all cross-border exposure of major banks.)

$30 billion is roughly $2 billion more than the assets Morgan owns (in terms of current market capitalization.)

But Morgan says its exposure to French banks is zero. Why the discrepancy? Morgan has probably taken out insurance against its loans to European banks, as well as collateral from them. So Morgan feels as if it’s not exposed.

But does anyone remember something spelled AIG? That was the giant insurance firm that went bust when Wall Street began going under. Wall Street thought it had insured its bets with AIG. Turned out, AIG couldn’t pay up.

Haven’t we been here before?

Republicans and Wall Street executives who continue to yell about Dodd-Frank overkill are dead wrong. The fact no one seems to know Morgan’s exposure to European banks or derivatives – or that of most other giant Wall Street banks – shows Dodd-Frank didn’t go nearly far enough.

Regulators still don’t know what’s happening on the Street. They have no clear picture of the derivatives exposure of giant U.S. financial institutions.

Which is why Washington officials are terrified – and why Treasury Secretary Tim Geithner keeps begging European officials to bail out Greece and the other deeply-indebted European nations.

Several months ago, when the European debt crisis first became apparent, Wall Street banks said not to worry. They had little or no exposure to Europe’s problems. The Federal Reserve said the same. In July, Ben Bernanke reassured Congress the exposure of U.S. banks to European nations in trouble was “quite small.”

Now we’re hearing a different tune.

Make no mistake. The United States wants Europe to bail out its deeply indebted nations so they can repay what they owe big European banks. Otherwise, those banks could implode ­ taking Wall Street with them. (And this is why the Fed is helping to finance the arrangement with eurodollars which are no longer tracked as part of M3 - Jesse)

One of the many ironies here is some badly-indebted European nations (Ireland is the best example) went deeply into debt in the first place bailing out their banks from the crisis that began on Wall Street.

Full circle.

In other words, Greece isn’t the real problem. Nor is Ireland, Italy, Portugal, or Spain. The real problem is the financial system ­ centered on Wall Street. And we still haven’t solved it.

And that problem will not be solved in the way that you might think of it, because the people 'solving it' are the same ones who created it. Their every effort will be directed toward increasing their power and preserving their situations and advantages, to the exclusion of most other concerns.

Gold Daily and Silver Weekly Charts - Flight to Safety, at Least for Today

Bounce today on a flight to safety, a concept that is still valid except during option expiration periods and panic liquidations perhaps.

There is a growing difference between the physical market and the paper markets. At some point they will converge.

"So the Western central banks got together, leased out some gold and the bullion banks sold the gold. The central bank gold being unloaded by the bullion banks is not to get the best price, but to smash the price. The smartest way to sell the gold would be to do it in the liquid sessions. But the pattern during the decline was they were selling it in the overnight session when things are quiet. This was no different that what we saw at the end of April, beginning of May on that coordinated smash.

You have to ask the question, why would anyone sell at the most illiquid times? It is not to get the best price, it is to move the market in the direction you want to move it...

The Asians have been buying like crazy, all through this takedown they have been buying. We have seen massive premiums and bottlenecks in supply, they simply cannot get enough physical metal as the prices have dropped. The demand has literally been insatiable. As I have stated before, the central bank gold, which was used to sell the market down, has gone to vaults in Asia. That’s a one way trip, it doesn’t come back into the market..."

'London Trader' at KWN, Insatiable Demand for Physical Gold

The downtrend is still not broken yet.

The equity markets are going to keep hacking up hairballs until Benny and Mario Draghi, Jean Claude's successor, gives them the big fat bowl of monetary cream that they want.

SP 500 and NDX Futures Daily Charts - Going Out On the Lows

Downside on the stocks which went out on their lows, led by the financial stocks based on fears of contagion from a Greek default.

Currency Wars: Restricting Gold and Silver Sales in France

A few people have asked me about the recent story concerning France banning cash sales of gold and silver. The story originated here but was picked up by quite a few other sites last week. I was waiting to get some additional information before I posted it as well.

This is different from the reports of limits specifically on gold and silver sales in Austria.

"According to the bank representatives and manager we spoke with, Austrian banks have now been ordered to restrict the sale of gold and silver bullion purchases and are limiting personal acquisitions of precious metals to 15,000€ (approximately $20,700 USD) at a time, or 11 ounces of gold at today’s prices."

Here is a link to the French law that has caused this latest discussion.

Tightening the Noose: France Bans Cash Sales of Gold/Silver over $600
By Mac Slavo
September 23rd, 2011

"...It looks like this trend of restricting the peoples’ ability to acquire assets of real monetary value is expanding. If a recent report from France is accurate, and based on the French governments official web site it looks like it is, then as of September 1, 2011, anyone attempting to sell or purchase ferrous or non-ferrous metals, which includes gold and silver, will be required to pay for their purchase via a credit card or bank wire transfer if it exceeds 450€ (~ $600 USD)...

...According to independent reports the law was passed to curb the illegal sale of stolen metals like copper, steel, etc. Given the rampant rise in thefts of these metals from telephone poles, construction sites and businesses here in the United States, we can certainly see this as a reasonable assessment for why the French passed this law.

However, the fact that no exception was made for gold and silver simply cannot be ignored. The new law effectively makes it illegal to purchase even a single Troy ounce of gold or around 18 ounces of silver in cash."

So I asked an aficionado of the metals in France what the straight story is on this, and here is the reply:

This law is basically saying that retail “metal” transaction OF ANY AMOUNT cannot be paid in cash. It further says that there is a limit to how much metals can be transacted via retail up to a limit set by decree (not yet specified).

Any retail transaction above 450EUR must be paid via bank transfer (ACH). This is encompassing all goods and services, not just metals.

I called a gold coin & bar dealer whom I know in Paris.

They told me that their legal counsel is awaiting for the final interpretation of this new law sometimes this week.

In the mean time, they still sell gold to retail customers and accept cash payments without requiring an ID for transactions up to 3000 EUR per day per person.

She warned me that it may change any time.

And so there you have it. If you wish to buy gold and silver unobtrusively in France you may wish to do so now. Otherwise be prepared to start using bank transfers including credit cards for all transactions in any metal, and all large transactions for anything it seems.

It is hard to accurately judge official motives in this sort of action. It *could be* to restrict activity in stolen copper as some have said.  It may very well limit demand for the 500EUR note.  lol.

But it could also be to limit the incentive for a run on the banks by making cash less useful to hold. It also helps to channel more transactions through the fee-taking banks, which is a tax on the real economy.

And it might very well be designed to restrict a run on the metals if the western currencies are devalued. I have heard elsewhere that this is tied to the revaluation of gold relative to other currencies which will be included in the new composition of the SDR. I have also heard that one or two countries will include gold in their official reserves and tie it to their currency at some official rate that is substantially higher than the current spot prices, setting up an interesting change in market structure.

In other words, this law has the flavor of currency controls to prevent a bank run in preparation for a devaluation. And given the current nature of their trade deficit, I think it is a bit naive to assume that the US will stand idly by and not participate in this coordinated devaluation as well.  Even that stalwart of hard assets Switzerland had to give way and weaken its currency to preserve its exports.

Restricting and manipulating short term prices can only go so far. At some point it appears they must also try to regulate and restrict access by private individuals if there is a market dislocation and a change in status quo. I fully expect that all exchange defaults will be force settled in cash at an official rate.  And the retail bullion inventory would likely disappear from the shelves overnight except at the most outrageous prices.

With Asia moving to more widely encourage private ownership of gold and silver, the international dynamics may become most interesting.

This reminds me somewhat of restrictions and laws regarding foreign currency in Moscow and other eastern European countries in the 1990's. There was a state dictated exchange rate, and all currency was to be done in an official exchange office.

The practical effect was that no one wanted roubles except grudgingly, and most non-official transactions were made at street rates in hard currencies like Swiss francs, Deutsche marks, or Dollars. And there were official shortages of many staples as the markets moved 'underground.'

My, how times have changed.  But they will never learn.

An Important Addition and Clarification to the OCC Report Discussion

As I wanted to look into the gold and silver situation, and the concentrations there amongst the Anglo-Americans I left out an important fact about derivatives in general.

The US OCC report does include not only commercial banks and trusts with US subsidiaries, but also "Bank Holding Companies."

The bank holding company report, while shown at a high level, is not included in the breakdowns of positions in gold and silver, so it is not correct to assume that these fellows do not have positions there. Rob Kirby informs me that this is because the OCC has regulatory oversight for commerical banks and trust, but the Fed has authority over the holding companies.

As you can see from the attached below, Morgan Stanley is a huge player in the derivatives market, but at the Holding Company level. I am privately informed that they are also major players in the gold and silver derivatives trade.

This to me is important, since their CDS are recently amongst the weakest in the US banks, as Bloomberg has been recently emphasizing, and so they probably present some of the highest counter party risk amongst the current crop of players. As the OCC does not break down positions held at the holding company level, even though they claim to include off balance sheet items, it presents an incomplete picture.

Perhaps under regulatory reform, the Fed will begin to disclose more information to the OCC, and to the public, as to the true health and holdings of the Bank Holding Companies. The difference in the two categories with respect to derivatives positions is roughly $83 trillion.

I neglected completely to mention this and even contrasted Morgan Stanley with Goldman at the commercial bank level.

I ask your indulgence for this omission.

Gold Daily and Silver Weekly Charts

There is intraday commentary on the derivatives markets with an emphasis on the Anglo-American dominance of the precious metals derivatives markets.

Gold caught a little bounce this afternoon and even closed rising despite a stronger dollar and a weak stock performance. But given the technical damage in the chart it was not significant.

It remains oversold and in a trading range as indicated on the chart. It really could go either way depending on whether their is a resumption of liquidation selling. But the fundamental trend and all the reasons for gold and silver to move higher is still in place. So we will most likely see a resumption of the bull market trend.

Wait for it.

The best I can say about this options expiration week, and the recent Night of the Long Knives, is that is over.

Have a pleasant weekend. Good night.

SP 500 and NDX Futures Daily Charts - Down to the Bottom of the River

Not a strong close for the month to say the least.

Traders were not interested in hold long positions over the weekend.

See you on Monday.

The Anglo-American Precious Metals Derivatives Duopoly: Quarterly OCC Report

The US Office of the Currency Comptroller (OCC) issues a Quarterly Report on the Derivatives exposure of US Banks and Trust. The report, including historical archives, can be found here.

The report includes "all insured U.S. commercial banks and trust companies as well as other published financial data." So obviously it is not comprehensive of private funds, and banks without a US subsidiary presence.

The archives go back to 1998, but it is quite clear that the report is not so interesting prior to the repeal of Glass-Steagall and the Gramm-Leach-Bliley Act, also known as the Commodity Futures Modernization Act of 2000.

The report shows that JPM has about 80 percent of the gold derivatives in the world on its book, with HSBC holding the other 20 percent.    And in other commodities, JPM holds a similar position as well as part of their overall $78 trillion derivatives book which is heavily dominated by interest rate and credit derivatives.  But hey, that's without netting, right?  Oh yeah, counter-party risk.

JPM is not just Too Big to Fail.  It IS the market.  And 95% of their transactions are still OTC.

Just for the sake of perspective I did include a chart from the 2Q 2000 report here which shows both the total derivatives exposure, leverage and concentrations, and the gold market in particular. 

Notice that some of the players are no longer with us, and of course there is the big combination of CMB and JPM, when the houses of Morgan and Rockefeller combined after this report was issued to become the leviathan of international banking. 

At that time Chase Manhattan Bank was the biggest player with about $14 Trillion in nominal derivatives with a leverage to total assets of about 43.  The gold market was a three way split amongst Chase, Morgan and Citi, with Fleet grabbing some scraps.

This is for the derivatives gold market among commercial banks.  At that time the silver market was dominated by a non-bank, the now almost infamous AIG. 

As Ted Butler relates in December, 2003:

"Here's how AIG got to be the biggest trader in the silver market. When Drexel Burnham Lambert went bankrupt in 1989, the DBL Trading Group was purchased by AIG, and became the AIG Trading subsidiary, which currently operates out of offices in Greenwich, Conn. You may recall DBL Trading was the subsidiary involved in the temporary gold loan default with the central bank of Portugal at that time.

Before moving over to AIG, the DBL Trading Group worked at Goldman Sachs (J. Aron) in the early 1980's, and before that began at ACLI (A.C. Leon Israel). For the sake of full disclosure, and in an interesting coincidence, I worked at Drexel Burnham Lambert in Miami, for 10 years until 1986, but had no involvement, whatsoever, with DBL Trading."

I include this not only for historical interest, but also to remind you that the derivatives market is only one facet of the markets overall, albeit a growing one that is still about 95% Over The Counter and unregulated. It also still does not include the futures markets in this data.

Here is an overall chart from the June 2011 Report. One thing that immediately jumps out is that JPM now has a total nominal derivatives position of about $78 Trillion. That's a lot of nuts.

The other unmistakable point is that besides the increased concentration, the nominal leverage of Goldman Sachs at 537:1 is that of a hedge fund and not a commercial bank or trust. Even Morgan Stanley is running at a modest 26:1.

By the way,  in a bit of non-metals related gossip, I hear that Mackie Messer is strolling the downtown area, and might be looking to put a blade between the ribs of Meier Schmul with the objective of having one less investment bank in the market, in addition to the fine pickings from the collateral corpses.

Who can really know such things? Not so many as think they do perhaps. But it is good to know who and where your friends are, and with whom they are associating. Just ask Herr Fuld.  Oops, Mistah Kurtz, he dead. John Paulson?

The leviathan JPM, uber bank of Rockefeller and Morgan, holds 80% of the gold derivatives in the world, with HSBC having the rest. HSBC was founded in the British colony of Hong Kong and is now headquartered at Canary Wharf London.

At this sort of concentration you do not have a size advantage, you ARE the market, with all that it implies in terms of knowledge of positions et cetera, at least concerning derivatives. In the non-gold precious metals JPM's derivatives are a more modest 69%.

How important are derivatives to gold and the metals? Not so much, unless you consider it important to know who is hedging what positions and future supply. And it also helps to manage some of the largest non-derivatives positions such as large ETFs for example.

But some might conclude that between them the Anglo-Americans have the gold market in hand.

JPM holds quite a derivatives position in 'other commodities' as well, presumably non-precious metal. Inconsequential thinkgs like food and energy. That makes the commodities boss at JPM, Blythe Masters, Der große Macher in anyone's book.

As general rule of thumb, if you are the House in any game, you should not be able to also sit at the table as a player, internal confidentiality agreements notwithstanding. It really is just that simple.

You should be taking money on a transactional service basis and net zero exposed. And if you can't do that and make enough money, then you need a new business model.

And the notion of commingling this sort of business with insured bank deposits and Federal Reserve subsidies is insane.

Any major commodities player needs to be compact enough to wrap up in a carpet and get rolled out the door, sans bailouts, should conditions require. Even a big player like Enron or Refco.

One cannot help but wonder if some of these mega banks have not become so interwined with government as to be in a virtual partnership in their implementers of fiscal and financial policy, which is a dangerous development indeed.

"Oh the shark has pretty teeth dear,
And he bears them dripping red,
A sharp knife has Macheath dear
And when he flicks it you are dead."

Gold Daily and Silver Weekly Charts

The markets are waiting for some catalyst, some reason for their next move.

Until then they just churn back and forth.

SP 500 and NDX Futures Daily Charts

Stocks are still weak, and in a trading range, looking for some impetus to their next big move, up or down.

Die Mackie Messers Der Wall Street - The Mack the Knives of Wall Street

Ubi sunt qui ante nos fuerunt?

I was watching old movies and documentaries last night as a follow up to my recent readings. They also have some contemporary and artistic resonance to today.

Here is a clip that I found interesting. You may be familiar with the music if not the lyrics.

Drei Groschen Oper - Die Moritat von Mackie Messer



The above is a scene from the G. W. Pabst movie version of DreiGroschenOper, or Three Penny Opera, with Ernst Busch as the moritat, or street ballad, singer. I have to admit I find his rendition with the jerking enunciation and exaggerated trills a bit distracting. But this original film excerpt gives people who have only been exposed to the jazz versions a better idea of the original meaning and context.

Here is the same tune, with a spoken introduction, performed by Kurt Gerron, who starred in the live premiere of Kurt Weill and Bertolt Brecht's opera at Berlin's Theater am Schiffbauerdamm in August 1928. Gerron played both the street singer and Tiger Brown, the corrupt police chief.



Based on John Gay's satirical Beggar's Opera from 1728, it is set in London just before the coronation of Queen Victoria. The opening night audience, which did not know what to expect, was stunned, demanding encores for almost every song according to eyewitnesses. It was a sensational success that swept Europe, spawning numerous productions, catapulting the authors and actors to fame. Gerron, while remaining a popular character actor, became a successful movie director.

Now it is part of the rustling leaves of history, the voices of ghosts returned, whispers from dead lips.

While watching the 1930 German version of Der Blaue Engel yesterday (with English subtitles as I am not fluent in German) I was reminded that Gerron was third billing as the impresario Kiepert. I had forgotten what a melodramatic piece on morality the movie was, that it launched Dietrich's career, and how riveting a performance is given by Emil Jannings as Herr Dr. Rath. His madness scene is still remarkable, with his high pitched screaming, even in this jaded age of exaggerated emotions and special effects. I find it incredibly prophetic for the German people, and especially the intelligentsia, of that time. They were seduced, and went mad.



One thing always leads to another. If we live here, it does not hurt to get to know the place, before we take our leave.

As you may recall, the 'Weimar Republic' had seventeen governments in fifteen years, and the social and financial disruption had its outlet in the cultural ferment of Berlin.  This phenomenon is brought out fairly well in the CBC documentary, Legendary Sin Cities: Paris, Berlin and Shanghai.

I watched it again this week. If in the 1920's the US was naughty, Paris was voluptuously extravagant, and Berlin was a spasm of idiosyncratic excess.

Actor and director Kurt Gerron had his own very sad end. Although the video clip here merely says he died at Auschwitz in Okt 1944, it does not remind us that just before his death Gerron, himself a Jew, produced a propaganda film documentary, probably under enticement and coercion, for the Nazis about the 'ideal and humane conditions' for the Jewish inmates at Theresienstadt. Such are the ways of the captive mainstream media and the demimonde of the status quo. Mackie, welches war dein Preis?

After it was finished he was shipped to Auschwitz and shot on arrival: advanced profit sharing from the Reich's wages of death. I found a documentary on the internet, Prisoner in Paradise, that speaks to this sad little chapter.

The song of history resonates through time, with like instruments. But what if someone removes all the strings, leaving only empty minds and vacant stares?

I became aware of Brecht as a playwright during a course of study while an undergraduate in university while taking a course in modern drama. I do not remember so much now except that my favorite of Brecht was Mutter Courage und ihre Kinder, or simply, Mother Courage.

The Mackie Messers of Wall Street are nothing new. Each generation has the responsibility to rein in its predators. It is just a question of whether anyone will sing a ballad about them after they are gone.

Let's hope someone sings for our children, so they will not forget, even if they are taken by clumsy hands into insensate barbarity again.

And what if the Café closes, and the lights go out all over Europe again? Our culture is now so artificial, it will not even remain as dust. But the word, and its song and those who hear it, never die, outliving the artifice and most monumental objects of men. And so there is always room for joy and optimism, and even love among the ruins, but not despair.

In Egypt's sandy silence, all alone,
Stands a gigantic Leg, which far off throws
The only shadow that the Desert knows:
I am great Ozymandias, saith the stone,
The King of Kings; this mighty City shows
The wonders of my hand. — The City's gone,
Nought but the Leg remaining to disclose
The site of this forgotten Babylon.

We wonder, and some hunter may express
Wonder like ours, when through the wilderness
Where London stood, holding the wolf in chase,
He meets some fragment huge, and stops to guess
What powerful but unrecorded race,
Once dwelt in that annihilated place.

Horace Smith, Ozymandias, 1818

Gold Daily and Silver Weekly Charts

The metals reversed lower today as fresh selling hit the markets along with selling in the equities.

Jitters about the German vote and European debt situation were blamed.

See today's stock charts posting for commentary.

My view of the metals action is skeptical if not downright cynical.  I assumed we would have a down day in the metals to knock out any brave souls whose call options went out in the money yesterday, and found themselves holding fresh futures contracts today.

But the market is what it is, and we need to wait for the downtrend to break. It is drawn on the gold chart in blue.