25 August 2009

The Man Who Exposed Madoff Cites Government Complicity in Fraud


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

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

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

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

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

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

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


AFP Interviews Harry Markopolos

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

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

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

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

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

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

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


The German patience with the EU is admirable.

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

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

Central Banking Publications
Weber Aims High
25 August 2009

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

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

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

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

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

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

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

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

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

Saving the Federal Deposit Insurance Corporation


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

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

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

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

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

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

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

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

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

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


24 August 2009

Henry Kaufman: The Road to Financial Reformation


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

Henry Kaufman Interview Regarding Financial Reform - Bloomberg Television 24 August

Or here on Youtube Henry Kaufman Interview Aug 24

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

Sept. 22 Kaufman Lecture

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

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

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

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

Why Is the Fed Creating Excess Reserves in the Banking System and Paying Interest on Them?


There have been some interesting side discussions at various venues including Naked Capitalism about the recent essay which I had posted titled When At First You Don't Succeed, Bring in the Reserves.

Let me clarify some points.

Yes, banking reserves in the US are a function of the Fed's Balance Sheet, by definition, because they are in the narrowest sense merely an accounting function, an entry on the books of the Fed reflecting actions undertaken by the Fed.

With purpose, I put the formal definitions of Reserve Bank Credit and Reserve Balances at the bottom of each chart. I had hoped this would make that point clear.

The essence of the essay was to point out the enormous increase in bank reserves which the Fed has created through their "New Deal for Wall Street" style banking programs. Because of this, the Fed has created a new function by which it pays interest on banking reserves, which to my knowledge it has never done before.

It is a new function at the Fed, and it does serve a important purpose. The purpose is to place a 'floor' under interest rates, in the face of a surfeit of liquidity which the Fed has created, and which shows up in the Adjusted Monetary Base, the Reserve Bank Credit figures, and so forth.

Now, some people have taken issue with my bringing the notion of excess Reserves to your attention for a variety of reasons. Even the mighty NY Fed has written a paper which attempts to defuse the notion that the excess reserves are indicative of anything that might be impeding lending.

Let me be clear about this.

The excess reserves are absolutely indicative of the Fed's having added substantial amounts of liquidity to the financial system. If the Fed were not paying interest on reserves, this liquidity would crush their target interest rates, since the banks are loath to hold reserves that are not generating some return. This is what they do, generate a return on capital. Capital has a price, even if it is an opportunity cost.

By establishing a floor, the Fed is setting a more blatant artificial level for interest rates, moreso than merely tinkering with drains and adds to the system. They are offering a riskless rate of return, and crowding out other competing requests for capital. Not necessarily a bad thing, but a reality of what they are doing.

What would happen if the Fed raised the interest rate it pays on reserves to let's say, twenty percent?

Economic activity in the US would grind to a halt, as banks placed every available dollar idly with the Fed's program, eschewing all other deals, liquidating assets if necessary, to place capital where it would receive the highest risk adjusted return. In essence, the Fed would 'crowd out' all other transactions that offered a lower risk adjusted return.

What if the Fed subsequently lowered the interest rate from twenty percent to zero? It would then enable more lending from the banks, as they sought to deploy their capital at higher risk adjusted rates.

There are some by the way that claim the excess reserves are so high because there is no demand for loans. This is a point of view only supported by those who a) have no understanding of finance and b) are seeking to support an extremely odd and mistaken view of the economy which seeks to justify their bets on a serious deflation.

There is always a demand for loans as long as there is economic activity; what varies is the price! Money is not particularly inelastic; that is, there is a rather high threshold at which people say, "I have too much!" It is rather a question of price, relative to return. Make the opportunity cost high enough and they will come (or be fired).

I hereby assert that I will borrow ALL funds the Fed might loan to me with no collateral at zero interest, and gladly so, as long as the short term US Treasury bills are paying more than 25 basis points interest. I reserve the right to defer on this offer if the Fed should make the policy error of hyperinflation a reality.

I hate to make points like this in the extreme with distorted examples, but sometimes it is what it requires to pierce through obfuscation to common sense.

So to summarize, what is the Fed likely to do if economic activity falters?

They are likely to lower interest rates paid on excess reserves closer to zero. They could even charge a 'haircut' on excess reserves which would highly motivate the banks.

These are all things which have been discussed before, often in the context of consumers! In fact, it is well known among bankers that as the Fed lowers interest rates money flows out of lower paying instruments like bank deposits and money markets, and into higher paying instruments that might be deemed too risky at high rates of riskless return. Such higher paying instruments are known as "stocks" and "corporate bonds." As former central banker Wayne Angell gleefully chortled in 2004, the Fed can indeed drive the public out of their savings and money market funds and into the equity markets by manipulating interest rates.

Does the Fed always 'create' excess reserves? It may be more correct to ask, does the Fed always create money, since excess reserves are an accounting function.

No. Banking reserves normally lag the creation of money, which is accomplished by lending, either from banks or more recently by neo-banks like Fannie, Freddie, GMAC, GE and so forth.

But at a time when economic activity is contracting, and the credit markets were seizing, the Fed took the lead in money creation by "monetizing" various types of debt. And they are going to enormous pains to maintain 'confidence' in the system and in particular the US dollar and debt. But we may ask, at what point does the confidence game become a con game? I would submit that it is when the Fed and Treasury purposely intervene in markets, beyond their normal interest rate targeting, and statistics and spread disinformation to manage perception.

There are other ways in which the Fed might address the failure of the productive economy to 'pick up the ball and run with it.' But most, if not all, of them involve the monetization of something, which is what happens when the Fed (and US Treasury) are taking the lead in money creation and not the productive economy.

Deflationists do not want to hear this, and central bankers do not wish you to know this, but it is the major factor in a fiat currency that it can be created literally 'out of nothing.'

This is why we have said long ago, and repeated since, that the limiting factor on the Fed's ability to create money is the value of the US Dollar and the sovereign debt.

As long as there is debt which can be monetized, then the Fed can monetize it and create money 'out of nothing.' For now they are acting with some reestraint, and channeling that money primarily to their cronies in the banking system, still able to mask the effects of their monetary inflation. CFTC Moves to Rein In Small Investors From Commodity ETFs

But the time is coming when they will not. And as they did when they demanded $700 billion in bailout money, the financiers will once again make the Administration and the Congress an offer which they think that 'we' cannot refuse, if only because the Congress will not listen if we tell them what we wish them to do, again.

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

22 August 2009

When At First You Don't Succeed, Bring In the Reserves


Someone asked why Bernanke seemed so positive about the US recovery, and what he would do if his prediction turned out to be incorrect.

The first answer is rather straightforward. He is 'jawboning' or trying to increase confidence in the system to motivate businesses to spend and consumers to buy. The Fed can only set the playing field, but the players have to be confident enough to take the field. We think he is underestimating the neglect that the American consumer has taken over the last twenty years in terms of their overall poor condition (real income), and the disrepair of their equipment (household balance sheets), not to mention the rocks and snares and pitfalls remaining on the field from the gangs of New York and the economic royalists.

But let's assume Bernanke's first major gambit does falter. What is he likely to do next?

Beranke's Fed does have a printing press, and he has been using it as we all know. Here is a chart showing the expansion of the credit side of the Fed's Balance Sheet. This is from the top line labeled "Reserve Bank Credit" from the weekly H.41 report which is becoming more popularly followed these days. If one adds the Feds gold holdings, currency in circulation, and Special Drawing Rights, we get the Total Factors Supplying Reserve Funds.

http://www.federalreserve.gov/releases/h41/Current/



So what would Ben do for "Plan B?" Would he merely add more programs, expand the Fed's Credit Items even more aggressively?

There was an important function added to the Fed's bag of tricks during this crisis that has not received sufficient attention perhaps: their ability to pay interest on reserve funds on deposit with the Fed from the Member Banks.

As can be seen from this next chart, this amount is now substantial running close to a trillion dollars. A portion of this would be characterized as 'excess reserves.' The Fed should be able to motivate banks to use these reserve by adjusting the riskless interest rates they pay.

This was a much desired tool by the monetarist Fed because it enabled them to expand their Balance Sheet and add a significant amount of credit to the banks system immediately, but to keep 'a bit of a leash' on the downstream effects of this liquidity even after it was deployed.

As the Fed's interest rate remains sufficiently high, the reserves, especially the excess reserves, remain in the banking system, and are not deployed actively as loans and inflationary additions to the financial system.

The Fed issues an H3 report, Aggregate Reserves of Depository Institutions and the Monetary Base. In their latest report, they characterize $708.5 Billion of these reserves as 'Excess Reserves.'

So, what we might expect to see is the Fed, as the banking system stabilizes after perhaps some new programs and credit facilities, begin to slowly unleash these excess reserves by reducing the interest to the Member Banks, which would lower the bar and motivate them to engage in more commercial loan activity.

We think one problem is that the banks have more options than merely keeping their excess capital at the Fed or loaning it out to private companies.

Certainly Goldman Sachs has shown that it can defy all the odds and make millions each day by aggressively playing the equity, bond and credit markets. It is also more likely that banks would be inclined to invest their excess capital through acquisitions of other banks, which might represent a moral hazard in creating fewer, and more "too large to fail" institutions.

Therefore we might see the first serious moves towards financial reform before the Fed begins to really unleash the liquidity which they have created in the banking system.

There is of course also their monetization of Treasury Debt, to support the stimulus programs being run from the fiscal side of the US financial apparatus. That would be included in the expansion of their Balance Sheet, and we would expect that to continue on at the very least indirectly, if not overtly on the Fed's balance sheet.

An Aside on the Gold Stock of the Fed

By the way, one method the Fed might use to immediately expand its Balance Sheet would be to recognize that their gold stock is significantly undervalued.

In the H.41 Report, the Fed shows a credit of $11 billion dollars in Gold Stock held primarily in New York, Chicago, Atlanta, and San Francisco, with lesser amounts at each of the Regional Banks. This gold is part of the collateral against the Federal Reserve Notes in circulation, and has been valued at an official rate of $42.22 per troy ounce for many years.
1. Gold held "under earmark" at Federal Reserve Banks for foreign and international accounts is not included in the gold stock of the United States; see table 3.13, line 3. Gold stock is valued at $42.22 per fine troy ounce
By calculation the Fed has 261,511,132 fine troy ounces on its books. If the Fed revalued their gold stock at a more reasonable market price of let's say $1000 per ounce, then this would immediately add $261 billion to the Fed's Balance Sheet IF the gold is really held by the Fed without encumbrances.

One has to wonder why the Fed has never taken the revaluation on its Balance Sheet for gold since the value of $42.22 is so clearly an historic artifact. They perform much more market based calculations for the Special Drawing Rights and their Foreign Exchange holdings. One certainly does not need to sell the gold in order to monetize it, since that has already been accomplished, albeit at a much lower rate.

One can only wonder.

Federal Reserve H3.1.2 US Reserve Assets


21 August 2009

SP Futures Hourly Chart at Noon


The "W bottom" worked, and equities blew through the Pivot this morning on 'better than expected' housing starts, and a general consensus among the financial spokesmen that the recession is over, although with risks to the downside if stimulus and more importantly monetary support from the Fed, is withdrawn from the financial system too quickly.

Today is option expiration in August. Our high confidence target of 1021 has been met on the chart. Now the market must prove that it can consolidate and move higher.

Our view is that the recession is not over, and that the Fed and Treasury have merely papered over the substantial problems that remain, while alleviating the short term credit crunch issues with absolutely massive injections of liquidity directly into the banks.

Having said all that, stocks can rise without regard to any fundamentals for some time if there is enough will and capital to make it happen. Treasury and the Fed wish this badly because rising stocks will quickly make people forget their mistakes and uneven policy reactions.

Can they do it? We will see. The result *should* be another financial asset bubble at best, a lingering zombie economy very likely at worst.

Should they fail, probably off an exogenous event which can absorb the blame, then the market will fold like an old accordion because there is little commitment underneath it, only paper.


20 August 2009

Why the Austrian, Keynesian, Marxist, Monetarist, and Neo-Liberal Economists Are All Wrong


US Personal Income has taken its worst annual decline since 1950.

This is why it is an improbable fantasy to think that the consumer will be able to pull this economy out of recession using the normal 'print and trickle down' approach. In the 1950's the solution was huge public works projects like the Interstate Highway System and of course the Korean War.

Until the median wage improves relative to the cost of living, there will be no recovery. And by cost of living we do not mean the chimerical US Consumer Price Index.

The classic Austrian prescription is to allow prices to decline until the median wage becomes adequate. Given the risk of a deflationary wage-price spiral, which is desired by no one except for the cash rich, the political risks of such an approach are enormous.

On paper it is obvious that a market can 'clear' at a variety of levels, if wages and prices are allowed to move freely. After all, if profits are diminished, income can obviously be diminished by a proportional amount, and nothing has really changed in terms of viable consumption.

The Supply side idealists (cash rich bosses, Austrians, neo-liberal, monetarist, and deflationist theorists) would like to see this happen at a lower level through a deflationary spiral. The Keynesians and neo-classicals wish to see it driven through the Demand side, with higher wages rising to meet the demands of profit in an inflationary expansion. Both believe that market forces alone can achieve this equilibrium. Across both groups runs a sub-category of statism vs. individualism.

Unfortunately both groups are wrong.

Both approaches require an ideal, almost frictionless, objectively rational, and honest economy in order to succeed. The Keynesians have a bit of an edge in this, because it is easier to control inflation than deflation in a fiat regime, and the natural growth of inflation tends to satiate the impulse to greed. They don't care if they can buy more as long as they can say they HAVE more. People tend to be irrational, and there is a percentage of the population that is irrationally greedy and obsessively rapacious. People are not naturally 'good.'

The greatest flaw in the many studies that come from each of the schools to prove their point is the brutal way in which they flatten the reality of the markets and make assumptions to allow their equations and analysis to 'work.' They spend most of their energy showing while the 'other school' is a group of ignorant fools, doomed to ignominious failure, in an atmosphere reminiscent of a university departmental meeting.

This has quietly scandalized those from other scientific disciplines who review the work of many of the leading economists. Benoit Mandelbrot was poking enormous holes in the work of the leading economists long before Nassim Taleb made it more widely known. The ugly truth is that economics is a science in the way that medicine was a profession while it still used leeches to balance a person's vapours. Yes, some are always better than others, and certainly more entertaining, but they all tended to kill their patients.

The most intractable part of the current financial crisis, and the ongoing problem of the US economy is the huge tax which is levied on the American public by its corporations, primarily in the financial and health care sectors, and a political system based on lobbyists and their campaign contributions.

There are hidden taxes and impediments to 'free trade' at every turn. The ugly truth is that capitalism-in-practice hates free markets, always seeking to overturn the rules and impose oligopoly if not outright monopoly through barriers to entry, manipulation of the political process, distortion of regulation, predatory pricing, brute force, and the usual slate of anti-trust practices.

Some of these 'hidden taxes' are the bonuses on Wall Street which require an increasing percentage of the financial 'action.' The credit cards fees and penalties levied by banks to support profits in a contracting economy. The Sales General & Administrative portion of the Income Statements of the pharmaceutical industry which only American consumers seem willing to pay. A health care system which is a monument to overspending, outrageous pricing, and greed.

The notion that "if only government would not regulate markets at all everything would be fine" is a variation of Rousseau's romantic notion of the noble savage which no one believes except those who wish to continue to act like savages, and those who get no closer to the real work of an economy than their textbooks. Economic Darwinism works primarily to the advantage of the sharks. Anyone who believes that 'no regulations' works well has never driven on a modern highway at peak periods.

Yes, a certain portion of the population are adult, and generally good and fair. But there is a percentage of the population that is not. And since the 1980's they have been encouraged by the culture of relativism and greed to 'express themselves' and so they have, with a vengeance.

Discussion rarely proceeds very far because of the dialectical nature of American thought. Both extremes are wrong, but they seem to content to merely bash each other, pointing out their errors, while repeating the same mistakes over and again.

The engineering of the economy has become married to the engineering of the political dialogue by the corporate media and their political parties. "The engineering of consent is the very essence of the democratic process, the freedom to persuade and suggest." Edward L. Bernays 1947

The condition of the American economy is strikingly similar to the Soviet state economy of the last two decades of the 20th century. People are trying to sustain a system "as is" that is based on bad assumptions, unworkable constructions, conflicting objectives, and a flagging empire laced heavily with elitist fraud and corruption. The primary difference is that the US has a bigger gun and its hand is in more people's pockets with the dollar as the world's reserve currency. But the comparison seems to indicate that the economy must indeed fail first, before genuine change can begin, because the familiar ideology and practices must clearly fail before they can recede sufficiently to make room for new ways and reforms.

A new school of Economics will rise out of the ashes of the failure of the American economy as happened after the Great Depression. Let us hope that it is better than what we have today.

In the short term, what does all this mean?

There is NO system that will work without substantial, continuing effort, and continual adaptation and commitment to a certain set of goals that are more about 'ends' than ideological process.

Because our system has been abused for so long, and is so distorted and imbalanced and dominated by a relatively few organizations beholden to a self-serving status quo, reform is not an afterthought, it is the sine qua non.

It means that until the banks are restrained, and the financial system is reformed, and balance is restored, there can be no sustained recovery.



SP Futures Hourly Chart at 10:45 AM


The dynamic on the chart is the short term potential double bottom "W" and the developing intermediate H&S distribution top.

A pullback of 4% with a move to a higher high is supportive of the 'new bull market' scenario and we would expect the media cheerleaders and paid market strategists to hit the pom poms hard if the Street can make this happen.

Volumes are light enough. But we also sense a growing cynicism and distrust of the US financial markets in traders and investors. There is a recognition that the game is rigged, and the 'house' is skimming a larger piece of the daily liquidity thanks to government money and new technology.

This 'skim' may destroy a game while enriching the house, as all seasoned casino operators know. It is not clear to us that the Wall Street crowd can practice this sort of longer term restraint.