The Dangerous US Financial Sector Is Still Smoldering and May Reignite

Timmy and the Merry Pranksters at the Treasury and the Fed are throwing taxpayer money at the financial sector with the same prudence with which Angelo Mozilo used sunblock.

Smothered by paper, the fire in the financials is still smoldering, and could reignite with the breezes of further credit contractions in commercial real estate, mortgage foreclosures, and frothy debt in the developing world.

When the US financial system tumbles there should be little doubt where Ben, Tim, Larry, and their Boss failed the American taxpayer and all holders of US debt.

The ratings fraud and accounting deception will continue until confidence is restored.


Barron's
More Nasty Bank Surprises
By JIM MCTAGUE
November 28, 2009

THERE'S GROWING EVIDENCE THAT THE CASE FOR buying financial stocks is larded with "bulloney." Recent indications are that bank regulators from the Treasury to the Federal Reserve to the Federal Deposit Insurance Corporation and on to the state level remain in the dark about the quality of bank-loan portfolios -- especially at small to midsize institutions. An estimated 21 publicly traded banks that have received TARP injections are on the ropes, according to published reports. The number likely will grow, leading to some nasty surprises for investors.

Because of the political antipathy toward Wall Street, the consensus is that any Congressional financial regulatory reform bill will be punitive in the extreme and consequently inhibit the growth and profitability of the sector for years to come. This hardly is a buy signal.

The latest and perhaps most startling evidence of endemic regulatory weakness is the failure this month of two banks and the bankruptcy of CIT, all recipients of TARP funds from Treasury after they were deemed earlier in the year by "expert" regulators to be safe and sound. CIT received $2.3 billion in taxpayers-financed TARP funds; UCBH Holdings, parent of San Francisco's United Commerce Bank, received $299 million; and Pacific Coast National Bank, a San Clemente, Calif., lender, received $4.1 million. All were publicly traded.

The aforementioned 21 wobbly publicly traded companies that have received TARP money had zero or negative net income. They've suspended dividend payments to the Treasury. Regulators vetted all of these institutions, using the "CAMELS" rating system. CAMELS stands for "Capital, Asset quality, Management, Earnings, Liquidity, and Sensitivity (which measures interest-rate risk, exchange-rate risk, and other market risk). Each bank's CAMELS score is secret. Banks with the lowest scores were excluded from TARP. Those with the highest scores were fast-tracked. Banks with average CAMELS scores received the most extensive vetting. They were recommended by their primary regulators for review by a panel of experts from the FDIC, the Fed and the Office of the Comptroller of the Currency. The panel then forwarded the case file on to the Treasury.

Some of the TARP awards seem outlandish. Linus Wilson, an assistant professor of finance at the University of Louisiana, points out that CIT Group's preferred stock was yielding an astronomical 20% before it received a TARP investment intended for healthy banks. The regulators demanded dividends on the TARP money of just 5%. Wilson says that regulators should have been able to determine in five minutes that this return was far too low to compensate taxpayers for the risk.

No surprise then that regulators recently determined that $5.1 billion in TARP funds are not in healthy banks but rather in banks that have failed or, may soon fail.

As for legislation, be assured it will toughen oversight, increase capital requirements and enhance consumer protection. Profits will shrink. The universe of financial institutions will contract. Here's hoping that you are better than regulators at picking winners from losers.

The 38 Year Cycle in US Monetary History

I am not a big believer in comprehensive cycle theory. The weakness of cycles is the same as all systems that seek to impose an external order on natural events and occurrences: one can always find something to fit in a less than rigorously defined methodology. This applies from biblical prophecy codes based on the placement of words and letters, to cycle and wave theories with a wide range of alternatives.

However, I also believe in what call 'generational memory.'  People as a group often forget the lessons of the past, and human nature being what it is, events based on bad judgement and reckless behaviour seem to recur at regular intervals.  Or as J.K.Galbraith observed, there are essentially no new financial frauds, just new variations on the established themes.

If there was any 'tell' for the current crisis, it was the general overturning of the safeguards for the financial system that had been put in place in the aftermath of the financial panic of 1929 and the Great Depression that followed, culminating in the eventual overturn of Glass-Steagall and the ascendancy of extreme leverage using exotic, unregulated instruments.

This is why we call this a generational change. This is no slump, and not even a common recession. And it is far from over.

We are experiencing some major changes that are easily lost when one only looks at the day to day moves, listens to the description of events on the mainstream media, and of course, have a lack of memory, a knowledge of history, of things that have happened to their grandfathers and great grandfathers. The arrogant ignorance of so many still in place is a sure sign of greater chastisement to come, until the lessons of history are learned again, and the system is brought back into a sustainable balance.

2009

The story is still being written, and history will have its say over time. But it will likely include the reckless expansion of credit by the Greenspan Fed, the lapses in financial regulation, the overturn of Glass-Steagall, and the financial scandals including LTCM, Enron, Worldcom, culminating in the failure of the US banking system which began in 2007 including the de facto nationalization of the banks.

The loss of confidence in the informal Bretton Woods II arrangement with the dollar as the world's reserve currence with the rise of alternatives, precipitated by the unprecedented expansion of the monetary base by the Bernanke Fed including the monetization of private debts, will be the hallmark of the crisis from a monetary perspective.

1971

Nixon Closes the Gold Window on Bretton Woods

"The Nixon Shock was a series of economic measures taken by U.S. President Richard Nixon in 1971 including unilaterally canceling the direct convertibility of the United States dollar to gold that essentially ended the existing Bretton Woods system of international financial exchange.

By the early 1970s, as the costs of the Vietnam War and increased domestic spending accelerated inflation, the U.S. was running a balance of payments deficit and a trade deficit, the first in the 20th century. The year 1970 was the crucial turning point, which, because of foreign arbitrage of the U.S. dollar, caused governmental gold coverage of the paper dollar to decline 33 percentage points, from 55% to 22%. That, in the view of Neoclassical Economists and the Austrian School, represented the point where holders of the U.S. dollar lost faith in the U.S. government’s ability to cut
its budget and trade deficits.

In 1971, the U.S. government again printed more dollars (a 10% increase) and then sent them overseas, to pay for the nation's military spending particularly in Vietnam and private investments. In May 1971, inflation-wary West Germany was the first member country to leave the Bretton Woods system — unwilling to deflate the deutsche mark to prop up the dollar.

Because of the excess printed dollars, and the negative U.S. trade balance, other nations began demanding fulfillment of America’s “promise to pay” - that is, the redemption of their dollars for gold. On 5 August 1971, Congress released a report recommending devaluation of the dollar, in an effort to protect the dollar against foreign speculators.

To stabilize the economy and combat runaway inflation, on August 15, 1971, President Nixon imposed a 90-day wage and price freeze, a 10 per cent import surcharge, and, most importantly, “closed the gold window”, ending convertibility between US dollars and gold. The President and fifteen advisors made that decision without consulting the members of the international monetary system, thus the
international community informally named it the Nixon shock.

Given the importance of the announcement — and its impact upon foreign currencies — presidential advisors recalled that they spent more time deciding when to publicly announce the controversial plan, than they spent creating the plan. He was advised that the practical decision was to make an announcement before the stock markets opened on Monday (and just when Asian markets also were opening trading for the day). On August 15, 1971, that speech and the price-control plans proved very popular and raised the public's spirit. The President was credited with finally rescuing the American public from price-gougers, and from a foreign-caused exchange crisis." Wikipedia

1933 - 1934

Suspension of the Gold Standard and Dollar Devaluation

"In early 1933, in order to fight severe deflation Congress and President Roosevelt implemented a series of Acts of Congress and Executive Orders which suspended the gold standard except for foreign exchange, revoked gold as universal legal tender for debts, and banned private ownership of significant amounts of gold coin. These acts included Executive Order 6073, the Emergency Banking Act, Executive Order 6102, Executive Order 6111, the Agricultural Adjustment Act, 1933 Banking Act, House Joint Resolution 192, and later the Gold Reserve Act. This set up the devaluation of the dollar. In early 1934 F.D.R. increased the price of gold by 69%($20.67 to $35/oz). This represented a 41% devaluation of the US dollar." Dollar Devaluation in 1934, I. M. Vronsky

1895

Gold Panic: U.S. Gold Supply Running Dry

"The early 1890s were not kind to America's gold reserves...Coupled with declining revenues triggered by various protective tariffs, the reserves plummeted, taking a severe toll on the economy. In 1893, the falling gold supply helped spark a debilitating financial crisis known as the Panic of 1893...By February 8, 1895, the gold supplies had thinned out to a paltry $41 million.

With the U.S. Treasury teetering on the brink of bankruptcy, Cleveland intervened, and using a syndicate led by J.P. Morgan as an intermediary and U.S. bonds as bait, attempted to buy back gold from foreign investors. Cleveland sold roughly sixty-two million dollars worth of bonds, valued at 3.75 percent, to Morgan's syndicate. Morgan and company in turn shopped the issues to foreign parties for a handsome profit. Although clearly borne of desperation, the deal nonetheless provided some badly needed relief: it briefly spelled the gold crunch and saved the Treasury from disaster. " This Day in History

1857

The Panic of 1857

"The Panic of 1857 abruptly ended the boom times that followed the Mexican War. The immediate event that touched off the panic was the failure of the New York branch of the Ohio Life Insurance and Trust Co., a major financial force that collapsed following massive embezzlement. Hard on the heels of this event arrived other setbacks that shook the public's confidence...

Widespread railroad failures occurred, an indication of how badly over-built the American system had become. Land speculation programs collapsed with the railroads, ruining thousands of investors.

Confidence was further shaken in September when 30,000 pounds of gold were lost at sea in a shipment from the San Francisco Mint to eastern banks. More than 400 lives were lost as well as a loss of public confidence in the government's ability to back its paper currency with specie.

In October, a bank holiday was declared in New England and New York in a vain effort to avert runs on those institutions. Eventually the panic and depression spread to Europe, South America and the Far East. No recovery was evident in the United States for a year and a half and the full impact did not dissipate until the Civil War."

1819

The Panic of 1819

"The causes of the Panic of 1819 were the first to largely originate within the U.S. economy. The resulting crisis caused widespread foreclosures, bank failures, unemployment, and a slump in agriculture and manufacturing. It marked the end of the economic expansion that had followed the War of 1812. However, things would change for the US economy after the Second Bank of the United States was founded in 1816, in response to the spread of bank notes across United States from private banks, due to inflation brought on by the debt following the war.

In the event, President Monroe, interpreting the economic crisis in the narrow monetary terms then current, limited governmental action to economizing and ensuring fiscal stability. He acquiesced in suspension of specie (gold) payments to bank depositors, setting a precedent for the Panics of 1837 and 1857."

Mark Pittman, Investigative Journalist

Bloomberg
Mark Pittman, Reporter Who Foresaw Subprime Crisis, Dies at 52
By Bob Ivry

Nov. 28 (Bloomberg) -- Mark Pittman, the award-winning investigative reporter whose fight to open the Federal Reserve to more scrutiny led Bloomberg News to sue the central bank and win, died Nov. 25 in Yonkers, New York. He was 52.

Pittman suffered from heart-related illnesses. The precise cause of his death wasn’t known, said his friend William Karesh, vice president of the Global Health Program at the Bronx, New York-based Wildlife Conservation Society.

A former police-beat reporter who joined Bloomberg News in 1997, Pittman wrote stories in 2007 predicting the collapse of the banking system. That year, he won the Gerald Loeb Award from the UCLA Anderson School of Management, the highest accolade in financial journalism, for “Wall Street’s Faustian Bargain,” a series of articles on the breakdown of the U.S. mortgage industry.

“He was one of the great financial journalists of our time,” said Joseph Stiglitz, a professor at Columbia University in New York and the winner of the 2001 Nobel Prize for economics. “His death is shocking.”

Pittman’s fight to make the Fed more accountable resulted in an Aug. 24 victory in Manhattan Federal Court affirming the public’s right to know about the central bank’s more than $2 trillion in loans to financial firms. He drew the attention of filmmakers Andrew and Leslie Cockburn, who gave him a prominent role in their documentary about subprime mortgages, “American Casino,” which was shown at New York City’s Tribeca Film Festival in May.

‘One Reporter’

“Who sues the Fed? One reporter on the planet,” said Emma Moody, a Wall Street Journal editor who worked with Pittman at Bloomberg. “The more complex the issue, the more he wanted to dig into it. Years ago, he forced us to learn what a credit- default swap was. He dragged us kicking and screaming.”

James Mark Pittman was born Oct. 25, 1957, in Kansas City, Kansas, where he played linebacker on the high school football team. He took engineering classes at the University of Kansas in Lawrence before graduating with a degree in journalism in 1981. He was married soon after and had a daughter, Maggie, in 1983. The marriage ended in divorce.

Pittman’s first reporting job, covering the police department for the Coffeyville Journal in southern Kansas, paid so little he took a part-time job as a ranch hand across the Oklahoma border in Lenapah, according to an interview he gave to Ryan Chittum for the Columbia Journalism Review’s The Audit, a watchdog for the business press.

‘Huge Personality’

“What a funny guy -- huge personality,” Chittum said in an e-mail message. “Mark was my favorite reporter working. In a time when too much journalism is timid or co-opted, Mark personified the whole ‘afflict the comfortable’ tenet of the business. Mark’s passing is a huge loss for journalism at a time when we can least afford it.”

Pittman spent a year in Rochester, New York, with the Democrat & Chronicle newspaper and 12 years at the Times Herald- Record in Middletown, New York, where he met his second wife, Laura Fahrenthold-Pittman in 1995.

“All I know is we fell in love the moment we met,” Fahrenthold-Pittman said in an interview Friday. “We moved in together a week later. He was as serious about his family life as he was about work. Mark did nothing in a small way.”

Pittman joined Bloomberg News in 1997. In 2007, he was writing about the securitization of home loans when subprime borrowers, who have bad or limited credit histories, began missing payments on their mortgages at a faster pace.

S&P, Moody’s

His June 29, 2007, article, headlined “S&P, Moody’s Hide Rising Risk on $200 Billion of Mortgage Bonds,” was excoriated at the time by Portfolio.com for “trying to play ‘gotcha’ with the ratings agencies.”

“And that really isn’t helpful,” said the unsigned posting.

Pittman’s story proved prescient. So did his reports on U.S. banks exporting toxic mortgages overseas, on Treasury Secretary Henry M. Paulson’s role in creating those troubled assets while he was chief executive officer of Goldman Sachs Group Inc. and on the U.S. bailout of American International Group Inc.

“He’s been on this crisis since before the crisis,” said Gretchen Morgenson, the Pulitzer Prize-winning financial columnist for the New York Times. “He was the best at burrowing into the most complex securities Wall Street could come up with and explaining the implications of them to readers of all levels of sophistication. His investigative work during the crisis set the standard for other reporters everywhere. He was a giant.”

‘Fearless, Trusted’

In the “Faustian Bargain” series, Pittman explained how 5 percent of U.S. mortgage borrowers missing monthly payments could lead to a freeze in lending throughout the world.

“Mark Pittman proved to be the most fearless, most trusted reporter on the most important beat during the 12 years he wrote about credit markets, corporate finance and the Federal Reserve at Bloomberg News,” said Bloomberg Editor-in-Chief Matthew Winkler. “His colleagues will miss his laughter and generous sense of mission. Bloomberg readers were rewarded by his many achievements culminating with a federal court ruling validating his search for records of taxpayer-financed policies withheld from the public and the Gerald Loeb Award.”

Public policy would be more effective if reporters, lawmakers and citizens understood how the financial system worked and why the crisis happened, Pittman said in the Feb. 27, 2009, interview with Chittum.

“Hopefully, we will be able to inform the people enough to know how badly we’re getting screwed,” he said with a laugh. “We need to know how to prevent it from happening again, and we need to know who did it.”

Booming Laugh, Bourbon

Standing 6 feet 4 inches (1.93 meters) with a booming laugh, a loud telephone voice and a taste for bourbon, Pittman made lifelong friends on Wall Street, in Congress, in journalism circles and in the artistic community after he and his wife opened an art gallery in Yonkers in 2005.

“I always learned something new when I spoke with Mark,” said Representative Scott Garrett, a New Jersey Republican on the House Financial Services Committee. “He was dogged in pursuit of the truth. This is a great loss for journalism and for those who relied on Mark for his insight.”

In “American Casino,” the title of which comes from an expression Pittman uses in the documentary, the filmmakers profile subprime borrowers who are losing their homes, mortgage brokers who made loans they knew their customers could never repay and bankers and ratings analysts whose companies profited from the housing boom...

Weekend Viewing: Fall of the Republic

A bit overstated and at times over the top, at least to my tastes.

However, it is important to hear the issues raised here, and to be aware of them. The documentary settles down after the first ten minutes and presents several thought-provoking ideas and observations.

Obviously one may likely not agree with them all, but again, listening to different perspectives helps us to calibrate where we are in troubled and confusing times.

Well of Emptiness: Family Day at the New York Stock Exchange

Today was 'Family Day' at the New York Stock Exchange. No it is not the day in which the boys celebrate the families which they have made homeless, the retirements they have ruined, and the faces they have ripped with their lugubrious bump and grind.

It is a day on which the junior people, semi-professional greeters, and B class spokesmodels who are stuck working on a long holiday weekend bring their kids to play on the big empty floor, growing emptier by the day as volume migrates to the Matrix, and the dark pools of the vampire squids. The better to eat you with, my dear.

And befitting a day of low volumes and maximum cynicism, the futures did almost exactly what we thought they might do and, after a well managed performance, absolutely nothing has been decided. We were thankful for a low open and an opportunity cover short positions, and then a nice long drift higher to let the long sides of our hedged positions go. And of course, shorts back on into the close, with moderation we hasten to add. No underestimating Tim and Ben here.

Another Sunday night is in the cards. Remember those? The long nights in which the players hold their collective breath while Asia opens, and then Europe, to see if the rest of the world is buying it, or continuing to sell it. When press releases from corporate giants and their government functionaries begin to leak the true estimates of the damage, shortly after they announce 'the fix' for the problem that they most recently swore great oaths did not exist.

The story of a potential sovereign default such as that of Dubai is not so much which banks are holding the actual loans, but rather, which counterparties are holding the Credit Default Swaps, and to what degree. This is still a derivatively challenged system, oversexed, overlevered, and unfortunately over here.

If it turns out that AIG is a counterparty on the wrong side of the banks again, it really would be a bit much, and Timmy should be fired the following day if he dares to utter the "B word."

There is a lot of theater in the markets and the media, all designed to shape perception, which is the last resort of the financial engineers and their corrupt politicians.

That is not a segway necessarily to the Jobs Summit wherein The One will sequester with the nation's leaders of a sort, and puzzle out what can be done to 'get more jobs.' So far the Obama Administration has resembled that of Herbert Hoover, rather than that of Franklin Roosevelt.

"Hoover quickly developed a reputation as uncaring. He cut unemployment figures that reached his desk, eliminating those he thought were only temporarily jobless and not seriously looking for work. In June 1930 a delegation came to see him to request a federal public works program. Hoover responded to them by saying: "Gentlemen, you have come sixty days too late. The Depression is over." He insisted that "nobody is actually starving" and that "the hoboes...are better fed than they have ever been." He claimed that the vendors selling apples on street corners had "left their jobs for the more profitable one of selling apples." Digital History Herbert Hoover and the 1930s

Have a pleasant weekend, and for our American readers, a tumultuous 'black Friday.' The results of the annual consumer binge will be portrayed and flayed to beat the band in the days to come. Remember that "you get what you pay for" but you also "pay for what you get," unless you are one of the bureaucractically blessed few who receive beyond all bounds of effort and any conceivable personal labour.

Here is the updated scorecard for the markets.

SP 500 Daily Chart: The Silence of the Turkeys

While Americans were celebrating their Thanksgiving Day holiday, the rest of the world gobbled 40 points from the December SP 500 futures.

Bears are doing high fives and the serial top callers are rolling.

Let's see if the correction will continue after the pilfering pilgrims are back on their prop desks.

Then again, maybe the Reverend Lloyd is just bringing in the sheaves. Why waste a crisis?

Up the trend, then down again. Trend is the trend, until it is not.

This *could* be the November selloff that was expected. Le Prop is on the short side to an acceptable degree. It could be a short ride, and so not taking it heavily short until we break this trend.

Until that point we either buy weakness and sell strength within the trends, or sit on our hands and do nothing.

Why is gold selling off, isn't it supposed to rise in times of crisis? Well, it did, and quite impressively, in the past week or so, in anticipation of this major failure in the world of paper finance. And now there is selling on the news.

Those who look for a one to one linear correlation between action and reaction will be sadly disappointed and confused, because that is not how the game is played by the banks. They trade in information, in dark pools and private whispers, and the dollars are the means of keeping score.

This is why timing buys and sells is so difficult, especially in hotly speculative markets like the US equity market, just for an example, because the game you are allowed to see on the table is not necessarily the one that is really being played. So better to play the long trends, where the short term does not matter.

But all is not lost. We still have a feeling that the word has gone out from Timmy to Lloyd that the puppies will not buy their puppy chow if the markets are gloomy, and this is why we are in a flat to rising trend in stocks.

Keep in mind that there is always an up and down movement within the trends, especially those whose action is artificial. We are nearing the downstroke on the charts on the overnight trade, which catches most small players unable to adjust and set up to take losses both in the running of their stops, and the severe adjustment from panic selling on the open.

So that's our play, but if we break the trend, well, it's a nice time to be in that safe harbor after all.

Dubai's Move On Debt Rattles Markets Worldwide - New York Times





US Dollar Index at 6:30 AM EST

The Tide of History and The Spirit of Human Resilience

Why do so many people continue to turn their noses up at an investment with returns like those listed below? And not only that, why do small groups continue to aggressively attack the very notion that it is genuine, a real trend, a development with appeal across many nations and people, a sustained market trend that is telling us something?

Returns, I might add, that are supported by very strong fundamentals of supply and demand. Coming off a twenty year bear market in which supply was diminished, and burdened by years of central bank selling that seemed to be non-profitseeking and bureaucratically determined to crush any rallies, the market turned off the bottom in 2001 and has barely looked back since except for brief corrections.

"Since the start of the decade gold has been in a strong secular bull market in which it has had only one negative year (2001) while the S&P 500 has had four. Gold’s strong performance has produced a cumulative return of 311.54% for an annualized return of 15.18% per annum this decade. In stark contrast, the S&P 500 has been in a secular bear market in which its cumulative return has been a negative 24.52% for a negative 2.77% annualized return. While gold has had periods of volatility (risk), what the above numbers indicate is that gold has had a superior investment profile relative to the stock market.." Chris Puplava, Gold and Newton's First Law of Motion

Central banks are now net buyers in the aggregate for the first time in many, many years. This is a significant change since they were a major source of marginal supply. The post Bretton Woods dollar regime created by Nixon in 1971 is shaking hard, trembling the foundations of a world currency system based on financial engineering, empire, and oil.

When the unthinking mob starts buying, and gold and silver are no longer considered eccentric but essential, and local shops and banks start buying and selling the metal, then it will be the time to sell. But probably not before.

This is a phenomenon, a generational occurrence. Personally, it is fascinating, and worth having retired early to see it unfolding day by day.

I have analyzed this market trend repeatedly over time, from many different dimensions, and have listened to every argument, pro and con. It holds water, it makes sense, adds up; it seems grounded in free market principles, historical trends, the invisible hand of the market. It is a keystone of Austrian economics.

And unless it is otherwise impeded, it will most likely continue for some time, until the financial engineering of bubble-nomics subsides, and returns on paper become 'real' again. When the world of fiat currency and finance becomes less arbitrary and more predictable, more stable and just. More rational and some might say, conventional.

The rally in precious metals sparks fear and envy in many; it makes them genuinely angry and emotional, even otherwise intelligent and rational people. And one must surely ask, "Why?"

I remember vividly a warm spring day in Red Square in 1996, watching a small group of the old guard, long time Communists, demonstrating against Yeltsin and the reforms of Gorbachev. They did not like the changes, and railed against them, dressed in their shabby clothes with their once mighty banners, now drooping.

Their savings in roubles were decimated, and the worst devaluation was yet to come with the debt crisis of 1998. The once mighty Soviet republic was in disarray. They clearly did not like it, violently opposed it, denied it, while yearning for the past. There was no one in the queue at Lenin's tomb, and even though it was absolutely deserted in the middle of the day, the young soldier on guard yelled reflexively at us to "hurry, move along" in an almost surreal way. He did not know what else to do.

And no one cared, except for a few curious onlookers like our small group. No one noticed. They were being made extinct by change which they would not, could not, accept because it conflicted with their view of how the world had been and how it should continue to be. They held to their familiar, conventional wisdom, and became out of synch with the times, an oddity, almost atavistic.

There were vibrant business opportunities although the risks were high. Shortages and 'criminal gangs ' were in the ascendancy, to a notorious degree, but the surface was peaceful overall. Life goes on, always. I had long conversations with many entrepreneurs, including those who were acting to solve the problems that were plaguing many Western corporations, who were in business to make things work, to find opportunity in the change, who were trying to make their way. One door closes, but another door opens. We made a good business of it, and some friends who are remembered fondly to this day.

The discussions we had about value were grounded in practicalities but were profoundly philosophical, as is so common among the long-suffering. Such is the character of the Russian people. I loved the land and the culture with a natural affinity that was almost surprising. But on the whole, people are the same everywhere, but with their own particular attractions and character which makes them uniquely interesting. The spirit permeates the world.

The tide of history rolls in, and does not conduct focus groups, or popularity polls, or regard the consensus of the crowd. The smart money tests it, and then moves early with it, or at least does not fight it. The only traces of the trend are what the few are doing and where their money is flowing. The tide moves slowly, inexorably, but is there for any and all to see if they would just look past their preconceptions, their ideologies, the fog of government, and their desire for what once was, but can no longer be.

At this point in history, gold is a harbinger of change. People of the status quo fear change and change agents, always. And despite their best efforts to stop it, to discredit the messenger, obliterate its effects, to silence the message, the tide of history comes and washes over them, and the landscape is changed. And the familiar is a thing of the past.

We live in remarkable times. If you do not like to hear about change, if it upsets you, then do not read this blog, and stick to the mainstream media. Documenting and analyzing and surviving change in the financial sphere is what this is all about. No matter where reason and the data may lead, no matter what icons may fall, après déluge.

This is history.

Live it, and not the myth.

Gold Is Rallying Because....

Gold is a superior store of value.

It resists the attempts by the monetary authorities to debase it, because except for concerted attempts to suppress its price through non-profitseeking selling at key market points by central banks, and naked short selling by the global commercial banks in the paper markets, gold cannot be created and controlled by financial engineers like Ben Bernanke.

It provides a refuge, a store of wealth for private citizens during a period of general currency risk.

A simple chart should suffice.



As part of the quantitative easing regime, the Fed has so debased the financial system that dollar debt is paying negative interest rates once again as it did in the 1970's.

In other words, it is costing money to hold dollar financial assets because of the mispricing of risk being engineering by the G7 central banks.

So, people and some central banks are seeking refuge in a stable store of wealth that is beyond the control of the financial engineers.

"With the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people." Fredrich August von Hayek

"The gold standard has one tremendous virtue: the quantity of the money supply, under the gold standard, is independent of the policies of governments and political parties. This is its advantage. It is a form of protection against spendthrift governments." Ludwig von Mises

Alan Greenspan himself states the case most eloquently in his famous essay from 1966 Gold and Economic Freedom.

"This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."

When the currencies of the US and Europe are debased by the financial engineers for the sake of the banks, when spendthrift governments run enormous deficits to fill the pockets of their special interests, informed wealth seeks a refuge in places where it cannot be so easily consumed for the exclusive benefit of the political elite.

This is sadly the case today, especially within the Anglo-American sphere of influence, from which the dollar had become the new opium trade, viciously addictive and debilitating. And so we have seen an historic flight to safety that began in the developing world, but is gaining momentum as the global dollar regime falters.

If you hold dollars, the Fed and the Treasury can confiscate your wealth, virtually at will. That is real power.

When the Fed lifts interest rates to again provide a positive return against inflation, then gold may stop rallying and reach a stable equilibrium price. This will be more difficult to do than it was to debase, as it is always easier to destroy than to create.

And it may be difficult to determine when that time comes, because the US bureaucrats have so thoroughly altered the Consumer Price Index over the past ten years that it is no longer a fair measure of inflation. Therefore it is a challenge to determine what is real and what is not, what is priced fairly and what is not. This is the hallmark of the modern western bankers and their accountants, and their demimonde in politics and the media.

Still, the message of the market is quite clear, to anyone who will listen.

A pleasant Thanksgiving holiday to my American friends, and a reminder to the rest of the world that you must muddle through without the direction of Wall Street for the next few days. How fitting that Thanksgiving was declared a national holiday by Lincoln in the depths of the Civil War, and made official by the Congress in 1941, at the end of the Great Depression, on the cusp of a terrible world war.

And Lloyd, I would not join the many and be happy at all if you took your own life as you have recently confessed that you feared they would. But there might be a cause for celebration if a master of the universe such as yourself would simply take this timeless message into you heart, and make it the light of the rest of your life. That is the right pricing of risk, the proper valuation of all that you are.

"Come, let us sing to the Lord; let us make a joyful noise to the rock of our salvation. Let us come before His presence with thanksgiving; let us make a joyful noise to Him with songs of praise. For the Lord is a great God, and a great King above all. In His hand are the deep places of the earth, the heights and strength of the hills. The sea is His, for He made it, and His hands formed the dry land. Come, let us worship respectfully, let us kneel before the Lord our Maker. For He is our God and we are the people of His pasture and the sheep of His hand. Now, if you will but hear His voice." Psalm 95

No time for despair, now is the time to be surprised by joy.

"I do not think of all the misery, but of the glory that remains. Go outside into the fields, nature and the sun, go out and seek happiness in yourself and in God. Think of the beauty that again and again discharges itself within and without you, and be happy." Anne Frank

What Is a Tobin Tax?

The purpose of a Tobin Tax is to place a financial penalty on short term transactions to curb speculation. It was originally proposed by James Tobin in the 1970's as a means of discouraging international currency speculation after Nixon closed the gold window and rendered the Bretton Woods agreement moot, at least until the ascendancy of the current dollar reserve currency system.

The tax is generally discussed as being 0.1% of the total transaction, or 1.00 per 1,000. It certainly would have a discouraging impact on the daytraders, and some could argue, as I would, that a percentage of the transaction at .1% might be considered regressive, and a huge penalty on institutional trading.

The tax might be better targeted at 'frequency' of trading, rather than nominal size of the transaction, in order to target speculation, under some reasonable transaction limit.

So for example, a flat tax of .50 per transaction would be negligible for the average investor, but would seriously impinge high frequency trading that is de rigeur amongst professional speculation these days.

What is also of concern is the discussion of a Tobin Tax as a international source of revenue, let's say for the IMF. A system of direct taxes on US citizens for the funding purposes of an international entity like the IMF must surely be unconstitutional.

And it goes without saying that there are sure to be 'exemptions' for certain types of trading in this tax, if the lobbyists have anything to say about it.

There will be another bailout of the banks. There will be discussion about punitive and ameliorative legislation to deal with them, in addition to the general lack of discussion about existing antitrust and bankruptcy laws, and the Glass-Steagall law which stood the test of time for sixty years.

American Banking News
Is a Tobin Tax in Store for Large Banks?
By Christopher
November 24th, 2009

The phrase “too big to fail” may get retired in 2010, but for banks such as Goldman Sachs, Citigroup Inc., and Bank of America, they may face a new round of punitive legislation to deal with the political fallout.

According to a special report in Money Morning, heavy government intervention in the banking sector combined with low interest rates and ongoing stimulus has made 2009 a profitable year for many banks.

In fact, according to a special report in Money Morning, so-called “bad” banks including Goldman Sachs, Citigroup Inc., and Bank of America have turned out to be a better investment than good banks.

But as they look to 2010, these same factors may signal trouble.

To begin with, if the Federal Reserve raises interest rates as is widely expected, it would reduce trading profits, reduce the profitability of borrowing short-term and lending long-term, and reduce the prices of assets such as houses and commercial real estate – putting even more strain on loan portfolios.

But an increase in interest rates is only the first of three areas of concerns for investors.

The length and the level of U.S. unemployment have economists wading through unchartered waters. If unemployment rises above its current 10.5% level and tests a postwar period high of 10.8% set back in 1982, it could signal huge losses as the U.S. consumer-credit system is not “stress-tested” for such high unemployment rates over a prolonged period of time.

And if the losses start piling up, the Fed might very well intercede again with a second bailout. This would be yet another strike against bank stocks since politicians would try to penalize investors for needing taxpayer money twice in two years.

All of this, plus the recent news of record bonuses at Goldman Sachs is creating momentum for punitive legislation against the banks that goes beyond the premiums banks pay to the Federal Deposit Insurance Corp. (FDIC).

One idea being considered is a “Tobin tax”. Originally proposed by economist James Tobin after the Nixon administration effectively ended the Bretton-Woods system of tying the U.S. dollar to the gold standard.

The idea behind such legislation, which would fall most heavily on very big conventional banks and trading-oriented investment banks, would be to tax transactions in bonds, stock commodity and foreign exchange markets.

Opinions are divided between those who discern a Tobin tax could protect countries from spillovers of financial crises, and those who claim the tax would constrain the effectiveness of the global economic system and dry up world liquidity.