Debt Saturation in the US Dollar Economy

The debt must be liquidated and income in the form of real wages must increase to bring this relationship back into balance.

This is going to be a dangerous path for the US monetary authority to tread, because a misstep will lead to an inflationary spiral that will surprise most economists as did the stagflation of the 1970's, which up until that point was considered to be almost impossible according to the prevailing theory of that day.

The financial engineers will keep at this until they hit they wall. If we were not in the car with them it might be a more interesting exercise to observe. The answer of course is to get out of the car as best you can.

Think of debt as a surrogate for the creation of money, in its various forms, for that is what it is. What this chart is showing is that money being creating is aenemic, and a trend that looks very much like the 'law of diminishing returns.'

This is the well spring of monetary inflation, that is, the power of money to create some substance to back it. The more dollars that are printed, the weaker their backing, without an economic vitality created by savings, investment, and labor.

This is why I would say that the US dollar is an obvious death spiral. I would not say that its demise is inevitable, merely likely.



Chart from Nathan's Economic Edge

Canaccord Sets PALM Target Price at *Zero*

Buy that dip, Chip. Traders who are buying now are hoping (betting) that Palm becomes a takeover candidate.

In the 1990s I was actively involved in M&A in the tech sector, primarily around Boston and Silicon Valley. Boston's 128 corridor was absolutely the worst place to try and make a decent acquisition, and few of them I witnessed worked out for the buyers.

In Silicon Valley things were a little more straightforward, but one had to watch their back with the omnivorous acquisitor, Cisco. The flippers were reasonably well known to the cognoscenti and a quick visit to the premises often was an easy 'tell.' The Sand Hill Road crowd and the other denizens of the Lion and Compass were always a treat to work with. Personally I preferred sushi in town followed by The Compass Rose at The Saint Francis, but I was an east coaster, and almost looking for light meal and a drink to take the edge off the jet lag.

I priced mature companies and start-ups, largely based on the potential of their technology and engineering talent, much more so than existing cash flows which were often negative and a key factor in playing the game.

Personally I think zero is too low a price for Palm. Maybe two dollars, with their float of 168 million shares. Maybe even four dollars if it catches a bid soon from more than one interested buyer who wishes to jump start into their space. One would have to look at their portfolio of technology and patents, and franchise players in the engineering group, and the value of your own currency, your stock, and its prospects.

Cash deals generally are a strong indicator of pure intent, and are therefore rare. One positive is that the tech market in the US is so bad that retention bonuses ought not to be such an issue, except for a handful of key engineering talent.

The problem with companies like this is that new money, particularly the venture capitalists and white knights, like to come in and obliterate the existing common shareholders. This is the 'last man standing' phenomenon.

If someone makes a play for Palm, it could turn into a bit of a bidding match. But for now the vultures will prefer to circle and hover. And it would not shock me if a certain broker wasn't hammering the price with their most recent target, for any variety of purposes and headlines.

TickerSpy
Canaccord Leaves Palm Hanging With $0 Target
by Owen Vater
March 19th

Investors who went bargain hunting with Palm (PALM) after its brutal late-February guidance are getting hammered.

Palm shares are off by -18% today after reporting an adjusted fiscal third-quarter loss of -61 cents per share, missing analyst consensus by -19 cents. The company beat on revenue after giving analysts a warning last month. Chairman and CEO Jon Rubinstein said, “the potential for

Palm remains strong,” but Canaccord Adams isn’t buying it, nailing the stock with a $0 price target, down from $4, and reiterating its Sell rating. The analyst noted that Palm has about 12 months of cash on hand with an accelerating burn rate, and the company could start to lose suppliers as its solvency comes into question.

The Palm selloff is dragging the Personal Computer and Smartphone Stocks Index by -3.7%. The Index is now trailing the S&P 500 by -13.7% over the last month, despite every other component gaining more than 2% for the period.

Quad Witching Expiration and a Pullback from the Back-Kiss on the Long Term Trend

The front month on the SP futures has now switched from March to June as a part of the Quad Witching Expiration. (Technically it switched last week, but for charting purposes I made the switch last night.) The June Futures have essentially the same formations as did March, its just that the earlier months have few trades to mark them.

This is the first serious test for US equities since mid-February, as it has been on a spectacular rally streak, no doubt fueled by excess liquidity applied to a selling exhaustion in the funds. Curiously not among corporate insiders who were selling at a rate of 57 to 1 in this latest rally, no doubt for diversification purposes

The extent of this correction will be determined on the amount of actual selling that starts to occur. For now what we are seeing is more of a trading correction in response to an outsized rise in price, or as the Street likes to say, the market was getting ahead of itself.

Key levels to watch are 1135 and 1120. If we break those I would look for a consolidation around the 1080-1100 level.

This news is weighing on US stocks today, but they were overripe for a correction at least.

Bloomberg
U.S. Stocks Erase Advance as India Unexpectedly Raises Rates
By Rita Nazareth

March 19 (Bloomberg) -- U.S. stocks erased their advance after India’s central bank unexpectedly raised interest rates for the first time since July 2008 after inflation accelerated to a 16-month high.

The Standard & Poor’s 500 Index fell less than 0.1 percent to 1,165.46 at 9:46 a.m. in New York. It had advanced 0.3 percent before India’s decision.

“Keep an eye on the punch bowl,” Larry Kantor, head of research at Barclays Plc, told Bloomberg Radio. “The major risk going forward for markets is not budget deficits, it’s the fact that policy makers have put so much into the economy to get things going that they’re going to be withdrawing that stimulus. That’s actually the big risk.”

“Everybody knows that the dice are loaded
Everybody rolls with their fingers crossed
Everybody knows that the war is over
Everybody knows the good guys lost
Everybody knows the fight was fixed
The poor stay poor, the rich get rich
That's how it goes
Everybody knows”

Leonard Cohen, “Everybody Knows”

Rumours of an Unexpected Fed Discount Rate Hike Dampen Stocks

Bloomberg reports that rumours of a surprise Fed Discount Rate hike circulated trading desks earlier today, helping to depress stock prices in the land of lotus eaters, almost darkening the colour of the biggest winning streak since August 2009.

The rumour reportedly originated with traders in Chicago. It was so ludicrous that one has to believe that it was indeed started there. You expected something original on the day after St. Patrick's Day? The Fed just raised the discount rate, symbolically I should add, at a regularly scheduled meeting.

Oh that's right, it is options expiration and a quad-witch nonetheless. Is the Chicago Board Option Exchange trying to whistle up some action? Are traders struggling to find an easy trade with the forces of the High Frequency Terminators so ably thinning the herds of small specs?

Why is Wall Street like the Planet of the Apes? Because the gorillas have all the weapons, nets, and horses, and ride around all day shooting the human beings.

There are those of us who remember the disrepute and revulsion in which the US markets were held by the public back in the dark days of the 1970's in the aftermath of the 72-74 bear market. The pit crawlers spent the day throwing paper airplanes at one another, the Dow languished sub-1000, and the brokers talked about the 'return of the small investor to the markets.'

It took the bull market of the 1980's and Reagan's voodoo economics and laws about IRAs and 401K's to bring the public back in for a wash and rinse by the Street.

Just another day in the Pax Dollarous.

Boehner Tells Bankers to Stand Up to Those Senate Punks

"O heaven,...put in every honest hand a whip to lash the rascals naked through the world." William Shakespeare, Othello

Senate Minority Leader John Boehner told the American Bankers Association to 'stand up to those punks' in the Senate who want to regulate them. He said 'staffers' but that is because professional courtesy prohibited him from saying 'Senators.'

Perhaps Mr. Boehner feels a burst of confidence since Timmy and Ben and Larry have his back. And of course the bankers to whom he was speaking already have 25 lobbyists fighting against reform for every Congressman in Washington, and buckets of cash to spread around.

Actually, the only ones who seem to be underrepresented and in trouble in Washington these days are the American people.

The Dodd bill has its good points, but contains some bizarre twists. The ruling that the Fed would only supervise banks of over 50 billion seems particularly bizarre. Mr. Hoenig of the Kansas City Fed objected to this today. As well he might, since his district contains NO banks worth more than $50 billions, and he would be presumably out of a job.

This is classic Democrat blundering. Spend many months negotiating and seeking partnership with people who would just as soon place their hands in a meat grinder as make any reasonable compromise, and then toss off some bizarre legislation seemingly out of nowhere, after having made a big deal out of wishing to be 'bipartisan.' The Democratic party seems leaderless.

One thing for which I will give credit. Mr. Obama has certainly united his country -- in believing that he is one part corrupt Chicago politician and two parts a rather ineffective waffler who mistakes campaign-style speaking for leadership and timidity for consensus building.

Leadership in the real world is measured by getting the job done, and being recognized as effective by your own people and your key stakeholders, inspiring them with confidence and the ability to do even more than they might have imagined.

The American President reminds me of a corporate executive at a company which had recently acquired mine who was clearly over his head in his current position. When asked why he did not meet his commitments, he replied without hesitation, "My people are incompetent." What was particularly galling is that he had been allowed to assemble his own team, and been given adequate time to build his plan and objectives. He missed most of them, badly but did manage to exceed his expenses.

Mr. Obama inspires most people with disappointment, dismay, confusion and despair. He has managed to alienate a good chunk of his electoral base while gaining nothing. To win is not to be elected; to win is to succeed in your goals and the expectations which you have set with your constituents.

Still, as unattractive as the Democratic leadership may be, there is nothing uglier than a politician soliciting money from fat cat businessmen, and few can be as smarmy as a Republican in heat for cash.

Dealbook
Boehner to Bankers: Stand Up to ‘Punk’ Staffers
March 18, 2010, 9:18 am

Opponents of Senator Christopher J. Dodd’s financial regulation overhaul bill are talking tough, telling bankers how displeased they are without mincing words.

Representative John A. Boehner, the Republican House minority leader, told members of the American Bankers Association on Wednesday that they need to be unafraid to stand up to whom he called “punk” Senate staffers, according to MarketWatch.

And even the head of the Office of the Comptroller of Currency took a swipe at the consumer protection aspects of the bill, according to The Financial Times.

Mr. Dodd, the chairman of the Senate Banking Committee has already been hearing from Republican senators who are unhappy with his decision to forge ahead without first reaching bipartisan consensus. Now House Republicans, according to Mr. Boehner, are arguing that Mr. Dodd’s proposal is too far apart from the financial regulation overhaul bill the House passed in December.

Here’s what Mr. Boehner said, according to MarketWatch:

“Don’t let those little punk staffers take advantage of you and stand up for
yourselves,” Boehner said. “All of us are hearing from our friends and
constituents on lack of credit, you can’t get a loan, the more your government
takes and taxes, the more regulations you have to comply with the more cost you
have there and less amount you are going to have available to loan to
customers....”

And remember, 36% of American Congressmen are also lawyers.

Dodd's Chief Counsel Was Trading In Financial Stocks During Financial Crisis

Wall Street Banks Using Geithner and the NY Fed to Stifle FDIC Reforms

The President's Working Group on Financial Markets, aka the 'plunge protection team,' is apparently acting to block financial reforms being proposed by Sheila Bair's FDIC, according to the attached piece from Chris Whalen of Institutional Risk Analytics, an authoritative source on US Banking.

The President's Working Group on Financial Markets consists of:

Time Geither, The Secretary of the Treasury, as Chairman of the Working Group;
Ben Bernanke, The Chairman of the Board of Governors of the Federal Reserve System,
Mary Shapiro, The Chairman of the Securities and Exchange Commission; and
Gary Gensler, The Chairman of the Commodity Futures Trading Commission.

This is reminiscent of the actions of Larry Summers, Robert Rubin, and Alan Greenspan to block attempts by Brooksley Born, then head of the CFTC, to head off the derivatives crisis back the 1990's, the very crisis which brought the US to the brink of disaster last year.

Obama has no credibility as a reformer, not with Tim Geithner and Larry Summers as the key members of his financial team. And the Fed is proving itself again to be little more than a mouthpiece and servant to the Wall Street Banks, completely unworthy of any additional supervisory powers.

Personally, I thought Chairman Bernanke's testimony in front of Congress yesterday to be both embarrassing and disgraceful.

It is more than disappointing, it is an outrage, if this is true. The actions of the President's Working Group on Financial Markets is a sore point with many, as it is repeatedly linked to secret dealings with the Wall Street banks, and efforts to manipulate US markets to support government policy.

If this is true, then we would hope that the Congress will be motivated, at least after the November elections when many new members will be joining, to launch a thorough investigation of Mr. Geithner and his activities both at the NY Fed and the Treasury, and the actions of the President's Working Group on Markets.

"We hear that the FDIC rule making process could start as soon as next month, but more likely will wait till the FDIC's board meeting in May. We also hear that the President's Working Group (PWG) on Financial Services is preparing a "white paper," in cooperation with the Federal Reserve Board and the Office of the Comptroller, to block the FDIC reform effort. This campaign, which apparently was orchestrated by the largest dealer banks, is intended to derail the new rules proposed by the FDIC mandating greater transparency and disclosure for bank sponsored residential mortgage securitization deals.

The President's Working Group, in case you don't know, is an informal group created in 1988 by President Ronald Reagan that allows the executives of the biggest banks to influence public policy in Washington, but without going through the trouble of registering as lobbyists or other public disclosure. Sometimes referred to the "plunge protection team," the PWG is part of the invisible government of Washington," an agency which operates within the government, but at the behest of private interests.

Barry Ritholtz has a nice summary on the PWG in his book, Bailout Nation, and also in his Blog, "The Big Picture." As Barry notes, the PWG is every bit as incompetent as most other people in Washington, but they do have one special skill: pushing the banking industry's agenda in Washington via informal "guidance" and white papers that are written by and for compliant regulators. The PWG essentially acts as a super-lobbying channel for the largest banks focused right at regulators. Only "team players" need apply.

The Federal Reserve Bank of New York and the OCC in Washington are reportedly drafting the "guidance" on reform of bank securitizations and at the request of the PWG. No clue whether the White House is involved directly yet or if this is merely a Tim Geithner operation. These PWG white papers are never released to the public even though the Treasury acts as the de facto public affairs organ for this corporate influence group.

We called out former Wachovia Bank CEO and Goldman Sachs (GS) banker Robert Steel on the subject of the PWG last year at the Chicago Fed's international banking conference. He was unapologetic and more than a little offended, or so he claimed. The PWG acts with impunity in Washington, in part because the members of Congress understand their subordinate role. We hear that Senator John Warner (D-VA) is now competing with Judd Gregg (R-NH) to be the next "Senator from Wall Street" and specifically seems to be angling to join a private equity firm. Gregg's tastes seem to run more along the lines of a large OTC derivative dealer bank.

The fact that the PWG is in league with the Fed and Treasury against the FDIC board is all you need to know about the politics of reforming private label mortgage securitization.

If Barack Obama were really interested in reforming Washington, he would rescind President Reagan's executive order and disband the PWG for good. Allowing the big banks which participate in the PWG to lobby financial regulators and members of Congress without any public disclosure is a national scandal and makes a mockery of any claim by Barrack Obama to be changing the business of Washington.

We noted in our comment last Tuesday in American Banker, "Viewpoint: Stop Blocking FDIC Securitization Effort," that "the practical policy issue is the losses observed in failed banks over the past two years, averaging over 30% of total assets, versus just 11% on average in the S&L crisis. The common factor in failed banks with high loss rates is unsafe and unsound securitizations practices, thus the FDIC initiative on securitization."

It is very telling to us that the FDIC is advocating greater openness and transparency in bank sales of mortgage loans to securitizations, but the Fed and OCC are standing with the larger dealer banks that arguably caused the financial crisis in complex structured assets. Hopefully these federal agencies and the industry groups they seem to be allied with will realize that the FDIC's rule making process holds the potential to revive private label mortgage finance and that they can influence the outcome - but only if they participate constructively.

One mortgage market veteran who ran risk for one of the largest private conduits in the business put the situation succinctly last week: "You can argue against the FDIC securitization proposals, looking at them in a bundle, as perhaps being overkill, but each piece of their proposal, taken separately, is pretty compelling. The other bank regulators and industry groups could easily negotiate a better, more streamlined deal that would help the market if they bothered to push back and participate constructively, instead of simply attacking the FDIC."

Chris Whalen, Institutional Risk Analytics, March 15, 2010

The Fed's View of American Banking: No Restraints for the Katzenjammer Kids

Through the mills of God grind slowly, yet they grind exceeding small;
Though with patience He stands waiting, with exactness grinds He all.
- Baron Friedrich von Logau, Sinngedichte

Mr. George Washington has a guest post over at Naked Capitalism that makes some points worth emphasizing. More Evidence That Banks Create Credit Out of Thin Air I find his work to be quite interesting, and a good companion to the work of Yves and Ed Harrison.

First, as we all know, banks do create money as credit 'out of thin air' in the current version of fractional reserve banking in the US. The Fed exercises some potential restraints on their ability to do so in the form of reserve requirements and Fed Funds target rates. One might think of the reserve requirement as a leash, and the Fed Funds as the price of exceeding the reach of the leash.

I had not been aware of the Fed's recent moves to eliminate the reserve requirement altogether. So, in keeping with the analogy, the Fed wishes to unleash the US banks to create money at will. One needs to realize that reserve requirements have already been significantly relaxed with the ruling on the use of sweeps to alter a bank's reserve profile on an overnight basis.

This is not quite as severe or outlandish as one might suspect, since there are examples in the rest of the world where reserve requirements are not used, such as in Canada and Mexico, and the voluntary system in the UK for example. The difference of course is that these countries have other traditions, customs, and laws in place. There is no comparison between the Canadian bankers for example, and the Katzenjammer Kids of Wall Street, although Canada may be heading for a fall of its own making as well. Their real estate is looking a bit frothy, and the instances of corruption on their equity exchanges I have witnessed is something to behold, and certainly a tip of some sort of iceberg that manifests elsewhere.

What is concerning about this in the particular perhaps is that the recent crisis in the US was precipitated by a solvency crisis caused in large part by excess leverage and rampant fraud, which then triggered a liquidity crisis, and a run on the banks. The similarites between this crisis and the Panic of 1907 seem more pronounced the more that is revealed. The difference of course is that Mr. J. P. Morgan and his bankers took strong steps to prevent such an event from reoccurring for their own good. How ironic that his own bank remains at the center of the problem at this turn of the cycle, but not as a remedial influence.

As we have seen with the New York mobs with the rise of Messrs. Luciano and Lansky, the syndication of abuse and manipulation of the law and the enforcement agencies is a paradigm shift that can transform even traditional small time thuggery into seriously organized crime that can overwhelm conventional safeguards and restraints.

The purpose of reserve requirements is to uphold some Capital Adequacy Ratio, meaning that a bank would have liquid assets adequate to support the normal demands of their customers. There are obviously other ways to do this, but a reserve requirement is a quite common method of controlling what is essentially a leverage and prudence issue. CAR is a bit of an anachronism when we have Frankenstein banks such as Goldman Sachs and Morgan Stanley, the Max und Moritz of American banking, that are less bank than hedge funds with little regard for depositors and traditional function of banks. The issue there is leverage and the adequacy of collateral. Is this where the Fed wishes to take American banking?

In the case of the US, the most recent crisis was precipitated by the rampant fraud in the assets held and sold by the banks in the form of collateralized debt obligations. The assets were not of a quality or a liquidity to support the bank's balance sheet.

The most recent revelations regarding Lehman Brothers in particular are quite pointed. The bank was using swaps to hide its true capital structure and leverage, and its vulnerability to a financial shock. When push came to shove, the company crumbled with losses much larger than anyone had estimated. The laxity at the New York Fed was an issue. It shows the weakness of what is essentially self-regulation of the banks by the banks, for the NY Fed is a creature of the banks. As Lehman says, "Everyone was doing it." It is just that Lehman were the ones that fell down, as the others were 'saved' at significant public cost.

By eliminating the reserve requirement the Fed is seeking to relax the constraints of its need and ability to 'save' banks when shocks occur. If there is no reserve requirement, then the Fed need only address itself to a run on the bank. As Mr. Washington states, the Fed stands ready to provide any and all capital required. They just do not wish to do it under constraints beyond their control.

What are seeing is the natural progression of a debilitation. The financial engineers keep creating problems with their tinkering, and the solution is to keep relaxing the constraints on their actions. As the comedian used to use, what we need is "MORE POWER!"

The Fed is the last place that should receive additional power over the banking system, showing itself to be a bureaucracy incapable of exercising the kind of occasionally stern judgement, the tough love, that wayward bankers require. And the mere thought of putting Consumer Protection under their purview makes one's skin crawl with fear and the gall of injustice.

They may get it, this more power, not because it is deserved, but because politicians themselves wish to have more power and money, and this is one way to obtain it.

The next time the financial system crashes, the torches and pitchforks will come out of the barns and there will be a serious reform, and some tar and feathering in congressional committees, and a few virtual lynchings. The damage to the people of the middle class will be an American tragedy. But this too shall pass.

Kurz, im ganzen Ort herum
Ging ein freudiges Gebrumm:
"Gott sei Dank! Nun ist's vorbei
Mit der Übeltäterei!"
Max und Moritz

Among the people quickly went
a joyful sigh of deep content:
"God be praised! at last we're free
From da boyz' insanity!

P.S. My grandmother (mein Grösi) told me the stories of Max und Moritz when I was a very little boy on her lap. It is my earliest childhood memory.

Net Asset Value of Certain Precious Metals Funds and Trusts

Revised to the close of trading

Bubble-nomics: SP and Nasdaq Straining at Resistance And the Remnants of Fear

The SP is trying to break out of the trend and hold it's gains. I would not get in front of this, unless you wish to guarantee an opportunity for an additional short squeeze. Remember, the wiseguys can peek into your collective hand at will, and read your strategy within milliseconds of your executing it. That is why playing short term trends is becoming increasingly difficult for the individual speculator.



It is useful to watch the Nasdaq 100 at key support and resistance levels, as well as the broader indices. The SP futures are generally the 'push' where the flash and sizzle of bull markets occur of late. Buying the futures drags much of the market behind it. But this can only last for so long unless additional 'real' buying steps in.



Formidable retracement. Now the rally must show its mettle and either confirm an economic recovery or the start of a new bubble led by financial assets, or not.



Little pricing in of fear, but the markets remain thin and a bit uneasy.



The Dollar is hanging on to support.