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Harsh Reality

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Several years ago, at one of the seven Laurie Anderson performances I have attended, Ms. Anderson (now Mrs. Lou Reed – although I seriously doubt whether she uses that moniker) described her first meeting with Philip Glass.  Immediately after meeting Glass, she anxiously asked him:  “Are things getting better or are things getting worse?”

These days, that same question is on everyone’s mind.  It appears as though the mainstream news media are hell-bent on convincing us that everything is just fine.  Nevertheless, many of us remember hearing the same thing from Ben Bernanke and Hank Paulson during the summer of 2008.  As a result, we ponder the onslaught of rosy prognostications about the future of our economy with a good degree of skepticism.  Regardless of whether there might be some sort of conspiracy to convince the public to go out and spend money because everything is all right  . . . consider these remarks by Steve Randy Waldman from a discussion about market monetarist theory:

Self-fulfilling expectations lie at the heart of the market monetarist theory.  A depression occurs when people come to believe that income will be scarce relative to prior expectations and debts.  They nervously scale back expenditures and hoard cash, fulfilling their expectations of income scarcity.  However, if everybody could suddenly be made to believe that income would be plentiful, everyone would spend freely and fulfill the expectations of plenty.  The world is a much more pleasant place under the second set of expectations than the first.  And to switch between the two scenarios, all that is required is persuasion.  The market-monetarist central bank is nothing more than a great persuader:  when “shocks happen”, it persuades us all to maintain our optimism about the path of nominal income.  As long as we all keep the faith, our faith will be rewarded.  This is not a religion, but a Nash equilibrium.

The persuasion described by Steve Waldman has been drowning out objective analysis lately.  Obviously, the sovereign debt crisis in Europe has created quite a bit of anxiety in the United States.  The mainstream media focus is apparently targeting that consensual anxiety with heavy doses of “feel good” material.  One must search around a bit before finding any commentary which runs against that current.  I found some and I would like to share it with you.  The first item appeared in Bloomberg BusinessWeek on November 22:

Pacific Investment Management Co.’s Chief Executive Officer Mohamed A. El-Erian said U.S. economic conditions are “terrifying” as the nation struggles to recover from recession.

The odds of the U.S. returning to recession are as much as 50 percent, El-Erian said during an interview on Bloomberg Television’s “In the Loop” with Betty Liu.  U.S. economic growth was worse than expected and congressional policy makers are gridlocked over what to do about the economy and the deficit, which risk exacerbating an already weak recovery, he said.

“We have less economic momentum than we thought we had and we have no policy momentum,” said El-Erian, who also serves as co-chief investment officer with Pimco founder Bill Gross at the world’s largest manager of bond funds.

“What’s most terrifying,” he said, “we are having this discussion about the risk of recession at a time when unemployment is already too high, at a time when a quarter of homeowners are underwater on their mortgages, at a time then the fiscal deficit is at 9 percent and at a time when interest rates are at zero.”

Let’s not forget that all of this is happening at a time when we are plagued by the most dysfunctional, stupid and corrupt Congress in our nation’s history.  President Obama is currently preoccupied with his re-election campaign.  His own leadership failures are conveniently re-packaged as products of that feckless Congress.  As a result, Americans have plenty of justification for being worried about the future.

One of my favorite commentators, Paul Farrell of MarketWatch, recently shared some information with us, which he acquired by attending an InvestmentNews Round Table, as well as from reading Gary Shilling’s expensive newsletter:

Get it? Main Street America, you should “expect very slow growth” in 2012.  That was the response when asked what “scenarios are you painting for your clients?”  The panelist at a recent InvestmentNews Round Table then added:  “It’s going to be ugly and violent.”  Why?  Because the politicians “are driving things” and they are “capricious, which leads to volatility.”  And clients are “not really happy,” but “they lived through ‘08 and ’09,” so 2012 will be “just a little bump in the road.”

*   *   *

So don’t kid yourself folks, recent economic and market “ugliness and violence” not only won’t end soon, it’ll get meaner and meaner for years after 2012 elections … no matter who wins.  Only a fool would believe that a new bull market will take off in 2013.  Ain’t going to happen.  That’s a Wall Street fantasy.  Fall for that, and you’re delusional.

In fact, you better plan on a very long secular bear the next decade through 2020.  With the European banks, credit and currency on the edge of a global financial meltdown, there’s a high probability that a black swan virus, a contagion will sweep the world, making all investing “uglier” and more “violent” for Americans in 2013, indeed for the rest of the decade.

*   *   *

Shilling sees “a secular bear market really started in 2000 and may persist for a decade as a result of slower GDP growth,” yes, persist till 2020 “with 2% to 3% deflation.”  He warns:  “Nominal GDP might not gain at all,” like recent flat-lining.  Which coincides with the expectations of America’s professional financial advisers.

Are you still feeling optimistic?  Consider the closing thoughts from a piece by Karl Denninger entitled, “The Game Is About Done”:

30+ years of lawless behavior has now devolved down to blatant, in-your-face theft.  They don’t even bother trying to hide it any more, and Eric “Place” Holder is too busy supervising the running of guns into Mexico so the drug cartels can shoot both Mexican and American citizens.

What am I, or anyone else, supposed to do in this sort of “market” environment?  Invest in…. what?  Land titles are worthless as they’ve been corrupted by robosigning, margin deposits have been stolen, Madoff’s clients had confirmations of trades that never happend and proved to worthless pieces of paper instead of valuable securities and while Madoff went to prison nobody else has and the money is still gone!

Without enforcement of the law — swift and certain — there is no deterrent against this behavior.

There has been no enforcement and there is no indication that this will change.

It will take just one — or maybe two — more events like MF Global and Greek CDS “determinations” before the entire market — all of it — goes “no bid” as participants simply stuff their hands in their pockets and say “screw this.”

It’s coming folks, and I guarantee you this:  Whatever your “nightmare” scenario is for such an event, it’s not bearish enough.

Keep all of this in mind as you plan for the future.  I would not expect that you might hear any of this on CNBC.


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Absence Of Anger

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I’ve been reading quite a number of articles written in anticipation of a revolutionary uprising by outraged citizens in response to the fallout from Wall Street’s giant Ponzi scheme.  The writers of these items are talking about a more significant uprising than anything we have seen from the Tea Party demonstrators.  Some are expecting riots in the streets.  Since widespread civil unrest has recently taken place in Europe, much attention has been focused on the issue of whether anything like that could happen in the United States.  From my own perspective, I just don’t see it happening.  Nevertheless, I can’t understand what keeps the American public from getting really mad at this point.  It could be due to an epidemic of Attention Deficit Disorder or excessive preoccupation with other distractions.  Perhaps some sort of far-flung conspiratorial effort is under way, involving mass hypnosis via television or drugged drinking water.

On the other hand, I do agree with those commentators on the point that the predicted insurgent reactions are entirely foreseeable.  Are they likely?  Consider what these pundits have said and decide for yourself   .  .  .

One of my favorite commentators, Paul Farrell of MarketWatch, discussed an inevitable backlash against the super-rich, who are waging class warfare by victimizing those of us down the food chain.  Nevertheless, he doesn’t really make it clear how this revolution will manifest itself.  Will there be actual physical violence  . . .  or just a “bloodbath” in the stock market?  Here is how he described it:

Yes, it’s called the Doomsday Capitalism revolution.  And I’m betting you’ll be able to track it on Twitter.

*   *   *

This new preemptive war is already in progress, and America’s billionaires are the aggressors:  Buffett’s billionaire buddies on the Forbes lists, his Wall Street banker buddies, his exporter buddies in China, all of Buffett’s buddies in this “rich class” are already engaged in a hostile takeover war against the American middle class, against the working class and the poor, against all Americans not on the Forbes lists of billionaires.

*   *   *

Here’s how I imagine this revolution unfolding as a series of rapid-fire tweets, as citizen-warriors pass along this collection of earlier warnings to reenergize and drive the rest of America to rebel against Buffett’s “rich class,” tweets that will trigger an anti-capitalist revolution.

Warning to all investors:  Prepare now, play defense.  Expect an economic upheaval rivaling the 1929 crash, creating a climate for true reform that will make the 1930s look like a real tea party.

At The Curious Capitalist blog, Stephen Gandel pondered what would result from all the fear and loathing about whether the Federal Reserve would begin another round of quantitative easing.  His essay was entitled, “Will the Federal Reserve Cause a Civil War?”  Mr. Gandel focused on a recent posting at the Zero Hedge website, which quoted this observation by Karl Denninger:

In a very real sense, Bernanke is throwing Granny and Grandpa down the stairs – on purpose.  He is literally threatening those at the lower end of the economic strata, along with all who are retired, with starvation and death, and in a just nation where the rule of law controlled instead of being abused by the kleptocrats he would be facing charges of Seditious Conspiracy, as his policies will inevitably lead to the destruction of our republic.

Stephen Gandel analyzed the potential for civil war as a consequence of more quantitative easing with this logic:

Lower rates do tend to favor borrowers over savers.  And the largest borrowers in the country are banks, speculators and large corporations.  The largest spenders in our country though tend to be individuals.  Consumer spending makes up 70% of the economy.  And the vast majority of consumers are on the low-end of the income scale.  So I think it is a valid question to ask whether the Fed’s desire to drive down interest rates at all costs policy is working.  Companies are already borrowing at low rates. They are just not spending.        .   .   .

That being said, civil war, probably not.  “It is a gross exaggeration,” says Allan Meltzer, who is a top Fed historian at Carnegie Mellon.  “I cannot recall ever learning about riots or civil war even when the Fed made other mistakes.”

Meanwhile, the prognostications of a gentleman named Gerald Celente appear to be gaining a good deal of traction.  Here are some of Celente’s thoughts as they appeared in his own Trend Alert newsletter, back in April of 2009:

“Nothing short of total repudiation of our entrenched systems can rescue America,” said Celente.  “We are under the control of a two-headed, one party political system.  Wall Street controls our financial lives; the media manipulates our minds.  These systems cannot be changed from within. There is no alternative.  Without a revolution, these institutions will bankrupt the country, keep fighting failed wars, start new ones, and hold us in perpetual intellectual subjugation.”

*   *   *

“I am calling for an ‘Intellectual Revolution’.  I ask American citizens to free their minds from the tyranny of ‘Dumb Think.’  This is a revolution about thinking – not manning the barricades.  It’s about brain power – not brute force.”

It would seem that some degree of anger would be required to incite an “Intellectual Revolution” —  even one without any acts of insurrection.  At this point, it just doesn’t appear as though the American taxpayers are really there yet – Tea Party or not.  People who “want their country back” aren’t the people who will lead this charge.  Watch out for the people who want their jobs, homes and money back.  They will be the ones with the requisite anger to seek real change – as opposed to the “change you can believe in”.


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Avoiding The Stock Market

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May 18, 2010

In the wake of the stock market’s “flash crash” on May 6, there have been an increasing number of reports that retail investors (“Ma and Pa”) are pulling their money out of stocks.  Beyond that, some commentators have stepped forward to speak out and advise retail investors to steer clear of the stock market, due to the volatility caused by “high-frequency trading” or HFT.  One recent example of this was Felix Salmon’s video message, which appeared at The Huffington Post.

HFT involves a practice wherein firms are paid a small “rebate” (approximately one-half cent per trade) by the exchanges themselves when the firms buy and sell stocks.  The purpose of paying firms to make such trades (often selling a stock for the same price they paid for it) is to provide liquidity for the markets.  As a result, retail investors would not have to worry about getting stuck in a “roach motel” – not being able to get out once they got in – after buying a stock.  Many firms involved in high-frequency trading (Goldman Sachs, RGM Advisors, Tradebot Systems and others) have their computer servers “co-located” in the same building as the exchange, in order to get each of their orders processed a few nanoseconds faster than orders coming from further distances (albeit at the speed of light).  The Zero Hedge website has been critical of HFT for quite a while.  They recently published this informative piece on the subject, pointing out how HFT firms caused the catastrophe on May 6:

. . .  when the selling in size commences they all just shut down.  So much for providing liquidity when it is needed.

At The Market Ticker website, Karl Denninger explained how HFT platforms often use “predatory algorithms” to drive a stock’s price up to the full extent of a customer’s limit order (a practice called “frontrunning”):

Let’s say that there is a buyer willing to buy 100,000 shares of BRCM with a limit price of $26.40.  That is, the buyer will accept any price up to $26.40.

But the market at this particular moment in time is at $26.10, or thirty cents lower.

So the computers, having detected via their “flash orders” (which ought to be illegal) that there is a desire for Broadcom shares, start to issue tiny (typically 100 share lots) “immediate or cancel” orders – IOCs – to sell at $26.20.  If that order is “eaten” the computer then issues an order at $26.25, then $26.30, then $26.35, then $26.40.  When it tries $26.45 it gets no bite and the order is immediately canceled.

Now the flush of supply comes at, big coincidence, $26.39, and the claim is made that the market has become “more efficient.”

Nonsense; there was no “real seller” at any of these prices!  This pattern of offering was intended to do one and only one thing – manipulate the market by discovering what is supposed to be a hidden piece of information – the other side’s limit price!

The extent to which frontrunning takes place was the subject of a recent conversation between Larry Tabb of Tabb Group and Erin Burnett on CNBC.  The Zero Hedge website provided this analysis of the video clip:

The funniest bit of the exchange occurs at 3:35 into the clip, when Tabb publicly discloses that front-running is not only legal but occurs all the time on open exchanges. When Erin Burnett, who unfortunately still thinks that the Deutsche Mark is used in Germany, asks who is doing the front running, Tabb says “It could be anyone.”

A recent piece by Josh Lipton at the Minyanville website focused on the activity of retail investors since the recent “flash crash”:

Specifically, during the past week through May 12, your friends and neighbors pulled $2.8 billion out of US stock funds, according to the latest data from the professional number crunchers at Lipper FMI.

To put that stat in context, we called up Robert Adler, the head of Lipper FMI Americas, for a chat this morning.  He tells us that’s the most investors have pulled out, in fact, since March 11, 2009.

At the same time, says Adler, investors plowed $16.6 billion into money-market funds.  “That’s the first inflows money market funds have seen in the last 16 weeks,” he says.

*   *   *

“There was an about-face this past week by investors,” Adler says, noting that such outflows from both equity and bond funds, and a sharp reversal in money market funds, demonstrate a clear and dramatic shift in sentiment.

The analyst is quick to emphasize, however, that one week doesn’t make a trend.  “We have to wait another week to see whether this was simply event driven or if this is the beginning of a new trend,” he says.

The current risk-aversion experienced by retail investors is compounded by the ugly truth that stocks are currently overvalued.  Shawn Tully of Fortune made this very clear in a May 17 commentary, wherein he provided us with a sage bit of prognostication:

Here’s how I see the odds.  The chances are about one in three that we suffer a huge, wrenching correction in the next year or two similar to the one in 1987.  That possibility is so high because stocks are so startlingly expensive.  Another high probability event is that markets go on a long sideways grind, with smaller drops along the way.  What’s extremely unlikely is that the market rises substantially from current levels and stays there for any extended period.

Whatever happens in the next couple of years, the odds are overwhelming that investors who buy stocks today will reap puny returns for 10 years.  For example, if you’d purchased shares at today’s PE of 22 in early 2003, you would have gotten a return of around 3% a year, barely enough to compensate for inflation, let alone buy the blood pressure medication you’d need to survive the scary ride of stock ownership.

Now let’s look out a decade or two.  The evidence is extremely strong that price matters, and matters a lot:  except in rare cases, buying stocks when they are pricey — when the Shiller PE exceeds 20 — leads to puny returns ten years later.

Not that you’d ever know that from the happy talk from Wall Street.  So screen the noise out, and follow the numbers.  They’ll eventually get better for investors.  But to get back there, we may revisit October of 1987.

Considering the unlimited number of awful news events unfolding in America and around the world right now, we could be headed for a market crash much worse that that of October, 1987.  Cheers!




EuroTARP Faces Criticism

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May 10, 2010

Who would have thought that Mother’s Day would coincide with the announcement of a 720-billion-euro bailout fund to resolve the sovereign debt crisis in the European Union?  Here’s how The New York Times broke the story:

In an extraordinary session that lasted into the early morning hours, finance ministers from the European Union agreed on a deal that would provide $560 billion in new loans and $76 billion under an existing lending program.  Elena Salgado, the Spanish finance minister, who announced the deal, also said the International Monetary Fund was prepared to give up to $321 billion separately.

Officials are hoping the size of the program — a total of $957 billion — will signal a “shock and awe” commitment that will be viewed in the same vein as the $700 billion package the United States government provided to help its own ailing financial institutions in 2008.

The package was much higher than expected, and represented an audacious step for a bloc that had been criticized for acting tentatively, and without unity, in the face of a mounting crisis.

*   *   *

Financial unease has been mounting.  Riots in Greece, ever-tightening terms of credit and the unexplained free fall in the American stock market last Thursday have compounded the sense that the European Union’s inability to address its sovereign debt crisis might lead to the type of systemic collapse that followed the fall of Lehman Brothers.

The debt crisis began with Greece teetering toward default, and fear quickly spread about other weak economies like Portugal, Spain and even Italy.  Previous efforts by the European Union to shore up investor confidence were viewed as too little, too late, with the markets making clear that they were looking for a bolder plan.

Ambrose Evans-Pritchard of The Telegraph provided us with an informative, yet critical look at the plan:

The walls of fiscal and economic sovereignty are being breached.  The creation of an EU rescue mechanism with powers to issue bonds with Europe’s AAA rating to help eurozone states in trouble — apparently €60bn, with a separate facility that may be able to lever up to €600bn — is to go far beyond the Lisbon Treaty.  This new agency is an EU Treasury in all but name, managing an EU fiscal union where liabilities become shared.  A European state is being created before our eyes.

No EMU country will be allowed to default, whatever the moral hazard.

*   *   *

For now, the world has avoided a financial cataclysm that would have been as serious and far-reaching as the collapse of Lehman Brothers, AIG, Fannie and Freddie in September 2008, and perhaps worse given the already depleted capital ratios of banks and the growing aversion to sovereign debt.

*   *   *

The answer to this — if the objective is to save EMU — is for Germany to boost its growth and tolerate higher ‘relative’ inflation.  This would allow the South to close the gap without tipping into a 1930s Fisherite death spiral.  Yet Europe will have none of it.  The weekend deal demands yet more belt-tightening from the South.  Portugal is to shelve its public works projects.  Spain has pledged further cuts.  As for Germany, it is preparing fiscal tightening to comply with the new balanced budget amendment in its Grundgesetz.

While each component makes sense in its own narrow terms, the EU policy as a whole is madness for a currency union.  Stephen Lewis from Monument Securities says Europe’s leaders have forgotten the lesson of the “Gold Bloc” in the second phase of the Great Depression, when a reactionary and over-proud Continent ground itself into slump by clinging to deflationary totemism long after the circumstances had rendered this policy suicidal.  We all know how it ended.

Back here in the United States, Karl Denninger of The Market Ticker pulled no punches in criticizing the idea of attempting to solve a debt crisis by creating more debt:

This package was calculated to bring about a market reaction similar to what our Federal Reserve and Congress did in 2008 and 2009.  The problem is that the ECB and EU are not similarly situated, in that they don’t have (in the opinion of the market) a solid balance sheet to lever up upon.  Indeed, the problem is within the sovereign balance sheets upon which the EU and ECB rest, and as such this little “program” announced this evening leads me to wonder:

Do they really think the markets are stupid enough to fall for this line of Ouroboros nonsense?

I guess we shall see if, in the coming days, the markets discern the truth of where the funding has to come from, and that in point of fact it is the very nations that are in trouble that have to – somehow – manage to both cut their fiscal deficits and sell more debt (which increases those deficits) to fund their package.

Indeed, I suspect Bernanke and his pals “re-opened” the swap lines not because of current dollar funding problems (there aren’t any) but because he knows this won’t and can’t work, as unlike in the US there is no strong balance sheet to which the debt can be transferred and then refinanced at a lower rate, unlike in the US.

Ben Bernanke would probably hate to see all his hard work at devaluing the dollar go to waste.  One of his worst nightmares would likely involve the dollar’s rise above the value of the euro.   American exports to Europe would become too expensive for those 55-year-old retirees.  Europeans wouldn’t be taking their holidays in America this summer because it would become too expensive, given the new exchange rate.  Whether or not EuroTARP really works as intended, there are plenty of people on Wall Street anticipating a huge rebound in stock prices this week.



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The Best Argument For Financial Reform

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March 26, 2010

Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, spoke out in favor of financial reform on Wednesday in a speech before the U.S. Chamber of Commerce.  The shocking aspect of Hoenig’s speech is that it comes from the mouth of a member of the Federal Reserve’s Open Market Committee (FOMC) which sets economic policy.  Beyond that, Hoenig brutally criticized what has been done so far to tilt the playing field in favor of the megabanks, at the expense of smaller banks.  Here are some choice bits from what should be mandatory reading for everyone in Congress:

As a nation, we have violated the central tenants of any successful system.  We have seen the formation of a powerful group of financial firms.  We have inadvertently granted them implied guarantees and favors, and we have suffered the consequences.  We must correct these violations.  We must reinvigorate fair competition within our system in a culture of business ethics that operates under the rule of law.  When we do this, we will not eliminate the small businesses’ need for capital, but we will make access to capital once again earned, as it should be.

*   *   *

The fact is that Main Street will not prosper without a healthy financial system.  We will not have a healthy financial system now or in the future without making fundamental changes that reverse the wrong-headed incentives, change behavior and reinforce the structure of our financial system.  These changes must be made so that the largest firms no longer have the incentive to take too much risk and gain a competitive funding advantage over smaller ones.  Credit must be allocated efficiently and equitably based on prospective economic value.  Without these changes, this crisis will be remembered only in textbooks and then we will go through it all again.

Hoenig’s speech comes at a time when the Senate is considering a watered-down version of financial reform that has been widely criticized.  Economist Simon Johnson pointed out how any approach based on U.S. authority alone to “resolve” or break up systemically dangerous banks would be doomed because “there is no cross-border agreement on resolution process and procedure — and no prospect of the same in sight”.

Blogger Mike Konczal expressed his disappointment with what has become of the Financial Reform Bill as it has been dragged through the legislative process:

It’s funny, I know what a good financial reform bill becoming a bad financial reform bill looks like through this process.  I’ve seen bribes and more bribes and last-minute giveaway changes.

The notion that bribery has been an obstacle to financial reform became a central theme of Karl Denninger’s enthusiastic reaction to Hoenig’s speech:

All in all it’s nice to see Thomas Hoenig wake up.  Now let’s see if we can get CONgress to stop opening the bribe envelopes, er, ignore the campaign contributions for a sufficient period of time to actually fix this mess, forcing those “big banks” to get that leverage ratio down to where it belongs, along with marking their assets to the market.

Thomas Hoenig provided exactly the type of leadership needed and at exactly the right time to give a boost to serious financial reform.  We can only hope that there will be enough responsible, ethical people in the Senate to incorporate Hoenig’s suggestions into the Financial Reform Bill.  If only  . . .



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Offering Solutions

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October 22, 2009

Many of us are familiar with the old maxim asserting that “if you’re not part of the solution, you’re part of the problem.”  During the past year we’ve been exposed to plenty of hand-wringing by info-tainers from various mainstream media outlets decrying the financial crisis and our current economic predicament.  Very few of these people ever seem to offer any significant insight on such interesting topics as:  what really caused the meltdown, how to prevent it from happening again, whether any laws were broken that caused this catastrophe, whether any prosecutions might be warranted or how to solve our nation’s continuing economic ills, which seem to be immune to all the attempted cures.  The painful thorn in the side of Goldman Sachs, Matt Taibbi, recently raised an important question, reminding people to again scrutinize the vapid media coverage of this pressing crisis:

It’s literally amazing to me that our press corps hasn’t yet managed to draw a distinction between good news on Wall Street for companies like Goldman, and good news in reality.

*   *   *

In fact the dichotomy between the economic health of ordinary people and the traditional “market indicators” is not merely a non-story, it is a sort of taboo — unmentionable in major news coverage.

That quote inspired Yves Smith of Naked Capitalism to write a superb essay about how “access journalism” has created a controlled press.  What follows is just a small nugget of the great analysis in that piece:

So what do we have?  A media that predominantly bases its stories on what it is fed because it has to.  Ever-leaner staffing, compressed news cycles, and access journalism all conspire to drive reporters to focus on the “must cover” news, which is to a large degree influenced by the parties that initiate the story.  And that means they are increasingly in an echo chamber, spending so much time with the influential sources they feel they must cover that they start to be swayed by them.

*   *   *

The message, quite overly, is: if you are pissed, you are in a minority.  The country has moved on.  Things are getting better, get with the program. Now I saw the polar opposite today.  There is a group of varying sizes, depending on the topic, that e-mails among itself, mainly professional investors, analysts, economists (I’m usually on the periphery but sometimes chime in).  I never saw such an angry, active, and large thread about the Goldman BS fest today.  Now if people who have not suffered much, and are presumably benefitting from the market recovery are furious, it isn’t hard to imagine that what looks like complacency in the heartlands may simply be contained rage looking for an outlet.

Fortunately, one television news reporter has broken the silence concerning the impact on America’s middle class, caused by Wall Street’s massive Ponzi scam and our government’s response – which he calls “corporate communism”.  I’m talking about MSNBC’s Dylan Ratigan.  On Wednesday’s edition of his program, Morning Meeting, he decried the fact that the taxpayers have been forced to subsidize the “parlor game” played by Goldman Sachs and other firms involved in proprietary trading on our coin.  Mr. Ratigan then proceeded to offer a number of solutions available to ordinary people, who would like to fight back against those pampered institutions considered “too big to fail”.  Some of these measures involve:  moving accounts from one of those enshrined banks to a local bank or credit union; paying with cash whenever possible and contacting your lawmakers to insist upon financial reform.

My favorite lawmaker in the battle for financial reform is Congressman Alan Grayson, whose district happens to include Disney World.  His fantastic interrogation of Federal Reserve general counsel, Scott Alvarez, about whether the Fed tries to manipulate the stock markets, was a great event.  Grayson has now co-sponsored a “Financial Autopsy” amendment to the proposed Consumer Financial Protection Agency bill.  This amendment is intended to accomplish the following:

– Requires the CFPA conduct a “Financial Autopsy” of each state’s bankruptcies and foreclosures (a scientific sampling), and identify financial products that systematically led to a large number of bankruptcies and foreclosures.
– Requires the CFPA report to Congress annually on the top financial products (the companies and individuals that originated the products) that caused consumer bankruptcies and foreclosures.
– Requires the CFPA take corrective action to eliminate or restrict those deceptive products to prevent future bankruptcies and corrections

– The bottom line is to highlight destructive products based on if they are making people “broke”.

From his website, The Market Ticker, Karl Denninger offered his own contributions to this amendment:

This sort of “feel good” legislative amendment will of course be resisted, but it simply isn’t enough.  The basic principle of equity (better said as “fairness under the law”) puts forward the premise that one cannot cheat and be allowed to keep the fruits of one’s outrageous behavior.

So while I like the direction of this amendment, I would put forward the premise that the entirety of the gains “earned” from such toxic products, when found, are clawed back and distributed to the consumers so harmed, and that to the extent this does not fully compensate for that harm such a finding should give rise to a private, civil cause of action for the consumers who are bankrupted or foreclosed.

It’s nice to know that bloggers are no longer the only voices insisting on financial reform.  Ed Wallace of Business Week recently warned against the consequences of unchecked speculation on oil futures:

Is today’s stock market divorced from economic reality?  Probably.  It is a certainty that oil is.  We know that because those in the market are still putting out the same tired and incorrect logic that they used successfully last year to push oil to $147 a barrel while demand was plummeting.

Because oil is not carrying a market price that fairly reflects economic conditions and demand inventories, overpriced energy is siphoning off funds that could be used for corporate expansion, increased consumerism and, in time, the recreation of jobs in America.

Did you think that the “Enron Loophole” was closed by the enactment of the 2008 Farm Bill?  It wasn’t.  The Farm Bill simply gave more authority to the Commodity Futures Trading Commission to regulate futures contracts that had been exempted by the loophole.  In case you’re wondering about the person placed in charge of the Commodity Futures Trading Commission by President Obama  —  his name is Gary Gensler and he used to work for  …  You guessed it:  Goldman Sachs.



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The SEC Is Out To Lunch

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August 27, 2009

Back on January 5, I wrote a piece entitled:  “Clean-Up Time On Wall Street” in which I pondered whether our new President-elect and his administration would really “crack down on the unregulated activities on Wall Street that helped bring about the current economic crisis”.  I quoted from a December 15 article by Stephen Labaton of The New York Times, examining the failures of the Securities and Exchange Commission as well as the environment at the SEC that facilitated such breakdowns.  Some of the highlights from the Times piece included these points:

.  .  .  H. David Kotz, the commission’s new inspector general, has documented several major botched investigations.  He has told lawmakers of one case in which the commission’s enforcement chief improperly tipped off a private lawyer about an insider-trading inquiry.

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There are other difficulties plaguing the agency. A recent report to Congress by Mr. Kotz is a catalog of major and minor problems, including an investigation into accusations that several S.E.C. employees have engaged in illegal insider trading and falsified financial disclosure forms.

I then questioned the wisdom of Barack Obama’s appointment of Mary Schapiro as the new Chair of the Securities and Exchange Commission, quoting from an article by Randall Smith and Kara Scannell of The Wall Street Journal concerning Schapiro’s track record as chair of the Financial Industry Regulatory Authority (FINRA):

Robert Banks, a director of the Public Investors Arbitration Bar Association, an industry group for plaintiff lawyers . . .  said that under Ms. Schapiro, “Finra has not put much of a dent in fraud,” and the entire system needs an overhaul.  “The government needs to treat regulation seriously, and for the past eight years we have not had real securities regulation in this country,” Mr. Banks said.

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In 2001 she appointed Mark Madoff, son of disgraced financier Bernard Madoff, to the board of the National Adjudicatory Council, the national committee that reviews initial decisions rendered in Finra disciplinary and membership proceedings.

I also quoted from a two-part op-ed piece for the January 3  New York Times, written by Michael Lewis, author of Liar’s Poker, and David Einhorn.  Here’s what they had to say about the SEC:

Created to protect investors from financial predators, the commission has somehow evolved into a mechanism for protecting financial predators with political clout from investors.  (The task it has performed most diligently during this crisis has been to question, intimidate and impose rules on short-sellers — the only market players who have a financial incentive to expose fraud and abuse.)

Keeping all of this in mind, let’s have a look at the current lawsuit brought by the SEC against Bank of America, pending before Judge Jed S. Rakoff of The United States District Court for the Southern District of New York.  The matter was succinctly described by Louise Story of The New York Times:

The case centers on $3.6 billion bonuses that were paid out by Merrill Lynch late last year, just before that firm was merged with Bank of America.  Neither company disclosed the bonuses to shareholders, and the S.E.C. has charged that the companies’ proxy statement about the merger were misleading in their description of the bonuses.

To make a long story short, Bank of America agreed to settle the case for a mere $33 million, despite its insistence that it properly disclosed to its shareholders, the bonuses it authorized for Merrill Lynch & Co employees.  The mis-handling of this case by the SEC was best described by Rolfe Winkler of Reuters.  The moral outrage over this entire matter was best expressed by Karl Denninger of The Market Ticker.  Denninger’s bottom line was this:

It is time for the damn gloves to come off.  Our economy cannot recover until the scam street games are stopped, the fraudsters are removed from the executive suites (and if necessary from Washington) and the underlying frauds – particularly including the games played with the so-called “value” of assets on the balance sheets of various firms are all flushed out.

On a similarly disappointing note, there is the not-so-small matter of:  “Where did all the TARP money go?”  You may have read about Elizabeth Warren and you may have seen her on television, discussing her role as chair of the Congressional Oversight Panel, tasked with scrutinizing the TARP bank bailouts.  Neil Barofsky was appointed Special Investigator General of TARP (SIGTARP).  Why did all of this become necessary?  Let’s take another look back to last January.  At that time, a number of Democratic Senators, including:  Russ Feingold (Wisconsin), Jeanne Shaheen (New Hampshire), Evan Bayh (Indiana) and Maria Cantwell (Washington) voted to oppose the immediate distribution of the second $350 billion in TARP funds.  The vote actually concerned a “resolution of disapproval” to block distribution of the TARP money, so that those voting in favor of the resolution were actually voting against releasing the funds.  Barack Obama had threatened to veto this resolution if it passed. The resolution was defeated with 52 votes (contrasted with 42 votes in favor of it).  At that time, Obama was engaged in a game of “trust me”, assuring those in doubt that the second $350 billion would not be squandered in the same undocumented manner as the first $350 billion.  As Jeremy Pelofsky reported for Reuters on January 15:

To win approval, Obama and his team made extensive promises to Democrats and Republicans that the funds would be used to better address the deepening mortgage foreclosure crisis and that tighter accounting standards would be enforced.

“My pledge is to change the way this plan is implemented and keep faith with the American taxpayer by placing strict conditions on CEO pay and providing more loans to small businesses,” Obama said in a statement, adding there would be more transparency and “more sensible regulations.”

Although it was a nice-sounding pledge, the new President never lived up to it.  Worse yet, we now have to rely on Congress, to insist on getting to the bottom of where all the money went.  Although Elizabeth Warren was able to pressure “Turbo” Tim Geithner into providing some measure of disclosure, there are still lots of questions that remain unanswered.  I’m sure many people, including Turbo Tim, are uncomfortable with the fact that Neil Barofsky is doing “too good” of a job as SIGTARP.  This is probably why Congress has now thrown a “human monkey wrench” into the works, with its addition of former SEC commissioner Paul Atkins to the Congressional Oversight Panel.  Expressing his disgust over this development, David Reilly wrote a piece for Bloomberg News, entitled: “Wall Street Fox Beds Down in Taxpayer Henhouse”.  He discussed the cynical appointment of Atkins with this explanation:

Atkins was named last week to be one of two Republicans on the five-member TARP panel headed by Harvard Law School professor Elizabeth Warren.  He replaces former Senator John Sununu, who stepped down in July.

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And while a power-broker within the commission, Atkins was also seen as the sharp tip of the deregulatory spear during George W. Bush’s presidency.

Atkins didn’t waver from his hands-off position, even as the credit crunch intensified.  Speaking less than two months before the collapse of Lehman Brothers Holdings Inc., Atkins in one of his last speeches at the SEC warned against calls for a “new regulatory order.”

He added, “We must not immediately jump to the conclusion that failures of firms in the marketplace or the unavailability of credit in the marketplace is caused by market failure, or indeed regulatory failure.”

When I spoke with him yesterday, Atkins hadn’t changed his tune.  “If the takeaway by some people is that deregulation is the thing that led to problems in the marketplace, that’s completely wrong,” he said.  “The problems happened in the most heavily regulated areas of the financial-services industry.”

Regulated by whom?

Doubts Concerning The Stock Market Rally

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August 6, 2009

As of today (Wednesday night) the current “bear market rally” continues to surprise people with its longevity.  On the other hand, many news outlets, including The Washington Times and CNBC are declaring a “New Bull Market”.  There seems to be no shortage of commentators proclaiming that the market indices will continue to climb forever.

Back on planet earth, there is a good deal of commentary about the suspicious activity behind this rally.  In my last posting, I discussed the “Plunge Protection Team” or PPT.  Rather than repeat all that, for the benefit of those unfamiliar with the PPT, I will quote the handy definition at the Hamzei Analytics website:

Plunge Protection Team has been the “Working Group” established by law in 1988 to buy the markets should declines get out of control.  It is suspected by many market watchers that PPT has become far more interventionist than was originally intended under the law.  There are no minutes of meetings, no recorded phone conversations, no reports of activities, no announcements of intentions.  It is a secret group including the Chairman of the Federal Reserve, the Secretary of the Treasury, the Head of the SEC, and their surrogates which include some of the large Wall Street firms.  The original objective was to prevent disastrous market crashes.  Lately it seems, they buy the markets when they decide the markets need to be bought, including the equity markets.  Their main resource is the money the Fed prints.  The money is injected into markets via the New York Fed’s Repo desk, which easily shows up in the M-3 numbers, warning intervention was near.  As of April 2006, M-3 is longer reported.

Many of us have looked to the PPT as the driving force behind this rally.  News sources have claimed that the rally is the result of money “coming into the markets from the sidelines” — implying that crisis-wary investors had finally thrown caution to the wind and jumped into the equities markets to partake in the orgy of newfound wealth.  The cash accumulating in the investors’ money market accounts was supposedly being invested in stocks.  This propaganda was quickly debunked by the folks at the Zero Hedge website, with the following revelation:

Most interesting is the correlation between Money Market totals and the listed stock value since the March lows:  a $2.7 trillion move in equities was accompanied by a less than $400 billion reduction in Money Market accounts!

Where, may we ask, did the balance of $2.3 trillion in purchasing power come from?  Why the Federal Reserve of course, which directly and indirectly subsidized U.S.banks (and foreign ones through liquidity swaps) for roughly that amount.  Apparently these banks promptly went on a buying spree to raise the all important equity market, so that the U.S. consumer whose net equity was almost negative on March 31, could have some semblance of confidence back and would go ahead and max out his credit card.

Similar skepticism was voiced by Karl Denninger of The Market Ticker website:

So once again we have The Fed blowing bubbles, this time in the equity markets, with (another) wink and a nod from Congress.  This explains why there has been no “great rush” for individual investors to “get back in”, and it explains why the money market accounts aren’t being drained by individuals “hopping on the bus”, despite the screeching of CNBC and others that you better “buy now or be priced out”, with Larry Kudlow’s “New Bull Market” claim being particularly offensive.

Unfortunately the banksters on Wall Street and the NY Fed did their job too well – by engineering a 50% rally off the bottom in March while revenues continue to tank, personal income is in the toilet and tax receipts are in freefall they have exposed the equity markets for what they have (unfortunately) turned into — a computer-trading rigged casino with the grand lever-meister being housed at the NY Fed.

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No, real buying is just that – real buying from real retail investors who believe in the forward prospects for the economy and business, not funny-money Treasury and MBS buying by The Fed from “newly created bank reserves” funneled back into the market via high-speed computers.  The latter is nothing more than a manufactured ramp job that will last only until “the boyz” get to the end of their rope (and yes,that rope does have an end) as the fractional creation machine does run just as well in reverse, and as such “the boyz” cannot allow the trade to run the wrong way lest it literally destroy them (10:1 or more leverage is a real bitch when its working against you!)

Is it coming to an end now?  Nobody can be certain when, but what is certain is that over the last week or so there have been signs of heavy distribution – that is, the selling off of big blocks of stock into the market by these very same “boyz.”  This is not proof that the floor is about to disappear, but it is an absolute certainty that these “players” are protecting themselves from the possibility and making sure that if there is to be a bagholder, it will be you.

Many commentators, including Joseph Saluzzi of Themis Trading, have explained how the practice of computer-driven “High-Frequency Trading” has added approximately 70 percent of “volume” to the equities markets.  This is accomplished because the exchanges pay a quarter-of-a-penny rebate to High-Frequency Trading firms for each order they place, waiving all transaction fees.  As a result, the “big boy” firms, such as J.P. Morgan and Goldman Sachs, will make trades with their own money, buying and selling shares at the same price, simply for the rebates.  Those pennies can add up to hundreds of millions of dollars.

I recently came across a very interesting paper (just over eight pages in length) entitled:  A Grand Unified Theory of Market Manipulation, published by Precision Capital Management.  The paper describes a tug of war between Treasury Secretary Ben Bernanke and the New York Fed, that is playing out in the equities and Treasury securities markets.  The authors suggest that if Bernanke’s biggest threat is high long-term Treasury yields (interest rates), the easiest way to prevent or postpone a yield ramp would be to kill the stock market rally and create a “flight to safety in Treasuries” – situation that lowers long-term yields.  The paper describes how the New York Fed facilitates “painting the tape” in the stock markets to keep the rally alive.  For those of you who don’t know what that expression means, here’s a definition:

An illegal action by a group of market manipulators buying and/or selling a security among themselves to create artificial trading activity, which, when reported on the ticker tape, lures in unsuspecting investors as they perceive an unusual volume.

After causing a movement in the security, the manipulators hope to sell at a profit.

Instead of accusations that the PPT is the culprit doing the tape painting during the final minutes of the trading day, we again see a focus on the New York Fed as the facilitator of this practice.  Here’s the explanation given in the paper by Precision Capital Management:

The theory for which we have the greatest supporting evidence of manipulation surrounds the fact that the Federal Reserve Bank of New York (FRNY) began conducting permanent open market operations (POMO) on March 25, 2009 and has conducted 42 to date.  Thanks to Thanassis Strathopoulos and Billy O’Nair for alerting us to the POMO Effect discovery and the development of associated trading edges.  These auctions are conducted from about 10:30 a.m. to 11:00 a.m. on pre-announced days.  In such auctions, the FRNY permanently purchases Treasury securities from selected dealers, with the total purchase amount for a day ranging from about $1.5 B to $7.5 B.  These days are highly correlated with strong paint-the-tape closes, with the theory being that the large institutions that receive the capital interjections are able to leverage this money by 100 to 500 times and then use it to ramp equities.

As for the all-important question of how the authors expect this to play out, they focus on what might happen at the market close on August 5:

And, while it is a bit early to favor one side or the other, we are currently leaning toward a nervous Bernanke and the need to ramp Treasuries at the expense of equities into August 9.  Equities have had more than a nice run and can suffer a bit of a correction.  Key will be watching the close on Wednesday.  A failed POMO paint the tape close could signal that an equities correction of at least a few weeks has gotten underway.

What we saw on Wednesday afternoon was just that.  At approximately 3 p.m. there was an effort to push the S&P 500 index into positive territory for the first time that day, which succeeded for just a few minutes.  The index then dropped back down, closing .29 percent lower than the previous close.  Does this mean that a market correction is underway?  Time will tell.  With the S&P 500 index at 1002 as I write this, many experts consider the market to be “overbought”.  Fund manager Jeremy Grantham, who has been entrusted to invest over $89 billion of his customers’ hard-inherited money, is of the opinion that the current fair value for the S&P 500 should be just below 880.  Thus, there is plenty of room for a correction.  The answer to the question of whether that correction is now underway should be something we will learn rather quickly.