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Seeing Reality With Gold Glasses

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March 8, 2010

The most recent report from the Bureau of Labor Statistics concerning non-farm payrolls for the month of February has surprised most people and it has left a number of commentators feeling upbeat.  Reuters had reported that “The median forecast from the ten most accurate forecasters is for payrolls to fall by 70,000.”  Nevertheless, the BLS report disclosed a figure of approximately half that much.  Only 36,000 jobs had been lost and unemployment was holding at 9.7%.   One enthusiastic reaction to that news came from the Mad Hedge Fund Trader:

While the employment rate for those with no high school diploma is 16%, the kind of worker who lost their manufacturing jobs to China, the jobless rate for those with college degrees is only 4.5%.  This is proof that the dying sectors of the US economy are delivering the highest unemployment rates, and that America is clawing its way up the value chain in the global race for economic supremacy.  It is what America does best, creative destruction with a turbocharger.  There is a third influence here, which could be huge.  The BLS only contacts existing businesses for its survey.

*   *   *

The bottom line is that payroll figures are much better than they appear at first glance.

Prior to the release of that report, many commentators had been expressing their disappointment concerning the most recent economic indicators.  I discussed that subject on March 1.  On the following day, John Crudele of The New York Post focused on the dramatic drop in the Consumer Confidence Index, released by The Conference Board — a drop to 46 in February from January’s 56.5.  Here is the conclusion Mr. Crudele reached in assessing what most middle-class Americans understand about our current economic state:

Even with the stock market still bubbling and media trying its damnedest to convince us at least a million times a day that there’s an economic recovery, the American public isn’t buying it.

*   *   *

The economy has stabilized since then, helped greatly by the fact that some wealthy people feel wealthier because of an unbelievable snap back by the stock market during 2009.  (And by unbelievable in this context I mean that what happened shouldn’t be believed as either legitimate or sustainable.)

Don Luskin of The Wall Street Journal’s Smart Money blog articulated his dissatisfaction with the most recent economic indicators on February 26.  One week later, Luskin presented us with a very informative analysis for understanding the true value of one’s investments.  Luskin spelled it out this way:

Consider stocks priced not in money, but in gold.  In other words, instead of thinking of stocks as investments you make in order to increase your wealth in dollars, think of them as something to increase your wealth in gold.  After all, you don’t want to make money for its own sake — you want the money for what you can buy with it.  Gold is a symbol for all the things you might want to buy.

*   *   *

It’s easy to track stocks priced in gold because the price of the S&P 500 and the price of an ounce of gold vary closely with one another.  As of Thursday’s close, they were only about $10 apart, with the S&P 500 at 1123, and gold at about 1133.

How about a year ago, on the day of the bottom for stocks on March 9?  That day the S&P 500 closed at 676.53.  Gold closed at 920.85.  That means that one “unit” of the S&P could have bought 73% of an ounce of gold.

Today, with stocks and gold each having risen over the last year — but with stocks rising more — one “unit” of the S&P can buy 99% of an ounce of gold.  All we have to do is compare 73% a year ago to 99% now, and we can see that stocks, priced in gold, have risen 34.9%.

A 34.9% gain for stocks priced in gold is pretty good for a year’s work.  But it’s a far cry from the 69.1% that stocks have gained when they are priced in dollars.  Do you see what has happened here?  Stocks have made you lots of dollars.  But the dollar itself has fallen in value compared to the real and eternal value represented by gold.

Here’s the most troubling part.  The entire 34.9% gain made by stocks — priced in gold, that is — was achieved in just the first five weeks of rallying from the March 2009 bottom.  That means for most of the last year, since mid-April, while it has appeared that stocks have been furiously rallying, in reality they’ve just been sitting there.  All risk, no reward.

*   *   *

So why, then, did stocks — priced in dollars, not gold — continue so much higher?  Simple:  We experienced inflation-induced growth.  Throw enough stimulus money, an “extended period” of zero interest rates from the Fed, and a big dose of government debt at the economy, and you will get some growth — and, eventually, lots of inflation.

Luskin concluded the piece by explaining that if stocks move higher while gold moves lower, we will be seeing evidence of real growth.  On the other hand, if gold increases in value while stocks go down or simply get stuck where they are, there is no economic growth.

Luskin’s approach allows us to see through all that money-printing and excess liquidity Ben Bernanke has brought to the stock market, creating an illusion of increased value.

Everyone is hoping to see evidence of economic recovery as soon as possible.  Don Luskin has provided us with the “x-ray specs” for seeing through the hype to determine whether some of that evidence is real.



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Damage Control

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December 17, 2009

Matt Taibbi hit another grand slam with his recent Rolling Stone article: “Obama’s Big Sellout”.  It was another classic work in his unique style.  The ugly truth it drove home was that Barack Obama used a “bait and switch” tactic in his Presidential campaign:  promising to reform Wall Street — until the day after he got elected — at which time he immediately jumped into bed with the culprits of the financial crisis.  The reaction of the Obama apologists to the Rolling Stone piece involved the usual tactic of attacking the messenger (in this case:  Taibbi himself).  It didn’t work.  The best way to see how this played out should begin with a reading of  Taibbi’s retort to a critique appearing in The American Prospect — a feeble attempt to demonstrate that Taibbi got his facts wrong.  A neutral judge, Felix Salmon of Reuters, then stepped in and ruled in favor of Taibbi.  The online responses to Felix Salmon’s essay are a great read.  At the Open Left website, David Sirota upbraided Taibbi’s critics, who spanned the political spectrum — many of whom expressed condescension at the “naïve” decision of an outside-the-beltway reporter to expose the breach of a campaign promise:

It’s certainly true that a lot of politicians’ words mean nothing – but if reporters start treating that as a non-newsworthy assumption in their coverage, then the whole journalistic system becomes a joke – a miasma of personality profiles and puff pieces that assumes that the only thing that must be valued in politics is personal intangibles like “charisma” and “charm” and “toughness” and all those other incessant cliches. And what a joke that makes of our democracy.  In a republic where we only get to vote our politicians in or out every few years, all we have to go on are their promises.  If we now must assume their promises aren’t true, and attack people for being “naïve” for daring to try to hold them to their promises, then we’ve made a joke of our whole political system.

Matt Taibbi’s article immediately forced the White House into a damage control mode.  Another softball interview was immediately set up with Steve Croft of 60 Minutes, wherein Obama attempted to redeem his false image as an adversary of the Wall Street investment banks.  The President took advantage of that opportunity to present himself as an antagonist of those he described as “fat cats”.  On the following day, Obama held a meeting in the White House cabinet room with some banking representatives who found the event important enough to attend.  Immediately afterward, Charlie Gasparino revealed the backstory behind Obama’s meeting with the bankers.  After informing us that the administration provided the bankers with Obama’s “talking points” in advance of the meeting, Gasparino disclosed this:

.  .  . people with first-hand knowledge of the sitdown said, it was a heavily scripted affair — with none of the fireworks Obama displays in public.

*   *   *

Said one CEO who attended:  “I expected to be taken to the woodshed, but the tone was quite the opposite.”

Said another senior exec with knowledge of the meeting: “The whole thing was so telegraphed that not much was accomplished, other than giving Obama a PR stunt.   . . .  He might have sounded mean on ‘60 Minutes,’ but during the meeting he was a hell of a lot nicer.”

Many commentators were quick to point out that by the time Obama started talking tough about “fat cats”, he had already given them all they wanted by allowing them to pay back their TARP loans on an expedited basis.  As Henry Blodget explained for The Business Insider:

And in case you missed what is really going on here, the banks that repaid TARP are now getting all the benefits of government help with none of the drawbacks.  They just ditched the bad stuff — namely, pay caps — and kept the good stuff (implicit bond guarantees, subsidized super-low interest rates, no obligation to do anything for anyone).  Obama can jawbone all he wants about “fat cats,” but that’s all he can do.

At The Washington Post, Steven Pearlstein bemoaned the fact that the TARP beneficiaries had been “let off their leash”.  Pearlstein expressed concern that this move created the potential for more problems in the future:

By rushing to cash in their chips, however, the administration not only gave up political leverage and additional profit, but took the risk that one or more of the banks may find that it can’t make it on its own.  While the financial system has rebounded faster than anyone could have imagined, potential threats still loom — a further collapse of commercial real estate, for example, or a string of sovereign debt defaults.  And bank profits, while having rebounded, remain significantly dependent on the availability of cheap funding from the Federal Reserve and other central banks that cannot be expected to last indefinitely.

The administration’s damage control effort turned out to be worthless.  With his centerpiece healthcare reform effort floundering in the Senate, Obama the President is appearing to be significantly less effective than Obama the candidate.  The President’s critics have been quick to pounce.  George Will noted that Obama has “seen his job approval vary inversely with his ubiquity”.  The New York Post’s Michael Goodwin alleged that Obama “doesn’t look like he cares that big chunks of the country, left, right and center, are giving up on him.”  However, the best analysis of the confidence crisis afflicting the Obama Presidency came from Dan Gerstein of Forbes.com.  Gerstein observed that the new Preisdent’s leadership style was to blame — something Gerstein described as “the Reverse Roosevelt:  Talk boldly and carry a toothpick.”  While debunking the administration’s claim that it had lost the leverage it had over Wall Street with the TARP paybacks, Gerstein argued that such an excuse “doesn’t pass the laugh test” because the banking industry is the most regulated industry in the country.  The task Obama faces is to cultivate a leadership style that will be useful in confronting the challenges he undertook when he assumed office:

For those center dwellers, the issue is not that Obama is too liberal or too pragmatic (the chief complaints of the noisemakers on the left and right), but that he is not effective enough.  They question whether he has what it takes to get results:  to find the right balance on health care, to admit and fix the inadequacies of the stimulus, to begin taming the deficit without impeding growth.  It is a crisis of confidence that at its heart is, as Brookings scholar and former Clinton adviser Bill Galston points out, a crisis of competence.

*   *   *

But regardless of the reasons, Obama signed up for these missions, and his ability to succeed in them will largely hinge on whether he can grow as a leader.  Can he overcome his inhibitions, whatever their cause, and learn from the legacies of our most effective presidents about how to wield the full power of his office?  He clearly knows how to don the velvet glove (often with substantial impact) — will he come to understand when to unleash the iron fist?

Obama’s pattern so far is far from encouraging.  But I would not give up hope for growth.

It appears as though we are back to the themes of “hope” and “change”.  This time we’re hoping that Obama will change.



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Matt Taibbi Deserves An Award

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June 25, 2009

Like many people, I found out about Matt Taibbi as a result of his frequent appearances on HBO’s Real Time with Bill Maher.  Last spring, Matt appeared on Real Time to discuss his research into the global economic crisis and the resulting scheme of numerous bailouts engineered in response to each sub-crisis of this economic catastrophe.  My March 26 piece: “Understanding The Creepy Bailouts“, quoted from Matt’s fantastic article for Rolling Stone magazine, entitled: “The Big Takeover”.  (At that time, the “Big Takeover” link led to the complete article.  Rolling Stone now provides only abbreviated versions of its published articles on line.)  One important theme of Matt’s commentary was evident in this passage:

The mistake most people make in looking at the financial crisis is thinking of it in terms of money, a habit that might lead you to look at the unfolding mess as a huge bonus-killing downer for the Wall Street class.  But if you look at it in purely Machiavellian terms, what you see is a colossal power grab that threatens to turn the federal government into a kind of giant Enron — a huge, impenetrable black box filled with self-dealing insiders whose scheme is the securing of individual profits at the expense of an ocean of unwitting involuntary shareholders, previously known as taxpayers.

Matt has a unique way of discussing the extremely complicated, technical issues involved in the financial crisis, by breaking them down into understandable, plain-language points.  Unfortunately, most mainstream journalists lack either the understanding or the courage (or both) to discuss our financial predicament in such a frank, informative manner.  Take for example:  Fareed Zakaria’s discussion of the economic catastrophe as it appeared in Newsweek under the title “The Capitalist Manifesto”.  Nobody could to a better job of ripping that thing to shreds than Matt Taibbi himself.  With his June 24 blog entry, he did just that:

Zakaria works hard to tell the crisis story minus these outrageous details.  Then he goes on to argue that, basically, nothing should be done.  We mostly just need a “gut check”; we, all of us, need to rediscover that little voice in all of us that says, “if it doesn’t feel right, we shouldn’t be doing it.”  I mean, that is actually what he wrote.  No one needs to go to jail, we don’t need to worry about who’s to blame, we just need, you know, do a better job using our trusty moral compasses to navigate the seas of life.  It’s classic Zakaria in the sense that he attacks ugly political phenomena with tired cliches and hack pablum until you’re almost too bored to keep your eyes open, then in the end reduces it all to a dumbed-down t-shirt that carries us forward to another cycle of political inaction: Laissez-faire capitalism doesn’t rip off people, people rip off people!

Matt’s previous blog entry on June 18, focused on one of my favorite subjects:  the hideous monster we have come to know as Goldman Sachs.  I had written a piece about that entity on May 21, discussing how Paul Farrell of MarketWatch and John Crudele of the New York Post had been voicing the same suspicions I had been harboring about Goldman.  After reading Matt Taibbi’s June 18 article, I enthusiastically sent the link to my friends.  This stuff was just too good!  Matt was laying it on the line in a way few others had the courage or the skill to do.  I doubt whether many in the mainstream media will follow his lead.  Here is one of the highlights from that piece:

Any way you slice it, Goldman was responsible for putting tens of billions of toxic mortgages on the market, resulting in mass foreclosures, mass depletion of retirement funds, and a monstrously over-leveraged financial system that we will now all be bailing out for the next half-century or so.  All of this so that Goldman could make a few billion bucks acting as the middleman in all of these deadly transactions.

If that weren’t enough, Matt pointed out that the upcoming issue of Rolling Stone would feature another of his reports  —  this one focused exclusively on Goldman Sachs.  That issue (#1082-83, with the Jonas Brothers on the cover) is now on the newsstands.  Matt’s article:  “The Wall Street Bubble Machine” is best explained in the subtitle:

From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression  — And they’re about to do it again.

In case you are wondering how they’re going to do it again  . . .  Matt reports that it will be by way of the “Cap and Trade” program.  Goldman has already positioned itself to serve as one of our government’s premier carbon credit pimps.  Matt offered this explanation:

Goldman is ahead of the headlines again, just waiting for someone to make it rain in the right spot.  Will this market be bigger than the energy-futures market?

“Oh, it’ll dwarf it,” says a former staffer on the House energy committee.

Matt’s “bottom line” paragraph at the conclusion of the essay underscores what I believe are America’s biggest problems:  “lobbying” and “campaign contributions” (our tradition of legalized graft).  Our government is not just one of laws . . . it is one of loopholes, exemptions and waivers.  Those things cost money.  The people who have the money to “invest” in such machinations, usually find themselves rewarded handsomely  . . .  at the expense of the taxpayers.  Here’s how Matt wrapped it up:

But this is it.  This is the world we live in now.  And in this world, some of us have to play by the rules, while others get a note from the principal, excusing them from homework until the end of time, plus 10 billion free dollars in a paper bag to buy lunch.  It’s a gangster state, running on gangster economics, and even prices can’t be trusted anymore; there are hidden taxes in every buck you pay.  And maybe we can’t stop it, but we should at least know where it’s all going.

Amen.

A Consensus On Conspiracy

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May 21, 2009

I guess I can throw away my tinfoil hat.  I’m not so paranoid, after all.

Back on December 18, after discussing the bank bailout boondoggle, I made this observation about what had been taking place in the equities markets during that time:

Do you care to hazard a guess as to what the next Wall Street scandal might be?  I have a pet theory concerning the almost-daily spate of “late-day rallies” in the equities markets.  I’ve discussed it with some knowledgeable investors.  I suspect that some of the bailout money squandered by Treasury Secretary Paulson has found its way into the hands of some miscreants who are using this money to manipulate the stock markets.  I have a hunch that their plan is to run up stock prices at the end of the day, before those numbers have a chance to settle back down to the level where the market would normally have them.  The inflated “closing price” for the day is then perceived as the market value of the stock.  This plan would be an effort to con investors into believing that the market has pulled out of its slump.  Eventually the victims would find themselves hosed once again at the next “market correction”.  I don’t believe that SEC Chairman Christopher Cox would likely uncover such a scam, given his track record.

Some people agreed with me, although others considered such a “conspiracy” too far-flung to be workable.

Thanks to Tyler Durden at Zero Hedge, my earlier suspicions of market manipulation were confirmed.  On Tuesday, May 19, Mr. Durden posted a video clip from an interview with (among others) Dan Schaeffer, president of Schaeffer Asset Management, previously broadcast on the Fox Business Channel on May 14.  While discussing the latest “bear market rally”, Dan Schaeffer made this observation:

“Something strange happened during the last 7 or 8 weeks. Doreen, you probably can concur on this — there was a power underneath the market that kept holding it up and trading the futures.  I watch the futures every day and every tick, and a tremendous amount of volume came in at several points during the last few weeks, when the market was just about ready to break and shot right up again.  Usually toward the end of the day — it happened a week ago Friday, at 7 minutes to 4 o’clock, almost 100,000 S&P futures contracts were traded, and then in the last 5 minutes, up to 4 o’clock, another 100,000 contracts were traded, and lifted the Dow from being down 18 to up over 44 or 50 points in 7 minutes.  That is 10 to 20 billion dollars to be able to move the market in such a way. Who has that kind of money to move this market?

“On top of that, the market has rallied up during the stress test uncertainty and moved the bank stocks up, and the bank stocks issues secondary — they issue stock — they raised capital into this rally.  It was a perfect text book setup of controlling the markets — now that the stock has been issued …”

Mr. Schaeffer was then interrupted by panel member, Richard Suttmeier of ValuEngine.com.

My fellow foilhats likely had no trouble recognizing this market manipulation as the handiwork of the Plunge Protection Team (also known as the PPT).  Many commentators have considered the PPT as nothing more than a myth, with some believing that this “myth” stems from the actual existence of something called The President’s Working Group on Financial Markets.  For a good read on the history of the PPT, I recommend the article by Ambrose Evans-Pritchard of the Telegraph.  Bear in mind that Evans-Pritchard’s article was written in October of 2006, two years before the global economic meltdown:

Hank Paulson, the market-wise Treasury Secretary who built a $700m fortune at Goldman Sachs, is re-activating the ‘plunge protection team’ (PPT), a shadowy body with powers to support stock index, currency, and credit futures in a crash.

Otherwise known as the working group on financial markets, it was created by Ronald Reagan to prevent a repeat of the Wall Street meltdown in October 1987.

Mr Paulson says the group had been allowed to languish over the boom years.  Henceforth, it will have a command centre at the US Treasury that will track global markets and serve as an operations base in the next crisis.

*    *    *

The PPT was once the stuff of dark legends, its existence long denied.  But ex-White House strategist George Stephanopoulos admits openly that it was used to support the markets in the Russia/LTCM crisis under Bill Clinton, and almost certainly again after the 9/11 terrorist attacks.

“They have an informal agreement among major banks to come in and start to buy stock if there appears to be a problem,” he said.

“In 1998, there was the Long Term Capital crisis, a global currency crisis.  At the guidance of the Fed, all of the banks got together and propped up the currency markets. And they have plans in place to consider that if the stock markets start to fall,” he said.

The only question is whether it uses taxpayer money to bail out investors directly, or merely co-ordinates action by Wall Street banks as in 1929.  The level of moral hazard is subtly different.

John Crudele of the New York Post frequently discusses the PPT, although he is presently of the opinion that it either no longer exists or has gone underground.  He has recently considered the possibility that the PPT may have “outsourced” its mission to Goldman Sachs:

Let’s remember something.

First, Goldman Sachs accepted $10 billion in government money under the Troubled Asset Relief Program (TARP), so it is gambling with taxpayer money.

But the bigger thing to remember is this:  The firm may be living up to its nickname – Government Sachs – and might be doing the government’s bidding.

The stock market rally these past seven weeks has certainly made it easier for the Obama administration to do its job.  That, plus a little fancy accounting during the first quarter, has calmed peoples’ nerves quite a bit.

Rallies on Wall Street, of course, are good things – unless it turns out that some people know the government is rigging the stock market and you don’t.

That brings me to something called The President’s Working Group on Financial Markets, which is commonly referred to as the Plunge Protection Team.

As I wrote in last Thursday’s column, the Team has disappeared.

Try finding The President’s Working Group at the US Treasury and you won’t.

The guys and girls that Treasury Secretary Hank Paulson relied on so heavily last year when he was forcing Bank of America to buy Merrill Lynch and when he was waterboarding other firms into coming to Wall Street’s rescue has gone underground.

Anybody who has read this column for long enough knows what I think, that the President’s Working Group Plunge Protectors have, in the past, tinkered with the financial markets.

We’ll let interrogators in some future Congressional investigation decide whether or not they did so legally.

But right now, I smell a whiff of Goldman in this market. Breath in deeply, it’s intoxicating – and troubling.

Could Goldman Sachs be involved in a conspiracy to manipulate the stock markets?  Paul Farrell of MarketWatch has been writing about the “Goldman Conspiracy” for over a month.  You can read about it here and here.  In his May 4 article, he set out the plot line for a suggested, thirteen-episode television series called:  The Goldman Conspiracy.  I am particularly looking forward to the fourth episode in the proposed series:

Episode 4. ‘Goldman Conspiracy’ is manipulating stock market

“Something smells fishy in the market. And the aroma seems to be coming from Goldman Sachs,” says John Crudele in the New York Post.  Stocks prices soaring.  “So, who’s moving the market?”  Not the little guy.  “Professional traders, with Goldman Sachs leading the way.”   NYSE numbers show “Goldman did twice the number of so-called big program trades during the week of April 13,” over a billion shares, creating “a historic rally despite the fact that the economy continues to be in serious trouble.”   Then he tells us why: Because the “Goldman Conspiracy” is using TARP and Fed money, churning the markets.  They are “gambling with taxpayer money.”

It’s nice to know that other commentators share my suspicions … and better yet:   Some day I could be watching a television series, based on what I once considered my own, sensational conjecture.