Saturday, October 30, 2010

Vintage Norman

At this point in the cycle, as we head into the elections next week and the uncertain outcome it portends, it may be a good idea to re-visit some thoughts Mike had a bit over two years ago at another critical time before an election. For new readers here and old you go from Mike's blog of September 17, 2008:

"A Dangerous New Policy"

The market turmoil today is easy to explain and easy to correct, but sadly, we will neither get a good explanation nor will we get the proper remedies. You will hear that it is because of the never-ending stream of bailouts that we are suffering through this, however that is not true. Up until last Sunday’s balk by Treasury Secretary Hank Paulson regarding a rescue of Lehman, things had been going fairly well: banks were recapitalizing, shares in some of the most beleaguered sectors like housing and banks were starting to recover, commercial credit issuance was rising, mortgage lending was picking up and most important, the U.S. was outperforming other countries around the world both in terms of its stock markets and its economy. That’s how it looked right up until Paulson uttered those famous last words: “I never once considered using taxpayer money to help Lehman.” What followed was the largest stock market decline since 9/11 and a virtual Who’s Who of financial firms who are now queuing up to witness their own demise. At this very moment, we are in a virtual freefall with no endgame in sight.

Perhaps it was not necessary to save an investment bank like Lehman. After all, in a $14 trillion economy the failure of what was essentially a financial intermediary should have been taken in stride. The problem, as I see it, was that by essentially throwing up his hands and saying that the government was prepared to leave the resolution of this crisis to “the free markets,” he changed the game in one fell swoop.

First and foremost let us understand that the idea of the “free markets” is a fallacy. Markets exist within the framework of a national and indeed, sometimes global, political system; they operate and are governed by laws, regulations and tax codes. In some cases they are even accorded special protections and rights, like in the case of patents and trademarks, etc. The word “free” in free markets is a misnomer. We have competitive markets, not “free” ones.

Yet the fallacy persists and many feel that all problems are better solved by the omniscient free market. Markets do react to problems and eventually “resolve” them, in their own way and sometimes that can be brutal. I’ll invoke the words of the philosopher Thomas Hobbes, who said, when talking about the natural state of nature and man, that life in that state can be “nasty, brutal and short.” As humans we give up some personal freedom to form societies in which there are rules and authorities. This keeps us from devolving into what Hobbes observed as man’s natural state of war and chaos. The markets are no different: they can be reigned over and controlled and corralled to some degree, or they can exist in a wild state.

I believe that our na├»ve appeals to “the hand of the free market” are being heeded and that is what makes this so very scary. Many of those who have longed for this day will be surprised, and not in a good way mind you. I said on Fox Business the other day that those who were against bailouts are seeing their dreams come true, however, their dreams will soon turn to nightmares. The current situation has devolved into that natural state that Hobbes described. Moreover, no one will be spared; not even those misguided folks who railed against the bailouts thinking that their good behavior (they paid their mortgages on time, never over-leveraged and wisely saved) somehow insulated them from any possible misfortune. They’ll be sadly mistaken.

Even policy makers have gotten influenced by this perception. Misinformed and misguided cries of “taxpayer on the hook” is leading to dangerous new policy, where the government is no longer acting as a backstop or countervailing force (because that is viewed as putting taxpayers in jeopardy) but rather, acting unilaterally to seize private property with some warped idea that the government needs to make profits. This is highly dangerous in my opinion.

Thirty-six hours after Paulson said that he would not help Lehman, he and the folks at the Fed appeared to go back on their pledge, saying that they would rescue AIG, the insurance giant that was taking its last few steps up the gallows. The Lone Ranger came riding in at the last moment. Or did he? For this help (which was not asked for at least in the way it came), AIG would have to pay loan-shark interest rates and the company’s owners—the shareholders—who had already lost pretty much everything (AIG’s largest shareholder, Hank Greenberg, is said to have seen his net worth decline by as much as $7 billion in a matter of days), would have just about zero, as the government takes a majority ownership position.

Herein lies the problem as I see it. The government is not a profit seeking enterprise. Rather, it exists for the public purpose. Yet mandating the government to “make profits” on the false notion that this someone behooves taxpayers, will not only destroy taxpayers but destroy the economy as we know it.

At the end of the day no private business can compete for profits with government in an economy where taxes must be paid in a currency that the government has the monopoly power to issue. Think about it. A company is set up to sell widgets. It has to raise capital (remember, the government’s cost of capital is zero ‘cause it issues the stuff), it makes a profit of $100 and gives 10% to the government as tax, leaving it with $90. It also has to pay back investors or the bank that lent it money to start up. So, it’s really left with less than $90.

In contrast, the profit seeking government uses its own money, which it can issue without constraint, then sells widgets for $100 and pays no taxes to itself. It should be clear that pretty quickly the government ends up owning the means of all production. That’s not called Socialism; that’s called Communism. The markets are not afraid of Democratic Socialism, however, the markets ARE afraid of Communism. Really afraid!

By operating under the false notion that the government must “make a profit” and that private owners and risk takers must be destroyed each and every time a firm needs something as simple as a loan or loan guarantee, private sector risk taking understandably collapses. Who will take risk when the government stands ready to take your property, unilaterally, without invitation or even a discussion of whether or not you are getting some fair compensation for it? The answer is nobody! That is why you are seeing stocks collapse today.

In all of the recent examples: Fannie Mae, Freddie Mac and AIG, the Fed or the Treasury could have extended loans or loan guarantees backed by these companies’ assets, charged an interest rate of whatever it chose, but preferably just above the yield on a 10-year Treasury, say. (Even though it could have chosen 0.0001% or any increment above 0% because the government’s cost of funds in zero) and that would have been sufficient “payback.”

In closing I will leave you with this example: Imagine if you went to buy a house and asked a bank for a loan, which the bank granted at some interest rate above the bank’s own cost of funds. That would be the bank’s “profit.” The bank will also secure the loan with the house. In other words, the bank can take the house if you default on the loan. I’m sure everyone understands this. Now imagine a scenario where the bank lends you the money at a specified interest rate, secures the loan with the property and owns whatever equity you build up in your home as well!! What kind of deal is that??? In the meantime, you are still stuck having to pay taxes and forking out money for the upkeep of the property. Who would buy a house??? The answer is nobody. But that is exactly the system we have set up here with the “bailouts" and this idea that the government should make profits. Herbet Hoover once said, "The business of government IS business." We had the Great Depression afterward.It should be no wonder, then, why investors are dumping stocks.

Tuesday, October 26, 2010

El-Erian: Federal Reserve 'Terrified' of Deflation

PIMCO head El-Erian was interviewed by CNBC today and is predicting that the Fed will commence with QE2 starting next week because the Fed is 'terrified' of deflation.

Interesting excerpt:

"QE is meant to drive down the price of safe assets so much that we are all pushed into doing something risky," El-Erian said in an interview Monday at a gathering of the Financial Women’s Association of New York."

I view the goal of QE as to increase the price of 'safe' or, risk-free, assets in order to lower the term structure of interest rates, here El-Erian has QE lowering bond prices. Maybe he misspoke, and the CNBC editor didn't catch it.

Although.....PIMCO was a contracted agent of the FRBNY during 'QE1'. Maybe this is what they really did during the first round, as ever since QE1 was over in April of this year, interest rates have fallen significantly!

Do any of these people know what the h they are doing?

Monday, October 25, 2010

QE2, perhaps, but Fed slowly reducing its balance sheet.

There's been a lot of talk about QE2 and the Fed has been purchasing bonds (setting bond rates lower), but it's also been quietly reducing its balance sheet.

These are the total amount of bonds purchased so far in Oct (millions $)

10/22/2010 $2,490
10/20/2010 $660
10/18/2010 $6,260
10/15/2010 $4,690
10/6/2010 $2,069
10/5/2010 $5,190

Total: $21,359

And here is the Fed's balance sheet:

So, yes, bonds have been bought, but as I said, that’s how the Fed sets rates lower.

The important thing, however, is that the Fed’s balance sheet (factors affecting reserve balances) have gone down. So while it is buying bonds, it is also selling other assets or allowing certain liquidity programs to expire. The total amount of reserves credited to the banking system has fallen. No net new “money” has been added.

Saturday, October 23, 2010

CNBC: Emergency Alert on Home Prices

Here's a short video report from CNBC yesterday about falling home prices:

The firm that is the source of the price data is reporting a 6% drop over the last few months and projects another 10% drop over the winter months. This de-flationary development will make it more difficult for banks to sell any foreclosed homes they may have in inventory, as it would make any loss they were previously estimating that much worse.

Is this the start of some serious deflation?

Related observation: CNBC reporter Olick makes a statement at the end of the video to the effect that "on Monday GMAC and Bank of America said that they will start some of the sales again and that will just add to the inventory..." This statement does not make sense. Foreclosures will add to inventories, sales will subtract form inventories. I've noticed that some of the mainstream reporting around this "foreclosure" issue is not differentiating between foreclosures and foreclosure sales. These banks I believe have stated that they will proceed with foreclosures as they need to press their legal rights, but I do not think that they are intending to proceed with foreclosure sales in light of the actual capital losses that they will have to realize upon the sale of a home at a price that is less than the loan amount.

Thursday, October 21, 2010

Hey, Debt Terrorists! Why didn't the debt explosion in the 1940s bankrupt us??

This chart says it all!

The per capita debt load exploded in the 1940s, yet it didn't bankrupt us. On the contrary, it made us rich because there is no such thing as a "per capita debt burden." That's a made up, fictitious construct. The debt of the government is an ASSET of the non-government, so what this chart should really be called is the per-capita asset windfall. That's what made us rich after it occurred.

The dollar is NOT being "debased!"

One of the things that we hear all the time is that the dollar is being "de-based."

People blame the Fed or excessive government spending or that we went off the gold standard or who knows what else, but they all say the dollar is losing its value and we are having to pay more and more for things.

Well, the fact is, this is absolutely not true! It's totally wrong!!

When people complain about debasement they usually speak in terms of the nominal price of something. For example, they say that a car used to cost $2500, now it costs $25,000, so we're having to pay more: the dollar buys less.

But that's a totally flawed way of looking at it.

The way to look at it is to calculate the amount of labor that it takes us to earn enough money to buy a car. (We work to earn money so we need to know how much of work is required to earn a certain amount of money.) If we work less nowadays to buy a car than we did back in 1970, then the dollar buys us more, not less.

And that's exactly what the truth is.

Using data from the Bureau of Labor Statistics and the National Automobile Dealers Association I did a little comparison.

Average hourly earnings today are $19.10.
Average hourly earnings back in 1970 were $2.58

The average price of a new car today is $28,500.
The average price of a new car in 1970 was $3,900.

Using these numbers we see that it took 1512 hours of work to be able to afford a new car back in 1970.

However, it takes only 1492 hours of work to afford a new car today. We work less today to be able to afford that new car, therefore, the price of the car in real terms HAS GONE DOWN!!!!

Which means...THE DOLLAR BUYS MORE, NOT LESS!!!!!!

And here's the kicker: back in 1970 all you really got was a basic car. A body with an engine. That's about it.

Today you get a car with an engine that starts every time you turn the key (no small feat back in 1970, especially in winter), air conditioning, power steering, power brakes, airbags, power windows, radio, all standard. You get warranties of up to 100k miles and much, much more. In other words, not only do you have to work less to be able to afford the car, but you get much, much, much, much, more car for your money.

The whole notion of debasement is totally, totally, false!!!

And it's not just about cars, it also applies to homes, clothing, food, medical care...pretty much EVERYTHING. The quality of everything has gone up and their real cost has gone down. That's with the Fed and the government spending and the fiat currency and all the other nonsensical crap that these debasement clowns talk about.

When they say the dollar is being debased, that is their BELIEF, but it is not the truth.

And as any smart person knows, there is a difference between belief and truth!

Tuesday, October 19, 2010

Why gold is a HUGE bubble!

Gold mine production is now at the highest level since 2000, when gold prices were at $250 per ounce!!

And gold demand from jewelry—the largest source of physical demand for gold—is collapsing!

Meanwhile, investors keep stockpiling gold at a feverish pace. Gold inventories on the Comex are up ten fold from 2001!!

So, add it all up…

Mine production already exceeds total gold jewelry demand by 50%!

And investors are piling up gold inventories…

When it comes time to sell, who will they sell to???

Nobody will be there to buy all that gold.

This is a major disaster waiting to happen. A MASSIVE bubble!

BE CAREFUL!!!!!!!!!!!!!!!!!!

Friday, October 15, 2010

Bernanke Introduces "Structural Unemployment" Into the Economic Lexicon

Fed Chairman Bernanke has provided another at best non-informational at worst misleading speech this morning. Link to the text here.

In a part of the speech where he addressed unemployment, he stated:
Although attaining the long-run sustainable rate of unemployment and achieving the mandate-consistent rate of inflation are both key objectives of monetary policy, the two objectives are somewhat different in nature. Most importantly, whereas monetary policymakers clearly have the ability to determine the inflation rate in the long run, they have little or no control over the longer-run sustainable unemployment rate, which is primarily determined by demographic and structural factors, not by monetary policy.

Here the Chairman re-states the Fed mandate of achieving maximum employment with price stability, but then in an about face states that monetary policy really has no influence on unemployment over the long term. This is a fascinating admission. Has he given up? Maybe he has, because he also now introduces the word "structural" into the economic lexicon pertaining to unemployment, this is outrageous. Previously this adjective was only used by deficit terrorists to describe their misguided view of long term fiscal deficit projections. Now apparently, the Fed Chairman is using it to describe his misguided view of unemployment.

What does this term "structural" mean? Is this a real economic term? Is it a recognized accounting term? Is it a stock? Is it a flow? If you think about it, it is used when misguided, ignorant economic policy makers cannot logically explain some economic phenomenon using their own outdated, inapplicable paradigm. If you cannot explain it, it must be some sort of "structural" factor, it is "built in", part of the "natural" economic "structure". Perhaps they view it as an insurmountable "barrier", but this would only be because in reality they do not understand the policies that cause it. There is a structural barrier, it is in their own minds.

The shame of this speech (again!) is that Congressional and Executive branch policymakers can interpret this to mean that there is no policy to counter this now "structural" unemployment introduced here by Bernanke. Bernanke is a disgrace for a public servant.

PS: Go Yankees!

Thursday, October 14, 2010

Petroleum demand falls to a 10-month low, yet oil prices are rising!

By Margot Habiby and Moming Zhou
Oct. 14 (Bloomberg) -- Crude oil fell as a government
report showed U.S. petroleum demand declined to the lowest level
in more than 10 months as the economy struggled to recover.
Crude dropped for a third day this week after the Energy
Department reported total petroleum demand declined 0.7 percent
to 18.3 million barrels a day in the week ended Oct. 8, the
lowest level since the seven days ended Nov. 27, 2009. A Labor
Department report today showed U.S. jobless claims unexpectedly
rose to 462,000 in the week to Oct. 9.
“The demand numbers were very weak,” said Tim Evans, an
energy analyst at Citi Futures Perspective in New York. “We
don’t really have a bull market unless we have stronger consumer

Yet oil prices are rising for no fundamental reason. It's all speculation and we deem that to be okay?? People will have to pay for higher fuel, heat and just about everything else because we are letting speculators raise the price of oil when demand is falling. Insanity!!!

I give Stuart Varney a HUGE schooling! Check it out!!!

Who exactly do we owe money to?

Who exactly do WE owe money to? We keep hearing this…that WE Americans are deeply in debt and that every person in America now owes $43,000 or whatever the figure is.

This is what the politicians and Deficit Terrorists (that’s what I call them) say, day in and day out.

But what does that mean? Have you ever thought about that??

Does that mean we, as citizens, each and every one of us, have borrowed $43 grand from the government??

If so, then it’s an asset for the government. That’s right, those loans are an asset; just like the loans on the books of a bank. And given that the product of the nation (our national income = $14.5 trillion) exceeds the amount we supposedly owe, we’re technically good for the money. So when you look at it that way, the government is rich, not broke: it has a very strong asset on its books.

But of course that's not what's going on. In fact, it's the opposite.

When people talk about America’s debt what they’re really talking about is the government’s debt. But that’s the same thing as I just explained above, only in reverse! The government’s "debt" is OUR asset. (Remember, for every debt there is a credit, for every liability there is an asset.)

We OWN these assets in the form of Treasuries, higher financial balances, etc. So in short, WE THE PEOPLE owe nothing...WE OWN!

And here’s the best part about it: when we get these assets they come without any corresponding liability. So, by definition, our wealth (assets – liabilities) increases!

Okay, what about the Chinese and other foreigners you may ask? Is that a liability of the government? Perhaps you can look at it that way, however, what the Chinese and other foreigners have is simply a claim on some quantity of dollars, which our government issues freely and without constraint.

The whole thing is really very simple.

They hysteria created by this is the same kind of hysteria that drove people to think ships would fall off the end of the earth back in 1491, but Christopher Columbus took care of that nonsense.



Got my Series 7!

Only took 30 years! Haha!

I've been in the financial industry for 30 years, but never had a Series 7. Didn't need it for what I was doing: exchange member, trader, economist. Took the test yesterday and passed it, first time! Now I'm a stock broker!!

Tuesday, October 5, 2010

Tennessee County’s Subscription-Based Firefighters Watch As Family Home Burns Down

"when the firefighters arrived, they refused to put out the fire, saying that the family failed to pay the annual subscription fee to the fire department. Because the county’s fire services for rural residences is based on household subscription fees, the firefighters, fully equipped to help the Cranicks, stood by and watched as the home burned to the ground..."

This is what it is going to come to because of a fundamentalist belief that everything in our society should be dictated by the private sector. Same thing will happen with police and law enforcement. You didn't pay your subscription? Okay, let the robber rob your house, then. That's your tough luck!


The whole entire system collapsed in 2008 and rather than abaonding this free market fundamentalism, we are buying into it even more deeply than ever!

Read this shocking article here.

Bernanke says deficits pose 'real and growing' threat to economy, calls for plan to cut them

With millions of people unemployed and the economy limping along at output levels far below its potential, Bernanke is worried about deficits??? The current condition is creating mass poverty, which will become the heritage of current and future generations. A broad decline in living standards is taking place and the U.S. is ceding its economic leadership to countries like China! Yet Bernanke is talking about deficits!!

Bernanke has now become part of the problem and not part of the solution. It's bad enough that we have scores of ignorant lawmakers in Washington thrusting this misery onto us; but we don't need a bunch of squirrel-minded academics at the Fed doing it too!

The Fed has far too much power and that power is being wasted or misused when you have this ideology. I think I am beginning to feel that Ron Paul has it right...we should abolish the Fed! We don't need the government AND the Fed conspiring to make a nation of slaves, serving only the privileged and powerful. Get rid of the Fed and at least we'll have one less ignorant institution to deal with.

Zero interest rates back in Japan

The global race to the bottom continues. The BOJ has lowered already low policy rates and set up a program to conduct their own version of quantitative easing. This in hopes of devaluing the Yen and fighting a Japan deflation through monetary policy.

The only consolation here is that at least the US doesn't have the monopoly on ineffective policy.

Story here at Yahoo!.

Sunday, October 3, 2010

From rocket scientist to hamburger flipper

Another sad consequence of the crazy belief system that has us cutting spending and investment. NASA is laying off thousands of scientists, technicians and engineers. Many will become hamburger flippers.

What a sad and terrible and IRRATIONAL loss this is. The greatest assemblage of scientists, technicians and engineers the world has ever seen will be dispersed forever. And why? Because of some crazy belief system that makes us think we can only fix the economy by cutting the budget.

In the meantime, the Chinese are boosting their space programs. It's just another example of how we are literally handing the Chinese our leadership and dominance in so many areas.

Read article here.

Welfare, weakened under Clinton, becomes the missing piece in the safety net!

Prisons will become the "new" welfare system as ordinarily law-abiding citizens are forced to steal in order to feed their families or get money to survive. More and more people will be put in jail as a result.

It's just like the military--how it has become a quasi, social services, health, education and labor administration. The military provides jobs, health care, pays for college education and provides social services and even housing. This is in addition to its originally intended role of ensuring national defense. All because as a nation we refuse to separate these social functions and expenditures/investments into fully funded agencies and administrations. The burden, therefore, falls on the military. Some kids die just because they wanted a college education. Some parents are killed or maimed just because they wanted health care. How immoral is that???

Now we will allow the prison system (which is brutal) provide welfare services (three square meals a day) to ordinarily law abiding citizens because an irrational and out of control belief that cutting the deficit comes before basic human needs. This is a total abrogation of the function of government, in my opinion. We are forcing people to live like animals, then locking them up, so that we cut the deficit???

Sick, totally sick!

Article here.