Saturday, May 30, 2009
Max may be going for maximum effect here, but he is on the right side of the argument, imo…
Max Keiser on Bankers' Bonuses - 27 March 2009 (1 of 2):
Max Keiser on Bankers' Bonuses - Face Off - 27 March 2009 (2 of 2):
(The map below is ACTIVE, you may zoom out to see Lake Baikal and its position within Siberia)
View Larger Map
While the nuclear treaty inspectors where flying to various facilities, we were given the run of the town and dined with the Mayor! It was like going back in time to about 1930. Markets had shoes, black, baby carriage, black, overcoat, black… those were their choices, but of course it’s already way different than that now. I’ll never forget speaking to people in the town and those who could speak English would ask where we were from? We would reply that we were Americans and they would absolutely refuse to believe us! “No, no, you must be European… Americans in Siberia? Never!” And that’s pretty much the exact response I got from the person running the news stand where I picked up the latest edition of Pravda for a souvenir.
So, let’s kick our weekend off with a little reading from Provda online which certainly looks nothing like the all black newspaper of old. I share this article with you somewhat reluctantly as it’s not flattering to America at all – yet it is mostly the truth as painful as that may be. It is a two page article, so be sure to read the second page:
American capitalism gone with a whimper
The lesson from my perspective? Neither side “won” the Cold War. We both lost, it just is taking longer for us to realize it. And now we still carry the debts and use Marxist ideology in an attempt to cover them up. After seeing the healthcare in Russia, I swore that I would never support socialized medicine or socialized anything! Dental work, medical care? Terrible. Innovation? Forget about it. One of the things that struck me hard and fast was the lack of work ethic. Nothing getting done, everyone moving in slow motion, little service. Why should they innovate or hustle? Everything they needed was provided - one each black.
Any country that uses Marxist ideology will suffer hugely. That’s my point, and unfortunately we are using his ideology in spades now.
The result is that we pretend our markets are free while they are the exact opposite. We have our government doing everything in their power, and even things outside of their powers, to prop up our FAILING markets. They do not understand the importance of the rule of law, and THAT is exactly why they are failing. The central bankers went unchecked and designed ways to permeate the globe with their debts… debts that are not repayable. And without the rule of law we wind up with highly manipulated markets that do not operate the way free markets are supposed to.
Just look at yesterday’s close. Where did that last minute spike come from? Was it supported by fundamentals? Was there some positive news event? I’ll let others tell you about it from their perspective:
From Zerohedge is probably the most informative piece regarding Agency trading volumes and computerized trading – it would seem the only trading left:
Goldman Sachs Principal Transactions Update: Collapse In Agency Program Trading Volume
And here’s Karl Denninger’s take:
What Was That? (Friday Market Close)
What was that indeed!
This entire rally from March on has been entirely trumped up – start to finish. Our own Fed “buying” our own debt (???INSANE???), one bailout after another, changes to accounting rules that obscure reality and allow mark to fantasy, money laundering operations run by our own government, on and on. Our markets are not even close to being “free.”
Doing technical analysis is POINTLESS in this environment. The government and the banks are working together to create an illusion. You can call that statement “conspiracy theory” or whatever the hell you want to, but it’s simply the undeniable reality. If you simply understand the relationship of capital flows between stocks and bonds, then you will realize that having your own government buying debt changes ALL the market dynamics.
Heck, even the Baltimore Chronicle is running stories on the manipulation:
THE FIX IS IN - Manipulation: How Markets Really Work
You are certainly “free” to donate your money to the game players if you wish, but I’ve been scaling way back and after seeing Friday’s action have decided that “starving the beast” is the only right and PRO-AMERICAN action. That is exactly what the holders of debt are doing world-wide as evidenced by TLT (20 year bond fund) being down 23% from its pre-Christmas high, a classic parabolic collapse that I (and a few others) forecasted as it was peaking (Bond Market Hide & Seek – A Domed House & 3 Peaks...):
I knew the markets would become difficult to play the further down the markets went, but they have degenerated to the point already that free market forces are simply no longer in play. The rule of law has been lost – it exists only in one direction and that’s entirely at the central banker’s discretion.
Searching for the right music to play at the end of this is like searching for the right music to play at a loved one’s funeral… pretty damn difficult. I was searching for Don Henley’s “Little Tin God,” but couldn’t find it, however I did find a song from Don Henley I had never heard before:
Don Henley – Inside Job:
Friday, May 29, 2009
And an anonymous poster was kind enough to find the speech on line for us, thanks: Reflections & Outrage…
At any rate, here is a very long legal brief he just submitted to the SEC. I have not read it all yet, but I know it outlines his case from his perspective. I will make more comments on this as I get through it – it’s 81 pages long, but for those who are interested in his perspective and background on the case here it is. I think it’s heartening to see the SEC review this, I hope they do the right thing and release him immediately. He is a national asset whose views should be highly considered, not shunned or tagged/discredited with jail time. Despite the naysayers, I say that his viewpoints reflect reality WAY more closely than those of the “accepted” economists who espouse Friedman, Marx, and Keynesian economic claptrap that amounts to nothing more than ignorance of math and has produced a mass psychosis of Alice in Wonderland thinking.
Skeptical Sherman: TARP $$ Paid Back Is NOT Geithner's Revolving Fund Should PAYOFF National Debt!!
Here are the details of the report from Econoday.
A "W" recession is what the Chicago purchasers report is pointing to as the headline index came in at a much weaker-than-expected 34.9, a reading well below 50 to indicate significant month-to-month contraction in business activity. New orders, always the key index, fell nearly 5 points to 37.3. Backlog orders fell nearly 11 points to a very depressed 26.3. Businesses, facing declining orders, continue to draw down inventories as much as possible with the index at 31.5. Job cuts are deeper than ever with the employment index down nearly 7 points to 25.0. Despite increases in energy and commodity prices, purchasers continue to report significant month-to-month declines in input prices with the index at 29.8. This report has a thin sample and a sample that includes both manufacturers and non-manufacturers. But its results are clear and do point to disappointing reversals in next week's national purchaser reports from the ISM. Stocks fell back in immediate reaction to today's report.
Market Consensus Before Announcement
The Chicago PMI Business Barometer in April jumped nearly 10 points to 40.1. While the latest reading was still sub-50 and indicating contraction, it at least showed that the rate of decline has eased. Looking ahead, we may see further but incremental improvement as April's new orders index jumped more than 11 points to 42.1
Backlog orders falling does not indicate future growth, that’s for certain. Sorry, but I just fail to see any of the supposed greenshoots that everyone is so enamored with. I see printing, buying our own debt, buying up failed businesses (but not yours), and false profits in the financial space.
A slowing of the freefall? Perhaps, but that’s just a function of math… Once something has fallen 50% or more, the RATE of fall MUST decelerate… no surprise there. Look at the chart above, you will see an index that was literally cut in half, from 60 to 30. Is it going to get cut in half again and fall to 15? Low odds of that, especially in a straight line. No, the real question is what is going to move our economy forward from here? Is it printing? Does that equal economic growth? How about financials who simply mark up their toxic loan and derivative portfolios? Does that equal growth? Does buying up GM, and handing out cash to financials in exchange for their toxic assets generate orders or create economic prosperity? Of course not… If we wish to return to a truly prosperous economy it will take the people to rise up and put an end the insanity…
Crosby, Stills, and Nash – Chicago (we can change the world):
I’m back! Thanks to everyone who kept the daily thread going, there were a lot of good comments on there, I appreciate it, thanks! It was nice to get away for a couple of days, the weather was terrific, the golf course was beautiful (very tough greens) and it was nice to just walk it and watch. My son had a lot of fun, played well but finished about in the middle of the pack. A little disappointing, but it puts him in the top 30 or so High School golfers in the state, not bad!
Futures are up this morning, here’s a chart of the overnight action, showing the /ES was stopped by the 912 pivot:
And I see that equities are the LAST to get it, again! I think that’s because there’s a retail side to equities that’s smaller with bonds and currencies. I have read so many opine that the historic blow-out of the yield curve is signaling recovery that it’s not even funny. This yield curve spread is NOT healthy, it is artificial. Rates on the short end are being bought down with your tax dollars and printed money, i.e. MANIPULATED. Rates on the long end are shooting higher BECAUSE OF THE MANIPULATION!!! And because of the massive, out-of-control spending that’s coupled with CRASHING TAX REVENUE and a BIZZARO WORLD where our government (YOU) is becoming the owner of what seems to be the MAJORITY of large corporations in America. THAT IS A FAILURE OF AMERICA – WAKE THE HECK UP PEOPLE!
The principles upon which we were founded are dying. What we thought was wrong is now sponsored and executed by our own government. The pain that would have been experienced will BE DOUBLED because of these actions. Now, instead of just a failed economy and financial system, we face a failed government. It was suicide via central banker.
Hey, Doug Kass can buy all the stock he wants into that, I remain bearish until the debts clear and we return to our Republic form of government. We are transitioning to fascism, plain and simple, and I’m just sorry for those who cannot face the truth. What’s happening to our economy is far beyond bullish or bearish, it is about the American system of governance and American way of life.
Now, let’s talk about Kass’s comments… He basically stated that “perma-bears” are LOSERS! That only converted ex-bears will make money in the markets! What BULL! Look, we are in a raging BEAR market, a very, very dangerous one. One where bears can make money, bulls can make money, and like always the hogs get slaughtered. What matters is how you read the fundamentals and how you play the market.
Some people play the daily swings while others swing trade, and still others “invest” over longer time periods. In THIS environment I personally try to swing trade. That means trades that last a few days to possibly a few weeks at most. And, I only do it with a very small percentage of my total investable money. To do more is nuts, in my opinion, in this environment. And unlike Kass, I don’t like to swing long in a bear market as they are simply too unpredictable in terms of duration. Yes, I play long on occasion when the setup is good, but those are very short term plays and I know that holding them for any length of time is just plain old risky.
And speaking of risk, first quarter GDP was revised up, but not as much as expected. Here’s what Econoday had to say:
First quarter GDP was revised up moderately as the Commerce Department's first revision bumped up the quarter's growth rate to a 5.7 percent annualized decline from the initial estimate of a 6.2 percent contraction. The revised estimate was worse than the consensus forecast for a 5.5 percent decrease. The upward revision was primarily due to less negative inventories and a smaller decline in exports.. The first quarter drop in GDP followed a 6.3 percent decrease the previous quarter.
On the inflation front, the GDP price index was revised to an annualized 2.8 percent increase which was incrementally lower than the initial estimate of 2.9 percent. The markets had expected an unrevised 2.9 percent increase. The headline PCE index was unrevised with a 1.0 percent decline while core PCE inflation also was unrevised with an annualized 1.5 percent increase.
Year-on-year growth for real GDP dropped by 2.5 percent, after falling 0.8 percent in the fourth quarter.
Although GDP growth was not quite as good as markets expected, the shortfall was not that significant. Markets likely have put these numbers behind and are focusing on post-open numbers for the Chicago PMI and consumer sentiment index. The sentiment number may be what markets really care about today, given the importance of improved consumer sentiment for recovery to take hold any time soon.
Market Consensus Before Announcement
GDP for the first quarter initial estimate came in with a sharp 6.1 percent annualized drop and followed a 6.3 percent contraction the prior quarter. A key fact from the report was that the first quarter decrease was led by a $103.7 billion cutback in inventories. Real final sales of domestic product fell only 3.4 percent while real final sales to domestic purchasers declined 5.1 percent annualized (purchases by U.S. residents of goods and services wherever produced). Markets likely will be watching to see whether weakness remains in reduced inventory investment. The cutback in inventories is seen as helping set up stronger growth in coming quarters.
Meanwhile, according to government statistics, corporate profits for the first quarter did increase from a year over year change of -36% in the 4th quarter, to “ONLY” -22% in the first quarter, YoY. LOL, here’s the chart showing the turn up… it’s a greenshoot alright, too bad is so far underground that it likely will never see the light of day! Note that there have been several turns in this chart before:
Current price to earnings are at extreme readings again. Certainly NOT bear market bottom types of readings, and those trying to look into the future and see significantly higher earnings are very likely to be dissapointed, again. Much of the increase in earnings you see here came from the TARP and other money that was passed through (money laundering) to the financials as well as mark to fantasy in the financial space - FALSE PROFITS!
And the dollar is plummeting yet again this morning – gold & oil shooting higher. This is their intention remember… that is to rob you of your purchasing power in an attempt to make the debts appear less ominous. That is a path to destroying the middle class, however, as wages will not keep up with this loss, and their debts must be repaid from somewhere. The worst possible combination for the PEOPLE is to have raging inflation in commodities coupled with wage stagflation which is exactly what the central bankers are trying to produce. Again, who’s that good for? Who is it good for to pump billions and to guarantee the PRIVATE debts of GM with public money? Again, it’s good for the bankers who are simply stealing us all blind and laundering their money through failed institutions. Real innovation and future competition will certainly not spring up from the ashes of GM. They would only spring up if GM was allowed to really fail, as they have.
Meanwhile the bond auctions are just huge and getting out of hand. The TNX and TLT took a breather yesterday but did not pull back significantly. Again, the pressure is there, the debts are mounting and as interest rates rise will eventually squick the holders of debt, the largest of course is our own government.
There are a few things I’m noticing in the techicals. Let’s first take a look at a 20 day chart of the SPX. I drew in the triangle that’s been forming… it should technically break up, but a wrong way and lower break would not surprise me and, as you can see, the H&S pattern I pointed out a few days ago is still in play but would require a break beneath the 880 area to confirm it. Also note that the 30 minute stochastic is overbought, the 60 minute has room for higher before turning lower which may happen later today:
The VIX is a very interesting chart. Here’s 3 months worth of it, you can see the descending wedge and how we have broken the upper boundary twice now. Yesterday attempted to but fell back inside again. When this breaks above, and closes above, it will be time to get more bearish:
Next chart is the daily NDX. It produced the infamous dueling hammers. The second hammer usually wins and sends prices in the direction of the second hammer’s handle – in this instance down (this is not a perfect indicator, but that’s the read):
A lot of balls in the air still, we now have new buy signals on the daily stochastics but fresh sells on the weekly. So, watch the bond market, watch the VIX, watch the triangle, and watch the dollar!
Sorry Kass, still bearish on our economy and think this bear market rally, while it may go on longer, is a low odds proposition to last substantially longer. In this case ramping yields on the long end will pressure the holders of debt and will eventually lead to more deleveraging. It’s coming, get ready... bulls, I think you're dreaming - it's more than a feeling...
Boston- More Than A Feeling:
Thursday, May 28, 2009
The 888 (880) level held overnight and futures rose slowly but steadily overnight:
The durable goods report came in with a 1.9% improvement and the weekly unemployment number came in slightly lower than last week at “only” 623,000. Frankly, that’s just a horrid number and yet where I read about it in three places they all made it sound as if it was a good thing! AND even worse, continuing claims rose again by a humongous 110,000 – placing continuing claims well above 6.6 million.
Econoday actually had this to say about continuing claims:
The alarming news in the report is a sizable 110,000 jump in continuing claims, in data for the May 16 week. The gain is the 19th in a row and puts total continuing claims at 6.608 million, a record indicating that jobseekers are having a very tough time finding work. Continuing claims are 495,000 higher compared to mid-April, a comparison that points to trouble for next week's monthly employment report. The unemployment rate for insured workers keeps rising each week, up another tenth at 5.1 percent and pointing squarely at a 9 percent handle for the total unemployment rate.
When I look at the media, I also see a lot of primping regarding GM going into bankruptcy… “It’s going to be a GOOD thing…” Seriously, look at CNN, that’s what they are telling you!
The media are in some type of mass psychosis as well – nuts!
Anyway, I’ll let Seth keep you up to date on the market moves, I really appreciate him and Point and everyone else who contributed to keep the thread going in my absence! I’ll be back this evening and will be close to normal tomorrow. I have some interesting Martin Armstrong documents to post regarding his review by the SEC. They have taken an interest, possibly because of all the work he put out, and are reviewing his case. He filed a brief with them and it is interesting reading, but I haven’t had the time to get through it all yet.
If you didn’t catch my post yesterday, I am leaning more bearish and do not think the 880 level will hold too much longer. It is the key level now, the pivot above is at 912 and the pivot below is at 848. The bond market is the KEY to the entire thing still… as I’ve been saying, something must give. But, do not be surprised if Bernanke comes out and calls rising interest rates a good thing and that he has it all under control, that it’s all a part of his plan to start pulling liquidity to keep inflation in check! LOL, if he does that, I’ll just die… but so will the economy! Of course the truth is that he’s being spanked for his indiscretion…
Have a good day,
Tuesday, May 26, 2009
I am out of town enjoying my son’s last high school golf tournament at the State Championship before he graduates and goes off to college. I will be back communicating with you by Friday.
In the mean time, I appreciate you keeping each other up to date with what’s happening on this daily thread. A lot of economic reports and bond auctions that will influence the markets come out the next couple of days.
Just remember that while you're watching the markets on your computer I will be walking around a beautiful golf course enjoying the 90 degree weather of Eastern Washington... (lol)
Lovin' Spoonful - Summer In The City
Futures are down after having dipped significantly but finding a “V” recovery this morning… Why the sudden change? I don’t know, perhaps the manipulators will tell the world that North Korea is simply shooting off bottle rockets in celebration of their world isolation? I don’t know (!) but the dollar is up, bonds are up, and the /ES is sitting right around the 880 area… Here’s the overnight action:
Let’s talk technicals a little first, before I go on another rant about the freaking banks…
Friday we had another small movement in the McClelland Oscillator, so expect a large price move today or tomorrow, direction unknown by that indication. The short term stochastics would imply higher, then lower, as the 5 and 10 minute are oversold, but the 30 and 60 minute are just leaving overbought (doesn’t have to happen that way and we’re going to open lower).
We also closed below the mid-point of the daily Bollingers, so the odds favor coming down to the bottom Bollinger. Doesn’t HAVE to happen, but the odds went up.
Here’s a chart of the daily SPX. You can see that the 880 area is offering support, but once it falls, there’s not much until the bottom Bollinger band. Note that the fast stochastic is about to reach oversold:
On the 20 minute chart there is a textbook Head & Shoulder pattern setting up. We did dip below the neckline in overnight trading, but to be valid the neckline needs to fall during the light of day. If it does, this pattern is worth about 45 S&P points and would target about the 835 area which is beneath the lower bollingers and is just about where the 100dma is located. Volumes were lighter on Friday, but it was a holiday weekend thus lower volume would be expected:
The VIX has yet to break upwards from its descending bullish wedge. Right now the line is a little over 33. Break above 34ish and that would be bearish for the market.
A lot of analysts are turning more bullish, even some of the “bears” such as Peter Schiff who hinted this weekend at a possible two year bounce, then decline, and also Marc Faber who also thinks equities are going higher. Maybe, but I highly doubt it. I am still thinking the highest odds scenario is that we move a lower in the short term, then bounce again, possible lasting as long as late summer, but in the Fall, forgetaboutit! That’s IF we don’t just head on down here and now.
But keep in mind that the game players are playing their ABSOLUTE WORST BULLSHIT GAMES. Remember that JPM sucked in the “assets” of WaMu… you remember, those toxic wasteland pools of option-arm mortgages with delinquency rates that would scare the hell out of Mother Teresa? You bettcha… those loans are still there and they are not getting better. In fact, the expensive homes that are financed by those loans are in far worse shape, value wise, than the subprime homes that have caused so much havoc. And the value of the loans that are up for reset in the next 2.5 years dwarfs the value of subprime.
Good thing for JPM and their ilk that they strong-armed the politicians and accountants at the FASB, because that way they are able to take those loans and mark them to anything they damn well please, thank you very much!
JPMorgan $29 Billion WaMu Windfall Turned Bad Loans Into Income
May 26 (Bloomberg) -- JPMorgan Chase & Co. stands to reap a $29 billion windfall thanks to an accounting rule that lets the second-biggest U.S. bank transform bad loans it purchased from Washington Mutual Inc. into income.
Wells Fargo & Co., Bank of America Corp. and PNC Financial Services Group Inc. are also poised to benefit from taking over home lenders Wachovia Corp., Countrywide Financial Corp. and National City Corp., regulatory filings show. The deals provide a combined $56 billion in so-called accretable yield, the difference between the value of the loans on the banks’ balance sheets and the cash flow they’re expected to produce.
Faced with the highest U.S. unemployment in 25 years and a surging foreclosure rate, the lenders are seizing on a four- year-old rule aimed at standardizing how they book acquired loans that have deteriorated in credit quality. By applying the measure to mortgages and commercial loans that lost value during the worst financial crisis since the Great Depression, the banks will wring revenue from the wreckage, said Robert Willens, a former Lehman Brothers Holdings Inc. executive who runs a tax and accounting consulting firm in New York.
“It will benefit these guys dramatically,” Willens said. “There’s a great chance they’ll be able to record very substantial gains going forward.”
When JPMorgan bought WaMu out of receivership last September for $1.9 billion, the New York-based bank used purchase accounting, which allows it to record impaired loans at fair value, marking down $118.2 billion of assets by 25 percent. Now, as borrowers pay their debts, the bank says it may gain $29.1 billion over the life of the loans in pretax income before taxes and expenses.
The purchase-accounting rule, known as Statement of Position 03-3, provides banks with an incentive to mark down loans they acquire as aggressively as possible, said Gerard Cassidy, an analyst at RBC Capital Markets in Portland, Maine.
“One of the beauties of purchase accounting is after you mark down your assets, you accrete them back in,” Cassidy said. “Those transactions should be favorable over the long run.”
JPMorgan bought WaMu’s deposits and loans after regulators seized the Seattle-based thrift in the biggest bank failure in U.S. history. JPMorgan took a $29.4 billion writedown on WaMu’s holdings, mostly for option adjustable-rate mortgages and home- equity loans.
“We marked the portfolio based on a number of factors, including housing-price judgment at the time,” said JPMorgan spokesman Thomas Kelly. “The accretion is driven by prevailing interest rates.”
JPMorgan said first-quarter gains from the WaMu loans resulted in $1.26 billion in interest income and left the bank with an accretable-yield balance that could result in additional income of $29.1 billion.
Wells Fargo arranged the $12.7 billion purchase of Wachovia in October, as the Charlotte, North Carolina-based bank was sinking from $122 billion in option ARMs. As of March 31, San Francisco-based Wells Fargo had marked down $93 billion of impaired Wachovia loans by 37 percent. The expected cash flow was $70.3 billion.
The Wachovia loans added $561 million to the bank’s first- quarter interest income, leaving Wells Fargo with a remaining accretable yield of almost $10 billion…
Hey, anyone who believes that sufficient writedowns were taken on those toxic acquisitions has holes where they don’t naturally belong. Thus we are back to make believe financials… an economy of the banks for the banks. Meanwhile, down on Main Street we still don’t manufacture hardly anything and unemployment is still climbing.
Speaking of unemployment, did you hear that some people are calling an end to the recession already?! It’s true! They are saying that since 1970 every time weekly unemployment claims have dipped, that was THE dip and they never went back up! LOL, I love claims like that by people who, like Bernanke, don’t look far enough back in history to have any clue. 1970! Give me a break. What’s occurring now is absolutely nothing like anything seen in this country EVER. Never has the population been so saturated with debt, never has our government had so much debt while at the same time their revenues are collapsing, NEVER has there been such a credit bubble in the history of mankind!
So, while the banks mark their assets to fantasy, you and I and the people on Mainstreet must mark our portfolios to reality! And thus the rule of law is a one way street! And speaking of one way rule of law, I chuckle tremendously at the couple who deposited $10k into their account and the bank credited them with $10 million! Another recent graduate of our school system who can’t do simple math, no doubt! Anyway, they saw the mistake and took the money and ran! Now there’s a “world-wide manhunt” underway! LOL, love it that the media would get so worked up over such PENNY ANTE theft, meanwhile the biggest theft in the history of mankind is occurring right under everybody’s noses – see the article above! People are NOT stupid, they see this one way rule of law and will CHEER this type of lawless behavior that is against the banks – I know I do! And there’s yet another example of moral hazard when the rule of law is not followed by all, it degenerates into a free for all. Look for more of that as people get fed up down on Mainstreet:
Bob Seger – Mainstreet:
ADMINISTRATIVE NOTE: I will be traveling to my son’s State Golf Championship this evening and will not be posting articles until I return later in the week. Before I leave this afternoon I will post a couple of these daily threads so that people can communicate with one another. I appreciate everyone keeping the posts going and sharing information. There’s a bunch of economic data coming later in the week along with a lot of bond auctions and I appreciate posting the results, it’ll help me and everyone else out too! Thanks in advance, and I’ll have more information later…
Monday, May 25, 2009
In fact, this is truly nation changing/ending material. What other downturn in our history has seen such wholesale buying and propping of “private” enterprise? None, and thus we are setting sail on a path that has not be traveled before, one that already has changed our nation. The effects of which will be permanent, thus no exit plan required (LOL).
What Geithner describes here is NOT just a rolling over of funds, but if payback is received and given to the “general fund” (i.e. SPENT), and they continue to dole out the “headroom” amount up to the $700 billion cap, then that makes the $700 billion TARP A POTENTIALLY INFINITE SUM. That’s no roll-over he’s describing there Senator, wake the heck up!
“Nate, in reading the following article, it's amazing how prior depressions to include the big recession in 1982 occurred every 50+ years right on cue. Besides excessive credit, do you have any idea, what would cause this (possible depression) to deviate from prior cycles?”Terrific question! But, the question is making the assumption that deep recessions actually occur at regular 50 year intervals… so, once we understand how cycles and history actually work, THEN we can answer the question, “what would cause this (possible depression) to deviate from prior cycles?”
So, this is going to be a very long post, but I think Hoye’s article is good enough and filled with enough good history that it is best read in its entirety. Anyone wishing to understand what’s happening MUST take the time to study the cycle farther back in time than the Great Depression! This is surely one of Bernanke’s greatest failures, it is a failure among business schools to teach, and it is a failure of government to work to towards a proper understanding of economic cycles and activities via SCIENTIFIC METHOD to create models that actually work.
Great Depressions Are So Methodical
Address to the Spring Dinner Meeting of the Committee for Monetary Research and Education (CMRE) www.cmre.org
May 14, 2009
One of the features of a great boom is the excitement of shared convictions about eternal prosperity. One of the features of the consequent contraction is bewilderment about how suddenly the bust arrived. Beyond those directly hit, the establishment becomes perplexed by the loss of liquidity and wonders where the money went.
With the 1980s crash in oil and property deals, a hearing run by offended politicians asked a particularly aggressive Oklahoma banker about "just where did the money go?". And as the Wall Street Journal faithfully reported "We spent it on wine, women and song – the rest we just pissed away."
As flippant as this may be, it is accurate and could be suitable in any example in any century. Fortunately, for consistency in any century, there is the classic definition of inflation that it is an "inordinate expansion of credit". In the 1930s, Keynes in a number of letters to the Fed twisted this around to mean that inflation was simply rising prices that had very little to do with central bank manipulations.
Fortunately, Keynes is not around to provide official confusion to the description that deflation is an inordinate contraction in credit. Relentless credit deflation started in 2007, and this implacable force has been part of every long depression.
Clearly, the title of this address puts me firmly in the bear camp. Just as clearly, the possibility of another great depression is highly controversial, particularly when such magnificent efforts are being made to restore the prosperity of a financial mania, which have always been ephemeral.
Perhaps my credentials should be reviewed. Everything I needed to know about the markets I learned on the old and notorious Vancouver Stock Exchange. For example, in a world of extravagant claims from big government, big academe and big Wall Street the old definition of a promotion is useful: "In the beginning the promoter has the vision and the public has the money. At the end of the promotion the public has the vision and the promoter has the money."
In 2006 to 2007 the public had the vision that policymakers could depreciate the dollar forever and were positioned accordingly. And for a moment the promoters looked brilliant as everyone thought they were wealthy. Moreover, as with any promotion the bigger it is – the bigger the crash.
There are two failures going on. The most obvious is in the financial markets and the other is in interventionist economics. The latter failure is in theory as well as in practice, and can be described as the greatest intellectual failure since the Vatican insisted that the solar system revolved around the earth, more particularly, Rome. Too many still believe that the financial world revolves around the Federal Open Market Committee.
Last year's disaster fit the pattern of the 1929 fall crash with remarkable fidelity. Such a crash was obvious and as the train wreck in the credit markets continued through the summer of 2008 the Fed continued its recklessness. But with some marketing skills, the objective of "stimulus" changed from keeping the boom going to the absurd notion that bailing out one insolvency, Bear Stearns, would revive the boom. As usual with a bubble, it was not just one bank that had been imprudent – most had been.
The establishment missing this recurring event was bad enough but there is another clanger and that is the hopeless notion of a national economy. Even in ancient times, Cicero knew that the prosperity of Rome was vulnerable to the credit conditions in the Middle East. In this regard, Mother Nature has again been providing some harsh lessons, and history suggests she and Mister Margin will ultimately be successful in teaching markets 101 to many policymakers.
In the meantime, coming out of the classic fall crash orthodox investments such as commodities, stocks and bonds were expected to rebound out until April-May. Until this hooked up, the typical GDP forecast was tentative in looking for the recovery to begin "by mid-2010”, but our "model" needed forecasts of the recovery starting much sooner. Then, thanks to the "Green Shoots" that began to appear with the rebound in March, confidence was gradually restored in high places such that the miracle of recovery would happen sooner. The higher the stock market gets the more popular this idea becomes.
And this gets us to another lesson from the old Vancouver Stock Exchange. "So long as the price is going up – the public can believe the most absurd story." This has been the best explanation of why Wall Street, the supposed bastion of capitalism, focused on every utterance from central planners in a central bank. Then when the price breaks, the vision disappears along with liquidity.
The next phase of the contraction has been expected to start after mid-year. For most participants, post-bubble bear markets have been sudden and severe. The 1929 example ran for three years and the post 1873 example lasted for five years. The latter has been the best guide for our recent mania and its bust, but this will be expanded in a few minutes as it is worth reviewing the excuses offered by many in not anticipating that short-dated interest rates as well as gold would plunge in a classic fall crash. This was the pattern with the 1929 and 1873 crashes and knowledge of such a plunge in short rates should have ended conventional wisdom that a Fed rate cut would have prevented crashes from 1929 to 2008.
The quickest sign of a gold bug forecast going wrong is "Conspiracy!". With their latest disappointment Wall Street strategists described it as a "Black Swan" event, and therefore unpredictable. That has been a cheap out as each transition from boom to bust has been methodical. Others called it a "Minsky Moment". Minsky accurately described the mechanism of a crash, but being a Keynesian he also wrote that "apt intervention" could keep the economy on a successful path.
Actually, financial conditions reached the perfect "Keynesian Moment". As we all know, Keynes said "If you save five shillings you put a man out of work for a day." As part of the greatest mania in history the savings rate plunged to zero – Keynesian perfection had finally been accomplished. Many in the street, but only a few economists, knew this was dangerous. Econometric modelers, who still believe in the powers of regression equations, have long had their out, which has been "Exogenous", and in one memorable paper of 1983 there was "Super-Exogenity". This arrived in May 2007 when the yield curve reversed from inverted to steepening. Our research expected it to occur around June. By July of that fateful year, there was enough deterioration to conclude that "This is the biggest train wreck in financial history". It is not over.
Although crashes are grisly events, they share a common response from the establishment. No matter how shocking, bloody, expensive, ruinous or just plain shattering a crash is – within a week, there is no one in the street who didn't see it coming. As ironical as this is, there is a critical link from the stock market to the economy.
On the usual business cycle, the peak in stock speculation typically leads the peak in the economy by about a year. On the previous example, stocks set their high in March 2000, and the NBER set the start of that recession in March 2001. Using their determination this has been the case for most cycles back to 1854. But, at the conclusion of each great bubble in financial and tangible assets things change from normal. The failure in the financial markets and the economy beginning in 2007 have been virtually simultaneous. As we all know, in 1929 the Dow made its high in September and the recession started in August. In 1873 the bear started in September, and the recession in October. This time around, the stock market high was in October 2007 and this recession started in December of 2007. Close enough to fit the post-bubble model, with implications that financial history is now in the early stages of another Great Depression.
This melancholy event is being confirmed by the behaviour of politicians and policymakers. After swanning around claiming credit for the boom politicians panic and then find scapegoats. Remember the "Goldilocks" celebration of perfect management of interest rates, money supply and the economy. Well, all five great bubbles from the first in 1720 to the infamous 1929 have been accompanied by such boasting, followed by what can best be described as frenzies of recriminatory regulation. If the political path continues – protectionism – will follow.
One of the worst such examples was called, in real time, the Tariff of Abominations. But, this is enough of dismal events and it is time to turn to irony for amusement and enlightenment. The clash between the establishment and financial history is rich with irony. Beyond that, financial history, itself, should be considered as an impartial "due diligence" on every grand scheme promoted during a financial mania by the private sector as well as by policymakers. Let's use a good old fashioned term – policymakers have been financial adventurers.
One of the richest ironies occurred with the 1873 mania and its collapse. With typical strains developing in the credit markets during a speculative summer, the leading New York newspaper editorialized:
“but while the Secretary of the Treasury plays the role of banker for the entire United States it is difficult to conceive of any condition of circumstances which he cannot control. Power has been centralized in him to an extent not enjoyed by the Governor of the Bank of England. He can issue the paper representatives of gold, and count it as much as the yellow metal itself. [He has] a greater influence than is possessed by all the banking institutions of New York.”
In so many words, because the treasury secretary was outstanding and had the benefit of unlimited issue of a fiat currency – nothing could go wrong. But it did; the initial bear market lasted for five years and the initial recession ran a year longer. The pattern of severe recessions and poor recoveries continued such that in 1884 leading economists began to call it "The Great Depression", that endured from the 1873 bubble until 1895. An index of farm land value in England fell almost every year from 1873 to 1895. Of course, academic economists were fascinated and for a couple of decades wondered how such a dislocation could have happened, or even worse, discussed how it could have been prevented. Ironically, this debate continued until as late as 1939 when another Great Depression was belatedly discovered.
Naturally the long depression was blamed upon the old and unstable Treasury System, and at the height of the "Roaring Twenties" John Moody summed it up with:
"The Federal Reserve Law has demonstrated its thorough practicality, and thus secured the general confidence of the business interests. The breeder of financial panics, the National Banking Law, which had been a menace to American progress for two decades, has now been replaced by a modern scientific system which embodies an elastic currency and an orderly control of money markets."
The probability of a depression has been discussed in the media. It seems that both sides have yet to provide adequate research, with the establishment's response limited to a classic non sequitur. "This is nothing like the Great Depression, where we had 25% unemployment". That was just the most recent example and sound research would compare unemployment numbers from the first year after the crash. In 1930 the number was around 8%, and in noting that there could be some difference in methodology today's number is an 8 percenter.
Will it get to 25 percent? This remains to be seen, but unemployment in the private sector will be the worst since the last great depression.
By way of a wrap we will take it from the top. In late 2007, Gregory Mankiw, boasted that the US had a "dream team" of economists as advisors, and as with all claims at the top of six previous bubbles "Nothing could go wrong". And even if things went only a little wrong there were the "safety nets" that Krugman claimed would prevent serious deterioration. Our view on Keynesian safety nets has always been that in a bust they would be about as useless as a hardhat in a crowbar storm.
In the post-1929 bust policymakers were realistic enough to know that the boom caused the bust. The SEC was established to prevent another hazardous 1929 mania. Also, one of the promoters of the SEC boasted that the SEC would put a "Cop at the corner of Wall and Broad Streets". Without much doubt the SEC has failed to live up to its billing. The discovery of malfeasance always accompanies the discovery of malinvestment.
Of course, the other act passed to prevent another 1929 mania was Glass-Steagal, which separated commercial banking from the evils of Wall Street. This was taken off the books in 1999 as too many banks were participating in the high-tech frenzy.
Has this happened before? I'm glad I asked the question. With the financial violence of the South Sea Company in 1720, the House of Commons passed the "Anti-Bubble" Act, which was taken off the books in 1771 – just in time for the full expression of the 1772 bubble. As with the climax of the 1720 bubble the Great Depression ran for some twenty years. This was also the case for the bubbles that blew out in 1825, 1873, and 1929.
This ominous sequence of financial excess and consequent disaster brings us to 2007, which will soon have the connotation of "1929", as the world experiences the sixth Great Depression. Quite likely, the only offsetting event could be the collapse of interventionist policymaking, that would eventually be seen as a blessing.
The title of this address, "Great Depressions Are So Methodical" is intended to be ironical, but some may be startled by the audacity of the statement. Actually it is the conclusion that anyone would make after a thorough review of market history. The real audacity is in the claims of charismatic economists that their personal revelations can provide one continuous throb of happy motoring. As Hayek said – Keynes, as a young scholar, was absolutely ignorant of financial or economic history. Only someone who was ineffably ignorant of financial history would claim that it can arbitrarily be altered.
The next Oscar in audacity goes to Paul Samuelson, who, in the 1960s, boasted that the business recession had been eliminated. Right!
Another such example was recently provided by Gregory Mankiw when he condemned the “old” Fed with "When you look at the mistakes of the 1920s and 1930s, they were clearly amateurish." Any impartial review of market history would conclude that the "Roaring Twenties" and the contraction was the way financial history works, after all it was the fifth such example. It is worth recalling that at the height of the 1929 mania John Moody had condemned the old Treasury System while reciting that the new Fed was the perfect instrument of policy.
Mankiw then bragged "It is hard to imagine that happening again – we understand the business cycle better".
The Harvard professor topped this late in 2007 with: "The truth is that Fed governors, together with their crack staff of Ph.D economists, are as close to an economic dream team as we are ever likely to see."
Now it is time to get into the way Great Depressions have worked. All six have started with soaring prices for tangible and financial assets that, typically, run against an inverted yield curve for some 12 to 16 months.
Then when the curve reverses to steepening it is the most critical indicator that the credit contraction is starting. This time around, the sixteen-month count ran to June 2007 and the curve reversed by the end of May. Our presentations in that fateful month stated that the greatest train wreck in the history of credit had begun. Deterioration through July prompted the advice that most bank stocks were a nice "widows and orphans" short.
Beyond the raw power of speculation, one of the key features is each mania has been accompanied by a remarkable decline in real long interest rates, sometimes to zero, and sometimes to minus. In our case the decline was to around minus 1.5% in January and the increase so far has been 5 percentage points. In five previous examples, the typical increase has been twelve percentage points, which has been Mother Nature's way of correcting untempered expansion of credit. And - in our times, untempered policymaking.
Lower-grade corporate bonds, have already suffered an increase of some 25 percentage points, which suggests that the 12 point potential for treasuries is possible.
There is another important distinction. At the peak of a great bubble, the stock market peaks virtually with the business cycle. In 1873, the stock market blew out in September and the recession started in that October. As noted above, a fiat currency with the potential of unlimited issue was not proof against yet another Great Depression. In 1929 stocks peaked in September and the economy peaked in August. This time around stocks set their high in October, 2007 and according to the NBER, the recession started in that December.
Since 1937 the average length of recession has been ten months, with six in the order of 8 months. This one has run for 17 months, which breaks a long-standing pattern. Following 1873, the initial recession lasted 65 months, and following 1929, it ran for 43 months. NBER data starts in 1854 and these were the longest recessions, with no others in this league. This one has the potential of being a long one.
This is a lot of history, but what is happening in the markets right now? Well, then the Green Shoots have finally encompassed chairman Bernanke. On May 5, Bernanke observed that the "broad rally in equity prices" is indicating that "economic activity will pick up later in the year."
At the height of a similar rebound to April-May of 1930, Barron's wrote:
“It is thus apparent that the public preference for stock is not only as marked as ever, but also the will to speculate is still a speculative factor not to be overlooked. The prompt return of huge speculation and the liberal manner in which current earnings are again being discounted indicate that it will be difficult to quench the fires of stock-market enthusiasm for long.”
Prompted by an animated stock rally, the Harvard Economic Society, but with more gravitas, concluded that it "augured" a recovery by late in the year. As we all know this did not last and what we should understand is that it is the dynamics of a crash that sets up the exciting rebound. Not policymakers.
Let's look at a classic fall crash, which we expected. The pattern is interesting. The 1929 crash amounted to 48%. The decline to the low in November 2008 was 47%, and within this the hit to October 27 amounted to 42%. In 1929 the initial plunge amounted to 40% to October 29.
The rebound was to November 4, in both examples, with 2008 gaining 17% and 1929 gaining 12%. The final slump into each November was 22% and 23%. Is it important to identify it as 1929 or 2008?
Our "historical" model expected the crash and the rebound, as well as the nature of the establishment's utterances. Another usual event is a frenzy of recriminatory regulation – all supposedly new, but delivered without knowing that their counterparts over the centuries have made the same futile gestures.
Ironically, today's excitement in the markets and convictions in policymaking circles are important steps on the path to a great depression. As disconcerting as this may be, it is worth reviewing another cliché of policymaking, which is the notion that lowering administered rates will restore the momentum of a boom. Massive declines in short rates, such as Treasury Bills have only occurred in a post-bubble crash. In 1873 the senior bank rate plunged from 9% to 2.5%, as the stock market crashed. In the 1929 example the fed discount rate plunged from 6% to 1.5%, as the stock market crashed.
This is getting a little heavy. Not so long ago, but in another world, financially speaking, when an economist would change a forecast on GDP from 3 % to 3.25% it was only done to display a sense of humor. Now policy wonks seriously debate whether the Fed target rate should be zero or a quarter of one percent (that’s 0% to 0.25%). It is patently absurd to debate what the rate should be or whether it would have any effect on financial history.
It won't, because we are in a world of financial violence that is not random, and not due to the Fed not making the perfectly-timed rate cut. Instead it is due to a natural accumulation of private speculation, as well as a chronic experiment in policy by financial adventurers – to accurately use a Victorian term.
There are some early terms to describe the sudden loss of liquidity that marks the end of a bubble. In the 1561 crash Gresham wrote the “Credit cannot be obtained – even on double collateral.”.
Another term goes back to the 1600s when Amsterdam was the commercial and financial center of the world. The Dutch described the good times as associated with "easy" credit and the consequence as "diseased" credit. I'm sure that all in this room would agree with the accuracy of the latter description. Diseased credit.
What can be done about it? Nothing – since the 1500s the literature is complete with many comments that someone, or some agency can set interest rates – either high or low depending upon the personal concerns of the writer.
Misselden in the 1618 to 1622 crash earnestly believed that throwing credit at a credit contraction would make it go away. Despite all this history, Keynes and his disciples cannot be accused of plagiarism.
Virtually, all of the "good stuff" likely to be revived into May is being accomplished. This includes investments such as commodities, junk-bonds and stocks, as well as positive statements from the establishment. Both technical and sentiment measures on the stock market are at "tilt" levels.
Because it is up at the right time, the conclusion is that the down will come in on time as well. This would be the next step on the path towards another Great Depression.
Of course, there is no guarantee that events will continue on the path. But, then there is no guarantee that it won't. Best to consider the odds.
Yes, BEST TO CONSIDER THE ODDS!
While that was an excellent article, let’s go back and revisit Chris’s question, “Nate, in reading the following article, it's amazing how prior depressions to include the big recession in 1982 occurred every 50+ years right on cue. Besides excessive credit, do you have any idea, what would cause this (possible depression) to deviate from prior cycles?”
My first comment is that big recessions do recur, but the cycle is closer to every 51.6 years as Martin Armstrong has defined by doing a very thorough study of history. What happens is that the economy alternates on this timeframe between “private” and “public” waves. We have just exited a private wave and are now experiencing a return to the “public” wave. This is now very obvious if you view current events… it was not so obvious just two or three years ago.
There are many economic waves traveling through time… like all waves, their effects can be additive or subtractive. Martin Armstrong has identified waves on the 8.6 day, week, month, and year timeframe. There is a 37.33 week and YEAR cycle (1980 to 2007…), a 51.6 year cycle, a 72 year cycle, and a 224 year “nation changing” cycle. These cycles are occurring within one another – Armstrong has written much on these cycles, someday they will be modeled and understood better, perhaps then they can be manipulated or altered but we are certainly NOT at that degree of understanding as of yet.
So, what could cause us to deviate from the cycle and to presumably avoid a deep recession or depression? NOTHING! IT IS TOO LATE TO DO THE CORRECT THING FOR THIS CYCLE. The damage has been done, events have been set in motion and the outcome is now assured! NOTHING CAN DERAIL THIS CYCLE FROM EXPRESSING ITSELF FULLY AT THIS POINT.
Once a credit bubble is allowed to develop, nay, even encouraged to be bigger, the eventual bust is 100% guaranteed. The roots of the bust lie in the exponential math that took us up the front side of that parabolic curve! Once launched, all exponential growth rates CRASH as those who have Spent some Time with the Good Dr. Bartlett… know.
While Dr. Barlett describes the math of exponential growth, it was Dr. Minsky who accurately described the seven bubble stages, a review of which is most definitely in order:
Ludwig Von Mises noted that the size of the bust is commensurate with the size of the boom and it was Hyman Minsky who accurately described the seven bubble stages (the following excerpt is from my book Flight to Financial Freedom – Fasten Your Finances, written during 2005/2006):
HYMAN MINSKY’S SEVEN BUBBLE STAGES
The late Hyman Minsky, Ph.D., was a famous economist who taught for Washington University’s Economics department for more than 25 years prior to his death in 1996. He studied recurring instability of markets and developed the idea that there are seven stages in any economic bubble:
Stage One – Disturbance:
Every financial bubble begins with a disturbance. It could be the invention of a new technology, such as the Internet. It may be a shift in laws or economic policy. The creation of ERISA or unexpected reductions of interest rates are examples. No matter what the cause, the outlook changes for one sector of the economy.
Stage Two – Expansion/Prices Start to Increase:
Following the disturbance, prices in that sector start to rise. Initially, the increase is barely noticed. Usually, these higher prices reflect some underlying improvement in fundamentals. As the price increases gain momentum, more people start to notice.
Stage Three – Euphoria/Easy Credit:
Increasing prices do not, by themselves, create a bubble. Every financial bubble needs fuel; cheap and easy credit is, in most cases, that fuel. Without it, there can’t be speculation. Without it, the consequences of the disturbance die down and the sector returns to a normal state within the bounds of “historical” ratios or measurements. When a bubble starts, that sector is inundated by outsiders; people who normally would not be there. Without cheap and easy credit, the outsiders can’t participate.
The rise in cheap and easy credit is often associated with financial innovation. Many times, a new way of financing is developed that does not reflect the risk involved. In 1929, stock prices were propelled into the stratosphere with the ability to trade via a margin account. Housing prices today skyrocketed as interest-only, variable rate, and reverse amortization mortgages emerged as a viable means for financing overpriced real estate purchases. The latest financing strategy is 40, or even 50 year mortgages.
Stage Four – Over-trading/Prices Reach a Peak:
As the effects of cheap and easy credit digs deeper, the market begins to accelerate. Overtrading lifts up volumes and spot shortages emerge. Prices start to zoom, and easy profits are made. This brings in more outsiders, and prices run out of control. This is the point that amateurs, the foolish, the greedy, and the desperate enter the market. Just as a fire is fed by more fuel, a financial bubble needs cheap and easy credit and more outsiders.
Stage Five – Market Reversal/Insider Profit Taking:
Some wise voices will stand up and say that the bubble can no longer continue. They argue that long run fundamentals, the ratios and measurements, defy sound economic practices. In the bubble, these arguments disappear within one over-riding fact – the price is still rising. The voices of the wise are ignored by the greedy who justify the now insane prices with the euphoric claim that the world has fundamentally changed and this new world means higher prices. Then along comes the cruelest lie of them all, “There will most likely be a ‘soft’ landing!”
Stage Five is where the real estate industry is today [2005/2006]. This stage can be cruel, as the very people who shouldn’t be buying are. They are the ones who will be hurt the most. The true professionals have found their ‘greater fool’ and are well on their way to the next ‘hot’ sector, like the transition from real estate to commodities now.Those who did not enter the market are caught in a dilemma. They know that they have missed the beginning of the bubble (gold, silver, and oil today [2005/2006]). They are bombarded daily with stories of easy riches and friends who are amassing great wealth. The strong will not enter at stage five and reconcile themselves to the missed opportunity. The ‘fool’ may even realize that prices can’t keep rising forever… however, they just can’t act on their knowledge. Everything appears safe as long as they quit at least one day before the bubble bursts. The weak provide the final fuel for the fire and eventually get burned late in stage six or seven.
Stage Six – Financial Crisis/Panic:
A bubble requires many people who believe in a bright future, and so long as the euphoria continues, the bubble is sustained. Just as the euphoria takes hold of the outsiders, the insiders remember what’s real. They lose their faith and begin to sneak out the exit. They understand their segment, and they recognize that it has all gone too far. The savvy are long gone, while those who understand the possible outcome begin to slowly cash out. Typically, the insiders try to sneak away unnoticed, and sometimes they get away without notice. Whether the outsiders see the insiders leave or not, insider profit taking signals the beginning of the end (remember who has sold their rental properties?).
Stage seven – Revulsion/Lender of Last Resort:
Sometimes, panic of the insiders infects the outsiders. Other times, it is the end of cheap and easy credit or some unanticipated piece of news. But whatever it is, euphoria is replaced with revulsion. The building is on fire and everyone starts to run for the door. Outsiders start to sell, but there are no buyers. Panic sets in, prices start to tumble downwards, credit dries up, and losses start to accumulate.
This is where you may see the “lender of last resort” who is usually the government. The government, although they were talking up a soft landing, are now forced to step in to prevent the crises from spreading to other sectors. Ironically, this is where the savvy investor who profited before, really profits now. With government backing, they are asked to step in and return “normalcy” to a now damaged sector.
The government’s attempt to “put out the fire” usually works. However, the conditions beyond the year 2010 will require oceans of water that the government does not posses. You must be ready!
So, there is a very predictable sequence of events with any economic bubble, again, the roots of the bubble can be found in the way exponential math functions. Economists and especially politicians have yet to figure this out, much less deal with it. For in fact, IT IS THEY WHO ARE THE ONES WHO SET THESE CONDITIONS IN MOTION AND IT IS THEY WHO ARE EQUALLY RESPONSIBLE FOR THE BUST.
Getting back to Chris’s original question, “what would cause this (possible depression) to deviate from prior cycles?” The answer is NOTHING.
In fact, THE ATTEMPTS TO PREVENT THE BUST FROM DEEPENING ARE THE VERY ACTIONS THAT WILL CAUSE IT TO DEEPEN!!!
This is a critical concept to understand, it is a concept that pilots are taught about in flight school… for you see, airplanes are made to be dynamically stable – that is they tend to return to center on their own IF THEY ARE DESIGNED PROPERLY. A properly designed economy will also be dynamically stable and IF LEFT ALONE will return on its own, the deviations from center would be small. But when a “pilot” is at the controls, they see a deviation develop and apply INAPPROPRIATE control forces that get in phase with the cycle and cause it to actually grow in size!
If they would have simply taken their hands OFF THE CONTROLS, then all would have been fine! I will humbly submit that Karl Marx, Keynes, Friedman, Greenspan, Bernanke, Paulson, Geithner, Bush, Obama, Larry Summers, and all other “PILOTS” have never studied economic stability and have yet to attend day ONE of pilot school! In fact, they actively prevent anyone from creating a school that actually teaches what happens in the REAL WORLD!
Why is that? It’s because they are not the pilots at the controls, the real pilots are not seen by the public, they are the central bankers of the world who profit from the malinvestments of bubble dynamics and set them in motion by creating a currency system and economy that IS NOT DYNAMICALLY STABLE.
These people need to be rooted out so that a dynamically stable system can be built.
So, I know this is becoming extremely long, but complex problems cannot be understood by lazily trying to mash it into a paragraph or two. So, as evidence that we are cycling from a “private” wave to a “public” one and that the bust WILL DEEPEN, let’s review Martin Weiss’s latest update that he published just this morning:
Memorial Day Disaster
by Martin D. Weiss, Ph.D. 05-25-09
This would normally be my time for a quiet Memorial Day at home.
But even as we seek calm, investors overseas are doing precisely the opposite.
They’re dumping U.S. assets.
They’re driving those assets down in price.
And they’re threatening to sink our entire economy into a THIRD phase of this crisis.
Remember: The first phase was the debt disaster. The second phase was the collapse in the economy. Now, in the third phase, Treasury bonds and the U.S. dollar are getting hit hard, largely due to foreign selling.
The latest drama began this past Thursday…
The supply of U.S. Treasury bonds dumped on the market was so overwhelming, even the Federal Reserve, with all its massive efforts to buy up bonds, could not stop the avalanche.
By the time most traders left for the weekend Friday afternoon, ALL of the gains in bond prices the Fed had been able to engineer in recent weeks were wiped out — vanquished by market forces beyond the Fed’s control.
Why The U.S. Government Is the Next Victim of the Market’s Revenge!
Look. In each successive phase of this debt crisis, investors have consistently attacked and destroyed the market value of institutions that owned large amounts of toxic assets — Countrywide Financial, Fannie Mae, Citigroup, Bank of America and many others.
The shares of these companies were pummeled; their ability to raise new capital, virtually extinguished.
Now it’s the U.S. government that’s the next victim of the market’s revenge.
Because the government never was — and never will be — immune to market selling. Like private corporations, it borrows. Like any borrower, it has creditors. And like all creditors, it’s ultimately up to THEM — not up to the borrower — to decide what to do with their money.
But unlike most borrowers, the U.S. government has arrogantly thumbed its nose at its creditors. Without remorse.
“We can do anything we damn please,” was the message from Uncle Sam.
“We can spend our money wantonly. We can bail out our giant corporations to our heart’s content. We can even debase our currency.
“But YOU, our creditors, are stuck with us. No matter what we do, you’ve got to keep loaning us more money, endlessly.”
Our creditors swallowed hard and tolerated this message for a while. But not now.
Now they’re fed up. They can’t take it anymore.
Now, explicitly or implicitly, the U.S. government has assumed the liability for TRILLIONS of dollars of bad mortgages, sour commercial paper, and sick consumer credit.
Now, directly or indirectly, the U.S. government has placed its own credit and credibility in grave jeopardy.
And now, our creditors are raving mad, dumping U.S. bonds and the U.S. dollar.
A Unique Convergence of Events
- Treasury bond prices aren’t the only U.S. assets plunging. The U.S. dollar is also plunging against major world currencies. It has just fallen below 6-month lows. It’s almost certainly going to fall further.
Gold has surged dramatically, coming within striking distance of the $1,000 level — and beyond.
Meanwhile, new, unexpected supplies of bonds are being tossed on the market on TOP of the massive supplies the Treasury must issue to finance its mammoth $1.84 trillion budget deficit estimated by the Obama administration for fiscal 2009.
Long-term interest rates are getting ready to soar far further. And as rates rise, consumers and businesses will have to pay through the nose to borrow. Or they won’t be able to borrow at any price.
You can expect a sweeping, devastating impact on the economy, especially in the real estate market. Even with LOWER mortgage rates, commercial real estate is already collapsing. With HIGHER mortgage rates, any hope for stabilization will be dashed.
Thousands of insurance companies and banks will suffer a new round of losses that could make the subprime mess seem small by comparison.
The Dow will plunge to our target of 5,000; the S&P, to 500.
If all of these events can tell you anything, it’s that you now have the kind of opportunity that generations of investors could only dream about.
You have the ability to read the handwriting on the wall; to know in advance what is most likely to happen next.
Treasuries bond prices are already sinking. Interest rates are rising. The dollar is falling. Unemployment is surging. Commercial real estate is collapsing. General Motors is going bankrupt.
This is the recipe for disaster I’ve been warning you about.
But it’s also a prescription for some of the greatest profits of all time, using contrarian investments designed to profit from the decline.
Good luck and God bless!
As you can see, the “pilots” of this cycle are making the same mistakes as the “pilots” of previous cycles. With the exception of the central bankers who profit from our poorly designed system, the rest of the “pilots” may have the best of intentions, but they simply do not understand the dynamics. As they say, “the road to hell is paved with good intentions!”
There are cycles in EVERYTHING, they are occurring on ALL time scales, they are ALL INTER-RELATED, and thus when you manipulate one, you manipulate them all! The odds of stopping this or any cycle any time soon are exactly nil. Perhaps in the year 2525…
Zager and Evans - In The Year 2525
So, Chris, I hope this answers your question; it was a good one – key in fact, as sometimes asking the RIGHT questions is the key to getting the RIGHT answers.
Sunday, May 24, 2009
Geithner Adopts Part of Wall Street Derivatives Plan
By Matthew Leising
May 23 (Bloomberg) -- The U.S. Treasury’s plan to regulate the over-the-counter derivatives market outlined by Secretary Timothy Geithner on May 13 contains recommendations similar to those made by Goldman Sachs Group Inc., JPMorgan Chase & Co., Credit Suisse Group AG and Barclays Plc three months earlier.
The banks sent the Treasury a plan written in February titled “Outline of Potential OTC Derivatives Legislative Proposal,” saying the Federal Reserve should extend capital and margin requirements to companies and hedge funds that trade in the $592 trillion unregulated market, according to a document obtained by Bloomberg News and confirmed by the Treasury. Energy companies, corporations and hedge funds don’t face such requirements now, while banks do under central bank oversight.
“The banks appear to wish to maintain the intra-dealer market and raise barriers to new entrants to keep the OTC business as compartmentalized as possible and to protect their profitable market conditions,” said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York. “The Street’s lobbyists appear to be asking for a ‘club’ structure in OTC trading.”
On May 13, U.S. officials called for increased oversight of over-the-counter derivatives to reduce risk to the financial system. Derivatives contributed to the failures last year of Lehman Brothers Holdings Inc. and American International Group Inc., leading to the seizure of credit markets and causing more than $1.4 trillion in writedowns and losses amid the worst financial crisis since the Great Depression.
The Treasury hears from many interested participants while crafting policy, said spokesman Andrew Williams. Derivatives are contracts whose values are tied to assets including stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.
“This proposal had little impact on our final result,” he said. “Our proposal calls for dramatically increased transparency and the enhancement of regulatory powers to prevent market manipulation that go well beyond anything in that draft.”
Bruce Corwin, a spokesman for Zurich-based Credit Suisse, and Goldman Sachs spokesman Michael DuVally and JPMorgan spokesman Brian Marchiony declined to comment on the bank draft. Representatives from New York-based Goldman Sachs and London- based Barclays didn’t immediately return calls and messages for comment left after normal business hours.
Geithner sent a proposal to Congressional leaders on May 13 laying out his plan to police the unregulated market where swaps based on interest rates, currencies, commodities and a company’s ability to repay debt are traded.
“All OTC dealers and other firms who create large exposures to counterparties should be subject to a robust regime of prudential supervision and regulation,” the proposal said. These included “conservative capital requirements,” “reporting requirements,” and “initial margin requirements.”
The bank-written plan, dated Feb. 13, said the systemic regulator “shall promulgate rules” requiring “capital adequacy,” “regulatory and market transparency” and “counterparty collateral requirements.”
“Better the devil you know than the devil you don’t,” said Robert Webb, a finance professor at the University of Virginia in Charlottesville, describing the bank’s preference for their current regulator.
The banks sought sole authority for the Fed over the market and limited the role of the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission, according to the document. The three agencies currently share information in the $28 trillion credit-default swap market.
Geithner’s proposal didn’t specify what agency or combination of agencies should oversee the market.
The Obama administration favors the Fed becoming the new systemic risk regulator to oversee financial companies that could pose a danger to the banking system, according to participants in a May 8 White House meeting.
While the central bank has been favored to take the job since a proposal by former Treasury Secretary Henry Paulson last year, lawmakers and some regulators have shifted away from that view. Federal Deposit Insurance Corp. Chairman Sheila Bair and SEC Chairman Mary Schapiro earlier this month recommended that a council of regulators assume the role.
Geithner’s plan goes further in many aspects than what the banks laid out in their draft.
No Clearing Requirement
The Treasury Secretary is proposing mandatory guaranteeing of private contracts with clearinghouses for standardized OTC contracts such as interest-rate swaps or indexes of credit- default swaps and increased electronic trading to improve price transparency for customers. He also wants required reporting of positions and trades.
The bank proposal doesn’t endorse clearing of OTC derivatives. In annotations to the draft it states “Note that the proposed outline does not propose any specific OTC derivatives clearing requirement.” It also says reporting requirements on trade data should be made to regulators “upon request.”
Webb said any regulation over the market should be applied evenly. “It’s not clear requiring everyone to have the same capital requirements is necessary,” he said. He added that banks have worked closely with the Fed for many years.
“You’re going to see some close ties between the industry and the regulator,” he said.
Going to see some close ties? Ha, ha, the industry and the regulator are already one in the same and have been for years. This is exactly how our system now works. The central banks draft and propose legislation to their cronies who they have inserted inside of the Treasury and Fed (the central banks are the Fed). Their sponsored mouthpieces then say and spin any unacceptable language into something that sounds as if they are doing something to protect the “people” or the economy.
My position is that there is NO legitimate need for more than 90% of the world’s derivatives. For the few remaining legitimate uses, a PUBLIC exchange is absolutely the right thing to do, but only if there is complete transparency, an OPEN market, and a proof requirement that sufficient capital reserves exist to fulfill the obligations of the contracts that are executed. Such an exchange should be overseen by an outside agent.
I don’t see any of that in this proposal. I see a power grab by the central banks to create a monopolized exchange where they can be in control without outside supervision. Thus they will have created the appearance of change without actually accomplishing anything. This has pretty much been their M.O. from the beginning, the “stress test” being the latest example.
Just yesterday I was speaking with someone I met and we were discussing the economy and real estate. I mentioned the failure of Washington Mutual and this person, who I would say was ABOVE AVERAGE informed, quickly replied that Wamu hadn’t failed, that they had been bought out! LOL, that’s the spin that’s been created and believed! Of course no one in our media is asking what happened to all the Wamu pools of option arm loans that were going bad… where do all those pools now reside? At JPM, of course, the most toxic organization on earth, yet the very ones who “passed” the “stress test” with flying colors AND are the ones proposing this latest sham.
I propose that we will not have a REAL economy again until both JPM and GS no longer exist. That day is coming sooner than either of those two firms realize. The securitization of debt process via derivatives have led our economy to the brink. We had better wake up and do something about it which is REAL lest we wake up to find that we are on the eve of destruction... (if you don't see the connection between these institutions, politics, and events of the world, then you are looking in the wrong direction - their point entirely.
Barry McGuire - Eve of Destruction: